CHAPTER 4
RESHAPING THE LANDSCAPE

You cannot plan out a new form of society in advance, then set it up and expect it to function as it was designed to.
-The Unabomber Manifesto

As long as you depend on the statistical aggregates we now call information, you'll know a good deal about your product, a good deal about your services, and not a blessed thing about your customers.
-Peter Drucker


    Relationships with the outside environment, or in other words, your business partners, are already under profound pressure from the new forces. The most obvious symptom of this pressure is the shifting definition of what is inside and what is outside of the firm. As the new forces drive down transaction costs, you must continually revisit your own operational model and decide which functions are more efficiently handled by the market-then move them there as quickly as possible. As you do, the remarkable property of information to increase in value the more it is used will lead you to more surprising changes. It turns out, for example, that customers are not only lower-cost providers of many activities we think of today as "customer service," but customers perceive and realize added benefit from doing these tasks themselves.

    The disruptive power of technology, on the other hand, exposes you to new and unfamiliar competitors. The decline in technology costs and the value generated by the effects of Metcalfe's Law unintentionally destroy barriers to entry even in markets and industries long thought impenetrable, including traditional "natural" monopolies like telecommunications and other utilities. These and other industries now find themselves being redefined by information brokers who stand to capture a healthy share of the profit margin using the new forces as leverage. To avoid the resulting killer apps you must adopt them yourself, trading off your existing brand and other information assets to ward off the newcomers even as you accelerate the destruction of your own business model.

    Lower information costs, moreover, make it possible to think of and measure your daily operations as a series of unique transactions rather than broad categories like products and customer segments. As transaction costs approach zero, in fact, the Law of Diminishing Firms reveals that standard products are nothing more than a brute force approach to reducing the transaction costs of collecting and responding to the needs of individual business partners, an approach that is now unnecessary. As consultant and author Joe Pine puts it, "Anything you can digitize, you can customize."

    The migration from atoms to bits is also creating a new importance for relationships that generate value through information exchange. Even as you outsource uneconomical functions to business partners, making the relationship with the outsourced functions more casual, the diversity and bandwidth of other interactions increase dramatically. As we approach (but never reach) the world of truly frictionless transactions, an organization's relationships are optimized by treating them as a community rather than a series of contracts.

    Oddly enough, what most enhances your network of relationships is to improve the connections between business partners, who have much to say to each other but no forum in which to communicate. Organizations are used to working hard to keep business partners apart, and find it difficult to understand how bringing them together generates new value, much of which they can capture through creative brand management. For organizations that begin life digitally, building themselves by building communities is as natural as breathing.

    These first four design principles are examined in this chapter:



    1.    Outsource to the customer.

    2.    Cannibalize your markets.

    3.    Treat each customer as a market segment of one.

    4.    Create communities of value.



    These principles can be used to design killer apps that develop new markets, to form new relationships with customers and other business partners, and to apply digital technology to change the nature of the goods and services you currently offer. Companies that have employed them have found new ways of collecting, consolidating, and valuing information, much of which is freely available and, indeed, may already be resident in their own databases. Customers and others, it turns out, are more than happy to provide the rest.