2015/11/19 09:30 Irene Ng, “Creating New Markets in the Digital Economy”

A seminar at Wolfson College by @ireneclng, with an abstract:

Digitisation is radically changing the way we buy and experience products and services. As such, companies need to understand the implications of digital connectivity, from the need to design and scale future business models to better fit ‘lived lives’, to creating value as well as increasing worth so that new markets can emerge.

Following her Wolfson@50 lecture on Nov 18, Irene Ng will hold a seminar based on her highly-acclaimed book Creating New Markets in the Digital Economy. During this half-day event, Irene will speak on the future of the Digital Economy, applying concepts from the book. Amongst the topics addressed during the event are: “Where is the Internet-of-Things (IoT)’s impact on industry”; “What are the business/financial models in data and IoT”; “Where will markets of the future be?”; “How will lives be changed in an age of ubiquitous technology and data?”. Irene will also provide her take on current issues on the state of the digital economy, the dominance of Internet businesses, the state’s role, the empowerment of individuals and the HAT (hubofallthings.com).

Irene Ng is Senior Member of Wolfson and Professor of Marketing and Service Systems, and Director of the International Institute for Product and Service Innovation at the University of Warwick.

This digest was created in real-time during the meeting, based on the speaker’s presentation(s) and comments from the audience. The content should not be viewed as an official transcript of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. The digest has been made available for purposes of scholarship,  by David Ing.


[Irene Ng]

Wrote and published books in 2013 with digital rights, Creating New Markets in the Digital Economy.

Then a publisher bought the hardcopy rights, with the condition the PDF version be removed

15 years as entrepreneur, 15 years in academia

  • Undergraduate in physics
  • Graduate work in marketing, mathematical economics
  • Published in operations and supply chain, marketing, economics, sociology
  • A mutt (multidisciplinary)
  • Need to have a discipline, a home, a mother ship where a lot of the contributions come back from in the peer community
  • An academic or entrepreneur?  An academic, as know whose opinions matter
  • A lot of work is with startups, an angel investor
  • Work meshes practice and entrepreneurial

No sacred cows, can play with everything

  • Used to own Empress Cruise Lines, sold it, and then had to sue them
  • Had become an academic
  • An offshore casino on the high seas, Panamanian flag, Liberian
  • Hauled everything into court, could then write a case study

When work in markets and business markets, two strong types of researchers:

  • ON-IT researchers:  describe, create insight and reflect what’s happening in the market, rear view mirror looking back
  • This is what we have, when there’s lots of data
  • IN-IT designers and engineers:  who want to shape, invent, create markets, and shape
  • Now, there’s more IN-IT than ON-IT
  • Attendees have an instinct that something is changing
  • IN-IT research uses ON-IT research, and thinking about how the future is shaped
  • But IN-IT research has no data, so how do you move forward when you don’t know
  • A lot of this research is this way

Three most fundamental aspects of the book that may not come across that strongly

  • Interact more on Facebook than LinkedIn or Twitter

Wolfson College

Value, variety and viability:  The three tenets of creating markets

  • Viability is the firm perspective

1.  Value:  a lot of papers on academia.edu

  • Integrative framework of value, summation of the works on value

Have inherited a Smith world, 500 years of trade:  pay something, get something

  • Is that normal?  Yes, for 1000 years
  • Before that, it was barter (and there wasn’t currency)
  • Currency and money is only since the last 1000 years
  • From a historical point of view, why do we have money?
  • Today, no gold standard, and have quantitative easing, which is based on perception
  • Blockchain might change that
  • Then want to think about the most basic things
  • Adam Smith:  Produce and trade, that’s where the wealth of nations come from
  • Buying shoes, happier when buying them when using them (which is unusual)
  • Normally, car, music, massauge, it’s the use — a value-induced approach

Book talk about goodness

  • Plato’s cave
  • If you think about value just in terms of “good”, then there’s no transcending thought
  • Have to say what is good, to whom
  • Can’t create value for everyone:  it’s to who, of something
  • It’s not a scalar, it’s vector
  • What is good for the firm isn’t good for the customer:  Not just the value of coffee, but where it was created
  • To whom, about what … and where was it created
  • Processually:  where was this created? how was it created?

Book talks about the way value is created, from the user creating it, with agency

  • Coffee has agency with the person drinking it
  • If no one wants to drink the coffee, no agency
  • If the cup doesn’t lend itself to drinking, have to pair with some affordance:  affording drinking
  • What companies do:  they don’t create value, they enable it with some attribute
  • Also value when it’s created and where it’s created

To create the value, need an outcome

  • Outcome is different from value
  • Not thirsty is an outcome
  • The way to create that outcome can be different

If value isn’t the same as the outcome, then the goodness to achieve the outcome isn’t value

  • Use phone, book, pen:  how many times do we think that this is good?  We don’t
  • Value isn’t something that you’re going to evaluate all of the time
  • This is why a lot of value is described in a phenomenological sense … which makes sense in an ontological perspective
  • Firms would like to ask you:  do you value this?
  • e.g. satisfaction measures, pressing button from good to bad
  • Level of cognition comes in the way we evaluate things
  • P-value:  can’t be measured (phenomenological)
  • Access value:  when you are asked
  • Link between satisfaction and value?

So, value is co-created

  • Customer resources to cocreate

Buy products to get benefits

  • Steve Vargo and Bob Lusch:  Service-dominant logic
  • Cited 6000 times since publication in 2004, not just in business school, but by engineering, operations and innovations researchers
  • Goods-dominant logic:  e.g. producing a mobile phone as an end it itself
  • However, many old phones sitting in draw without a function
  • Only a person can realize and enhance it:  if phone the stockbroker, don’t thank Apple or Vodaphone
  • However, when get lost, may thank Google Maps for showing the way
  • Attribution theory
  • The value is created by me, but the firm has no control, yet the firm can advertise the value
  • Premier Inn:  You can get a good night’s sleep or your money back — how does that happen, who is coming into my room to ensure I’m getting a good night’s sleep?
  • There’s a blank between the attribute of outcome and value
  • We have subjugated ourselves away from the economy.  Why?
  • Mind has closed in:  process of checking in, sleeping — you think Premier Inn is true, they can promise outcome
  • This is because all activities and practices are opaque, part of the phenomena, not in the GDP
  • Subjugated human activities
  • Don’t think about drinking coffee, because think it’s free … to you
  • You bought half of the product (the bed), and you contribute the other half (in your mind) — which is cocreation
  • You allow hotels to advertise this

More and more of our practices are become less opaque, in a digital world

  • While you can’t tell what I’m doing with this coffee, moving to a world where you can
  • Digitization:  could be a half a million people know that the coffee is brown, and it’s hot
  • When the cup is digitalized, would know
  • It’s all connected on the Internet
  • Everyone could be known, e.g. with posting on Facebook or Google
  • An innovation that drops in this space can change things

Resources are used in the co-creation, could be mine

  • Symmetry is important
  • It’s in the world, but not in the GDP

Broadband:  when we go on the Internet, do search

  • Dictionary, thesaurus, calculator are all in the GDP:  15GBP
  • Not completely reflected in GDP
  • So many things rapidly bundled, have to think about translation of value in the GDP

Cocreation:  what is the resource?

  • Driving a car
  • Car has a lot of attributes, many driven by the resources of the firm
  • But then driving, the consequences and desired end state is a lot of resources of the driver
  • If think about getting from getting value, what about autonomous cars?
  • Autonomous cars are think in value from the firm’s side
  • However, there is the experience of driving the car, the status symbol of owning a car
  • In every dimension of goodness, some of it comes the firm, but a lot of it is how I feel
  • So, value creation is multidimensional

Innovation, in all products, has some things that can be taken over by the firm

  • To get from A to B, could take the bicycle
  • The role of the firm is seen in the light of human beings, and practices we have towards outcomes
  • Practices are opaque
  • However, as soon as outsource to a driver, it enters the GDP:  you stop driving, someone else drives you

Where is value created?  What is opaque?

  • In the 1970s, 1980s, became a service economy
  • It’s not because we went into services, it’s because companies outsourced their internal functions
  • e.g. BMW outsourced cafeteria, manufacturing
  • Thus, became the biggest driver of the economy
  • In the future, as more digital comes in, it will become less opaque, and GDP will increase

In the old days on the phone, no one cared what you were browsing

  • Now, information from Safari goes to Apple
  • They can monetize your data
  • It appears in the GDP
  • Does this help?

Farmer example:

  • Farmer, harvest and packages
  • If eats apples, uses resources
  • If she has a toothache, no outcome

[break, need to speed up]

Context important

  • How does a firm create form and content, if it doesn’t know what the context will be to the customer

Value is contextual. Resources are also contextual.

  • Babies smile
  • Do you take a picture with a phone or a camera?
  • The phone is an available resource, the camera is in the drawn
  • Things become value in context, because they enable resources for cocreation in context for outcomes
  • SD Logic:  value becomes
  • Resource-Based View of the firm, doesn’t mean that all resources are the same
  • The resource is a resource if it helps us:  it’s not the camera’s fault or the company’s fault that they don’t use it
  • Proliferation of cameras and phones, are in context
  • The camera and phone could be functionally the same, but not provide the same value in context

People forget that when you create value in context, that means that it’s not created when you buy it (or put it in a drawer)

  • Beer in the larder, not yet created value
  • Sunday with the sports, drink it — there’s the value
  • But if you didn’t buy it and chill it, could have someone come to the door with chilled beer, and would pay double
  • Willingness to pay creates where market is
  • Difference in competence (differently from the way companies it the word):  What are our resources?
  • If we think about the stuff around it, we create value with a small subset of ourselves
  • That’s small potential, but it’s not being used

2. Variety:  The most importance concept to be tagged with value, especially in an age where digitilization is coming through

  • Human life is lived in variety
  • (Heideggerian in philosophy)
  • Our lives are so clockwork:  get the train to go to work
  • Most designed things are designed around routine
  • Variety isn’t usually good in routine … but that’s what living is
  • Thinking about the use of things leads everyone to think about routine
  • Able to lift the coffee cup, able to use the pen
  • Anyone outside of the norm is marginalized, not by society, but sometimes by the products we use:  routinized products
  • We then marginalize individuals who can’t exercise the routines
  • Can you have a product that understands variety?
  • Engineer would say:  no, you need to make a different product
  • But not making a variety in products — it’s variety in use
  • Every day, I use my mug in a different way … or my shoe in a different way
  • Variety in use — something that product designers don’t like, as can’t specify requirements
  • But we make tradeoffs
  • If want to make you a cup of coffee, you can specify any way you would drink it:  today with milk and sugar
  • But then replace with a vending machine, have to think about about the variety it provides
  • Products create rigidity
  • The world started with services, and then became rigid
  • Now wake up, first reach for the phone, which was different from 10 years ago when there was more variety

What is a product?  Jaeyoon Yu says it’s a template for behaviour

  • We, as human beings, are templates
  • Our templates don’t have enough variety
  • The more variety the template gives you, the more the market rewards you
  • Phone used to be a simple template, now it’s so much more
  • It’s fragmenting
  • On a smartphone, there’s lots of ways to communicate, now
  • Our ability to connect, not just between selves but between things, has gone hyper
  • It works for some people, and others become overwhelmed
  • Used to be happy with iPod for music, but when then connected, it’s not enough
  • Generativity theory:  human beings request the next step, when they experience things

This is caused by contextual variety:  the context of using it

  • Variety is the latent need, the manifestation of latent demand for future products
  • Resonance chamber:  a music hall, where the ceiling has movable plates, where depending on the music, it changes its acoustics
  • That’s a product that can change its capability in context of use
  • Do we have a mug that can change itself into a wineglass when you pour wine into it?  Not yet
  • However, there are new materials coming, could change in context
  • A human being can serve you with coffee, but can’t scale
  • A product can scale, but is rigid
  • It’s not a surprise with that McDonalds serves you with people … but now they’re coming up with a vending machine (which is complex, as it tries to understand your variety).
  • A vending machine makes a person modularize behaviour
  • e.g. if want bun toasted, could ask for it; now have to push button by button
  • A lot of firms don’t understand need firms to change, but don’t know about context

3:  Viability – the value for the firm

  • Have to think about revenues and costs
  • Only one product that has a single cost — space travel
  • Other markets are based in variety
  • Transfer pricing is an interesting problem:  who subsidizes whom, on a plane?  Economy subsidize business class, or reverse? Both
  • If had all business class, prices would drop
  • If had all economy class, no subsidy
  • Have to think about both scale and revenue
  • Candy Crush:  Transactions are, at most, a dollar … but there’s a billion of them
  • Insulin patch:  thinking the customer should pay more?  Maybe should pay less.  Now 100,000 customers, but if had a target to pay less if customers scale up to 500,000
  • The power of scale:  possible by material products, e.g. 3-D printers
  • Why not have USB all around the house?  Would bring the price down
  • If there’s a digital infrastructure around it, would get even more scale

In 1996, when iPhone came out, how many segments of phones did Nokia have? 10 or 20?

  • iPhone initially created one phone, collapsing 10 segments into one
  • In business school, thought customization cost more
  • iPhone shatters assumption, as the individual customizes the phone
  • Apple is the large phone company, they were lucky that they created the platform, with the Apple brand in the premium game
  • Apple didn’t plan on this:  Steve Jobs doesn’t like software, he wasn’t building a phone, he was building a computer, Apple doesn’t do software
  • Steve Jobs says he doesn’t build software, Bill Gates does
  • Created a platform that can be totally personalized … although they haven’t decided on size
  • Apple is trying to learn how a mother would use a big phone differently from a daughter who uses a small phone
  • Only we know our variety, our use context, how we’re going to use it, when we’re going to use it
  • Just give us the platform
  • Almost everything is going that way
  • Don’t want to do standardization

Could we do this with a car, e.g. a dashboard that is fully customizable?

  • Every industry locks in path dependency, will be hard to change

Now we have the three core concepts of Value, Variety and Viability, in the book

  • We’ll talk around that now

[This is from yesterday’s lecture, “Payment is applause: markets and business models past, present and future“]

Irene in 1965, 2 years old, black and white photo

1965 in UK

  • M4 opens
  • Permissive society begins, divorce rates goup
  • Sound of Music released
  • Beatles, Help
  • First Grateful Dead concert
  • Quantities of scale in industrialization
  • U.S. recovering from 1950s standardization

What is the economic model:  how does what, we gets what?

  • Business model is about the way the company does business:  value proposition, experience of product, the way we buy products

Individual-centered view of the world (more right that wrong)

  • It’s users that drive markets
  • Technology doesn’t disrupt markets, it’s the users
  • There are lots of technologies that never reach you, when it’s created in a garage
  • Markets begin when you take out your wallet
  • In a computer lab, Apple is always old technology, but they create new markets

Humans buy capabilities:

  • Hammer:  Need, tool, capability
  • Firms supply the tools
  • Human applaud, by paying
  • Firms seem to hate companies that make profits, but yet we pay them
  • Margins are different issue from paying:  we applause
  • We have the agency to pay, sometimes without question

Are we buying tools or capabilities?

  • Need, hungry; tool, food; capability is caveman hunting
  • Today, still hungry; more tools as choices of food; capabilities through work
  • Need to look good; tools makeup; capability is looking good
  • Tools are bought in markets

Where are markets?

  • Trading ducks for vegetables, at the river delta
  • But then someone wants half a duck
  • Original markets were utilitarian
  • Markets began on water transportation at river mouths, becoming cities

Markets today:

  • Amazon
  • Shopping malls
  • Street markets
  • Two reasons we buy:  hedonistic, or utilitarian
  • Markets are powerful, if you know how to shape them

Starting to see markets evolving into multi-sided markets

  • How did the shopping mall come about?  Why not a big department store?
  • Variety
  • After a while, one company can’t do it
  • They open up a platform and let others create more variety
  • Have gone through phases where one company could not provide it all
  • eBay, Amazon, are all evolving into multi-sided markets

What is the role of markets?

  • (1) Market has a huge role in coordination
  • How would you know where to get a tool, if you didn’t go to a market
  • Need to go to a place, e.g. Amazon
  • When there are so many tools and capabilities, it’s a huge role to find who has what, who wants what, and who will pay
  • (2) Must have a mechanism to fulfill needs
  • The exchange has to consummate through the price
  • Apple Pay is now coming in
  • (3) Allocation and reallocation of resources
  • When the demand for tea goes up, the production goes up
  • When Christmas comes, products come in
  • This is why Apple wants to know what you want to use the product for
  • Have you ever tried to establish a price to sell to a friend?
  • The market helps to lubricate the price setting, sometimes through auctions (eBay), sometimes through proposals
  • (4) Provides choice and freedoms to absorb variety and individual heterogeneity
  • (5) However, markets will create externalities (pollution)
  • In the digital world, markets bring up issues of privacy
  • (6) Markets may fail, or might not exist, e.g. public goods
  • e.g. U.S. doesn’t have a coast-to-coast railroad, but who would pay for that?
  • Often, the state will say they’ll pay for it, as a public good
  • Who will pay for roads
  • (7) Markets may need to be regulated
  • Typical theory of the firm says that shareholder equity matters, or labour — opportunism to cheat, lie

Who else does this?

  • Would the state do this better?
  • Centralized planning:  communism, where the state does all of these functions
  • Then people say, don’t want the state to do this
  • But then:  when would the state do it better?
  • Some would say that the state does better in health
  • Have NHS, universal healthcare
  • Obamacare is a strange mix of healthcare and payers
  • The market does this, but the state gives it a hand
  • HAT?  Market socialism?

Advances

  • 1975, personal computer
  • Who owns and accesses that information?
  • We started with a dumb terminal with a big head (mainframe)
  • We then went to smart terminal with no head (personal computing)
  • Now, back to smart with big head?
  • 1979, digital music:  we can digitize the analog
  • The first possibilities of digitalization, can send it everywhere
  • Today, can digitalize the colour of a book cover
  • Will move into practices
  • 1989:  The worldwide web
  • We can move information
  • 1974:  Universal Product Code, revolutionalized supply chains, gave clue that we could track everything
  • 1973:  Mobile phone:  we can do (whatever) on the move and on demand
  • Universal utility belt, a superpower
  • But who knows what we’re doing?  Apple does
  • 1995: GPS, we know where we are

Four major influences:

1. Globalization, role of markets have changed

  • Manufacturing to China
  • Prices are political, protectionism
  • Entrenchment?

Digitalization

  • International Journal of Research in Marketing:  “Internet of Things: Review and Research Agenda”, can e-mail Irene to ask for PDF
  • Richard Normann called this liquidification
  • Irene calls it leaking
  • Information will leak out everywhere
  • Details on train, where it will arrive, space in one car for seating, another car for bicycles
  • They physical thing is leaking, new transactions
  • You don’t pay for search, would you pay for the train?
  • The data is liquidified, it’s moving everywhere
  • How do you price information of the train?
  • We used to buy CDs, now pay $9.95 a month, have a bath and soak playlist, have a barbeque playlist, each created for contexts
  • Should this reward, or punish entrenched places

Connectivity:

  • From computers, to people, to everything
  • What happens to exchange?
  • You don’t know who wants half a duck for a little bit of vegetables
  • What’s the role of money?
  • What’s the role of the social economy, where can pay someone for cooking by walking their dog
  • These all disappear from the GDP, but our lives may not be that bad
  • AirBnB and Uber have taken advantage of connectivity for exchanges

Computers, Computable and Connected Smart Things

  • Have something that would catch all of the information like a PC would break up into parts of the body
  • Service provision may not be from the firm
  • Ph.D. studying the role of the firm?  Coase says it’s efficiency.  What if everything was known in parts?

Markets change

  • Locations/places, physically and spatially
  • In time, both absolute and relative time between buying and using
  • Friction is the separation between the purchase and the using it
  • Don’t have variety of tea in the morning, it can’t be digitalized
  • The last yard:  the market of the future
  • Who will buy?

Look at markets from value, variety and viability, maybe the markets haven’t changed so much

  • Market inefficiencies
  • Path of least resistance
  • On RyanAir flight, can’t get a Cafe Nero coffee; but on a hot day in front of Empire State Building a water vendor will come
  • Vendors will come because they will pay, in context, and in demand
  • This is where wealth is

More than 50 years of an exchange economy, looking for a business model

  • Three parts:  (i) the market, (ii) the experience, and (iii) the offering
  • In the digital economy, how you design the offering will be more entangled with the experience, and how you pay for it
  • When you have the firm paying for music, it changes the experience, the way you use it
  • Connecting products to it, then different industries can creep in
  • Amazon, moving into video
  • Google, moving into physical space, Nest
  • Moving to the domain of connected stuff, serving you to give different capabilities

The future?  Beyond the research, crystal wall gazing

  • The future is beyond capability (way beyond markets)
  • Belief the future is through amplification and augmentation
  • The ability to be in multiple places in multiple times — have cameras in the house, can view from anywhere
  • Choices and freedoms, want to work from a beach, that requires a lot of augmentation
  • Augmentation in demand, when I want it
  • To shape society, we need to shape markets, not merely reflect it
  • Bots:  Strive for individualization as much as we strive for automation
  • Human beings will always fight back
  • Market cap of Facebook, Amazon, Google, Twitter is USD$988 billion
  • Market cap of P&G, Nestle, Coca Cola and Samsung is USD$815 billion
  • Epic collision between companies on data, and companies that sell things

As an IN-IT thinker, could shape this

The new battlefront is the control, access and combinations of personal data for the augmentation and amplification of human capabilities

  • This means the control of personal data

Need to intervene:  http://hubofallthings.com

  • Layer missing, want some personal data back
  • I could have a HAT, could use it to analyze my data
  • If me make the HAT fee, and standardize, yet personal for own data, then it will be viable for the firms to create apps on top of that
  • Have spent GBP1.2M across 6 universities
  • How do we internalize externalities
  • Have to create a market for personal data
  • If go to a restaurant, and have a hat, they could give you your data back
  • Today, we have terrible knowledge ability, recall ability
  • Companies have it, why don’t we have them as individuals?
  • It’s an irony
  • When you sign up with Google and Facebook, your protection of personal data is pathetic.
  • But if you host with AWS and sign up with Tesco, going near that data would become industrial espionage
  • Instead of waiting for governments to come to this, could do this
  • Rolling out HATs in UK and Singapore in 1H2016

[Questions]

Digital innovation relevant for physical products?

  • Path dependency is important
  • If used to a certain world, hard to change
  • Toilet manufacturer can put in sensors to measure urine, but he thinks he’s a toilet manufacturer
  • As an SME, it’s hard to get funding together
  • His market is builders, not consumers, where he doesn’t have competence, doesn’t know which channel to use
  • No one has a toilet app
  • The whole process of getting into a new value system requires a transversal of innovations
  • Digitalization liquidifies information where it’s important
  • Instead of having a sensor in a beer glass, can sell more by having a bartender coming up to ask you
  • For consumer packaged manufacturers, their data stops at the grocery store
  • Meta information is important, e.g. close to empty, when and how you consume them
  • A lot of money in CRM, when and where you buy it
  • Reverse supply chain:  waste and recyclables, have a huge impact on packaging
  • Saying it’s all digital, which one goes in first?
  • Glass is becoming more digital, it can become dark to become a screen to project
  • Materials, and the ability to absorb digital become important

Big data

  • An externality, don’t know where the data could be used
  • Could be used to figure out who you are, where you are
  • See HAT video
  • Firms have no choice but to anonymize the data
  • The HAT has more power than the firm, because can share my data
  • Big data solidified the need for understanding data science, but more through algorithms than insights

Control of personal data, trust.  Can be handled through blockchain

  • HAT is all of the metadata, could be disruptive more in the digital world than the physical world
  • Supposed can establish things as fact, rather than speculation
  • Blockchain gives a mechanism where you can trust the fact; trusting the vendor is another story
  • Imagine all of your life, if everything is a fact
  • Think of a plumber with all of his work is fact, and there’s defects years later
  • Immutability is a factor:  when I jump, how do you know it’s me, and not my dog on the activity monitor

When value is created?  e.g. fire extinguisher, insurance, may never get benefit, although do have peace of mind

  • Many people look at function, in terms of value
  • Peace of mind is enduring when you have it, it’s a value in use (as opposed to value in experience)
  • Have a Ferrari in the driveway, but never drive it, get the value of status
  • “Value in use” isn’t a good term, “value in experience” is better in multiple dimensions

Variety, behavioural economics says beyond a certain level, the choices get harder, not easier

  • Variety more in experience, different from variety in buying it
  • If too much variety at the point of exchange, it adds costs to the person
  • A lot of variety in experience is taken care of in experience
  • At point of buying, want wide variety, but less complexity

Commercial plan on rumple

HAT data exchange, charge for privacy, etc.

  • An Apple model, providing a device, but money is made separately in the apps

Toktok:  government mandating security

[Slides available on request by contacting Irene Ng]