Creating value

Recently, there was quite a hullabaloo over a post by Jeff Jarvis documenting his issues with Dell’s customer services. There were some strongly voiced opinions about what Dell’s priorities should or shouldn’t be – keep shareholders happy by selling products (and making money) versus keep customers happy by providing a good service.

It shouldn’t take a rocket scientist to spot that the two subjects are somewhat related – unhappy customers have this annoying habit of demanding refunds and choosing to take their business elsewhere. What surprised me was how adamant some people were that the company’s priority is to complete a monetary transaction, i.e. sell a product, and that customer relationships hold no value, – an inconvenience and financial burden best avoided if at all possible.

It shouldn’t take a brain surgeon to spot the flaw in this outdated view, but it takes a better writer than me to explain it clearly. John Hagel has an excellent post describing how how markets are being changed by three shifts occurring in parallel:

1. We are moving from a world of scarce shelf-space to scarce attention
2. Costs of production and distribution are declining on a global scale, whilst customer acquisition and retention costs are rising
3. The decline in interaction costs make it easier for customers to identify vendors, find information about them, negotiate, monitor performance and switch to another vendor if they are not satisfied

Net result: Value creation is shifting from businesses driven by economies of scale in production to businesses driven by economies of scope in customer relationships.

I think that result explains why Dell is beginning to struggle – they became the ultimate value creator in their market when it was governed by economies of scale in production. But the market has shifted and the business model that created success in the past no longer provides sufficient competitive advantage. Believing there is no value in customer relationships is unlikely to be a successful strategy for any business going forward…

And on a somewhat-related I.T. note – I don’t think current customer relationship management (CRM) systems are in a position to leverage economies of scope, despite their title suggesting they ought to be… I think most of them are designed to be consumer relationship management systems – intended for communications controlled by the supplier rather than interactions driven by the customer.

Links:

• The age of customerism and producerism – blog post by Jeff Jarvis responding to Amanda Chapel’s claim that there is no value in customer relationships
• Mastering New Marketing Practices – blog post by John Hagel describing the three shifts outlined here, and their impact on business systems
• Dell against the world – article in Red Herring, documenting Dell’s reaction to poor results (i.e. not planning to change strategy)
• Changing Habits – related blog post
• Internet Economics – where this post is being filed