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Read a very pertinent article on Social Marketing on Knowledge@Wharton. The article talks that the buzzwords like Fansumers, viral video etc are more than the marketing gimmicks. These trends are game changers and are going to impact the conventional marketing thinking at Madison Avenue. There is a real need by the consumer to be heard and make an impact on the future product. According to the article “Online technologies allow customers to communicate in new ways with one another, and companies must decide whether to ignore, co-opt or dive into these new waters of interactivity.” Those companies that want to dive into these new developments in Web 2.0 will find that ‘peer’ production has had the disruptive effect on 2 aspects of marketing.

1. Market Research Tool: New and large number of willing and mostly unpaid consumers can be tapped to understand their concerns and objectives. Market Research can be driven by the consumers and firms can take the role of ‘facilitation’.
2. New Channel for Branding: You Tube video and other viral marketing technique has created new ways to ‘soft-pedal’ the brands – brands that are not ‘in your face’ yet ubiquitous. The marketing department needs to understand that their brand message needs to be less aggressive.

The most important conclusion the article makes is “Brands are not in control any longer, and those that let go and put the power in the hands of the user will do well”. Thus Web 2.0 has brought about major transfer of brand control. Let go of your control on your brand - is the message but it’s the hardest thing for a company to let go. But, sooner or later the businesses will understand that by democratizing their brand’s control, a far larger captive audience can be drawn to the product. Letting go of the control on the brand will automatically create an ecosystem of consumers who have the vested interest similar to that of the firm to make that brand successful. But the firm needs to manage and monitor that ecosystem.

Take Dell as an example. Dell now provides computer with Linux operating system. There is a captive base of Linux fans who want the Dell Linux box to succeed. Dell marketing department can take advantage of the Linux users’ vested interest to create a sustained buzz both online of offline.  Another Example is branding of Ron Paul, the Republican Presidential Candidate here in the US. Yesterday his supporters raised $6 million on internet in a single day! All this was done by the supporters without coordinating with Ron Paul. Ron has set his initial vision for America and his supporter using online social media have empowered themselves to promulgate his brand. If you look at it, supporters of Ron have more control on his brand than Ron himself. Because of that, branding of ‘Dr. No’ is far more pervasive compared to other Republican and Democratic contenders.

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Bullwhip effect is an important concept in Supply Chain Management. This is the phenomenon when a slight change in demand gets amplified as you move away from the customers in the value chain. Let’s say the quantity of office supplies sold by the retail stores in a region has stagnated. But if the demand increases say for four months linearly, the retail stores see this as a trend and begin to anticipate increased future demand even though its just a temporary effect. The retail stores will increase its order size from the distributors. Distributors, who see this trend, anticipate even larger orders from the retail shops and will place larger order with the suppliers. This trend continues down the supply chain amplifying the effect. Bullwhip effect is not new but the ‘Wisdom of the Crowd’ has the tendency to exasperate this issue even further.

As collaborative technology matures, and as the number of people ‘peer’ producing increases, common sense tells that the Bullwhip effect should reduce. More the number of people involved in the process, more ‘eyes’ to identify the potential and probable Bullwhip effect, right?  Thats the main selling point of crowd sourcing - “many heads are far better than one”. But, few incidents over the past few years indicate that the Bullwhip effect gets lot worse if the number of people involved increases.

• The US Stock Bubble of 2001: Bull market of late 1990s that led to the dot com bubble highlighted the ‘irrational exuberance’ by the investors. Large number of investors got involved in the stock market because of the democratization of investing brought about by several on-line trading firms. Low trading fees led to frenzied trading. Though Web 2.0 technologies were not available then, primitive technology to support the ‘Wisdom of the crowd’ existed in form of message boards and multiple online web based investment portals. Several smart people like brokers in New York, venture capitalists and tech workers at Silicon Valley were involved in creating an euphoria for the tech stocks. None of them saw the ‘bubble’ leading to crash of NASDAQ in late 2001.
• Global Credit Crunch of 2007: Again very smart investors (both large and small) are getting bitten by the Credit Crunch of 2007. In fact involvement of larger number of people in the real estate market has led to soaring of property value, which in turn led to the sub prime mess. Banks, Mortgage industries and other financial institutions who deal with risk every day got side tracked and surprise – surprise they did not anticipate the coming sub prime and liquidity crisis. From borrowers to lenders, everyone globally is seeing their investments getting decimated.

As seen above, the amplification is strongly correlated with the number of people involved. As more people get plugged directly or indirectly in the global economy, we will see some wild gyrations. Wisdom of the crowd acts in a harmful way doesn’t it. Why is that? Why, when the number of people involved increases, our collective ability to detect anomalies and ‘bubbles’ diminishes? The answer lies in what Warren Buffett calls ‘Institutional Imperative’ (see my blog Traditional Manager and the curse of Institutional Imperative). Buffett describes the ‘Institutional Imperative’ as that need for people to act and do like their peers no matter how irrational it may seem.

This institutional imperative ‘mixed with’ the wisdom of the crowd is the sure recipe for creating an enhanced Bullwhip effect. We will see more volatility in the market as the number of people involved increases. The hype of crowd sourcing and ‘peer’ production needs to be dealt with carefully. Though there are some great applications that can take advantage of user created content, I think there is also an elevated risk of going in a wrong path for a long time without being corrected because of the ‘wisdom’ of the crowd.

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What is Institutional Imperative? It’s a concept that is promoted by Warren Buffett, world’s ‘smartest’ investor. Buffett describes the institutional imperative as the “need” for the managers to act and do like their peers no matter how irrational it may seem. Its peer pressure for CEOs, Executives and the Managers. I have paraphrased the definition from Ken Little’s article Understanding Warren Buffett. Buffett makes sure that the management has checks and balances in their organization to resist Institutional Imperative. I am not sure if Buffett invented that phrase, but its one of the investment tenet he uses to evaluate companies before he buys them. By the way, there is not Wikipedia entry on Institutional Imperative yet.

Traditional managers (I am talking of executives as well as mid level managers) no matter how smart they are will be tempted to follow the herd by that invisible ‘institutional imperative’ force. If companies A, B, C are all doing the same thing, then it makes sense for the managers in company D to mindlessly follow the same strategy. “Hey, may be the managers of company A, B, C know something we don’t know” - that is the thought process of the managers in company D. Never mind, this ‘new’ strategy will take everyone (management, owners and customers) down the road to less profitability. This, from an investor perspective, leads to misallocation of capital and resource causing lower ROE (Return on Equity). Hence Warren Buffett looks for companies with strong management that can resist the curse of Institutional Imperative. This analysis of finding the management is qualitative in nature, and Buffett uses his intuition to identify companies with strong management.

Why is Institutional Imperative relevant to implementation of IT Strategy? Well, if the managers cannot resist the temptations to ‘conform’ to everyone in the industry, then the implementation of their IT Strategy (as a matter of fact their Business Strategy) is not based on their firm’s core competency. Mindless copy-cat Strategy will lead to suboptimal results. I strongly believe that management needs to institutionalize checks and balance to evaluate if their Business Strategy (and their IT Strategy) is not formulated due to the curse of Institutional Imperative. Now, in this hyper growth globalization period, it is extremely important to be very proactive in identifying and resisting the curse of Institutional Imperative. This alone will enable the traditional managers to differentiate their products or services in the long run.

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Two recent Information Week’s blog talk about Data Center Strategy for Google and Microsoft. They are aptly titled Google’s Data Center Strategy Revealed and Microsoft Drops Few Data Center Strategy Hints.

Though the titles are provocative, both the blogs provide scant detail regarding each company’s Data Center Strategy. Information has been scarce for a long time regarding how these companies manage their ever growing Data Centers. Not only their current location but also the future locations for the Data Centers are a big secret. Both Google and Microsoft which are locked in a fierce competition closely guard their Data Center Strategy. In the IT world, you cannot get more commoditized than Data Center Infrastructure. From a hardware perspective, you house a bunch of computers together and achieve economies of scale, right? How could firms like Google, Microsoft, Yahoo, IBM etc. achieve differentiation with the commodity service like Data Center? This is where I think non technical executives and academicians like Nicholas Carr get IT wrong. Granted, the hardware underneath the computing power in the Data Center is the same in all the organizations. But, the combination of hardware and software solutions like data caching algorithm, data retrieval and storage algorithm that sits on top of that ‘plain vanilla’ hardware provides the Differentiation. Every firm has a proprietary solution to make data storage, retrieval and search faster and that provides a competitive edge. For example in the book Google’s Story there is an account of how Larry Page and Sergey Brin initially ‘rewired’ throwaway computers at the Stanford campus to manage their ever increasing storage needs. That ‘rewiring’ (i.e. combination of hardware and software solution) is the secret sauce that gives the firm their competitive advantage. Every one of the above mentioned firms have allocated huge R/D resources to tweak their ‘secret sauce’ to gain milliseconds in performance.Even though hardware behaves like a commodity product, the ‘value added’ services on top of it will continue to provide the much needed differentiation. Nicholas Carr’s vision that IT will soon begin to behave like Electricity (that’s how he compares IT in his Harvard Business School Case titled IT Doesn’t Matter) might never come to fruition.

Microsoft or Google or any other firm will never reveal their Data Center Strategy!

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