Summary of Lecture 2 – Part 1, 14/08/2012

We had back to back lectures on first two days. The readings for the second session were divided into a short case study on SAP (SAP – A Company Transforms Itself Through Social Media [PDF]) and a relatively more academic article “Social Media? Get Serious!” There was also the IBM CMO study, but a lot in that report doesn’t directly correlate to my course. The important takeaway from IBM study was that social media now appear among the top two challenges faced by most chief marketing officers (CMO)! I think that the combination of business analytics and social media is perhaps even more challenging. This graph here shows the under-preparedness of the CMOs. (On a side note, surprisingly they are relatively less unprepared in ROI accountability. More on this later on my other blog Marketing Equity)

Data explosion and social media are the top two areas of CMO under-preparedness

SAP Case

SAP is one of the largest enterprise software companies in the world. According to its ADR trading on the NYSE, the firm’s equity is valued at $76 billion with annual revenues of close to $19 billion. Chances are that you may not have heard about this German company because they operate in B2B segment. It is instructive to study how SAP decided to build an online developer community in order to become a software platform.

Wikipedia has an entry about what a platform is. Very broadly it is a foundation on which independent developers build their services. For example, Windows operating system has been perhaps the largest software platform in the world. Several third-party software are build on it. Similarly Apple’s iOS–the mobile operating system which powers iPhone and iPad–is another example of a platform where a multitude of third-party apps are built on the basic framework provided by Apple. A true platform creates network effects (see my post about Apple’s network effects), leading to locked-in customers who remain on the platform for years. They don’t switch easily. SAP was targeting to become a platform. An obvious question is how could it convince its developers to design applications for SAP.

The solution was to create an online community of developers, bring them together, engage with them, and share content. Such knowledge creation in Enterprise 2.0 is highly valuable. First, SAP created a space where developers could exchange ideas, resolve issues, and support each other. Second, SAP created and shared content such as powerpoint presentations with the developer community. Third, they encouraged active participation from the developers in creating content such as blogs. Fourth, SAP used a point system to enable earning reputation in the community. Finally, it possibly helped SAP to reach small businesses who were thus far wary of working with a software behemoth with a closed system. SAP, in other words, repositioned itself.

The lessons from SAP case are many. However, for brevity, I focus on a couple. First, big enterprises can benefit from opening up. There is always the threat from getting exposed to competitors and hackers. But when you know about these threats ex ante, safeguards can be put in place to mitigate them. SAP took a bold step of opening itself to the world, and it was richly rewarded. At the time of writing the case, they had a thriving community of half a million developers! SAP could add premium content to the community at a price, thereby using (sort of) a freemium model–providing stuff free to bulk of the people and value added stuff at a price to a few. Such opening up let SAP experiment with the pricing. It also created an opportunity to connect to numerous small businesses. Second lesson is that social media marketing is not limited to B2C firms. SAP showed that you can run and grow successfully an online community of developers. Such examples provide evidence that with careful consideration and unrelented effort, B2B social media strategy can be crafted.

[To be continued…]

IBM CMO Study

Last year IBM conducted a study interviewing 1,700 CMOs across the globe. Some key finding from the report –

“Our interviews reveal that CMOs see four challenges as pervasive,universal game-changers: the data explosion, social media, proliferation of channels and devices, and shifting consumer demographics. But CMOs from outperforming organizations address these challenges differently from other CMOs”

I was curious to know what the successful CMOs do different. And lo and behold, there are three things that we keep on teaching to our students all the time and still many never seem to appreciate them –

1. The most proactive CMOs are trying to understand individuals as well as markets

2. CMOs in the most successful enterprises are focusing on relationships, not just transactions

3. The outperformers are committed to developing a clear “corporate character”

Finally, something my marketing analytics students will appreciate –

“Our research shows the measures used to evaluate marketing are changing. Nearly two-thirds of CMOs think return on marketing investment will be the primary measure of their effectiveness by 2015. But proving that value is difficult. Even among the most successful enterprises, half of all CMOs feel insufficiently prepared to provide hard numbers.”

Read the full report here –

Apple’s Network Externality

Palgrave defines network externality or network effects as follows:

Network externality has been defined as a change in the benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind of good changes.

In layman’s language your value of using something is dependent on how many others are using it. Most technology companies are critically dependent on network effects. An example is a telephone. You get the most value out of a telephone only when there are many others who own a telephone and you can use yours to get in touch with them. Although the network effects can be both positive and negative (where you lose value from higher usage by others like in exclusive luxury items), in this post I focus on positive network effects only.

Network effects can be categorized as

1) direct where you get the benefit of a product directly because others are using it. An example is telephones.

2) indirect where you get the benefit of a product not from the usage of the same product by others but because of the peripheral products that are developed because of the consumption of others. This sounds complicated but it is not. For example, when you use an Internet browser it doesn’t matter how many others are using the same browser. However, if you consider that a higher adoption makes a browser dominant and leads to more developers creating third-party add ons (like in Firefox and Chrome), you obtain more benefits from added functionalities because others are using the same browser.

Apple until the beginning of the last decade was at the losing side of network effects. Windows even today dominates the PC operating system markets worldwide because of the indirect network externalities created by its widespread adoption. Nobody really cares whether the person sitting next to you is using a PC or a Mac. But several software developers have designed their systems to run on Windows alone. Since there is a small market of Mac users, the software makers may find it unprofitable to write codes for OsX Lion, Apple’s operating system for computers. For example, last year I was told by a friend that she couldn’t install SAS, the statistical software package, on her Mac and therefore had to buy and use a Windows-based machine.

However, with the introduction of iPod, Apple changed that game to make network externalities work for them. iPod-iTunes present a classic case of indirect network externality. Again, it perhaps doesn’t matter much whether the next person is using the same brand of music player as you do. (In fact, there might be some negative network externality if you derived exclusivity due to your shiny iPod in early 2000s!) But iTunes revolutionized the way music is made available to people. Of course it makes a lot of sense to buy a music player that runs iTunes because that’s the world’s largest online music store! Apple continued their triumphant march into the complex world of network effects by launching iPhone and App Store. There is no direct benefit people derived by using an iPhone that is also used by millions. However, it was the App Store that is predominantly the crowd puller. Again, the indirect network effect is at play here. Today the situation is that most app developers want to design apps only for iPhone or Android [Audio].

An Example of iMessage in iOS 5

Lately Apple has started looking into taking advantage of direct network externalities as well. FaceTime was one such attempt. If you have enough people on Apple devices, it perhaps makes sense to buy an Apple product and use FaceTime to communicate with them. More your network uses iOS devices and communicates using FaceTime, more valuable Apple products are to you. However, we don’t know how well it is doing (Check the comments in this article). Just the last week, Apple decided to take another shot at direct network effects by introducing iMessage, the new service in iOS 5, which lets you send messages to another iOS 5 device. This perhaps makes iPhone more compelling for the people who have other friends using iPhones. I personally know several BlackBerry users who preferred it due to the BBM feature. (Here is a comparison between the two services.) It’s is certainly difficult to know to what extent Apple will benefit due to this direct network effect. However, it is likely to assist it in increasing the adoption.