Across industries, companies are struggling to determine how best to deal with the power that social computing gives customers to share with millions how they feel about a product. This new-found power in the hands of customers creates an openness of information (positive and negative) that is having a dramatic impact on the success of new products and overall company revenues.

A company can take four approaches to address this new openness: ignore, control, mimic or embrace. Of these options, embrace provides the greatest opportunity but requires the most change from the company. Enterprises that embrace this new openness and become truly open companies will realize greater economic returns than their competitors.

Social Computing Creates Profound Openness

Your customers have always shared their thoughts about your products and services with a small circle of family, friends, and colleagues. Extensive research has shown that this "word of mouth" communication is the most trusted source of information about your products and services. One of the most recent and comprehensive surveys focused on Internet-based word of mouth is one published by Nielsen in October, 2007 showing that 78% of consumers globally trust consumer recommendations more than any other source.[1] In the past, each individual’s circle of connections was limited and isolated, and the platforms to communicate to larger groups were expensive (e.g. TV or newspaper advertising). Therefore, only companies and some established ratings agencies (e.g. Consumer Reports, JD Power) had the money to spend on distributing product information to large groups. This structure led to companies creating, distributing, and controlling most of what was said about their organization and its products.

Today, social computing has brought together these circles of connections that can reach everyone on the Internet — over 1.2 billion people[2]. Common functionality such as "email a friend", "promote", and "rate" makes it very easy for humorous or shocking content to spread like wildfire in this environment — a groundswell of word-of-mouth activity. Numerous companies already have had the painful experience of being caught up in one of these Internet waves. One classic example is how quickly videos spread of Dell computers catching fire, and how quickly this information spread across the Internet. A more humorous example is the successful effort by fans of a CBS TV show called Jericho to resurrect the show after it was canceled. Through a groundswell effort, fans sent 20 tons of peanuts to the CBS president to change her mind for being "nuts" for canceling the show. Not only did it work, but an online nuts company leveraged this effort and created a place on their site for fans to talk about Jericho — a savvy move to capture revenue and build long-term loyalty.[3]

Organizations are at different places in coming to terms with this new reality. In many organizations, the Marketing department has accepted it but the Legal department has not — leading to contradictory actions. If your company is still in denial about the new openness, you should realize that any morning you may wake up to find yourself caught up in a groundswell of communication about your company.

Four Options to Address the New Openness

There are four options your company can choose from to address the new openness: ignore, control, mimic, and embrace.

Ignore

Many companies are still in denial about the impact social computing will have on their business. Many see it as an over-hyped fad that is best to ignore, and not become a distraction. Ignore is a reasonable response if your industry has yet to feel the effects of this new openness. However, industries that sell directly to consumers and especially to younger demographics are deeply impacted by this trend and are already immersed in one of the other three response modes. Industries that sell very high ticket items to businesses and governments (e.g. aerospace, defense) are least impacted.

Caution is advised when choosing this option because openness can move very fast once it starts. For example, the Department of Defense has recently embraced open source software (another manifestation of openness), and Red Hat has successfully built a $100 million business in a very short time at the expense of players like Sun Microsystems that never thought they had to worry about openness in the Defense Department.

Control

The Legal departments of most organizations, even in those industries most deeply affected, are generally still attempting to "control" this unwanted openness that they perceive violates copyrights and trademarks. The music industry is deeply engaged in this option as the record companies aggressively pursue copyright infringement cases against individuals who share music over the Internet. This can take one or more of the following forms:

• Enforcement actions regarding copyright infringement
• Preventing customer forums on the website for fear of negative comments
• Preventing engagement in social networks for fear of associating with negative behavior
• Increasing the secrecy of product roadmaps and plans
• Preventing new product suggestion websites for fear of a customer suing if one of their ideas becomes a successful product

Unfortunately all of these attempts are swimming against the tide of the new openness and are unlikely to succeed — as we see in the music industry. It also completely alienates your customers that are most fervent about the new openness. Through these actions companies provide exactly the type of content that can create a negative groundswell that can overwhelm a company.

An appropriate amount of control is appropriate to prevent others from using branded copyrights and trademarks, and necessary to demonstrate continued right to use by defending them. However, brand value is largely intangible, and the value resides in the minds of customers. Defending a brand too aggressively can easily damage that intangible value and destroy exactly what was to be protected. Caution is urged in pursuit of this option.

Mimic

"If you can’t beat them, join them." This approach is popular among many companies today. This option attempts to take existing advertising approaches and modify them to be more in tune with the Web 2.0 experience. Interactive advertising agencies are all aggressively promoting this option to their clients. Their advice can be summarized in the following steps:

1. Consumers are spending more time online in social networks and less time reading newspapers and magazines and watching TV.
2. Consumer behavior online can be segmented into groups called Creators, Critics, Collectors, Joiners, and Spectators or some other classification.
3. Companies need to advertise their brands online in novel ways that will generate impressions that are cheaper than offline CPMs, and mimic social networks by adding similar functionality to company microsites.
4. Let us help come up with a novel campaign that will generate page views, impressions, and maybe a contest. We will place branded offers in these new online communities (mySpace, Facebook), get them to come to a microsite we design to mimic the experience, and allow them to do novel things that will create word-of-mouth traffic.

This sounds like a reasonable approach — it must be if they are all recommending roughly this same approach to their clients. But this response is filtered by the interactive agencies’ view of the world, their current capabilities, and the positions and expectations of their clients. There is a reason that the response from interactive agencies is similar: it is simply the advertising response to new technology. The generic version of the above four-step response is the following:

1. Consumers are using a new technology (radio, TV, cable TV, DVDs, games, cell phones, search engines, etc.).
2. Consumers use it differently and you can group people that use it similarly together.
3. You need to increase your advertising budget and advertise on this new technology.
4. It's new and different so help is needed. We can help.

The problem is that this time companies are not dealing with simply a new technology to display advertising. This new openness is enabled by social computing that fundamentally empowers customers to share their thoughts about products with greater credibility and with as much reach as Marketing departments. As part of this new openness, customers expect an honest direct conversation with companies — not an advertising message.

Some believe that advertising has no place in a new open world, and money should no longer be spent on it. A good example of this is Zappos.com. The online retailer started in 1999 with shoes, and by 2003 had $70 million in revenue. They then chose to spend $0 on advertising and instead invest that money in the quality of the customer experience, primarily through free shipping, returns, exchanges, and a call center staffed 24/7. To the shock of advertising agencies, the result is that their revenue for 2007 has increased over ten times to $800 million. This dramatic growth is a result of the new openness of word-of-mouth spreading faster via the web and social computing then was ever possible before.

Not only are advertising approaches less effective than ever, but advertising provides the perfect fodder for a negative or humorous groundswell that negatively impacts your company. Much like the teacher’s voice in Charlie Brown, it drones on and on and no one really listens, but it certainly is easy to make fun of it.

Embrace

The core concept of the new openness is the realization that customers are now in control of a company’s perception in the market. If a company makes customers enthusiastic about their products they will share their positive experiences with many others online, and product demand will grow. If customers have negative experiences, these too will be shared widely and negatively impact the company. This is a scary concept to most organizational functions. It makes much of the current approaches by Marketing ineffective. It scares Legal and confuses Sales. This is truly a disruptive change that many organizations find hard to embrace. But what if companies do embrace the new openness and become an open company? How much is there to gain? What is the best way to get started?

How much is there to gain? We are in the early days of the new openness, but there have already been some astounding valuations paid to young companies that have figured out how to take advantage of it: MySpace acquired for $580 million, YouTube acquired for $1.65 billion, and Facebook valued by Microsoft’s $240 million investment at $15 billion. More established companies are also finding significant value by embracing customers and including them in the product development cycle. Legos allows customers to design a custom Lego assembled solution on their 3D Lego Builder, and then purchase and ship the exact parts needed to build the design. Another example is Swisscom Mobile Labs (http://labs.swisscom-mobile.ch) which is now able to post beta products to a lab site and receive direct feedback from over 500 lead customers in less than a week. The result has been a dramatic reduction in the time to develop and launch new products as well as the ability to make a no-go decision more quickly on less promising products. Over ten new products have been launched through this process.

Where to Start

We've had the good fortune to work with a number of leading organizations in their efforts to become open companies.[4] Out of this client work we have found three common criteria shared by organizations that are successfully on the path to becoming open companies.

First: Focus your energy on the actual product or service you are offering. In the new openness it is much harder to make an inferior product successful. Negative product information will spread faster and be more credible than large amounts of advertising and other marketing spend. Engaging in the new openness is ineffective and dangerous if it is done only at the time of product launch — it must begin sooner, at product inception and development. Only if you are completely convinced that a new product is going to be a success should you engage blithely in the new openness, because if you are wrong you have simply made it easier for people to spread negative information about your company and its products.

If you believe your products do have issues then engage customers now in a process to help improve them. By being open and bringing them into the process you will enhance their opinion of your company, improve the products, and create ambassadors to help promote the next releases.

Second: Adopt Open Innovation. Most companies are still using product development processes that rely almost solely on internal individuals for product ideas, enhancements, and go/no go decisions. Even those companies that talk about "the voice of the customer" and do ethnographic research, focus groups, etc. are still working under the illusion that the company is in control of all of these efforts by determining the groups, the questions, and interpreting the results. These approaches are decades old, slow, and inferior to open innovation models. Open innovation asserts that a significant portion of new ideas and enhancements come from outside organizations, primarily among power users of your products. The challenge therefore is to find these power users and engage them directly early on in the product development process and create a community for them to feed off each other to inspire even better ideas.

The best evidence for the assertion that open innovation outperforms closed innovation is to examine a direct competition in the marketplace between these two innovation models — closed source (proprietary software) vs. open source. In areas of direct competition, open source projects that leverage open innovation such as Linux, Apache, MySQL, Eclipse, etc. have been gaining market share at the expense of closed source vendors. They have been so successful that many large technology companies (e.g. IBM, Microsoft, HP) have been forced to embrace these new successful players.

Third: Leadership can start in many places, and it will spread quickly. As with most disruptive change, the hardest part is getting started. Once companies embrace the new openness and directly engage with customers, a lot of the actions that follow seem intuitive and obvious. The question is: who will stand up and be the first to get started? In our work, we have seen Directors and VPs of Marketing, Support, Product Management, and Customer Satisfaction all act as leaders of an open dialogue with customers. Anyone who has direct interaction with customers regarding the product can begin the process of openness.

We have found that once one group starts the process, other groups realize the benefit and extend the conversation with customers. For example, at one client the process started in product management through creation of an online new product community that shared early versions of new products for feedback, and enabled customers and partners to share how they were using the product and any modifications they had made. Once this site was up and running, Support found it a useful resource to answer customer inquiries about new products and share ideas for enhancements. Once Sales & Marketing found out about it they realized that the active customers were really ambassadors for new product launches and could help spread positive word-of-mouth. Leadership started in product development and then spread quickly.

Conclusion

Across industries, companies are struggling to determine how best to deal with the power that social computing gives customers to share with millions how they feel about a product. This new-found power in the hands of customers creates an openness of information (positive and negative) that is having a dramatic impact on the success of new products and overall company revenues.

There are four identified approaches a company can take to address this new openness: ignore, control, mimic, or embrace. Of these options, embrace provides the greatest opportunity but requires the most change from a company. Those companies that embrace this new openness and become truly open companies will realize impressive economic returns versus their competitors.

There are three keys to success with the choice to embrace: (1) focus on your products and services, not on advertising; (2) adopt the concepts of open innovation; and (3) leadership can come from various functional areas, and success will spread quickly.

[1] http://www.nielsen.com/media/2007/pr_071001.html
[2] http://www.internetworldstats.com/stats.htm
[3] http://www.nutsonline.com/jericho-speakup.html
[4] See Optaros case studies on Swisscom Mobile and Endeca