Barry Libert

The Following article appeared in HBR on July 3rd, 2015.

The idea of “co-creating” with customers has been circulating for years, but until recently few companies effectively exploited its power or understood its contribution to the bottom line. True, customers can customize their M&Ms, build their own bikes with Trek Project One, create unique doors for their home at Jen-Weld, and design their own Nike running shoes. But these co-creation models produce only one-off physical goods, and none represents a fundamental shift in how these companies create value; they’re peripheral to the core business.

Today, however, by exploiting new digital technologies, firms like Apple, Lending Club, and AirBnB have made customer co-creation of value central to their business models and in doing so now rank among the world’s most innovative and valuable firms. Our research indicates that companies that make their customers partners, and share the value created, lead the pack on revenue growth, profit margins, capital efficiency, and enterprise value. We call these companies Network Orchestrators. By leveraging customer networks and their tangible (e.g. homes and cars) and intangible (e.g. expertise and relationships) assets, firms can gain these advantages of the Network Orchestration business model.

How, then, do firms cultivate these valuable customer networks? It starts by understanding customers’ affinity with the brands.

Four levels of affinity

Through our research on network-centric businesses and our experience advising hundreds of companies we have developed a framework for understanding customer affinity.

Most leaders are already working to deepen customers’ relationships—converting uninterested consumers (transactors) into passionate brand advocates (promoters). However, what these executives don’t fully appreciate is that the customer affinity spectrum extends far beyond promotion. Through co-creation, companies can access a deep well of customer capabilities, knowledge and assets.

Although the Net Promoter Score (NPS) is a market standard, customer promotion alone can’t sustain a co-creation model. Promoters might give you their dollars and promote your brand with their Tweets or Facebook “likes”, but today’s connected customers want to give, and receive, more. Creating models based on co-creation requires identifying the subset of customers with the right kind of brand affinity.

These four types of customers represent different levels of brand affinity:

1. Transactors: These customers have no loyalty to your brand. Although they may make purchases, they are unaware of or not swayed by your brand proposition and do not desire a relationship with your company.

Example: Carol owns a small business and needs a customer relationship management (CRM) platform. Overwhelmed with choices, she signs a one-year contract with the first salesperson that returns her call, planning to reevaluate next year.

2. Supporters: These customers are aware of your company and brand, and buy from you consciously. They support your company by purchasing regularly. However, they do not promote your brand and they may switch easily to other products.
Example: Jim’s firm has used the same CRM software for ten years. The functionality barely meets his needs, but he hasn’t yet had the time to invest in finding a better solution so renews his contract, but only on a month-to-month basis.

3. Promoters: These customers frequently purchase your products or services and are very loyal. Their affinity is strong enough that they advocate for your company to their networks helping your company grow through word-of-mouth.

Example: Ann just switched to a new CRM platform and has heard from the sales team that it saves time and increases conversion. Happy about these results, Ann recommends it to all of her followers on social media.

4. Co-creators: These customers are so engaged with the brand that they share in the value creation, and receive value back. They create and offer their own assets, knowledge and relationships in exchange for a share of the value generated—including revenue and profits.

Example: Jacob loves his CRM software and has become an expert in its use. He decides to use its open source platform to create add-on apps that he believes will be useful to other users and posts it on the company’s app exchange.

A significant shift happens when customers reach co-creation status with a brand. With Transactors, Supporters, and Promoters, the company is responsible for fulfilling the customers’ needs. However, when a company co-creates with its customers (usually by providing a technology platform which facilitates interactions and transactions), company and customers create shared value.

To help you better understand where you and your customers fall on the customer affinity spectrum, take our Customer Type Assessment. While there are many ways to segment customers, this type of segmentation is particularly useful because of its implications for the business model.

Companies that co-create

Let’s look at three companies that leveraged digital capabilities to build customer co-creation into their business models. Each has moved beyond allowing customers to design their own products, to share value by acting as a platform to promote the customer networks’ talents and assets.

Apple’s Developer Network: Apple provides the platform; companies and individuals provide the applications. They each receive a portion of the value created, whether revenue, awareness, or utility. Over its lifetime, the app store has generated more than $25 billion for developers.

Airbnb.com: Airbnb provides the online database and some additional services; their partners provide the good sold—the properties for lease. Revenues are shared and together Airbnb and its “hosts” have built a company that was most recently valued at more than $25 billion, more than the value of Hyatt Hotels.

Lending Club: This peer-to-peer lending platform connects would-be borrowers and lenders. All of the “products”—loans and investments—are created and provided by its members. Lending Club went public in 2014 and its enterprise value is nearly $9 billion.
Co-creation advantages

Customer co-creation is central to the Network Orchestration business model. Our research shows that companies that facilitate a network of co-creators deliver shareholder value two to four times greater than companies that don’t leverage co-creation business models. We see four main reasons for this value gap:

• Greater revenue growth: As co-creating partners, customers have an incentive to help grow the business. Your success is theirs, whether the rewards are monetary or intangible. Co-creation is less a measure of “customer loyalty” than an indicator of “reciprocal loyalty,” where both parties serve each other.
• Lower marginal cost: Your customer co-creators bring an entirely new set of assets to the company, at a very low or near-zero cost (see Rifkin’s The Zero Marginal Cost Society). They may be willing to share their opinions, skills, relationships, and even their real assets (cars, apartments, etc.) for the right incentives and shared value.
• Improved customer insight: The increased customer intimacy that comes with co-creation deepens your understanding of your market, enabling you to serve it better. When customers co-create and have a vested interest in its success, they are more willing to share personal data and other assets with it.
• Increased organizational flexibility: A network of customer co-creators increases the company’s adaptability and speed. This network is distributed and self-organizing, which makes it highly responsive to changing customer needs. When a new vacation hotspot emerges, Airbnb does not need to change its supply chain or purchase new properties; instead its co-creation network naturally expands to satisfy the demand.

Five steps to co-creation

Customers cannot be coerced into co-creating. They must be eager participants in the value equation. To drive co-creation, you must invite your customers into the value equation. We recommend a five-step process called PIVOT: Pinpoint, Identify, Visualize, Operate, and Track.

1. Pinpoint where your customers currently lie on the customer affinity spectrum and the areas where they will be most interested in co-creating. Evaluate your leadership team’s openness to co-creation as well.

2. Identify the characteristics of your key customer groups, including their level of engagement, their unmet needs, and any tangible or intangible assets that could be leveraged in a co-creative relationship.

3. Visualize a new business model where your customers co-create with your firm to help meet their own needs. Based on their characteristics, design a system that will incent them to participate, with a particular emphasis on leveraging digital technologies as the platform.

4. Operate your new co-creative digital business. Fund it, recruit the right digital talent, and insulate it from the politicking of the broader firm. Experiment and iterate rapidly.

5. Track the performance of your co-creative customers and the value they add. Add new metrics to standard financial reports, including the revenues customers generate and the costs saved through their participation.

As written, these five steps seem relatively simple, but we all know they are far more difficult in practice. The biggest hurdle to co-creation is usually shifting the leadership team’s mental model. Most leaders are so accustomed to owning the value creation process that they cannot imagine the customers as active participants, instead of passive recipients.

Think of it this way: Does the hospital ask patients to help design their own healthcare? Do professors enable college students to contribute to the curriculum? Do auto manufacturers allow drivers to co-create their next car? In general, no. But they might see a dramatic change in engagement and innovation if they did.

Giving up control, and sharing rewards, may seem terribly risky, but it is the key to the co-creative business models that generate unprecedented value with lower marginal costs, and greater profits. It’s unwise to delay this journey any longer. Your customers are waiting.

The post What Apple, Lending Club, and AirBnB Know About Collaborating with Customers appeared first on OpenMatters.

The following article appeared in Venture Beat on May 5th, 2015

Would you turn over your family to some third party to act as an intermediary if you really cared for them? How about renting them back to get to know them better? Sounds pretty absurd right? But that is what most major brands (and small businesses) have done the world over with their 1.6 billion customers. And the costs of getting them back are only rising.

How did we get here you asked? Our discussions with most CEOs give some insight into this question:

• Authors: “How do you interact with your customers?”
• CEO: “We got over 57,000 thousand ‘likes’ on Facebook.”
• Authors: “Not bad. But what do you know about them and their wants and needs?“

CEO: “Not much …”

• Authors: “And how have you turned those ‘likes’ into anything tangible for your company?”
• CEO: “We haven’t really. Should we have?”
• Authors: “Yes, according to research, your customers want to co-create your future and theirs as they are doing with many of today’s billion dollar startups like Uber, Lending Club, and Airbnb”
• CEO: “I didn’t know that. OMG, how do I get them back?”

The bad news first: You will get disrupted if you do not co-create with your customers

Emerging peer-to-peer exchanges and shared economic (network based) business models are forcing a complete reset of how companies think about, act with, and relate to their customers, according to recent Gartner Research. This changed environment has already put a few old ‘closed’ companies like Kodak and Borders out of business, while open innovation pioneers like P&G and shared networks like today’s fast growth startups are showing impressive results from leveraging open networks.

According to recent research by OpenMatters and Wharton Business School, companies that share insights and economics and co-create with their network of customers, employees, investors, retailers, and suppliers are worth 2-4 times more than companies with other business models.

The result: Incumbent organizations are being forced to open up and build customer networks so the Alibaba’s and Esty’s of this world don’t eat them alive.

Put another way, the COO of Danone, Berard Hours, said “On the Internet, a brand needs to be a [real] person. It’s not only [having] a relationship with a product [that matters to customers’].”

Now for the good news: Your customers will actually help you to succeed

A recent study by Forrester Research says that the majority of customers want interaction with your company as a real “person,” not to be carted over to Facebook — only 16 percent of customers want that. Additional research over the last few years has shown that consumers actually want to be involved and want an interactive relationship with brands, confirmed by a 2014 study by PR giant Edelman Group.

But how does a company achieve having a relationship with a customer when it spends so much time focusing on its products or services and has outsourced its customers to Facebook and Twitter?

We, your customers, are already there – seeking to co-create every company’s future for us and them. For example, we are already sharing our opinions on Yelp and TripAdvisor, helping design advertising for Danone yogurt, creating new Nike shoes that have our own branding on them, and designing the future doors to our homes on Jen-Weld. P&G and others have partnered successfully with their customers for R&D innovation purposes, and many small companies use crowdfunding to finance their new products from their customers wallets (including real estate development and ownership). We, the customers, are just waiting around for the smart companies to wake up to our request to be involved and participate in our collective future.

MyStarbucksidea.com is a great example of how to build a co-creative relationship with consumers. The crowdsourcing platform lets 150,000+ customers initiate and vote on coffee ideas. Starbucks gets free R&D and focus-group work done, and customers get to share in their own coffee futures.

Your future: Share and share alike with your customers

As in any other industry, we see a massive switch to the digital world that will be mobile-first and where people share in their future and that of their brands. Traditional strategy is out, and brands have to find a way to become “like a person” on the Internet, sharing their future economics with their customers, employees, and partners – or risk losing to new, network based, shared economy startups with multibillion-dollar valuations. Thinking in terms of Maslow’s hierarchy of needs, companies that fulfill the self-actualization and self-mastery needs of their stakeholders’ will master this new digital world.

There are many software tools out there to help you implement this new customer co-creative approach, but the important first step is to change your mindset about your customers. They are more than Facebook likes that you need to rent back. They are the core of your future innovation and economics.

If Einstein had an MBA, he would have applied his famous formula for business: E=mc2. As in, the value of an enterprise equals the masses of your customers multiplied by the velocity of their contributions, squared. So don’t skip on customer co-creation and shared economics. Your future is dependent on you taking back your customers and making them your co-creative partners. Anything less will only spell trouble for you and your team.

Barry Libert is an angel investor, digital board member, and senior fellow at Wharton.

Simon Schneider is the CEO of Zyncd, a peer-to-peer expert networks for sharing ideas.

The post Why you should stop giving your customers to Facebook appeared first on OpenMatters.

The following Article appeared in Knowledge@Wharton on February 6, 2015

Advancement in digital technologies has disrupted everything, including leadership styles, according to Barry Libert, Jerry Wind and Megan Beck Fenley. Employees want more ownership rather than to follow instruction; customers want to participate in the marketing and development process; and leaders are finding that open and agile organizations are able to maneuver more effectively than organizations where “all insight and direction comes from the top. In short, the autocratic Commander, whether brilliant or misguided, just won’t cut it anymore,” they write in this opinion piece.

History is full of great Commanders. The stories of General Patton commanding his troops before D-Day, Steve Ballmer yelling at his employees to “get on their feet” at a Microsoft event, and Jack Welch berating his people as he barked his orders “straight from his gut” are all well documented. These leaders accomplished great things and relied heavily on a “Command and Control” style of leadership. However, leadership preferences are evolving in parallel with a number of market and cultural shifts. Their successors, General Colin Powell, Jeff Immelt (GE) and Satya Nadella (Microsoft), as well as a host of other executives like Tony Hseigh of Zappos or Marc Benioff of salesforce.com, more often take on the role of Collaborator or Co-Creator, rather than Commander. And for good reason: These less autocratic leadership styles resonate with today’s empowered, connected and skeptical customers and employees — often leading to increased innovation, loyalty, profit and growth. Twitter

So what has changed in the last 20-30 years to require new ways of leading? Technological advancement has created a ripple effect that is transforming the market. Today’s digital technologies — social, cloud, big data analytics, mobile and the Internet of everything — have created new, intangible, sources of value, such as relationships and information that are delivered by new business models. Along with the new sources of value, customers and employees’ wants and needs have evolved as digital technologies have created new ways of interacting with businesses. Attracting, satisfying and retaining these connected and savvy stakeholders requires leaders to learn some new tricks — but there are rewards. Businesses and leaders that adapt to this new environment see economic payout with higher profit, growth and valuations, and more (see our earlier article in Knowledge@Wharton, Why Businesses Should Serve Consumers’ ‘Higher Needs’)

New Leadership Styles

So what is a leader to do given this new digitally enabled and hyper-connected environment? Employees and freelancers (such as Apple’s developer community) want ownership, impact and recognition, rather than to follow instruction. Customers want to participate in the marketing and development process (witness how consumer/business relationships have grown on social media and the rise of crowdsourcing businesses like Victors and Spoils), rather than be told what they want and why. Leaders are finding that open and agile organizations are able to respond faster and more effectively to these developments than organizations where all insight and direction comes from the top. In short, the autocratic Commander, whether brilliant or misguided, just won’t cut it anymore. Leaders need a broader range of style options to match the broader range of assets companies are creating today.

In our business model research, based on financial data from the S&P 500 companies, we found that Network Orchestrators — companies that invest in intangible assets, like relationships with customers and suppliers (Facebook, LinkedIn, Airbnb, TripAdvisor) have the highest Multipliers (price to revenue ratios) at an average of 8x (more details here). These value premiums result from rapid growth and low scaling cost, as noted by Jeremy Rifkin in The Zero Marginal Cost Society. Further, we identified that the different leadership styles complement some business models and detract from others because each business model leverages different types of assets, which perform best under different leadership styles.

Since most companies are actually a composite of different asset classes and business types — for example, Nike manufactures shoes (physical), but also develops some software (intellectual) and is developing a network with Nike+ (network) — most leaders use several of the four leadership styles:

The Commander sets the goal and tells others how to accomplish it. This works well with machinery, which happily does what it is told, and with direct subordinates who prefer to simply execute. It is less effective with employees and customers who want choice and participation. The result in today’s world is high marginal costs and little participation and buy-in. This style is most suited to the production of manufactured, commoditized goods as it is limited by the Commander’s vision and bandwidth.

The Communicator also sets a vision and a plan, but communicates it in order to inspire and create buy-in. This works better with employees and customers who want to at least understand where “the firm is headed.” It enables them to take action in line with the leader’s vision (it scales effectively), but it does not encourage innovation. This style is suited to services firms where all employees must work to fulfill the mission.

“Leaders need a broader range of style options to match the broader range of assets companies are creating today.”

The Collaborator works hand-in-hand with customers and employees (be they full time, part time or independent) to achieve the organization’s goals. As a result, it is empowering and enabling. This style taps into the innovation of people and drives the creation of new intellectual capital. Great examples are open innovators such as Victors and Spoils, a collaborative ad agency and Merck with its crowd-sourcing competitions.

The Co-Creator allows other stakeholders to pursue their individual goals in parallel with the goals of the organization. As a result, he or she drives both rapid scaling (due to the high level of participation) and innovation. This style is at the heart of network companies where value is shared by the company and the network participants, such as Airbnb, Uber and Innocentive.com.

The four styles are differentiated in terms of scalability — how efficiently they enable growth — and innovation — whether controlled by the leader or shared with stakeholders. Most leaders are already able to employ several styles effectively (although co-creation is still a rarity). However, using leadership styles effectively, in the proportion required today, and in the right situations, is tricky. Let’s take a look at how these styles were used by a great leader. Steve Jobs isn’t often remembered for his collaborative, open leadership style, but a thoughtful review of his business choices and words reveals more flexibility:

1. Commander: Jobs often had a specific vision for design that he would insist on.
2. Communicator: Jobs’s inspiring keynote presentations are legendary.
3. Collaborator: Jobs collaborated with others “to take music and sport to a new level.”
4. Co-Creator: Jobs eventually built a developer network that is unprecedented.

For Jobs, and for many leaders, co-creation can be uncomfortable. Given that network-based businesses are the most highly valued and profitable companies in today’s digital world, what does it take for a leader to co-create? Our answer: the ability to relinquish control and the willingness to share the value created with the crowd.

When Jack Dorsey and his collaborators developed Twitter in 2006, employees of their startup used it internally. As co-founder Evan Williams described it, “There was this path of discovery…. Twitter actually changed from what we thought it was in the beginning.” They had no idea the role it would play in sociopolitical movements, pop culture and business until the network actually started using and forming it. Although it may be difficult for founders to allow the network to shape their creation, that is the path to creating the most valuable, and valued, tool.

The same is true for companies like Airbnb, Etsy and Uber that actually share revenues with their partners. Their business models depend on the enthusiastic engagement of their partners (hosts, creators and drivers). But these multi-billion-dollar start-ups are not the only companies that use this new leadership style. So do established companies like Visa and MasterCard, stock exchanges and those that rely on open-source development, like Red Hat Software. These businesses survive and grow because of the participation, co-creation and co-ownership of their members.

Generating More Innovation, Growth and Profit

If you are a leader of a traditional company or industry, you may be thinking that Co-Creators are great for digital start-ups, or even existing membership based businesses, but not really applicable to you.

We disagree. Our research and others suggests that in the digital age there is much to be gained by increasing your leadership skillset to include Co-Creation, even if you aren’t a network company:

Allowing partners to share in the value creation and provide resources greatly reduces your marginal costs of marketing, sales and distribution — for example, the way Uber avoids buying cars and hiring employees with its partner network;

1. Employees and customers who are co-creators — for example, those using Coca-Cola’s Freestyle machines to custom-make their own drinks — are more loyal and thus less price sensitive or likely to defect, improving customer lifetime value;
2. Co-creation leads to an influx of new ideas by opening the organization to the innovative capability of external sources (a great example is https://www.innocentive.com);
3. Co-creation builds a flexible and organic system that can more quickly adapt to market changes and new technologies (for example, Apple’s developer network can quickly jump on new trends and needs); and
4. Co-creative business models are growing at faster rates, are more profitable and more scalable than those that rely on proprietary, in-house solutions and people (see What Airbnb, Uber, and Alibaba Have in Common).

In the end, the argument for leaders to co-create is an argument for profit, growth and value creation. Today, the most valuable assets are intangibles: relationships (with employees, customers and investors), knowledge (ideas) and people. The newest business model, Network Orchestration, taps into these “assets” at low or near-zero marginal cost of scaling, resulting in rapid growth, higher profit margins and, ultimately, greater investor returns.

Remember that your firm already has dormant networks of customers, employees and partners that want to share in value creation, and are already doing so with other firms. They are an enormous asset, but one that cannot be tightly controlled, even by the best executives. Only leaders who are able to relinquish some control and share the rewards will be able to access the value that these groups have to offer.

“Remember that your firm already has dormant networks of customers, employees and partners that want to share in value creation, and are already doing so with other firms.”

Building Today’s Digital Leadership Styles

Leaders who wish to add co-creation to their playbook should be guided by the following four guidelines:

• Understand your innate preferences. Everyone is naturally inclined to a particular style of leadership. Assess your own capability with each of the four leadership styles. Take a test at www.digitalgrader.com/leadership-survey.
• Find mentors to support your development. Seek out leaders with strengths in this new style of leadership. It is hard to change without support, and mentors provide external perspective and give practical ways to change your approach. Reverse mentoring, where younger employees advise the leadership, is also a great option for leaders coming up to speed on new digital technology and cultural shifts.
• Experiment with new business models: Dedicate yourself and your team to regular exercises and workshops that hone your co-creation skills. Begin to experiment with co-creative, network businesses by investing some of your capital into business initiatives that require co-creative leadership.
• Create measurable goals for co-creation. Successfully co-creating looks different than successfully commanding. Update your personal and leadership team objectives with appropriate indicators: customer or employee engagement, participation, loyalty and co-creation. It will keep you on the straight and narrow.

Remember, every one of us possesses a “portfolio” of leadership styles and each one has its place. A surgeon may be a Commander in the operating room, a Communicator with patients and a Collaborator when performing research. However, the styles that created value for many leaders decades ago are less effective with today’s empowered stakeholders — and since 95% of companies are not Network Orchestrators, we suspect that most leaders lack strength at co-creation. The digital, cultural and asset revolution provides a fantastic opportunity for shared success — increased growth and profit for businesses, and increased value for customers — but creating network-based businesses will require openness, adaptation and the development of new leadership skills.

Authors:  Barry Libert is CEO of OpenMatters and a senior fellow of the SEI Center at Wharton; Jerry Wind is director of the SEI Center and a marketing professor at Wharton; and Megan Beck Fenley is a digital consultant at OpenMatters and researcher at the SEI Center.

The post Is Your Leadership Style Right for the Digital Age? appeared first on OpenMatters.

I am proud to announce that our article on Network Organizations (Uber, AirBNB and Alibab) was one of the ‘Ideas that Shaped 2014’ according to HBR.   To read the story in HBR, see the attached.

The post Ideas that Shaped 2014: HBR appeared first on OpenMatters.

The following article appeared in WSJ/CFO Journal in December, 2014 .

One glance at The Wall Street Journal will show you that digital business models are increasingly in vogue. Uber, Airbnb, DropBox, and WhatsApp are just a few of the more recent examples of this rapidly growing $10 billion digital start-up trend. CFOs of established firms are taking notice that going digital creates value.

Research by OpenMatters with Deloitte & Touche LLP, examining 40 years of data from the Standard & Poor’s 500, finds that investors assign higher valuations to organizations that embrace emerging technologies (big data, social media, the Internet of Things, and mobile, and so on) to create digital networks. This change is part of a broader trend of corporate value shifts from the predominance of tangible assets, including plant, property, equipment and financial assets, to value from intangible assets.^[1] As digital technologies increasingly disrupt age-old sources of value, this issue of CFO Insights, looks at how CFOs can tap into this value shift through business model innovation.

Four Business Models Driving Value

The rise of intangibles as a part of total market and corporate value has occurred in conjunction with the proliferation of new business models. Our research, in fact, shows that almost every company fits into one of four types business models, regardless of industry or function—and each one corresponds to a shift in technology and asset structure. Specifically, companies predominantly fall into one of the following categories, based on the way they create value:

1. Asset Builders. These companies build, develop and lease physical assets to make, market, distribute, and sell physical things. Examples include everything from automakers to chemical manufacturers, big box retailers, and distribution and delivery businesses.
2. Service Providers. These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include consulting firms and financial institutions.
3. Technology Creators. These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include software, big-data tools, and medical-device companies.
4. Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include online financial exchanges, social media businesses, and credit card companies.

The models are differentiated by the underlying technology that was leveraged to develop them. For example, Asset Builders emerged from the Industrial Revolution, when business was fueled by factories; Service Providers developed in the mid-1970s, when companies started to service what they sold; Technology Creators flourished during the 1990s’ information revolution; and Network Orchestrators, the newest entrants, are the companies that have embraced technologies, such as the cloud, analytics, social networks, Internet of Things, and mobile technologies (CASIM) to create value through leveraging unique information, and by orchestrating value generated by network participants. Although a company’s business model may not reflect when a particular company was founded, it does represent what technologies and methods it uses to create value.

The business models are also differentiated by the increasingly lower marginal costs afforded by the technologies embraced. In fact, the OpenMatters/Deloitte research has found that evolving technologies produce a “multiplier effect,” increasing market valuation from 1x to 2x revenues as you move along the spectrum from Asset Builders to Service Providers. Above the “digital divide”—meaning companies that either fall in the Technology Creators or Network Orchestrators categories—companies receive valuations 2x to 4x higher than the other two business models. Moreover, those latter two business models also outperformed on other dimensions, including ROCE, ROA, and EBIT margin in both the short- and long-term.

Business models and the value shift

From 1972 to 1992, the most valued 5% of the S&P 500 were mostly Asset Building companies. From 1992 to around 2010, Technology Creating companies dominated the top valuations. Finally, 2001 to 2012 saw the rise of Network Orchestrator businesses, which are on a trajectory to make up the majority of the top valuations within the next decade.

Only a few companies, however, are capturing the extra value created by Network Orchestrators. In 2012, less than 5% of the S&P 500 had value multipliers higher than 6x revenue (mostly Technology Creators and Network Facilitators), while more than 60% had a multiplier less than 2x (mostly Asset Builders and Service Providers). In addition, few companies ever reach beyond established business models to capture the new sources of digital value. In fact, in the Q2 2014 CFO Signals report, half of CFOs surveyed said their company generates all of its revenue from just one business model, and about 80% said they generate at least 70% of their revenue from a single model.^[2]

For individual companies, the shift to intangibles is also reflected in the slow demise of book value. The major auto companies, for example, maintain enormous real-estate holdings (for example, factories), but managing those holdings drains cash, dilutes focus, and hinders innovation. On the other hand, Apple, which relative to its size has few tangible assets and thus a low book value, is a perpetual innovation machine and has the highest equity value—more than $620 billion—of any company globally. This crucial distinction calls into question the long-accepted belief that ownership of tangible assets is an essential path to sustained success.

Tapping into the value shift

The rise of intangibles—which typically consist of human capital, intellectual capital, and network capital—also has implications for finance and corporate strategy. These forms of capital can create both new cash flows and “real growth options” to enhance corporate value (see W.C Kester, “Today’s Options for Tomorrow’s Growth” Harvard Business Review, March-April 1984^[3]). Tapping into this value shift requires CFOs to consider the following:

1. Shifting mental models. Companies, through their leaders, invest in what they believe has value, and that is driven by the “mental model” of a company’s CEO, the CFO, its management team, and board of directors. For example, leaders of Asset Builders believe that value resides in developing and owning (or leasing) hard assets, which can be used for manufacturing, distributing, and selling physical things. On the other hand, Network Orchestrators’ top priorities are building and operating social and commercial networks that foster interactions and co-creation with their customers and suppliers. For CFOs, migrating a company’s mental model is the first step to capturing the value inherent in intangibles—and a topic we will explore more deeply in part three of this series.
2. Adjusting capital allocation. CFOs would agree that capital should be allocated to where value is created. Yet, while technological and cultural shifts have created opportunities for new, more-profitable business models, many finance chiefs are still allocating capital based on outdated thinking about risk and rewards. Based on our analysis of 40 years of company data and their asset allocations, our findings suggest that most leaders are not allocating their capital to today’s sources of value and technologies in order to harness the power of intangibles. For CFOs, who own the capital-allocation process, or at least have a material role in this process as catalysts or strategists (see the Four Faces of the CFO^[4]), it is important to revisit capital allocation and assess if it taps into the broader value shift. At the very least, we suggest that CFOs allocate 70% to their core business model, 20% to the adjacent business model, and at least 10% to activating dormant networks into value-generating initiatives, including crowdsourcing new ideas.
3. Rethinking business performance management. Financial data alone is no longer sufficient to convey the value that the new digital business models create (as evidence that more than 80% of today’s corporate value is generated by intangible and unreported “assets”). Given this reality, “big data” (which refers to the information gathered on everything from customer transactions to inventory levels, often in real time, and in quantities previously unimaginable) needs to be fused with financial data to constantly measure, monitor, and report the results from these new and often unmeasured and unreported sources of value (customer engagement on websites for example). For CFOs, this means finding ways to mine the information new technologies offer in order to help their organizations benefit from today’s hyperconnected, flat world.
4. Adjusting investor relations. Once a company crosses the digital divide, how it measures, manages, and communicates its value to its investor relations professionals and to analysts also must change. After all, if you are providing more value, you want to be recognized for it. It is not always a linear path, however. First, language has to change: new key performance indicators (KPIs) fueled by big data need to be developed to reflect the value added. And sometimes the audience has to change. When WWE transitioned to its business model to content as a subscription, it also changed how it communicated and as a result, the investment analysts that covered the company changed too. For CFOs, this means that companies can manage (and report) only what they measure and investors follow suit. So to receive the benefit of today’s high valuations, CFOs need to measure what is valuable, report it to their management team and board, and allocate capital to these intangibles to get investor buy-in and support. 

CFOs as strategists in the digital age

Given CFOs’ fiduciary responsibility to deliver shareholder value, it makes sense that they should be leaders in digital business model innovation. When the evidence shows that each marginal dollar can be spent to generate value at a multiplier of 1, 2, 4 or 8 times revenues, CFOs have a responsibility to actively engage as strategists or catalysts for digital business model innovation. They can harness the value shift by actively rebalancing their company’s investment portfolio and reallocating capital to create scalable and extensible intellectual property, and consumer, commercial or financial networks, that generate substantial additional value for their organizations.

Authors:

William Ribaudo, Partner; Dean, U.S Next Generation CFO Academy, Deloitte & Touche LLP,  wribaudo@deloitte.com

Barry Libert, Chairman and CEO, OpenMatters; Senior Fellow, SEI Center at Wharton. barry@openmatters.com

Ajit Kambil, Global Research Director, CFO Program, Deloitte LLP, akambil@deloitte.com

Megan Beck Fenley. Consultant, OpenMatters; Researcher, SEI Center at Wharton, megan.beck@gmail.com

NOTES:

[2] CFO Signals, Q2 2014; U.S. CFO Program, Deloitte LLP

[3] W.C Kester, “Today’s Options for Tomorrow’s Growth” Harvard Business Review, March-April 1984

[4] Deloitte LLP’s Four Faces Framework: http://www.deloitte.com/view/en_US/us/Services/additional-services/chief-financial-officer/four-faces-cfo/index.htm

The post The Value Shift: Why CFO’s should lead the change in the digital age appeared first on OpenMatters.

This article first appeared in HBR on November 20th, 2014.

When Facebook acquired the messaging service WhatsApp for $19 billion in the spring of 2014, the question on everyone’s mind was, does the service really merit a valuation of almost 20 times projected revenues?

WhatApp’s valuation may be extreme, but huge gaps between revenues and valuation are increasingly common. Cloud-based sharing service Dropbox received venture capital funding at a valuation of $10 billion, or 40 times revenues. Airbnb.com raised funding at a valuation of $10 billion, which would make it worth nearly 20 times its revenues — and worth more than Hyatt Hotels or Wyndham Worldwide. Taxi-replacement service Uber is currently raising funding and is expected to see a valuation of $30 billion, estimated to be more than 15 times revenues. Most recently, Alibaba’s IPO raised funds at a value approximately 10 times revenues.

These companies represent a new trend in the types of business that investors prefer. Leaders of more traditional companies are left wondering why these upstarts merit such high valuations. Are they more profitable? Do they see faster growth? Do they have higher return on assets and lower marginal costs?

Our answer is yes — to all of the above.

In collaboration with Deloitte, we examined 40 years of financial data for the S&P 500 companies to see how valuations trends have evolved along with business models and emerging technologies. Our research led to three key findings.

1. There are four business models.

To begin, we searched for a simple way to characterize the different types of business that were engaging the hearts and minds, and pocket books, of investors. Because today’s highly valued, fast growing businesses can be found in almost every industry, we quickly moved past standard industrial classifications and developed a new framework based on business model, which is the principal way an organization invests its capital to generate and capture value.

The four models are:

• Asset Builders: These companies build, develop, and lease physical assets to make, market, distribute, and sell physical things. Examples include Ford, Wal-Mart, and FedEx.
• Service Providers: These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include United Healthcare, Accenture, and JP Morgan.
• Technology Creators: These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include Microsoft, Oracle, and Amgen.
• Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include eBay, Red Hat, and Visa, Uber, Tripadvisor, and Alibaba

We applied this business model framework to our dataset, the S&P 500 Index companies from 1972 to present, in order to see how the four models performed over time. Two different researchers categorized each company into its dominant business model, giving consideration to several factors: The company’s description of itself in annual reports; the revenue generated by different business units; capital allocation patterns such as R&D or COGS expenditure; and market perceptions including news articles and analyst reports.

Although most companies operate in several business model categories, we assigned to each company the most advanced business model that it uses for a significant portion of its business, or that it is making strong efforts to develop. For example, although most of Nike’s business is manufacturing and selling shoes, which we classify as Asset Building, Nike has also developed the Nike+ ecosystem, which connects these physical goods to the Internet where users track activities and share progress with their friends. For this reason, we classified Nike as a Network Orchestrator.

2. Network Orchestrators create more value.

Our business model classification and analysis yielded some surprising results. Network Orchestrators outperform companies with other business models on several key dimensions. These advantages include higher valuations relative to their revenue, faster growth, and larger profit margins.

Let’s look at the numbers in detail. Our analysis indicates that as of 2013, Network Orchestrators receive valuations two to four times higher, on average, than companies with the other business models. Further, trend data over the past decade indicates that this valuation gap is widening over time. We call this degree to which a business model drives the gap between revenues and valuation “the multiplier effect.”

A company’s price to revenue ratio – what we call its “multiplier” — is calculated based on its market valuation and revenues, two numbers that are difficult to manipulate with accounting. Market valuations reflect investor expectations for future cash flows, and indeed we found that companies with the highest multipliers outperform less valued companies on revenue growth, profitability, and Return on Assets for more than a decade.

When we looked beyond the impact of business model on price-to-revenue ratio, we also found that Network Orchestrators outperform companies with other business models on both compound annual growth rate and profit margin. We believe this occurs because the value creation performed by the network on behalf of the organization reduces the company’s marginal cost, as described in Jeremy Rifkin’s The Zero Marginal Cost Society. For example, TripAdvisor.com benefits from its customer’s reviews and AirBnb leverages its network’s housing assets.

3. Few companies operate as Network Orchestrators.

Fewer than 5% of companies are Network Orchestrators despite the positive impact of this business model on multiple performance measures. Why? We see several reasons.

• First, today’s network-based business models require new technologies and competencies. Most corporate leaders are skilled at building, owning, and managing their own physical assets or people. Network Orchestrators, however, rely on intangibles such as knowledge (Gerson Lehrman Group) or relationships (Facebook), or other people’s assets (Uber) as well as new “non-management” and “non-ownership” competencies related to facilitating a network of individuals and their individual assets and relationships.
• Second, Generally Accepted Accounting Principles (GAAP) categorize some assets as “assets” (plant property and equipment), others as expenses (people, training, and intellectual property) and ignores others (customers, sentiment, and networks) altogether, frequently resulting in the under-allocation of capital to intangible assets. This is especially problematic given that, today, intangible assets make up approximately 80% of corporate market value.
• Third, standard industry designations result in siloed thinking, leaving empty space where new business models can enter. For example, think back to the early 1990s. Most traditional retailers were slow to move into the online space because they didn’t consider themselves “technology companies.” The online market was left open, and in came a slew of new players such as Amazon, eBay, and Zappos, who gobbled up market share and changed the retail game. Today, the power of networks is creating a new cross-industry transformation. Consider what Uber and Lyft are doing to the taxi industry or how Airbnb is affecting the hotel industry.
• Finally, business models are tightly integrated into all parts of a company, and are therefore daunting to change. Changing business model requires changing capital allocation, but Research by McKinsey & Company shows that most companies follow the same allocation patterns year after year, despite dramatic changes in the business environment.

These four factors make it difficult for executives and board members to cash in on the value offered by new business models.

Networks are sources of information, capabilities, and assets that lie in and around every organization. Most networks, however, lie dormant and untapped. To become a Network Orchestrator and create more value and better performance, leaders must connect to and activate their networks, tapping into new sources of value, both tangible (Airbnb’s network of lodgings) and intangible (the expertise of Apple’s Developer Network).

4.  Four Steps to get started and realize value like Airbnb, Uber and Alibaba

We recommend that all leaders and boards consider the steps below:

1. Assess your business model. Understand which business models currently exist within your organization and also the preferences and biases of the leadership team members who have created these models through capital allocation.
2. Inventory your network assets. Take stock of your dormant network assets including customers, employees, partners, suppliers, distributors, and investors, and determine which have the greatest potential.
3. Reallocate your capital to networks. Divert at least 5% to 10% of investment capital to activating your networks. Take an experimental approach to early allocation and expect ongoing adaptation. This could be accomplished organically, or through acquisition or partnership.
4. Add network KPIs. Add to your standard financial metrics new network-oriented indicators such as number of participants, their sentiment, and level of engagement. These KPIs will provide direction for your network adaptation.

The bottom line: begin your evolution today and create the multiplier effect in your own organization. Activate your dormant networks by reaching out to your customers, employees, partners, suppliers, employees, and investors and figure out how you can co-create value with them.

Take this assessment on www.digitalgrader.com to determine your business model and learn how to build and leverage your network assets.

The post What Airbnb, Uber and Alibaba have in Common appeared first on OpenMatters.

The following article appeared in the November 3rd issue of FT’s AgendaWeek.

One glance at today’s most valuable companies and multi-billion start-ups tells the entire story: its time for all board members to cross the digital divide or put at risk the future of their organization. Alibaba, Facebook, Uber, DropBox, and WhatsApp are all just a few of the more recent examples of news-making digitally enabled businesses enjoying high investor valuations and customer numbers.

But these examples are just the tip of the digital iceberg, according to research by OpenMatters, with input from Deloitte & Touche. Our research, based on data from S&P 500 companies, shows that investors assign higher valuations to companies that embrace new technologies such as social, mobile and big data and other Internet technologies, and then use them to create digital networks. These systems ultimately shift the cost of making and selling knowledge to their own technological infrastructure, and reduce to nearly zero their marginal cost of operations. Some of the more traditional boards have realized trend and are beginning to “de-industrialize” their companies, reallocating their capital from tangible assets and traditional on-premise technologies to intangible assets such as human, intellectual and network capital as well as digital technologies. The real question is: has your board?

To profit from these highly valued, non-owned assets of your customers, we recommend four steps for all board members:

Assess your board member’s unstated mental model. Boards and leaders invest in what they believe has value, and that is driven by their “mental model.” For example, leaders of asset intensive companies believe that value resides in owning or accessing hard assets, which can be used to manufacture, distribute and sell physical things. On the other hand, digital natives such as Facebook and Alibaba prioritize building social and commercial networks that foster interactions with or among their customers. Boards must take stock of preexisting attitudes, behaviors and beliefs regarding what creates value so that they can realign their mental models with today’s investor and customer realities.

Realign your board’s capital allocations with today’s value realities. Boards are responsible for driving shareholder value and that means allocating capital to where value is created. However, our research shows that few companies are keeping pace with today’s digital technologies and many are falling prey to the organizations that are leading the fray. To meet these needs, we recommend that boards allocate at least 10% of corporate capital to activating dormant networks, be they customer, employee, partner, or investor, using today’s digital technologies.

Integrate big data with your financial and operating data. Financial data alone is no longer sufficient for boards to make informed decisions about capital allocation and sources of value. Given this information gap, boards must add new key performance indicators, or KPIs, to track intangible assets. We also recommend adding big data updates to standard board packets. The big data reports should include information gathered on everything from customer transactions to employee engagement levels.

Change what and how you communicate to your shareholders. Once a company adapts capital allocation and crosses the digital divide, it must change how it communicates these new sources of value value to shareholders and analysts. After all, if you are providing more value, you want your company to be recognized for it—particularly in terms of valuation. There must be a shift in language and in focus to match the new metrics that gauge success.

The fiduciary responsibility of board members is to tend to the health and value of their shareholders, and our latest research makes a strong case for crossing the digital divide. Now is the time for boards to act and protect the future of their organizations by assessing their existing strategies, reallocating their firm’s capital to new sources of value and technologies, and managing these new ‘intangible assets’ actively with new metrics. In today’s rapidly changing business environment, no one can survive on the wrong side of the digital divide, least of which are the people responsible for the long-term viability of the organization.

By Barry Libert and Megan Beck Fenley

Barry Libert is a digital board member, angel investor and technology advisor to boards and CEO’s. Megan Beck is a consultant at OpenMatters and researcher at the SEI Center, Wharton

The post Four Ways Boards Can Overcome Digital Disruption appeared first on OpenMatters.

The following article appeared in the October issue of Observe Magazine.

Amazon.com and its customers are in a symbiotic relationship. On a weekly basis, customers give Amazon not just their money, but also their interests (through browsing and clicking) and opinions (by rating products). In return, Amazon delivers myriad purchases conveniently and quickly to doorsteps around the world, and makes useful suggestions about what its customers ought to read, listen to and buy next. For many families, this arrangement works well enough that Amazon earns its own line item in the household budget. Indeed, Amazon should probably add its customers, and the steady stream of data they generate, as an asset on its balance sheet. Imagine if it did what that would mean to how much more attention and care we would all receive?

Perhaps that’s not such a ridiculous idea given the hyper-connected world in which companies now operate. Customers are normally not accounted for in financial reports, but the shopping habits and opinions of the millions of Amazon shoppers form quite a robust piece of intellectual property. The time may have come for companies to recognize their customers as assets and contributors, not just passive consumers. Further, if organizations want to prosper in the digital age, it is time for them to build and recruit management teams that understand these facts and have real digital acumen to deliver on this opportunity.

New digital technologies, those known as CASIM (Cloud, Analytics, Social, Internet of Things, and Mobile), are enabling a new and higher- order type of relationship between companies and their customers. Companies can use CASIM technologies to increase their presence in customers’ lives – hanging out on their mobile phones, participating in their social networks, letting them rate and review – and gathering data all the while.

Big data analytical capabilities allow companies to crunch and process all this free data, turning it into useful insights that can help nurture strong and lasting relationships. Where and when do customers shop? What types of products and services get purchased together? These are just the tip of the iceberg. Intimately knowing customers allows firms to improve internal operations and better serve them.

This is a win-win situation, but it requires a change of mindset and skillset for many executives and corporate directors. Customers are already there, eagerly sharing opinions on Yelp and TripAdvisor, helping design advertising for Danone yogurt, sharing their Nike+ enabled runs on Facebook, even developing Apps for Apple.   But most established firms are hesitating when it comes to this type of customer intimacy as it means releasing some control.

Some companies are taking radical steps today to build the technological capabilities needed to capitalize on their customer assets. But it will require a savvy leadership team and board to genuinely profit from this massive opportunity.

The post Do You Really Value Your Customers? appeared first on OpenMatters.

The following article first appeared in Knowledge@Wharton on August 30th, 2014

Snapchat received a $10 billion valuation this week, joining an ever-increasing number of young IPOs and startup companies that are meeting consumers’ evolving needs to create extraordinary value for investors.

How can Snapchat, Uber and Airbnb be worth so much? An answer to that question may come from an unexpected place. American psychologist Abraham Maslow is best known for his seminal research on the hierarchy of innate human needs, but his work also has a surprising application for businesses models and shareholder value, according to Barry Libert, Jerry Wind and Megan Beck Fenley, who wrote this opinion piece.

In 1943, Abraham Maslow developed his formative work on the hierarchy and progression of human needs, “a theory of psychological health predicated on fulfilling innate human needs in priority, culminating in self-actualization.” Maslow insightfully noted that the human hierarchy of needs spans from the tangible, such as food and water, to the intangible, such as self-esteem and creativity.

Maslow would probably be surprised today to discover that a similar progression can also be observed in the business world. Many firms, enabled by new, digital technologies, are making the shift from providing goods and services — physical things — to providing information and connectivity — intangible things. This shift is already creating ripples of change in finance and financial markets. Companies that serve these higher, more intangible needs of customers are being rewarded by the financial market with higher valuations than those that serve the lower, more tangible needs of customers that include structure and sustenance. Snapchat, Airbnb and Uber are just the tip of the iceberg of $10 billion startups and $100 billion public companies.

The Future of Business and Finance

Put simply, the ways businesses meet the needs of their stakeholders, and the types of needs served, have changed over time along with the development and adoption of new technologies. Together, these needs and enabling technologies create different business models, each with their own scalability, capital and operating efficiencies and, therefore, valuation.

The bottom two levels of Maslow’s hierarchy relate quite closely to the agrarian and industrial revolutions in which large organizations were constructed to fulfill the physiological and safety needs of people. These industries include farming, water, utilities, irrigation, real estate and energy (physiological needs), as well as fire, police and the military (safety needs).

More recently, however, businesses, enabled by a host of new technologies, such as cloud, social and mobile, have begun to serve the intangible needs of human beings which sit at the top levels of Maslow’s hierarchy. These include:

• Belonging: Many companies now exist to facilitate communities. Facebook connects people with their friends, LinkedIn with their colleagues and Match.com with potential mates. There are also many highly specific communities for people dealing with unusual circumstances, such as rare diseases (e.g., RareConnect.org) or unusual hobbies (e.g., ArcheryTalk.com). Many of these communities had not been able to gather and communicate previously.
• Self-esteem: There are also many new ways for people to demonstrate, and be recognized, for their achievements. From the slightly frivolous, “How many likes did my new profile picture get?” to the utilitarian, “How many stars did my most recent Airbnb guest give my apartment?” we are now able to measure our quality and impact in myriad ways.
• Self-actualization: Finally, new organizations are enabling people to express themselves creatively and/or make a living in innovative ways. Instagram allows creative expression through photographs. Etsy gives artisans a forum to share and sell their handiwork. Uber and Airbnb allow people to take control of their careers and to make a living using their resources in a new way.

It is not surprising that businesses have grown in scope to serve these higher order needs, particularly in a world in which the middle class is growing and they have fewer physiological and safety concerns. What is surprising, however, is how dramatically companies and their investors have shifted their capital from tangible, asset-based businesses (aligned with the bottom two needs) to intangible, asset-light organizations (aligned with the top three needs). According to research by Ocean Tomo, in 1975, tangible assets made up 83% of the market value of the S&P 500 companies. By 2010, the numbers had flipped completely, and intangible assets constituted 80% of market/corporate value.

This fundamental change signals something profound about the future of finance and financial markets.

Put simply, the finance function, and generally accepted accounting principles (GAAP), must adapt in order to help organizations measure and manage these new sources value (communities of common interest, self-esteem, self mastery and self-actualization). Accounting practices have not kept pace with the changing asset base of business as well as many key intangible assets. In fact, many higher-order needs of individuals are either mis-measured (lumped into the Goodwill grab bag), or ignored altogether. Human capital, such as employees, is classified as an expense. So are employee training, education and health care. Worse, customers and their relationships are not measured at all. This situation does not serve business leaders well, particularly leaders of large, established companies that are trying to find the right way to develop and use more scalable and capital-efficient intangible resources together with today’s technologies to drive performance and shareholder value. This mismatch provides a large opportunity for accounting firms to help leaders understand these different sources of value and thereby change the landscape for how business is done and governments are run globally.

Helping leaders understand and utilize intangible assets becomes even more urgent when you realize that the financial markets have already adjusted their thinking and capital allocations in favor of these newer, intangibles-based business models that use today’s technologies to scale at zero, or near zero, marginal cost. Our research, conducted by OpenMatters in partnership with Deloitte, looked at 40 years of data from the S&P 500 companies and found that investors are rewarding organizations that satisfy these higher levels of customer needs, such as community, esteem and self-fulfillment, with valuations that are far greater than the organizations that satisfy the lower-order physiological and safety needs.

Our research identified four primary ways that companies create value for their customers:

1. Asset Builders that make, market, distribute and sell physical products. Examples include manufacturers (all industries), distributors and retailers.
2. Service Providers that hire people who provide services for which customers are charged. Examples include consulting firms, health care providers and financial institutions.
3. Technology Creators that develop and sell intellectual property, such as software and biotech. Examples include software and pharmaceutical companies.
4. Network Orchestrators that create and manage networks of consumers, businesses or investors to help the participants market and sell their wares on a peer-to-peer basis. Examples include financial trading markets, on-line social networks and credit card processing companies.

The later two business models, Technology Creators and Network Orchestrators, are rewarded by the financial markets (investors) with price to revenue ratios two to four times greater, on average, than Asset Builders and Service Providers due to their focus on highly scalable “intangible assets.”

What Does This Mean for Your Organization?

Simply, this: There is a great shift in value that is occurring globally as organizations climb Maslow’s hierarchy to serve our less tangible needs. In fact, we are just beginning to witness the power of firms that use today’s technologies to fulfill the belonging, self-esteem and self-actualization needs of individuals Twitter . From well-known network players like Facebook, Airbnb and Uber, to smaller startups like Behance.com and Spoonflower, to older established companies like GE and AT&T, the market is moving towards intangibles.

All companies have a network of resources in their customers, employees, suppliers, distributors and retailers, and investors. Given this research, how can you make use of these resources in your organization? Begin to climb the hierarchy of needs by following these four steps:

1. Orientation: Understand the needs of your networks that you have not fulfilled, including community, self-mastery and self-actualization. Example: Trip Advisor created a customer network that shares hotel and travel reviews, allowing them to be viewed as trusted experts.
2. Assessment: Inventory all your relationships — their number, sentiment, capabilities, level of engagement and resources. Example: AT&T’s The Innovation Pipeline (TIP) is a crowdsourcing program that enables employees to generate, and vote on, innovative ideas for the company.
3. Action: Determine which technologies, platforms or ecosystems are essential to connect stakeholders to each other so that they can fulfill their own needs and yours. Example: LinkedIn uses social software to connect the world’s professionals to enable them to be more productive and successful.
4. Measurement: Analyze the results of your actions and those of your network members to see the value that is being created and shared. Example: Amazon.com carefully measures and tracks the inventory and transactions of its network of third party sellers to that it can support and ensure quality from this revenue stream.

All organizations, whether for profit or not, are in the business of satisfying the wants and needs of their customers. Investors, on the other hand, are in the business of rewarding, with their pocketbooks, the companies that best serve the essential needs of their customers with the most efficient business models.

Given that we are now beginning to connect the dots between what customers value (their hierarchy of needs) and what investors reward (zero to low marginal cost businesses that scale through customer co-creation), it’s time for executives (particularly the CEO and CFO), leadership teams and boards to measure and invest in what matters — not just the tangible assets at the bottom of Maslow’s hierarchy (material and tangible), but also the immaterial and intangibles at the top — so that their companies develop the tools and skills that deliver what matters to their customers. The result: more value for their investors.

The bottom line: In following Maslow’s approach to value, firms will participate in people’s entire hierarchy of needs and generate extraordinary value in the process. What more can an investor and customer ask from a company?

Barry Libert is CEO of OpenMatters and a board member/senior fellow of the SEI Center at Wharton; Jerry Wind is director of the SEI Center and a marketing professor at Wharton; and Megan Beck Fenley is a digital consultant and researcher at the SEI Center/OpenMatters.

The post Why Businesses Should Serve Customer’s ‘Higher Order’ Needs appeared first on OpenMatters.

This spring, a new CEO was appointed to the helm of Microsoft (and by the way, Steve Balmer already resigned from the board and any responsibilities at the firm).

What is so amazing is that finally, this once great company has realized that the world has shifted from desktop to mobile and from on premise to cloud.  now let’s see if this behemoth can make their own digital shift in their business model.

Below is the opening remarks from their new CEO.  Enjoy the read and think about what this means to your company – are you mobile and cloud first?

‘Today is a very humbling day for me. It reminds me of my very first day at Microsoft, 22 years ago. Like you, I had a choice about where to come to work. I came here because I believed Microsoft was the best company in the world. I saw then how clearly we empower people to do magical things with our creations and ultimately make the world a better place. I knew there was no better company to join if I wanted to make a difference. This is the very same inspiration that continues to drive me today.

It is an incredible honor for me to lead and serve this great company of ours. Steve and Bill have taken it from an idea to one of the greatest and most universally admired companies in the world. I’ve been fortunate to work closely with both Bill and Steve in my different roles at Microsoft, and as I step in as CEO, I’ve asked Bill to devote additional time to the company, focused on technology and products. I’m also looking forward to working with John Thompson as our new Chairman of the Board.

While we have seen great success, we are hungry to do more. Our industry does not respect tradition — it only respects innovation. This is a critical time for the industry and for Microsoft. Make no mistake, we are headed for greater places — as technology evolves and we evolve with and ahead of it. Our job is to ensure that Microsoft thrives in a mobile and cloud-first world.

As we start a new phase of our journey together, I wanted to share some background on myself and what inspires and motivates me.’

So the question is:  is your company mobile and cloud first and if not – why not?  Further, have you added networks (customer, employee or partner) to your business model?  Again, if not, why not.  Think about how powerful and valuable Microsoft would be if their 2 billion users (more than Facebook) were members of their network and felt a sense of belonging?

Its time to start today to pivot your business and build a mobile, cloud and social first company or lose any chance you have of creating competitive advantage in today’s hyper connected and peer to peer world.

The post Our Mobile and Cloud First World appeared first on OpenMatters.