The Relationship Economy - UPEI Jan - March 2003

The Customer Revolution - The Relationship Based Business Model - Turning Our World Inside Out

We are so encultured by the traditional model for organization that we no longer think about it. It is just how things are. When anyone becomes unconsciously captured by an idea, they are vulnerable to a new and better one. The Ford production model was invented a 100 years ago this year. It has been so successful that it has taken over every aspect of how we organize to do work – not only in business but in government, education and healthcare.

But, in the last 5 years, many leading firms that use this model are being threatened with extinction. The discounters have overwhelmed the full service airlines. In retailing, Kmart is bankrupt and many of the past retail leaders such as Home Depot and the Gap are really struggling. In bookselling, Amazon has shaken the industry to the core. In PC’s there is only HP left to confront Dell. In food, McDonalds seems mortally wounded and cannot appear to help itself.

We are also seeing the public sector struggle. Our K/12 education system is not delivering. Drop out rates are close to 30%. Boys are seriously underachieving. Our healthcare system is becoming too expensive and risks being overwhelmed by the advent of the seniors’ demographic bulge. Those that try and improve things by applying the old model harder and faster seem to get even further behind. So what is going on? This course will help shed light on this turning point.

A new model for organizing for work both in business and in the public sector has arrived.

When applied well, it destroys those that still use the traditional model. It has enough practioners now that we can see how it works and we can extract the lessons so that we can apply it ourselves. Understanding both the old and the new model will become a survival issue. This course will look below the surface of the Ford Model and reveal how it really works. Why? Because we have taken it for granted and we no longer question it or even see its rules and how they work. We will put the traditional organization into the MRI and see why using the Ford model is a fatal condition. .

We will look at eBay, at Amazon, at Dell, at the Discount Airlines, at Wal*Mart and we will discern from their activities, a new model emerging that has a radical approach to costs and a radical approach to value. We will see that at its heart the new model has a radically different set of assumptions about power and about relationships. We will see what it means to make the shift from a transaction economy to a relationship economy. We will see how these firms have revolutionized costs. We will see how they have found value in emphasizing community. We will see why in most cases it is much more personally rewarding to work in this type of organization.

We will look at the demographic and cultural forces that underpin this new model and we will look at some of the new Social Software that is transforming the customer and workplace interface.

We will speculate what this new model means for business and all institutions in Atlantic Canada. We will explore the “Hick” effect – many of the new leading organizations have been born in small town cultures. We will also explore what this model means for education and healthcare delivery. Finally we will explore what this means for your personal choices and for your work life.

Context for the Course – The Core ideas
When Henry Ford introduced mass production at the beginning of the 20th century, he not only changed how things were made, he changed the culture of the workplace. In this production culture, head office was the organization’s brain and it decided everything. Products were conceived, designed, produced and then marketed and sold. The enterprise pushed out from the centre. This model has taken over all aspects of organized life today. At its heart is a need to control the core process. Everything and everyone had to be “managed”. It was successful during a long period of relative stability.

We are so imbued with this model that we mainly fail to see it for what it is – only a model which has had a life of about 100 years. Today, we have reached the design limits of this model. More efficiency cannot be squeezed out of it and the business, social and technology environments are now changing so fast that such a model cannot react fast enough.

A new model is emerging. It is the reverse of the production model. In this new model, which we can see in the actions of new adopters such as Wal*Mart, Amazon or Dell, the flow is reversed. The customer sets the product agenda. It is the customer who decides what they want and who drives the production process back into, not simply one organization, but into a network of suppliers organized by the host company. The new model works deliberately to eliminate, or significantly reduce, inventory, such as eBay, Dell or Southwest, or to carry inventory in a distributed form in the supporting federated system such as Wal*Mart and its suppliers. With very low or no inventory, they have a compelling cost advantage.

All have remarkably sensitive customer interfaces where, at best, individual customer profiles, preferences and accrued activity and trust are maintained in real time such as by Amazon, eBay and Dell. Or, profiles are held in aggregate, where community profiles are maintained such as at Wal*Mart.

This is not simply a re-engineering of the process but a shift in culture. It involves the giving up of the idea that the market can be controlled by head office. Head office in these organizations does not pretend to be able to predict customer behaviour, instead it works to have the best sensory system possible. It uses this acutely sensitive information system to track trends and to react immediately.

As a result, the customer experience has been transformed from an outward push to an inward acceptance. It is fun to fly Southwest as well as being inexpensive. Amazon provides a community of book reviewers that pulls the customer into the primary sales position in the firm. Wal*Mart greats each customer and so on. The customer gets what they want rather than only what the firm will give them.

In a world where most of have all that we need, in terms of things, this putting the customer into the driver’s seat give them the potential for the experience of control and participation that the old system prohibits.

This is the key to understanding the new model. Its value is in the experience of control and participation given to the customer. For the first time, the customer is in control and not the corporation. Once customers have experienced this, they do not go back! Conversely, in the new organization, to give the customer control and participation, head office has had to give the front line control, and participation as well. Once employees have had a taste of this they too do not want to go back.

To pull this off, these organizations have pushed a remarkable amount of decision making power out to the front line. Floor clerks in Wal*Mart can move material around the store and each store has a computer assisted re-order model that enables the store to track orders to the unique preferences of its own community. At Dell you speak to a real person who then tracks your order all the way to set up. At eBay the buyers and sellers deal direct.

If you are a competitor of one of these new model firms and you are still using the old model, you will fail. You cannot deliver the costs and you cannot deliver the customer experience.

So we see the icons of the old model struggling or even moving into bankruptcy. United Airlines, AMR Air Canada; Kmart, Home Depot; and most small booksellers and Indigo and Chapters. eBay is on track to dominate the second hand car market. Dell can take on any competition and is moving into other sectors beyond PC’s.

In the old model, you could compete by applying a simple concept – more money. By gaining access to more resources, you could use increased scale to push prices and costs down and use your increased hegemony to have power over the consumer. This is why the trend in the old model is for more scale. But now scale will not help United Airlines or Home Depot. The new model demands that you kill off your old culture, the culture that made you successful and which you know so well.

This is what competing by using culture really means. It means that an old model restaurant chain has to give up its identity to compete. McDonalds cannot stop itself from being a production based culture that drives from the centre out. It is so invested in the old model that it cannot change. This is what makes it and many like it so vulnerable to a new model competitor who competes by culture.

All new models supplant their predecessors. Henry Ford destroyed the idea of the automobile as a luxury item and invented a model that could be applied to any organization. This is the story of McDonalds and why it was successful and will now fail. For Ray Kroc was the “Henry Ford of Food”. He introduced a new production model to the diner. In the early years, if you were a family diner and were faced with a Production Model competitor, you inevitably failed. This is even the story for government services and for education and health care. They have become production line organizations.

Just as all the benefits in the 20th century accrued to those organizations that adopted the Ford model well and early, so in our time, the advantages will accrue to those that understand and apply the new relationship model.

Course Objectives
• To use a series of case studies on eBay, Amazon, Dell, Wal*Mart and Southwest & Ryan Air to develop an explicit understanding of the key features of the new model
• To understand the origin and the application of the Ford model in all sectors of organization
• To explore the new Darwinian process of how the small and the nimble destroy the large and the powerful
• To understand the cultural aspects of this shift and how they connect to a major cultural shift in society
• To speculate on how this model can be applied to business in Atlantic Canada
• To understand how the new model may be applied to parts of the public sector such as education and health
• To explore what this model means for each of us as individuals

Required text & Recommended Reading
We will be using three texts this semester. None of them are text books – all of them are leading works on various aspects of this issues. All are fun to read as well.

• Our core text is called “The Support Economy – Why Corporations are failing individuals and the next episode of capitalism” by Shoshana Zuboff and James Maxmin. Published by Viking Penguin ISBN 0-670-88736-6. ($39.99 Cdn)The book explores the reasons for the failure of the Ford model and presents a clear vision of how a model based on capturing the value in the relationship will work

• Our case book text is called “The Perfect Store – Inside eBay” by Adam Cohen. Published by Little Brown ISBN 0-316-15048-7. ($36.95 Cdn) This book explores the founding of eBay and picks up many of the ideas in the Support Economy and puts a human face on them. If there is a “How to Book” for the relationship economy this is it.

• Our process book is called “The Innovator’s Dilemma – When new technologies cause great firms to fail” by Clayton Christensen. Published by Harvard Business School Press ISBN 0-87584-585-1. This clever book reveals how good firms risk their future by ironically upgrading their service and hence costs to meet the needs of their existing clients – risking that they open up pools of opportunity for low cost innovators to come in below. Southwest Airlines’ rout of the conventional full service airlines or the Mini Steel Mill’s triumph over big steel come to mind as examples. Here we see how the application of new technology can be so disruptive.

Other Course Resources
My weblog, which is updated daily, has a great deal of other supporting material and links. It is an interactive site and allows for your comments. I would like you to start your own weblog as part of the experiential aspect of the course. Weblogs are part of the new very inexpensive tool kit that is reconnecting the world.

Have a look at “The Cultural Creatives- How 50 million people are changing the world” by Paul Ray and Sherry Anderson. This will give you a sense of the powerful cultural forces of individualism that are driving the shift in organizational model.

Have a look at “The Hidden Connections – Integrating the biological, cognitive and social dimensions of life into a science of sustainability” by Fritjof Capra. The first half of the book is a challenge but his second part where he takes the theories of living systems and applies them to organizational life is breathtaking and simple.

Have a look at “Free Agent Nation – the future of working for you self” by Daniel Pink to see how many individuals, millions of them in fact, are now working in the new model for themselves

Course requirements and structure
The course will be offered online using the webct platform at UPEI. The course will last for 12 weeks and will have 4 assignments – i.e. specific written papers. The key to the course is a “Learning Conversation” which takes place in the Bulletin Board. 40% of the marks will be for regular participation in the bulletin board. It is mandatory that you participate regularly in the bulletin board.

The assignments will be valued at 10% for the first 3 and 30% for the final paper. The assignments will be set from a menu of topics – the course is very broad. I want to offer you enough choice to enable you to find topics that especially interest you.

Evaluation plan

• Participation 40% of the total mark
o The bulletin board is at the heart of the course. Dive in and have fun.
o I am looking for Quality and Quantity.

 Quality is defined by introducing novel insights and by building well on the ideas of other.
 Quantity is defined by participating 3-6 times a week
 If you participate less than 3 times a week without just cause, you will fail the course immediately

• Assignments 60% of the total mark.

o Papers that simply deal with the question and repeat the class thinking will be marked in the 60-75% range
o Papers that show original thought as well as having the covered the material will be marked in the 75-85% range
o Exceptional Papers that should be published will be marked in the 85-95% range

Course Schedule

Please note that some of the schedule may change. Please see this as an outline. Check my weblog under UPEI for the current schedule and for supporting material for all the key points of the course.

It is important to have read the set books early.
Week Topic Assignment

Part 1 – Conceptual Overview – What is the new Model in action

1. Jan 8 Intro - EBay and Amazon The Perfect Store by Jan 18

2. Jan 17 Dell, Southwest and Wal*Mart

3. Jan 22 What are the new lessons? Assignment 1 due Jan 22

Part 2 – What is the Ford Model? What is the new model as a theory? Why Culture?

4. Jan 29 Explore the Ford Model Support Economy by Feb 12

5. Feb 5 What is the new model?

6. Feb 12 What are the cultural issues ? Assignment 2 due Feb 12
Part 3 – The power of disruptive technology – Why great companies are failing

7. Feb 19 The Innovator’s Dilemma Dilemma by Feb 26

8. Feb 26 Social Software and Community

9. March 3 Costs and Inventory Assignment 3 due March 3

Part 4 – the power of experience and competing by culture

10. March 5 Applying the “Experience” concept

11. March 17 The internal changes to culture

12. March 19 The public sector – Education and Health?

13. March 24 What it means for you? Assignment 4 due March 26

Comments

[Rob Paterson]

Hi Tom
I have hung up my teaching hat
Rob

[tom desrosier]

Rob, I stumbled upon this...

When's your next Web offering?

I see once again that I but a grasshopper.

Tom

[robert paterson]

Hi Chris
I agree with you. I think that all organizational issues whether we talk of parents or IBM ultimately are connected to context. In fact is not context the key to individual awareness as well?

In my work now this is all that I concentrate on. I find that if there is a modern probelm it is that we have a focus on an administraive and internal context. For parents and teachers it seems to be on control and important but secondary issues such as brushing your teeth, a tidy room, being quiet in class ect while missing that larger context of development and how this is obtined. In organizations it is results and porcesses with also thinking about what the customer really needs. For most of us as individuals, don't we miss our own development in the serach for stuff?

[chris macrae]

It seems to me that in a relationship economy a company must know its context. The best question I've found on that in 15 years of searching is: who would uniquely miss what if this organisation did not exist? Probe by stakeholder

Now admittedly, not all organsiations will want to stay where there context is. But if you are going to move somewhere, its far easier if you have relationship permissions of all involved; far more costly to get there if you dont, and may not be practical at all. Love of context also involves everyone looking out for those changes that are relevant to taking the context to higher order value multiplication for all who commune around the organisation and trust in its value exchange dynamics.

[Audrey Pyke]

I read the outline of this course and it looks very interesting and challening. I am interested in reading more about the Ford Model.

[robert paterson]

My courses are credit courses at UPEI in the Business Administration School. You can apply to UPEI. There are 2 spaces left.

My focus as a consultant - I teach part time - is on culture and mindset.

The common theme I work on begins in Early Childhood where culture is passed on by parents to their children Here the research aha is that authoritarian and permissive parenting has very poor outcomes. I then look at the workplace where we find the same impact of culture. We can see that the typical corporate culture is very authoritarian as well - driving stress and illness and loops back into poor parenting.

Finally I look at the aging of society and am working with the Feds on a strategy to re-integrate seniors (folks like me now aged 53) back into the mainstream of society and work. Our thesis is that seniors have had their voice and purpose taken away and have been relegated and now accept a role as children. The state has in effect an authoritarian and parental role which creates a huge dependency which when we will make upi 30% of the population cannot be afforded any more.

So the culture loop is the same for all of us.

The course explores the idea of a Collegial or relationship based commercial relationship that I think has a chance of knocking over the authoritarian culture of the transaction economy.

If you are thinking about ag? Then our current system is based on a few dominant players in the middle who use their authoritarian power to squeeze the farmer and the consumer. How then do we create a direct and collegial relationship based connection between the producer and the consumer. Only then will the system change. Our current focus on the production system will not go anywhere until the core driver for the production system - the distribution system is changed as well.

[J. Humphreys]

I may be interested in the 'fixing agri.'and the changing market place courses offered on line; but if said courses share any common ground with the Doug Hall marketing philosophy I am not interested. Your web page covers a wide variety of diverse topics, what is the focus of your academic career? Are your on line courses credited towards a degree in ,for instance, Canadian Studies? I would be a mature student with a rag tag background including a couple of years at Kings/Dal. and a diploma in alternative grazing livestock (sheep) from agri. col. in N. Yorkshire. I do not believe human beings can think outside their box (nb. Robert Graves box poem) but would enjoy being convinced.