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Okay, time to take a look at G2, the second generation of Business in the modern era. The GI Sell! Sell! Sell! era was superseded by a G2 Added Value era which entailed a radical shift in the Customer-Supplier relationship.
Previously on The Notion of Customer …
G1, The first generation of Business in the modern era, was based upon Production. Suppliers produced things. Customers bought the things they produced. This meant that the primary success measure for Suppliers was Sales volume through Value-in Exchange, and the Customer Behaviour Mode was Expectation & Entitlement.
G1 encouraged entrepreneurs to operate in all areas of Business, responding to opportunities created by new technologies and falling costs. New developments arrived in two distinct phases: first TURBOCHARGE THE PRESENT and, second, EMPOWER THE FUTURE.
G2 - deep dive
G2 is the second generation of modern Business. To investigate it come with me if you will on a brief excursion back to the 1970s. It probably won’t go down in history as one of the most loved decades (although I like the description of it in the UK as “that rather wonderful decade of power cuts, glam rock and terrorism”1) but it was the hinge that led us from the old analogue world to the new digital world. Sure, back then, digital capabilities were far less developed than they now are, but it was the decade when the doorway to the new world swung irrevocably open. It was, in fact, the start of a transformation (or Great Reset as I have written about it in several earlier posts, including here) as identified by management guru Peter Drucker:
Every few hundred years in Western history there occurs a sharp transformation. ... Within a few short decades, society rearranges itself – its world view; its basic values; its social and political structure; its arts; its key institutions. Fifty years later there is a new world. And the people born then cannot even imagine the world in which their grandparents lived and into which their own parents were born. We are currently living in such a transformation.2
Digital technologies started to make their presence felt after the Second World War. In 1950, for instance, the man who had kickstarted the computer age with a $1 million personal donation to the U.S. navy, IBM’s chief Thomas J. Watson, estimated that his company, which was then really the only game in town, might be able to sell two or even three computers a year. His thinking, atypically, was bounded by the 55-feet (16.7 metres) long, 8-feet (2.4 metres) wide Harvard Mark I computer he had funded in 1943 and its attendant army of acolytes. But, also in the 1940s, the all-electronic computers spawned by ENIAC (Electronic Numerical Integrator And Computer) were a thousand times faster and down to a mere two-car garage size. By the mid-1950s IBM was selling computers that would actually fit inside a room to scores of American companies and Watson was wiping egg off his face all the way to the bank.
So, sure, digital tech was around before the 1970s, but the event that seems to me to mark the transition from digital infancy to an independently developing digital world happened in November 1971. It was the launch of a ‘micro-programmable computer on a chip’, Intel’s 4-bit 0.1MHz 4004 microprocessor, the enabler of microcomputers. At the time, the vast majority of people were unaware of its existence, let alone its importance.
In September 1971, an entirely different category of event had taken place that is directly relevant to this topic: the New York Times Magazine carried an essay by Nobel Laureate economist Milton Friedman titled The Social Responsibility of Business is to Increase its Profits3. Earlier Friedman had declared:
There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”4
This is at the heart of discussion about goings-on at the Customer-Supplier Interface. Today, Friedman often gets roundly criticized for his statements but that is to fail to properly analyze what was going on. Friedman’s claim gets picked over time and again: was he right or was he wrong? And, if the latter, was it because he was an evil, right wing, profiteering, capitalist so-and-so?
My two-cents-worth: in 1962 when he wrote Capitalism and Freedom, he was right because, at that time, the nation-state model was still the unquestioned constitutional order. Within that framework, it was the task of businesses profitably to sell as much production as possible, and it was the job of the nation-state to set and enforce the rules within which those businesses operated. This fact also makes sense of ‘classic’ marketing nostrums like the 4-Ps (Product. Price. Promotion. Place.) and Ansoff’s Product-Market Matrix. However, by 1971, the transition to a new dispensation had begun and everything was in flux. Peter Drucker again, writing in 1999:
[T]he period after World War II saw both explosive growth in the number of nation states as the successors to the pre-war empires all organized themselves as such and the mutation of the nation state into the Megastate. But in the last decades – beginning perhaps in the 1970s – the nation state began to come apart.5
But the business corporation was a child of the nation state - an entity designed to enable synergies between corporations and the welfare of a nation’s people (as articulated by Philip Bobbitt in The Shield of Achilles). So, starting to unpick the nation state was inevitably going to cause wider upset.
Today, of course, things have gone much further. Drucker saw this coming, too:
[The nation-state] has already been outflanked in crucial areas where sovereignty has lost all meaning. Increasingly, the new challenges facing every government are challenges that simply cannot be dealt with by national or even international action. They require transnational agencies who have ‘sovereignty’ of their own. Increasingly, regionalism is also sidelining the nation state. And, internally, the nation state is being undermined by tribalism.6 (Emphases as in the original)
The above quote is brilliant. It summarizes the core dynamic that killed off any hope of maintaining the Societal-Political-Business linkages that provided stability throughout the G1 era.
Which is not to say that everything stayed he same throughout that period. Of course it didn’t. By 1974, it was Drucker, yet again, who, as so often, saw what was going on and nailed it:
Profit is not the explanation, cause, or rationale for business behaviour and business decisions, but rather the test of their validity.7
Drucker then went on to state what, to my mind, is the most important management statement of the last 50 years:
There is only one valid definition of business purpose: to create a customer.8
Not least, if you think about it, this created an explicit link between Customer Centricity and Business Purpose. What caused the change will become clear as we go along but, for the moment, let’s just stick with the 1970s. What else happened?
Well, if the soundtrack to the first half of the decade was glam rock, the second half is remembered for punk. Also, there was a new thing called reality TV: programs like ‘An American Family’ (USA 1972) and ‘The Family’ (UK 1974) got people asking in bewilderment, “Why would anybody want to watch the everyday life of ordinary people?” Plus, of course, there was all the serious stuff, politics and the like. So serious and bewildering, in fact, that Professors Philip Kotler and Louis W. Stern, both at Northwestern University, decided that the 1970s was just too chaotic for inclusion in their 1990 summary of Marketing trends and projections up to the millennium.
As evidence of the chaos they cited: unexpected cost inflation, shortages of needed materials, new technological breakthroughs (for example, the first trials of mobile cellular telephony in Chicago in 1979), unwanted government regulations, high interest costs, aggressive internal competition, the end of the post-war baby boom, and unemployment.9 To give a flavour, here’s a sample of Professors Kotler and Stern’s conclusions:
Today, these conclusions look old-fashioned because ... well ... they are. But, even if the full implications of imminent digitization and interconnectivity were not clear to Professors Kotler and Stern, they certainly identified the direction of travel. And, most important, their work helps us to clarify our two foundational questions: What does a business sell? What do its customers buy?
Let me draw your attention to a key factor running through Table G2.2:
Line 1: indicates the transition from 1960s mass marketing and selling to increasing customization, which hints at more individualized, potentially longer-term customer relationships.
Line 2: indicates the move, in short order, from product-orientation (which had dominated for a long time) to market-orientation and then towards identification and response to specific customer types, which hints at more individualized, potentially longer-term customer relationships.
Line 3: Product line rationalization was identified as the means to make more sense of a product set to customers (think Steve Jobs and his pruning of the Apple range), which hints at more individualized, potentially longer-term customer relationships.
Line 4: ‘Strategic mission for each product’ meant setting down a clear path for each product, with a mission in the growth and cultivation of customer relationships, which hints at more individualized, potentially longer-term customer relationships.
Well, you get the drift, but let me wrap up this backward glance with a brief expansion on a few of the points just made. As digital technologies advanced, particularly from 1982 when the Internet Protocol Suite [TCP/IP] enabled interconnected networks to go worldwide, businesses deployed them to turbo charge the status quo. Which is to say to more assiduously pursue a business purpose of profit and shareholder value maximization. Why would they not? After all, there was no precedent in living memory for any other mode of operating. So why would they not offshore and outsource work to lower cost parts of the world? After all, unrestricted cost reduction was a legitimate activity in the established G1 and new G2 business models. At the time, the digitally-enabled turbocharging of profit and shareholder value could therefore be viewed as rational ... although, had business leaders thought more about longer-term outcomes, they might have moderated their behaviors. But, hey, kids in candy stores are hardly known for their restraint!
Few business people, one suspects, glimpsed that the emerging digital world not only would bring radical changes to the business operating model but would also have a huge geopolitical influence – the potential to cause serious or, even, terminal damage to the nation-state. If the business corporation as we know it was a tool of the nation-state, what on earth was going to replace it in the new dispensation? And would any new formulation alter the status of the Customer? Well, yes, actually, back in the 1980s, a refinement to the traditional business model did quietly go mainstream – the ‘Product+ Added Value’ revolution.
In the B2B world, some specific services had, for years, been provided to business clients via, for example, advertising agencies and management consultants. Self-evidently this work cannot be solely volume-sales-based. To some extent at least, it must be tailored to the specific wants and circumstances of a client company. This dependency on one-off problem analysis and resolution of course ratchets up the cost: hours spent by relatively scarce and highly paid specialists meant that added-value services were ‘big ticket’ and only justifiable in corporate settings. But, in the 1980s, emerging digital resources ‘democratized’, to some extent, the provision of some services:
Personalization, training and insurances were offered to enable businesses and individuals learn how best to tailor, use and maintain new products.
An increasing number of products were now sold with the promise of ongoing upgrades during their service life.
This represented a significant change to the way that some products could be sold and bought. Which brings us to the dawn of the G2 era: companies selling Product Plus Added Value, customers buying Productivity. If you think back to the ‘Value’ quote from Adam Smith’s Wealth of Nations that legitimized Value-in-Exchange for G1, this represented a widespread shift towards Value-in-Use.
New technologies always start out enabling existing work to be done more efficiently before moving on to do entirely new things. Trouble is, it’s difficult to foresee the ‘entirely new things’ until usage of the new tech provides some glimpse of what might be possible. The flip-top cellphone, for example, really was all the rage until the day dawned when Apple launched the iPhone. Overnight, it became passé.
However, some visionaries were ahead of the pack and, in the 1990s and 2000s, the first true digital commercial practitioners emerged (for example: Amazon, 1994; Google, 1996; Facebook, 2004) and generally started bewildering ‘traditional’ businesses and knocking seven bells out of some of them. In response, everyone built websites, sought further cost reductions and opted into two new disciplines: Customer Relationship Management (CRM) and Customer Experience (CX).
CX, intended to take account of all the new touchpoints that the new technologies create and enable, grew out of Interaction Design and User Experience (UX) work that, itself, had emerged in the 1970s, pioneered at Xerox PARC. One of the movers and shakers of this development was David Kelley, founder of ground-breaking design company IDEO:
I would say the most interesting thing that’s happened for me personally as a designer over the last twenty-five years is the move away from the design of objects. ... Designing experiences and services takes you away from the nuts and bolts, for a while anyway, and gets you into understanding people and their needs. ... [I]f you’re going to design experiences and services, you have to have new prototyping tools ... Now we’re using more storytelling. My students are taking improv classes and acting things out. Design is moving from understanding technology and building devices toward understanding people and telling stories.10
Emerging, as it did, from a perceived ‘tech’ need, CX evolved separately from Marketing ... which is problematic. Here’s a definition of Marketing, dated 2012, from two top marketers:
The unique role of the marketing function is to create better value for customers, by building salient brands and innovative propositions that people find relevant, appealing and distinctive, to drive sustainable, profitable, demand-led growth.11
Reading that, how can CX be anything other than a part of marketing? But ever since CX’s inception, its link with Marketing has been distinctly hit and miss. More miss than hit, in fact. Now, in the 2020s, CX operates in a fuzzy space. Matt Watkinson, author of an award-winning book on the subject12, makes the point that customer experience accrues from four sources: the product or service itself, the brand, one’s awareness of the product/brand, and that which is recognized as CX (e.g. customer journey mapping).
In the 1980s and 1990s the Marketing and Sales functions became not only separated but also antipathetic towards one another. They sniped about strategy, goals, budgets, relevance: a fruitless and energy-sapping squabble. So bad was it that, in 2006, three luminaries published Ending the War Between Sales and Marketing13. It got a lot of attention at the time, but the problems were deep-seated. So, for CX to come along at the same time and occupy yet another sealed-off channel was madness. At a time when Marketing, Sales and Service should have been drawing together, coming into alignment, they chose to do the opposite. The fact this makes no sense is thrown into sharp relief when one reviews the Customer-focus trail from the 1980s.
In the 1980s Tom Peters wrote a treatise on Creating Total Customer Responsiveness, a rip-roaring thesis that achieved great publicity when it was published14. Okay, it was written at a time when things were very different – the internet hardly existed, for heaven’s sake – but it stands up extraordinarily well to this day. All too little of it was implemented.
In 1991, a Brit, John Fraser-Robinson, put the Customer-first proposition in a disconcertingly direct fashion15:
The object of a business is not to make money.
The object of a business is to serve its Customers.
The result is to make money.
Could this be true? Self-evidently, a business without customers cannot make money, but was it a bit strong to claim that the primary object of a business is not to make money but, rather, to serve its Customers?
Well, it seemed not because, in addition to Peter Drucker’s assertion quoted earlier that the purpose of a company is to create a customer, along came Messrs Hammer and Champy with their seminal work Reengineering the Corporation16. This influential volume proposed a wholesale reengineering of corporations from a vertical, separate-silos’ focus, to a horizontal process focus where the end point of any process was … you guessed it … the Customer. The imperatives driving this shift were classified by Hammer and Champy as “the three Cs: Customers, Competition, and Change”. The first of that trinity, introduced under the heading “Customers take charge”, was explained thus:
Since the early 1980s, in the United States and other developed countries, the dominant force in the seller-customer relationship has shifted. Sellers no longer have the upper hand; customers do.17
Skip forward to 2001, and Tom Siebel, founder, chairman and CEO of ‘customer capability’ software company, Siebel Systems (acquired by Oracle in 2006), kicked off his thesis about “Customers Are in Charge” like this:
Customers are more empowered today than ever before: customers increasingly write the rules.18
All of which would seem to suggest that there has been reasonable consensus about the pivotal role of the Customer and the reality of Customer Power for a very long time. After all, the authors just quoted weren’t being tentative or shy in their expressions. And if the Hammer and Champy message about complete enterprise reorganization managed to ‘get through’ and get acted on, as clearly it did, why was it that one of the supposed key drivers of that revolution – “Customers take charge” – often got half-hearted treatment? (At risk of sounding cynical, enterprise reorganization was swiftly enacted because it delivered big cost savings that went straight to the bottom line.)
However, to this day, it seems to be the case that, for many enterprises, real Customer Centricity remains an unfulfilled goal. (We’ll expand on this in a future post in the series.)
Throughout G2, the action moved ever further from a depopulating High Street out onto the global frontiers of the 24/7 online age. And research kept showing that customer loyalty and employee engagement were both diving down, down, down, and trust in corporate entities themselves was evaporating. At the same time, however, new technological wonders kept arriving. What was going on?
Well, at a geopolitical level, we all know that globalization advanced, lifting hundreds of millions of people in less-developed countries out of poverty19. At the same time, in the West, both the nation-state and its love-child the business corporation faced mounting pressures that their populations did not fully comprehend.
Earlier I mentioned Philip Bobbitt’s work in the context of the synergistic relationship between the nation-state and the business corporation. He asserted that the legitimacy-claim of the nation-state was: “The State will better the welfare of the nation.” But he went on from there to say that the successor to the nation-state was the market-state whose basis for legitimacy is …
The State will maximize the opportunity of its citizens.20
So, what is a market-state? Here’s Bobbit’s answer:
In the market-state, the marketplace becomes the economic arena, replacing the factory. In the marketplace, men and women are consumers, not producers (who are probably offshore anyway).21
Think about it for a minute. It is a huge shift. Expanding on this point, Bobbitt quotes Michael Walzer:
What can a hospital attendant, or a schoolteacher or a marriage counsellor or a social worker or a television repairman or a government official be said to make? ... More important than the producers ... are the entrepreneurs – heroes of autonomy, consumers of opportunity – who compete to supply whatever all the other consumers want or might be persuaded to want ... competing with one another to maximize everyone else’s options.22
Bobbitt makes a further point:
If the nation-state was characterized by the rule of law – and ... the society of nation-states attempted to impose something like the rule of law on international behaviour – the market-state is largely indifferent to the norms of justice, or for that matter to any particular set of moral values so long as law does not act as an impediment to economic competition.23
Hmm, don’t you think this hints – or screams! – at the collapse of trust in capitalism that seems, now, to have gripped large numbers of people in the western world?
And the punch line:
The market-state is, above all, a mechanism for enhancing opportunity, for creating something – possibilities – commensurate with our imaginations.24
Bobbitt states that the use of the word possibilities, in this context, comes from Peter Drucker and his description of Post-Capitalist Society (1993). It is, I think, a profound idea: so much so that I use the word to exemplify that which is both sold and bought in G3, the most recent Business mode.
However, before going to discussion of G3, in the next installment of The Notion of Customer, we’ll briefly consider three linked issues - Outsourcing, the Enterprise Sale, the Strategic Alliance – that were enabled in the late-20th and early 21st centuries by digital resources. Initially, given the cost of resourcing and operating these capabilities, they were viable only for large-scale B2B applications. However, developments in digital technologies created the falling cost line and new techniques (e.g. APIs) necessary to make them increasingly viable in B2C situations.
So, next, some key facets of G2 and, after that, some thoughts about today’s situation in G3, the third generation of modern business.
To sum up this part of the story, the shift from G1 to G2 invoked the following changes:
What is sold and what is bought: Possibilities
Value Mode: from Intrinsic, Value-in-Exchange to Extrinsic, Value-in-Use
Behaviour Mode: from Customer Expectation & Entitlement to Customer Activation & Engagement
Customer Cognitive Mode: from Unconscious “Bring progress to me” to Conscious “Help me make this better”
… and more besides, as we’ll expand upon in upcoming installments.
Thanks for reading.
Liddle, Rod. “Yes man” interview with Rick Wakeman. The Spectator (19th December 2020)
Drucker, Peter. Post-Capitalist Society (1993)
Friedman, Milton. The Social Responsibility of Business is to Increase its Profits, New York Times Magazine (September 13, 1971)
Friedman, Milton. Capitalism and Freedom (1962)
Drucker, Peter. Management, Tasks, Responsibilities, Practices (1974)
Drucker, Peter. Post-Capitalist Society (1993)
Drucker, Peter. Management, Tasks, Responsibilities, Practices (1974)
Drucker, Peter. Management, Tasks, Responsibilities, Practices (1974)
Fraser-Robinson, John. Total Quality Marketing (1991)
Kelley, David quoted in Designing Interactions by Bill Moggridge (2007)
Bird, Andy & McEwan, Mhairi. The Growth Drivers (2012)
Watkinson, Matt. The Ten Principles Behind Great Customer Experiences (2012)
Philip Kotler, Neil Rackham and Suj Krishnaswamy. Ending the War Between Sales and Marketing, Harvard Business Review (July 2006)
Peters, Tom. Thriving on Chaos – Handbook for a Management Revolution (1987)
Fraser-Robinson, John. Ibid
Hammer, Michael & Champy, James. Reengineering the Corporation – A Manifesto for Business Revolution (1993)
Hammer, Michael & Champy, James. Ibid
Siebel, Thomas M. Taking Care of eBusiness (2001)
UN Millennium Goals
Bobbitt, Philip. The Shield of Achilles: War, Peace and the Course of History (2002)
Bobbitt, Philip. Ibid
Bobbitt, Philip. Ibid
Bobbitt, Philip. Ibid
Bobbitt, Philip. Ibid