reading

Table of Contents

About the author

Acknowledgements

User Manual

PROLOGUE

From zero to 36 billion

Kodak Moments

Upheavals

PART I – CASUAL ECONOMY

The rise of the personal computer

· Moore’s Law revisited

· The four cycles of personal computing

· · Cycle #1: Office and hobby (1975-1995)

· · Cycle #2: Web and e-commerce (1995-2010)

· · Cycle #3: Mobile (2010-2020)

· · Cycle #4: IoT and AI (2020-2025)

The rise of the GAFA

· Platform ecosystems

· The first platforms

· The Wintel Imperium

· Netscape and the web

· Google

· Amazon

· Facebook

· Apple

· China: Alibaba and WeChat

PART II – CODE

Transformational Products

· Services are eating the world

· The discovery of usefulness

EXPERIENCE LOOP

SERVICE DIFFUSION – transforming user expectations

· Casualness

· Radical use value

· 10x value

· Built-in marketing

SERVICE EXPERIENCE – transforming user behavior

· Lock-ins

· User interface

· User experience

SERVICE CO-CREATION – transforming the value chain

· Business Model

· · Enrich & defend

· · Create & compose

· · Mix & milk

· Scale

· APIs

· Data

Teil III – PLAYBOOK

Building Blocks

Product Team

· Product Management

· Product Design

· · Brand & identity

· · Business & service

· · Process & architecture

· · Interaction & interface

· Product Engineering

· · User interface

· · Mobile

· · API design

· · Cloud integration

Product Creating

· Product Staging

· · Research

· · Lab

· · Construction

· · Greenhouse

· · Stage Gates

· Product Field

· · Frame

· · Map

· · Check

· · Find

· · Hands-on Product Thinking

· Product Toolbox

· · Design Thinking

· · Service Design

· · Prototyping

· · Design Sprint

· · Agile Development

· · Lean

· · Testing

· · Lean Analytics

Product Factory

Epilogue

Glossary

Sources

From zero to 36 billion

“We shall meet in the place where there is no darkness.”

– George Orwell, 1984 (1948)

It is the Orwell Year, 1984. On my desk stands a Commodore 64 with an acoustic coupler linked to a telephone via simple handset cups purchased at the local hardware store. At the other end of the copper twisted-pair line another home computer is connected, and the two of them “shake hands” virtually through an exchange of pips and whistles, modulating and receiving data sent from one PC to the other. I’m online for the very first time! Looking back over 30 years, I could never have imagined that this was the beginning of the Digital Age. Back then, in the mid-1980s, there were only a few thousand geeks of my generation in the whole world able to mesh their computers for a few minutes per day. Today, we’re always online, anytime, anywhere. Daily, the internet is entering deeper into our lives and doing new chores for us. It has become the greatest convenience machine ever invented.

But the net is not only reshaping our lives, it is also transforming the way businesses do business. How did this come to pass, and why are the effects on companies and products so breathtaking?

This web of connectivity didn’t happen overnight. In fact, it took decades to come about, and it proceeded in a series of waves and tiny steps. The first occurred in 1977 when Steve Jobs and Steve Wozniak developed and introduced their Apple II, the first pre-configured personal computer. Four years later, IBM followed suit with the very first PC to bear that name. Bill Gates of Microsoft provided the operating system for the IBM machine and he made sure he retained the licensing rights to what he called MS-DOS. Nobody at IBM, apparently, realized just how important the PC would become. In no time at all developers at other companies were turning out all kinds of word processors and spreadsheets.

The PC changed the office. It became everybody’s little helper. Two decades later in 2001, shipments of new PCs reached 130 million units in a single year.

The second wave was even higher and faster: The world wide web needed only 15 years from its beginnings in the mid-1990s to reach de-facto saturation. In 2007, when Apple CEO Steve Jobs presented the first iPhone to the public, the number of internet users worldwide passed one billion. Eventually, the mobile wave surpassed even those numbers, with more than

36 billion sim cards produced in 2017 alone. The smartphone has become the world’s remote control around which many of our everyday functions are organized.

Welcome to the Casual Economy.

Kodak Moments

“As one industry after another looks at itself in the mirror and asks about its future in a digital world, that future is driven almost 100 percent by the ability of that company’s product or services to be rendered in digital form.”

– Nicholas Negroponte, Being Digital (1995)

That binary digits (bits) have certain advantages over physical materials (atoms) is well-established. Nicholas Negroponte coined the phrase “bits vs atoms” long ago in his bestseller Being Digital. The context was clear even then. Bits are orders of magnitude cheaper to process and distribute than atoms. Thus, digitizing processes, business models and products yield returns even if they otherwise remain fundamentally unchanged.

But that isn’t how it turns out in most cases because connectivity alters the underlying business logic and change is inevitable. Reducing distribution and transaction costs essentially to zero opens the way to completely new business models. In addition, the marginal costs, such as the additional sum incurred in the production of one more unit of a product or service, also falls to nothing, so digital products are not subject to the laws of scarcity. Once produced these goods can be reproduced any number of times at essentially no cost at all. Seen that way, the internet is actually one great big copying machine.

Anyone trying to digitize a business model based on scarcity is up against a fundamental problem. This can only work with products that are not easy to substitute; otherwise the attempt will fail. Today, it’s users and attention spans that are scarce, not the digital products themselves. That is the reason for the power shift within the digital economy to the customer and away from the vendor.

All this first became apparent in the mid-1990s when e-commerce began to revolutionize retail markets thanks to unbeatable distribution and transaction costs. However, the products themselves remained basically unchanged. On the other hand, the internet is now transforming the products by placing itself in the center of the product experience, as network effects increasingly become part of the product’s perceived value. More and more products are becoming apps for smartphones. Those that offer the best → user experience (UX) catch on quickly, reach more users than their competitors and, over time, squeeze them out of the market. The user experience offered by Uber not only beats old-fashioned taxi rides, it can also potentially make owning a car undesirable. The atoms of the car become less important for the product “mobility” than bits represented by the Uber network. Digital products enrich the user through the experience of using them, while traditional products gradually fade into legacy, losing their interface and their customer access.

Digitization demonstrates the validity of a new branch of economics called → service-dominant logic, or S-D logic, which describes all economic activity as a service-for-service exchange in which the activities people want done for them represent the source of value and thus the purpose of exchange, not the goods, which are only occasionally used in the transmission of the service. In other words, the value for the consumer does not depend on the product itself but on its→ utility, which is something created by the customer. The service is the product, and it can be reproduced much more cheaply and efficiently than atoms. Digital services can also be improved and upgraded much faster than physical products.

Essentially, a digital service is just software, and software innovation cycles are naturally much shorter than those for hardware. Amazon updates its software during peak times more than 1,000 times an hour. Software updates are not only faster than exchanging hardware but also add new value to the hardware. In every automobile it produces, Tesla already installs the hardware which will one day enable their cars to drive themselves, even though the necessary software isn’t available yet. They plan to offer autonomy later as an update for which, of course, they will charge extra.

→ Functions-on-demand are the strongest indication we have that the paradigm shift from atoms to bits is already well under way. Without software, hardware is progressively declining to offer zero value. Another factor that is contributing to this obsolescence is virtualization. In this case, hardware is completely replaced by software which makes more efficient use of physics. The hardware itself is increasingly being moved to the cloud.

In his bestseller The Innovator’s Dilemma, published in 1997, Clayton Christensen was first to point out this obvious contradiction, namely that it is smarter for companies to concentrate on their most profitable customers and products. It is better, he argued, to ignore disruptive technologies if they do nothing to better satisfy the needs of their key customers, or that do not fit their current business model. New technologies, it turns out, are often only marginally superior to existing ones, and often, they may prove inferior. That’s why some new technologies only enter the bottom of the market or exist in expensive niches.

It’s hard to predict how this will turn out. In the digital world, a multitude of parameters – processing power, storage capacity, bandwidth – play a role, with each evolving exponentially. Each generation is twice as powerful as its predecessor, and since each new technology basically starts at zero, the hardest step is the very first one – from Zero to One, as Peter Thiel, one of the founders of PayPal, wrote in the book bearing that title. Systems that are subject to exponentiality grow slowly at first. It takes 10 doublings to reach a thousand, but then things start happening extremely quickly. Another 10 doublings, and you reach a million. Another 10, and we are suddenly talking billions. However, that is just theory. In the real world, a bunch of factors combine to slow development down: saturation, for instance, and disruptive competition. Technological progress alone does not make robust enterprises. Andy Grove, the co-founder who turned Intel into the world’s most successful manufacturer of computer chips, was right when he titled his management bestseller Only the Paranoid Survive.

As long as a product and its business model work, the pressure to transform is fairly limited. Big companies are especially good at systematically and incrementally improving products and business models. For decades, Kodak was a perfect example. It always spent loads of money on R&D, ran huge laboratories and invested heavily in innovation, but in the end, it was swamped by digitization which made its chemical film business obsolete. The old ways simply worked for too long, despite the fact that Kodak succeeded year by year in making its product better and better.

Kodak’s rejection of digital cameras was not necessarily based on arrogance alone. Neither the company nor the people working for it were stupid – quite the opposite because it’s usually the smart people who seek to find out what will work and what won’t. But when Kodak asked its customers what they wanted, they got answers like: “We want a film that produces even brighter colors, can be processed ever faster, and is even more impervious to the kinds of changes in lighting that frequently occur in photography.”

Kodak was very good at improving these properties in its products over time and customers, after all, were unable to imagine that taking pictures could be done any other way – with the help of digital chips, for instance. And, at least in the beginning, digital pictures were dramatically inferior to chemical photographs which were the result of processes refined over decades. Old products are generally superior to disruptive newcomers pushing in from the sidelines, at least when they have reached their zenith of development.

The first commercially available digital cameras had a much lower resolution than a single-lens reflex camera using traditional film – just as electric cars are inferior to internal combustion models in terms of range and price. YouTube videos used to be much grainier than television: they jerked, the screen was a lot smaller, and the picture quality was dismal. Over time, streaming video eventually gained the upper hand over broadcast TV. Digital products have a big advantage: The infrastructure on which they are based can grow exponentially, as we will see in the next chapters. This allows them to profit from the so-called “network effect”, which opens up a whole new dimension of benefits.

Gordon Moore, another co-founder of Intel, forecast way back in the 1960s that the density of the transistors in integrated circuits would double every 12 months or so. Known today as Moore’s Law, this principle still governs progress in the digital world, even if for practical purposes it has slowed down slightly, now doubling only every 18 months on average. This means that while a standard microprocessor will become twice as powerful, the price will remain the same.

The exponential growth of computer power also leads to a dramatic drop in price for processing, storage, sensors, and bandwidth. What we call the Digital Age is really the Age of Connectivity. Thanks to falling prices networks could be extended from big mainframe computers to more personal ones and then to smartphones and soon will incorporate just about everything through the ubiquitous → Internet of Things. Linking a gadget up to the internet costs just a few cents. This mixture of ever more powerful, fully networked devices and a global cloud computing infrastructure are leading to the explosive growth of new services and products.

Long before digitization, enterprises struggled (and failed) to cannibalize their legacy business because the result was usually not as good, and hence less profitable, than the old one. It is therefore considered an established fact that disruptive innovation needs to come from outside because large companies are blind to transformation – and in fact probably need to be so. But is this really true? Do companies have to sit still and wait for some outsider to turn up and crash their business model? Why can’t they create their own disruptive innovation?

Upheavals

“An iPod, a phone, and an internet communicator. An iPod, a phone… Are you getting it?”

– Steve Jobs, iPhone Launch (2007)

However, startups struggle, too, and many don’t survive, despite being completely digital, having digital natives at the helm and being steeped in the digital culture. If all companies had the same success rate as startups, our economy would have tanked years ago – statistically, at least.

If it’s not the culture and the methods, what is it the difference that makes the difference? It’s the product, stupid! Products with the potential to transform customer behaviors, markets and enterprises. It takes products that create value for customers in today’s digital ecosystem to ensure the future of your company.

The time a company spends on the S&P 500, Standard & Poor’s index of the 500 largest companies on the stock exchange, fell to 18 years in 2012 – in 1980 it was 25 years, and in 1958 it was 65 years. If this trend continues, three quarters of today’s S&P 500 companies will have completed the full circle of rise and fall on this major stock market index and will be gone by 2027.

This shows graphically how hard it has become to stay relevant over a prolonged period. If corporations fail, it’s because their products have become irrelevant. Nokia and Blackberry, for instance, were doomed the day Steve Jobs took the stage to introduce the iPhone in 2007.

In order to improve their chance of survival established companies need to create a pipeline of Transformational Products. Unlike startups, large companies can’t bet on a single horse. They need a mix of in-house development, partnerships and acquisitions. This resembles the way successful venture capitalists build up a portfolio of startups.

In transforming itself into Alphabet, Google placed a number of substantial bets because its executives realized their existing product portfolio would one day become obsolete. Larry Page and Sergey Brin are putting their money on Alphabet’s ability to create new blockbuster products, and it’s Alphabet’s job to develop them and stuff them in the pipeline.

Successful products transform the way consumers use them. They are habit-forming products that supplant existing habits, as Nir Eyal explained in his book Hooked (2014). Larry Page routinely subjects every new product to the toothbrush test: Is this something I would use at least once or twice a day, and does it improve the quality of my life? It’s all about relevance to everyday users and about changing their behavior.

In the digital age, the value chain is turned on its head. The greatest value is added at the intersection with the user – and that’s why control of the → user interface is so crucial. As customer and consumer behavior changes, so do markets, and eventually, if successful, the company. Corporate change happens at the end of the process, not at the beginning. Digital transformation affects the user first, then the market and, finally, the company.

Developing Transformational Products is no trivial task. The key is finding new benefits for customers, finding the right shape for the product and designing the right business model. It’s hard to plan this ahead of time, and the path to success is often long and winding. It usually involves lots of trial and error, and endless testing. That’s a lot of effort with costs both in time and money, but even so can sometimes end in failure.

That’s the reason many corporations prefer to concentrate on easier stuff like marketing, sales, and procurement, control processes that require good planning. In short, they focus on incremental improvements and risk-avoidance. As Peter Drucker, the pioneer of modern management theory, said: successful companies are good at doing things the right way, but in times of transformation and upheaval, it is more important to do the right things.

Fig. 1: Digital transformation

This is what this book is about.