Digital technology is expanding the options for consumers outside the boundaries of a firm’s traditional supply chain.
“You can have any color as long as it is black.” Henry Ford’s immortal words in the early 1900s suggested that standardization was a significant strategy that eventually paved the way for mass production and our industrial age. Indeed, standardization became a preferred approach to achieve economies of scale and low costs for mass-market penetration.
Over the years, however, enhancements in production and information technology allowed firms to relax the constraints of standardization and embrace customization without necessarily sacrificing production efficiencies or low cost. Today, the 2016 Ford Focus offers 10 exterior color choices that customers can pick from its web pages before the car is manufactured for them. If one also considers the numerous other components that could be varied in a car, a customer could potentially pick from thousands of pre-determined options that Ford can then customize, yet manufacture and deliver in mass volumes and efficient scale.
With the advent of digitization and the App economy, the frontiers of customization are expanding further. Through Ford’s connected car platform, Sync, customers can further customize their cars by adding a variety of applications such as Pandora and Spotify for streaming music, Cityseeker for dining venues, Goallifescores for sports, and Audioteka for streaming audio books. There are an estimated 18 million developers creating such apps that can work on Sync and other platforms. Unlike earlier customizations, these new choices are not necessarily hardwired into the car. Ford’s customers can add to or change the configurations of these digital customization choices after the car is delivered to them in ways that Ford may not even be able to anticipate.
With the help of third-party developers and complementors, the locus of customization is shifting from the producer to the customer. While Industrial Age customization did enhance options for different customer preferences, those options were hardwired into a firm’s supply chain in ways that preserved efficient scale. Customers could choose, but only from those options that a firm had already programmed to deliver through established and internally controlled supply chains. Digital Age customization allows for customers to exercise and consume options outside the boundaries of a firm’s traditional supply chain.
To leverage such strategic opportunities, firms need to recognize a new concept: demand-side interdependencies. Demand-side interdependencies arise after the consumer procures the product. For the traditional or Industrial Age thermostat, for example, such interdependencies would include an appropriate wiring and the availability of electricity. But as the traditional thermostat has transitioned into a smart one, it has also become a sensor for collecting information and a focal point for communication across room occupants and an array of other smart devices. As a result, much more than just electrical wiring and power supply now contribute to its demand-side interdependencies.
In January of 2014, Google acquired Nestlabs for $3.2 billion. Why would Google pay such a high premium for a company making thermostats? One of the reasons is that Google recognized the Nest’s potential for creating, shaping, and influencing new demand-side interdependencies. Nest’s “work with Nest” program invites a number of devices to connect with the Nest thermostat. For example, a BMW vehicle can communicate with Nest and have its thermostat settings at 70 degrees when a homeowner drives into the garage. An LG washing machine could connect to a Nest thermostat that controls when it operates. As more and more such devices connect to “work with Nest,” users can avail of a growing set of options to customize Nest to their requirements, even after it is installed in their homes. Indeed, Nest has now become the gateway to the connected home.
Traditionally, demand-side interdependencies were largely left for the customers to arrange for and manage. After all, such demand-side interdependencies were few and largely stable in the industrial age. The traditional business models of Honeywell never considered controlling the availability of wiring and electricity. Digitization and the arrival of the Internet of Things (IoT) are changing all that. Also, with the advent of Application Programming Interfaces (as well as the numerous strategic implications of APIs), demand-side interdependencies are growing in scope and significance, becoming easier to track and possible for firms to influence. Firms that are able to pioneer initiatives for recognizing, tracking, and influencing such new demand-side interdependencies can expand their frontiers of customization.
Implications for Industrial Age Companies
APIs and their strategic use in managing demand-side interdependencies can pivot Industrial Age firms using industrial production and supply chain models into new API-based ecosystems models. This shift also empowers their customers to dictate their choices and enables producers to widen their sources of inputs to offer these choices and expand their frontiers of customization. How should a firm go about doing so?
- Identify and develop demand-side interdependencies: Companies should begin to consider the products/services that they have built inside, for possible extensions by third parties. By adding APIs to data and services, firms can avail opportunities to invite the attention of complementors who could expand the ways in which the products and services are used in conjunction with other products and services on an ongoing basis. This will allow them expand their product and service offerings through more and more customized options.
- Track and influence products/services in use: Most digital products/services today have toolkits that allow developers to connect and interoperate a product with other products. These toolkits also enable companies to track the use of their products/services, so that they can identify where most of the connections are being made and the trends behind the popularity of different connections. Firms should also engage in strategies to shape and influence these trends and make their connection points more prevalent and prominent.
- Develop new metrics: As demand-side interdependencies begin to take shape, a new network emerges connecting how a firm’s products/services are connected with other products/services, complementors, and customers. Firms should develop new metrics to gauge their network position within their demand-side interdependency networks. These metrics, such as the centrality of their position or the breadth of connections, may be different from what firms are traditionally accustomed to when managing supply chain interdependencies.
Historically, most manufacturers have preferred to retain control over the choices they offer to their customers. The accepted premise was that such internal control of customization choices within their supply chains was necessary to guarantee customers with a certain quality of experience. In today’s environment, however, customers have needs that are hard to predict and often change in unanticipated ways. By extending a firm’s scope of operations to manage demand-side interdependencies, firms can discover a new source of agility in the digital world.