Tag Archives: Henry Ford

The Key to Digital Innovation Success

More than a half century ago, Ted Levitt transformed the strategic marketing agenda by asking a seemingly simple question. In his classic Harvard Business Review article “Marketing Myopia,” Levitt declared that truly effective executives needed the courage, creativity and self-discipline to answer, “What business are we really in?”

Were railroads, he asked, in the railroad business or the transportation business? Are oil companies in the oil business or hydrocarbon or energy business? The distinctions aren’t subtle, Levitt argued, and they subverted how companies saw their futures. Marketing myopia blinded firms to both disruptive threats and innovation opportunities.

Levitt’s provocative question remains both potent and perceptive for marketers today. But my research in human capital investment and “network effects” suggests that it, too, needs a little visionary help. Increasingly, successful market leaders and innovators – the Amazons, Apples, Googles, Facebooks, Netflixs and Ubers– also ask, “Who do we want our customers to become?”

That question is as mission-critical for insurance and financial services innovators as for Silicon Valley startups. The digitally disruptive influence of platforms, algorithms and analytics comes not just from how they transform internal enterprise economics but from their combined abilities to transform customers and clients, as well. Successful innovators transform their customers.

See also: The 7 Colors of Digital Innovation  

The essential insight: Innovation isn’t just an investment in product enhancement or better customer experience; innovation is an investment in your customer’s future value. Simply put, innovation is an investment in the human capital, capabilities, competencies and creativity of one’s customers and clients.

This is as true for professional services and business-to-business industries as for consumer products and services companies.

History gives great credence to this “human capital” model of innovation. Henry Ford didn’t just facilitate “mass production,” he enabled the human capital of “driving.” George Eastman didn’t just create cheap cameras and films; Kodak created photographers. Sam Walton’s Walmart successfully deployed scale, satellite and supply chain superiority that transformed “typical” shoppers into higher-volume, one-stop, everyday-low-pricing customers.

Similarly, Steve Jobs didn’t merely “reinvent” personal computing and mobile telephony; he reinvented how people physically touched, stroked and talked to their devices. Google’s core technology breakthrough may appear to be “search,” but the success of the company’s algorithms and business model is contingent upon creating more than a billion smart “searchers” worldwide.

The essential economic takeaway is that sustainable innovation success doesn’t revolve simply around what innovations “do”; it builds on what they invite customers to become. Simply put, making customers better makes better customers.

Successful companies have a “vision of the customer future” that matters every bit as much as their products and services road maps.

Insurance, fintech and insurtech industries should be no different. The same digital innovation and transformation dynamics apply. That means financial services firms must go beyond the “faster, better, cheaper” innovation ethos to ask how their innovations will profitably transform customer behaviors, capabilities and expectations.

In other words, it’s not enough to answer Levitt’s question by declaring, “We’re in the auto/property/life insurance business.” The challenge comes from determining how insurance companies want their new products, innovative services and novel user experiences to transform their customers. How can insurance companies invest in their customers in ways that make them more valuable? Who are they asking their customers to become?

So when insurers innovate in ways that give customers and prospects new capabilities — like Progressive’s price-comparison tools and Snapshot vehicle-usage plug-ins or Allstate’s mobile-phone-enabled QuickFoto claims submission option — they’re not just solving problems but asking customers to engage in ways they never had before.

Who are these companies asking their customers to become? People who will comparison shop; allow themselves to be monitored in exchange for better prices and better service; collaboratively gather digital data to review and expedite claims. These are but the first generation of innovation investments that suggest tomorrow’s customers will do much more.

This is of a piece with how a Jeff Bezos, Steve Jobs, Mark Zuckerberg or Reed Hastings innovates to make their customers — not just their products — more valuable.

Today’s Web 2.0 “network effects” business model — where a service becomes more valuable the more people use it — are superb examples of how smart companies recognize that their own futures depend on how ingeniously they invest in the future capabilities of their customers. Their continuous innovation is contingent on their customers’ continuous improvement. Call it “customer kaizen.”

How rigorously and ruthlessly fintech, insurtech and insurance companies champion this innovation ethos will prove crucial to their success. Being in “the blockchain business” is radically and fundamentally different than asking who we want our blockchain users to become.

See also: ‘Digital’ Needs a Personal Touch  

Giving better, faster and cheaper advice on risk management via digital devices is different than fundamentally transforming how customers perceive and manage risk. It’s the difference between “transactional innovation” and innovation based on more sustainable relationships of mutual gain.

The insurance industry needs to transform its innovation mindset. Start thinking how innovations make customers and clients more valuable. If your innovations aren’t explicit, measurable investments in your customers’ futures, then you are taking a myopic view of your own.

Today’s strategic marketing and innovation challenge is how best to align “What business are we in?” with “Who do we want our customers to become?”

Do We Even Need Insurers Any Longer?

Voltaire once said that “if God did not exist, it would be necessary to invent him.” Could you say the same about insurers today, I wonder?

It is striking that, as organizations have sought to come to terms with the pace and scale of change now confronting them, the story of Kodak’s rapid decline from controlling 90% of U.S. film sales and 85% of camera sales to eventual bankruptcy has emerged as the cautionary tale of what can happen when you fail to keep pace with technological change. The corporate equivalent of the man who failed to sign the Beatles.

However, what many people forget is that Kodak actually invented the world’s first digital camera — in 1975. Far from being some sort of industrial dinosaur, therefore, Kodak was an innovation-driven company operating right at the cutting edge of photographic technology. And while endless books and articles have been written about the reasons for Kodak’s demise, in my view, the principal issue was less the failure to keep pace with change and more a lack of imagination.

See also: Matching Game for InsurTech, Insurers  

Kodak could not imagine a world where a digital camera would be for anyone but the dedicated professional, given its (at the time) prohibitive cost. Kodak could not imagine a world where processing speeds, image resolution, battery life and storage capacity would increase exponentially, at a fraction of the cost. Kodak could not imagine a world where people would not wish to take rolls of film down to the chemist to get them developed, pick them up a few days later and then diligently stick that “Kodak moment” in an album. Kodak could not imagine a world where everyone would carry a mobile phone that contained a camera that allowed images to be instantly shared on vast online networks.

If Kodak hadn’t been helping invent this new world, the failure would have perhaps been more understandable. At the time, such a world must have seemed to have been drawn from the pages of a science fiction novel. And executives’ lack of imagination was compounded by a fatal cocktail of arrogance — Kodak famously saw little point in sponsoring the Los Angeles Olympics in 1984 given its dominant position, allowing Fuji to gain a foothold in the U.S. market and grow its market share from almost nothing to 17% by 1997 — and a complete failure to articulate and execute a plan once the scale of the threat to the core business had become clearer. Fuji, faced with the same market dynamics and yet without the benefits of Kodak’s pioneering R&D, did not fall into the same trap.

To my mind, there is a clear read-across to the financial services industry, right now.

There is no shortage of activity. Market commentators and the media are lining up to sell their vision of both the El Dorado that lies just over the horizon and the sixth circle of Hell (heresy, for those of you who don’t know you Dante!) that awaits those who fail to convert to this new religion based on innovation. Every large player has got some sort of incubator or lab or chief innovation officer, whatever that is. Joint ventures are being formed. Data scrubbed. Analytics teams hired. Digital strategies unveiled. Billions of dollars is pouring into fintech and insurtech startups, most of which will likely not survive the first round of funding.

But does the innovation go far enough? Are the incumbents correctly reading the signs but merely agitating the surface in response, while deep down changing nothing? Are they like Kodak, incapable of imagining what tomorrow’s world could look like, because to do so conjures up an image so terrifying that it implies that they should torch their existing business so as to give birth to a new one from its ashes?

This question is of particular relevance to the insurance market, an industry whose often-archaic business practices and antiquated operating models, not to mention huge frictional costs and under-investment in IT systems, must have the financiers and techies in Silicon Valley licking their chops in anticipation. Show me another industry where a U.S. client, say, will find its risk placed via a local broker, via a U.S. wholesale broker, via a London wholesale broker, via an MGA, into a Lloyd’s syndicate, only to be reinsured via a FAC reinsurance broker to a reinsurer and then potentially via another treaty reinsurance broker to another reinsurer, with each stage of the chain clipping the ticket.

How much of every dollar of premium goes to providing the actual cover versus feeding a serpent in danger of swallowing its own tail?

It doesn’t take much imagination to see the huge potential for eliminating or automating steps in this chain, creating value for the disruptor and hugely improving client outcomes in terms of cost and service levels. But the real winners here will be those who have the scale, firepower and smarts to invest in the analytics and systems to drive not just marginal efficiency improvements in discrete parts of the value chain but to challenge the very basis of the way things are done. Traditional small to medium-sized players, therefore, unless they are operating in very specific niches, may find themselves at a long-term, structural disadvantage to larger and smarter players with more access to data and more ability to invest in the people and systems required to drive insight from it.

More critical than ever, however, will be client relationships and access. Improved analytics and slick systems is all fine, but if you don’t have the customer or the products and marketing skills to get to them, you’re wasting your time. That, at least, has not changed. In fact, if anything, in a more clinical, automated, digital world, client contact and warmth is set to become more important than ever.

This, is turn, raises an interesting question, though. While for years, brokers have operated under the somewhat existential threat of disintermediation, is the boot not now very firmly on the other foot? Unlike the insurers, who only know what they underwrite, the larger brokers, in particular, potentially have access to vast swathes of client and claims data across every single class of business and geography. Armed with this and the client relationships, and with a wall of capital looking to be deployed in the market (the rise of the ILS market bears potent witness) why do they need the insurers at all? Why not just rent the capital, underwrite the best business themselves and use the traditional market for the rest and to reinsure out the peaks? And if the brokers can do that, why not Google or Amazon, which have huge client reach and brand loyalty, unmatched analytical ability and the firepower to build, buy or hire in whatever insurance expertise they might need?

See also: 3 Ways to Improve Agent/Insurer Links  

Of course, the situation is not that simple. The market has not evolved in the way it has by accident. Large, complex and long-tail risks require huge balance sheets and often syndicated underwriting and reinsurance towers, to be written at all. Shareholder returns vary massively between brokers and insurers for a reason. In the rush to embrace the new, we risk ignoring all that works and that is good about the old. And because of this, change, when it comes, is likely to be more gradual and evolutionary.

But change it will, and, as the Kodak story shows, the key risk may well not be that people fail to recognize that the change is coming — I believe most do — but that they fail to imagine quite how radical that change could be and therefore fail to plan accordingly.

Henry Ford famously said that, “If I had asked people what they wanted, they would have said faster horses.”

The danger is that many risk now falling into the same trap.

The Need for ‘Price-Driven Costing’

In 1973, I began my insurance career as a claims’ adjuster. We handled some of the first claims in the new NFIP Flood Program. There was chaos.

A year later, I was hired by Cumis Insurance to staff a new sales office in Baton Rouge,LA. The market hardened dramatically, capacity was limited and our office closed before we sold a policy. I learned about market cycles.

My next job was as an insurance producer. My job and the agency business were good. We were paid 25% commission on homeowners policies, there was no transparency (comparative rating didn’t exist in our part of the world) and the most exciting change was when Safeco allowed field men (yes, they were all men) to wear blue or buff-colored shirts in lieu of the traditional white.

During my first week at work, a colleague dropped an article titled “Marketing Myopia” on my desk and said, “read it.” The author was Theodore Levitt. The piece was then and still is a classic — and framed my thinking about an issue that has only grown in importance and must become  the future of insurance.

Levitt opened with an observation on the railroad industry, which declined because it defined itself incorrectly – “railroad-oriented instead of transportation oriented… product-oriented instead of customer-oriented.”

Levitt also mentioned a fundamental misunderstanding about the success of Henry Ford. “We habitually celebrate him for the wrong reasons: for his production genius. His real genius was marketing. We think he was able to cut his selling price and therefore sell millions of $500 cars because his invention of the assembly line had reduced the costs. Actually, he invented the assembly line because he had concluded that at $500 he could sell millions of cars. Mass production was the result, not the cause, of his low prices.”

From 1978 to 1981, I represented Fireman’s Fund/FAMEX in its GM dealers program. At that time, the No. 1 concern of General Motors and its dealers was that GM would gain 65% market share and that the government would then break GM into Cadillac, Buick, Oldsmobile, Pontiac, Chevrolet and GMC corporations. We all know how this played out.

In 1993, I opened my consulting practice focusing on CHANGE – its management and architecture. (“The best way to predict the future is to create it,” as Peter Drucker said.) I spoke to the leadership of a community bank and said that, although GM, IBM and Sears were the giants in their respective industries, “one of these three will ultimately go bankrupt.” The bankers rolled their eyes and laughed. We all know how this played out. (In my children’s lifetime, I may prove right on the other two.)

Later that same year, Drucker offered an op-ed in the Wall Street Journal, titled “The Five Deadly Business Sins.” It said, “The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. Most American and practically all European companies arrive at their prices by adding up costs and then putting a profit margin on top… their argument, ‘we have to recover our costs and make a profit.’

“This is true but irrelevant; customers do not see it as their job to ensure manufacturers profit. The only sound way to price is to start out with what the market is willing to pay.”

Levitt’s voice echoes his agreement from the “Marketing Myopia” article, when he says, “Our policy is to reduce the price, extend the operation and improve the article. You will notice the reduction of price comes first.” Drucker’s wisdom closed the circle that began with my reading of “Marketing Myopia.”

In 1994, I became the executive director of the Louisiana Managed Healthcare Association (LMHA) – the health maintenance organization (HMO) association. I quoted Drucker dozens of times as I attempted to explain the difference between the then-existing fee-for-service system and the new world of “capitation” and “managed care.” I was shouted down more than I was applauded.

That same year, a couple named Harry and Louise (in a TV ad campaign) defeated Bill and Hillary’s attempt to reform healthcare. Fast forward another 20 years and Obamacare is the law of the land. At its essence is managed care – a price-driven costing model. The market won’t go back to cost-driven pricing.

Two more observations from Drucker as your prepare for tomorrow — or choose to ignore it:

— “Because the purpose of business is to create a customer, the business enterprise has two and only two basic functions: marketing and innovation.”

Innovation is so necessary because customers are constantly changing. We must be defined and driven by clients.

–“There are now only three possible roads the financial services industry can take. The easiest, and usually most heavily traveled, is to keep doing what worked in the past. Going down this road means, however, steady decline….The second road – to be replaced, and probably fairly rapidly, by outside innovators – remains a possibility for today’s firms. But there is also a third and final road – to become innovators themselves and their own ‘creative destroyers.’”

Your future depends on more production but only at a price the market will pay. Your sustainability depends on innovating your processes to ensure profitable delivery whether your commission is hidden in the premium or disclosed or whether premiums are quoted net of commission.

Today, when I drive by a dealer, the genius of Drucker is reinforced. Look at a pickup truck on the lot. The window sticker shows the “cost-driven price.” The sign on the windshield celebrating a $12,000 discount is the price-driven cost.

If you want to sell a truck in today’s world, discounts are not optional!

The same is true for insurance.