Kellogg Magazine  |  Fall/Winter 2015



You can always get what you want
  You can always get what you want


jaunt down memory lane to ancient times — let’s say, 2010 — makes it clear: The weird, messy economic party the Internet started is in full, riotous swing, and thanks to an explosion in smartphone use, more and more people and companies are joining in.

Yet these days, a mere smartphone app does not a successful business make. Instead, some leading companies are cutting out the middlemen, both virtual and physical, and connecting customers directly to what they want — and, increasingly, to sources that are physically closer and closer.

Understanding this proximity of resources, capabilities, agency and knowledge of customer needs has allowed these companies to snatch market share — and money — from big-name, monolithic players that, for many decades, effectively owned huge swaths of economic turf. Now, thanks to new approaches to delivering both services (transportation, health care, energy) and actual goods (toothbrushes, airplane engines), economic territory is up for grabs.

Innovative companies are using a combination of technology and creativity to drive the production and provision of products and services ever closer to the point of demand, reshape markets as we know them, and unmake the rules for who captures value and how.

Breaking the (supply) chain
Any discussion of this new paradigm isn’t possible, apparently, without uttering a certain four-letter word: Uber.

Uber, with its unapologetic swagger, deftly connects consumers to a massive new crop of citizen drivers, Kellogg Clinical Professor of Innovation and Entrepreneurship Robert Wolcott says. By doing this, Uber circumvents the traditional taxi and car service industry while simultaneously capturing value for itself and a newly created workforce.

"It unlocks resources to satisfy the wants and needs of consumers more quickly than the old solution — and brings many more people and resources to bear on the problem," Wolcott says. Wolcott and Andrew Razeghi, a consultant and lecturer of marketing at Kellogg, are trying to understand what the swift pace of technological change will mean in the coming years, and what new business models will be required to stay on top. It’s early days yet, but as Razeghi says, we are witnessing "the unbundling of the corporation as we know it." Uber, in other words, is only a symptom of a much bigger shift in who takes home the money at the end of the day.

New avenues of access
New avenues of access
Doctor On Demand, a telemedicine startup, "probably couldn’t even have existed three years ago," says Seth Lasser ’05, VP of marketing at the San Francisco-based company. "The fact that everybody has the ability to have a two-way video conversation in their pocket makes our business possible," Lasser says.

"Consumers come to us the first time because of convenience. It’s fast, it’s late at night, they’re not feeling well, they can’t get to their doctor and with us they can be seen immediately."

VP of marketing, Doctor On Demand
Nearly two-thirds of Americans (64 percent) now own a smartphone, according to an April 2015 Pew Research Center report. That’s nearly double the percentage in 2011. Pew data also show that as of October 2014, 42 percent of U.S. adults owned a tablet. And although this is all good news for a company like Doctor On Demand, the mere presence of a possible market doesn’t guarantee customers.

What does bring customers, Lasser says, is what the company offers — backdoor access to something that is a huge headache for many, many Americans: health care. For $40, anyone with a two-way video connection can see a medical doctor nearly instan-taneously, which, as anyone who has navigated the maddening steeplechase of insurance, crowded doctor schedules and incon-venient hours can attest, is practically impossible through traditional channels.

"Consumers come to us the first time because of convenience," Lasser says. "It’s fast, it’s late at night, they’re not feeling well, they can’t get into their doctor and with us they can be seen immediately." The company also sees a lot of consumers who can’t afford to get health care through traditional channels. "But their primary feedback — the reason they come back — is that the doctors are amazing," Lasser says.

Separating winners from losers
The novel arrangement that Doctor On Demand provides circumvents an entrenched, unfriendly system, and investors are betting on its success. The company recently secured $50 million in Series B funding.

But as Lasser points out, Doctor On Demand is by no means the only player in telemedicine. What sets the company apart, he says, is not only the quality of the product, but the way it’s delivered. "We’ve got more five-star reviews on the app store than everybody else combined," Lasser says. "It’s as simple, and complicated, as having the best user experience."

Indeed, says Sunil Chopra, IBM Professor of Operations Management and Information Systems. For companies trying to rise above a host of competitors offering similar products, the customer experience can be the deciding factor. Chopra gives the exam-ple of and, two e-commerce retailers so similar that Chopra joked that the difference between typing or is trivial, "only a difference of one keystroke," he says.

Yet despite its massive supply chain and established presence across the United States, has lost out in the online retail space to a company that made ease of use central to the customer experience, says Chopra. "That is really something that Amazon realized very early on, and it has helped it a lot."

And it’s not just about making your app or website intuitive and easy to use, says Rob Day ’01, a partner at Black Coral Capital, a private equity firm that invests in natural resource innovation. Increasingly, a well-designed consumer experience requires behind-the-scenes work to connect the "full stack" of what customers will need, forcing them to make as few choices as possible.

To illustrate, Day uses an example from the burgeoning rooftop solar industry, another example of a direct-to-consumer model that is cutting out a monolithic middleman. Imagine, he says, that you decide to go with solar in your home. You have to buy solar panels, yes, but also figure out installation, backup power, permitting, a monitoring system and smart appliances. And somehow finance the whole thing. In other words, it’s confusing and time-consuming.

Companies that can own that entire backend process and deliver it in one neat package will inevitably beat out businesses that offer only one service and leave consumers to do all the connecting, says Day. So, he adds, "It’s really more about bundling services and user experience, not just user experience."

From services to stuff
One company bundling services with an actual physical product, and with no middleman in sight, is CloudDDM. Co-founder Rick Smith ’94 calls it "the world’s first fully automated 3-D production factory."

The company, which launched in May 2015, runs 100 industrial-scale printers inside UPS’s Louisville shipping hub. It combines an easy user experience — drag-and-drop 3-D printing capabilities — with scale and overnight delivery to 48 states. "You can have an engineer hit print when they go home, and the part arrives on their desk the next morning," Smith says.

"I think it’s a brilliant model, and it significantly enhances efficiency for specific kinds of products," says Wolcott, "but as [Rick will] tell you, it’s a transitional model."

Indeed, Smith envisions a future where 3-D printers are everywhere, and consumers can order a pair of customized sneakers they can pick up around the corner a few hours later. "All the old-school industrial infrastructure that is set up to deliver mass production gets dismantled," Smith says.

Yuri Salnikoff ’95, CMO of MakerBot, the Brooklyn-based upstart desktop 3-D printing company, agrees. Salnikoff says that desktop 3-D printing can not only change the direct-to-consumer market but, perhaps more importantly, will also someday allow companies to eliminate many of the costly requirements of doing business, everything from shipping to storage to inventory forecasting. "Why not have a desktop 3-D printer where you can print out a part?" Salnikoff says.

Startups vs. incumbents
MakerBot is a young company. In just six years, it has gone from a hobbyist’s entity to a power player with an eye on the future, its web-enabled, software-rich printers embedded everywhere from elementary schools to product labs at GE. And just like many other ascendant, transformative businesses that have upended traditional models, it started with just an idea and a few ambitious people.

"The world is very different than a decade ago for entrepreneurs," Wolcott says.

And this means that the big guys are looking intently in the rearview mirror.

"I think they’re worried," Razeghi says, "but they’re worried about symptoms, and they’re not dealing with the cause of the prob-lem, which is that markets are up for grabs today."

However, Razeghi, Wolcott and Day all say that massive companies have some inherent advantages. Familiarity and comfort are powerful forces when it comes to buying behavior, and the brands we all know are firmly fixed in our collective consumer subconscious.

"It’s not certain that the winners have to be outsiders," Day says, adding that big corporations aren’t fated to plod toward obsolescence. "It’s a matter of whether they choose to lead the parade or get dragged kicking and screaming into the future." And regardless of who wins, says Chopra, these are shifts "that in the end are going to be very good for the consumer."