CONGRESS 2010 RIDING THE VALUE SHIFT IN MARKET RESEARCH ONLY THE PARANOID SURVIVE David G. Bakken Published by ESOMAR: September 2010 First presented at: Congress 2010 Copyright © ESOMAR 2010. All rights reserved. ISBN 92-831-0244-4 CONGRESS 2010 PART 4 / THE DISCUSSION SPACE ABOUT ESOMAR ESOMAR is the world organisation for enabling better research into markets, consumers and societies. With approximately 5000 members in over 100 countries, ESOMAR’s aim is to promote the value of market and opinion research in illuminating real issues and bringing about effective decision-making. To facilitate this ongoing dialogue, ESOMAR creates and manages a comprehensive programme of industryspecific and thematic events, publications and communications, as well as actively advocating self- regulation and the worldwide code of practice. ESOMAR was founded in 1948. 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CONGRESS is our flagship event, attracting over 1,000 people, with a full programme of original papers and keynote speakers, plus a highly successful trade exhibition. Full details on latest membership are available online at www.esomar.org. CONTACT US ESOMAR Eurocenter 2 Barbara Strozzilaan 384 1083 HN Amsterdam The Netherlands Tel.: +31 20 589 7800 Email: [email protected] Copyright © ESOMAR 2010 1 CONGRESS 2010 PART 4 / THE DISCUSSION SPACE RIDING THE VALUE SHIFT IN MARKET RESEARCH ONLY THE PARANOID SURVIVE David G. Bakken INTRODUCTION The market research industry seems under attack from all quarters. Agency researchers complain that the industry is becoming commoditized due to clients’ unwillingness to “pay for quality.” Clients retort that their agency partners do not demonstrate the ROI for research and fail to provide the insights they need to realize their business goals. From outside the MR industry, software vendors are providing “do it yourself” tools that allow clients to conduct survey research without the assistance of an external agency. Both client-side and agency researchers have joined the discussion about how to fix market research, with suggestions ranging from improving research skills to embracing do-it-yourself tools as a new way to partner with clients. However, the current turmoil in the world of market research is likely a symptom of a more fundamental, underlying change in the industry – a change that reflects a shift in the way value is created and delivered. In other words, the industry is at a strategic inflection point . The companies that are first to recognize this underlying change and respond with new business models will be most likely to ride the value shift to future success. STRATEGIC INFLECTION POINTS Intel Corporation is the largest semiconductor manufacturer in the world by revenue. Intel microprocessors power most of the personal computers in use today, as well as innumerable servers that run Microsoft operating systems. Moreover, Intel captures a disproportionate share of PC industry profits. Operating income for 2009 was $5.7B (USD) on sales of $35.2B. In contrast, Dell Computer, one of the leading integrators of components into finished PCs, had 2009 operating income of only $2.2B on sales of almost $53B. Early on, when PCs cost upwards of $5,000 (USD), building personal computers was very profitable. We might conclude that increased competition – those profits attracted new entrants to PC manufacturing – was the main cause of margin erosion. However, the research that Clayton Christensen of Harvard Business School and his collaborators have conducted over the last several years reveals a different but common underlying pattern to explain industry value shift. According to Christensen et al (2001), as industries mature the “architecture” of the industry becomes modularized. Industries that start out as vertically integrated become fragmented, with a multitude of firms supplying different components of the total industry value proposition. This happened to the computer industry, first as component manufacturers Copyright © ESOMAR 2010 2 CONGRESS 2010 PART 4 / THE DISCUSSION SPACE found ways to crack IBM’s hold on the total system, then continuing as minicomputers and, ultimately, PCs, achieved a level of performance that met or exceeded customers’ requirements. The same type of transformation is taking place in market research. In the 1970s and 1980s vertically integrated firms that owned or controlled the critical value chain components dominated the industry. Early computer-assisted telephone interviewing systems, as one example, were developed in-house, and one firm’s proprietary system was unlikely to be compatible with another’s. These same firms owned call centers and employed face-to-face interviewers to work in the shopping mall research centers they maintained. Data processing, analysis and reporting were similarly carried out by people on the research agency’s payroll. These vertically integrated research companies succeeded by developing proprietary and interdependent systems for delivering research. This was the best way to coordinate the diverse activities that make up a typical market research study and insure quality. Eventually, however, key processes, such as telephone data collection, become modularized . Outsourcing some activities to value chain specialists often looks like a good thing at first, offering greater flexibility, speed and lower costs. Early standalone call centers such as Western WATS in the United States provided flexible, high quality interviewing capabilities, often at lower cost than in-house centers due to labor market advantages. More recently, the same type of value chain specialization has occurred in data processing, advanced analytics, and a host of other technology-enabled research tasks. Full-service research agencies still hold onto the role of systems integrators , but that role is now under siege as well. In Only the Paranoid Survive (Grove, 1996), Andy Grove, then President and CEO of Intel, describes the challenges that Intel faced during what he calls “a strategic inflection point” in the computer industry. In the early 1980s Intel’s core business, the design and manufacture of memory chips, was under assault from Japanese competitors. Of course, Intel’s managers at first did not recognize this as an inflection point, and they reacted as most do to strong competitive threats. For example, they considered looking for niche markets within the memory chip sector where they could compete more effectively. In the end, however, Intel abandoned the memory chip business and poured its resources into microprocessors. Grove points out that it is hard to detect an inflection point amid all the more or less “normal” change that occurs within an industry. In part this is due to our tendency to assimilate new information into our existing frames of reference. Intel’s managers, for example, did not grasp immediately the magnitude of the threat posed by the Japanese companies. Similarly, managers in many industries underestimated the impact that the Internet would have on their businesses and the new competitive threats that would emerge as a result of this enabling technology. In the remainder of this paper, I suggest that market research is at an inflection point every bit as transforming as the one that Intel survived. We see the symptoms – increasing “commoditization,” the emergence of “do-it-yourself” research, and other threats from outside the research industry – and fret about their significance, but as an industry we are missing the larger, underlying shifts in the research value chain that will shape the future of market research. Copyright © ESOMAR 2010 3 CONGRESS 2010 PART 4 / THE DISCUSSION SPACE THE VALUE SHIFT IN MARKET RESEARCH Two underlying patterns drive value shift in an industry. First, as industries mature, customer demands typically shift from performance (getting the job done to a minimal standard) to reliability to convenience and finally to low cost . According to Christensen and his collaborators (Christensen, 1997; Christensen, Raynor and Verlinden, 2001), this evolution takes place because performance and reliability reach a point where they exceed the needs of the marketplace. In other words, firms over-deliver on the customer value proposition. One sign of this is competition based on “nice-to-have” features and benefits rather than on core customer value propositions. At the same time, there invariably exists one or more segments of customers for whom performance and reliability are not the only considerations. These segments demand convenience and low cost. This creates opportunities for new business models that address these demands, sometimes at the