Introduction
INNOVATION ON THE DIGITAL FRONTIER

A number of years ago I (Joe) gave a boardroom talk in Milan, Italy, to a number of executives from different companies. One was the vice president of a global coffee manufacturer, who said something that amazed me: “There’s been no innovation in the coffee industry in fifteen years.” I responded: “Have you never heard of Starbucks?” This gentleman could only conceive of innovation in physical goods, not in experiences— a particularly ironic stance given we were in one of the foremost coffee meccas of the world, the very city that inspired Howard Schultz to create the Starbucks coffee-drinking experience.

That is what we desperately need in business today: experience innovation. Why? Because we are now in an Experience Economy, where experiences—memorable events that engage people in inherently personal ways—have become the predominant economic offering. It eclipsed the Service Economy that flowered in the latter half of the twentieth century, which in turn superseded the Industrial Economy, which itself supplanted the Agrarian Economy.¹

Experiences are not new, just newly identified as distinct economic offerings. They have always been around—think of traveling troubadours, Greek plays, Roman sporting events, commedia dell’arte performances—but now encompass so much of the economy that every company faces a stark choice: innovate goods and services ever faster as their productive lives get ever shorter, or focus on offering innovation further up the “Progression of Economic Value” (Figure I.1), on experiences that engage customers, or even transformations, built atop life-changing experiences, that guide customers in achieving their aspirations.² These higher-order offerings create greater value for customers, generally have longer life spans as they prove more difficult for competitors to imitate, enable premium prices, and let companies capture more economic value.

Figure I.1 The Progression of Economic Value. From B. Joseph Pine II and James H. Gilmore, The Experience Economy, Updated Edition (Boston: Harvard Business Review Press, 2011), 245.

Innovation is the great decommoditizer, for by definition if it is truly new, it is truly differentiated, as no one else has the same capability; competitors cannot create that same value at any price. And today, taking either innovation path to stay ahead of the commoditization steamroller seeking to squeeze margins and flatten profits, a company must attune itself to the greatest source of offering innovation ever devised: digital technology.

The Digital Frontier

As coffee manufacturers the world over missed the shift to the Experience Economy, so too have many companies missed how digital technology has been remaking the competitive landscape. Consider Motorola, once the king of cellular phones. Its stay atop the pinnacle of the industry, however, resulted from analog phones; once the shift to digital washed over the industry in full force, it was Nokia that took over the crown. Nokia innovated far better in function and styling, providing more of what customers wanted from the new capabilities digital technology brought to mobile phones and services. Motorola fought back and produced occasional successes, such as the RAZR, but could not consistently outperform Nokia and spun off the business into Motorola Mobility as it became one of many also-rans in the industry.

But so, really, did Nokia. For what both companies missed was the intersection of digital technology and experience innovation pioneered by Apple. When Apple entered the smartphone industry and took it over—in worldwide global mindshare if not in market share—it thought long and hard about the phone-using experience and created a device not just highly functional but a joy to use. It thought long and hard about how the experience we have with our phone could be a great part of its value, and then about how the experiences we have on our phone, via apps, could overwhelm every other consideration. It thought long and hard about how to turn the purchasing of the phone (and of course all its other technological offerings) into an experience itself and innovated the one-of-a-kind Apple Stores, which today generate over half the company’s revenues. It even thought long and hard about the box-opening and guide-reading experiences, for goodness sake, and innovated ones for the iPhone and its App Store, respectively, about which people wax poetic!³ Apple still primarily sells digital-based goods (with many services, such as the iTunes store, and a few membership-based experiences, such as One to One), but it markets digitally infused experiences, and thereby reaps the rewards.

Thinking long and hard about using digital technology to create unique customer value—that is the theme of this book. The digital frontier, lying at this intersection of digital technology and offering innovation, beckons companies seeking to create new customer value by mining its rich veins of possibility. For digital innovations enrich our lives by augmenting and thereby enhancing our reality; by engaging us through alternate views of reality that make us active participants in the world around us; by letting us play with time in ways not otherwise possible; by engrossing us in virtual worlds that enchant and capture our time; by allowing us to interact with those worlds through material devices and even gestures; by letting us physically realize whatever we imagine; and by enabling virtual representations that mirror our reality to enlighten us from a new vantage point. Digital innovations can even give us a greater appreciation and desire for Reality itself, whenever we take the time to unplug and just be. But by far the greatest value will come from those innovations that create third spaces that fuse the real and the virtual.

Why Digital Technology Changes the Game

As far back as 1984, pioneering computer scientist Alan Kay recognized the unique power of digital technology “The computer is a medium that can dynamically simulate the details of any other medium, including media that cannot exist physically. It is not a tool, although it can act like many tools. The computer is the first metamedium, and as such it has degrees of freedom for representation and expression never before encountered and as yet barely investigated.”⁴ Around that same time, one of those investigating the power of this new medium, Jaron Lanier, coined the term “virtual reality” as he envisioned the creation of a “virtual world with infinite abundance.”⁵ And less than a decade later, Brenda Laurel, in her wonderful exploration Computers as Theatre, told us that “computers are representation machines” and that designing the “human-computer experience” is “about creating imaginary worlds that have a special relationship to reality—worlds in which we can extend, amplify, and enrich our own capacities to think, feel, and act.”⁶ Now, what these visionaries foresaw two and three decades ago has become impossible for us to ignore because it underlies so very much of the value companies create today, so much of the value customers seek.

Digital technology differs from all other kinds of man-made technology due to the distinctive characteristics of the bits at its digital core. Although most readers will be familiar with these characteristics (and others that could be cited), it still is worth recognizing the following:

∞ Bits are immaterial. They weigh nothing, cost little or nothing to store or replicate, and do not “age” with time. They require no ongoing maintenance, are always as good as they were the first day they were produced, and do not wear out with use. For example, music recordings replicated on vinyl albums may get dirty, scratched, and wear a little each time a needle slides down the groove bouncing off the molded pattern of matter holding the analog information about the music. Even the CD, an intermediate technology somewhere between the analog vinyl record and the digital music file on a computer or iPod, is subject to damage, misplacement, and general deterioration over time. But much to the chagrin of the music industry, music in a lossless digital format can be replicated without limit and stored indefinitely while every copy remains as good as the original recording.

∞ Bits are easily integrated, again at little or no cost. Any digital device can talk to any other digital device—at the speed of light—in a wave of ongoing digital convergence. Your PC or Web-enabled mobile phone can now be used to control your home’s lighting, pools, heating, air conditioning, and DVR (digital video recorder) from wherever you are in the world. And if you want to go out to eat while on the road, there’s an app for that, as your iPhone can take your verbal request to locate a restaurant, give you the latest reviews, show it on a map, email the result, and get you a reservation. Apps even allow you to ask open-ended questions about what is available to do in your area today, tonight, or this weekend. Such capabilities come about from the mashup of a wide variety of once distinctly separate analog technologies, including telephone directories, road maps, newspaper and magazine reviews, and so forth, to provide a seamless, simpler, and more complete experience.

∞ Bits are cheap when it comes to imagining, experimentation, and prototyping. With purely digital offerings you can play around with them to your heart’s content and market’s readiness without every incurring the cost of physical production. Even with physical goods (including the goods required to support real-world services, experiences, and transformations) you can design/prototype/test, design/prototype/test, design/prototype/test until the forecasts come home before spending one dime on expensive machine tooling and full-scale physical production.

∞ Bits enable the development of offerings otherwise flat-out impossible. Long before virtual reality was a glint in Jaron Lanier’s eye, in 1972 the first digital fly-by-wire (DFBW) system replaced conventional mechanical flight controls with electronic flight controls coupled to a computer. This new technology domain opened the door for a modern generation of inherently unstable military aircraft, unflyable by conventional controls but incredibly maneuverable when guided by DFBW controls.⁷ Think bicycle versus tricycle: a bike is more unstable than a trike, but it is greatly more maneuverable.⁸

∞ Bits are easily modified, combined, improved, and customized. Who among us has not come to expect a never-ending stream of updates of, upgrades to, and personalizing of the software tools we use, often at no or minimal incremental cost? Google has taken great advantage of this characteristic. Google e-mail has been a constant stream of delightful surprises that make it more feature-rich as time goes on without users ever having to lift a finger to perform an upgrade. The same holds true for the Google Chrome browser and thousands of other offerings from hundreds of other companies. Goodbye out-of-date software—and so long to being treated exactly the same as everyone else, as technology increasingly customizes itself to our every desire.

∞ Bits are abundant. Once you produce something digitally, you in effect have an infinite supply. There is no physical limit to how many copies you make or who can have or experience the digital offering as is the case with material offerings made of atoms and all of the associate production and logistics issues. You can share bits-based offerings, again at little or no cost, not just to anyone but to everyone in the world, not just theoretically but practically.⁹

Together, these characteristics make digital technology the technology of experiences. As former Intel chairman Andrew Grove foresaw back in a mid-1990s speech at the Comdex computer show, “We need to look at our business as more than simply the building and selling of personal computers [that is, as goods]. Our business is the delivery of information [that is, services] and lifelike interactive experiences.”¹⁰ That vision has certainly become the case in the past fifteen years, for digital technology today enables wholly new-to-the-world possibilities for the staging of such experiences by an ever-broadening array of methods. As just one example, I (Kim) conduct extensive online research, engage in raging Twitter discussions, Facebook, LinkedIn, iPhone, and iPad (all verbs) to my heart’s content, attend WebEx meetings, participate in Ning communities, and even conduct virtual consulting engagements with a combination of Skype and GoToMeeting.

Or consider MyFord Touch. Its touch screen enables you to control your entire environment, including customizing your dashboard, while voice recognition enables on-the-fly control, not only of the car, but of your mobile phone and digital music player as well. You can browse your phonebook and make calls with the sound of your voice, get turn-by-turn directions, contact 911 emergency in the event of an accident, access a vehicle health report letting you know if your car needs servicing (with the option to schedule that service immediately), do business searches or get traffic, sports, and weather reports—all at your fingertips, or, should we say, the tip of your tongue. As the great integrator, digital technology boosts the prospects of new discovery and invention, and hence the possibilities for new value creation, onto an even steeper upward trajectory.

All domains of technology, including computing, communication, entertainment, manufacturing, transportation, and genetic engineering, converge as their foundations each become digitized. Innovations increasingly make even matter itself programmable, and for those goods that resist digitization, companies digitize information about them so they can—often in collaboration with customers—virtually design and then after production track, monitor, and mirror them online.

Plain and simple, zeros and ones talk to zeros and ones. This provides a common language for the exchange of information and thus the integration between any forms of technology expressible in digital form. The ongoing digitization of broad swaths of technology, with no limit in sight, greatly extends the information revolution that began with the computer. The upshot: digital technology turbocharges innovation, becoming a super-catalyst for creating new value, for its ability to meet the needs of humanity is undisputed, unparalleled, unbounded—and still largely unexplored.

Thinking Long and Hard

In order to create that value, you must go on your own journey of exploration to the digital frontier, where infinite possibility awaits. This book presents a new way of thinking about the opportunities for creating new, wondrous, immersive, and fully engaging experiences that effectively fuse the real and the virtual. We illustrate it with copious examples throughout, although we (Joe and Kim) confess that in these fast-moving times we fully expect many to be out-of-date by publication—some maybe even out of business, as is endemic with any arena as fast-moving as this—with many even better examples brought to market after the book was written. So while the exemplars you see here may not be the latest and greatest at the time of your reading, they do well represent this book’s concepts at the time of its writing. We also offer some thought experiments, numerous guiding principles, and, at the book’s core, a novel framework—a three-dimensional sense-making tool—for discovering, depicting, and designing new offerings.

We won’t sugarcoat it: this model is complex. You may have difficulty grasping it at first and remembering all of its facets. You will definitely have to think long and hard about what it means and, in particular, how to apply it. I (Joe) had a statistics professor at MIT, Arnold Barnett, who whenever the mathematical going got rough would say, “Fasten your seatbelts!” Well, here you’re going to have to fasten your seatbelts just a few pages into Chapter 1, “Cosmos Incogniti,” and keep them tight for most of the rest of the book.

But if you do so, and stick with it, you will be amply rewarded. For you will then be oriented to the framework central to employing digital technology in order to fulfill what customers seek in today’s Experience Economy. You will be guided in learning multiple methods for generating ideas for new offerings that make sense for your company in particular, as well as techniques for mapping experiences that engage and compel. You will then not only have staked out your own region on the digital frontier, but you will be ready to advance your business in capturing the value there for the taking.

And along the way, you will further appreciate the greater implications for you, your business, and ultimately for society as we explore and then exploit these new possibilities—first in our imaginations, then with our technology, and finally through our direct experience.

Infinite possibility awaits those willing, able, and prepared to make the journey.