TWO The Customer: Joined at the Hip
An enterprise’s purpose begins on the outside with the customer . . . it is the customer who determines what a business is, what it produces, and whether it will prosper.1
—Peter F. Drucker
On paper, it seems like the most obvious notion: The customer is in the driver’s seat, at the control panel. What could be more fundamental? And yet few organizations, busy with all they are doing inside their own walls, are truly focused on the outside world of the customer.
If you are in business, beware. The silent revolution of technology and demography described in the last chapter has given each customer his or her own handy remote control. Everything has changed about your customers and your relationships. You’ve never had as many people around the globe to reach. And they reach you, too, one by one, not as a homogeneous group. Dozens, maybe hundreds of factors influence the way these individuals around the world see value. Customers aren’t just in the driver’s seat these days; they are also gassing up the vehicle, doing some of the service, and controlling a fair amount of the traffic on the road.
Peter Drucker’s conviction that the customer is at the center of it all shaped his thought from the very start. As a young journalist in the 1930s, Peter credited Time-Life’s success to Henry Luce’s understanding of the customer rather than his journalistic savvy. In Peter’s first management book, Concept of the Corporation, he attributed General Motors’ success to Chief Executive Alfred Sloan’s unique understanding of the customer, not Sloan’s scientific approach. As recently as 2004, in his last Wall Street Journal editorial piece, “The Role of the CEO,” Peter again said that everything begins with understanding the customer. In today’s world, where customers are standing up and taking control, understanding your customers and the value you provide to them is more critical than ever.
Drucker’s conviction that the customer
is at the center of it all shaped his thought
from the very start.
In this chapter, we look briefly at what customer focus is all about since the silent revolution: We examine Peter’s classic questions about the customer, tuned to the twenty-first century, and look at how customer focus (or the lack thereof) drove day-to-day corporate life and strategy at Procter & Gamble. As you read, think about how getting inside the mind of your customer could redefine your business from front to back.
MEDTRONIC: INSIDE THE CUSTOMER
Medtronic is a company that personifies Peter’s ideal of customer focus. Founded in 1949, it is the world’s leading medical technology company, with $11 billion in annual revenues and an average annual growth of 18 percent for the past 20 years. At the core of this financial success is Medtronic’s customer orientation, which is embedded in its mission: to alleviate pain, restore health, and extend life. Each year, 6 million patients benefit from Medtronic’s technology for treating chronic conditions such as heart disease, neurological disorders, and vascular illnesses.
One of my high-school friends, Stephen Oesterle, M.D., is Medtronic’s senior vice president for medicine and technology. He explained that the company considers physicians its all-important partners and shares their passion for improving the quality of patients’ lives. The doctors help Medtronic decide what products to invent by understanding patients’ problems and the devices needed to address them. “At least 99 out of our top 100 products were conceptualized in the field by physicians who were struggling at the bedside to try to correct something,” says Oesterle.
Connecting to the customer—being
joined at the hip—is the beginning
of defining your tomorrow.
Partnering with physicians has resulted in a cornucopia of life-saving inventions; Medtronic has developed new ways to rewire our bodies, restoring cardiac rhythms with pacemakers and defibrillators, and devising more effective approaches to managing diabetes. It is also using neurostimulation (electrical stimulation of the spinal cord or a targeted nerve) for depression, incontinence, deafness, Parkinson’s disease, epilepsy, migraines, and spinal cord injuries—the possibilities seem endless.
The growth opportunities for the company are spectacular. In the next 25 years, the number of Americans, Europeans, and Japanese over age 60 will double. At the same time, the number of people in developing countries who can afford high-end medical devices is increasing exponentially. Many of them will likely have a degenerative disease that Medtronic products address.
With an unprecedented responsiveness to customer needs, Medtronic came up with a vision for disease management. Devices, implanted in patients, will be remotely programmed and use wireless networks to transmit vital signs such as blood pressure, glucose levels, and pulmonary pressure, thus saving face-to-face visits for instances when serious problems occur. So a heart patient from Manhattan can go on vacation to Puerto Rico knowing that the staff at his doctor’s office will alert him if they spot a build-up of fluid in his chest—a primary indication of heart failure. His doctor will urge him to go to a hospital—and even tell him which one in San Juan is best—where a local doctor who never heard of him before can access all his key data. The San Juan doctor can confer with the patient’s own doctor back home, who will look at a computer screen and double-check the treatment. This is happening already, thanks to the implanted monitor. Years ago, when Peter Drucker started consulting for medical suppliers, this sounded like science fiction. Now it’s science—customer-driven science.
Connecting to the customer—being joined at the hip—is the beginning of defining your tomorrow.
CONNECTING WITH YOUR CUSTOMER: FOUR DRUCKER QUESTIONS
When Peter talked about the customer, he had four classic themes that he came back to over and over again. These themes ran through 70 years of his work. Peter asked every one of his clients:
1. Who is your customer?
2. What does your customer consider value?
After long discussions answering those two questions, he would then ask:
3. What are your results with customers?
4. Does your customer strategy work well with your business strategy?
Virtually every one of Peter’s clients I spoke with had a story about the tremendous impact of these questions. Rethinking the answers with Peter changed how the clients thought about the business they were in. Southern Pipe, a regional plumbing company, redefined its customer; instead of serving contractors alone, its branches began serving local communities and homeowners as well as contractors. Herman Miller, the design-centered furniture company, changed its customer focus from midwesterners with an eye for a striking look to large city dwellers and lovers of modern art.
When I interviewed John Bachmann, the retired managing partner of the financial service firm Edward Jones, he described his moment of truth about the customer. Peter got into a disagreement with Ted Jones, the managing partner at the time, about who the firm’s customers were. It began when Peter asked Ted, “How do you decide where you put your offices?”
Being clever, Ted said, “Well, you do it like the baseball player, Wee Willie Keeler. We hit ’em where they ain’t.” Ted explained that they targeted cities where there were no competitors, where Edward Jones was the only stockbroker in town. Peter, pushing him, asked, “Why would you do that?” Ted responded, “Because we do better.” Peter asked how much better and suggested that they look at the facts. When they lined up all their offices, they found that Edward Jones did 25 percent better where there were competitors. Ted had seen the market geographically and had defined the customer as the rural American with no alternative access to the stock market. In fact, their customers were people who wanted personal service and relatively low-risk investments. Peter’s questions fundamentally changed their understanding of their customer and their value proposition. When I drive by their office near my home in Westchester, New York, I smile, thanking Peter for putting them there.
The question, “Who is your customer?”
seems awfully simple. But don’t be deceived.
The customer is no longer a passive
receiver of products but is engaged in
designing and refining them.
The question, “Who is your customer?” seems awfully simple. Mission statements and quarterly reports suggest that most companies and nonprofit organizations know the customer as intimately as a favorite neighbor. But don’t be deceived. In this complex, ever-changing Lego world, identifying the customer is not the straightforward task many assume it to be. For one thing, the real customer is not necessarily the one who pays for the product or service, but the one who makes the buying decision. Every marketing analysis needs to start by assuming that the business doesn’t know its customers and needs to find out who they are. The customer is no longer a passive receiver of products but is engaged in designing and refining them. Consider health care. It is now standard procedure for patients to investigate symptoms on the Internet, learning about diseases and treatments and tracking records of doctors and hospitals. Patients assess the latest clinical drug trials and experimental procedures. Consumers are now actively directing their own medical treatments. The specialist or MD doesn’t make the decision; he or she advises and is an influencer. It’s a clear example of the customer taking charge in the new world.
WHO SHOULD BE INCLUDED IN YOUR DEFINITION OF THE CUSTOMER?
In this interconnected environment, there’s an entire team behind every customer. The user, the buyer, and the influencer are linked together as never before, and they sway other buyers. We need to do more than understand them; we need to engage with them, alone and in groups, and understand how they want to be engaged. This is a whole new type of relationship, with the customer influencing other customers.
Companies spend a lot of time trying to reach the women—and yes, it is usually women—who fill supermarket carts. But they have a supporting cast of decision makers: kids and doctors and nutritionists and Pilates instructors and friends who proselytize about the various supplements and diets. Drucker went so far as to say that there is never only one consumer. He believed that at least two people usually stand behind a buying decision. Now companies have to keep tabs on intermediate customers and “filters,” such as Web sites that rate products. All these influence endusers’ buying decisions—even if the customer doesn’t realize it.
There is never only one consumer.
Drucker identified the phenomenon of the customer team when he was advising the Girl Scouts of America more than 20 years ago. He found that the mothers were as much the organization’s customers as the girls were. And mothers from different backgrounds required different kinds of connections. By emphasizing family values, the Girl Scouts were able to woo Latina mothers and thus recruit new members among their daughters. Capturing this rapidly growing population helped make the Girl Scouts the fastest growing not-for-profit organization in the 1980s.
At Avon the customer is as much the sales rep as the end-user. The sales rep needs to understand the differences between products and help the buyer decide. Intermediaries, like sales reps, work in unexpected ways which can give consumers more power than ever. Peter told me about one doctor whose patients dictated where she took a job. I recently talked to a surgeon who switched to a new hospital because it had gotten a better rating in U.S. News & World Report based on surveys of patients. The patient is not only the hospital’s customer but also its evaluator and a major influence on its staff.
CUSTOMER VERSUS COMPETITOR?
In this networked world, your customer often turns out to be a competitor as well. In some cases your product may be packaged with others and sold as an integrated unit. Those sales may increase your revenue but decrease your brand identity, because the final product may not carry your brand.
I recently worked with a company that does graphics for software, games, movies, and music releases. Not long ago Sony or Disney would buy the company’s graphic work and packaging and have it sent to a replicator to box with the disk. Now, replicators have begun to handle the purchase of graphics printing for the studios. The replicator is both a customer and a competitor of the graphics company. As this shift was occurring, my client was building its in-house graphics management and structural design capabilities. It is now managing all the artwork for several products—and the replicator is a complementor, a customer, and a competitor, combined into one. As the CEO put it: “Our customers and competitors have become all wrapped up into one—and we have to work with them all.”
It is becoming increasingly difficult to tell friend from foe. In the online business world, the line between competition and cooperation is especially blurred and constantly changing. For several years Google has had a close, mutually profitable customer relationship with eBay, the online auction company. eBay spends twice as many advertising dollars on Google as it spends on other search engines and gets about three times the traffic.8 And yet this symbiotic relationship is complicated. In its quest to become a one-stop information shop for the world, Google has launched a classified-advertising business called Google Base, which is free to users. Google is rumored to be ready to launch an online payment business code-named Google Wallet. Both are in direct competition with eBay.
In response, eBay has sought out alliances with two other technology leaders, Yahoo! and Microsoft, which are also under attack from Google. Yahoo and Microsoft could potentially become eBay customers using its online payment business, PayPal, and eBay’s Internet phone service, Skype. Simultaneously, syndicating their clients’ ads on eBay’s auction pages is a huge opportunity for Yahoo! and Microsoft, and Google would like to do it, too.
Will Google’s technological advantage enable it to walk all over its competitors? Or will it overreach from hubris, as so many other companies have? Keep your eye on this young company to see the answer.
In our new world, where relationships have proliferated, the customer you are ultimately serving can change from transaction to transaction. “When is our customer a competitor?” is a question that needs to be asked again and again.
WHO IS NOT YOUR CUSTOMER?
In my many conversations with Peter, he frequently asked the “not” question. He would sit back in his den, smile, and say, “It is also important to ask the other side of the question. Make sure you know the bounds you are assuming and that they are the bounds you want and that you want everyone in your organization to understand.”
Bill Donaldson, of Donaldson, Lufkin & Jenrette (DLJ), told me that Drucker’s “not” question made a big contribution to DLJ’s success: “I think one of the greatest things that Peter left with me was [the understanding that] one of the most important decisions you’re going to make in building this firm is the decision about whom you’re not going to do business with. That can be credited with a large part of the success of DLJ in the heyday of the 1960s, and again in the 1980s and 1990s. We didn’t do business with customers when we had questions about their ethics in the growing market. We didn’t have to, and putting the question on the table made the decision that much easier.”9 Donaldson further credited the firm’s internal identity for facing up to the issue. Often in the hallway, he would hear associates discuss and debate who was and who was not a DLJ customer.
Identifying noncustomers includes asking, “Who among our existing customers should not have customer status, and why?” In 1993, Colgate North America was struggling with the complexity of its products and customer base. After carefully reviewing its customers, Colgate realized that it needed to transition smaller customers to distributors so that it could focus its efforts on the larger customers who accounted for the bulk of its sales. This decision helped the management team regain the number one position in oral care two years later.10
Having explicitly defined its customer groups,
management has the foundations of a robust
outside-in perspective.
Drucker frequently said, “It is good to do one thing right. Don’t do too much.” Asking who is not the customer helps keep an organization focused and encourages transitions at the right moments. Having explicitly defined its customer groups, management has the foundations of a robust outside-in perspective. The work then needs to center on setting the business up to resonate with each customer’s current and anticipated realities, needs, and value placement.
WHICH OF YOUR CURRENT “NON-CUSTOMERS” SHOULD YOU BE DOING BUSINESS WITH?
In a changing world, this inquiry, which Peter used so often, forces managers to think a little harder. Andy Grove, Intel’s former chairman, says, “Peter Drucker is a guiding light to a whole lot of us.” Over time, Intel has grown by converting non-customers to customers. In the early 1990s, Intel began to understand the needs of a key non-customer—the wireless phone companies. To serve this fast-growing market, Intel dropped its historical third-party connection to players like Motorola and Nokia in favor of direct relationships. Intel thus focused on the wireless phone companies and began selling them chips and capabilities to support their emerging needs.
Today, Intel is crossing into another new area, selling laptops to the developing world—an Intel PC, not a PC with Intel inside. Laptop companies were Intel’s customers. Now they are competitors. Intel is making customers out of noncustomers in vast, overlooked regions of the world. It recently announced several regional PC design initiatives, including a desktop computer for the Indian market and another for Mexico. The Mexican machine, offered in partnership with Telmex, the Mexican communications company, offers a subsidy for a broadband Internet connection and is priced at about 20 percent below similar machines.
Teachers are another newly discovered customer for Intel. CEO Paul S. Otellini announced a five-year, one billion dollar program to train teachers and to extend wireless digital Internet access worldwide. The goal is to train 10 million teachers around the world and give them and their students access to a low-cost, Microsoft-compatible machine to be called Edu-wise. “It doesn’t need exotic technology and it runs real applications,” Otellini explained.11
When I asked Peter to tell me the action items here, he said to just keep asking the question and to make sure that the answers are really thought about, not just reflex responses.
The essence of a business’s identity lies in the value the business provides to its customers. What that value is remains the most important question a company can ask itself. Yet the question is rarely asked, because people often assume they know the answer. That assumption has killed many companies.
When I cut my teeth as a young McKinsey consultant in 1980, AT&T was a company I admired immensely—as did most of the business world. Drucker wrote with much praise about its iconic leader, Theodore Vail, and its legendary customer focus. In the 1990s, however, AT&T lost touch with what its customers valued, which was low cost and convenience. Instead it focused on leveraging its expanding network and became mired in a monopolistic culture of bureaucracy and complacency. When Michael Armstrong took the helm in 1997, the market had great hopes that he would overhaul the company and stem erosion in its core long-distance business while positioning AT&T as a telecom leader. Instead, the focus was on trying to fight the local Bell companies by acquiring cable companies to gain access to their local customers. At the same time, customers were gradually moving away from traditional long-distance calling in favor of wireless phones, e-mail, and instant messaging. They were not interested in making telephone calls through cable, and AT&T’s move fueled customer defections to the Internet. Thanks to the vastly increased number of high-speed, broadband Internet connections made available in recent years, however, and driven by such firms as Vonage and Skype, a significant number of customers now use their Internet service suppliers for multiple services, including telephone.
It didn’t help that senior management spent valuable time thinking of ways to placate its increasingly angry shareholders by creating complex schemes to split the company into separately traded units. During Armstrong’s reign, AT&T’s customer base plummeted from 90 million to 54 million, and it lost about $60 billion, or 75 percent of shareholder value. While AT&T was busy talking to investment bankers and upgrading its technologically deficient cable networks, two young Scandinavian entrepreneurs were forming alliances and launching the Internet telephone company Skype (acquired by eBay on October 14, 2005),12 which offers its users free calls to other Skype users online. Today, Skype has 61 million customers in 225 countries and is adding 170,000 new ones every day;13 AT&T is down to about 22 million.14 In early 2005, AT&T, once the world’s largest company, agreed to be taken over by one of its former children, SBC Communications. Although SBC renamed itself AT&T, it’s safe to say that AT&T as I knew it in 1981 no longer exists.
Whether companies like it or not,
the customer is the boss.
With the silent revolution, what the customer values and what influences that value are shifting dramatically. Whether companies like it or not, the customer is the boss. In the developed world, most customers have moved up on Abraham Maslow’s “hierarchy of needs” and are seeking fulfillment and service rather than another material product.15 With time increasingly valued, convenience commands a greater premium. And, of course, the customer’s increasing role in tailoring the product influences perceived value. These fundamental shifts in customer values must be recognized.
Explicitly making the customer the boss does not place the company at a disadvantage as some fear. By embracing the notion of the customer as boss, management can make the relationship a win for both parties—by asking the questions that force the organization to “walk in the customer’s shoes” and understand what the customer values.
HOW DOES YOUR CUSTOMER’S PERCEPTION OF VALUE ALIGN WITH YOUR OWN?
Over the years, consultants and internal marketing groups have performed countless customer value analyses. We have interviewed customers, identified major attributes that they value, and carefully assessed their relative importance—all excellent work. The problem is that everyone from the board of directors to the CEO on down needs to be out there talking directly to the customers themselves and finding out what is going on. Direct, personal contact carries an emotional intelligence not readily reported on paper. Value has to be understood from the customer’s perspective, and the only way to do it is to ask the customer directly. This task cannot be delegated. In this data-rich world, first-hand emotional intelligence still matters.
In this data-rich world, first-hand
emotional intelligence still matters.
That is why, on any given day, you may find Procter & Gamble chairman, president, and CEO A.G. Lafley in the kitchen of a Venezuelan housewife or walking around in the most dangerous parts of São Paolo and Rio de Janeiro to see firsthand how consumers are buying and using P&G products. The analysis can be delegated, but not the customer contact.
I spoke with Robert Gwyn, former executive vice president and board member of Jacobs Engineering, a $6 billion company that designs and builds facilities and installs equipment for industries with very precise requirements, such as aerospace and defense, chemicals, and pharmaceutical companies. He explained that Jacobs’s value proposition is targeted at CEOs, even though COOs and heads of engineering make the purchasing decisions. Jacobs maintains relationships with the full executive committees. It does not claim to provide the lowest cost or best quality buildings, but the company does promise to minimize business risks by addressing the customer’s strategic tradeoffs (such as spending more time on developing a particular drug versus starting to build the production facility needed to get the drug to market). Jacobs Engineering doesn’t ignore cost; it brings a cost discipline to everything it does. But its top-level value proposition has to do with strategic tradeoffs. Its customers are not in commodity businesses but in dynamic industries where the bets are high.
I asked Gwyn how Peter Drucker had influenced the company. He told me that Jacobs had begun as a family-owned company focused on process equipment and the chemical industry. In the 1980s, Peter’s writings had helped the members of the management team think through the value they provided and articulate their value proposition. They realized that they were more than an industry service company, and their target customers rapidly expanded beyond chemical and energy companies to include defense, pharmaceutical, and infrastructure businesses, fundamentally changing the scale and scope of the firm. The company is now about 10 times the size it was 17 years ago. As to how the silent revolution is affecting Jacobs’s value proposition, Gwyn said that the value proposition hasn’t changed but delivering on it has. Many more people at each company are now customers and have their fingers in the pie. Each person adds value but also costs time and threatens to unsynchronize the whole. It has become far more difficult for Jacobs to have the discipline and ability to integrate ideas rapidly and to further enhance the value being provided than it used to be.
HOW DO CONNECTIVITY AND RELATIONSHIP INFLUENCE VALUE?
Beyond the significance of the product itself, the value perceived by a customer increasingly depends on his or her relationship with the company and control of the end result. This has remained true even as face-to-face interactions have given way to cyberspace transactions. Sumerset Houseboats boosted online sales dramatically by more directly engaging the customer in the process of building a boat. In the 1970s, Sumerset was a neighborhood company, and the locals would wander in daily to see their boats taking shape. They knew the boatbuilders and were involved every step of the way. When Sumerset’s online business took off, it wanted its online customers to have the same opportunity as neighborhood folks. Today, Sumerset customers go online to customize the plans for their boats and to view photos of their boats being built. This is far more than a gimmick. It is a way to empower customers and create a sense of community.
On the industrial side, the value of deep, close association with the customer has been demonstrated over and over again, with suppliers placing staff or whole departments at customer sites to handle logistics, or assigning systems engineers to the customer site long term to assist with complex equipment. And yet this kind of connectivity can be slow in coming. For every company that will use Jacobs Engineering to help it make strategic tradeoffs in planning a new facility, there are others unwilling to entrust aspects of their operations to a third party. A senior executive at Cincinnati Milacron estimates that when it works with customers on the full system design, equipment productivity is 20 percent higher. Yet a number of its customers feel that system design must remain in house. Despite the explosion in connectivity, companies still encounter pockets of resistance and need to find ways to provide value while respecting the customer’s desire for autonomy.
Part of the connection is a holistic understanding of customer needs, which drives many marketing decisions. Motorola found that at Wal-Mart new mothers often bought cell phones in the same purchase “decision window” as disposable diapers. Apparently new mothers were very conscious of their need to stay in touch with their families, hence the odd juxtaposition of diapers and dialing. Motorola bought end-aisle displays near the diapers to prompt increased purchases.
A very different approach to understanding and meeting customer needs is in bundling capabilities, products, and services to meet those needs. The master bundler—or, as competitors might argue, the master bully—is, of course, Bill Gates. Microsoft’s co-founder and former chairman explicitly looked at the bundles consumers buy when defining Microsoft’s strategy of integrating previously stand-alone products and technologies into its Windows operating system. From a customer perspective bundling provides tremendous value. It saves not only money but also time and aggravation as the bundled software works well together and is compatible with a variety of computers.
Competitors have successfully argued that the bundling is predatory, and in 2001 a U.S. court ruled Microsoft’s own Internet Explorer browser bundle was illegal. This doesn’t seem to have stopped Microsoft, however. Since then Windows Media Player, Outlook Express, Windows Messenger, and Windows Movie Maker, among others, have been bundled. There are rumors that the next operating system, Vista, will include anti-spyware and security software, threatening to kill Symantec and McAfee just as bundling Internet Explorer killed Netscape. In the computing landscape, the terrain is always changing. Google has started to offer free, downloadable software bundles called Google Pack, consisting of software from Google and other companies. None of these programs is from Microsoft.
WHICH CUSTOMER’S WANTS OR DEMANDS REMAIN UNSATISFIED?
Managers must determine which customer wants in their target markets are unsatisfied and then further determine whether they can or should step up to provide value. By regularly challenging the organization to give fresh answers to these issues and by promoting a culture of respect for the customer, management stays current on the dynamic circumstances that determine the customer’s wants and buying decisions. Such knowledge and culture give logic to what otherwise might be viewed as irrational or inexplicable behavior on the part of the customer.
Consider the Apple research team which regularly scrolls through chat rooms searching for customer comments about unsatisfied needs. The need for a car charger for the iPod was found in one such chat room two years ago.16
In a very real way, nothing mattered to Peter if you couldn’t talk about the results. He often asked his clients to write down the results they expected from a particular decision and check them six months later. Results have to be measured carefully and understood and interpreted properly; they are not absolute and can be understood only in context.
By the late 1980s, Peter felt that many companies were so focused on shareholders that they had lost sight of the customer. He’d thought a lot about this, and he wondered why CEOs weren’t listening. Although he believed that profits are a company’s ability to invest in tomorrow’s opportunities, he liked to remind me that profits follow customer satisfaction, not the other way around. Peter often reminded executives that the person buying a pair of shoes is not paying for the shoemaker’s profit. She or he is paying for a nice, comfortable pair of shoes. The purpose of a business is to provide value to the customer—to provide something that an independent and knowledgeable outsider who can choose whether or not to buy is willing to get in exchange for his or her purchasing power. The profits that flow from this value reflect the company’s effectiveness in aggregate, but those results do not necessarily show the company where it is meeting customer expectations and where it is falling short. And the company needs to know this, especially now. According to the New York branch of the Federal Reserve Bank, the number of products offered to a consumer in New York State increased fourfold from 2000 to 2005.17
HOW ARE YOU MEASURING YOUR OUTSIDE RESULTS?
What key pieces of intelligence are you missing, and how do you calibrate your antennae to capture this intelligence? Do you employ a manageable set of the most telling metrics? At an Ogilvy & Mather board meeting, one member asked, “Are we a financial company? When you look at what we are measuring, we look like a bank, not like a creative company.” The company changed its tracking measures to capture information more relevant to its culture and mission—advertising effectiveness, the percentage of repeat clients, the lifespan of ads, and creative awards and investments.
In 2001, when Colgate switched its customer service measure from “orders on time and complete” to “product available on the shelf,” its revenue jumped by 3 percent.18 I had the opportunity to watch how that simple shift fundamentally changed the company’s orientation. A conventional service metric, on-time and complete delivery, is an internal measure that is more responsive to the retailer than to the consumer. Availability, on the other hand, is a prerequisite for customer purchases and satisfaction. Although the store is a customer of sorts, it is only part of the chain that supplies the end-user; it is not the end-user. It is not enough to focus on the right customer; the results must be quantified and tracked to keep the customer focus clear.
HOW ARE OUTSIDERS MEASURING AND SHARING RESULTS ABOUT YOUR PRODUCTS AND SERVICES?
The wealth of information available on the Internet very likely includes more about your business than just what’s contained in your company Web site. The “customer team” that Drucker talked about has moved beyond the consumer’s friends and family to include product-specific, Web-based information sources such as blogs, bulletin boards, and chat rooms—many of which provide detailed descriptions, critiques, and ratings as well as contact information. These sites are often very influential, more so than are friends and family. They are also vehicles for exchanging information. It only makes sense to monitor these sites to ensure that your information is accurate and up to date, that you are not being overlooked, and that you take advantage of every opportunity to create a positive Internet buzz.
But you can use the Internet for more than promoting your products and services. It offers a wealth of information on how customers experience and perceive your products, what features they are looking for, and what they value. Responding to information on the customer experience—by improving your product offering or refining your sales approach, for example—is one more way of building your company’s outside-in perspective.
ARE YOU FULLY LEVERAGING THE INFORMATION YOUR RESULTS PROVIDE?
Where do gaps exist between targeted and actual results—and what causes them? What comparative information are we using to interpret our results (e.g., market trends, competitive performance), and what does that tell us about our performance? For example, a 30 percent growth rate looks good but loses some of its luster and signals missed opportunity when direct competitors are achieving 40 percent growth rates. Or strong performance in a declining market might suggest, “It’s time to reassess our purpose and identity,” rather than, “We are on the right path.”
To get the maximum impact from results, the business must communicate those results throughout the organization as well as to external partners. Even more critical is to link results to strategy decisions and then translate them into actions that produce better results. I helped Frank Weise do this at Cott when he took over as CEO in 1999. Together we translated every external measure reported to link it clearly with the relevant performing organization inside the company. To link production-line performance with customer shelf availability, we rewarded Cott employees when every Wal-Mart shelf had 100 percent stock availability every day for a week (there were a lot of pizza parties in the plants). And when there were issues at the shelf, SWAT teams from the plant and logistics organizations went out to the customer to discover the underlying causes of those problems and to communicate and solve them. This program changed Cott, now the leading private label provider of carbonated beverages, from a second-rank supplier to a leading partner with many of its customers.
ARE YOU HONEST AND SOCIALLY RESPONSIBLE IN PRESENTING YOUR RESULTS?
An enterprise needs to examine the ethical dimension. As Enron and so many other corporate frauds have made monumentally clear, social responsibility is inextricably linked to sustainability. Corporations flout this reality at their peril.
The “outside-in” perspective:
An organization’s point of reference should
always be what is going on in the marketplace,
not in the company’s boardroom.
While fraud still occurs, it is not only outright fraud that engenders misreporting. Many companies just can’t stand to look in the mirror. They fool themselves into thinking they are doing better than they really are. A glaring example is the myth, widely held during the high-tech bubble, of “Internet traffic doubling every 100 days.”19 Companies must monitor their results 24 hours a day, 7 days a week. Managers need to use their intuition and judgment to capture a rich understanding of the large and growing landscape “outside” the corporation. Running the business from the outside-in also ensures that management doesn’t fall prey to the insularity that dooms many institutions.
Peter believed that all opportunities were evaluated and all resources allocated in the context of management’s understanding of the “outside” marketplace. Peter called it the “outside-in” perspective: An organization’s point of reference should always be what is going on in the marketplace, not in the company’s boardroom. This brutally honest perspective has a huge impact on everything a company does, from its overall strategy and direction to its continued progress.
Within the business, an outside-in perspective is based on the business’s systematic capability to gather external information and interpret it honestly in order to build an organization that truly listens to the customer, and to devise and implement customer-tailored strategies in response to customer needs.
Individualized strategies are a new approach to serving the customer. They require a degree of bonding and a solutions-oriented approach that has been made possible by standards, the new ease of data management, and people becoming comfortable with having their own shopper cards at A&P. Targeting and serving large customer segments have given way to creating a value chain (and, often, a delivery system) for each customer. Constructive, enduring bonds result from an up-to-date, outside-in perspective and from relationships based on mutual trust. Outside-in intelligence becomes a wealth-producing strategy when it is translated into unique and meaningfully differentiated value that is delivered to the customer. And this strategy cannot be monolithic—it is designed and executed customer by customer to reflect the unique configuration of value sought by each customer. Customer-tailored strategies fall into four broad categories reflecting the level of the firm’s integration with its customer and the scope of its product offerings, from a one-product shop to a one-stop shop (see Figure 2.1).
Figure 2.1 Types of Customer Strategies Reflecting Level of Integration and Scope of Offering
The vertical axis captures the extent to which the capabilities of different entities that provide value to a given customer—the company, its customer, and its other outside partners—are integrated with the customer’s operations. The silent revolution described in Chapter One makes it massively easier for independent firms to collaborate in solving a customer’s problem and to function as part of the customer’s organization without actually having to merge or be acquired. Consequently, integration has become a fundamental element of customer strategy.
Today’s flow of information and standardization enable the high level of integration in Infosys Technologies, the India-based firm that is competing with giants like IBM and Accenture, uses to manage its clients’ entire global IT needs. By assuming full responsibility for clients’ IT, Infosys acts as a backroom eliminator. Founded in 1981, Infosys cut its teeth providing nuts-and-bolts IT solutions (from devising the business plan for a new online community to designing the portal to writing the software it runs on). It is rapidly adding high-end IT strategy and business process consulting as it is transforming into one of the largest global players in independent software development and maintenance.
The backroom service provider is highly integrated with the customer. It assumes discrete responsibilities that lessen but do not eliminate the customer’s backroom operations. For example, Doane, the private-label pet food manufacturer, manages the store and delivery functions for Wal-Mart’s private label dog food, Ol’Roy. Doane’s services do not eliminate Wal-Mart’s backroom, but it does take on part of the burden by providing a pet food specialist that ensures that the product is where it needs to be all the time.
At the lower end of the integration spectrum is the responsive product or component player, typically with a unique brand or capability offering, which is continually being updated. Also at the lower end of the integration scale is the one-stop shop or bundler, which fully meets a range of customer needs but does not integrate itself into the customer’s operations. No longer limited to the department store, one-stop shops include Expedia and Orbitz. These Web sites allow travelers to compare prices and schedules on flights, cruises, hotels, rental cars, vacation packages, and vacation activities, and to customize and plan every aspect of their trip, even to the point of receiving e-mails with flight status information, weather forecasts, and packing suggestions in the days preceding departure.
Exceptional companies generally participate in all four categories. UPS is one such organization. UPS manages the full logistics and delivery function for Home Depot, effectively eliminating this retailer’s backroom. For other customers, UPS locates a pickup and sometimes an operator at the customer’s site to facilitate backroom operations. And customers such as Wal-Mart use UPS as a one-stop shop for all shipping services. Finally, there are those, like Amazon, which use UPS’s service for a discrete piece of their delivery needs, such as cost-effective home deliveries to and returns from individual customers.20
PROCTER & GAMBLE COMES HOME
From its humble beginnings as a soap and candle maker, P&G became one of the world’s best known and most admired consumer goods companies, with sales close to $57 billion in 2005. Fully 17 of its brands have at least $1 billion in sales, including such well-known names as Tide, Pantene, and Pampers. Although it went global later than Colgate-Palmolive and Unilever, P&G today derives about 48 percent of its sales from outside North America, operating in over 80 countries and marketing its products in more than 160.
In June 2000, P&G was faltering. The board of directors had decided to replace CEO Durk Jager after only 17 months, following several profit warnings and a more than 50 percent drop in market value in the previous six months. However, problems had been in the making for many years.
Until the mid-1990s, P&G was a reliable growth machine. It doubled sales every 10 years and grew its earnings by 10 percent through the acquisition of higher-margin health and beauty companies and by reducing costs through economies of scale. With the emergence of Wal-Mart, P&G became known as a leader in collaborative partnering. The company simplified product lines and formulations, and it introduced global brand names to reduce costs and speed up product launches.
But its relentless focus on distributors’ needs to the exclusion of the consumer eventually made P&G a victim of its own success. It became a very powerful, successful, almost arrogant bureaucracy that gradually lost sight of the outside world—most notably the all-important consumer. As A.G. Lafley notes, “I think there is something about bureaucracies that turn inward, especially successful bureaucracies. They . . . get a lot more fascinated by the operation of the bureaucracy than what’s going on in the world around them.”21
By 1995, growth in sales dropped to below 4 percent, and international sales grew by less than 3 percent during 1995–2000. While earnings held up initially, huge restructuring costs depressed net earnings between 1998 and 2000. Global market shares were stagnant or dropping in 70 percent of P&G’s businesses, and, adding insult to injury, Colgate Total overtook Crest as the leading toothpaste.
In January 1999, Durk Jager replaced John Pepper as CEO. Jager strongly believed that the only way for P&G to emerge from its slump was to rapidly create new products by speeding up innovation and to break up the bureaucracy through massive organizational changes—in effect, to create a cultural revolution. “A measure of our business vitality is the vitality of our organization—the degree to which people are breaking barriers, challenging conventional wisdom, stretching to achieve the unachievable, redefining the marketplace.”22 To make his point, Jager was reportedly fond of saying, “If it’s not broken, break it.” This initiative, called Organization 2005, was to be a six-year, $1.9 billion effort. P&G’s identity as a preeminent marketer had been challenged, and an intense effort to change old beliefs, reporting structures, and incentives ensued.
In 1999, during an informal brainstorming meeting with a few P&G senior managers, Drucker was asked his opinion on Organization 2005. He said:
It’s a very impressive document, but it left me very dissatisfied. I felt I had gotten only the appetizer of the meal because it focused on products and technology. There is a dimension in there that’s lacking . . . I call it attitude. The greatest opportunities, and the greatest threats to a company like P&G in the next 10 or 15 years, are changes in demographics, in consumer segmentation, in distribution channels, which always need a totally new consumer, and I did not get any of that. You’re still looking from the inside out, and the landscape you see is yesterday’s landscape. And when you look from the outside in, it isn’t P&G that has changed. It’s the landscape that has changed. And I missed that. I [also] don’t like the way you talk about changing the culture. My question is, how do you utilize your culture? When I look at your company, it represents enormous achievements. Your job is not to repudiate them, but to build them. And to be proud of them. Otherwise you alienate far too many [of your] people and tell them you are no longer worth anything. And for the next 10 years at least, your bread and butter will come from what these people produce. And so I don’t like changing the culture. I like how we build on it for a changed world.23
Jager’s gamble was that introducing many new, innovative products would prevent commoditization and maintain P&G’s premium prices around the globe. Huge investments in R&D followed, increasing that investment from a historical average of 3.8 percent of sales to 4.8 percent in 2000. Meanwhile, advertising fell from 10.2 percent in 1998 to 9.2 percent of sales in 2001. The innovation process was driven by internal scientific and engineering perspectives rather than by consumer needs and ideas from outside partners. As a result, only about 20 percent of the new products were successful.
The premium-pricing concept also was unsuccessful in the low-income, high-growth developing world. Thinking that every consumer would appreciate the value of a higher-quality product, P&G offered the same global brand names, formulations, and gross profit margins in every market. Since most low-income consumers could not afford P&G products, sales growth was slow, and countries representing over 80 percent of the world’s population accounted for no more than 15–20 percent of P&G sales. In its efforts to find the next killer brand, P&G had neglected its bread and butter business.
In June 2000, A.G. Lafley replaced Jager as CEO of P&G. Lafley agreed with many of the strategies set forth in Organization 2005 but recognized that P&G “tried to do too much too fast,”24 and as a result “the wheels were coming off in a lot of places.”25 His first order of business was to get back to basics: that in a consumer goods company, the consumer is the boss:
I would say that still one of the biggest opportunities of my company is what [Peter Drucker] calls “outside-in,” what we call “externally connected and focused.” I am pushing really hard for us to stay connected to the messiness and the unpredictability and the volatility of the external environment, some of which is customer, some of which is competitor, some of which is innovation and technology, that’s coming at you in all directions, a lot of times from outside your industry. Economic and political happenings. It’s big and messy and complicated, and I’m just paranoid that we’re going to miss important things that are going on out there that are going to impact our customer and our enterprise’s interaction with that customer. I think it sounds too simple to believe, but the first thing we did is elevate our consumer to the boss. And it was way more than words because it meant we really needed to understand who she is.26
I think it sounds too simple to believe,
but the first thing we did is elevate
our consumer to the boss.
This strategy fit P&G’s strengths and culture as a marketer and restored the confidence of the workforce. It also helped challenge the insular mentality. “We don’t exist in silos anymore,”29 says Susan Arnold, P&G’s beauty-care and feminine-care boss.
Lafley immediately set out to rebuild the old major brands—Tide, Pantene, and Pampers. The renewed focus on consumer needs drove the marketing push. “When A.G. first came on board, we were struggling. We were trying to get new brands out there and do everything at the same time,” recalls Martin Nuechtern, head of global hair care. “A.G. made things very clear: Make sure you focus on Pantene.”30 The Pantene line was revamped from a primarily features-driven product (e.g., shampoo for fine hair) to a consumer-benefit product (e.g., greater volume).
With Pampers, the outside-in perspective resulted in an almost counterintuitive change—the painful realization that a pull-on diaper more completely satisfied consumer needs. P&G had the largest installed base of taped-diaper converters, which drove the engineering group know-how and R&D formulation expertise. Letting go of the taped diaper and embracing the pull-on was difficult. “In too many of our businesses, the technology or the machine had become the boss.”31
P&G’s new approach radically changed how it prioritized R&D, and a relentless, disciplined weeding resulted. The company killed 75 percent of corporate innovation projects because they could not pass the litmus test of delighting consumers more than competitors’ products could. Similarly, P&G is revamping its approach to global advertising.32 Carpet bombing television audiences with traditional 30-second commercials is, much to the horror of the advertising industry, a thing of the past. In the developed world, technology has enabled viewers to avoid commercials altogether. In response, P&G is trying to figure out what information is relevant to the consumer, even when the consumer can’t articulate it. To improve its two-way communication with consumers, P&G launched the interactive Web site Pampers.com, offering mothers advice on everything from breastfeeding to temper tantrums in over 20 different languages. To woo consumers in the developing world, P&G is embracing a new cultural diversity, reaching out to Jews (by publicly washing donated clothes during Passover in an Orthodox Jewish community) and Muslims (by launching Tide White Musk for Ramadan, when Muslims carry small bottles of white musk essence).
To reach its growth targets, P&G had to expand its definition of the customer to include low-income customers who could not afford any of P&G’s products. This required a complete change in mindset. Rather than ask, “What is the best way to market our global product line in this country,” the company had to ask, “How much can a consumer reasonably be expected to pay,” and then develop the formulation and supply-chain strategy to meet that customer need—fundamentally building the company from the outside in. That often meant reformulating the product to its bare minimum elements, giving up previous sacrosanct minimum margin requirements, and using local contract manufacturers.33 In 2005, 8 of P&G’s top 16 countries in terms of sales were developing markets—countries that are expected to add about a percentage point of growth each year.
CONCLUSION
In a world where the customer has become a key controlling force, the importance of knowing and working with your customer has never been greater. In answering the four questions about customer identity, value, results, and integration, we must keep in mind:
1. The customer is no longer merely a receiver of goods and services. He or she is your partner, and your roles are evolving all the time. The relationships are not simple, and they often include whole communities.
2. Value is based on your ability to connect with the customer and know more about his or her needs and desires than he or she can articulate. This connection requires openness and integrity. It benefits from being personalized—there are no bundles of customers. The vertically integrated brand is being replaced by the multiparty, networked value chain that coherently integrates parts, products, and services into a bundle.
3. Results happen customer by customer. The customers know the results—good and bad—as soon as you do, if not sooner.
4. Customer strategy depends as much on the level of integration with the customer as on the product and service itself. The strategy needs to be built on the bundle of capabilities and strengths within and accessed by your company.
These realities and the corporation’s need to operate effectively in the Lego world only underscore the importance of beginning and ending with the customer. When I asked Peter what managers should do about this new customer, he said, “Ask yourself every day, which customers did I touch today, and what did I learn?”
Delivering value depends on your listening and translating, and innovating accordingly. As we discuss in Chapter 3, it is only with an outside-in view that businesses can change customers’ expectations and begin to provide products and services that customers did not know they wanted—the truest measure of an innovative product.
