You might think you have a customer-driven strategy, but it’s not always obvious who your most important customers are. Writing for Harvard Business Review, Robert Simons describes the term “customer” as one of the most elastic in management theory.
If a primary customer is not identified, customer-based strategies are useless, insists Simons.
To illustrate, the author contrasts Yahoo’s strategy with that of Google. Yahoo spread resources across entertainment and finance media while underinvesting in search, resulting in a “messy and confusing” website.
Google, meanwhile, focused on users interested in technology and new applications. It allocated resources to its engineers and techs, who were free to innovate. The goal of the company was to build the best technology for multiple applications, such as search, Android and maps. The clear business model and value proposition saw them transform into a giant, leapfrogging Yahoo in the process.
The bottom line, insists Simons, is that the primary customer defines the strategy and, ultimately, the business.
Simons presents a four-step customer-driven framework to help executives build successful business models:
1) Identify your primary customer. The lesson from the likes of Google is that your most important customers are those that can unlock the most value in your business, rather than those that generate the most revenue. The primary customer might be the consumer or end user of a product or service, or an intermediary such as a broker or reseller.
Identifying the most appropriate primary customer requires an assessment of each customer group along three dimensions:
• Perspective. This, explains Simons, “refers to the culture, mission, and folklore of a business, often revealed in stories about important events or people in the company’s history… it is the lens through which executives consider opportunities and strategic direction”. The author uses the examples of Apple’s Steve Jobs’s perfectionism over product design and Amazon’s Jeff Bezos’s zealousness about giving shoppers a superior experience.
• Capabilities. These are the company’s embedded resources, such as Google’s technology, Amazon’s logistics, and P&G’s superior brand marketing.
• Profit potential. This is a customer’s ability to deliver profits. This does not necessarily refer to the customers who are able to pay premium prices – Simons points out Walmart has demonstrated that substantial profits can be achieved through becoming the choice of a high volume of cost-conscious customers.
Your primary customer is the group that best satisfies all three dimensions.
2) Understand what your primary customer values. Some customers want the lowest price, others want good customer service, others still want the best quality – and some don’t even know exactly what they value most.
Simons recommends refining your understanding of your customers through data on buying habits, preferences and search history.
3) Allocate resources. Once the primary customer and correct values have been identified, the appropriate business model can be adopted and sufficient resources allocated.
Simons lists the five basic configurations to choose from:
• Low price. For primary customers looking for the lowest price, “centralised operating functions (such as merchandising and distribution) should receive the bulk of organisational resources”.
• Local value creation. If your customers like products or services that are specific to their locale, enable managers to tailor customer offerings by pushing resources out to their regions.
• Global standard of excellence. If customers want the best possible technology or brand available, organise resources around global business units defined by product lines.
• Dedicated service relationship. Simons explains: “If your customer is looking for an ongoing, deeply embedded service relationship, you should organise like IBM. Customer teams in industry-based ‘verticals’ marshal and coordinate product and service delivery from centralised, product-based ‘horizontal’ units.”
• Expert knowledge. If the primary customer seeks expert technical knowledge, R&D should be the focus of the company’s resources.
4) Make the control process interactive. Your business model might be successful today, but it might not survive tomorrow. Disruption can occur in the shape of changing customer tastes, new technologies or new entrants in the marketplace. Therefore, you need to continually gather information on the shifting competitive environment – especially changes likely to affect your primary customer’s behaviour.
Simons advises that managers should continually ask: What has changed? Why? What are we going to do about it? If there are changes in profit potential, your choice of primary customer might change. If there are changes in values, you might need to reallocate resources.
Choosing The Right Customer
Harvard Business Review