Most organizations claim customer-focus and pride themselves on being customer-driven. Interestingly though, customers include any number of players in a company’s value chain – consumers, purchasing departments, wholesalers, retailers, and so on. Loosely defined, customers are people or entities that supply an organization’s revenue by buying its service or product. Yet there are companies that label internal units as customers (R&D for instance could consider manufacturing its customer), while others like the pharma giant Merck don’t even require their main customer to directly impact sales and revenue. Research scientists in universities and premier laboratories around the world are Merck’s primary customer. Its business model relies on providing the bulk of organizational resources to research, with scientists conducting ground-breaking studies, publishing papers, speaking at conferences, and creating compounds that can be commercialized by its marketing and sales group.
It may not be easy to discern who your most prized customer is. And not many companies want to define customers as narrowly as Merck does either. Yet trying to hedge your bets and treat all stakeholders as customers in today’s rapidly evolving markets is likely to make
you vulnerable to your more decisive competitors who consciously focus on and serve what their prime customer values most. Amazon’s strategic choice and near-obsession on consumers from among its four different types of customers – consumers, sellers, enterprises, and content providers – is reflected clearly in its mission, “to be the world’s most consumer-entric company.” Though some of its own practices have been unprofitable to Amazon to ensure this and the ‘other’ customers have felt short-changed, Amazon’s unwavering focus to consumers has been rewarded with unparalleled customer loyalty and soaring stock valuations. The contrasting fortunes of Yahoo and Google on the other hand also corroborate this, albeit differently. Starting out as a broad-based internet portal supported by proprietary editorial content, over time Yahoo took to spreading its resources on additional initiatives, under-investing on search, and muddled along the way. In the mean time, Google leapfrogged Yahoo in the race by focusing on users who appreciate technology and its ability to unlock new opportunities, whether in search, Android, or maps.
Adopting a principal-customer focus strategy essentially involves four steps/challenges!
1.Identify – The first challenge lies in identifying which is truly an organization’s best One of the ways of doing this is by assessing on three distinctive dimensions – perspective, capabilities, and profit potential – and evaluating whether they match.
Perspective refers to the culture, mission and folklore of a business revealed in stories about its important people or life-altering events. There has to be synergy between the ‘perspectives’ of an organization and the one it considers its prime customer. For instance, Steve Job’s obsession with perfection in product design created a legacy that frames opportunities later managers may or may not choose to uphold. “It is the lens through which executives consider opportunities and strategic direction.”
Capabilities are the embedded resources and inherent strengths of a firm, such as technology (Google and Apple), logistics (Walmart and Amazon), superior brand marketing (P&G, Nestle, and Ralph Lauren) or industry-specific capabilities. Such capabilities, developed over time and difficult to imitate, position a business and serve the needs of certain customers profoundly.
Profit potential refers to the customers’ capability to deliver profits. Effective techniques, such as Michael Porter’s five forces analysis which lends insight into the relative profitability of various customer types, can be adopted to make this critical decision. LinkedIn for example had to make a difficult choice among its three customer groups that generate revenue – job recruiters, advertisers, and individual members. Evaluating on all parameters it settled on individual members as its primary customer – a stand that has served it well.
2.Understand – Once an organization has understood and determined who its primarycustomer is, the next step is to understand which product and service attributes the customer values. Different customers may value different things even within the same market and industry: lowest possible price, dedicated service relationship, cutting-edge Again there are customers that don’t even know exactly what it is that they value. Uncovering the full truth about their needs requires systematic research at multiple levels. Most companies assume that their product and services meet customer needs without testing the assumption. Smart companies set up systematic dialogue with their customers. Nestle, for instance, has war rooms with analysts that monitor relevant social media chatter. P&G had its executives living with lower middle class families in Mexico City which helped them to produce the fabric softener Downy Single Rinse for markets where water is in short supply.
3.Allocate – After identifying the customer and what it prizes most, it becomes imperativeto allocate resources aligning to one or more of the given five business-model configurations – low price (Walmart), global standard of excellence (Microsoft), local value creation (Nestle), dedicated service relationship (IBM), or expert knowledge (Merck). Of course companies may want to adopt and leverage various combinations of these five basic configurations. As a general proposition, for more than one primary customer, an organization must have separate units adopting the most appropriate configuration for each premium customer to deliver the unique experience or value it holds dear.
4.Monitor – However robust the business model configuration, a (primary) customer’stastes, preferences, and needs will evolve. Technology, policies, regulations, market conditions and action plans may change too. It is therefore crucial to remain alert about shifts in the competitive environment and emerging opportunities/threats that might redefine customer values and impact customer behavior. It goes without saying that it becomes mandatory to keep the control processes alive and interactive, restructure and reorient business models suitably, and in the most radical situations consider attributing primary customer status to another firm altogether, should there be need for reorienting business strategy and execution processes
It makes good business sense to remain fluid and avoid making a choice of primary customer for organizations that have the first mover’s advantage. However, in the larger landscape of multiple players, many have lost out trying to be too many things to too many people!
November 2015
Based on Harvard Business Review South Asia March 2014 ‘Choosing the Right Customer’ by Robert Simons, Charles M. Williams Professor of Business Administration at Harvard Business School.