HBS Professor Ranjay Gulati spoke on "Out of the perfect storm -- Growth in Turbulent times"
At a Harvard Business School Club of Boston event Dec 2, 2010, Professor Gulati talked about how he became curious about the way companies began speaking about their renewed focus on customers during down economies. He began research in last recession, 99-00. However, he did not necessarily believe the PR created by the companies.
Although Jack Welch denied making this statement, it is widely attributed to him: “I inherited a company with its head inward and its ass to the customer.”
Professor Gulati found about 12 companies that seemed to be really customer-oriented. These companies grew 253% over 10 years vs. the S&P’s 10%. S&P’s shareholder’s return on equity equaled -.6% while his companies returned 134%. Eleven of twelve companies outperformed their peers.
Professor Gulati described several firms that did create a real customer focus.
Best Buy is organized by product category because that is the way men buy. Men walk in a store and go directly to the X section, buy X, and leave. But Best Buy found that 55% of their customers were female. These women would ask the salesmen if they could come over and help with the installation. Many salesmen mis-understood the question….
So Best Buy bought Geek Squad to address the installation requests. In addition, women would enter the store seeking a total system, not just product X, and be confused. So Best Buy started stationing PSA (Personal Shopping Assistants) at the door to ask women (or men with confused looks on their faces) what they wanted and to escort them around the store. The PSA badges were small so they were not obvious, but the system works well for Best Buy.
Do you know what the fastest growing category in grocery stores is? Bagged salad, but the product was not developed by a lettuce company. The lettuce companies did market research through the lens of their products. They asked customers; “Do you like my lettuce?” or “What would change about my lettuce?” They did not ask, “What problems do you have preparing food for your family?” If they had asked questions about customers’ problems, they would have realized that parents get home with hungry kids who want to eat now and need prepared and healthy food.
The professor visited Harley-Davidson and referred to the company as a motorcycle firm. He was constantly, but politely corrected by employees, “No we are a lifestyle firm.” An executive finally explained, “If you want a performance bike, you go to Europe. If you want price/performance, you go to Japan. We cannot compete in either category. We encouraged our dealers to create groups that would ride together and talk about their bikes.” Harley-Davidson realized that its customers needed more to talk about so they created a line of accessories so now 80% of its bikes are customized at an average of $4k per bike.
Competitors seek to introduce products that improve on rivals’ current products. But what happens when the products become mature? The products are improved (and priced) beyond the needs of the average buyer. Customers do not switch to the new improved products and the producer wonders what happened. And a new competitor steals market share with a less expensive product with fewer features which is “good enough” for many buyers.
A firm that manufactured lubricants for industrial machinery followed this pattern until its new products quit selling. Its executives went to the customers and asked “What do you want in a better lubricant?” The customers replied that lubes were such a small cost that they didn’t care about a better lube. They cared about machine downtime and the life of their equipment. The lube executives went back to their offices and told R&D to develop a lube that would address these problems. The new product reduced machine downtime by 15% and extended equipment life by 8%. The lube company is happily selling a lot of the new lube.
There can be only one lowest cost producer in a market. Wal-Mart occupies this position in retail by addressing customer needs. How can Target compete? By addressing customer wants.
Target was facing revenue and profit drops during the last recession so it looked at Wal-Mart. Fifty percent of Wal-Mart’s business is food so Target entered the food business with two house brands. The premium one competes against national brands and the value one competes against house brands. It introduced food products with improvements. What happens to the potato chips remaining the bag if you do not finish them? They get stale, but not Target’s chips. Its bag has a zip lock so it is re-sealable.
The two characteristics of these organizations were curiosity and humility. They became customer centric by harmonizing the relationship, product, and value.
The biggest impediment to customer focus is silos. Many companies are really organized by silos and must break them down to become customer focused. The biggest gap is execution.
Is your organization really customer focused? Are your competitors? While the economy is improving, the lesson is that smart competitors listen to their customers from the customers' perspective, not from their own.