Shifting Your Strategy From Products to Customers

You can walk into almost any company and what you find are product divisions and product managers running product budgets to achieve product market share, so their measures, their management, their focus, the attention is all centered around their products, and success is measured by product units sold and the volume of product that they can move. Profit is measured by product rather than by customer; marketing and sales people are provided incentives on the basis of the amount of product that they can move; and even in terms of new value creation, innovation centers on product improvements and product features and new products.

In all this product fixation, I find that the customer has been given short shrift – is lost a little bit – and so this book is written to place the customer back at the heart of the firm and at the heart of strategy, and not necessarily to enhance the weight of marketing within the organization, but much more to bring the customer into the strategy discussion.

Rachel Salaman: Does this apply across all sectors, or is it more relevant in some?

Niraj Dawar: So I find it's necessary to talk about a shift in three types of companies.

One: there are companies and industries that tend to be product-centric and obsessed with their products, you can think of technology firms or pharmaceutical companies, they tend to be very product-centric because so much depends – or at least they believe that so much depends – on their new products.

The second type of company that benefits from a tilt, or thinking about tilt, are companies whose products are commoditized, or they operate in industries where commoditization has taken place ,and these are not just your standard commodities of raw materials and inputs, but also even in financial services your products are rapidly commoditized. Competitors can replicate your products fairly easily and fairly quickly, and that means that you are operating in an environment where you have to look for other means of differentiation.

The third type of company that benefits from tilt are companies that are looking to expand beyond the product, and they are looking to move up the value curve. They are looking to add new ways of distinguishing their offering, and the first thing that they think of normally is to add services to their product, or to expand into design and so on, and so tilt provides them with a framework for thinking about how starting with the customer allows you to home in on the right types of differentiation. So those are the three types of companies that I think would benefit from tilt.

Rachel Salaman: And when you explain tilt in the book in more detail, you talk about "upstream" and "downstream" business activities. Could you just talk a little bit more about that now?

Niraj Dawar: Sure. So, imagine if you were to array all of the activities of a firm along a continuum, upstream activities would be those related to the product and production; to the sourcing of raw materials and to supply chains and logistics that are involved in production and sourcing activities – so everything related to the factory and the product and making the product better; so innovation and R&D: all those are upstream activities.

Downstream we have activities that are related to customer acquisition, customer satisfaction, customer retention, and all of the interactions with the customer.

Businesses tend to be structured and managed around their upstream activities, and have been for 250 years or so, and managers spend considerable time and effort managing for the upstream, when in fact what is happening increasingly is that the downstream activities account for a larger share of the costs in a business.

They also account for a larger share of the value that the customer pays for, will come back for, will pay a premium for, and so the downstream activities are increasingly the sources of competitive advantage, and so in the book I look at what would it take to shift management attention, resources, measures, towards the downstream. As an example, we know what innovation means in the upstream, but we have a much more fuzzy idea of what innovation means in the downstream. How do you improve customer interactions, for example? So that's what tilt does: it lays out a framework for downstream activities to be measured and managed.

Rachel Salaman: And just to be clear, you're not suggesting that businesses take their eye off the quality of their products, are you?

Niraj Dawar: No – if anything, the conclusion from tilt should be that ensuring that a company's upstream activities remain competitive is extremely important, but it's important in the sense that the upstream activities represent table stakes: you can't play without achieving competitive parity on products and product features, for example, or even on production and production costs and the efficiency and supply chains. So if you don't have those, you are not any better than your competitors, so just to play – just to be in the game – you have to have fairly good products, good production, you have to have efficient supply chains.

In addition to that, you have to constantly improve the products, and so product innovation is important, and you can't stay in the game without maintaining a certain new product development pace.

What I try and present a case for is that to win, you have to have superiority in the downstream, and the advantages that you build in the downstream tend to be lasting and not easily replicated by competitors.

Rachel Salaman: You mentioned earlier customer interactions, and that comes up a lot in the book. What exactly do you mean by that: what kind of interaction?

Niraj Dawar: So customer interactions are all of the ways in which your company – your business – interacts with the customers, so right from how the customer learns about your products or about your brand – your reputation – to how the customer compares your products with other competing products; how the customer obtains product trial; experiences the product; experiences the company; so all of the interactions that take place, and this could be the customer hearing about your product from a friend on Facebook all the way to the customer needing to store or resell your product after they've purchased it. All of those are customer interaction. And you can call them "touch points," but touch points, even those are too restricted; what I'm talking about is any time, any instance in which the customer comes into contact with information about your products or your company.

Rachel Salaman: Is it possible, do you think, to generalize about the degree of tilt that you're advocating here between upstream and downstream?

Niraj Dawar: That's a good question. What I'm suggesting is that there are three important shifts that are taking place within organizations.

First, the costs have shifted downstream. It used to be that the factory, and products, and making the product would account for a large proportion of total costs, and increasingly, it's the downstream activities, customer acquisition, customer satisfaction, and customer retention that account for a growing share of your total costs.

The second thing is that customers value activities that you perform in the downstream. So all of the customer interaction activities add value, and add differentiation, and the customer is willing to pay for those activities.

A simple example is that you can buy a can of Coca Cola in a supermarket almost anywhere in the world as part of a 12-pack or a 24-pack. You pay about 25 to 30 cents per can, whereas if you're in a park on a hot day and you've been walking for two hours and you see a vending machine, you think nothing of dropping two to three dollars into the vending machine. Now, you've paid a substantial price premium: you've paid upwards of a 700 percent to 800 percent price premium by purchasing the can from the vending machine, but what you're really paying for is to have the can of Coca Cola at the point of thirst, chilled, in a single serve, and that is worth something to the customer.

So what we're looking at is downstream activities that allow the customization of the product to the context and allow the offering – the customer value that is not inherent in the product itself – and that allows you in this case, the Coca Cola case, to capture a 700 percent to 800 percent price premium. So increasingly, customers value downstream activities and are willing to pay for them, and are willing to pay premium prices for them.

And finally, costs have shifted, the sources of customer value have shifted, and as a result, I think the sources of competitive advantage are shifting to downstream activities. It used to be that companies relied on proprietary access to raw materials, for example, as a source of competitive advantage. Oil companies still value their oil reserves and their proprietary access to certain oil fields as a source of competitive advantage.

Then we moved onto factories and scale of production as sources of competitive advantage, and we've been through a cycle of technology where new products and the ability to develop new products increasingly became sources of competitive advantage, so product innovation became a source of competitive advantage, and what I look at in "Tilt" is ways in which customer interaction activities become sources of competitive advantage, and how you can develop competencies and you can develop skills that allow you to maintain a competitive advantage in the downstream.

Rachel Salaman: In the book you say that companies need to "find their center of gravity." Could you explain what you mean by this, perhaps using the Nespresso story as an example?

Niraj Dawar: Sure. A company can locate its center of gravity in the upstream downstream continuum once you array all of your activities along that continuum, and you ask, "Where do the bulk of my costs reside and which are the activities that most contribute to customer value?" and those that are sources of competitive advantage.

So in the Nespresso story, Nestlé, which owns Nespresso, had been in the coffee business for quite a while when, at the start of the century, they started to realize that coffee was increasingly being commoditized, particularly by large retailers introducing private-label brands.

They decided to look at ways of adding value to the coffee business. And one way to think about the coffee business, there's the generic commodity product, but customers are not just willing to pay for the coffee, they're also willing to pay for how they buy and consume the coffee, and so the ability to have a pretty authentic espresso coffee in your home when you don't have to go out, you don't have to go to a coffee shop, you don't have to drive there, you don't have to get dressed to go there, you don't have to have the right change – and this could be in the middle of the night when most coffee shops might be closed – you can still have that espresso.

So there's a certain sort of costs and risks that Nespresso takes out of the equation for the customer who wants to consume coffee, and when you compare the Nespresso coffee with all of these costs and risks that you've taken out of the equation for the customer, suddenly the Nespresso coffee, even though it's priced at five times regular coffee, starts to look like good value for money to the customer, because a Nespresso served in the comfort of one's home, when you want it, the way you want it, and that adds a huge amount of value.

So it's shifting the sources of competitive advantage – the sources of differentiation from selling a better coffee (not that Nespresso isn't a better coffee: it is a better coffee) but it's a coffee that adds value by reducing the customer's costs and risks of accessing coffee.

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Rachel Salaman: I mentioned that your book is very practical – full of tips. What are some of the key questions a company needs to ask to find the right tilt for their business?

Niraj Dawar: What I try to do in every chapter of the book is to present a set of questions that managers can ask to start to formulate their strategies for the downstream, but the starting point of those questions is to really ask, "Why do our customers buy from us rather than from our competitors?" And if we can answer that question, and if we can develop consensus within our organization in answer to that question; if we can ask our customers that question "Why do you buy from us rather than from our competitors?" that starts to really get at the heart of the value that we deliver to our customers, and it also gets to the heart of our differentiation with respect to our customers.

So what makes us more valuable to our customers than our competitors? Answering that question is a starting point to get into a discussion of how we can improve that value, and from what I've found in speaking with very large numbers of organizations across four continents is that the answer to the question "Why do our customers buy from us rather than from our competitors ?" almost always tends to be about the interaction – it tends to be about trust, and reliability, and ease of doing business, and comfort, and all of those reputation effects rather than a better product or even a better price. So what tends to happen is that the customer values all sorts of soft factors in the interaction, and that's why they keep coming back: that's why they buy from us; that's why they pay a premium price to do business with us; and if we can then build on that we can start to develop systematic ways of improving that value and increasing that value.

Rachel Salaman: You talk there about how the customers see value in the products and services and interactions that they have with companies, you also talk about how companies can see value in their customers, so what do you mean by that?

Niraj Dawar: Companies have knowledge of their customers, they know their customers better than anybody else, or they should know their customers better than anybody else, and that knowledge is extremely valuable today. Putting together information about customers; understanding patterns in the marketplace that others have not understood, or can't understand because they don't have the information about customers; that I think is a tremendously valuable way of creating something new for customers in the customer interaction.

So an example would be putting together information, if you look at a simple example from say the mining industry, where one of the suppliers to the quarry industry is the explosive suppliers, and they are selling a commodity product: their competitors sell explosives just as explosive as theirs. You might think they are able to differentiate, but essentially the quarries are purchasing on the basis of price, so how do you add value to the quarries? And one way to think about it, one company looks at this and says what we can do is to try and understand what the customer wants from the explosion: why is it that they are buying the explosives in the first place, and the answer it turns out is that they are looking for rock of a certain size that they can then sell on to the landscaping industry, for example; so to have rocks of a certain size come out of an explosion is their target – they want a large proportion: over 80% of the rock coming out of a particular blast to be within certain tolerances of size – and if they can improve that percentage they gain tremendous efficiencies. If the percentage of rock falling within those tolerances falls below a certain threshold, they lose money.

So the blast is extremely important, not the explosives – so what this company does is study thousands of blasts and starts to understand the parameters that govern the outcomes, so the weather, the size of the charge, the placement of the charge, and a whole bunch of parameters, in fact 20 parameters that affect the outcomes in terms of the percentage of rock that is within the size tolerances. So then they develop for the customer a service, and that service is a guaranteed outcome of rock falling within certain size tolerances; so now they are no longer selling explosives, they are actually selling the outcome of those explosives to customers, and that changes the competitive gain: you are no longer competing on price to sell explosives, and customers are actually having their risk reduced when purchasing from you.

But what truly is of value for the explosive seller here is that they've gone out and studied thousands of blasts at the quarries, and the more information that they gather about those blasts, the more value that they can build in to the services that they offer to the quarries. And that's value from the customers – that's the value of the customers: you don't just sell value to the customers, but your customers are valuable to you.

Rachel Salaman: In the book you talk about the "playing field in the customer's mind." What do you mean by that, and how does it fit into this discussion?

What I try to do in the book is to say that you can build a competitive advantage that doesn't reside within the four walls of your company, and traditionally we've looked at sources of competitive advantage that are proprietary to the firm, and that are locked up within the walls of the company, but I believe that increasingly competitive advantage resides in the marketplace and one of the places in the marketplace where it resides is in the mind of the customer.

So let me give you an example: if say by some hazard of fortune, Coca Cola were to lose all of its physical plant and bottling capacity overnight in a fire – globally all those assets were to perish – how likely is it that Coca Cola could begin operations again tomorrow?

And the answer to that question, most reasonable business people agree, is that Coca Cola will fairly easily be able to obtain financing to start its operations again. It may not be able to get back in business the next day, but eventually they will come back. And there are lots of examples of companies that have come back from, say, product-harm crises and so on.

There is a second part to this thought experiment, and that is to imagine that all of the customers around the world – seven billion consumers – overnight forget the brand name Coca Cola and all of its associations. And in this instance, how likely is it that Coca Cola could obtain financing to start operations again tomorrow? And most reasonable people say it's much less likely that Coca Cola would obtain financing to start operations again.

So what this illustrates is that the primary asset – the competitive advantage that Coca Cola has built over the last 125 years or so of operation – is not on the premises; it doesn't reside on the premises: that competitive advantage resides in the marketplace; in the minds of customers around the world. It's a distributed asset, and you have to manage that asset in some way.

So what I try and do is to use the metaphor of the competitive playing field inside the customer's mind, and I try to map that playing field as a means of saying, "Here's how to build a competitive advantage in the downstream; here's how to build a competitive advantage that doesn't reside within the four walls of your company."

Rachel Salaman: And as part of that you suggest that people assess who their competitors are in this competitive playing field. Could you explain that?

Niraj Dawar: Yes. So if you ask a manager, "Who do you compete with?" and their answer may be based on companies that put their products on the shelf alongside theirs, or companies that appear on the page rank close to theirs when consumers search Google, for example.

So you rely on physical cues to determine who our competitors are, but ultimately what really matters – the true test of who we compete with – is to ask the question "Which brands does the customer consider before buying ours?" or, "Which brands does the customer consider along with ours?" and then, "If they don't buy ours, which brands do they buy?"

So those are our true competitors, but to answer that question we have to get into the customer's mind, and have some ways of measuring brand consideration prior to brand choice. So that's what I try and elaborate on in the book.

Rachel Salaman: There's a really interesting section of the book where you bust a few myths, and one of them points to how nuanced these arguments are. You say that it's a myth to say that competitive advantage is gained by listening to customers and giving them what they want, but we've just been talking about the importance of customers. Can you explain why that's a myth?

Niraj Dawar: Well, I think it's a myth once you start to recognize whether marketers have the ability to influence consumers' criteria of purchase. One of the questions that marketers are often asked – in fact I get this question almost every time I teach a core course in marketing at the MBA level – it's "Do marketers respond to customer needs or do they shape customers' needs?"

And you may recall the famous quote from Steve Jobs where he said, "It's not the customer's job to know what they want." And that quote echoes Henry Ford from 100 years earlier, who said, "If I had asked customers what they wanted they would have said they wanted a faster horse."

So market research – the activities of going out and asking customers what they want – can only get you so far; at some point you have to recognize that in order to lead in a competitive space, you have to shape customers' criteria of purchase, and business leaders or brands that have established leadership positions in competitive spaces tend to be companies that are comfortable shaping customers' criteria of purchase.

Rachel Salaman: You also in this section question the belief that technological improvements drive the pace and evolution of markets. Why do you question that belief?

Niraj Dawar: I question the belief – you see, technologies are necessary in order to move markets forward, but they are not sufficient. What it takes to move markets forward is an understanding of why customers buy and an ability to influence why customers buy.

So let me give you an example. In the razor blade industry for the last 25 years everybody has known that the next generation of Gillette blades will have an extra cutting edge to them. So I don't know what we're up to right now – 11 cutting edges or 17 cutting edges – but we've known for 25 years that the next generation will have one extra cutting edge, and perhaps some swivel or vibration to the blade.

So the question is, why have competitors not pre-empted the next generation? How come they haven't come out with the one additional blade that it would take to pre-empt Gillette and to take the thunder out of their arguments – to take the wind out of their sails? And the answer is that competitors don't have the market clout to move consumers to the next generation of blade – so four blades are better than three, but only if Gillette says so. They say so through a billion dollar marketing budget, so they have the ability to influence customers' criteria of purchase – competitors don't.

So in this case, the technology of an additional cutting edge is a necessary condition for innovation, but it's not a sufficient condition to move markets. And that's what I try to get at in the book where I say that technology is important: it does drive the next generation, but it's not sufficient: you need to have an understanding of markets in order to really have successful innovation.

Rachel Salaman: You end the book by looking at how to make the advantages of downstream strategies sustainable. What's your advice here, and could you give an example?

Niraj Dawar: I think downstream activities tend to be more sustainable than upstream activities. Upstream activities over the last 20 or 25 years have started to become standardized, streamlined and outsourced, and as a result, product production, the benefits of scale, the benefits of product design are accessible to your competitors just as much as they are accessible to you, and as a result that playing field has been leveled.

So the question is, "What sort of sustainability do we have?" And I try to answer the question if the upstream has been commoditized or if it's been leveled, what is it about the downstream that allows for the building of sustainable competitive advantage, and why is advantage built in the downstream more sustainable than advantages that are built in the upstream?

And my answer to that question, and I presented a number of arguments that enumerate why the downstream is more sustainable, but let me give you one example, and the example is Facebook. The reason Facebook is more sustainable is not because it has bigger servers – although it does – is not because it has smarter people – although it's people are pretty smart – not because it has a huge bunch of patents – although it does have a lot of patents – the reason that Facebook's competitive advantage is sustainable is because people are posting information online, and the more they post, the more their friends post, and the more sharing occurs in the marketplace.

And so the competitive advantage and its sustainability reside in the marketplace; in the behavior of customers, in the relationships between customers; and the thicker those relationships, the deeper those relationships, the more Facebook has a sustainable competitive advantage. So its interests reside in deepening the relationships between people – in making sure that they continue to share information, and that the more individuals share information, the more their friends and connections will share information, and that becomes the source of competitive advantage.

In other words we have to think of competitive advantage as residing in the marketplace: as residing in the connections between customers and in the networks that exist in the marketplace.

Rachel Salaman: We've covered a lot of ground in this interview. What do you think are the key takeaway points for leaders in organizations of all sizes?

Niraj Dawar: I think one of the key points is to ask yourself, "Are we simply paying lip service to customer centricity or are we truly customer-centric? And what does it mean to be truly customer-centric? Are we generating competitive advantage in the downstream? Are we innovating in our customer interactions?"

Those are questions that I think are central for any manager to answer. Customer centricity is not just about talking more about the customer: it's about truly creating new forms of value in the downstream.

Rachel Salaman: Niraj Dawar, thanks very much for joining me.

Niraj Dawar: Thank you so much, Rachel.

Rachel Salaman: The name of Niraj's book again is "Tilt: Shifting Your Strategy From Products to Customers."

I'll be back in a few weeks with another Expert Interview. Until then, goodbye.