Differentiate to Boost Flagging Profit Margins
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Facing eroding profit margins in once thriving, product-driven markets, successful companies use new technological tools to sharpen their focus on the customer and gain a competitive edge, according to Ranjay Gulati, the Michael Ludwig Nemmers Distinguished Professor of Strategy and Organizations at Northwestern University’s Kellogg School of Management.
At a meeting in June hosted by the Harvard Business Review and Microsoft, Gulati explained that although companies have a strong incentive to become more customer-facing, many have yet to make any significant moves in that direction.
Despite their claims to the contrary, he said, most companies “are not customer-centric but rather are looking at the customer through the lens of their product.”
In nearly every market, even those typically dominated by a single, strong product, companies have seen their market share-and their profits-slip as copycats emerge to offer customers more choices and slash prices. “Pharmaceuticals for instance, used to be a wide open space that you could own,” said Gulati at the New York City event for senior IT and business executives. “Now you have four or five comparable products and with looming threats of regulatory reforms customers are in the future likely to choose on price.”
As a result, companies can’t afford to differentiate themselves on product alone. “How many more blades can you put in a razor?” asked Gulati. Instead, they must bind customers more closely to them by better understanding who comprises the customer base, divining what they want and then implementing programs and campaigns designed to foster strong relationships with those customers.
Unfortunately, much of the expertise and knowledge regarding customers and products reside in different parts of an organization-companies typically are organized by product, service or geography-with no link between them. Therefore, one of the biggest impediments to becoming customer centric at that point are the internal silos that companies must transcend, or in some instances break, to truly align themselves around customers.
Marketers, Gulati contended, are in the unique position as a catalyst and have the technological tools at their disposal to serve as innovators, strategists and ultimately integrators who can break through those organizational silos and turn their companies toward the customer.
The first commandment
The first commandment, however, is “know thy customer.” Casinos in Las Vegas frenetically added theme parks, volcanoes and top-name entertainers to attract customers, because, as Gulati noted, “there is an extremely high correlation between where they stay and where they gamble.” One casino took a different approach and won big time, though.
Harrah's Entertainment says it is the world's largest provider of branded casino entertainment. Gulati says Harrah’s started to gather detailed data about customers’ gaming habits to build a database of information that could be mined for differentiating insights. “The traditional idea in Vegas is that customers don’t want you to know anything about them,” Gulati explained. Harrah’s ignored that conventional wisdom, he said.
Instead, it studied customer data and with the analytics tools identified a mid-market of customers who gamble as a hobby and have no interest in theme parks or Jacuzzis in their rooms. Using analytics, the casino company was able to successfully build relationships with this profitable group by creating a frequent gamblers program that includes customized offers and events.
Harley-Davidson, Starbucks and Best Buy, too, have seen their businesses thrive by putting a premium on understanding the customer and then developing programs aimed at relationship-building, according to Gulati. Harley-Davidson, the motorcycle giant, portrays itself as a lifestyle company that sells customized bikes and accessories to enthusiasts, Gulati said. The Starbucks Company insists that it is more than a global purveyor of coffee and instead offers a coffee-house experience, he added, by using analytics to better understand its customers’ entertainment interests.
Best Buy Co. says it is North America's number-one specialty retailer of consumer electronics, personal computers, entertainment software and appliances. At the retail chain initially aimed at the male shopper, surveys and the analytics showed that “about half of its customers are women” who have different buying habits and shopping needs, Gulati explained. In response to what was obviously an underserved market, for those stores where there was a preponderance of women visiting the store, Gulati said the company quickly added personal shoppers, regrouped products into clusters more closely related to women’s shopping needs (kitchen and laundry equipment in the same area, for example) and created incentive programs.
What’s more, the chain discovered another underserved market that it was already serving but not very effectively. Gulati explained that it attracted small business owners who needed help setting up and troubleshooting their purchases. In response, Best Buy purchased the Geek Squad and rolled out a major push into installation services.
While Harrah’s, Harley-Davidson, Starbucks, and Best Buy differ widely in the products and services they offer, Gulati noted that these four companies armed their marketers with the technology they need to break through organizational silos and build meaningful relationships with customers.
“There are a wealth of tools available,” said Gulati. On the customer side that includes data warehouses and analytics. Internally, collaborative solutions let disparate teams communicate with each other and metrics let marketers track how well their innovative programs are working, he adds.
About Ranjay Gulati - analyst
Ranjay Gulati, the Michael Ludwig Nemmers Distinguished Professor of Strategy and Organizations at Northwestern University’s Kellogg School of Management in Evanston, Ill. He is the author of the upcoming book Silo Busting: Transcending Barriers to Build High-Growth, Customer-Centric Organizations, which will be published by Harvard Business School Press in 2008.
Teri Robinson - writer
Teri Robinson is a free lance writer with more than 20 years of experience providing articles for business and technology magazines. Her articles have appeared in Inc magazine, The New York Times, PC magazine and Computerworld.
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