From Product-Centric to Customer-Centric Management

Hi, I'm Pete Fader, I'm the Pei-Yuan Chia Professor of Marketing at the Wharton
School and co-director of the Wharton Customer Analytics Initiative. I'm really
excited to be starting my module of our introduction to marketing course. But the
fact that I run a research center called, The Customer Analytics Initiative suggests
that I'm a data guy, and that's true. I love looking at data about customers, try to
figure out which customer is doing what and for how long and for how much money,
and what kind of tactics can companies use to create and extract more value from
the customer. So for me, it's all about the customer behavior, the, the patterns that
we see over time and the kinds of strategies that companies can build around those
patterns or to do better for themselves.
So I want to start by going back to one of the frameworks that Barbara Kahn used
in her modules. You might recall this slide over here, where she laid out the basic
kinds of strategies that companies can follow.
And a couple of these strategies are really clear. Everyone understands what
performance superiority means. It's, it's just having the very best product out
there. So whether you're an Apple, a BMW or a luxury product like a Louis Vitton
or a Gucci. You want to have the best. Operational excellence is also pretty clear.
you want the lowest price, you want the most efficient operation or the most
efficient experience for your customer. So whether you’re talking about a Walmart
or an IKEA or a Zara, you are really interested in keeping the cost low, keeping the
process very efficient. That gives us operational excellence. But it's the third leg of
this diagram that we're going to spend a lot of time on. This idea of customer
intimacy. The basic idea makes sense.
Let's focus on the customer. But exactly what does that mean? Who is the
customer? Are we going to focus on all customers the same way? Just how intimate
do we want to get. And how do we actually make more money on something that
actually adds costs than some of these other strategies. So that's going to be the
main focus of our efforts, is taking this idea of customer intimacy. Or, as I like to
call it, customer centricity and really understanding what it is. Clarifying what it
isn't, motivating why it's important, and trying to get firms to make a well informed
decision about whether they want to pursue that kind of strategy.
And, whether when or how to actually go after it. So that's going to be the focus of
our work. I'm here on South street. One of the popular shopping areas in
Philadelphia. And all around me would be stores that represent the different kinds
of, of strategies that Barbara spoke about. Just over my right shoulder, you'll see
one of my favorite pizza places. That's performance superiority. Right down the
block, there's a number of fast food restaurants. That would be operational
excellence. But what about customer intimacy? What kinds of stores would really be
customer intimate, or customer-centric, as I like to say. And what makes them
different? So let's really understand how these different strategies compare with
each other, and then take the deeper plunge into customer centricity.
So give me a few minutes to review the traditional steps of running a business.
Running a business in a performance superior or operationally excellent kind of way
and that's going to give us the basic foundation so we can really understand how
customer centricity is different. Some of the challenges associated with it. And some
of the opportunities that customer centricity can provide, that you might not be able
to achieve, with a performance superiority or an operational excellence strategy.
So let's take a step back and review these traditional steps of running a business.
For most commercial enterprises the overall objective, beyond everything
else, beyond all the tactics that a company is, is using and the strategy that it's
hoping to follow, it's all about making money. And again, Barbara reviewed this and
you don't need to be told this. it's all about maximizing the value of the whole
corporation.
It's looking at the money that we make today, the money that we'll make tomorrow,
the money that we'll make ten years from now. And when we recognize that time
value of that money, that today's dollars are more important to us than tomorrow's
dollars. When we take the discounted flow of the company's profits that in theory,
gives us the overall value of the corporation. So, our job as a manager to maximize
the value of the corporation which means, maximizing the net present value of
profits that the company is going to get. So we agree on that. That part is pretty
easy, conceptually. But the question is, how do companies achieve it?
And that takes us back to those core strategies that Barbara laid out. And when you
think about the most traditional one among them, again performance, superiority,
operational excellence. It's all about coming up with a blockbuster product or
service. Coming up with a brilliant idea that puts us steps ahead of all of
our competition, and then figuring out ways to bring that idea, that product or
service to market. So it's conceptualizing it, it's developing it, it's manufacturing,
distributing, marketing that idea.
That's what business is traditionally all about. And so the key, for most firms for
making money, isn't only coming up with that idea but then figuring out ways to
produce lots and lots of it. And one of the things that we've discovered over the
years, is that producing lots and lots of quantities of this product or service that we
want to deliver, not only helps us make greater revenue. But the fact that we're
producing and distributing so, so much of it also brings our cost down.
So the, the core focus of most traditional businesses is high volume, low cost. And
again, coming up with a great idea that enables us to do that. So, so many
companies have built their business. Around that. And even today a common
question that we always ask ourselves, particularly when we have a new business is
will it scale?
Can we produce or deliver this product or service at scale so we can do so much of it
that it's going to let us bring in the revenue and bring our costs down. So that's,
that's, that's the basic way that most companies operate. And over the years, many
different metrics have arisen that help companies understand how well they're
doing it. Obviously they can look at the volumes that they're delivering. Obviously
they can look at changes in their costs. Are costs coming down as we develop and
deliver more and more of this product or service? So some metrics that show us how
well we're, we're doing our business are fairly clear. Some of them are less clear.
For instance, a very powerful metric is market share. So many companies today
obsess over market share, because not only does it give them an indication of how
well they're doing relative to their competitors in a given industry, but it also has
these interesting properties of being a leading indicator of how well you will be
doing. There's a lot of research that goes back to the 1960's, the 1970's that
shows that market share is not only a good backwards indicator of how well you've
done, but a leading indicator of how well you will likely be doing in the future. So, so
many other metrics, like market share and others, are central to this product
superiority, or operationally excellent strategy.
Beyond running your business and measuring to see how well you're doing it, a
company isn't only interested in fine-tuning those metrics. They're interested. And
in fact, they're mandated to have growth. It's not enough just to do what
you're doing a little bit more efficiently and effectively. Your shareholders demand
growth. They want more. They want more than you can possibly have delivered
before.
And so where does growth come from? In a world characterized by a performance
superiority or operational excellence. What are the sources of, of major growth
that, that a company can enjoy? And we really see two different sources, that
at first sound fairly distinct from each other, but when we think about it a little bit
more carefully they're actually just different flavors of the same kind of growth.
So let's think about them a little bit. One source of growth is taking the products
and services that we've been delivering already and bringing them to new
customers. Either going to new customer segments or to new geographies.
So it's taking this great product or service and bringing it to new customers.
That's clearly a new source of growth.

The other source of growth that I'm sure all of you could think about, would be
innovation. So in addition to producing and distributing a certain set of products or
service, what more can we do? So let's go back to the folks who developed these
great products and services in the beginning, and say give us some new products
and services. Let's go back to the R & D people and say. Okay you have a certain
degree of expertise that has enabled you to bring us the current product. What more
can you do to bring us either variance of that product, or entirely new ones that
haven't existed before? So that's an obvious source of growth would be new
products, or extensions to existing products.

So at first, this idea of taking our current product and bringing it to new customers,
or coming up with new and different products seem fairly different from each
other. And indeed the tactics associated with them, the expertise within the
corporation does indeed have to be a bit different. When we step back and think
strategically, both of them actually have a lot in common. Both of them share this
basic idea. We have a certain degree of product expertise. How can we extend
it? How can we take that product expertise, and either extend it to new customers
or extend it to new products? So regardless of the specific way that you go after
growth, the main source of growth is extending our overall product or service
delivery. And that's what most companies have to be really good at. We're, we're
good at doing a certain kind of thing. We're going to try to do it as, as efficiently or
effectively as possible. Now how can we take that product expertise and extend it in
new directions?

And how do companies go about doing that? How do they go about running the
existing business as well as figuring out how to extend the existing product. Well if
you look at the organizational chart of almost any company on the planet. The
company tends to be organized around the different kinds of products and services
that it delivers. So you'll have a product manager or a brand manager, but it's all
about having separate silos around the different products or services and then
organizing all the activities that way. And so, so, very often each of these different
silos will be responsible not only to run its own operation as efficiently as possible,
but think about its own way of extending that kind of product expertise.

And so, if we sum up the way that most companies operate, it's all about this idea of
product or service expertise. That's the competitive advantage that so many
managers, so many academics, so many industry experts have focused on for so
many years. We are the best at conceptualizing, developing, delivering a certain
kind of product or service. And we're going to stay ahead of our competitors by
becoming more efficient. By going to new markets, and always developing new
products and services that are going to keep us a step ahead. Product expertise.

So what I've just described to you is pretty standard stuff. For most of you, if you
look at your experience as a consumer or through your work experience, you'll
realize that that's the way that most businesses operate. And instead of just calling
it business, we can now put a label on that. And that label I like to use is product
centricity. See, in the old days we didn't need a special label for it because for
most companies this was business and business was this set of steps that I just
described to you. But today, we're seeing different kinds of business models
emerging. And so we want to now distinguish the set of practices that I just
described. In fact I like to use a metaphor about a fish swimming around in water.
So while the fish is in the water. It doesn't realize that it's in water until it jumps
into a new environment.
It jumps out of the water for a, for a moment. And realizes, uh-oh, I'm in a different
environment now. And I kind of like the old environment better. I'm going to stay in
the water. And this is exactly the kind of issue that many companies are facing
today. They're swimming around in their own water of product centricity. It works.
It keeps the business going. It gives them some opportunities for growth. And for
many companies that's totally fine. But for other companies, whether it's out of
desperation or out of opportunity, they're looking for different kinds of
environments. They're looking for different kinds of strategies. We're seeing more
and more companies, jumping out of the water, and saying is it better out here?
How can I operate out here? Should I operate out here? And that's why we're now
going to put a specific label on the old way of doing things, product centricity. So
again, most of you understand that, this is business as usual. Many of the concepts
that Barbara was talking about implicitly refer to a product-centric approach.
And just to sum up the product-centric world before we kind of start moving away
from it, I have this one other slide for you here. That shows you many of the classic
characteristics of a product centric business. And if you look up and down the slide,
you won't find a lot that's tremendously insightful, and that's the point I want to
make.
Is that the traditional product centric approach to business, again, focusing on
performance superiority or operational excellence. is, by now, second nature to most
managers. So if you look at as the slide shows, the kinds of customers that we're
going after, the kinds of metrics that we're using, the overall focus in the
organization and the business, it's pretty standard stuff. I just want to call your
attention to this one point to, towards the bottom of the slide. The idea of the
mental process.
And I love this idea of divergent thinking. And it goes back to an idea I mentioned a
few minutes ago. We have this product expertise, what can we do with it? How can
we spread it out to other kinds of customers, and other kinds of businesses? Again,
implicity, that's the way that most businesses operate. And we hire people who can
think divergently, who can take our particular core business, and think about ways
of spreading it out, to new markets, and new products and services.
So I want to make that explicit, because as we go on, we're going to talk about some
very different mental processes, as well as different metrics, and all of the points
that you see on this slide are going to become quite different.

Cracks in the Product-Centric Approach

Okay, so we've reviewed the product-centric approach to business. We understand

that for most companies, again those focusing on performance priority, or
operational excellence, it's all about coming in with that blockbuster idea, reducing
a lot of it, keeping the cost down, and using appropriate metrics for it. And we call
that product centricity.

Now, we're going to start talking about some alternative approaches, but I don't
want to suggest that product centricity is doomed to fail. I don't want to suggest
that all companies must move away from product-centricity. I don't want to suggest
that that's a recipe for disaster. But I do want to suggest that there are some
aspects of product-centricity that make it not quite as great as it used to be.
So as you can on this slide over here, I like to say that there are some cracks in
product-centricity. There are just a, a, a number of trends going on today, things
that didn't really exist say 15 or 20 years ago. That make the product-centric
approach just a little bit less, guaranteed successful than it was back then.
In fact, I'd like you to just take a, a minute or two think about what are some of the
changes, today, compared to 15 or 20 years ago, that make product centricity just a
little bit different? That take some of the shine off it, that take some of that
automatic kaching, away from being product-centric. What would be some of the
emerging trends? Most of which are trends that are here to stay, that might make a
company think twice about whether they want to focus on product-centricity, or
start looking towards a different kind of strategy. Take a moment and think
about that, and then we'll run down a list of some of the leading factors that, that
take some of the edge off of product-centricity.

So I bet first and foremost on everyone’s list, is the idea of commoditization. See
back in the old days, it was so hard to come up with and manufacture a new
product, or deliver a service. That you would stay steps ahead of all of
your competitors for a long period of time before they could come, come up with an
equivalent idea. But today, because of technology, things commoditize much more
quickly. Product life cycles are getting much, much shorter. Companies know that
as soon as they launch something new, they have to have the next new thing
already in process. So this idea of commoditization, takes away some of the
goodness of product-centricity.

Here's a way of thinking about it. In the product-centric world, every company
is counting on some kind of natural monopoly. We're doing something that's going to
keep us ahead of all of our competitors for a long period of time. And that's what's
going to let us focus on the dev, developing the best of delivering the most
efficient. But as those life cycles shorten, as things commoditize, it takes away some
of that natural monopoly power. But that's just one reason. It's a big one, but by no
means the only.

Another important reason would be changes on the customer side. Our customers
are so much smarter, more informed than ever before. It used to be that our
customers were much more passive. They would take whatever products or services
that we would give them, and they would say, oh, that's great, terrific, thanks very
much, I'll figure out how to use it. But today's customers are much different from
yesterday's customers. They're much more informed. They're much more
demanding. And they're much savvier. And again, a big reason for this is, the
internet. Information technology. Customers are so much more aware of options
that are available to them, or options that might not yet be available to them.
But that they, they clamor for than they ever were before. Again, the customers
aren't passive, like they use to be. So smarter customers put much more demands
on, on companies. And make it harder for them to extract as much value out of the
products and services that they deliver.

And a third way that technology makes life a little bit more difficult for product-
centric companies, is, is the idea that products are, are now available everywhere
instantaneously. If you think about what FedEx, or DHL, or UPS, does they
take away some of that natural monopoly power that a company had.
In the old days, companies would rely on the fact that no one else had a product like
them. But even if other companies did have a product like them, customers wouldn't
be aware of it. And even if customers were aware of it, customers wouldn't have
access to it. But today, because distribution technology brings everything,
everywhere overnight if you want it, it's much harder to protect yourself from other
products and services that are, that are available in other regions.

So there's all kinds of ways that technology takes some of the, the edge off product-
centricity. But by no means is it limited to technology. Part of it is a mindset. People
are thinking globally much more than ever before. So, so customers are much more
actively looking for products and services from other regions than they ever were
before. And then there's the issue of deregulation. Again, regulation was a way that
gave companies monopoly power. That they were the only game in town and
customers had no choice. But as one industry after another deregulates, companies
need to be much more competitive. And it's much harder to stay a step ahead. And
in some cases, it's not deregulation, but it's re-regulation. It's regulations that are
making markets much more competitive. So, again, that's another reason why
product centricity just isn't what it used to be.

A sixth reason comes back to the customer again. Not only is the customer smarter,
but as I mentioned before, customers are far more demanding than they ever were
before. So in the old days, it was good enough just for, to, to let the customer take a
bunch of products and services and figure out what they're going to do with it.
Figure out how those different products and services are going to help them solve
the problems that they have. But today's customer is much more demanding, and is
insisting that companies not only deliver them one product or service at a time, but,
but bundled together products and services.

Sometimes, including products and services that the company might not make any
money on. It is now much more imperative than it ever was before for companies to
be seen as a trusted advisor. To be providing full fledged solutions to the customer
and not just piece meal products and services that the customer will figure out how
to combine together.

One of the great stories along these lines is that of IBM. IBM, which of course
stands for International Business Machines, used to be one of the ultimate product-
centric firms. They were just the best at coming up with, and developing
certain kinds of products, business machines, computers and so on, better than
anybody else. But they had a revelation in the mid 1990s, that they could actually
make more money being a trusted advisor. Instead of saying here, customer, buy
our machine, telling a customer what set of machines and services to be buying.
That there are actually higher margins, especially as computers and other
information technology equipment commoditizes, they can actually do better being a
solution advisor. And slowly but surely, as many of you know, IBM spun off many of
its business machines. They no longer manufacture personal computers. Their
presence in most other hardware areas has diminished.

But where they're making their money today, is from being a customer centric
solution provider. Is going to the customer and saying, here are the set of products
and services you should be buying. And that kind of expertise doesn't commoditize
nearly as much as any one product might.

And so that idea of moving away from just selling products, to being a full scale
solution provider is a major change in the last 15 to 20 years. And there's one more
point that I want to talk about with you. And it's not necessarily the most important
crack in product-centricity, but it's one that I like to think about a lot.

And that's the data. See, today's technology enables us to collect and manage, and
utilize data about customers, in a way that we just could have never imagined
before. So if you think about old companies. Think about Henry Ford, who was
one of the, the real originators of product-centric thinking. He had no idea how
many customers he had. He didn't know whether he was selling one car to each of
ten million different people, or whether he was selling ten million cars to one
person. He didn't know. And frankly he didn't care that much. Because he was so
product-centric in his thinking, that it was just a matter of turning that crank, of
pushing products out the door. Of keeping the volumes up and keeping the costs
down.

But today given these other cracks and product-centricity, it's much more important
for companies to be using the data about their customers. To be understanding
who's buying what. And for how long, and what other products that they're
buying. So the information systems give us the possibility of developing business
models that were unimaginable before. But could actually be more successful than
the product-centric approach. And I want to give you a couple of examples of that.

Data-Driven Business Models

So I want to talk about a couple of examples about companies that have used
information technology and specifically the data about their customers. To come up
with business models that are quite distinct, from product centricity. And so two
examples I want to share with your very briefly, would be Harrahs, the casino chain
here in the US, and Tesco, grocery retail chain in the United Kingdom. In many, in
many ways the stories are quite similar.

Despite the fact that they're very different companies operating different businesses
and different geographies. In both cases, these were companies that were getting
beaten up in their businesses. They weren't nearly as large as some of their
competitors, they didn't have the resources to compete head-to-head, in a
traditional, product-centric manner.

And so they turn to the data. They turn to a deep understanding about their
customers to draw insight and to let them change their business models in a
way that actually let them rise to the top of their industries. So let's talk first about
Harrahs casino chain here in the US. They're having a hard time competing against
other chains that just had deeper pockets, greater resources. It was hard for them to
develop the products and services to compete on a head to head basis. So Harrah's
instead turned to its data, and in particular, developed an amazing loyalty
program.

Now many companies develop loyalty programs, but few of them were able to draw
the actionable insights that Harrah's was to truly understand at a granular level
what each customer's doing. Not only which games they're playing, but what meals
they're eating, what room preferences they have, what entertainment options they
seek. And to understand, when that customer is likely to change his behavior, when
he's likely to walk away from the table, and what kinds of things that Harrah's
itself could do to change their behavior for the better. What kinds of messages and
offers to provide, at the right time, and through the right channel, in order to create
and extract more value from that customer.

So Harrah's was just brilliant in drawing those insights and understanding, for
instance, what someone's threshold was. If this customer goes down about say,
$150, it's time to intervene. It's time to offer them a meal or some kind of other
activity which is going to make them feel great. But equally importantly, is going to
reset their mental account. And so when they sit back down again, their threshold
is back towards zero. So Harrah's was very smart about understanding that kind of
messaging.

And it's a very similar story for Tesco. Again, a competing very, very tough with
other big grocery chains in the UK. Sansbury, Morrisons, and so on. They turned to
the data, they developed the OLC programme. They really understood their
customers in some very clever ways, they would understand which households were
buying a lot of their meals and, and other products from TESCO. And which ones
weren't and specifically which kinds of products were the light households not
buying from TESCO.

So, Tesco knew which kinds of coupons to send to which kinds of households, at
which time, in order to get them to buy more. And this helped them not only grow
the business with those customers, but also helped them to compete more
effectively. So when Wal-mart bought a small chain and entered the UK. Tesco
knew which customers were most vulnerable to switch to
Walmart, and which products they'd likely buy from Walmart. So Tesco knew,
again, which coupons to send to which households, at which time, in order to really
hold on to those customers and bolster their business.

So by understanding its customers. TESCO is able to do a great job defending itself

against Wal-mart and, and staying at top of the grocery business in the UK. So
those are only two examples of companies that have turned to the data in addition
to developing fine products and services but really leaning heavily on the data and a
rich deep understanding of their customers. In order to pivot their business model,
in a way that they could never achieve, through products and services alone.

Three Cheers for Direct Marketing

So while the Harris and Tesco stories are terrific, I will provide pointers to some
books that summarize each of those stories quite well. I want to emphasize that
they're not the only ones who have built a business around a deep understanding of
their customers, and by no means are they the first. In fact, the first companies that
actually built a business in this manner, around their customers, has happened
many, many years ago. And it emerges from the sector of direct marketing. When I
say direct marketing most people don't have a real positive association with it. They
think about low end products.

They think about infomercials and other, you know, not great marketing
activities. it, it's, it's not the kind of industry that you aspire to be associated with
or learn from. But when you strip away what most customers see from direct
marketers, and look at the actual business practices below the surface, you realize
that it's actually quite impressive. If you, if you look at, at what direct marketing
is really all about, it is really building the business around the customer. But not
just, the customer in some generic sense, but around each and every customer. It's
about understanding the relationship with each different customer. Who has bought
what from us. For how much. What kinds of products have they inquired about.
What kinds of products have they returned. What interactions have they had with
customer service. That's what direct marketing is all about. It's having a much
richer relationship between the company. And the customer.

What's interesting about it is, that direct marketing is not a new concept. It's been
around since 1967, when Lester Wonderman looked at these emerging set of data
driven business practices. And said, you know what? There's actually a lot we can
do, we can actually formalize some of these business practices, and come up with
some best practices associated with them. But even if you don't spend a lot of time
thinking about direct marketing, a lot of the words and the concepts have
already filtered their way into today's everyday marketing conversation. So, a lot of
the segmentation concepts that Barbara discussed are often associated with direct
marketing. But even other expressions like customer lifetime value. Something that
you've heard about before, that we're going to spend more time talking about, that's,
that, that comes directly from the direct marketers. So the direct marketers were
the first ones who said, you know what? We can collect all this data about
our customers, about each and every one of them, and we can actually build a
business by understanding who the valuable customers are, who the less
valuable ones are. Which messages we should be sending to which customers
at which time, and, importantly, what kinds of products we can develop and deliver
in order to create more value for our most valuable customers and to try to attract
more customers like them.

So the Harris and Tesco stories are wonderful, but they're not unique. And so I
want to spend a lot of time celebrating some direct marketing practices. And I want
to emphasize that a lot of firms out there today might not aspire to be direct
marketers, but they don't realize it, but they are. Any company that's operating on
the internet. Any company that has the capability to track a particular customer
over time. Has the capability to learn from direct marketing, and I encourage all of
you to read books on direct marketing. Even if you don't think about yourself that
way, there's just so many concepts that you can learn and leverage, especially as we
enter this world of big data.

Which Firms Are Customer Centric?

Now that we understand what product centricity is all about and we've discussed
some of the cracks in product centricity. And even some of the opportunities from
companies to escape from and maybe do better than a product-centric approach,
I want to start moving away towards customer centricity. But before I give you a
definition and talk it through, I'd like you to think about what customer
centricity means, based on your experience as well as what I've discussed so far. So
in order to do that, I want to work with a series of examples here. In fact, on this
slide, you'll see the names of four very famous retailers. Three of them operate on a
global level, so Walmart, Apple, Starbucks. I'm sure most of you are familiar with
them. And Nordstroms.A high end very, a high touch department store chain here
in the US. If you're not familiar with them not a big deal. I think you'll appreciate
the story anyway. What I'd like you to do is take a moment, and from your
experience with, your perceptions of these firms, decide which of them would be
highly customer centric.

So I want you to think about what customer centricity means in light of our
discussion so far. And decide which of these, could be one, could be all, could be
none, up to you, would be above the bar in terms of customer centricity. So think
about what customer centricity means, and which of these firms qualify in that
regard. Think about that for a second. And then I want to talk through all four of
them. In my book, none of these firms are truly customer centric. Now, I want to be
careful about this. I have great admiration for all these firms. I'm a big customer of
all of them. I really like what they do. But all of them for different reasons.
Fail to be truly customer centric, nearly as much as perhaps some of you
thought when in deciding which of them, which of these firms are or aren't customer
centric. So I'm just going to take a few moments to talk through each one of them,
and then, finally we'll bring up our definitions of customer centricity. First there's
Walmart. Now again, Walmart is a terrific firm, but Walmart knows, surprisingly
little about any one of it's customers. Unlike Harris, unlike Tesco, unlike so many
other retailers out there, Walmart does not have a loyalty program. Walmart has
made very little effort to date to try to figure out exactly what each customer's
doing. And how they can influence each customer's behavior.

So while Walmart might not make a lot of efforts to understand what any one
customer's going to buy, they make great efforts to understand the customers as a
whole. They understand regional differences. They understand when certain kinds
of events occur. For instance, when a hurricane is about to hit the south eastern
US, they need to fill the stores with water and batteries and so on. So they
understand the customer in a generic way but they make very little effort to
understand the customers in a very specific granular way as a direct marketer
would suggest.

And you know what, that doesn’t bother me because Walmart isn’t intending to be a
direct marketer. If you think about the Walmart business model, it’s about selling
in great volumes, it’s about bringing the costs way down. So, in many ways,
Walmart is a prototypical, and a wonderfully successful, product-centric firm.
Let's come up with products that we can sell a whole lot of, that's going to let us
bring our costs down. And let's figure out ways to extend our product goodness,
and, and all the aspects that I mentioned for product-centricity apply to
Walmart. So in many ways, I, I excuse them. I allow them to focus on product
centricity because they're so good at it. There are a very few firms in the world that
can operate in an operationally excellent manner as well as Walmart can.

It's a similar but different story for Apple. because Apple again, is the classic
performance superiority firm. They don't spend a whole lot of time doing market
research, to figure out exactly what the customer wants. They don't spend a whole
lot of time focusing on segmentation and real granular analysis to try to predict
what any one customer is going to do over time. What Apple focuses on, is
leveraging its product expertise. Is taking the kinds of products that they've already
developed, and figuring out what are the next ones that they should develop. So
again, a classic example of product centricity, and they do it better than most
company, most other companies on the planet, and they can get away with it.

Now, Walmart and Apple, for the most part are focusing on doing product-centric
things. Operational excellent for Walmart, performance superiority for Apple. They
are doing some smart things at the margin to understand their customers better.
For instance, Walmart is spending a little bit more time developing technology
that's not only going to help them learn about their customers, but be even more
operationally efficient than they were before. So, for instance, here in the U.S. They
have a new program they call Scan & Go, a mobile app that lets people scan
products as they move around the store so as they check out, the whole scanning
process happens much faster.It's a brilliant idea that lets them be more
operationally excellent, but also lets them start tagging individual customers and
tracking them over time. So they're starting to take on some more customer centric
initiatives without sacrificing the operational excellence.

And Apple is also starting to do a number of things. Again, small initiatives not
driving the business that are letting them understand their customers a little bit
better. Whether it's tracking peoples music preferences through iTunes. Or some of
the activities that they do in the Apple retail stores. Slowly but surely, they're
starting to develop a better understanding of their customers at a more granular
level. And who knows? One day, if and when competition catches up and Apple can
no longer be the product leader that they are, they could probably turn around and
start to be a great customer-centric firm as well. But today, it's not quite as mission
critical as it is for other firms.

The third company on our list, Starbucks, is a very interesting contradiction. At a

local level, Starbucks or any coffee retailer, is very, very customer centric. The
Barista, the person on the the other side of the counter, the person who makes your
coffee, knows a lot about you if you're a regular customer. Not only does he or she
understand your coffee preferences and what other items you might buy in that
store but just through the casual conversations you have with them, they might
know what movies you like, what kind of clothing you’d like to buy, something about
your job, your family and they often make recommendations to you. That are going
to make your life better even if Starbucks itself isn't making a penny off of those
recommendations. That is customer centricity. Okay, being a trusted advisor to the
really good customers, finding ways to lock that customer in and so on.

So, the paradox is, while Starbucks is very customer centric at a local level, they are
not that customer centric at a national level. You take your Starbucks loyality card,
and you bring it a Starbucks in another city or another country and show it to them
and say, I'd like the usual please, they have no idea who you are. So not only can
they not meet your immediate needs, but it's hard for them to be a trusted advisor
and to make other recommendations to you when they have no idea about anything
about your history.

So to me, that's a really key point. It's not enough for a company to be customer
centric some of the time when they know who you are. But a truly customer centric
company will identify you and will be able to value you and make recommendations
no matter what kinds of interactions you have with them. Whether you go from
store to store, whether you go online or offline. That's what customer centricity is all
about. Now Starbucks to their credit recognizes this. And they're coming up with all
kinds of interesting technologies that are going to let them collect and integrate
your data across stores and across other touch points you have with them. They
recognize that the opportunities and the necessity for customer centricity is at
least as important as it is to come up with the next great coffee flavor. So again, it's
that balance between focusing on the product and focus, focusing on the customer
that so many companies are now struggling with.

And finally, there's Nordstrom's. And while that might be the least familiar
company on the list, especially to those of you outside the US, it might be the most
interesting example to help us understand what customer centricity really is and
isn't. But whether you've shopped at a Nordstrom store or not, you might be
familiar with the story that makes Nordstrom so supposedly customer-centric or
not. And here's the way it goes. Nordstrom's a high end department store. They sell
clothing, shoes, and so on. One thing they don't sell is tires. Yet, one day someone
walked in to a Nordstrom store. Supposedly in Fairbanks Alaska, and wanted to
return a set of tires that obviously they could not have bought at
Nordstrom's. Perhaps there was a tire store at that location before Nordstrom's
opened shop. And Nordstrom's being so incredibly customer centric, gave them
the money back for tires that they didn't buy at Nordstrom's.Now is that customer-
centricity or what? I like to say, or what. If you think about it for a minute, is that
really customer-centric or is it actually kind of stupid? Does it make sense to give
someone money back for a product that they couldn't possibly have bought from
you?

For me, I say, most of the time it's probably a bad idea to do that. And the question
is, under what circumstances would it be a good idea to do that? Think about that
for a second. When would it make sense to give someone money back for a product
that they couldn't have possibly bought from you? When would it make sense? And
here's the answer. If that customer is incredibly valuable to you, and I'm talking
about future value, I'm talking about the fact that we expect this customer to be
buying so much from us in the future that if we don't give them money back for the
tires that they thought they bought from us, if we don't give them the money back
today, we're going to lose that value. If that's the case. We'll happily give you the
money back for the tires that you didn't buy.

Maybe we'll double the money back. Who knows. So it all depends on the value of
the customer. The future value. The lifetime value of the customer. If that's
sufficiently high. Then we'll roll out the red carpet for you. And if it's not. And for
most customers it wouldn't be. Then we would politely decline. We might still be
nice to you, of course, but we're not going to give you money back if we don't see the
value in it. And that's the problem with Nordstrom's. Nordstrom's offers such
wonderful service. They treat everybody so incredibly well. Regardless of the value
of that customer. And that's the problem with Nordstrom's, is that because they fail
to focus on figuring out the future value of each and every customer, they're just
going to treat everybody really well. And there's a lot to be said for that, it's a
wonderful company. I like knowing that when I go in there I'm going to be treated
really well. But I think that they're missing some opportunities by picking and
choosing a little bit more. In the old days it was impossible to do that, but today
Nordstrom's, like every other retailer, has the capability to collect the data and
use technology to do a little bit more targeting and a little bit more selection to
figure out who is worth the extra special treatment. And who, doesn't necessarily
deserve it. So to me the Nordstrom's example is a great example of, of where a
product and customer centricity collide. And what I want to do now is, is to start
focusing more on what customer centricity really means. And that's what we're
going to do next.

What is Customer Centricity?

Welcome back to module two. Just to review in module one we looked at traditional
ways of doing business, particularly for a strategy associated with Performance
superiority or operational excellence. and we looked at the different characteristics
of businesses that do that kind of thing, which of course I called product
centricity. We discussed why product centricity isn't quite as great as it used to
be, and started touching on businesses that turn in a different direction, customer
centricity, but we haven't defined it yet. We've given a number of examples of
companies that we'd say are, or at least have been, highly customer centric,
IBM, Harrods, Tesco, as well as a number of companies that are terrific
companies, companies like Walmart, Apple, Starbucks, Nordstrom, but don't qualify
as necessarily being over the hurdle, but are making great strides towards customer
centricity.

So what about your business, or what about these businesses around me here on
South street? How do we determine whether a business really is or isn't customer
centric? In other words, what is the definition of customer centricity? So what I like
to ask my students to do is to write that down. So how do you define customer
centricity, based on what we've discussed so far, based on the examples that we've
looked at? So in fact, I'd like you to take a minute and just jot down whether it's a
full sentence, or even just a few words that you would associate with customer
centricity. Take a minute and do that, and then I'll, then I'll give you my
perspective, my definition on what customer centricity is.

Okay, so you gave me your definition of customer centricity. I'm going to show you
mine. But before I put the words on the screen, because a lot of it's just going to be
words on a screen. I, I want you to look at these words, and think about them a
little bit differently. I want you to think about how this definition of customer
centricity, and what it implies, just how radically different it is from conventional
product-centric business practices. In fact, I want you to look at these words and tell
me, if you were to start doing exactly these kinds of tactics, if your company was to
start having these kinds of perspectives, why you'd be fired?

In other words, there are fireable offenses in this definition over here, and what are
they? Okay, if you look at it, there's a lot of things that might make sense. It all fits
together, sounds nice. Hopefully, it's well-aligned with your own definition of
customer centricity, but I really do want to emphasize just how different it is. So for
instance, what are, what are the fireable offenses here? One of them would be this
idea of select set of customers. In the product-centric world, you can't have a select
set of customers. In the product centric world, we're so dependent on generating as
much volume as possible, on the selling as much stuff as we can, that we can't really
afford to be selective. It's going to be hard to keep our costs down if we're
selective. So the whole idea of having and emphasizing a select set of customers,
very much runs against the grain of, of many businesses.

Another would be the bottom line on this definition. The idea of really focusing on
maximizing the long-term financial value of certain kinds of customers. In most
situations it's hard for a company to do that. Given the pressures of Wall Street,
and just the conventional ways we look at business. We're so short-term
oriented, we got to the hit the quarterly numbers. Whereas in the customer-centric
world, and going back to many of the examples that I mentioned before, we want to
invest in the right customers. We're willing to, to recommend products and
services that we're not going to make any money off of. For instance, going back to
the IBM example, there was a case where a company was willing to recommend
other products and services. So IBM was actually losing opportunities. But locking
in customers for the long run, being seen as a trusted adviser in some cases can be
worth it, that the long run profits that we can get from customers can be
greater than just trying to get them to buy another thing right now. So again that's
a radically different way of doing business.

Another part, higher up in this definition, is the idea of aligning our research and
development activities around our customers. The way it usually works is, we go to
the R and D people and we say, hey R and D guys, gals, come up with the next block
buster for us. You've been so good at, at coming up with these terrific products and
services. What's the next big thing that you have for us?

But here we're talking about something different. Here we're saying, hey R and D
guys and gals, here are really valuable customers over here. Let's come up with
something for them, something that's going to make them even more locked in,
something that's going to create greater long-run value for them, and something
that's going to help us recruit even more customers like them. R and D folks, come
up with something for them. It's a tot, totally different way of doing business. Now,
if you think about that last point, it's not quite as radical as it might sound because,
after all, what made our valuable customers so valuable? The fact is, they like the
products and services that we develop, and so if we leave it up to the R and D
people, whatever they come up with next our, our customers will probably love it
anyway. But it's the mindset, it's the idea of going to R and D and putting these
valuable customers front and center. It's, it's the way, just changes
the conversation, and perhaps the design, within the organization. That's what
starts making it customer centric. So that's my definition of customer centricity. But
again, those are just words on a page, what we really want to think about is what
this means?

See, there's a lot of companies that might adopt that definition or something else
like it, and then put a big banner on the lunchroom wall for all the employees
saying we are now customer centric. Well, it's not that easy. There's a lot of
challenges in actually bringing this definition and this mindset to life. And so I
want to think now about some of those challenges as well as some of those
opportunities. So we can see in the rest of the slide over here about what customer
centricity really implies. And I want to give you a few examples about that.
So again, thinking about the fact that customer centricity requires us to be forward-
looking. We're looking at not which customers have been valuable, but which
customers will be valuable using the data, the models, the technology that we have
available to us.

So what does that mean? So here's a very specific example. So many companies
have some kind of salesperson of the month incentive and they tend to be
backwards looking. We're going to reward salespeople based on how much stuff they
sold last month or quarter or year. I want it to be forward looking. Think about it
this way If you have that kind of backwards-looking program, you're encouraging,
you're incenting your salespeople to try to close sales that were going to happen
anyway. Like, you know, hey, I've got to get this one done before the month ends so
I can get my bonus. That's not necessarily helping the company in the long run. In
order to have real long-run benefits, you have to be future-looking. So here's the
way a salesperson of the month incentive should work.

I want a company to calculate the lifetime value of each and every customer. And
let's do that at the beginning of the month, or the quarter, or whatever. And then do
it at the end of the month or the quarter. And let's ask ourselves, not, not just how
much stuff we sold to the customer, but how much did we elevate their lifetime
value? So instead of us going to customers who are going to buy things anyway, and
just watch them buy things they were going to buy, let's try to build relationships
with customers.

Maybe they weren't inclined to buy, and you know what? Maybe they didn't, by the
end of the month. Well, we're closer to making this sale. We've impro, we've
improved the relationship. We've lengthened and maybe deepened the
relationship. That we think in the long run we've, we will create much more value
that wouldn't have been there. That's how I want to reward the sales
people. Okay? On future value that they're sowing the seeds to create. Now, that's
risky. That requires some faith. It requires some data. It requires some models. But
if you can do it, and I'm aware of a number of firms that have in a variety of
different businesses, then you're actually much better off. Think about it from the
salesperson's perspective. Instead of just rewarding them based on what they've
done. You want to encourage them to build relationships. You don't want to just
close sales. You want to build long lasting relationships. You want them to invest in
the customers, even if they're not getting anything out of it right away. I mean,
after all, that's what sales people want to do. They want to build and strengthen
relationships.

They don't want to just close sales and move on. So, if you have this kind of forward
looking perspective, not only might it be better your shareholders in the long run,
because of the profits you'll create, but it's even better for the sales people, because
it lets them do what they're really good at. And again, I can point to examples
of companies, I'm, I'm thinking of a particular pharmaceutical company that
changed its sales person incentive program to be forward-looking instead
of backward-looking, and wonderful things happened. The salespeople were
happier, the company made more money, and the salespeople actually looked to the
marketing people to say hey, can you help me identify other good prospects that I
should be going after?

So instead of just trying to, you know, shake down customers, to just make sales
right away, that kind of relationship building is good for absolutely everybody.
These kinds of forward looking incentives work in other ways as well. Think about
airlines, think about MBA students. I spend a lot of time thinking about MBA
students. What happens to our Wharton students when they come to school? So
they were working in industry before, spending a lot of time flying. Now what
happens for the two or so years, that they're at Wharton? Their status with the
airline drops, and then when they start on a new job after graduation, they have to
start all over again. If the airlines were really forward looking, they would recognize
that some of these students are going to take a temporary hit on their travel. But
after they graduate, they're going to be traveling even more, far more than they
ever did before.

So if the airlines were smart, they would go to our students, the day they were
admitted, and so you know what? We're going to put you in the Presidents
Gold Medal Chairman's Red Carpet Club for the next five years. Because we
recognize, based on what we know about you, that you're going to be a really good
customer in the future, and even if you're not going to be a great customer tomorrow
it's worth the investment for us. That's what I'm talking about, and that's what we
don't see a lot of.
Customer centricity requires us to look ahead, figure out who the valuable
customers will be and do things for them to help them recognize that we have their
best interests in mind. That's the kind of investment that I'm looking for. Those are
the kinds of incentive structures that I want and some of the organizational designs
associated with it. That's what customer centricity should be all about.

More Reflections on Customer Centricity

I want to spend a little bit more time thinking about the distinction between those
really focal, those really valuable customers, and the eh, not so valuable ones.
How do we achieve the right balance there? If you take my words a little bit
too literally, I keep focusing on the valuable, valuable, valuable customers. And I
keep saying let's just zoom our whole business around them. If we were to do that,
then we've become very vulnerable. We have all of our eggs in one basket. And what
happens if we're wrong about them?

What happens if there's other customers out there who are fairly valuable? What
happens if something changes to our product or in the marketplace that turns those
really valuable customers against us? So how do we find the right balance?
And so here I, I want to raise an important but subtle point. The idea that, the more
we zoom in on those really focal customers, the more we need the less
valuable customers, in order to have a stable mix.

The metaphor that I like to use here comes from finance. Alright, we want to have
some, some really high flying stocks in our financial portfolio. High risk, high
return. We definitely want to have some of them. Those are going to be where the
real growth comes from. But the day-to-day stability comes from the more
predictable ones, the cash, the bonds, and so on. So in our customer mix, we want to
have that same kind of portfolio approach. We want to have a large number of these
stable, predictable, but potentially not very valuable customers that we're going to
balance off with the high flyer customers, the really focal ones. This is where I come
up with the notion of The Paradox of Customer Centricity.

It goes like this. The more we zoom in on those really valuable customers, the more
we need those other customers around in order to have a stable balance for the
company as a whole. You see, with only a few exceptions, no company can be truly,
purely customer-centered. If you are a private wealth manager and your customer
base consists of four billionaires. Yes, you can be totally customer centric. You know
everything about everyone of them. You can be a trusted advisor to each one of
them. But if you have millions or tens or hundreds of millions of customers, it's a
matter of finding the just right balance between being truly customer centric with
the customer segments that we see as really valuable.
But being products centric with the remaining customers, who aren't as
valuable. Being operationally efficient with them. Now the difference between a
true product centric firm is we're not going to let those so-so customers drive the
business. We're going to continue to focus on the customer-centric ones for
growth. We're going to continue to focus a disproportionate amount of our R&D
activity on those really good customers, coming up with products for them, hoping
and finding ways to make those same products palatable and attractive for the
product-centric customers. But it's a matter of finding that balance. That's the
paradox of customer centricity and one of the challenges for firms is to figure out
how to do that well.

Questions on Customer Centricity

As we wrap up our discussion about what customer centricity is, I just want to offer
a few more reflections or questions, associated with customer centricity. For
instance, a really big one is, who is the customer? Again, is it the end consumer,
who's buying and using the product? If you think about many situations, it's not so
clear. I work with a lot of pharmaceutical firms, when I ask people at those
firms, who are the customer, I'll often get four different answers. Is it the patient?
Is it the physician? Is it the hospital or the medical practice? Is it the insurance
company? You can make an argument, that each one of them is the customer and
depending on who you talk to, at the pharmaceutical firm, you'll get a very strong
argument, one way or another.

So one of the important steps on the road to customer centricity, is getting some
agreement on that question. Agreeing, that one of these entities is the customer, we
care a lot about the others, we need to keep them in mind, as we go through our
planning practices. But, but, one kind of customer matters more than others. Going
back to the Proctor and Gamble example that I mentioned before, there there's a
tremendous amount of clarity on it. Proctor and Gamble knows, that today, their
customer is the retailer.

I wouldn't be surprised, if 20 years from now, Proctor and Gamble said, the
customer is the consumer, but they're moving in an orderly way. So it's important to
first sit down and figure out, who then, the customer could be. Who are all the
different constituents, who could qualify as being the customer? And then having a
healthy discussion, to try to come up with the consensus about, which one we're
going to focus on, and which other ones, might still be on our horizon. We also want
to think about, what are the barriers associated with customer centricity. A few of
them, I've mentioned already, it might be the data. Perhaps we can't get the data, if
you'll be able to individual customer doing things, over time, there might be
regulatory issues. There might be reasons why, we can't treat customers
differently, for instance in the pharmaceutical space. There might be cultural
reasons, it's just impossible for this company, to move from a product centric, to a
customer centric view. If the company's been focused on, developing and
distributing block busters for all of its existence, it's hard all of a sudden, to pivot
around the customers. So there's a number of barriers that, that can be in
place. The ones that I just mentioned are fairly general, they're fairly broad, but
every company is going to have its own challenges.

And before saying, we're going to become customer centric, it's very important to
come up with that list, and think real carefully about, existing barriers and new
ones, that can be arising, to, to do a real careful inventory, of, of, of barriers towards
customer centricity. And of course at the same time, you want to think about the
resources that you could bring in, to address or maybe preempt, some of those
barriers.

Very often, the resources are going to be financial. You're going to have to invest
money, to build the information technology systems and to hire employees, and to
start developing a data infrastructure. Sometimes, they're going to be cultural,
we're going to have to hire the right kind of people, who can think around,
conversion thinking around the customer, instead of diversion thinking around the
product. So, there's a, a number of, of, of different ways that we can start
thinking in advance, about overcoming the barriers, before the, the barriers actually
start impeding our progress.

Another important consideration is competition. It's interesting, that in some cases,

seeing your competitors taking moves toward customer centricity is a very strong
incentive for you to do so. So, for instance, we see a number of industries where
customer centricity has really made great strides, such as, financial services,
such as, hotels and hospitality, where's it's competitive pressures. Hey, they're
moving towards customer centricity, we should be doing it, too. But in many cases,
the best motivations to move towards customer centricity, it's the entire opposite of
that, hey no one's doing it, let's be the first. That would be the example of Hammers
and Tesco.

Sometimes, being the only one doing the customer centric thing, is the way to make
it most successful. So again, you want to think about the ecosystem for your
industry, and is it better for everybody to be customer-centric, is it better for it to be
only you, and that might drive your decision. In the end, the big question is, do you
want to be customer centric or not? Does it make sense for your company? And if not
now, when should you be customer centric? And think about, again, a company like
Proctor and Gamble, Walmart and so on.

Making plans now, for changes that they can make in a few years. And as you
decide, whether to be customer centric, the timing about it, you want to start laying
some of the, the baby steps towards it. So, it might be developing technology
initiatives like, the Scan and Go Program, that I mentioned for Walmart. It might
be an organizational initiative like, My Black Is Beautiful for Proctor and
Gamble. It might be other kinds of experiments that, that a company is going to
run. Let's just set aside, a part of the organization or group of customers. Let's treat
them differently and see if we can. And see if it's more profitable than, than, than
handling them, in the usual product centric manner. Those are the kinds of
decisions, I want to see companies making.

And I think, it’s very important for all companies, to at least be thinking about it, so
they can make an informed decision, about what customer centricity might mean
for them.