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    Strategy

    Customer Intimacy: Give Customers Exactly What They Need

    Companies who practice Customer Intimacy as their core strategy are neither the most innovative or the lowest cost producers in their industries.  Their approach is to forge and sustain long-term relationships with customers by providing a level of service other suppliers have a hard time matching.

    As with Product Leadership and Operational Excellence, there’s more than one way to implement a strategy of customer intimacy.

    The two primary forms we see Customer Intimacy taking are:

    1. Bespoke (Custom) Products
    2. One-Stop-Shop

    Bespoke Products

    customer intimacy, tailor, custom, made-to-orderA good illustration is a tailor who makes made-to-measure or bespoke suits. Such suits are usually much more expensive than off-the-rack suits you could buy at a department store. It takes more time to make a bespoke suit than to buy off-the-rack.

    If they’re more expensive and take more time to make, then why do some customers purchase a made-to-measure suit?

    By going this route, the customer has much more choice in the suit he or she will purchase. They can choose exactly the quality and pattern of fabric used in the suit. They can have it made in any style they want. They have choice in the accessories such as buttons and pockets they can’t find in off-the-rack suits.  Lastly, it will fit perfectly, because the suit is designed around their body shape and size. As a result, made-to-measure suits will wear for many more years than a standard suit.  In the long term, the bespoke suit offers better value and satisfaction than off-the-rack.

    Here’s a profile of the characteristics of a Bespoke Products strategy:

    PRODUCT.  You offer made-to-order products to give customers exactly what they need or want. It could be from a range of stock components you assemble or it could be a wide range of components you have access to.

    OPERATIONS. Your plant is designed for flexibility to produce a wide range of products based on standard components that can be assembled multiple ways to create unique products

    INNOVATION.  You focus on optimizing the process used for assembly of the product more so than developing new products. You’ll be looking for ways to reduce labor. You’ll keep your eyes open for new components that might fit with what your customers desire.

    PROFITABILITY. You may realize higher profit margins than your competitors because you charge a premium price for making custom products they cannot easily match.

    SELLING. You focus on offering customers the best fit for their needs. Your sales personnel are consultative, not price sellers, and adept at uncovering customer requirements or preferences.

    PEOPLE. Your employees must be adaptable, flexible and multitalented. You hire a mix of seasoned workers and innovative thinkers. The innovators drive transformation within your company to create new products or services that allow you to take on efficient competitors.

    QUALITY. The quality of your products is superior to your competitors’. The materials and/or components are chosen by the customer so they get exactly what they need at the quality they demand.

    YOUR EDGE. Customization. Your competitors can’t match your product or your service within their cost structures.

    The tailor may be a good analogy for this approach to customer intimacy, but here are some others from different industries.

    In the fast food industry, McDonald’s historically has tended to offer standardized products. At Burger King, Harvey’s or Wendy’s, however, you can have your burger dressed the way you like. 

    In the personal computer industry, HP has tended to sell standard model of desktop and laptop computers. Dell, on the other hand, allows its customers to build their own computer from a menu of options such as memory, hard drive capacity, processor etc.

    One-Stop-Shop

    At the turn of the 20th century, housewives spent more time shopping than we do today. They would go to the butcher’s for meat; the greengrocer’s for produce, the baker for bread and a general store for hard goods.

    The introduction of the supermarket dramatically changed the shopping experience by enabling shoppers to purchase a wide range of products from a single store. It was a time saver and, in some cases, they were able to purchase products at lower prices than the individual merchants because the supermarkets had buying power.

    So, how can this principle be applied in business?

    It’s most likely you will have a network of plants – as opposed to a single plant – producing an array of products that complement each other.

    PRODUCT.  You offer a comprehensive range of complementary products that can be used together.

    OPERATIONS. Your plant could be designed for flexibility to produce a wide range of products. More likely, you operate a network of plants that are focused on specific product types that, together, complement each other, enabling you to offer a complete process solution as a single source. These plants may not necessarily be the lowest-cost for their respective products, but they will be competitive with your specialized competitors.

    INNOVATION.  Innovation is driven by your close relationship with your customers, who confide their needs in you and ask for your advice. You may require a new process for one solution or product development for another.

    PROFITABILITY. You may realize higher profit margins than your competitors because your specialized production equipment or plant scale allow you to be the efficient.

    SELLING. You focus on offering customers a complete solution for their needs.  While most customers prefer to have multiple suppliers, you emphasize accountability for the overall performance of your solution, which can expedite resolution of problems.

    PEOPLE. Your employees must be adaptable, flexible and multitalented. You hire a mix of seasoned workers and innovative thinkers. The seasoned workers probably come from the client industry and bring process knowledge and insights gained from such experience. The innovators drive transformation within your company to create new products or services that allow you to take on efficient competitors. In some cases, you may have an employee embedded in your customer’s organization so you are on the leading edge of customer preferences.

    QUALITY. The quality of your products is comparable to your competitors’, but rarely lower than your competitors’

    YOUR EDGE. Product Scope and Accountability. Ultimately, it’s your people who enable this. Their empathy for the customer and commitment to service are probably unmatched by your competitors.

    To go back to our analogy of the tailor, men’s apparel retailers such as Harry Rosen have taken the concept one step further. They offer their customers bespoke tailored suits but they are not just a seller of suits: they are wardrobe consultants. They can help customers accessorize suits with shirts, ties, shoes and belts that complement the suit.

    A classic example of a company using the one-stop-shop strategy is Home Depot.

    In developing its product assortment, I think Home Depot strategically positions itself as a home improvement retailer – not just as a hardware store. You’ll find the usual home improvement products found at a retail hardware store – plumbing and electrical components as well as tools and lumber  – but customer can also purchase a wide variety of lighting products, ceramic tiles, major appliances, and paints.  The scale of Home Depot’s stores is such that they can carry a broader selection in every category than a hardware store could.

    Another facet of Home Depot’s strength is in service.  Home Depot pioneered the concept of having skilled tradespeople working as associates to be able to give customers excellent advice on materials and how to use them to help them in their product selection. Home Depot can help homeowners with renovation projects such as kitchens or bathrooms with professional designers who work directly with the customer. They also offer installation services for appliances, windows, doors – and, yes, kitchens and bathrooms, too – using contractors who are carefully screened to reassure the customer the job will be done right.

    And, if you’re the type who likes to do his own renovations, Home Depot can also support you by renting you professional-grade tools (and provide training, too) to do just about any kind of home improvement project.

    Great products.  Outstanding Selection. Customer service and support.  These are the underpinnings of Home Depot’s success.

     

    If you’d like to read more about Customer Intimacy, we recommend reading this article from the Harvard Business Review.

     

    Next week, we’re going to wrap up with some case studies from my own experience to help illustrate the strategies we’ve discussed, but with more emphasis on how and why the companies I worked for chose those strategies.

    Operational Excellence. More than just lowest-cost.

    Operational Excellence, as a strategy, involves supreme efficiency in product or service delivery.

    The traditional way this strategic option is taught is called “Low Cost Producer”; however, we find this limits thinking too much and we prefer to talk in the broader context of efficiency.

    Operational Excellence, Efficiency, Cost, SpeedThe diagram to the right represents a trinity of trade-offs. A company may produce a product at the lowest cost among its competitors but it may have to compromise on speed or quality to do so. Similarly, a company may focus on fastest order turnaround, but it may require extra costs or lower quality standards to accomplish this consistently.

    Let’s focus in the main axis of efficiency: cost and speed. Along the way, we’ll show how quality is impacted.

    This is an especially important strategy to use in commodity markets, where there is little product differentiation. Cost (price) and Turnaround are key differentiators. Similarly, this is a good fit for distributors, who have little control over the products they market (other than the assortment) but much more control over fulfillment and price.

    1. Low-Cost Producer

    We’re starting off with Low-cost producer because it’s the most familiar way Operational Excellence is used in practice.

    PRODUCT.  You probably have a standardized product with relatively few options so you can source raw materials more cost-effectively.

    OPERATIONS. Your plant usually has specialized production equipment or is built to produce high volumes that allow you to realize economies of scale. You probably have a very limited range of raw materials you work with.

    INNOVATION.  Your focus is on process development more so than product development. You’ll be looking for ways to reduce labor and/or materials.

    PROFITABILITY. You may realize higher profit margins than your competitors because your specialized production equipment or plant scale allow you to be the most efficient.

    SELLING. You focus on value selling. It may not necessarily be by securing business with the lowest price.  It could be that you can demonstrate how your product can be used more cost-effectively overall than your competitors’.  

    PEOPLE. Your employees are dedicated to identifying improvements to your process to maintain your edge over the competition. Engineers and accountants are your key hires.

    QUALITY. The quality of your products is comparable to your competitors’, but rarely lower than your competitors’. You might offer a high quality and a lower quality version to give your customers some degree of choice.

    YOUR EDGE. Price. You have the potential to squeeze out competitors with higher cost structures.

     

    In an industry (restaurants) known for low margins, McDonald’s has been extremely successful with this strategy by offering basic fast-food meals at low prices. They offer a relatively limited selection of standardized products (don’t think of asking for no mustard on your Quarter Pounder) for which they can source ingredients efficiently. They are able to keep costs low by hiring and training inexperienced employees rather than trained cooks. They also rely on few managers, who typically earn higher wages. These staff savings allow the company to offer its foods for bargain prices.

     

    2. The Fastest

     This sub-strategy focuses on being the company that can fulfill a customer’s needs in the shortest time. It’s premised on time being of greater value to some customers than money.

    Without a primary focus on product, this is, in essence, a strategy founded on service. In fact, this is a strategy that lends itself well to services or distributors.  For example, the fastest oil change, the quickest insurance quote or the fastest way to get from A to B.

    PRODUCT.  As with the low cost producer, you may have a standardized product that allows you to fulfill orders from inventory or straight from the line. If you are a service provider, your secret may lie in the technology you use to process information.

    INNOVATION. The source of innovation is likely to be technology. It could be more efficient information systems so you respond faster to customer needs than your competitors. It could be your manufacturing process involves fewer steps.

    PROFITABILITY. You may be able to charge a premium price to some consumers in return for rapid fulfillment and, though you may not have the lowest product cost, your margins are probably above average for your industry.  

    SELLING. Case studies can demonstrate to potential customers how you’re your service is, without giving away any secrets to your competitors. Help customers understand how your fast turnaround can be a source of competitive advantage for them in their businesses. Focus on industries and customers where there frequently are deadlines to be met: your fast turnaround could be the difference between winning and losing a piece of business.  

    PEOPLE. Your employees like winning races. You hire engineers or invest in IT business analysts to simplify processes and eliminate unnecessary steps. 

    QUALITY. Your primary KPIs are probably OTD (On-Time Delivery %), some form of measurement of fulfillment time, and Perfect Order Rates.

    YOUR EDGE: Speed.

    FedEx is a company that promises faster delivery of packages than anyone else. The pioneered overnight next-day delivery – something the postal system was never able to do consistently. FedEx charges more for delivery than the postal service, but by appealing to the generation of instant gratification, customers are more than willing to pay those premiums because FedEx also has an enviable record for reliability.

     

    Next week, we’ll cover Customer Intimacy, providing an overview of what Customer Intimacy is and how it looks in practice.

    Product Leadership

    Product Leadership is all about designing and delivering superior products to customers.

    In some cases, it could be as simple as continually making incremental improvements to a product so it can sustain a claim as being superior to its competitors. A more extreme approach involves leadership via innovation – developing breakthrough or disruptive products.  Note you could just as easily substitute “Service” for product when Service is what you deliver to customers (or clients), not service as in how you deliver the service to the customer.

    Product LeadershipI liked the photo you see at the right because it seemed to give the clearest idea of what product leadership is all about.

    A company that practices Product Leadership as a strategy is known by its customers as a company whose products are one or more of the following:

    • Best-in-Class. They perform better than any competitor’s product.. They may be of the highest quality.
    • The Latest. Their products are considered trend-setters.  They may have innovative features.
    • Most trusted. This probably applies most to Services, which may rely on integrity to be sold.

    1. Best-in-Class

    We’re starting off with Best-in-Class because it’s the easiest and most cost-effective way to get into Product Leadership.

    PRODUCT.  Your product consistently outperforms your competitors’ products on multiple dimensions

    INNOVATION.  Instead of R&D, your focus is on product development: working with existing technologies in new ways.

    PROFITABILITY. The perceived value of your superior performance by customers is significantly greater than the cost of imparting the features into the product.

    SELLING. Demonstrations are the best way to show your customers how much better your product is than your competitors’. 

    PEOPLE. Your employees are dedicated to identifying improvements to your product to maintain its edge over the competition. Problem-solving is probably one skill common to them all.

    YOUR EDGE. Keeping ahead of competitors with a steady stream of product improvements.

    An example of a company that is based on product leadership via having products that are consistently best in class would be Procter & Gamble. Whether it’s laundry detergent (TIDE) or hair care products (HEAD & SHOULDERS), P&G has always sold products that outperform competition.  For that performance, they also charge a premium price.

    The Latest

    Being first with a new product has advantages – especially if your product is a breakthrough and you are, in essence, defining the market. This approach requires more investment and risk than “Best-in-Class”, but can also yield higher profit margins.

    PRODUCT.  You consistently introduce the newest products in your category. You’re first with new features or breakthrough technologies.

    INNOVATION. The Latest approach requires investment in R&D to drive innovation and discover those new features or breakthrough products. You probably support these innovations with patent protection.

    PROFITABILITY. Don’t be afraid to charge a very high price at launch. Pricing will only go down as competitors try to imitate you. For trend setters, money is no object; having the latest thing is everything to them.  Maintain a premium to competitors’ entries at all times.

    SELLING. Show People. Focus on trend setters and early adopters. Demonstrations are a great way to show your customers your new gotta-have product.  Social media can also be a powerful driver when your product launch goes viral.

    PEOPLE. Your employees have inquiring minds.  You hire the best and brightest throughout the organization because scientists don’t have a monopoly on innovation. You probably have a strong marketing team to complement R&D by identify trends and consumer issues your company can address.

    YOUR EDGE: Constant innovation.

    A good example of a company focused on leadership by being first is Apple. The iPod was a breakthrough in making music portable. Similarly, iTunes was the first (legal) way people could download music. The iPad made computers truly portable.

    Most Trusted

    This is not an approach new companies can take. It takes time to cultivate the trust of your customers.

    I think this approach applies well to mature categories where innovation and new products are not seen often.

    PRODUCT. Your product is probably known for quality and reliability more than innovation and your leadership is based on the quality of your products.

    INNOVATION. As with Best-in-Class, your focus will be more on product development – incremental improvements, but always thoroughly tested before being made available to customers. Innovation could also focus on the operations side to develop improved ways of manufacturing to guarantee better quality.

    PROFITABILITY. Don’t be afraid to charge a very high price at launch. Pricing will only go down as competitors try to imitate you. For trend setters, money is no object; having the latest thing is everything to them.  Maintain a premium to competitors’ entries at all times.

    SELLING. Remind people about your reputation for quality. Position your product as a safe purchase because your product is more reliable than your competitors’. Showing off awards for product quality can help.

    PEOPLE. Your employees reflect your trustworthiness in the market. They’re not the best nor the brightest, but they take pride in their work.

    YOUR EDGE: Your reputation. Being around longer than your competitors. Very few complaints.

    For a variety of reasons, I’m using IBM as an example of a company with product leadership on the basis of being a trusted brand. They weren’t seen as the innovators in computer hardware (that was Apple). They’ve moved on from focusing on products to being a service provider.  They certainly are not the lowest-priced provider of software services, but they are one of the most trusted, In the world of information technology it’s said, “No one ever got fired for buying IBM”.

     

    There’s plenty more that could be said about product leadership.  If you’d like to learn more, a good book to read is “The Discipline of Market Leaders” by Michael Treacy and Fred Wiersema.

     

    Next week, we’ll introduce you to Operational Excellence., providing an overview of what Operational Excellence is and how it looks in practice.

     

     

     

    Strategy: It’s About Making Choices

    I find most people over-think strategy.  They feel it’s complex, full of buzzwords, too theoretical. For smaller businesses, some think strategy is something for large corporations who can afford to have strategic planning departments.
    Some companies spend their time crafting mission statements.  It’s not that mission statements are a bad idea. A good mission statement will be a way of expressing the company’s underlying strategy. When the mission statement is developed without being founded on a strategy, it usually comes out vague, wishy-washy and meaningless to most employees and customers.

    Strategy is really all about making choices and it’s not as complex as people think. In truth, there are only 3 basic strategies to choose from.  

    Where most people go wrong is not sticking to a single strategy or not aligning the other elements of their business plan around a single strategic principle. Another trap is focusing on tactics rather than strategy. Your tactics may be sending mixed messages to your customers because they are drawn from multiple types of strategy instead of consistently following a single strategic direction.

    3 Basic Strategies, Strategy is about choicesMichael Porter has an interesting way of phrasing it: “Strategy is what allows you to say “no” to the things you shouldn’t do.”
    We’re going to discuss the basics of strategy over the course of the next few weeks.  What we promise is to keep it simple. No buzzwords. No charts or diagrams.
     
    A colleague of mine recently did a presentation on strategy for a business networking group and I liked the way he structured it.  He used the analogy of a triathlon: three different sports – cycling, swimming and running. Winning triathletes don’t win because they’re the best at all three sports.  They win because they’re tops in one sport and just good at the other two.
    In a similar way,  business can be broken down into 3 strategic elements: Product (or Service), Operations and Customer Focus.

    A concept I learned from some of the sales people who worked for me –  the 3-legged stool – shows how simple it can be to apply strategic principles. They offer the customer a choice of three things: Product, Price and Service.  The customer can only have two of those three things, and the third they have to concede to the sales person.  For example, if a customer wants great products and excellent service, he will have to accept that he will have to pay a premium for these.  If it’s price and service, the customer will have to make some concessions product quality or features.

     At the overall business level, the three strategic directions a company can take are:
    1. Product Leadership – sometimes known as innovation
    2. Operational Excellence – sometimes referred to as “low-cost producer”
    3. Customer Intimacy
    Next week, we’ll discuss what Product Leadership means and how it can be applied in your business.  Don’t feel disappointed if you don’t think Product Leadership is right for your company. It’s OK to not follow that path. It just means you will have to make a choice between the other two types of strategy.