Customer-centric confusion: Why customer focus is not enough to succeed

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There is a popular myth that being customer-oriented is the secret of success in business. Sadly, although being customer-focused is essential for success, it is not enough to guarantee it. Success requires a company to focus on a range of actors in addition to customers, to understand what each one values and to organise the business ecosystem to ensure that each one gets enough of what they value to be satisfied. Any company that does this really well, like Google, Facebook and Apple, can dominate their markets.

Focusing solely on customers is not enough

There has been much discussion of the advantages and disadvantages of being customer-focused over the past 25 years. For example, the Marketing Science Institute sponsored a programme of research into market-orientation in the late 80s/early 90s which looked at customer focus and its impact on company profitability. The research was carried out by a number of independent academics at top US universities. To no-one's real surprise, they found that companies that focused solely on customers - at the expense of other actors in the business ecosystem - had significantly lower profitability and business performance than companies that took a more balanced approach. It showed that although creating satisfied customers are a critical for a company to be successful, they are but one of a number of actors whose needs sometimes require difficult trade-offs for a company to optimise profitability.

The MSI programme resulted in dozens of academic papers and and culminated in an excellent book by Rohit Deshpande on 'Creating a Market Orientation'.

It’s the customer’s job, stupid!

One of the earlier findings that came out of the MSI research was that companies had different definitions of a customer-orientation. As Slater & Narver pointed out in a paper on 'Customer-Oriented and Market-Oriented: Let's Not Confuse the Two' some companies see being customer-oriented as meeting customers' expressed needs in the short-term. Others see being market-oriented as meeting customers' latent or hidden needs in the longer-term. This is essentially the difference between being driven by customers vs. driving the market.

Some ten years later this distinction – the focus on understanding customers' latent needs and using the insights generated to create market-driving innovations - was expanded, separately by Clay Christensen and Tony Ulwick, to became the 'jobs-based' approach to innovation. The jobs-based approach gathers ethnographic insights into the different types of customer jobs - functional jobs concerned with getting things done, emotional ones concerned with how they feel and social jobs concerned with how they are perceived by others - and uses them as the foundation for targeted innovation.

The jobs based approach succeeds in the market up to 80% of the time, a vast improvement over the 80% failure rate of traditional idea-driven invention. As a result, the jobs-based approach has rapidly become the dominant model in contemporary product, service and experience innovation. 

Follow the flow of value

One of the reasons the jobs-based approach to innovation is so successful is it makes explicit exactly what customers do and do not value. Armed with this knowledge a company can innovate products, services and capabilities to give the customer more of what they want, whilst getting more of what the company wants too. Value needs to flow between the different actors if both are to be successful. The same principle applies to all the different actors in a business ecosystem; a company needs to understand how value flows between the different actors over time.

Elke den Ouden has developed a powerful visual approach to mapping value flows that enables a company to identify the different actors in its business ecosystem, the interactions they have together over the customer lifecycle and how value flows between them during each interaction. It has been used by Phillips Lighting to design innovative new lighting services that provide a significantly better standard of living for dementia patients.

The economy is at a turning point. It is starting to migrate away from single-sided markets dominated by physical retailers providing a large range of products and services to captive customers, towards multi-sided markets enabled by software platforms that allow thousands of retailers to provide an even bigger range of products, services and experiences to millions of customers. As Phil Simon shows in his excellent book, ‘The Age of the Platform’, household names like Safeway, Vodafone and Dell are being disrupted by platform-based companies like Google, Facebook and Apple.

The key to success in these platform-based companies is not only customer focus, but also to focus on all the other actors in addition to customers, to understand what each one values and to organise the business ecosystem to ensure that each one gets enough of what they value to be satisfied. Customer focus is not enough to succeed. It probably never was!

Graham Hill is a partner at Optima Partners.

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18th Feb 2014 22:10

80% Success vs 80% Failure

Nile HQ's Insight & Service Design Principal, Phil Goad, asked for the source of "The jobs based approach succeeds in the market up to 80% of the time, a vast improvement over the 80% failure rate of traditional idea-driven invention". 

The 80% success and 80% failure rate figures comes from Outcome-driven Innovation consultancy Strategyn's 'Innovation Track Record Study' (http://www.strategyn.at/sites/default/files/uploads/TrackRecord_07.pdf) which actually quotes an 86% success rate for the jobs-based approach against an industry average of 17% (= 83% failure rate).

Goldenberg et al in a paper on 'The Idea Itself and the Circumstances of its Emergence for New Product Success (http://pluto.huji.ac.il/~msgolden/home_page/pdf/idea_itself.pdf) show that up to 95% success rate in innovation can be achieved by responding quickly to customer needs. This is almost identical to the jobs-based approach.

The idea-driven invention failure rate figures quoted by Prof Frank Piller during his 'Building Customer Centric Organisations' course at IE B-School vary from 55% for heavy industry to 95% for cosmetics.

Graham Hill
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19th Feb 2014 09:29

Really interesting post. So do platform-based companies like Google and Facebook have an inherent advantage over other businesses and if so how can more traditional businesses adopt some of the charateristics of platform-based ones so that they can compete? I am not so sure that businesses that have a traditional legacy can compete with the likes of Google Facebook if the scenario you present is true!

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19th Feb 2014 15:51

Hi Tibor

Thanks for your comment.

Although many of the most successful platform-based companies that Phil Simon describes in his book, 'The Age of the Platform' are new-fangled Internet companies, not all are. Many companies, e.g. Visa, American Airlines and Covisint, provided multi-sided markets over their own proprietary platforms a long time before the Internet. Evans & Schmalensee provide many examples of pre-Internet multi-sided markets in their book 'The Catalyst Code' (http://www.catalystcode.com/theconversation/blog/).

One of the ways to compete against platform-based companies is to join forces with other like-minded companies in a collaborative network. Snow et al describe how collaborative communities of companies function in a paper on ‘Organising Continuous Product Development and Commercialisation: The Collaborative Community of Firms Model’ (http://onlinelibrary.wiley.com/doi/10.1111/j.1540-5885.2010.00777.x/abstract). As Snow points out, this new structure has evolved to provide dynamic innovation capabilities in the face of increasingly competitive markets where active collaboration is required to compete.

There is more than one way to compete. Paradoxically, the Internet provides legacy companies with new ways to compete, using the Internet, with platform-based companies like Google, Facebook and Apple.  

Graham Hill

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26th Feb 2014 20:25

Response from John Coldwell from the MyCustomer.com LinkedIn Group

Hello Graham,

You conclude your article by saying "The key to success in these platform-based companies is not only customer focus, but also to focus on all the other actors."

I may be being a bit thick here, but I've re-read the piece twice and I can't see any mention of who these other actors might be [other than customers].

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26th Feb 2014 20:26

Hi John

Thanks for your comment.

As I mentioned in the original blog post, Elke den Ouden has developed a powerful visual approach to mapping value flows that enables a company to identify the different actors in its business ecosystem, the interactions they have together over the customer lifecycle and how value flows between them during each interaction. 

If you click through the link and go to Chapter 9 on page 203, you will see that there are a number of different 'actors' in the two Phillips value networks Prof den Ouden illustrates.  Taking the simpler, B2B solution (the left-hand value network) as an example, in addition to the Patient (customer), other actors include: Patient Association, Pharmacy, Ambulant Care, Nursing Home, Serviced Apartments, Housing Corporation, Service Provider, Lighting Manufacturer and Controls Manufacturer. Value in the form of: Goods & Services, Money & Credits, Information and Intangible Value, flows between the different actors within the value network.

Understanding what customers (and other actors) value and how it flows between them is critical to developing better service systems, where each of the actors gets enough of the value they want to make the system as a whole viable.

I hope that explanation helps. Do let me know if you need any further explanation or examples.

Graham Hill

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26th Feb 2014 20:54

Response from Peter Massey from the MyCustomer.com LinkedIn Group

Love the jobs based approach though not heard it called that before. Nest is my favourite example

 

 

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27th Feb 2014 11:19

Hi Peter

Thanks for your comment.

The customer jobs-to-be-done approach to innovation pioneered by Clay Christensen and Tony Ulwick is now widely used by private and public organisations. By using an ethnographic approach to understanding customer needs, capturing them in a structured 'jobs & outcomes' language and validating them using large-scale surveys, they provide a much better foundation for outcome-driven innovation than traditional idea-diven approaches to invention do. The results speak for themselves with Strategyn reporting an 80% success rate for innovation vs. the 55-95% failure rate widely attributed to traditional invention.

Although the jobs-based approach to innovation was originally developed for product innovation, it has since been extended to service innovation by Lance Bettencourt at Service 360 Partners (see Bettencourt, 'Service Innovation' for further details). And there is no need to stop there. Many companies are placing a growing emphasis on not just offering improved products and services to customers, but also on 'servitizing' them to provide customers with outcomes. Why buy a product and have to go through all the hassle of implementing and operating it, when you can buy it as a guaranteed outcome and leave the provider with all the hassle instead? A [email protected] article on ‘Power by the Hour: Can Paying for Performance Redefine How Products are Sold and Serviced?’ describes how Rolls Royce offers its aero-engines not as products for sale or as services for lease, but as ‘Power-by-the-Hour’ outcomes; airline customers only pay when the engines are in use powering their planes full of fare-paying passengers through the sky.

If you are interested in servitization I can highly recommend the forthcoming Spring Servitization Conference to be held at Aston University in May. I attended the conference last year and learned a lot from companies like Xerox, BAe Systems and Alstom who discussed their servitization activities there.

Graham Hill

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03rd Mar 2014 15:15

A problem that we see often is that the structure of the CRM system limits the ability of organisations to change and provide service to customers in a way that focuses on the changing outcome which the customer is looking for. The best systems are reviewed regularly from the ground up so that 'servitising' can be achieved.

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08th Mar 2014 15:36

I agree with Graham on the need to cast the net wider.  My research at Ovum has identified 8 core attributes which have to be harnessed if firms are to be persistently relevant to customers.

These are: 1: Visionary leadership which focuses the firm on its customers and provides the overall sense of purpose, 2: engaged workforce that buys into the purpose and is empowered and supported, 3: highly collaborative - across and beyond the organisation (customers, customer communities, partners and the ecosystem as Graham says), 4: great sensing capabilities to sense what is going on in the customer and competitor domain as well as the usual operational intelligence,(few organisations have got this right yet), 5: great customer experience across any and all channels the customer prefers to use (most organisations fail here), 6: continuous innovation in the value it creates and delivers ( most organisations fail here too), 7: connected and frictionless processes across its value chain/network, 8: an adaptive enterprise architecture that allows for business model adaptation as well as grafting on new technologies where relevant .

Leadership must be aware of all 8 and orchestrate and enable them. Firm's that get this right are what I call customer-adaptive. This is what CRM was meant to be before it got hijacked by the software industry.

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