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.
- Rohit Deshpande - 'Creating a Market Orientation'
- Slater & Narver - 'Customer-Oriented and Market-Oriented: Let's Not Confuse the Two'
- Bettencourt & Ulwick - The Customer-Centered Innovation Map
- den Ouden & Brankaert - Designing New Ecosystems: The Value Flow Model (Chapter 9 in Design United, ‘Advanced Design Methods for Successful Innovation)
- Phil Simon - ‘The Age of the Platform’