Courage to Build a Customer-Focused Organization

Something’s eating at the heart of old-school western business, and it isn’t just a hangover from the tough economy or recent financial sector excesses. Not that long ago, iconic brands were faltering, commoditization was rampant, margins were plummeting, planning horizons got stuck quarter-to-quarter, suppliers and distribution partners were bickering, and opportunities for growth were increasingly being sought in greener pastures overseas. But like children swept up in a messy divorce, it’s the ultimate consumer’s buying experience that got caught in the middle.

You see, now that the dust has settling on the great 21^st Century economic malaise, the basic game is still be the same. Winners will still be those who delight end customers by breaking with the pack and offering them distinctly better experiences than others are. But in today’s hyper-connected world, providing better experience alternatives means making a difference in more than just your product’s features and its price.  It involves re-thinking every aspect of how your end customers learn about, find, evaluate, choose, buy, own, use, update, and share, maybe even talk about, your product, service, or solution. This is distribution.

More than ever, what customers say they crave most are better buying and ownership experiences in the distribution channels available to them, not lower prices or bigger selections. And this fundamental dynamic holds true whether your end customer is in a mature, western market or a growing emerging one. Good times or bad, customers choosing among options will always discriminate on a complex range of variables, and only a certain segment makes their decision on the single dimension of price (unless all the options are identical!). Even in tough economic times, consumers make careful trade-offs around dimensions like durability, safety, usability, personalization, returnability, installation and much more when comparing prices. This is as true in Iowa as it is in Beijing, Mumbai and Rio.

And dramatic advances in internet and mobility technology mean that new improvements to your end customers’ experiences are being pushed further and further downstream into your distribution activities and partners. The net result is that all these touch point experiences will come together to either reinforce or destroy your customer’s experience with, and therefore perceptions of, your brand. And your future.

What customers say they crave, then, are more authentic interactions at every touch point in the experience-creating channels for your offering. They  want to be treated as individuals, not abstract members of segmentation schemes. Future innovations in distribution channel experiences simply can’t be described in the arcane language of ‘customer satisfaction’ research and ‘buyer insight’ studies.

Creating competitive advantage through your distribution channels comes from looking harder and more creatively at white spaces in your industry. White spaces in distribution, once spotted, may seem hard to reach or dangerous to explore. Some members of your management team will want to turn away from such daunting prospects, calling their retreat a “return to fundamentals.” The familiar may indeed be more comfortable (i.e., “doable”), but treading on old ground will typically do little to help your company change the actual experiences your customers have downstream in your channels.

This is where Frans Johansson’s thinking becomes helpful. Johansson, author of the fascinating book The Medici Effect: What Elephants and Epidemics Can Teach Us About Innovation, synthesizes medical, mathematical, and business research into a fresh perspective on converting natural fears of white space unknowns into managerial terms. He views white space as opportunities that arise in the margins, or the unknown, where two or more industry players or marketplace activities intersect.

Using this perspective, you can start to see your supply chains and your distribution channels as simply a stapling together of one industry intersection or activity after another, all the way from components supplier to assembler to wholesaler to retailer, and with all sorts of other ancillary industries such as logistics added in at different points along the way. Often, managers in under-performing chains or channels experiencing intense cost reduction pressures, inadvertently start regarding these intersects as necessary evils - the inefficiencies and loss of control that a company must endure in order to avoid doing all the customer experience work itself. But more powerful and enduring gains in the marketplace can be made if instead you view every one of these intersects as a white space opportunity, and see that orchestrating all of them in fundamentally new ways is the biggest opportunity of all.

Classic prospect theory teaches us that, without even realizing it, managers often take bigger risks in relatively safe environments than they are willing to take in hazardous ones. It is not so much that managers cannot live with uncertainty; the real problem is that they and their organizations fear losing. In the relative comfort of one’s industry, it is easy to do badly but it is hard to lose entirely. There may be some off years, some bad quarters, and the odd product failures, but the chances of going out of business are fairly low in the medium term. The long term, as they say, is another story. And the day of reckoning may be here for many companies.

That’s why Johansson says it takes “intersectional courage” to work the white spaces between industries. Managers fear the unknown risks involved in tackling new space. Ironically, however, taking the plunge may be less risky for your company than continuing to operate in the old corporate confines of tried-and-true processes. Staying afloat in a tough competitive environment is not exactly risk-free. But for a variety of reasons, it can be hard for managers to make an accurate comparison between white space and normal business risks.

But here’s what you will likely find most frustrating on your journey: those whitespaces are more than likely hiding right out in the open. What makes such golden nuggets so hard to see is the dense fog of conventional wisdom and constraints-based thinking that the old generals in your business have long espoused, and which you are struggling to break free.  As new leaders, you must stop fighting their last war!

Of course, this is not a journey for the timid, the faint of heart, or the risk-averse. But as one senior leader recently said to me – “What’s our alternative? Follow the lemmings over the cliff?”. Maybe Woody Allen was right that ‘just showing up is half the game”. But what about the other half? And what about winning?

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

CSA Distribution Audits Fueling Growth

Comparing the distribution channel pressures of today with those of even ten years ago reveals a striking decline of distinctive marketplace differentiation. These changes represent a significant opportunity for companies that regularly re-assess whether they are doing everything they can to guide, manage and motivate their channel partners to achieve new levels of growth and profitability.

·   How are end-customer channel needs in your marketplace evolving and how do they create barriers to you and your distribution partners achieving your growth objectives?

·   What gaps exist between your channel partners’ current business models and the economics of emerging customer channel needs in your fast-changing industry?

·   How motivated and prepared are your channel partners to respond effectively and efficiently to industry and competitive performance pressures in their local markets?

·   Are your channel management and incentive programs as aligned as they need to be with the demands your channel partners are facing in today’s fast-changing markets?

Approach. The CSA Channel Opportunity Audit is an independent and systematic diagnosis of your company’s distribution channel opportunities and threats, and is composed of four key elements of diagnosis:

Our Channel Opportunity Audit approach has been used successfully with hundreds of companies over the past twenty five years and focuses on one dominant goal:

Surface tangible ways to work with channel partners to differentiate your products and services with end-customers and accelerate market share growth.

Process. The CSA Channel Opportunity Audit is typically executed in four to five weeks of elapsed time in your marketplace, and proceeds systematically through a series of detailed assessment and analysis steps:

Step 1:  Internal Management Interviews. A highly-seasoned distribution channel expert from CSA will interview senior thought leaders and line managers within your organization to surface critical insights and beliefs about current distribution channel opportunities and threats.

Step 2:  External Market Discussions. CSA will conduct one-on-one working discussions with end-customers and distribution channels in your marketplace to surface their insights and observations about how changing industry and customer dynamics are affecting their current business models and economics.

Step 3:   Synthesis and Diagnosis. A Channel Opportunity Audit report will be provided to you that outlines how your company is positioned to address pressing channel threats and opportunities.

Step 4:     Private Facilitated Workshop. You and your senior leadership colleagues will receive an advance briefing packet and participate in an executive-level Channel Opportunity offsite facilitated by management advisor and educator Richard E. Wilson, a global expert on distribution channel strategy, execution and management.

Benefits. The CSA Channel Opportunity Audit is specifically designed to be a fast-paced and efficient way for you to build stronger readiness for action with your distribution system.

 

Richard E. Wilson is managing director of the advisory firm Chicago Strategy Associates, and a former clinical professor of marketing at the Kellogg School of Management and Director of the school’s Center for Global Marketing Practice. rick@chicagostrategy.com

Cutting the Commodity Mindset Chains

Upstream parts and equipment suppliers often tell me they feel like the tail on the dog. Most of the market attention goes to the front end of the beast, the final solution sellers. Whether it’s jumbo jets or oil rigs on down to stoves or mobile phones, it’s the final brand product that ultimately designs the product, chooses component suppliers, and gets the order. Boeing, Saudi Aramco, Whirlpool, Nokia. They hold the high cards, and - here's the rub for upstream players - they grab most of the margin as well.

But not always. A recent Economist article has a great example of a Taiwanese microchip manufacturer that suddenly is growing like gangbusters – because it chose to extend its value beyond simply making and providing commodity components such as chips.

MediaTek looked at the manufacturing and design problems confronting its downstream cell phone customers on China’s mainland that were limiting their ability to meet end customer demand. MediaTek then figured out what it could do to help solve those problems better than other component suppliers, while itself avoiding onerous investments in huge new chip facilities. In the process it would remake itself into a high-value-added “fabless” supplier. As The Economist describes it:

In 2004 MediaTek expanded into higher-value territory by making the bundles of chips, or “chipsets”, on which mobile phones rely. Being a latecomer, the firm opted to sell processor-, radio- and other sorts of chips together with the necessary software. This “total solution” makes it much easier for phone makers to produce handsets.

MediaTek’s customers were Chinese shops trying to bootstrap their way into the modern economy with no spare cash. Imagine how their owners felt when Mediatek came along to make this possible:

A handset firm there used to need 20m yuan ($2.9m), 100 engineers and at least nine months to bring a product to market. Now 500,000 yuan, ten engineers and three months will do. As a result, Chinese handset-makers now number in the hundreds.

These customers felt turbocharged, for sure. And the same for Mediatek. In five years, its annual revenues have zoomed from $1.2 billion to $2.9 billion. But The Economist’s excellent coverage skipped over one essential element in the formula:

Rising from a product supplier to a “platform supplier” takes more than new design skills and convincing peer suppliers of other components to tag along behind you. It takes convincing your downstream end-solution (OE) customers they need this service. Fact is, even when they need it badly (and I’ve seen cases of this), they don’t necessarily recognize what they’re missing. You have to help them see the light, and the scale of their opportunity. You have to sell them not just a platform but a service. In MediaTek’s case, it’s: “We can help you get to market three times faster, and with only a tenth as may engineers.”

That’s not just a commodity component. That’s value!

And What an Outlier It is

Forbes.com wrote on its website about a contemporary phenomenon that many new generation Marketers recognize as the dawn of a new age. Eyes are opening to the reality that sustainable (and profitable!) growth strategy is first and foremost rooted in tangible, meaningful, and demonstrable differenitation - as determined by the end customer.

Here's an excerpt of the Forbes.com piece (authored by Rich Karlgaard):

"Apple is now 33 years old, but it seems like a perpetually new company. Jim Cramer so loves Apple, he said Tuesday night Apple's stock was headed to $300. I have no clue where Apple's stock is headed, but I do think its blowout performance since the iPod launch in 2001 has everything do to with Apple's keen sense of cultural shifts, which keeps the company at the edge of new. The genius of Steve Jobs has always been to marry his good-enough layman's understanding of technology with his world-class design eye and his preternatural understanding of cultural moods.

Apple always seems one step ahead even when it comes from behind. Apple didn't invent the personal computer, but it made the computer personal. It didn't invent the MP3 player, but the iPod put it all together. Smart phones existed before the iPhone. The forthcoming Apple iPad (or whatever it is called) will stand on the shoulders of the Amazon Kindle and maybe crush the Kindle. That's my speculation as a rabid Kindle lover.

The lesson of Apple is to think deeply (or differently) about what touches customers in an enduring way. Apple proves that great design and product coherence--stuff that looks cool, works well, and thus justifies higher prices--can work even in a recession.

Apple is a secular company with a religious following. It understands that people want transcendence and hope, especially during a difficult period. Apple's products, to those who like them--myself, I love my MacBook Pro but still prefer a BlackBerry to the iPhone--have a quality that reaches beyond today's drudgery and reminds us of what is possible. Movies did that in the 1930s. Apple is doing that now. Which is why Apple is an outlier."

Legacy brand leaders: is your company stepping up?

And Don't Forget The Channels Part

Manitowoc, the maker of huge cranes used in construction projects, had announced a (not surprising) big sales and earnings drop (Wall Street Journal, March 31), and their stock has sunk like a stone. We all know that new commercial construction was on the skids, but the Manitowoc news was still sad to hear. Especially since they’ve evidently had already done what you’re supposed to: squeeze out production efficiencies, stretch working capital, go back to the table with lenders. Keep the ship afloat.

Is there anything left that they could do to get sales growth under way again? I think there is. While I know nothing about what Manitowoc is actually trying on its marketing strategy front, there are a couple things they’d do well to explore, if they haven’t already. And we’re not talking bank-breaker stuff. Early stage exploration costs almost nothing.

First, since sales are way down in European markets, this is a good time for Manitowoc to revisit its foreign distribution partners and their business models. I don’t mean raise their prices, or insist they load up on inventory. I mean revisit and reinvent everybody’s activities down at a granular level, in search of new value-creating levers. What’s effective, what isn’t? What will help end customers most, what doesn’t add much value? Who’s good at what? How should we reapportion our division of labor?

When everybody’s desperate to reignite sales, they’re going to be more cooperative.

Second, look for ways that Manitowoc can reposition itself from a product manufacturer to a solutions provider. Cranes are a focal point in any large-scale construction process. Schedules get planned around them, very carefully. Manitowoc may be able to get more mileage out of that centrality than it has exploited thus far. Why not be sure there isn’t a way to sell the crane as the anchor to a larger solution that pulls together other equipment, other contractors, and makes portions of the entire construction process run more smoothly.

Even a cash-strapped company can afford to investigate new, innovative third-party distribution possibilities. And now isn’t a bad time. In fact, it’s an excellent time.

Why Verizon is Down 30%

Verizon’s FiOS strategy of taking super-fast fiber optic internet access to consumers' homes held great promise when it was unveiled. Internally at the company it was held up as the path to renewed marketplace dominance. It was going to be the platform Verizon would use to fight back AT&T and T-Mobile (remember them?) on the old carrier war front, and Apple, Nokia, Samsung, Dell, HP, Microsoft, and others on the new mobility solutions front. The company’s top-most executives, including its CEO, unabashedly trumpeted the super-fast, broadband service as savior of the old guard's future.

Things don’t seem to be playing out, and the question on the minds of next-gen Leaders at Verizon, as well as interested on-lookers, is why and what can be done about it. They might want to start by digging in with a more critical eye to that distant image, their end consumers.

Only a few short years ago I sat amazed as the head of corporate strategy at a top wireless player wagged a finger and exclaimed: “I sense you have a handset bias, but our data shows conclusively that consumers care first and foremost about their choice of telecommunications service provider, and only then about different hardware options”. As quaint and nostalgic as that view may sound, It illustrates well a pandemic problem in many of today’s long-established businesses.

It is extremely hard for died-in-the-wool veterans in any industry to give up out-dated notions of how their customers think and how well-suited their companies’ old business models are to today’s world. Certainly AT&T’s near total dependence on Apple’s innovative products must rub salt on the wound, even as it generates the core fear that drives such resistance to hearing important new truth.

In a world where customers are influenced most by exciting, innovative, often expensive, downstream hardware, applications, and retail channels, won’t the telecommunications carriers become more and more commoditized back-end providers? For Verizon, can they really build a sustainable, margin-rich growth platform by simply wiring consumers' homes with faster and faster broadband? What really sits behind Apple's, and AT&T's through coat tails, success? [Hint: think about how the iphone creates - relative to other companies' offerings in the field - actual, tangible, demonstrable shifts in end consumers' lives and mobility experiences. What used to be called "value" added before value became equated with lowest price].

At the end of the day, lost legacy players will always encounter forks on the road to reinvention, growth, differentiation, and profitability. But unless they have the luxury of monopoly, taking the path that refuses to acknowledge the voice of the customer is never the best decision.

DowJones Acknowledges Innovation Sells

DowJones bloggers John Shipman and Paul Vigna outline in a recent news piece on consumer marketplace trends what they consider breaking news: consumer spending isn’t dead, it’s just becoming more selective (“Consumers Do Spend on innovative Goods”, WSJ, Oct. 27, 2009). My deepest hope is that today’s marketers recognize both the truth and the folly of their view.

First the truth. Consumers do indeed discriminate between alternatives that are made available to them, and they do indeed lean towards solutions that stand apart in providing the best outcome to their personal needs and preferences.

But here’s the folly: they always have. It’s just that we are coming out of a dark age of corporate strategy that has been surreally and myopically focused on low cost, low price, scaled-driven competition. Unfortunately, this has also meant a dearth of undifferentiated offerings. And too often the most “me too” has been coming from leading legacy brands. It’s always led to the same: when all else looks essentially the same, more and more consumers make their choice decision on price. Even highly discriminating ones.

Nonetheless, if Shipman and Vigna’s article is meant to herald a return to the lost wisdom of Drucker, Kottler, Stern, and others then bring it on. A new era of market(ing)-led growth strategy is indeed dawning, and a new generation of business leaders is abandoning yesterday’s spreadsheet crutch and fantastical pro formas to dig in to the hard work of differentiation.

It can’t happen fast enough.

Microsoft Escalates Vertical Integration Wars

The WSJ reported today that Microsoft has decided to enter the rapidly escalating battle over how the consumer electronics market space is being fundamentally restructured (Microsoft Seeks to Take a Bite Out of Apple With New Stores).

Unlike Gateway's anemic efforts at forward integration into retail (1997-2004), I anticipate Microsoft's moves, along with those of other leading players, will dramatically reshape the landscape. Those moves include Best Buy's backward integration in private label (see: In Hard Times, Is Best Buy’s Best Good Enough? ), Wal-Mart's and wireless service reseller Tracfone's entry into mass market electronics (see: Wal-Mart Wireless Expands), Samsung's designs on the content and apps end of digital retail (see: Samsung Seeks Some iPhone Magic ) and Amazon's rabid appetite to dominate the conventional 'click and buy' internet merchant space (see: Can Amazon Be the Wal-Mart of the Web?).

But back to Microsoft's forward integration into consumer electronics retailing: here's the bottom line perspective from the company:

"Our customers have told us they want more choice, more value and better service, and that's what we'll deliver through our Microsoft Stores" David Porter, corporate vice president . Microsoft retail stores, WSJ, 10/15/09

This is only the latest entry of another major player in what is shaping up to be a battle of the titans. Noisy dithering by wall street analysts, journalists, and other pundits over who's making the most aggressive price reductions, who's sourcing smartest, who's ramping up their M&A engines for greater scale and efficiency, and who's "getting the value message from consumer" is simply obscuring a more fundamental and ultimately dramatic business model restructuting hidden in plain sight.

So, buckle up - it's going to become a (much) bumpier ride competing in the consumer electronics space! (due credit to Bette)

Healthcare Distribution - A Must-Read

In my twenty-five years of work on distribution strategy, I have never read a more fascinating analysis of distribution system challenges and opportunities as the one recently published by Dr.Atul Gawande, a surgeon, writer, and a staff member of Brigham and Women's Hospital, the Dana Farber Cancer Institute, and the New Yorker magazine.

If you have not yet read his piece in The New Yorker, I strongly encourage you to take the time. It's an absolute must-read analysis for anyone interested in designing and managing higher-performing, lower-cost complex distribution systems.

Enjoy!

New-Style Marketing Efficiency

In an interview Sunday with the New York Times, Steve Balmer registered his impatience with management presentations that “take the winding road” instead of declaring their message upfront and letting the group debate it.

Mr. Balmer is well known to be a no-wastage guy when it comes to time. And now that the economy is threatening Microsoft’s  thirty straight years of growth, he wants to push that spirit of compression deeper. Microsoft has to shift to a culture of efficiency. “Organizations need to do more with less.”

I have a suggestion for increasing efficiency and effectiveness together. Possibly Microsoft does it already, but not if it functions like most large companies.

In my area, marketing and distribution channels, it’s customary to precede initiatives by testing the waters with large, comprehensive quantitative market research and strategy initiatives. It’s an expensive and slow way to start. Worse, though, it almost always kills momentum, as people question methodological purity, insist on greater accuracy, and quibble about segment definitions.  A penchant for exactitude often snuffs out action.

Companies get off the dime faster and cheaper with small-scale actionable efforts done internally. The nimble ones use facilitator content expertise to pull insights out of a handful of conversations they hold with well-placed managers around their company and representing its partners. In business-to-business settings, they use the same extended discussion format to understand key customers’ chief business issues and opportunities. In consumer businesses, they may conduct a few customer focus groups. Usually they find that ninety percent of what they need to know – and almost always the critical ninety percent – can be pulled out of what people simply talk about when you listen and respond intelligently.

I don’t mean, these companies just do what customers tell them to do or fix what customers are dissatisfied with. Instead, smart listeners pick up on clues in their subjects’ remarks. What are their aspirations? What’s getting in their way? Help them imagine the unimaginable.  Surveys aren’t good at detecting what would, in the now over-used term, delight customers. And delight is the basis of exciting new businesses, which may require wholly different strategies, operations, and distribution.

Quantitative research has its place. But it isn’t first place. The new efficiency in marketing will increasingly rely on strategy beginnings that are deeply insightful and open to adventure and unanticipated discoveries. They really will do more with less.

 

 

Border Wars in Distribution

There’s a war raging in global business markets these days between those that make products and those that distribute them. And the stakes of turning distribution into a zero-sum game are rising fast. At risk is the position, power, profitability – perhaps the very future - of branded product manufacturing.

After years of doubling down on cost, efficiency, sourcing, and operations, alarm bells are going off across the landscape of powerful global product players.

The reason is that more and more consumers and business customers are dissatisfied by rampant commoditization and sameness in their product acquisition and service experiences. These customers are demanding more fulfilling ways to learn about, compare, buy, as well as own, use and maintain new products.

In today’s markets, real differentiation occurs far from plants, warehouses, and advertising meetings. It’s happening in end customer’s total buying and owning experiences, and it’s created downstream - by distribution.

For manufacturers, it is no longer enough simply to supply. Increasingly, they also need to find win-win ways to become involved in the distribution of their products.

One reason is that distribution remains a virtual greenfield of untapped distinctiveness. Another reason is that large distributors have gained sufficient scale to tip the balance of power away from manufacturing. Understanding a product’s end customers better than the distributor that makes the ultimate sale is the best way to rebalance supply chain partnerships. Manufacturers tightly focused on a subset of the product breadth carried by dominant retailers and wholesalers have unique category insights, competencies and resources that can be laser-focused to create improved distribution experiences for end customers. A third, and to our minds predominant, reason is that adopting a genuine distribution mentality implies sharpening the company’s focus externally on end-customers.

Apple Inc. provides a sensational recent example of a manufacturer innovating its distribution. Over several decades, Apple has built an awe-inspiring track record of product innovation. Frustrated that its products weren’t being sold effectively, Apple attacked the problem head on and created a network of best-in-class stores virtually over night. Even though consumer electronics is crowded and mired in price wars, Apple’s retail sales-per-square foot, gross margins and ‘zero to $1 billion in revenue’ speed have set U.S. records for acceleration.

After building a new direct channel from scratch, Apple then proceeded to dominate indirect distribution channels, and in an entirely different product category.

Leveraging fever-pitch interest in its new iPhone, Apple dictated terms to wireless commutations carriers. It told them how to market, where to sell, what to price, and more. The new precedent effectively restructured conventional third-party carrier handset distribution. For any manufacturer, let alone one new to a category, to seize such command of distribution is unheard of. To do so in both direct and indirect channels is as amazing as it should be inspirational to branded manufacturers.

And consider the case of German power tools maker Stihl, which has been running a provocative advertising campaign under the banner: Why is the world’s number one selling brand of chain saws not sold at Lowe’s or The Home Depot? With competitors fleeing small, local channel partners for the promises of obscene volumes from these national Home Center chains, the question posed in Stihl’s ads is more than a rhetorical one. But the company knows that more sustainable market share and profitability growth can occur only if their retail system outperforms on seven specific customer experience needs. These needs, Stihl believes, are best met through independent Dealers. So far, at least, it appears they are right.

While tools competitors are struggling to avoid being elbowed off big box shelves by private labels and imports, Stihl and its dealers are enjoying sales growth well over 10% annually and price premiums the rest of the market envies.

What is the lesson? We believe it is that to be successful, branded manufacturers must absolutely be in distribution. But we’ll all be distributors is a state of mind, not a matter of ‘owning’ every channel. Stihl certainly does not, and even Apple does not go that far with the iPhone. In fact it is usually a mistake for a manufacturer to forward-integrate into distribution (or for that matter, for a distributor to backward-integrate into manufacturing). These two business models call for very different competencies, cultures and investments.

Still, the model for branded manufacturing going forward seems to be that strong, proactive market winners get involved downstream.

Competitiveness and Intellectual Accounts

A recent Op/Ed piece argues that our competitiveness as a nation in coming decades will be determined not only by our financial accounts but also by our intellectual accounts. That same prediction is being made about a less lofty realm as well - at the level of global go-to-market and supply systems.

Power bases are shifting - to expertise, which will always trump its weaker cousins coercion and even reward. Expertise about opportunities to create incremental new value for all the players in these complex supply and distribution systems. From strategic conversations that provide insights directly - in the voice of the end customer.

When marketing channels are championed, or stewarded as Professor Kash Rangan describes, from an external perspective, an end customer perspective, surprising things happen. Customers see new value, and improved buying and decision alternatives. Intermediaries are winners, focused on creating tangible growth-oriented advisory and physical distribution value for both their customers and their vendors. And branded product and solution manufacturers operate on a strategic path of differentiation.

Differentiation in not only product dimensions, but total customer experience. The kind of customer experiences that build excitement and new options for end customers. The kind that grow a marketplace and increase the margin pool. The kind that optimally-structured marketing channel systems provide. Finally. Welcome to the 21st Century.

* * * *

Disclosure - But then I think this could finally be the Cubs' year. The team not only has talent and seasoning, the team has chemistry. And they think. Can they build momentum - from a .500 start?

A Tale of Two Retailers

After shopping with his family yesterday, a friend of mine told me two stories that between them show just how good – and how bad – the customer experience at retail can be these days. Let’s start with the bad and get it behind us.

My friend and his wife were on the hunt for a table lamp that would work with 3-way light bulbs. Entering an upscale home furnishings store with, among other things, hundreds of lamps they quickly found something they liked. But when they peered under its shade, there was no light bulb. In fact, none of the nearby lamps had bulbs. Nor was there any indication whether the lamp could accommodate a 3-way. Eventually a saleswoman unearthed a bulb, though not a 3-way, and popped it in so that my friend and his wife could at least judge the lamp on its basic business, providing light. As to the 3-way she assured them that since the socket said it could take 150 watts, 3-way bulbs would work.

She was wrong. Back home after buying the lamp, stopping at the hardware store, and attempting to put in a bulb – my friend discovered it wouldn’t fit. The lamp shade mounting was much too short. Now, maybe he should have figured this out himself at the store. But shouldn’t the saleswoman have known this much? Shouldn’t she at least have verified what she said. She didn’t. Today my friend returned the lamp, his regard for the store seriously damaged. All for want of a few light bulbs and a simple 5-second sales training lesson on the rudiments of one of the store’s major product categories.

Totally opposite, and a thousand times better was my friend’s experience at Border’s, which the family stopped into purely by chance and with zero intent to buy. As he browsed, his twelve-year-old son came up to him excitedly and said, “Hey come here to the CD’s. Now: Pick out a disc and ask me to play you a track from it – any track you want.” And he could. He swiped the CD’s barcode, punched a couple buttons on the store’s equipment, and handed the earphones to dad. Voila, a sensationally convenient and fun way to shop. And a sensational way for Border’s to sell impulse purchases. Only self-restraint kept our trusty consumers from walking out with six new CD’s and an unplanned hit to their credit card balance.

PS: My friend and his wife then remembered that a home furnishings store they visited earlier had lamps clearly marked “three-way” and salespeople who said (correctly) that “most of our lamps are 3-ways.” The couple went back and bought one. At this point in the process, how attractive the product looked was mattering less. What made the sale was a no-surprises, no-wasted effort purchase.

I’ve made things simpler than they are, of course. Retail managers are forever tearing their hair out because they can’t get little things like light bulbs taken care of routinely and properly in their outlets. And for the manufacturers who make the lamps and win (or lose) the sales based on retailer know-how and execution, the problems are only compounded. Still, I don’t think my friend’s case was untypical.

More and more, the product – no matter how upscale – is a commodity that can be purchased anywhere. But how it’s purchased, and how the customer feels about the experience, can vary a great deal from one place to the next.

Leading (the market) is a Verb

More than a few people spend their lives pursuing wealth, status, and possessions. According to Aristotle, they are barking up the wrong tree. Happiness is an action, he said. We find it in the doing. Today, Aristotle might set up instead as a management guru. If he did, his advice to corporate executives would sound a similar note: don’t gauge your company’s market leadership in terms of revenue growth, brand recognition, market share, or capitalization. Pure hubris. If that’s all you aim at, you will go the way of the AT&Ts, the Enrons and, it increasingly appears, the United Airlines and General Motors.

Market leadership isn’t a position. It isn’t an organization structure, a point on a cost curve, a segmentation analysis, or a customer relationship management technology. It’s action. Market leadership comes of leading.

But, how? There is one essential habit of market leadership that is utterly lacking today: true strategic partnering and intimacy with customers and channel intermediaries. In a hyper networked, intensely competitive world market, genuine market leadership demands astute and – this will be especially hard to swallow – unselfish business relationships.

Surely, you groan, we have strategic relationships with key customers already. My response is, I doubt it. Maybe you meet quarterly to negotiate and coordinate with large accounts, but if your company is like most it doesn’t tango. Most companies obsess the industry standard tactics – “Where’s our order?” “When will the new product arrive?” “Can you give me another foot of shelf space?” “What’s my price break going to be this month?” That’s not the hard work of relationship management or partnering.

Here’s how to build more productive – and profitable – relationships with important customers and channel partners, and it may sound odd at first: Large corporations seeking to benefit from a relationship with each other need to work through strategic issues at the highest level of management. together in person

I learned something about this, the hard way. For too many years my colleagues and I in the management consulting business have designed growth strategies for a variety of manufacturers, distributors, and retailers with discouraging results. Despite unassailable analysis and the enthusiastic reception we typically enjoyed, our impact on the business too often was disappointing. Usually our clients admitted as much themselves. “I don’t get it. What do we do with this in the field? “How do we get our customers to cooperate?” How would it look day to day?” For them (and frankly, for us) the practical world of strategic relationships and partnering existed in a separate dimension from abstract market segmentations and Value Propositions.

Management consulting’s mistake? Basing recommendations on in-depth customer and end-user research conducted on behalf of – rather than by - their clients. The better solution, while not foolproof, is simplicity itself. Bring client and customer’s senior executives into the same room to address strategic needs together. Help them hold structured, facilitated, deeper dialogues. In brief, make it possible for them to act like partners and have a true relationship, rather than long-distance correspondence. Nothing mysterious, but it does run counter to executives’ natural impulse to delegate. It also grates against age-old patterns of corporate rangling over pricing, promotions, product specs, delivery dates, returns, and you name it.

Just witness a case where there’s a distinct lack of consumer happiness today: home remodeling projects. The Home Depot sells billions of dollars’ worth of home construction products every year, but depends on thousands of private installers across America to follow up on consumers’ requests for installation of fixtures, flooring, lighting, and so on. The subcontractors’ independence and lack of uniformity makes it all but impossible for The Home Depot to maintain an untarnished brand. For the consumer, it’s the successfully installed product that counts. Which means that for The Home Depot, wood flooring isn't simply a product category any more. It's become a product and service category.

A large vendor cannot dismiss this change as none of its concern. Several years ago, The Home Depot developed plans to reduce its fragmented network of regional flooring product suppliers from over twenty to just three national relationships. Like other national home center buyers, solving intractable installation challenges was at the top of their list of strategic issues. From Armstrong’s perspective, being in the core supplier group was essential. Should DBM or Shaw, strong rivals, do a better job of partnering with The Home Depot to resolve installation and other problems, Armstrong could wake up to find The Home Depot imposing requirements that might play against its strengths and raise its costs. And, because it didn’t contribute to the solution, Armstrong would likely be forced to cut its margins. Worst of all, the wood flooring industry in China was thriving, allowing The Home Depot plenty of opportunity to actively promote its lower priced house brand, Traffic Master if the business commoditized.

The real challenge in most industries, is that thinking hard and strategically about important customer issues – from the customer’s own perspective - is foreign to most suppliers. The farther upstream they operate, the more oblivious they tend to be. Still, there are exceptions. One of the most interesting is the German automotive manufacturer Robert Bosch. Bosch specializes in esoteric automotive components, notably fuel-injection systems and sundry electronics. Its biggest direct Original Equipment customers, the big Western car and heavy truck makers, are mostly financial wrecks just now. Yet Bosch not only sets steep prices, it also holds commanding share in its parts markets. Adding insult to injury, Bosch treats customers with notorious arrogance. That’s “imboschable” is a favorite way of referencing the company. You would think large customers would take their trade elsewhere. Yet why are they still giving most of their business to Bosch?

Feather-ruffling aside, Bosch turns out to be a master at customer relationships. It does so not by sweet talk or golf games, but by sitting down with large customers and tailoring its approach to fit what sets that specific auto or heavy truck maker apart. It might organize its capabilities to optimize fuel efficiency for one, fine-tune engine performance for another, and help design and fabricate vehicles more efficiently for a third. In each case, Bosch is going well beyond product to a total service solution that depends on an intimate customer rapport, built through face-to-face summits between their own managers and customer executives.

By the usual measures, Bosch the supplier and The Home Depot the retailer both lead their categories. But little guys should take heart. Weaker competitors – even upstarts and unknowns – could use the methods I describe just as easily as the big fish. Power isn’t a requirement. Money certainly is not. Time and outlays for a few top-to-top strategic meetings with large customers are a pittance next to, for instance, a cereal maker’s budget for supermarket promotion allowances or the cost of a Sunday night TV spot.

Well done, the impacts are broad, deep, and lasting. Vendors gain an inside track on competitors, target value adding areas that customers immediately relate to, and can often influence their customers’ business practices and structures to better match their competences. Best of all, it’s the only truly sustainable path to differentiation and improved margins. Retailers improve efficiency and differentiation. Supply chains come into tighter alignment and competitiveness improves. Original Equipment customers get more value.

Alternatively, suppliers and retailers can always stick to their old game, us-against-them, and see how it plays out in an era of growing economic uncertainties and accelerating global pace. I’m reminded of the remark by a U.S. Forest Service ranger on the Apostle Islands of Lake Superior, home to moose and packs of timber wolves. A moose’s defense when cornered by wolves is to back up against the nearest tree and lash out with its sharp hooves. As the ranger dryly commented to the Wall Street Journal: “It works every time ... except the last time.”

Better instead for senior executives to focus squarely on productive relationship management and active market leadership. Through real account-level strategy and momentum, not abstract corporate studies, schemes, and objectives. As global market power shifts inevitably toward larger customers and channel intermediaries, it is the single best way to lead.

Specialty Boutiques Gain Ground on Big Boxes

Circuit City has joined forces with Comcast for the launch of a new retail experiment called Connect at one of its stores in Massachusetts, reports Planet Retail. The format resembles a consumer electronics boutique, rather than a big box store.

Customers are able relax in seating areas around the store, drink coffee, watch local cable channels on large television screens, and work with consultants who help outfit their digital home with both hardware and content. The store will be the first of its kind, and Circuit City and Comcast plan to use the store as a test, trying out new ideas and gauging its success before making a decision about whether to open similar stores in other cities.

Our prediction: Much, much more of this to come...U.S. retail channels are on a march back to exciting consumer experiences and away from bland (insulting?) 'big box' discounters.

U.S. Ships Retail Commoditization Strategy Overseas

While U.S. management practices are still widely followed and emulated around the world, there's one era of distribution strategy our international brethren would be wise to reject. Yet evidence is mounting that overseas retail players are nonetheless escalating the commoditization of their market positions.

We're just now emerging from the commoditization funk in domestic U.S. retail sectors. Frank Blake, CEO at The Home Depot, recently spoke for the industry when he publicly pronounces to over 2,000 vendors that the company was misled by conventional management advisers into a myopic and ultimately fatal "squeeze vendors for low prices" strategic obsession. He lamented the loss of basic 'retail 101': delightful consumer experiences.

What's most frustrating, the strategic tragedy of the 1988-2008 retail commoditization era was well anticipated by forward-looking consumer experience advocates. Here's a few excerpts of a definitive 1989 study for Miles Inc. (maker of One-A-Day brand multiple vitamins) and Kellogg Company (maker of cereal and other food products), which warns about the risks of a single-minded search for lower prices and higher Gross Margins at the expense of robust retailing:

Private-label products present a growing danger to the package-goods industry... forcing marketers to compete with price promotion...private-label products drag down category profitability....the study's results fly in the face of conventional reasoning among grocers, who
look at private-label products as a way to increase margins....Ogilvy Group

When private label gains dominance, other elements start to diminish....unit sales go down, advertising-to-sales ratios go down, volume declines, manufacturer support evaporates and category profits erode...manufacturers, turned off by private label's encroaching share of the
market, tend to surrender the affected category, abandon new-product research, and reduce general marketing and advertising support....most manufacturers are left with no weapon but price.....John Howell, President, Miles, Inc. (One-A-Day vitamins)

Manufacturers are reacting because a lot of category squeezing is taking place and national manufacturers are "looking for excuses" to abolish private label. Private label now accounts for 12.9% of the dollar volume of all grocery products in the U.S. While private brands could drag down overall category gross profits, that's irrelevant. Retailers are concerned
with "getting customer loyalty to the store with private brands not with national brands... private label is a "loss leader" to draw consumers to a particular store rather than a competitor across the street....Brian Sharoff, President, Private Label Manufacturers Association

It's disheartening to see that overseas retailers, many in strong emerging markets, are following their U.S. counterparts and repeating the descent into a commoditization void. We would rather they invested in new retailing models that provide incremental value to all - consumers, manufacturers and retailers. For many consumers, it's simply insulting to suggest that all they care about is lowest price (ask the parents buying lead tainted toys).

In a bid to face the slow down in consumption in Spain, where retail banner sales represent about 15% of Carrefour's entire sales worldwide, the retailer is to increase the market share of its private labels currently standing at 25%....Planet Retail, 12/11/07

Is it too late for these retail leaders to see some light? Perhaps a few "fly on the wall" visits to U.S. retail boardrooms are in order. That might just scare them silly and open their eyes. Come on over!

Internet Shopping and Improved Customer Experiences

There are growing signs that U.S. retailing is continuing its move from an era focused tightly on driving out inefficiencies in supply chains, reducing costs, and delivering environments offering low prices to a new era of benefits-based business models. Early evidence from private conversations and public retailer reports suggest the new era is gaining steam as new formats and vendor relationships start to take hold. The new era of "improved customer experiences" will introduce consumers to greater choices, improved decision-making, more expertise and assistance with solutions, and lifestyle-oriented national brands.

An interesting parallel development is happening on the web. Once viewed narrowly as simply a place to find lower prices, web retailing is moving quickly to stake out new ground. Locational convenience, ease of shopping, speed of transaction, breadth of assortment, and other attributes make web retailing 3.0 look strategically more attractive.

For example, according to a recent NYT article, Brookstone, the hardware and housewares retailer, said it would introduce technology this week allowing visitors to browse a three-dimensional representation of a Brookstone store, with fixtures and signs common to all of the chain’s roughly 300 locations. The 3-D store closely resembles what one might see in the Second Life simulated world (except a missed keystroke will not accidentally take you to a virtual S & M club while searching for a gift for dad).

As in Second Life, Brookstone’s 3-D store lets users move freely through an animated world. In the store, when shoppers pause in front of a product, an item description appears, along with a link to a checkout page. For now, that link brings customers to a checkout page on Amazon, with which Brookstone has a marketing partnership.

And online merchants are introducing revolutionary new search features meant to take even more pain out of the typical shopping experience. Barnes & Noble recently introduced a revamped Web site that is heavy with taped interviews with authors and other video features meant to replicate the bookstore experience. But for buyers, not browsers, a major change to the search function will help speed them through the store’s roughly one million book choices.

These moves by online retailing merchants will continue to put pressure on traditional brick & mortar chains to evolve the customer experience in their stores as well. Expect some fascinating new retail developments over the next five to ten years.

Commoditization Era Winding Down: Home Depot to Follow Target and Lowe's Lead

In a further sign that major U.S. retail players are putting significant strategic focus on improved customer experiences, Tru-Value is striving to make a major strategic overhaul of its 4,000 company-owned and independent stores. The focus is women, and Tru-Value is making an aggressive "catch up" move to stay relevant in the changing home improvement marketplace.

In a nod to standard practice today, the company is focusing on wider aisles, color-coded navigational signs, softer lighting, earth tones and an expanded array of decorative fashion items. Lyle Heidemann, chief executive of the Chicago-based cooperative, said that "the redesign should be more "female friendly," without alienating the traditional hardware customer...we finally have a retail perspective of what a store should be...in the past, we had a wholesale assortment to pick from...now, here's what we believe is a good retail assortment."

Rival Lowe's has been responding to an increasing role for women in designing and remodeling their homes for some time. They had learned from Target. And Frank Blake announced at a recent meeting of over 2,000 vendors that Home Depot would be following the same path.

Consumers Use Gift Cards to Avoid Commoditized Retailing

Without a "must-have" item or stellar shopping experience, consumers wait for a price deal. And desperate stores are resorting to earlier and earlier holiday start dates to make up for what is essentially an industry wide outbreak of so-so brands and ho-hum services.

"We have to recognize that part of the sluggishness of the consumers isn't just the economy. The industry isn't doing enough to get the consumer excited," said Marshal Cohen, chief industry expert at the Port Washington, N.Y.-based NPD Group Inc. in a Chicago Tribune article.

Perhaps most telling is the rising popularity of gift cards, easy presents for those who can't figure out what to buy or don't want to navigate commoditized retail environments. The Tribune article goes on to report that gift cards for the first time ranked as the most sought-after gift, with 54 percent of shoppers putting it on their wish list. Once considered an impersonal present, gift cards have risen in status, and their ascent means more consumers are spending little time in stores, or no time at all, if they buy gift cards online.

The implication for branded product manufacturers is encouraging. It's only a matter of time - and likely soon - that dominant retailers will be forced to abandon a long era of commoditizing sourcing and pricing decisions and return to their roots as merchants. Retailers looking to be pre-emptive and stake out new in-market differentiation with consumers will soon be striking deals with strong, branded product manufacturers to provide support.

We welcome the emerging opportunity, and encourage the new generation of branded product leaders to use this window as an entree to refreshed partnerships and tighter collaboration.

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

* * * * *
Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

* * * * * *
UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.