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CUSTOMER-FOCUSED STRATEGIES NEEDED TO AVOID DISRUPTION

TO AVOID DISRUPTION, IT’S not enough to understand customer needs—you have to devise strategies to address them. Too many leaders focus instead on investors and increasing short-term stock prices. Of course, companies must increase long-term shareholder value. But the way to do that is not through short-term, investor-focused strategies but by longer-term strategies for keeping customers happy.

Most leaders understand that they have to deliver what customers need, but their companies’ incentives and compensation don’t support that and their short tenure exacerbates the need for short-term performance. Most U.S. executives are rewarded with excessive stock awards and stock options with two to three years’ vesting and ten years’ exercise, as figure 5 shows. Most of these are awarded based on financial metrics.

Naturally, leaders focus on strategies that maximize their compensation (stock prices), even when doing so directly conflicts with delivering to customers in the long term. Some of the ways in which leaders increase short-term stock prices (and their own compensation) are mergers and acquisitions, incremental innovation, marketing, lobbying, and global expansion. But short-term strategies like these all too often have disastrous long-term consequences, as customers end up disrupting the company and industry. The New York Times reported that blue chip companies that used cheap debt to acquire other companies were in trouble.¹ Strategies that incentivize leaders based on the long-term value they create are a better bet.

FIGURE 5 P&G leadership compensation (in millions). Cash includes salary and bonuses, equity includes stock and option awards, and other includes retirement plans, executive benefits, and other income. On an average 70% of P&G executive compensation came from equity (20% of that was stock options). Source: Procter & Gamble Company, “2018 Proxy Statement,” August 24, 2018, https://goo.gl/faahkg.

Tying leaders’ compensation to metrics like customer feedback on social media, repeat customer rate, and growth in the user base could get leaders focused on customers. This should be balanced with financial metrics. With their compensation dependent upon customer satisfactions, leaders would devise strategies that deliver on customer need and truly harness the power of their organization behind them.

Consider Procter & Gamble, a 185-year-old American consumer goods company, which is now struggling because it followed short-term strategies like the ones mentioned instead of long-term strategies devised to meet their customer’s changing needs. And this despite the fact that P&G’s purpose, values, and principles statement says, “We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come.”² P&G just doesn’t seem to understand that markets are changing all over the world and that what worked for them in the past will not work now.

Only a few companies are more customer focused than Procter & Gamble, and its long life is a testament to that. Nevertheless, its revenue declined from $83 billion in 2014 to $67 billion in 2018, as figure 6 shows. It tried to increase profitability by getting rid of unprofitable brands in 2016 and 2017. However, this approach doesn’t seem to be working, as margin again declined in 2017—even with the best and brightest doing its advertising and R&D.

Why aren’t P&G’s old strategies working now? Despite the growing economy, U.S. shoppers have been cutting back on household goods, and P&G’s organic growth has stalled at between 1% and 3%. While subsidiary Gillette has lost market share in the United States, Dollar Shave Club and Harry’s are grabbing it. In India, P&G is losing market share to companies that deliver more natural, traditional Indian products, as Patanjali does. Millennials everywhere care more than previous generations about having healthy, natural products, but they won’t pay high prices for those products. As Nelson Peltz, activist investor, puts it, “Customer preferences are changing worldwide.” All this means big losses, and P&G leaders don’t seem to understand the reasons for it.³

FIGURE 6 Procter & Gamble revenue and profit margin trends. Source: “Annual Reports,” Procter & Gamble, https://goo.gl/5KEp6V.

To summarize Peltz, one of those reasons is that millennials don’t trust big brands and prefer natural, organic wellness products.⁴ In essence, P&G’s strategy of incrementally improving its existing products and launching at higher price points every year, and relying on advertising to keep customers buying, doesn’t work with millennials. The company seems to be losing its ability to grow quickly and to increase prices, actions that made them an investor darling in the past. To survive, P&G must come up with strategies that address millennials’ needs for natural and organic products. This is what Patanjali, the Indian upstart, did—and doing it too could put P&G back on a growth path and create long-term investor value.

Understanding customer needs, coming up with strategies to address them, and then aligning operational, organizational structure and incentives around them is the recipe for success. Very few companies are doing this well now. Leaders who win will stop focusing on short-term strategies for investors and will make customers their first priority. Only then can they choose the strategies that lead to success and align their entire organizations around them.

How likely is your company to succeed? Thoughtful answers to the following questions will give you a good sense of that.

•   How well does your company focus on and understand your customers?

•   How effective are the strategies and capabilities your company has embraced to deliver on customer needs?

The better your company is at doing both, the more likely it is to grow. Even if your company is small, you are well prepared to take on industry leaders if you keep an eye on changing customer needs. And if you keep revising your strategies to meet those needs, you’ll keep growing. The worse you are doing in terms of these questions, the more you need to bring the focus back to customers and embrace strategies that deliver on customer needs. Otherwise, you will be disrupted.

WHY COMPANIES DON’T FOCUS ON CUSTOMERS

You could trace the source of most behavior to incentives. When leaders’ compensation is based on short-term stock price performance, that’s what they focus on, even if doing so means terrible customer experiences and long-term disaster. An MIT study found that CEO and leadership compensation tilted toward stock grants and options starting in the early 1970s.⁵ Since then, executive pay has rarely been tied to customer satisfaction, customer feedback, or any other metric focusing on customers.

When entrepreneurs start a company, they know their success—including their venture capital—is tied directly to customer acceptance, so, naturally, pleasing customers is their focus. But as companies grow, investors tie executive compensation to short-term share price growth. That’s how Tesla proposed compensating Elon Musk—according to market valuation or share price growth, with no mention of customers. Though the implicit assumption is that Musk will have to get customer acceptance to grow the company, the reality is different. Musk is battling with Tesla’s short sellers instead of focusing on customers.⁶

History shows that increasing incentives too much can lead to bad behavior. Wells Fargo compromised on customer trust to improve stock valuation. GE spent $24 billion on stock buybacks between 2016 and 2017 to increase its share prices, and got into a cash crunch in 2018.⁷ When executives focus on short-term stock prices, the long-term health of the business suffers. Firing everyone in top management and replacing them with entrepreneurs is not the solution. Even entrepreneurs like Mark Zuckerberg seem to lose focus on their customers when their companies go public. Incentives, organization structure, culture, hiring, and training have to be changed to bring an organization’s focus back to customers, and that shift has to start at the top, with how executives are incentivized.

Investors win in the long run when customers are happy, because their long-term gains are tied to continuing customer satisfaction. Ask any small business owner. Small business owners know that their survival depends on their ability to keep customers happy. Some large companies have shown that concentrating on customer needs is good for the shareholders; the two interests are tightly linked in the long term. Customer-pleasing strategies are not always immediately profitable, however. For example, Amazon lost money with its Prime service at first, though in the long term the program pleased both investors and customers. If the company had concentrated on short-term profits, Amazon would probably not be where it is today.

And if executive compensations are linked to short-term profits, neither customers nor shareholders will be satisfied. This is why CEO pay, too, should be linked to customer satisfaction and the company’s long-term growth. Studies show that as companies become more prominent, leaders become more distant from customers. They spend more time managing the organization and investors, less time with customers. They believe their role ends with training employees. A 2017 HBR survey of one thousand CEOs found that, on average, CEOs spend 10% of their time with clients, 7% with suppliers, and the rest with internal groups. Unless you are a big customer, you will not get any attention from the CEO or his/her leadership team. The C-suite is very isolated from its customers—at companies that ultimately fail. The GE turnaround plan proposed by outgoing CEO John Flannery is a good example. The document is focused on investors and touts internal capabilities. There is no mention of gaining customer trust or addressing customer needs.⁸

Great leaders make time for their customers and learn from customer interactions. Hamdi Ulukaya, the Chobani CEO, stands outside the SoHo store to listen to his customers. The same is true for small business owners; they know that you can’t run a small business while hiding in a back office. To lead a thriving company, the CEO has to spend time with customers. Otherwise, the company can’t become customer focused. Training employees and changing the mission statement don’t change the company’s focus. Only CEOs who meet with customers, make them a priority, and understand them from their own direct experience can champion the change and carry others along with them.

FAILURE OF CURRENT BUSINESS STRATEGIES

It’s no surprise that leaders devise investor-focused business strategies—that’s what they think will maximize their compensation and provide job security. So they use strategies like incrementally improving products, marketing and advertising, mergers and acquisitions, global expansion, and special interests to reduce customer choices while (they hope) growing revenue and profit in the short term. These strategies aren’t even meant to address current customer needs, let alone those of new customers, but to increase short-term stock prices. Retooling or refocusing these strategies on customer needs doesn’t help either. Companies must abandon these losing strategies. They frustrate customers and ultimately lead to disruption. Let’s review these no-win strategies and show how they fail to connect with customer needs.

Incremental Innovation

Companies spend a lot of money incrementally improving their existing products—even in the face of evidence that customers don’t want them—to increase short-term revenue and profit. They launch “new and improved” household goods or automobiles with added features, every year, at higher price points. The goal is to extract as much money from customers as possible, as frequently as possible. Think of the incremental innovation to the iPhone that Apple launches each year. Investors love these upgrades, as they increase short-term company revenue and profitability, but the additional value for customers is minimal. Customers will eventually stop buying, and disrupters will then have their opportunity to enter the market.

For example, when P&G acquired Gillette in 2005, it increased the number of blades in the razor and raised its price every few years. Online razor companies such as Dollar Shave Club, Harry’s (in 2011), and Edgewell Personal Care (in 2015) moved into the market, attracting customers with both cheaper blades and home delivery. Starting in 2013, Gillette’s volume stopped growing, and it declined by 3% in 2016 and a further 2% in 2017.⁹ To compensate for this declining volume, P&G increased prices by 4% in 2014 and in 2015, and by 5% in 2016 (figure 7). Gillette finally realized that even higher-end customers have their spending limits. So P&G cut prices in 2017 and launched new products at price points closer to those of their online rivals, trying to win back their customers. But the customers did not return.

FIGURE 7 Gillette revenue increase—price versus volume. Source: Euromonitor, embedded figure, in Sharon Terlep, “Gillette, Bleeding Market Share, Cuts Prices of Razors,” Wall Street Journal, April 4, 2017, https://goo.gl/fcxj86.

The incremental innovation strategy is still used across industries. Based on our work with clients, we estimate that companies spend 20% of their R&D budget on breakthrough innovation and 80% on incremental innovation, despite the fact that breakthrough innovation is far more likely to address customer needs and thus to grow revenue and profit. Think about what the first iPhone did for Apple. Companies keep spending on incremental innovation, thinking it will assure a return on investment, but that is not true anymore. That strategy worked with baby boomers and Gen X. But it doesn’t work with millennials, who don’t value incremental innovation and won’t pay for new features they may never use. Samsung has started including more technology in its midpriced and lower-priced smartphones, instead of only in its flagship brands, to attract millennials.¹⁰

Instead of incrementally improving products, companies should be spending their R&D money on finding better ways to meet customer needs. If they don’t, someone else will—and probably at a lower price. For example, automotive companies kept launching cars at higher prices, claiming they had increased safety and better met emission requirements. Many millennials responded by using ride-hailing, and convincing them to change their lifestyles and buy cars will be difficult. Now other generations have caught up with the trend. As their night vision fades, boomers are using ride-hailing services to avoid driving in the dark. Gen Xers use them as designated drivers.

Marketing and Advertising

Businesses across industries spend a significant amount of money on marketing and advertising to convince customers to buy their products or services. They believe that advertising can convince customers to choose their products over their competitors’ products. Investors, too, believe in advertising—they think brand recognition means long-term value. That may once have been true, but it isn’t now, for two reasons.

First, millennials trust peer reviews far more than advertising and brands. They don’t believe ads, and they don’t value celebrity or third-party endorsements.¹¹ And across generations, people simply are seeing and watching fewer ads. They use ad blockers online and various devices to avoid ads on cable. Many don’t even have cable, so TV ads are reaching fewer and fewer people. Even major events like the Super Bowl, the Oscars, and the Olympics have smaller audiences each year. When viewers are forced to suffer through ads, many choose to not watch at all.

In their desperation to catch customer attention, companies like Coca-Cola and Pepsi switched from advertising to in-store promotions and point-of-sale marketing—putting products near the checkout counter. Their logic was that if people saw the product while they were waiting to check out, they’d buy it impulsively, but that doesn’t work as well as it once did, either. Customers are not looking around them; they’re on their smartphones. And the checkout lines aren’t as long as they once were in many places. Knowing that customers won’t wait, many retailers are making checkouts simpler.¹²

The golden age of marketing and advertising is over. Companies are wasting their money if they think they can convince customers to buy their products with ads. Millennials have always been brand agnostic, and Gen Xers and boomers see fewer ads than they once did—and trust them less.¹³ Instead of spending money on advertising, companies should find ways to get genuine customer reviews that millennials and Gen Z will trust.

Many big companies realize this and have cut their marketing and advertising budgets. Many small and medium-sized companies fall for claims by Google and Facebook about their high return on investment on their ads. But without third-party validation, these claims mean nothing. P&G reduced online spending significantly, as their push for transparency revealed it was a waste of effort and money. Uber believed that their mobile ad agency (Fetch) was billing for fake clicks and filed a lawsuit.¹⁴ So, companies must stop relying on advertising—including online advertising—to get customers to buy their products. It doesn’t work.

Mergers and Acquisitions

When their core businesses become less popular, many companies acquire or merge with competitors to restrict customer choices and increase revenue and profits. For example, mergers among airlines has meant charges for baggage and higher fees, to compensate for falling ticket prices. Companies claim that these acquisitions improve their efficiency, and they don’t mention customer needs. Wall Street expects mergers to increase profits due to lower overhead. But mergers are usually bad for both employees and customers. They mean layoffs—though usually head counts rise again later, in the form of temporary workers and outsourced vendors. Customers are the real losers.

For example, after all the mergers, airlines continue to charge higher and higher prices for additional services, to increase their revenue. When customers don’t have choices, they have to pay them, and in 80% of the air travel market, customers don’t have choices beyond the big four—United, American, Delta, and Southwest. Mounting customer dissatisfaction with all this probably means that Congress will eventually act against current industry practices.¹⁵

Mergers and acquisitions no longer guarantee rising profits. Recognizing this trend, some companies are off-loading their acquisitions to remain competitive. Consider GE. Jack Welch grew the company, acquiring one thousand companies. But many GE units behaved like monopolies and twisted customers’ arms to increase revenue and profit. Naturally, customer discontent brewed. Customers in the railroad industry complained that GE Rail (now GE Transportation) forced them to buy rail cars and hardware they didn’t need. GE Rail even discouraged the sharing of customer-demand data with other railroads for smoother operations! As soon as they found viable alternatives, railroads moved away from GE.

Jeff Immelt, GE’s next CEO, had to shed a dozen or more businesses that Welch had cobbled together. But he continued to acquire other companies to please investors and never focused on customers’ needs. While utilities were moving from carbon-based fuel to renewable energy, Immelt was betting on coal and crude oil.

The next CEO, John Flannery, appointed in late 2017, decided to shrink GE to three businesses—aviation, health care, and energy/power—and get out of lighting, locomotives, and other businesses. But the focus is still on shareholder returns, and the company has not shared plans to gain customer confidence. GE’s future does not look bright.

Mergers and acquisitions do not predict growth and profitability; they’re signs that a company is struggling against disruption. This strategy works only if it helps companies meet customer needs, and even then, companies may end up paying more and taking drastic actions to keep investors happy. If a company does need new products and doesn’t want to develop them, partnering with or licensing from companies that are pleasing their customers is a better strategy.

Global Expansion

Once, people in countries like China had a craze for American products, but now these people want products and services that cater to their needs. For example, China was once the largest market for KFC outside of the United States. The fad for American fried chicken ended, though; the Chinese eventually went back to dumplings. Unable to deliver those, KFC’s parent company spun off its China business. KFC is not alone. According to the Economist, multinationals make less money outside of their home region than they once did.¹⁶ These giants are not able to adapt quickly enough to changing customer needs, and local businesses are beating them in more and more markets. The writing is on the wall. Either U.S. companies cater to local needs or they lose the market.

Global expansion is not as simple as it once was. International trade will continue to increase, despite trade wars, but there are no virgin territories left for multinationals to enter. Even in markets where they are currently competing, they have to adapt to changing customer needs to be successful. If multinationals ignore the needs of customers in developing markets, a disrupter from these countries could end up disrupting U.S. or European markets. For example, as Amazon tries to enter China, U.S. grocery retailers are partnering with Alibaba, the Chinese e-commerce giant, to counter Amazon’s acquisition of Whole Foods.

Lobbying and Special Interests

U.S. companies spend a lot of money lobbying federal, state, and local representatives to gain unfair market advantage and improve investor returns by restricting customer choices. The pharmaceutical industry, the biggest corporate spender on lobbying, has long opposed Medicare’s and Medicaid’s ability to negotiate drug pricing.¹⁷ The United States is the only country in the world where government insurance providers are not allowed to negotiate drug pricing. It is also the only country where pharmaceutical prices are increasing rapidly. Despite the United States being the largest pharmaceutical market in the world, U.S. customers pay the highest drug prices anywhere in the world.

The government’s restrictions on customer choices don’t end at the federal level. There are restrictions imposed by state and local government as well. For example, customers in the United States can’t buy cars directly from manufacturers because state franchise laws protect dealerships.

But customers are successfully pressuring their representatives to change laws. Despite significant resistance to ride-hailing from the taxi lobby, most cities yielded to local pressure and allowed ride-sharing. In most industries, it’s only a matter of time. Either elected representatives will listen to their constituents or they will be voted out of office. Lobbying is not a sustainable strategy to increase investor returns. People all over the country are disgusted by it.

Not all lobbying is bad. It’s essential for any business to spend money on educating lawmakers. But more money gets spent trying to influence lawmakers to restrict customer choices than on educating them. The money spent influencing lawmakers is counterproductive. Once company practices become public, it destroys their reputation with customers for good.

Different Strategies for Changing Demographics

It’s time to stop relying on business strategies like those described here. All of these strategies focus too heavily on short-term stock prices and not on long-term growth. Businesses and leaders have to focus on serving their customers and must devise new strategies that will meet their customers’ current and future needs. If they don’t, customers will disrupt their businesses—more aggressively and more swiftly than they have in the past, too. This trend will only accelerate as millennials and Gen Z become the dominant buying groups.

NEW CUSTOMER-FOCUSED STRATEGIES ARE NEEDED TO AVOID DISRUPTION

Modifying those old strategies won’t attract or keep customers. To meet customer needs now and in the future, companies have to develop new, customer-focused strategies. Some companies are already doing this and making a fortune.

Consider Chobani’s explosive growth. Understanding that customers want healthy food and will pay twice as much for Greek yogurt, Chobani’s founder, Hamdi Ulukaya, bought a dairy factory from Kraft.¹⁸ Chobani immediately became popular with health-conscious customers. Instead of selling the company, Hamdi scaled quickly and catered to the growing demand. The company built a big warehouse across the road from its plant, and another big plant in Idaho. The ability to meet customers’ growing demand for healthy food made Chobani grow. Its U.S. yogurt market share increased from 7% in 2010 to 22% in 2016, while Danone’s and Yoplait’s shares declined (figure 8). The company soon expanded into international markets.

FIGURE 8 U.S. yogurt market share. Source: Euromonitor, embedded figure, in John Kell, “General Mills Loses the Culture Wars,” Fortune, May 22, 2017, https://goo.gl/JfeRdQ.

The following is an overview of the strategies—service, personalization, speed, quality, and reinvention—that help companies deliver on customer needs. Subsequent chapters will detail how to use them.

Service

All customers love services such as warranties, faster returns, and easy credit. Many also love free shipping, help during shopping, easy checkout, and other services that benefit them. Most will spend more money when a company provides the services they value. But many companies don’t do this well. To beat the competition, they offer services to all segments and then realize that they’re not profitable. What works far better is targeting services to specific segments, which can do wonders in developing customer loyalty and increasing their spending. Amazon’s Prime is a great example.

Personalization

Millennials’ desire to express their individuality is already driving demand for personalization, for products and services that are tailored to each individual. However, companies struggle with this, too, because millennials are not willing to pay a premium price. Companies can make personalization affordable by thinking outside of the box about how to design, create or manufacture, and deliver products or services. A few companies, such as Zozotown, are experimenting with personalization, but no one has figured it out. It’s a big opportunity and a threat for all businesses.

Speed

Millennials want everything now and are impatient about everything, from their careers to their purchases. They have little brand loyalty and will embrace other products or services if their old favorites don’t show up on time. Either you adapt to this mind-set or you lose to companies that do. And it’s not just millennials; older generations are getting impatient too. They don’t like to wait at checkout counters or on the phone, and they won’t wait for their favorite brands. So leaders must figure out how to deliver faster. Otherwise, before they know it, their customers will be buying from their competitors. And, for most business leaders, doing things faster means thinking in entirely new ways, in ways that match their customers’ new expectations. Chobani is an excellent example of how companies can scale quickly when their products become a hit with customers. Fast fashion companies such as Zara show how companies can quickly respond to changing customer trends.

Quality

More and more customers are reading peer reviews on Amazon and other sites before buying products or services. They’re looking at product performance, service, and quality issues, and they trust what their peers tell them—not companies’ claims or advertising. Now, all products and services are judged according to how well they work for customers. Improving quality is a sure way of getting repeat business and attracting new customers with favorable reviews. Most leaders don’t try hard enough for quality. As soon as they’ve beaten the competition, they consider their products good enough. But in today’s world, no company—no matter how far ahead of the competition it is—stays good enough for long. You have to continue to improve quality to remain relevant. Aldi and Lidl have shown how a focus on quality made discount grocers popular throughout Europe.

Reinvention

Customer needs change, and it’s difficult to predict what those needs will be in the future. Delighting current customers is not enough. You have to keep wowing them—and your new customers, too, whoever they may be. The only way to do that is to become skilled at creating strategies that support your customers’ needs, and then to keep updating those strategies. This means setting up your whole organization to identify and respond to customers’ needs as, and even before, they arise. Disney is an excellent example of a company that has changed itself over decades to remain relevant to all generations.

A crucial part of making these strategies successful is companies’ ability to use their operations to deliver on customer needs. You can’t do it with the Industrial Revolution–era operational philosophy of “Bigger is better” and “One size fits all.” The only reason Chobani became successful is because of its ability to scale operations as customer demand increased. Hamdi said as much: “Never has a food aisle been challenged liked this and changed so quickly by a startup ever. Some say we’re the fastest growing startup ever, including technology.”¹⁹

Most companies don’t do this as well as Chobani did. Tesla is struggling to increase its production for its Model 3 even as customers are rescinding their offers and buying competing products. Corporate leaders have long neglected operations. It’s time to bring the focus back to them, too. In short, companies need to create strategies and operations to deliver on customer needs.

SUCCESSFUL TURNAROUNDS

Every company will fail at some point; what determines their survival is how quickly they get back on their feet. One of the most significant recoveries in the past twenty years is Apple. The Apple board of directors fired Steve Jobs in 1985, under pressure from CEO John Sculley. Jobs said:

I didn’t see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter into one of the most creative periods of my life. I’m pretty sure none of this would have happened if I hadn’t been fired from Apple. It was awful-tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don’t lose faith. I’m convinced the only thing that kept me going was that I loved what I did. You’ve got to find what you love.²⁰

After leaving Apple, Jobs started NeXT and launched Pixar Animation Studios. During those years, Jobs the visionary evolved into Jobs the businessperson. Ironically, Apple struggled and wanted Jobs back. Jobs returned to Apple in 1997, where he focused on customer needs, making products that even grandmas can use. With innovations such as the iPod, iPhone, and iPad, he eventually turned the company around. And the rest, as they say, is history.

Apple is not the only impressive turnaround story. General Motors bounced back after its 2008 bankruptcy by improving the quality and safety of its cars. Marvel rediscovered itself after a 1990s bankruptcy when the comics market crashed. Now Iron Man, the Avengers, Spider-Man, and X-Men are billion-dollar franchises. These are just a few of the companies that have shown themselves able to recover from failure. They all did it by abandoning the old strategies designed to bring short-term profits to investors and embracing new ones focused on customers.