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STRATEGY FROM THE OUTSIDE IN PROFITING FROM CUSTOMER VALUE
By GEORGE S. DAY, CHRISTINE MOORMAN
The McGraw-Hill Companies, Inc.Copyright © 2010George S. Day and Christine Moorman
All rights reserved.
Strategy from the Outside In
With the wreckage of the Great Recession still smoldering and slow economic growth expected for the foreseeable future, it's not surprising to see that many companies are turning inward and hunkering down. Profits, growth, and value creation seem to have become stretch goals rather than baseline expectations. Companies that were praised over the last decade for delivering shareholder value have largely fallen on hard times; buried under debt, they have no clear plan for capitalizing once customers are willing to spend again. The Fortune 500's top 25 at the beginning of the century included companies such as General Motors, Ford, Citigroup, Bank of America, AIG, Enron, and Compaq. Measured by market value, only 8 of the 25 largest companies in the world in 2000 can claim that distinction today.
Yet a number of companies operating in the same challenging environment have gained market share, grown revenues and profits, and created more value for customers, in contrast to their competitors' intense focus on budget cutting. Indeed, there are companies that have managed market share, profit, and customer value growth throughout the vertiginous boom-and-bust business cycles of the last 20 years. These companies may not have been favorite stock picks, nor have all of them topped the lists of the decade's most profitable corporations. But what they have done is found a way to build value over the long term. These are not flash-in-the-pan companies, world-beaters one year and stragglers the next. They are companies like Johnson & Johnson, Procter & Gamble, Fidelity, Cisco, Walmart, Amazon, Apple, IKEA, Texas Instruments, Becton Dickinson, and Tesco, among others.
These companies have been successful because they have remained true to the purpose of a business (as stated by Peter Drucker): to create and keep customers. They've kept that purpose not by focusing on shareholders and meeting quarterly numbers, by playing games with their financial statements, or by focusing just on competitive advantages. Instead, they've done it by consistently creating superior customer value—and profiting handsomely from that customer value.
We've spent years looking at these companies—and many not-so-successful ones—looking for patterns and commonalities that explain their stellar results, and we've concluded that they offer three very important lessons for any executive who wants to consistently create superior customer value and generate economic profits over the long term. There is no step-by-step formula, but there are consistencies in how these companies think, how they make strategic decisions, and, most important, how they operate to ensure they are maximizing the value they create and the profits they capture.
These companies approach strategy from the outside in rather than from the inside out. They start with the market when they design their strategy, not the other way around.
They use deep market insights to inform and guide their outside-in view.
Their outside-in strategy focuses every part of the organization on achieving, sustaining, and profiting from customer value.
Two Paths to Strategy
The first thing that distinguishes these value- and profit-creating companies is that they drive strategy from the perspective of the market—in other words, from the outside in. This may sound trivial, but it is shockingly uncommon. For all the talk about "putting the customer first" and "relentlessly delivering value to customers," most management teams fail to do this. Put most simply, outside in means standing in the customer's shoes and viewing everything the company does through the customer's eyes.
Far more common than outside-in thinking is inside-out thinking and inside-out strategy. Inside-out companies narrowly frame their strategic thinking by asking, "What can the market do for us?" rather than, "What can we do for the market?" The consequences of inside-out versus outside-in thinking can be seen in the way many business-to-business firms approach customer solutions. The inside-out view is that "solutions are bundles of products and services that help us sell more." The outside-in view is that "the purpose of a solution is to help our customers find value and make money—to our mutual benefit." Some differences in the two ways of framing strategic issues are shown in Figure 1-1.
Inside-out thinking helps explain why a large database company that was looking to grow by leveraging its deep information about the companies' finances spent several million dollars to develop a product for small and medium-sized enterprises without first having in-depth conversations with potential buyers. Management, seduced by the seemingly vast potential of this market, relied on the assurances of the sales force that customers would buy. During the process, no one asked what value the company would be offering customers, or how the company's new product would offer customers more value than the status quo. Instead, managers focused on what customers could do for the company. As a result, the new product flopped and was abandoned in less than a year.
An even more costly example is Ford's unfortunate decision not to add a sliding door on the driver's side of its Windstar minivan. The extra cost of the fifth door was the major factor in this decision, but just to be sure, the designers asked a sample of buyers their opinion. Only one-third of the sample thought it was a good idea, while the rest said no or weren't sure because they couldn't envision the benefits. Meanwhile, Ford's competitors were "living with" prospective buyers at shopping malls, do-it-yourself stores, and soccer fields. That fieldwork showed that the fifth door could solve a lot of problems for families and handymen. Based on these benefits to customers, Ford's competitors, including Honda, Chrysler, and GM, added the door, which was an immediate hit. Ford's sales suffered so badly because of the lack of this feature that the company was forced to add it later. Doing so meant that Ford had to redesign its van to match competitors'—at an out-of-pocket cost of $560 million (not including the opportunity cost of lost sales).
Winning from the Outside In
With an outside-in mindset, top management's strategy dialogue starts with the market. The management team steps outside the boundaries and constraints of the company as it is, and looks first at its market: How and why are customers changing? What new needs do they have? What can we do to solve their problems and help them make more money? What new competitors are lurking around the corner, and how can we derail their efforts? This perspective expands the strategy dialogue and opens up a richer set of opportunities for competitive advantage and growth.
Jeff Bezos, the founder and chairman of Amazon.com, is a champion of the outside-in approach. He explained how Amazon was able to meet the needs of its customers for Web services by offering access to its cloud computing network and for a more convenient reading experience with the Kindle. He describes it as a "working backward" mentality:
Rather than ask what we are good at and what else can we do with that skill, you ask, who are our customers? What do they need? And then you say we're going to give that to them regardless of whether we have the skills to do so, and we will learn these skills no matter how long it takes.... There is a tendency I think for executives to think that the right course of action is to stick to the knitting—stick with what you are good at. That may be a generally good rule, but the problem is the world changes o
Excerpted from STRATEGY FROM THE OUTSIDE IN PROFITING FROM CUSTOMER VALUE by GEORGE S. DAY. Copyright © 2010 by George S. Day and Christine Moorman. Excerpted by permission of The McGraw-Hill Companies, Inc..
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