The old pillars of new retailing

Despite the harsh realities of retailing, the illusion persists that magical tools can help companies overcome the problems of fickle consumers, price-slashing competitors, and mood swings in the economy. Such wishful thinking holds that retailers will thrive if only they communicate better with customers through e-mail, employ hidden cameras to learn how customers make purchase decisions, and analyze scanner data to tailor special offers and manage inventory. But the truth is, there are no quick fixes. In the course of his extensive research on dozens of retailers, Leonard Berry found that the best companies create value for their customers in five interlocking ways. Whether you're running a physical store, a catalog business, an e-commerce site, or a combination of the three, you have to offer your customers superior solutions to their needs, treat them with respect, and connect with them on an emotional level. You also have to set prices fairly and make it easy for people to find what they need, pay for it quickly, and then move on. None of these pillars is new, and each sounds exceedingly simple, but don't be fooled--implementing these axioms in the real world is surprisingly difficult. The author illustrates how some retailers have built successful operations by attending to these commonsense ways of dealing with their customers and how others have failed to do so.     

Business marketing: understand what customers value

How do you define the value of your market offering? Can you measure it? Few suppliers in business markets are able to answer those questions, and yet the ability to pinpoint the value of a product or service for one's customers has never been more important. By creating and using what the authors call customer value models, suppliers are able to figure out exactly what their offerings are worth to customers. Field value assessments--the most commonly used method for building customer value models--call for suppliers to gather data about their customers firsthand whenever possible. Through these assessments, a supplier can build a value model for an individual customer or for a market segment, drawing on data gathered form several customers in that segment. Suppliers can use customer value models to create competitive advantage in several ways. First, they can capitalize on the inevitable variation in customers' requirements by providing flexible market offerings. Second, they can use value models to demonstrate how a new product or service they are offering will provide greater value. Third, they can use their knowledge of how their market offerings specifically deliver value to craft persuasive value propositions. And fourth, they can use value models to provide evidence to customers of their accomplishments. Doing business based on value delivered gives companies the means to get an equitable return for their efforts. Once suppliers truly understand value, they will be able to realize the benefits of measuring and monitoring it for their customers.     

Strategy and the Internet

Many of the pioneers of Internet business, both dot-coms and established companies, have competed in ways that violate nearly every precept of good strategy. Rather than focus on profits, they have chased customers indiscriminately through discounting, channel incentives, and advertising. Rather than concentrate on delivering value that earns an attractive price from customers, they have pursued indirect revenues such as advertising and click-through fees. Rather than make trade-offs, they have rushed to offer every conceivable product or service. It did not have to be this way--and it does not have to be in the future. When it comes to reinforcing a distinctive strategy, Michael Porter argues, the Internet provides a better technological platform than previous generations of IT. Gaining competitive advantage does not require a radically new approach to business; it requires building on the proven principles of effective strategy. Porter argues that, contrary to recent thought, the Internet is not disruptive to most existing industries and established companies. It rarely nullifies important sources of competitive advantage in an industry; it often makes them even more valuable. And as all companies embrace Internet technology, the Internet itself will be neutralized as a source of advantage. Robust competitive advantages will arise instead from traditional strengths such as unique products, proprietary content, and distinctive physical activities. Internet technology may be able to fortify those advantages, but it is unlikely to supplant them. Porter debunks such Internet myths as first-mover advantage, the power of virtual companies, and the multiplying rewards of network effects. He disentangles the distorted signals from the marketplace, explains why the Internet complements rather than cannibalizes existing ways of doing business, and outlines strategic imperatives for dot-coms and traditional companies.     

Making business sense of the Internet

For managers in large, well-established businesses, the Internet is a tough nut to crack. It is very simple to set up a Web presence and very difficult to create a Web-based business model. Established businesses that over decades have carefully built brands and physical distribution relationships risk damaging all they have created when they pursue commerce through the Net. Still, managers can't avoid the impact of electronic commerce on their businesses. They need to understand the opportunities available to them and recognize how their companies may be vulnerable if rivals seize those opportunities first. Broadly speaking, the Internet presents four distinct types of opportunities. First, it links companies directly to customers, suppliers, and other interested parties. Second, it lets companies bypass other players in an industry's value chain. Third, it is a tool for developing and delivering new products and services to new customers. Fourth, it will enable certain companies to dominate the electronic channel of an entire industry or segment, control access to customers, and set business rules. As he elaborates on these four points, the author gives established companies a systematic way to sort through the risks and rewards of doing business in cyberspace.     

The coming battle for customer information

Companies collect information about customers to target valuable prospects more effectively, tailor their offerings to individual needs, improve customer satisfaction, and identify opportunities for new products or services. But managers' efforts to capture such information may soon be thwarted. The authors believe that consumers are going to take ownership of information about themselves and start demanding value in exchange for it. As a result, negotiating with customers for information will become costly and complex. How will that happen? Consumers are realizing that they get very little in exchange for the information they divulge so freely through their commercial transactions and survey responses. Now new technologies such as smart cards, World Wide Web browsers, and personal financial management software are allowing consumers to view comprehensive profiles of their commercial activities-- and to choose whether or not to release that information to companies. Their decision will hinge, in large part, on what vendors offer them in return for the data. Consumers will be unlikely to bargain with vendors on their own, however. The authors anticipate that companies they call infomediaries will broker information to businesses on consumers' behalf. In essence, infomediaries will be the catalyst for people to start demanding value in exchange for information about themselves. And most other companies will need to rethink how they obtain information and what they do with it if they want to find new customers and serve them better.     

All strategy is local

The aim of strategy is to master a market environment by understanding and anticipating the actions of other economic agents, especially competitors. A firm that has some sort of competitive advantage-privileged access to customers, for instance--will have relatively few competitors to contend with, since potential competitors without an advantage, if they have their wits about them, will stay away. Thus, competitive advantages are actually barriers to entry and vice versa. In markets that are exposed, by contrast, competition is intense. If the incumbents have even brief success in earning greater than normal returns on investments, new entrants will swarm in to grab a share of the profits. Sooner or later, the additional competition will push returns as far down as the firms' costs of capital. For firms operating in such markets, the only choice is to forget about strategy and run the business as efficiently as possible. Barriers to entry are easier to maintain in a competitive arena that is "local", either in the geographic sense or in the sense of being limited to one product or a handful of related ones. The two most powerful competitive advantages-customer captivity and economies of scale-are more achievable and sustainable in circumscribed markets of this kind. Their opposites are the open markets and host of rivals that are features of globalization. Compapies entering such markets risk frittering away the advantages they secured on smaller playing fields.., Ifa company wants to grow but still obtain superior returns, the authors argue, the best strategy is to dominate a series of discrete but preferably contiguous markets and then expand only at their edges. WalMart's diminishing margins over the past 15 years are strong evidence of the danger of proceeding otherwise.     

Contextual marketing--the real business of the Internet

The painful truth is that the Internet has been a letdown for most companies--largely because the dominant model for Internet commerce, the destination Web site, doesn't suit the needs of those companies or their customers. Most consumer product companies don't provide enough value or dynamic information to induce customers to make the repeat visits--and disclose the detailed information--that make such sites profitable. In this article, David Kenny and John F. Marshall suggest that companies discard the notion that a Web site equals an Internet strategy. Instead of trying to create destinations that people will come to, companies need to use the power and reach of the Internet to deliver tailored messages and information to customers. Companies have to become what the authors call "contextual marketers." Delivering the most relevant information possible to consumers in the most timely manner possible will become feasible, the authors say, as access moves beyond the PC to shopping malls, retail stores, airports, bus stations, and even cars. The authors describe how the ubiquitous Internet will hasten the demise of the destination Web site--and open up scads of opportunities to reach customers through marketing "mobilemediaries," such as smart cards, e-wallets, and bar code scanners. The companies that master the complexity of the ubiquitous Internet will gain significant advantages: they'll gain greater intimacy with customers and target market segments more efficiently. The ones that don't will be dismissed as nuisances, the authors conclude. They suggest ways to become welcome additions--not unwelcome intrusions--to customers' lives.     

Alternative paths for the growth of e-commerce

Electronic commerce promises to be the drive behind a new wave of economic growth. Yet, the actual achievement of the prospected benefits and their allocation will depend on the features of the business models driving the diffusion of the new sales channel. The paper rejects the existence of a deterministic relation between e-commerce technological features and the structure of future electronic markets. Accordingly, alternative growth paths are explored and different scenarios are sketched depending upon the prevailing nature of the economic relations among the involved actors. For each scenario, the paper discusses the implications in terms of e-commerce diffusion speed and benefits allocation. The analysis of possible growth paths reveal that public intervention plays a non-negligible role in shaping the business model(s) that will eventually emerge, hence the impact of e-commerce on social welfare.     

How to acquire customers on the Web

Most retailers on the Web spend more to acquire customers than they will ever get back in revenue from them. Many think that sky-high spending on marketing is necessary to stake out their share of Internet space. But is it really? How do retailers know how much to pay? Consider CDnow, which has developed a multifaceted customer-acquisition strategy that reflects a clear understanding of the economics of an on-line business. At the heart of its strategy is affiliate marketing, a concept the company pioneered. Under its BuyWeb program, anyone can put a link to CDnow on his or her Web site, and if a customer uses that link to arrive at CDnow and make a purchase, the referring site owner gets a percentage of the sale. CDnow pays no money if no sale is made, which makes the marketing program completely efficient. But CDnow didn't stop there. Being a Web store, it had complete data on the number of visitors to its site and what they bought, which it used to work out the lifetime value of an average customer. CDnow used that figure to determine how much to wager on the expensive and risky world of traditional advertising to reach a wider audience that wasn't already on-line. CDnow's experience, still a work in progress, contradicts John Wanamaker's oft-quoted lament: "I know half the money I spend on advertising is wasted, but I can never find out which half." As the CDnow example demonstrates, there is a way to find out which half really works.     

Open-market innovation

Companies in many industries are feeling immense pressure to improve their ability to innovate. Even in these tough economic times, executives have pushed innovation initiatives to the top of their priority lists, but they know that the best ideas aren't always coming out of their own R&D labs. That's why a growing number of companies are exploring the idea of open-market innovation--an approach that uses tools such as licensing, joint ventures, and strategic alliances to bring the benefits of free trade to the flow of new ideas. For instance, when faced with the unanticipated anthrax scare last fall, Pitney Bowes had nothing in its R&D pipeline to help its customers combat the deadly spores. So it sought help from outside innovators to come up with scanning and imaging technologies that could alert its customers to tainted letters and packages. And Dow Chemical and Cargill jointly produced a new form of plastic derived from plant starches--a breakthrough product that neither company could have created on its own. In this article, Bain consultants Darrell Rigby and Chris Zook describe the advantages and disadvantages of open-market innovation and the ways some companies are using it to gain competitive advantage. By importing ideas from the outside, the authors say, companies can collect more and better ideas from different kinds of experts. Creative types within a company will stick around longer if they know their ideas will eventually find a home--as internal R&D projects or as concepts licensed to outside buyers. Exporting ideas also gives companies a way to measure an innovation's real value. However, the authors warn against entering into open-market innovation without properly structuring deals: Xerox and TRW virtually gave away their innovations and had to stand by while other companies capitalized on them.     

Mind your pricing cues

For most of the items they buy, consumers don't have an accurate sense of what the price should be. Ask them to guess how much a four-pack of 35-mm film costs, and you'll get a variety of wrong answers: Most people will underestimate; many will only shrug. Research shows that consumers' knowledge of the market is so far from perfect that it hardly deserves to be called knowledge at all. Yet people happily buy film and other products every day. Is this because they don't care what kind of deal they're getting? No. Remarkably, it's because they rely on retailers to tell them whether they're getting a good price. In subtle and not-so-subtle ways, retailers send signals to customers, telling them whether a given price is relatively high or low. In this article, the authors review several common pricing cues retailers use--"sale" signs, prices that end in 9, signpost items, and price-matching guarantees. They also offer some surprising facts about how--and how well--those cues work. For instance, the authors' tests with several mail-order catalogs reveal that including the word "sale" beside a price can increase demand by more than 50%. The practice of using a 9 at the end of a price to denote a bargain is so common, you'd think customers would be numb to it. Yet in a study the authors did involving a women's clothing catalog, they increased demand by a third just by changing the price of a dress from $34 to $39. Pricing cues are powerful tools for guiding customers' purchasing decisions, but they must be applied judiciously. Used inappropriately, the cues may breach customers' trust, reduce brand equity, and give rise to lawsuits.     

Get inside the lives of your customers

Many companies have become adept at the art of customer relationship management. They've collected mountains of data on preferences and behavior, divided buyers into ever-finer segments, and refined their products, services, and marketing pitches. But all too often those efforts are too narrow--they concentrate only on the points where the customer comes into contact with the company. Few businesses have bothered to look at what the author calls the customer scenario--the broad context in which customers select, buy, and use products and services. As a result, consultant Patricia Seybold maintains, they've routinely missed chances to deepen loyalty and expand sales. In this article, the author shows how effective three very different companies have been at using customer scenarios as the centerpiece of their marketing plans. Chip maker National Semiconductor looked beyond the purchasing agents that buy in bulk to find ways to make it easier for engineers to design National's components into their specifications for mobile telephones. Each time they do so, it translates into millions of dollars in orders. By developing a customer scenario that describes how people actually shop for groceries, Tesco learned the importance of decentralizing its Web shopping site and how the extra costs of decentralization could be outweighed by the higher profit margins on-line customers generate. And Buzzsaw.com used customer scenarios as the basis for its entire business. It has used the Web to create a better way for the dozens of participants in a construction project to share their drawings and manage their projects. Seybold lays out the steps managers can take to develop their own customer scenarios. By thinking broadly about the challenges your customers face, she suggests, you can almost always find ways to make their lives easier--and thus earn their loyalty.     

Customer value propositions in business markets

Examples of consumer value propositions that resonate with customers are exceptionally difficult to find. When properly constructed, value propositions force suppliers to focus on what their offerings are really worth. Once companies become disciplined about understanding their customers, they can make smarter choices about where to allocate scarce resources. The authors illuminate the pitfalls of current approaches, then present a systematic method for developing value propositions that are meaningful to target customers and that focus suppliers' efforts on creating superior value. When managers construct a customer value proposition, they often simply list all the benefits their offering might deliver. But the relative simplicity of this all-benefits approach may have a major drawback: benefit assertion. In other words, managers may claim advantages for features their customers don't care about in the least. Other suppliers try to answer the question, Why should our firm purchase your offering instead of your competitor's? But without a detailed understanding of the customer's requirements and preferences, suppliers can end up stressing points of difference that deliver relatively little value to the target customer. The pitfall with this approach is value presumption: assuming that any favorable points of difference must be valuable for the customer. Drawing on the best practices of a handful of suppliers in business markets, the authors advocate a resonating focus approach. Suppliers can provide simple, yet powerfully captivating, consumer value propositions by making their offerings superior on the few elements that matter most to target customers, demonstrating and documenting the value of this superior performance, and communicating it in a way that conveys a sophisticated understanding of the customer's business priorities.     

When your contract manufacturer becomes your competitor

PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers. Shanghai Automotive Industry Corporation (SAIC) started out manufacturing vehicles for Volkswagen and GM; now it's preparing to sell its own cars in China, Europe, and North America. Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside. In this article, the authors explore the double-edged relationships original equipment manufacturers (OEMs) forge with their contract manufacturers (CMs). On the one hand, an OEM can reduce its labor costs, free up capital, and improve worker productivity by outsourcing all the manufacturing of a product. The company can then concentrate on value-adding activities--research and development, product design, and marketing, for instance. On the other hand, an OEM that retains a contract manufacturer may find itself immersed in a melodrama replete with promiscuity (the ambitious CM pursues liaisons with other OEMs), infidelity (the OEM's retailers and distributors shift their business to the upstart CM), and betrayal (the brazen CM transmits the OEM's intellectual property to the OEM's rivals or keeps it for itself when the contract is up). OEMs cannot simply terminate their outsourcing arrangements--they need contract manufacturers in order to keep specializing, adding value, and staying competitive. But OEMs can manage these relationships so that they don't become weak or the CMs too strong. Doing so requires modesty about revealing trade secrets; caution about whom one consorts with; and a judicious degree of intimacy, loyalty, and generosity toward partners and customers.     

Knowing a winning business idea when you see one

Identifying which business ideas have real commercial potential is fraught with uncertainty, and even the most admired companies have stumbled. It's not as if they don't know what the challenges of innovation are. A new product has to offer customers exceptional utility at an attractive price, and the company must be able to deliver it at a tidy profit. But the uncertainties surrounding innovation are so great that even the most insightful managers have a hard time evaluating the commercial readiness of new business ideas. In this article, W. Chan Kim and Renée Mauborgne introduce three tools that managers can use to help strip away some of that uncertainty. The first tool, "the buyer utility map," indicates how likely it is that customers will be attracted to a new business idea. The second, "the price corridor of the mass," identifies what price will unlock the greatest number of customers. And the third tool, "the business model guide," offers a framework for figuring out whether and how a company can profitably deliver the new idea at the targeted price. Applying the tools, though, is not the end of the story. Many innovations have to overcome adoption hurdles--strong resistance from stakeholders inside and outside the company. Often overlooked in the planning process, adoption hurdles can make or break the commercial viability of even the most powerful new ideas. The authors conclude by discussing how managers can head off negative reactions from stakeholders.     

Welcome to the experience economy

First there was agriculture, then manufactured goods, and eventually services. Each change represented a step up in economic value--a way for producers to distinguish their products from increasingly undifferentiated competitive offerings. Now, as services are in their turn becoming commoditized, companies are looking for the next higher value in an economic offering. Leading-edge companies are finding that it lies in staging experiences. To reach this higher level of competition, companies will have to learn how to design, sell, and deliver experiences that customers will readily pay for. An experience occurs when a company uses services as the stage--and goods as props--for engaging individuals in a way that creates a memorable event. And while experiences have always been at the heart of the entertainment business, any company stages an experience when it engages customers in a personal, memorable way. The lessons of pioneering experience providers, including the Walt Disney Company, can help companies learn how to compete in the experience economy. The authors offer five design principles that drive the creation of memorable experiences. First, create a consistent theme, one that resonates throughout the entire experience. Second, layer the theme with positive cues--for example, easy-to-follow signs. Third, eliminate negative cues, those visual or aural messages that distract or contradict the theme. Fourth, offer memorabilia that commemorate the experience for the user. Finally, engage all five senses--through sights, sounds, and so on--to heighten the experience and thus make it more memorable.     

Strategy and the new economics of information

We are in the midst of a fundamental shift in the economics of information--a shift that will precipitate changes in the structure of entire industries and in the ways companies compete. This shift is made possible by the widespread adoption of Internet technologies, but it is less about technology than about the fact that a new behavior is reaching critical mass. Millions of people are communicating at home and at work in an explosion of connectivity that threatens to undermine the established value chains for businesses in many sectors of the economy. What will happen, for instance, to dominant retailers such as Toys "R" Us and Home Depot when a search through the Internet gives consumers more choice than any store? What will be the point of cultivating a long-standing supplier relationship with General Electric when it posts its purchasing requirements on an Internet bulletin board and entertains bids from anybody inclined to respond? The authors present a conceptual framework for approaching such questions--for understanding the relationship of information to the physical components of the value chain and how the Internet's ability to separate the two will lead to the reconfiguration of the value proposition in many industries. In any business where the physical value chain has been compromised for the sake of delivering information, there will be an opportunity to create a separate information business and a need to streamline the physical one. Executives must mentally deconstruct their businesses to see the real value of what they have. If they don't, the authors warn, someone else will.     

Global gamesmanship

Competition among multinationals these days is likely to be a three-dimensional game of global chess: The moves an organization makes in one market are designed to achieve goals in another in ways that aren't immediately apparent to its rivals. The authors--all management professors-call this approach "competing under strategic interdependence," or CSI. And where this interdependence exists, the complexity of the situation can quickly overwhelm ordinary analysis. Indeed, most business strategists are terrible at anticipating the consequences of interdependent choices, and they're even worse at using interdependency to their advantage. In this article, the authors offer a process for mapping the competitive landscape and anticipating how your company's moves in one market can influence its competitive interactions in others. They outline the six types of CSI campaigns--onslaughts, contests, guerrilla campaigns, feints, gambits, and harvesting--available to any multiproduct or multimarket corporation that wants to compete skillfully. They cite real-world examples such as the U.S. pricing battle Philip Morris waged with R.J. Reynolds--not to gain market share in the domestic cigarette market but to divert R.J. Reynolds's resources and attention from the opportunities Philip Morris was pursuing in Eastern Europe. And, using data they collected from their studies of consumer-products companies Procter & Gamble and Unilever, the authors describe how to create CSI tables and bubble charts that present a graphical look at the competitive landscape and that may uncover previously hidden opportunities. The CSI mapping process isn't just for global corporations, the authors explain. Smaller organizations that compete with a portfolio of products in just one national or regional market may find it just as useful for planning their next business moves.     

How to identify your enemies before they destroy you

We've all heard the stories about corporate giants who ignored disruptive innovations and paid a steep price: Think what the personal computer did to Digital or Japanese economy cars did to the Big Three automakers. Big companies now spend a lot of time and money trying to make sure they don't get blindsided by their smaller, leaner counterparts. But it's not easy to distinguish genuine threats from also-rans as they emerge. Most of the nascent technologies that typically bombard executives will not amount to competitive threats and deserve to be ignored. As a result, disruptions are usually not taken seriously until they become obvious--when it's often too late. A disruptive innovation is a technology, product, or process that creeps up from below an existing business and threatens to displace it. Usually, the disrupter offers lower performance and less functionality at a much lower price. The product or process is good enough to meet some customers' needs; others welcome the disruption's simplicity. Gradually, it improves to the point where it displaces the incumbent. But, the authors argue, disruption isn't inevitable. They have developed a tool that can help companies detect potential disruptive innovations while management still has time to respond effectively. The tool's decision-making methodology harnesses the organization's collective wisdom to determine how likely it is that a particular innovation will seriously damage an incumbent's business. The methodology has two components: an analytical instrument and an organizational process. There's nothing magical about it--but it gets managers to think systematically about identifying and addressing threats to the core business. And the tool's rigorous approach can spell the difference between flailing around and acting effectively in the face of a serious competitive threat.     

Corporate imagination and expeditionary marketing

In the 1980s, competitive success came mostly from achieving cost and quality advantages over rivals in existing markets. In the 1990s, it will come from building and dominating fundamentally new markets. Core competencies are one prerequisite for creating new markets. Corporate imagination and expeditionary marketing are the keys that unlock them. McKinsey Award winners Gary Hamel and C.K. Prahalad argue that corporate imagination quickens when companies escape the tyranny of their served markets. (Motorola, for example, sees itself as a leader in wireless communications, not just as a maker of beepers and mobile phones). Think about needs and functionalities instead of marketing's more conventional customer-product grid. Overturn traditional price/performance assumptions. (Fidelity Investments unlocked a vast new market by packaging sophisticated investment vehicles for middle-income investors.) And lead customers rather than simply follow them. Creating new markets is a risky business, however--a lot like shooting arrows into the mist. Imaginative companies minimize the risk not by being fast followers but through the process the authors call expeditionary marketing: low-cost, fast-paced market incursions designed to bring the target quickly into view. Toshiba introduced laptop computers to the market at such a blistering pace that it could explore every conceivable niche--and afford an occasional failure without compromising its credibility with customers. To stimulate corporate imagination, top management needs to redefine failure and develop new time- and risk-adjusted yardsticks for managerial performance. Managers must be encouraged to stretch their company's opportunity horizon well beyond the boundaries of its current businesses.