As part of my research for Connected!, I came across an interesting research study titled Effects of Customer-Centric Structure on Firm Performance (1). The study shows that being customer centric can actually decrease financial performance by almost 23%. Wow! This research definitely got my attention. Especially in an age where everyone is singing how wonderful customer centricity is.
As I dug deeper, I found that the study brought out 3 key aspects:
- First, customer satisfaction positively increased due to better and more focused attention by firms on their customers
- Financial performance increased by 8% in cases where competitive activity was weak, and where competitors were not already customer centric
- Financial performance degraded by 23% where competitors were already customer centric and where competition was strong
The first result was sort of expected. But result 3 above was surprising. So I dug deeper.
Apparently, there were 2 core drivers of the above results. First, organizational overhead or coordination increased significantly in a customer centric organization. This wasn’t too much of a surprise. Second, in cases where there were high levels of competitive activity, very little was typically gained by way of uncovering innovative approaches and meeting unaddressed customer needs. Given that being customer centric is actually supposed to drive this very result, the study brought out a very interesting anomaly.
There is no arguing with data. Ready to abandon being customer centric?
Not quite because I do have good news for you! Here goes.
- First, how customer centric you are probably cannot be determined solely by top level organizational structures and business divisions. Empirical data is always collected “after” such studies bring out these dramatic revelations. The catch-22 is that existing data does not always tell the whole story.
- Second, even in an organization structured by customer segments, there is lots of coordination and alignment of incentives against a largely standard product portfolio that doesn’t actually change much by customer segment. The results of the study may have been skewed by this fact. Many organizations hence are never really customer centric to begin with. They are just organized like that.
- Finally, organizations may indeed have specific and tailored product offerings aligned by customer segments. The claims of being ineffective in a strong competitive field are true only if we factor in the dominance of uniform and similar offerings from one organization to the next. Such product portfolios hence are actually also commoditized.
Clearly the right kind of innovation and how we meet customer needs is a critical factor. Brand plays an important role in being distinctive and preferred but it must be supported by the underlying differentiated value propositions. Innovation is much needed, not only to rejuvenate existing product lines, but also to introduce new products that will fuel the future and protect against competitive advances.
However, innovation today must be different given the increasingly connected nature of businesses. A central premise of my upcoming book is that the world is getting connected (of course) across industry boundaries. Hence our traditional go-to-market by product lines is slowly being rendered inadequate. Instead, we need to define our go-to-market by cross-industry customer experiences. These experiences in turn must be defined by the overall purpose of our customers. Consequently, that focus on the customer’s purpose will extend beyond our products alone.
Everywhere we look, the market is evolving slowly towards this new model. But many of us are still looking inside-out, not outside-in. Hence our customer centric structures don’t yield results. Think of the following industry examples which show how the world is getting connected: Google Home, banks connecting with fitness centers, Apple Siri connecting with Uber, Amazon Alexa connecting with banks, chabots on popular chat platforms such as Facebook and WeChat, student education programs like uPromise connecting all kinds of spending and occasions, wells Fargo connecting with accounting programs, Blue Cross Blue Shield connecting with Lifetime Fitness, and the list goes on. These examples serve as good indicators of the oncoming trend.
So what can we do to meet this challenge of being customer centric? In my book I outline how we must think of executing and organizing for a connected world. The chapter is very innovatively named as “Execution”! Execution is the fifth and final element of the Connected Company framework I lay out in “Connected!”. The other elements being cross-industry customer journeys, 3-tier loyalty program, a new equation for customer engagement, and a model to integrate our products and focus them on customer purpose.
The 3 methods outlined in “Execution” are below:
1. Connected Communities
One of the biggest issues with innovation is execution. Either we can’t seem to channel the right ideas through, or good ideas don’t seem to get executed well. Innovation and research groups are often misaligned or unable to tangibly meet the constant ROI demands made of them.
This problem was summed up very well in Innovators Dilemma (Clayton Christensen) which recommended that breakthrough innovation be set up as a separate business unit to be successful at delivering. Various other approaches have been recommended including the concept of ambidextrous organizations which studied various org designs and recommended an approach similar to that in the Innovators Dilemma.
However, the challenges for innovation today are different from what these concepts outlined. In fact, business innovation today is more than about core products and business alone. The connected nature of businesses can render an innovative product obsolete rapidly. Innovation has to be thought about in an ecosystem, and for that reason, the traditional approach of setting up separate business units is insufficient. The design must be created consciously with a focus on customer purpose, with the aim of rejuvenating not only the product lines, but also how we go to market. The “connected communities” as I call them are almost like industry consortiums but only much broader – operating across industries. They are formal creations and have a simpler charter – to span connected customer experiences. They need to operate much like an industry consortium and cut across industry and product lines. The communities include partners from multiple industries to bring cross-company customer journeys to life. And then, looking outside in, create and pilot new CX programs within their organizations and their partners to stitch various product portfolios together. These connected communities must have the budget and resources to execute the entire lifecycle of innovation, before mainstreaming the pilot.
The important message is to create and gain momentum on a CX program from the outside in, and then use it to enhance and evolve the core. The next big hurdle is to operationalize these CX programs. CX Focused Org design explains this.
2. CX Focused Org Design
We are all customer centric. Or at least we claim to be. We put the customer at the center of everything we do. But then, we turn around and divide our organization by products, businesses, and geographies. Next, we valiantly strive to realize the power of all our capabilities to serve the customer through layers of integration and coordination. This gives rise to the dismal results revealed by the research I referenced in the beginning. Obviously, this approach is missing an essential ingredient that causes us to fall short of realizing the full potential.
Let’s consider the top level org structures to be superfluous (for reporting purposes only). Then there really are 2 basic go-to-market models. 1) brands or products going straight to customers, or 2) through an account or customer group often segmented by customer types. Both these models need to be augmented to compete for the connected future. In a CX focused design, this is done by including an overarching CX program layer which is essentially the connected community. Designing for the future is about thinking very clearly about customer experiences in an ecosystem, not just in an independent corporate context. Hence, our top level products should be a combination of value propositions from the entire ecosystem that supports the customer experience. These value propositions will be an output of the Connected Communities. The Nike+ program, and the new Plenti loyalty program could be considered broad examples of this approach. They signify an overall program, but also allow for individual products. Our challenge is to make this CX focused org design standard, not optional. One of the primary hurdles is explicit measurement and accountability. The next section addresses that.
Connected Scorecard
We all know about the Balanced Scorecard and the associated tool called the Strategy Map, originally made famous by Dr. Robert Kaplan. Regardless of how extensively you use these tools, the concept is important to apply and understand, even at a high level. The strategy map alone gives tremendous food for thought. People and how they are motivated along the desired path are critical for a good org design. No amount of coaxing can accomplish what we don’t or can’t measure.
The effectiveness of any methodology depends on what we feed into it. In this case, the primary input is the strategy or the way to play. I’ve introduced a simple, easy-to-use Connected Scorecard as an input to existent management methodologies. This scorecard brings the outside-in perspective to the top of the food chain. It provides a simple way to measure how we are achieving the goals of meeting the needs of our customers in a connected world. There are only 2 measurement groups – ecosystem, and customer journeys. The first one measures how well we are including players in a cross industry fashion (coverage, relationship strength, competitive parity) . The second one measures the breadth (how many) and depth (how well, financial contribution) of the customer journeys we are enabling. The Connected Scorecard will hopefully mitigate the problems of isolated innovation, competitive inertia, and the issue of balancing the future with the present. It gives us a practical framework for driving and measuring our effectiveness in a connected world.
In summary, measuring the effectiveness of being customer centric can be viewed in one way through the lens of finding unmet needs to leapfrog the competition. In order to do that, it is critical to actively address customer journeys in a world where industry boundaries are crumbling. The concept of connected communities, CX focused org design, and the scorecard are possible techniques to help us accomplish that.
(1) The research study referenced can be found here.
(2) Image credit
Thanks for reading! Please do share your feedback and thoughts. This blog is based on my upcoming book Connected! – How #platforms of today will be apps of tomorrow. The book outlines how the platform story of today will evolve in the near future, and presents a “Connected Company” framework. One of the pillars of the framework is Execution (which we read about today). Read about the book here, and sign up to receive updates and launch discounts. Also visit my first book Dancing The Digital Tune which brings out 5 principles of customer engagement and creating a strategy for the digital world. It was of course, also the foundation for Connected!