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Implementing Lean Marketing Systems

Outside in Strategy– Customer Value Guest was Christine Moorman, co-author of Strategy from the Outside In: Profiting from Customer Value

Related Podcast: Outside in Strategy– Customer Value

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Implementing Lean Marketing Systems Christine Moorman is the T. Austin Finch, Sr. Professor and founder of The CMO Survey at The Fuqua School of Business, Duke University. Professor Moorman is the author of over 60 journal articles, reports, and conference proceedings. She has co-edited the book Assessing Marketing Strategy Performance (with Don Lehmann) and has made over 100 presentations of her work at companies and universities all over the world. Her primary areas of activity are marketing strategy and customer-focused innovation Professor Moorman has served on the Board of Directors and chair of the Marketing Strategy Special Interest Group for the American Marketing Association, as Director of Public Policy for the Association for Consumer Research, and as a Trustee for the Marketing Science Institute. She won the 2008 Mahajan Award for Career Contributions to Marketing Strategy from the American Marketing Association and the 2008 Distinguished Marketing Educator from the Academy of Marketing Science. Professor Moorman’s research has won two best paper awards and been published in Journal of Marketing Research, Journal of Consumer Research, Marketing Science, Journal of Marketing, Journal of Public Policy & Marketing, International Journal of Research in Marketing, Academy of Management Review, and Administrative Science Quarterly. Her research has been supported by grants from the Marketing Science Institute, the Institute for the Study of Business Markets, and the National Science Foundation. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems Joe Dager: Welcome everyone. This is Joe Dager, the host of the Business 901 podcast. With me today is Christine Moorman. She is the co-author of Strategy from the Outside In: Profiting from Customer Value, a recent book published by McGraw Hill that discusses profiting from customer value. Christine, could you start out by giving me the elevator speech about yourself? Christine Moorman: I'm a professor at Duke University and I teach courses in marketing strategy at the Fuqua School of Business. I've done both research and consulting work looking at how organizations can really learn from the market, learn from customers, and how they can grow and innovate in response to what they've learned. Joe: What prompted you to write the book? Christine: That's a good question, Joe. I spent the last 20 years in my career studying companies, teaching about companies, working with companies, and one of the reoccurring themes is that a lot of companies fall into what we call inside out thinking. They just lose touch with what their customers want, what their customers need, they lose sight of the fact that competitors start doing a better job service those customer's wants and needs. They begin to focus on what they're good at. They begin to focus on the bottom line. And, they begin to focus on other things like shareholder value, which is a perfectly reasonable Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems outcome, but when it takes precedence over first serving customers, and then we have a problem on our hands. It was observing that over and over and over again that made me want to try to take it apart and understand why this was happening and what companies could do instead and what I could offer them in terms of advice about how to manage their companies so instead they could manage from the outside in. Joe: You talk about customer value. Is that really how a customer perceives the value that your organization puts forth or gives to them? Christine: Exactly. We talk about the idea that what is it that customers want? You know, how are their needs changing over time? How can we then serve them more effectively than the competition? It's not rocket science in that sense. I mean, it's pretty basic business 101. Joe: What is interesting that I find is customer value isn't rocket science, but it's pretty difficult sometimes to get that information and to really understand it. Does your book describe how to do that? Christine: I think you're right. It's the idea of customer isn't very complex, but then getting a true sense of what it is that your customers really want can be difficult. One of the difficulties is that companies I think fall prey to two common mistakes. First of all, they gather way too much data. So, they get stuck in this sort of big data trap and they're trying to analyze their way out of it. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems The second trap that they fall into is that a lot of that data doesn't reflect direct interaction with customers. I think the best way to really understand what's going on with your customers is to spend time with them. We talk about living with your customers in the book. We don't mean literally living with them; we mean spending time directly with them either in their homes where they're using the product or in the stores where they're buying the product, and on sales calls where they're interacting with the sales force it manifests itself having that direct contact. The very best companies do this well. They not only have their front line employees out there engaging with customers, but they have top managers all the way from the very top, CEOs, you know, who are out running the cash register to see what the customer problems are, to see what the unmet needs are, you know, all the way through middle managers who again, might be attending to different activities that involve face-to-face contact with the customer. Joe: Can you name a couple companies that you think that are good at this? Christine: Yes, I can. In terms of the market insight part of it or the overall managing per customer value? Joe: I would say for managing for customer value because I think you've got to get the big picture a little bit first. Christine: Sure. So, well one company that we profile quite a bit in the book is Tesco, which is a British retailer who really pulled itself out of a death spiral in the mid-90s under Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems the leadership of Terry Lahee who was the chief marketing officer and later went on to become the CEO. They just do so many things well that help them achieve this success at managing for customer value. As I was mentioning before, they spend time directly with their customers. They have a program that's called Tesco Week In Store where the top managers are out there with the customers. They also rely on employees to, you know, in various focus groups and ways of gathering information from employees all over the company, for insights about what customers want and need. They have an incredible way of capturing for their loyalty card, The Club Card, capturing a lot of information about what consumers are doing in their interactions with the company. They systematically mine that information to be able to drive their strategy towards what the customer wants and also to defend against encroaching competitors in all the ways that we talk about in the book. We talk about a set of things that are called the customer value imperatives. Tesco does all of these imperatives pretty well. But fundamentally, these imperatives involve getting information about consumers and the driving the strategy off of that information. I mean, we could talk specific about those imperatives. But at the core, the idea is that these are principals that will allow Tesco and other companies like Procter and Gamble, you can even talk about other business to business companies, as well, that do this, that really Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems do drive strategy from the outside in as opposed to just saying I've got this little bundle of resources and I'm going to now play them out in ways that are efficient. Firms have to do that. But, if they sort of put the cart before the horse, if they put those efficiencies ahead of servicing customers, those efficiencies will eventually dry up and competitors will encroach. The other company I would just mention briefly that we talk about is almost a paragon of this outside in view is Amazon. A lot of your listeners know about the different things that Amazon has done. One thing that Amazon reflects at the core is this outside in view of strategy because Chuck Bezos, the CEO, has made it clear that they will go where their customers need them to go. He makes this quote which we really play up in the book that I think is tremendous that we can all learn from. He says rather than ask what we're good at and what else we can do with that skill, you ask who are our customers, what do they need? You say you're going to give it to them regardless of whether we have the skills to do so. At the core of that statement is the idea that, obviously he's not going to go off and make aircraft engines. There are some limitations to this mentality. But nevertheless, it still reflects an openness to grow in the direction and to evolve the company in the direction that where it reflects customer interest and customer needs. They've done that from the online bookstore all the way through the Kindle. If you look at the Kindle, they had no expertise in electronic devices. But, what they did have was a strong relationship with customers who trusted them for online content. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems Joe: I think that's interesting they developed the Kindle. They also bought Audible for listening to the books too for an extension of business. So, it's just not innovation of a new product too, it's also some acquisition involved there too. Christine: Absolutely, I think this strategy from the outside in can involve organic growth, and it can involve growth through acquisition. I'm all on paper with that. I think that makes sense depending on the costs and benefits of growing this yourself or buying someone who is already good at it. Joe: I enjoy hearing it's not necessarily what you're good at. So many of my listeners are continuous improvement of people and to get them outside of their four walls and they wonder why continuous improvements efforts don't last. And to me, the reason they don't last is because they're not driven by customer value. They're driven by internal structure, and if the customer is pulling in from you, then that drives and keeps the continuous improvement efforts going. Christine: Absolutely, and it's a very virtuous cycle then. On the other hand, if you just focus on continuous improvement, at some point, you can't squeeze any more blood from a turnip, so to speak. I mean, there is only so much you can take in terms of costs out of the system before you actually start to affect quality and value. I think this whole dynamic of really understanding and responding and creating customer value and then driving the system in a way internally, developing the business model, for example, that can do that extremely efficiently, is a powerful, powerful combination of having the customer value on the one hand and these terrific efficiencies. That's very hard Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems to beat. Competitors will turn away, as they consider entering markets when they see that combination on the part of companies. Joe: I think you're right there. If you're driven by your value proposition and being able to spread that gap, even if you are a leader in that certain field, if you are able to spread that gap by your quality improvement, that's what continuous improvement is about. Christine: Exactly! Exactly! Joe: When I read your book, I pulled an older book off my bookshelf, and your book seemed to be a 2010 version of Treacy's "Discipline of Market Leaders.� If nobody's ever read the book, I wouldn't tell them to go and read "The Discipline of Market Leaders" now. I would have them read your book. But, it did really seem like a 2010 version of that book, and I mean that as a compliment. Christine: Well, thank you. I appreciate that. I see the parallel is that Paul talks about the three sources of leadership. I forget his exact terminology, but he has three sources of leadership that actually parallel very closely what we offer in our first imperative, which is this idea of really try to be a customer value leader, which means, pick a position in the marketplace that you will really like to excel at and don't try to be all things to all people. He talks about these three different kinds of sources of value that the firm can attempt to compete on. And we have three similar sources. In fact, we cite him in our articulation of those. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems But, I think we do slightly differently than in that particular point. Where we take him a step further, is that we actually talk about the fact that there are points of parity and points of distinction that the firm is looking for that if you want to be, for example, a performance leader, where we talk about having some technological performance advantage, that might be in biotech, or that might be in hardware, software. We also talk in that same way about fashion leadership, or style leadership. In either of these cases though, you will exceed, if you want to be a leader on that dimension, you'll exceed the competitors. You will go beyond the average, if you will. But, that doesn't mean that you can be, that your service, for example, that you provide customers, or that the price that you charge can be so out of line that consumers see the whole value proposition as unreasonable. So, we talk about being really good at one of these and then being at parity on the other two. I think that's one point. The other point is the fact that we try to make clear, which is I know something really important to executives is that the world just keeps changing from underneath you that you have this position of value. And as soon as the competitor comes in, they teach the consumer something new and their perception of what's valuable or not valuable starts the shift. Maybe also that competitor takes the position that's more attractive on that particular value than you've been able to achieve. So, it's a case in managing this position of customer value leadership that is really being very vigilant, staying in touch with what's going on in the market, what are competitors Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems doing. More importantly, how customers see those competitors and what they're doing. Do they see them as taking that position that's greater than yours? That's a very important aspect of this outside-in mentality, and profiting from customer value that a lot of companies aren't willing to do over time, to really take seriously that we are going to have to monitor the market, monitor what customers are thinking on a continuous basis, and find a way that makes sense of that so that we know how to move at which direction, at what time, in response to what's happening out there. These are some of the ways in which a company that is focused on customer value can be assured that they will not only do well in the market place, but maximize profits. The first of these is to be a customer value leader. And to really have a position where, again, you have a position of leadership. You have a business model that supports it, that will allow you to create that value for customers over time and also to make a lot of money in the process. In other words, capture value for the company. So, this whole dynamic of creating value for the customer, capturing value for the company, is very important. I know that this is something that they put a lot of stock in getting that business model right. If the business model's snapped onto a value proposition, it's really powerful. Then you have a great combination of capabilities that can serve the company well. If you get that first imperative right, so in the case of Tesco, you know, they are a company that is, interestingly enough, although they are a supermarket, they're a superior Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems relative value provider. They understand their customers. They give them excellent service. They customize the stores to provide that value. In terms of moving to the second imperative, they had to innovate new value over time for those customers. They could not sit still, because Sainsbury were at their heels. Other companies were putting pressure on them that were higher quality stores. So, they started offering new store formats, like a metro express, big box stores. They entered financial services and started competing head to head with the bank, which was really interesting. It's been successful for them in the UK. They've also entered new geographies around the world. Now, they're third in the world. But they didn't stop there. They capitalized on both their customer assets, and their brand assets, which are our third and fourth imperatives. The idea here is that, you've done great things for your customers; you hold a position of leadership. You've innovated some new value for them. And now, the viewpoint is that there is money on the table to be made from these relationships that you have with customers, and the perceptions that they hold, of your company. But you have to explicitly manage those customers, and explicitly manage the brand asset that you've built in their minds and hearts. Tesco did both of those things, really well. Most important thing that they've done is to really convince the employees that they represent the brand and that every encounter that their customer has with a Tesco employee in a Tesco store is a reflection of the Tesco Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems brand. And so, kind of this, uncompromising position, that really protects the brand against loss of relevance, and also, competitive encroachment. Joe: I'm only good at three out of the four, two out of the four. Do I have a chance? Christine: Absolutely. In the book, we talk about the fact that, these are pieces that you can build, over time. I think the one that you definitely do need, to start with, is you have to take seriously, this issue of customer value leadership, and you have to seek that. Once you own a position like that, then you can start to think about new value, capitalizing on the customer assets. If you haven't started this process yet, that is definitely the place to start. Once you've done that, then you can think about exercising resources in different areas across these three other imperatives. They don't have to be done, necessarily, in any sequence, other than the first one. Joe: Is this a how to book? Do you discuss certain things to do to carry these things out, and to measure them? Christine: We talk in the book about, first of all, we try to explain why we think these imperatives are really the way to manage, an outside in company to maximize profits. We offer a series of, if you will, pointers, tips for doing this. I hope you found the examples in the book illuminating because we worked very hard to find companies who were actually doing these things, and to point those examples out. In my classrooms, at least, people are much more likely to believe the case that I'm trying to Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems build if I can show them, "Oh, here's an example of General Electric doing this. Here's an example of this Internet startup doing it. Here's an example of another company." We offer a lot of examples. Depending on your business, you may be able to learn differently from the variety of examples. But in each of the chapters, we also hold up some metrics that firms could use in thinking about how they would measure their progress on each of these customer value imperatives. Joe: When you look at, let's say, capitalizing on the customer as an asset. Can you take that, I mean, the customer is our asset, in a business. There's nothing else that we really have as a business as a stronger asset, is there? Christine: There is nothing that you, that a company would claim as an asset that is more important than its customer. But, the irony is that, at least for now, and this is going to change, but at least for now, that of course isn't on the balance sheet. You know, so, it's, you know, you don't put down the value of your customer relationships in the United States, and you don't say that, "Well, we have this many customers, and, you know, they're worth this much." There are some conditions when firms are forced by the SEC currently, to make disclosures, if their customers are of a certain size, and percentage of their business. But on average, most companies aren't making those disclosures. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems So what happens is that companies start thinking about, "Well, it's these other resources, that we have, these other assets, that we own, that really should be driving our business." But, that's a huge mistake as we've made, as a point that I've made throughout this conversation. So, yes, it is the most important asset, the customer is. Joe: I think it's kind of funny, because I just wrote a blog article yesterday about Michael Porter's value chain. That's been around for ages, but when you look at all the continuous improvement efforts that TQM, Lean, six Sigma, and all these different efforts people made, they've left sales and marketing, off of the continuous improvement cycle, they haven't really attacked the demand side of the business. That part of the value chain, is the most important, but still the one that I'd think is, people have a tendency to stay away from it. They want to control, they want to have the control within the company, and your title, "Strategy from the Outside In," hit me as so relevant, that I pre-ordered the book. Christine: Well, we talk about these four imperatives as the new value chain. Maybe better put, instead of the extension of Porters value chain, which of course if very powerful and important. But I think you're right, there are a lot of reasons why companies sort of get stuck there, and we talk in the book about what some of those reasons are, but one of them is that there's a lot of positive reinforcement, at least, for a while, in terms of increasing efficiency. You know, it looks good. It shows up on the bottom line, immediately, when you Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems start. I think that's one of the reasons that people tend to stay in those earlier stages of the value chain. Also, if you think about it, it's easier, in a sense, to manage, because you have more control. Think about the things that you're controlling in those earlier stages, your operations. Which is a whole lot easier to manage than customers, who, of course, have their own businesses, and their own households to run, and they don't often do exactly what we want them to do. They're hard to understand, take time. Then competitors get in there and start rumbling around, and messing up our strategies. You notice, those conditions make it very hard to learn from customers, but also, hard to get a good read on how well we're doing with them. I think companies tend, a lot of managers would tend to go to the easy read, and the easy manage. Get that positive reinforcement. Joe: One of the things I think is really unique is that you talked a about other people within the company participating with customers and how important that may be. You talk about some of the Tesco strategies, and the reason that your employees can be effective with customers is because they understand that value proposition? Is that fair to say? Christine: Absolutely. I think that's fair to say. Do an interview, we include a couple of deep case studies about companies that have a very successful marketing leader, who are part of these outside in efforts, and one of the companies that we profile in the book is Wal-Mart. Steven Quinn, who is the current chief marketing officer, he makes a very bold Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems statement to the employees at one point in the transformation of Wal-Mart, from being a retail company, to a customer focused company. He tells them all, "You are the brand." That's not something that Wal-Mart really focused on. They did try to make it a pleasant place for people to shop but at some point in the evolution of the company, they kind of lost sight of the fact that, everything's happening in the store environment that weren't necessarily pleasing to customers, like, overstuffed aisles or dimly lit store. Not supporting employees in the way that, a lot of the customers felt that the employees should be supported. Customers didn't want to give their business to a company that wasn't taking care of their employees. Quinn was trying to not only get the employees to realize they were representing the brand, but to get that whole constellation of store level, corporate level activities all pointing in the same direction, so that the customer understood, this is what Wal-Mart stands for. And I want to give them my money. Joe: Is that what you mean by capitalizing on the brand? Christine: Absolutely. I think, in Wal-Mart's case, they needed to really further build their brand before they could completely capitalize on it. They had the great beginning, under Sam Walton, but the culture had not really stayed true to his vision. I think with Quinn, and a lot of other leaders who came through during this time, you know, Eduardo Castro, right, the president of Wal-Mart's US unit, who is Quinn's boss, they did a lot of wonderful things. Under Quinn, they shifted the brand message from, Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems "Always low price." to "Save money, live better." If you think about that, that's a very important shift, and it wasn't just the words, it was also kind of a shift in the way that Wal-Mart was thinking about itself. A focus just on low price, that's not as meaningful to customers as saying, save money, live better. Use that money for more important things in your life, and use our store as a means for doing that. It turns out that, Sam Walton had actually said something like that, earlier on in his career, and so it was easy for Quinn to evoke that, and bring that to the company. But if you think about it that was something that had to be pulled through every aspect of the company's activities, not just their advertising, physical assets, like signs, or truck logos, all of those things had to be changed. It was important to be able to show the customers that Wal-Mart stood for more than just cheap. Which is, I think, if you had asked consumers 10 years ago, I think most consumers would agree, that's what Wal-Mart stands for. "Save money, live better, " means something completely different. Joe: I think he has, 'when I think of Wal-Mart now, I don't necessarily, cheap isn't the word that I use. It's more, save money, and I'm pretty oblivious to a lot of that type of information that's coming across? Christine: Absolutely, yeah. I'm with you on that. I'm with you. Do you want me to give you the quote that Sam Walton, do you want me to give you that quote? Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems Joe: Yes, what was that? Christine: Sam Walton said, 'If we work together, we'll lower the cost of living for everyone. We'll give the world the opportunity to see what it's like to save and have a better life.'" Joe: Quinn just broke that down to our sound bites that we live by now, right? Christine: Right, which is "Save money, live better". Exactly. . But brilliant, because one of the things that I'm sure your listeners can appreciate is that, it's hard to bring cultural change to an organization. There's no doubt that moving from the inside out to the outside in, is a big culture shift. If you can rely on especially venerated leaders, like Walton, you know? They just, the employees love him. They called him "Mr. Sam, " you know, even the public relations person, when I was working with Steven on the interview, talked about how "Mr. Sam said this, Mr. Sam said that." It just, really struck me, how important it was for Quinn to be able to understand what this prior leader had said, and tried to do, and to be able to evoke that, to whatever extent he could, and if he tried to bring the company back to a customer focus. Joe: I read your book and I buy into it. I think I need to compete in the customer value arena, which, I'm a firm believer of. But how do I change? How do I organize and do that?

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Implementing Lean Marketing Systems Christine: There are a lot of things that I think companies can do, that we talk about in the book. I'll mention a few here. One is that, if you look at most companies, they're still organized by product or service divisions. So, there'll be a product group that takes care of this product, and another group that takes care of another product. Even at Procter and Gamble and Company that we talk extensively about in the book they still have a group that takes care of, you know, this deodorant, and that group that takes care of this diaper product, and the two don't talk to each other, even though they might actually have the same customer. That's the problem. Instead, companies can think about, how do we organize ourselves by the customers that we serve? Actually having customer groups, instead of product groups, that's a huge way. Then you can nest the products within or across those two groups, depending on exactly what the products are. But if you start with a structure, that, first off, is focused on customers, and not on products, this will go a long way to moving the company from, you know, an inside out view, which is really product focused, to an outside in view, which is more customer focused. That's probably the most important thing that companies can do. Joe: Instead of having the old product manager per se in an organization, we're talking more about having a product market manager, with "market" being the key word, and maybe that managing of that will have several products under it, because we really need to organize by markets. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems Christine: Exactly. You would have customer groups, products within them; you might even have a Chief Customer Office there. Instead of even a Chief Marketing Officer, I mean, there's going to be a lot of similarities in their jobs, but if you think about it, what are marketing people doing? They're helping lead the organization to stay focused on the customer. So, why not, even just re-label the activities that they're engaged in as being, you know, Chief Customer Officer, Assistant Customer Manager, instead of Assistant Marketing Manager, or Vice President of Marketing, Vice President of Customers. We're starting to see these transformations, within companies, and I think it's a very positive thing. Joe: What type of companies would I recognize that are doing that? Christine: One company that you could study as a case study is Fidelity. They went through a transformation where they organized their front end employees by customer segment. Instead of being focused on, certain kinds of investments, which would be, again, product centric, they organized their employees by segment. So these employees were dedicated to different groups of customers that were more or less valuable to the company. And so, the most skilled employees, the highest knowledge employees, would be dedicated to the most valuable customers, and they would be trained and set up with procedures to give those customers the highest level of service. This makes a lot of sense. These are your most valuable customers, let's go ahead and give them the best employees and the highest level of services that we can give to them, Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems because we know that they're going to be able to give us the profits. They're going to be able to give us a return on our investments. For customers that don't want as much from the company, or don't have the means to spend on certain kinds of investments, maybe they would get a moderate level of service. There are also customers who don't want to interact face to face with employees. They would rather do everything online, knowing about their needs, you would set up a system whereby they could do their own trading, for example. They would be more satisfied, than having to talk with somebody about their investments, and get advice. The idea is that knowing all this about your customers' knowledge levels, their need levels, their investment levels, their profitability levels, you can then organize your front end, organize your employees so that they're serving these different groups in different ways. That makes a huge difference in terms of how profitable your activities are, in part, because you're giving your most valuable customers, most of your resources. The other thing is, those customers are getting what they want, so they're going to give you a greater share of their wallet, in other words, of their investment business, they're going to give you a higher percentage. When Fidelity did this, their share of wallet went from 30% up to 54%, of these customers. Their retention rate, which is whether customers continue to come back, went from 89% on a yearly basis up to 94%. These numbers are huge increases. If you think about it, that all comes from, again, segmenting the market, and then structuring your organization around these different customer groups, so that you can serve them better. Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems Joe: I think it's interesting that you quote that differential, that improvement, because I think that's really is how companies should measure themselves, is by market share. Or, as you said, a bigger share of the wallet or, that, them are definitely good signs on whether you're improving or your improvement efforts are working. Christine: Absolutely. I think the idea here is that, if we can use customer focused metrics, there are a lot of metrics that don't necessarily reflect what's going on with consumers. So, we want things that look at metrics like, the lifetime value of a customer. The value of our customers, how does that compare, you know, to our competitors'? Are our customers more valuable than our competitors'? That might be a hard question for a lot of companies to answer, but there are questions that and metrics that companies can use that are customer focused. Retention rate is a really good one. I'll give you an example of how powerful this is. USAA, which is a financial services firm, they sell insurance and financial services to military personnel and their families, a tremendous company. I don't know if your listeners have experience with them, but they're a tremendous company. They have a retention rate, which again, is, the percentage of your customers that come back in any time period, we'll just say on a yearly basis. Their retention rate is 96%, against an average in the automobile industry of 80%. If you just do some really simple math on that, you'll see how powerful it is. Because if I, let me do this with you, because I think, I do it with my students and I always find it to be really valuable, which is that, if we look after three years, for the average automobile Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems insurance company, how many, what percentage of the various customers that are with them today will be gone? We take 80%, raise it to the power of 3, and we realize that only 51% of their current customers will be here in three years. Versus USAA, with a retention rate of 96%, raised to the power of 3. 88% of their customers will be here in three years. That differential is huge, when you think about a stream of cash, that's coming from those customers that you can be assured of over time. That retention rate is a powerful indicator of your future cash flows coming in to the company. Joe: Why don't we measure companies this way? Why aren't we looking at companies, especially when you go to acquire a company? Aren't these key metrics that should be looked at in, let's say, a merger and acquisition? Christine: Yes. They definitely are. I think, part of this is, frankly, that we're just now really starting to understand how important it is to focus on these customer level measures, things like retention rate, lifetime value, the value of brands. I mean, the value of brands is something that you see many, many companies touting in M&A activities. I've not been privy to a lot of the details associated with customer level information, showing up in M&A activities, but, if your listeners are involved in those kinds of activities, they should be asking about, what is the retention rate of this company? What's their retention rate of this company's closest competitors? What's the acquisition rate? You Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems know, for every customer out there, when we go after them, how likely are we to get them, to sign up for our service, or to buy our product? How's the company performing with different groups of customers? By that, I mean, does the company have a certain reputation or relationships with very profitable customers? Because that's where the profits will come from over the long run, if the company forms relationships, strong relationships, with profitable customers, and works to make those relationships last over time, those will be the profitable acquisitions, and the effective mergers. Joe: We use customers in a pretty broad term. From your book's perspective, are you looking at market value, maybe the customer within the market value, and also looking at, let's say, competitors. One of the points that I always try to look at, is that when someone says, "I got a customer satisfaction score of 60%." Well, if all my competitors have a customer satisfaction score of 60%, I'm just average. I mean, 60%, 70% might sound good, but if the entire industry is at 70%, it's average, right? Christine: Exactly. So, what you can do is, you can actually make an index. I like to recommend that you can put your score, whatever the customer metric is, if it's satisfaction, if it's customer retention, you could put that over the industry average, that's one way. But most firms don't want to just compare themselves to the average. You can also put it over the top firm. You would put your score over the top firm, and then, whatever that number is, you can multiply, I multiply times 100, and then, if you end up with a score of 100, that means that Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems you're on par with either the average or the best company, whichever you put in the denominator. An easy metric like that is helpful. Because then, if you're, for example, if you're at 110, that means you're 10% above the average. If you're at 90, that means you're 10% below. It's an easily interpretable metric. Those kinds of indexes can be very important, and I think, as you're saying, to be honest, and to get a, not just a number, but to put that number in context, to give it meaning, by virtue of well, how are firms doing in this industry? The other thing is, the industry itself may be in trouble. So, I think it's really important for firms to not only learn from what's going on in their own industries, but to learn from what's going on in other industries, too, to get that big picture view, in terms of, what are the best companies doing, in terms of innovation? Across industries, how are the best companies leveraging their brands, across industries? We talk in the book about Procter & Gamble, and how they took this idea seriously of learning from other industries. They were trying to figure out, we've got all these huge brands that we've built, your listeners know a lot of these names, of Tide, and Crest, and Jif was one of them at the time, Pringles. We've built these big brands, now how do we leverage them, without killing them? Because that's always the concern as you start to extend a brand, you might dilute it. Where do they look to figure out how to do that? They didn't look at other consumer package goods only. They took this broad view to say, "Let's look at other companies who Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems have done this successfully, and who have failed it, doing it. Let's see if we can learn from their lessons." I'm aware of the fact that they drew a huge sample of these case studies, and one in particular, that they found to be helpful, was the example of Titleist, which is the golf equipment company, and they'd observed there that Titleist didn't have any trouble extending their brand into all kinds of balls. For example, there are very high end balls, that, the most, you know, elite golfers were interested in, that had certain features associated with them, and then there were other balls that didn't have those kinds of qualities, so, for example, the serious golfer might be interested in the Titleist Pro V, which is going to sell for $58. But the lower level golfer might be interested in the Titleist DT Solo, which sells for $40. Now, a strict view of brand management might say, "Wow, doesn't that Titleist DT Solo kind of dilute the value of that higher end product?" The answer is no. That, there's a way to be able to manage both of these brands and have them on the marketplace, and make it clear that one of the balls is for a certain type of golfer, a recreational golfer, and the other ball is for the serious golfer. There's no confusion that Titleist is targeting these two different golfers. Well, Procter learned from that. They learned from other companies about how they could actually take their brands and offer them to different groups of consumers, if the products were different enough from each other, but under the same brand name.

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Implementing Lean Marketing Systems That's an example of an important principle, which is if you really are going to have the customers' point of view; you should look beyond your own industry, and think about how you could use what other excellent companies are doing to help serve those customers more effectively. There are a great number of excellent examples of how companies kind of learn by studying other industries. They just have to open their eyes and spend the time reading and thinking about those other industries. Joe: What's something that I may have left out that you'd like to tell me? Christine: The thing I would want to emphasize is that this is something that takes time. That, it requires, it can't be just plugged into in an existing organization, that you do need to think about how to structure the organization, and introduce metrics that will get people motivated to focus on these kinds of customer things, that you need to think about how to really manage this within the organization. You don't have to do all the imperatives at once, but just to get this outside in view, kind of focused, within the organization, and in the minds and hearts of what the managers and employees are worrying about every day. That will take persistence, and it will take leadership, and the CEO, of course, needs to be the front runner in leading by example on this issue. They will need to be out in front, waving the flag. They're going to need everyone in the organization, all of the top leaders, but all of the employees as well, following them. We recommend in the book that it's also important to have one person whose job it is to really worry about managing the customer value, and to Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems be the sort of ringleader, if you will, and that, we recommend is the Chief Marketing Officer. That person's job will be to be the customer advocate. I think in the organizations where this works well, everybody starts to get it so well that, you know. We talk about Philips Electronics in the book quite a bit, and the CMO there made the point that, at some point, in the transformation of Philips from being a company that had what they call a "factory mindset", to a company that was very focused on the customer, that realized, in the end, that profits don't get made in the factory, they get made in the market. That at some point in that transformation, the members of the C suite were coming to him, and asking him for information about these different customer metrics, that they were using within the organization. They realized that they were important indicators of the company's long term profit success. That type of transformation is what you'd like to see happen over time, because one person can't make this happen. A strong CMO, as smart and hardworking as he or she may be, isn't going to make this happen. But, if everyone joins together, over time, that's definitely the most effective way to pull it off. Joe: I think it's interesting you point out, the CMO. One of my questions I have for you, you put him as the champion from outside in. Why wouldn't you put the VP of sales? Christine: That's a good question, Joe. I think, at a lot of companies they often are the same person. In fact, we see a dual title, I don't have an exact percentage for you, but I Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems have some research going on, where we actually ask for that information, and look at the longevity of the CMOs within companies. Those with, both the sales and the marketing, expertise tend to have higher retention rates. In many companies, sales can often have the strongest connection to the customer, right? Because, they are the ones engaging directly with the customer and in those companies, it may make sense for a Chief Sales Officer to take the position of leadership on this. That, I think, is a matter of looking at the companies and what they're doing. The problem with sales is that there can be short term thinking about managing the customers. The bigger problem there is that incentives have been set up to reward that kind of short term management of the customer, meeting quota and not the long term relationship, which is what marketing would probably tend to advocate more. But if those incentives can be fixed, and the salesperson, the head of sales can adopt this kind of customer focus, then I don't see any reason why that would be a problem. I think, as long as you have somebody who accepts that point of view, and is willing to manage, help manage the rest of the organization to get there, I think that's fine. I'll just add one other thing that, on this particular point, is that in a lot of companies, especially like packaged goods companies, say, like Proctor, Nike, etc., the sales organization will not have a very strategic role within the organization. I think giving the Chief Sales Officer, or the VP of Sales that position, probably wouldn't work. So there's always this question, when you look at any organization, you know, where is the power, where is the knowledge, and how can we get this done most effectively? I think Outside in Strategy– Customer Value Copyright Business901


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Implementing Lean Marketing Systems those are important things to consider as you think about where to locate the right leader for this job. Joe: I'd really like to thank you, very much for this conversation, Christine it's been a wonderful time spent. This podcast will be available on the Business901 blog site and also available on our iTunes store, and again, I'd like to thank you again, Christine. Christine: Thank you, Joe, it's been my pleasure.

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Implementing Lean Marketing Systems Joseph T. Dager Lean Six Sigma Black Belt Ph: 260-438-0411 Fax: 260-818-2022 Email: jtdager@business901.com Web/Blog: http://www.business901.com Twitter: @business901 What others say: In the past 20 years, Joe and I have collaborated on many difficult issues. Joe's ability to combine his expertise with "out of the box" thinking is unsurpassed. He has always delivered quickly, cost effectively and with ingenuity. A brilliant mind that is always a pleasure to work with." James R. Joe Dager is President of Business901, a progressive company providing direction in areas such as Lean Marketing, Product Marketing, Product Launches and Re-Launches. As a Lean Six Sigma Black Belt, Business901 provides and implements marketing, project and performance planning methodologies in small businesses. The simplicity of a single flexible model will create clarity for your staff and as a result better execution. My goal is to allow you spend your time on the need versus the plan. An example of how we may work: Business901 could start with a consulting style utilizing an individual from your organization or a virtual assistance that is well versed in our principles. We have capabilities to plug virtually any marketing function into your process immediately. As proficiencies develop, Business901 moves into a coach’s role supporting the process as needed. The goal of implementing a system is that the processes will become a habit and not an event.

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