Harvard Business Publishing Managing Segments and Customers V2 Solutions

Choosing the Right Customer

The First Step in a Winning Strategy

From the Magazine (March 2014)

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Reprint: R1403B

All companies claim that their strategies are customer driven. But when "customer" means any number of entities in a company's value chain—consumers, suppliers, retailers, even internal units like R&D—managers tend to lose focus, and their firms become vulnerable to competitors who have clearly defined who they serve and how.

In this article, Robert Simons of the Harvard Business School presents a framework that can help companies develop strategies that are truly customer-centric. The framework lays out four steps:

• First, identify the best primary customer for your business. This choice determines what resources and capabilities you invest in and how you organize your business. Amazon serves four very different types of customer (consumers, sellers, enterprises, and content providers), but it devotes the lion's share of its resources to pleasing consumers, even if that means sellers or content providers sometimes feel shortchanged.

• Second, create processes to learn what your primary customer values are. Data analytics, ethnographic research, and other methods can reveal needs and preferences that customers themselves may not be aware of.

• Third, allocate resources accordingly, using one or more of the five business-model configurations: low price (Walmart), local value creation (Nestlé), global standard of excellence (Microsoft), dedicated service relationship (IBM), or expert knowledge (Merck).

• Finally, build an interactive control process to monitor shifts in the assumptions that underlie your choices and prepare an action plan to respond.

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Idea in Brief

The Problem

It isn't always obvious who your most important customer is. In fact, for some companies, the most important customers actually supply little or no revenue. Many companies, therefore, try to hedge their bets and treat all their stakeholders as customers.

How It Works

When companies shy away from choosing a primary customer, they may survive for a while. But they risk being pushed aside sooner or later by competitors who clearly identify a primary customer and create a business model designed to satisfy that customer ahead of all others.

The Solution

Adopt a customer-driven strategy that involves four steps:

1. Identify the customer group that best fits your company's culture and traditions, most closely matches your existing capabilities, and offers the greatest direct and indirect profit potential.

2. Understand what that primary customer values most by tracking purchases and preferences and studying behavior.

3. Adopt the business model that best allows you to satisfy your primary customer's needs and preferences.

4. Finally, make sure you have good systems in place to identify and respond to shifts in those needs.

All companies claim that their strategies are customer driven. But the term "customer" is among the most elastic in management theory. A working definition might be that your customers are the people or entities that buy your products and services and supply your revenue. That includes any number of actors in a company's value chain: consumers, whole­salers, retailers, purchasing departments, and so forth. Some companies go as far as to label internal units as customers: Manufacturing is a customer of R&D, for instance, and both are customers of HR.

A version of this article appeared in the March 2014 issue of Harvard Business Review.

Harvard Business Publishing Managing Segments and Customers V2 Solutions

Source: https://hbr.org/2014/03/choosing-the-right-customer

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