Marketing strategy expert Niraj Dawar says companies should instead ask: 'What else do our customers need?'
Niraj Dawar, professor at the Ivey Business School (Canada and Hong Kong), is a renowned marketing strategy expert who has also been on the faculty of leading business schools in Europe and Asia. He works with senior leadership in global companies and has executed assignments for BMW, HSBC, Microsoft, Cadbury, L’Oreal and McCain on three continents, as well as with startups in the biotech and information space. His publications have appeared in the Harvard Business Review, the MIT Sloan Management Review and in other leading academic journals. Most recently, he has authored Tilt: Shifting Your Strategy from Products to Customers (Harvard Business Review Press, Rs 1,250). In this interview, he tells Forbes India why the opportunities of capturing value in the downstream are relatively neglected and have huge payouts when they are recognised.
Q. Your follow-up question to managers often is that why do your customers buy from you rather from your competitors. This is after you have asked them what business are you in. Why do you do that?
The reason I ask that is to encourage managers to ask themselves that question because it really allows you to understand that the reasons that customers buy are related to the interaction between the firm and the customers. The reasons are often about reliability, trust, relationships, comfort, the ease of doing business and reputation. In fact, very rarely does the answer to this question have anything to do with better products or cheaper prices. The reasons are almost entirely between the softer aspects of the interaction between the buyers and the sellers.
Q. What is the centre of gravity of a business as you talk about in your book Tilt?
If you look at the activities of a firm all the way from sourcing of their raw materials, transformation of those materials, production, innovation, and supply chains—then towards the downstream, customer acquisition, customer retention and customer satisfaction, those are all activities that the firm engages in. Not all of those activities contribute equally to the cost of the business. And not all those activities contribute equally to the value that the customer buys, sees, and pays for. And not all of those activities contribute equally to the competitive advantage of the company.
Q. So what are you suggesting?
If we can answer the following three questions: i.e. which of these activities accounts for the bulk of their cost? Which of those activities accounts for the value that the customer sees, pays for, comes back for, and becomes loyal for? And which of these activities accounts for the source of competitive advantage? If we can answer those three questions then we start to locate the centre of gravity of a business along the spectrum of value creation activities. And I believe that increasingly the centre of gravity of successful firms is going to reside in the downstream activities, in the activities related to customer acquisition, customer retention and customer satisfaction.
Q. Could you explain that through an example?
Imagine all Coca-Cola’s assets, i.e. their trucks, their supply chains, their factories, all their physical assets were to go up in flames overnight. How likely is it that they would be able to get financing to start operations tomorrow? And the answer, if you were to ask any reasonable manager, would be that it is very likely that they would be able to get financing to start operations again tomorrow.
If you take the second half of the thought experiment and imagine that a colourless, odourless gas leaks out of a weapons research laboratory somewhere and it envelopes the world and seven billion consumers forget about the brand name Coca-Cola and all of its associations. Now how likely is it that Coca-Cola can get financing to start operations again tomorrow? The answer is, quite unlikely. When you compare those two situations what you recognise is that sources of competitive advantage do not reside inside the four walls of the company but out there in the minds of the consumers. And they have to do with the brand and the reputation, and not the product. And that’s how a company’s centre of gravity can be assessed. So Coca-Cola’s centre of gravity clearly resides in the marketplace.
Q. Any other example?
If you take the entire pharmaceutical industry and map the companies according to their centre of gravity, the centre of gravity of some companies resides in the massive sales forces that they have, in the relationships they have with doctors, whereas for some other pharmaceutical companies their distinct advantage lies in the laboratory, in creating new molecules, in patenting them. The question I have is, which of these companies is in the driver’s seat? Who is acquiring whom? The answer is that the companies which have downstream assets, i.e. the relationships with the doctors and the subscribers, are the ones acquiring those that have the patents. And not the other way around.
Q. You talked about the centre of gravity of companies shifting downstream. Can you talk a little more about that?
The answer is that customers only find it credible when it comes from Gillette. So, four blades are better than three only if Gillette says so. There is no value for competitors to develop a better product unless Gillette develops a better product. What is driving innovation is not the better product. It is consumers’ acceptance of the better product. So, downstream reasons, not upstream reasons drive innovation. So is a better product the answer? No. Understanding customer’s criteria of purchase is the answer. Influencing that criteria of purchase is the answer.
(This story appears in the 07 March, 2014 issue of Forbes India. To visit our Archives, click here.)