Customer-Driven Disruption

Five Strategies to Stay Ahead of the Curve

Suman Sarkar

• Publisher: Berrett-Koehler Publishers
• Year: 2019
• ISBN:
  9781523099771
• Edition: 1
• Topic: Business
• Subtopic: Manufacturing
• Index: Business

Businesses worry about new technologies, but customers are the ultimate disruptors—Suman Sarkar offers bold strategies for making sure you understand your customers and keep up with their ever-changing needs. Disruption—the brutal roiling of markets, the decline of long-established brands and products, and the rise of new upstarts—drives business failure and success. Most people think technology causes disruption, but technology merely enables it. Changing customer needs cause disruptions, and too many businesses get caught unaware.
Suman Sarkar offers proven strategies that will enable any business to stay radically close to its customers and address their evolving needs. He argues that businesses need to focus on existing customers first—research shows they're likely to spend more and are more profitable than new customers. Personalization is becoming important for the newer generations in both developed and developing markets, so Sarkar describes approaches to make them cost-effective. In our era of instant gratification, customers want what they want now—Sarkar explains how you can develop and deliver products and services faster than ever. And since a few bad Yelp reviews, social media posts, or angry tweets from customers can ruin you, Sarkar shows how to proactively make sure the quality of your products and services stays better than that of your competitors.
The key to survival in this era of changing customer needs is to focus on and address them quickly so customers don't switch to the competition. Drawing on his experiences with leading companies worldwide, Sarkar offers five strategies and techniques that will keep you ahead of the curve.

1

CUSTOMERS DRIVE DISRUPTION

FILENE’S BASEMENT WAS A Boston institution—tourists even came to watch customers digging through the messy bins of designer clothes. Famous for its markdowns that increased by 25% each week, Filene’s Basement was the first discount retailer in the country to focus on high-end clothes. At its Running of the Brides events, excited women searched for bargain-priced wedding gowns. But most of the customers were boomers and Generation Xers and, by 2011, the famous bargain basement closed forever, like many other department stores around the country. Though people blame Amazon and online retailing for the demise of these once popular stores, the real reason is that customers’ needs are changing and department stores don’t meet them anymore.

It’s partly that baby boomers are spending less, both because they are shrinking as a generation and because they are downsizing. So millennials are outstripping them in total spending. The two generations’ needs are very different. Consumerism and buying frenzy driven by sales are foreign concepts to millennials. Name brands don’t impress them the way they impress boomers and Gen Xers—millennials value service, personalization, and speed.

Retailers that are slow to bring new designs to market, can’t help with style questions, and lack tailors to fit clothes—or charge extra for styling and tailoring—will never be popular with millennials. This generation, while large, doesn’t have much disposable income. Millennials would rather shop at stores that charge less and address their needs better than department stores do—so they choose upstart companies. And customer needs in all industries are changing just as much—look at how Uber and Lyft disrupted the taxi and black car companies worldwide.

Every industry is at risk of disruption due to changing customer needs, and most business leaders are ill-prepared for the challenge. They don’t focus on customer needs. Instead, they focus on technology, regulations, or investors. But even companies that try to focus on customers find millennials and Gen Z challenging. They are still structured around selling only to boomers and Gen X, who will pay for products, for bells and whistles, and are often swayed by advertising. But millennials would rather pay for experiences than products and features.

This 180-degree change in customer needs requires an entirely different approach on the part of companies. We can look, for example, at the automotive industry, which is still trying to sell customers new cars every year, based on new features. But as car sharing replaces car ownership, that’s not going to work, no matter what upgrades new models have. Do passengers care if an Uber car is self-driving? All they want is a comfortable, safe ride in a clean car with a pleasant driver. But the car companies keep pushing self-driving vehicles. And across industries, it’s the same: companies push products and services that don’t match customer needs.

There are exceptions. Some companies are successfully differentiating among the generations and are addressing millennials’ need for personalization. Zozotown, an undisputed leader in Japanese online fashion, introduced the Zozosuit to take 3-D scans of customers’ bodies. They use the measurements to recommend sizes and sell clothes such as suits, jeans, and T-shirts made from precut patterns. Orders are sent out within two weeks. Masahiro Ito, a board member who oversees engineering at the firm, says the fashion industry has not yet adapted to meet the needs of a generation accustomed to buying everything online, to their specifications, and at their convenience. “We offer exactly that,” he says.¹ The company’s continued success will depend on whether it can make its clothing affordable, a key concern for millennials. We will cover the topic of personalization and cost in chapter 4. However, unlike many retailers in the United States and Japan, Zozotown has taken steps to address personalization, one of the millennials’ needs.

Thinking about (or finding out!) the answers to the following questions will give you a sense of how likely your company is to be disrupted.

• How well do your company’s products or services address customer needs?

• How effective is your company in selling to both baby boomers and millennials?

Your answers to these questions will indicate how focused on customers your company really is. It’s not technology or innovation from your competition that will disrupt your business; it’s your customers. If you’re not focused on them, they will leave as soon as they find a viable alternative, and their departure is only a matter of time.

FOCUS ON CUSTOMER NEEDS, NOT WHAT’S ARTICULATED

Understanding customers’ needs is the first and most crucial step in dealing with disruption, and many companies don’t try hard enough to reach that understanding. They focus on what their customers tell them they want. As Steve Jobs said, “Some people say, ‘Give the customers what they want.’ But that’s not my approach. Our job is to figure out what they’re going to want before they do. I think Henry Ford once said, ‘If I’d asked customers what they wanted, they would have told me, A faster horse!’ People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.”²

Not everyone can be as brilliant (or as lucky) as Jobs was in doing this, but any company that tries can understand what’s driving customers’ statements, and companies that don’t do this will fail. Companies have to figure out the drives behind the needs and think outside the box to meet them.

Take for example Jobs’s approach to the iPhone. Other mobile phone companies reacted to customers’ need for internet connectivity by trying to duplicate their desktop experience. But that didn’t work on their phones’ small screens. Jobs saw a new way to give customers what they wanted (connectivity)—make the screen bigger and create apps. The iPhone was so radically different that Steve Ballmer, the Microsoft CEO, dismissed it, saying, “There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60 percent or 70 percent or 80 percent of them, than I would have 2 percent or 3 percent, which is what Apple might get.”³ Other competitors dismissed the iPhone, too.

But customers loved the iPhone. Apple’s revenue increased from $38 billion in 2008 to $229 billion in 2017. Most of the growth came from the iPhone. As figure 2 shows, the iPhone’s contribution to Apple revenue increased from 5% to 62%. Most other handset manufacturers went out of business within four to seven years, except for Samsung, which unabashedly copied iPhone features. Though Ballmer later regretted his comment, Microsoft eventually withdrew its Windows Phone, and as of 2018, it has no presence in the smartphone market.

FIGURE 2 Apple revenue trends and iPhone contribution. Source: “Financial Information: Earnings Releases and 10K Annual Reports,” Apple Investor Relations, https://goo.gl/1tqAi6.

RECOGNIZE THAT CUSTOMER NEEDS VARY BY COUNTRY AND GEOGRAPHY

In the past, American companies could count on people all over the world wanting the same products that their American customers wanted. The typical American company’s strategy for overseas sales was to take what they were selling in the United States, make small packaging modifications, and sell it worldwide. At one time, customers in emerging markets were fine with that, since the U.S. brands were better than local ones. But the old approach to selling U.S. products in developing markets doesn’t work anymore. The customers in developing markets are demanding products that are more suited to their own cultures and tastes. Multinationals aren’t catering to these needs and thus are losing market share to domestic players.

To deal with disruption, you have to understand customers in your own county and you have to recognize that customers in different countries have different needs and figure out how to meet those. For example, a few years ago, customers in developing markets were looking for devices that provide connectivity on the go, but they couldn’t afford what Apple and Samsung offered—and they didn’t care about some of the fancy features. Global sales of smartphones priced below $200 increased from 35% in 2013 to 47% in 2017. Apple and Samsung didn’t understand this and kept trying to sell the phones their American customers loved. That strategy didn’t work. Starting in 2015, most new iPhones were priced at over $500 (see figure 3).

This gave Chinese manufacturers their opportunity. Chinese handset manufacturers, like Huawei, started creating the smartphones that customers in developing markets wanted. Their phones have such strong reception that calls could be made from basements and parking garages. OPPO focused on selling cheaper phones in rural China. Vivo, the second-largest smartphone manufacturer in China, focused on cameras in a market that’s obsessed with selfies. Xiaomi had a smaller share and concentrated on selling high-end phones at a lower cost. Once these companies perfected their phones in China, they took them to other developing markets and to Europe. By 2018, Huawei had surpassed Apple.

FIGURE 3 iPhone pricing and global smartphone sales, by price range. Sources: Jamie McKane, “How the Price of an iPhone Has Changed Over the Past 10 Years,” Mybroadband, September 15, 2017, https://goo.gl/HsCLtM; Timothy W. Martin and Eric Bellman, “Samsung Joins Race to the Bottom for Global Smartphone Prices,” Wall Street Journal, September 4, 2018, https://goo.gl/Do3yRU.

Chinese manufacturers won in developing markets because they were price competitive and focused on local needs—and not only in China. A little-known Chinese company, Transsion Holdings, captured a 40% share in African countries by offering four SIM slots to avoid out-of-network calls, a battery life of fifteen days, and a camera that’s tuned to darker skin tones.⁴ Combined global market share of Apple and Samsung declined, from 49% in the first quarter of 2013 to 33% in the second quarter of 2018, while Chinese manufacturers increased market share from 4% to 34% in the same time period (see figure 4).

According to Counterpoint Technology, most of the world’s smartphone sales growth in the first quarter of 2017 was driven by India, the Middle East, and Africa. Chinese smartphones made up half of India’s sales in 2017, compared to 15% a year earlier. Xiaomi had the same market share as the leader, Samsung. Apple’s response? They began manufacturing the older-generation iPhone SE in India, without modifying it in any way for the needs of the Indian market. Needless to say, sales were low. And the Chinese are gaining market share in Europe, too. As of the first quarter of 2018, they have 25% of the European market. According to the research firm Canalys, Samsung and Apple sales are declining while Huawei and Xiaomi sales are soaring.⁵

FIGURE 4 Global smartphone market share of Apple and Samsung compared to Chinese manufacturers, including Huawei, Xiaomi, and Oppo. Source: “Global Market Share Held by Leading Smartphone Vendors from 4th Quarter 2009 to 4th Quarter 2018,” Statistica, January 2019, https://goo.gl/2DxEzK.

The same sort of thing is happening all over the world in consumer goods, fast food, telecom, and banking—local companies are gaining market share, multinationals are losing it. Multinationals’ old copy-and-paste strategy for selling their products and services abroad doesn’t work anymore. If multinationals fail to cater to local needs, not only will they lose customers abroad but also their competitors will develop products and sell them in the West and in developing markets. Chinese smartphone manufacturers like Xiaomi and OnePlus are making an effort to enter the United States, despite significant U.S. opposition to Huawei.⁶

GENERATIONAL CHANGES WILL DRIVE FUTURE DISRUPTIONS

While local companies are taking market share away from multinationals, generational changes are accelerating the process, both in emerging markets and in the West. This is because some products from emerging markets are attractive to younger generations worldwide, and in all countries, baby boomers are downsizing. This is a huge change for most corporations, which are structured around selling to boomers and must now learn to sell to younger generations.

Even Apple sells the iPhone by focusing on features like larger screens, OLED glass, facial recognition, and faster processors. These may appeal to boomers, but they mean nothing to millennials and Gen Z. If companies want to stay in business, they need to figure out what would have meaning to millennials and Gen Z. I like my iPhone, but my Gen Z daughter loves all the ways she can personalize her Android phone. Like many in her generation, she is into photography and can fine-tune her Android phone far better than she could fine-tune an iPhone. Different things appeal to different generations, and companies have been slow to understand this and to develop products and services that reflect it.

The following will briefly summarize the broad buying habits of different generations and discuss (in very broad terms) what companies need to do to retain or attract them.

Baby Boomers

Baby boomers, born between 1945 and 1963, have long been the powerhouse behind the U.S. economy, accounting for half of all U.S. spending.⁷ Boomers buy an estimated 50% of the computers and 66% of the cars sold in the United States. They grew up during an economic boom and, despite the Great Recession, some still enjoy the benefits of decades of stock market growth. Boomers believe in brand names and credentials and will spend more on products, services, and employees that have them. For example, the blind application of Six Sigma principles in areas like research and development (R&D) proved disastrous.⁸ This reliance on the known and the proven is one reason that boomer executives struggle with new business models, ideas, and diversity.

In many ways, boomers are different from previous generations. They are living longer, retiring later, carrying more debt (including student loans for their children and sometimes even grandchildren), and maintaining discretionary spending. The...