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?
Take Coca-Cola once again. In most cities around the world, you can buy a can of Coca-Cola as a pack of 24 in a supermarket and it will cost you about 25 cents per can. Now consider an individual who is in a park on a hot sultry day and he has been out for two hours. He wants a Coke. He sees a vending machine and he can easily drop two dollars into the vending machine and get a can. The vending machine delivers to the customer a can of Coca-Cola, at the point of thirst, in a single serve and chilled. For those reasons, single serve, at the point of thirst and chilled, the premium that is charged is 700 percent.
Q. And the customer willingly pays for it...
Yes, there is a 700 percent price premium and the customer willingly pays that premium. Where does the value come from? The value came from a downstream activity of ‘how’ as opposed to ‘what’. It pays for the company to recognise these sources of value and to create ways of delivering and capturing that value. Many companies fail to recognise that. They build a product and they think that is the value they have created without recognising that there are opportunities around the product to develop offerings which are customised to the situation and the context of what the customer is looking for.
Think about it this way, many companies spend a huge amount of money doing business process re-engineering, or reorganising their operations, or making their supply chain and operations more efficient. The result is a 2-5 percent cost saving, which might double their margins, which is huge. But think of the opportunities in the downstream where you capture 700 percent growth in value. If you compare these two, I believe that the opportunities of capturing value in the downstream are relatively neglected and have huge payouts when they are recognised.
Q. Why are they neglected?
They are neglected because we have spent the last 250 years building factories, since Richard Arkwright, in the middle of the 18th century England, built the first one. Having built the factory, one of the things he realised was that by streaming together all of the innovations in the textile industry like the spinning jenny, the flying shuttle, he reduced the cost of producing textiles by 90 percent. Even though he had reduced the per unit cost of production, that came with the cost of leveraging. He had borrowed money to build these factories. So, at the end of the month he had to pay interest regardless of whether he was able to sell or not. What happened was that his business became driven and obsessed with just one question, how much of this stuff can we sell. That was his obsession because everything else depended on that question. Q. And that’s carried on since then?
For 250 years, strategy has been about how much more of this stuff we can sell. We have not asked the question, what else do our customers need? We have not asked the question, why do our customers buy from us and not from our competitors? These are downstream questions. The upstream question is how much more of this stuff can we sell or can we make a better product? We have had the factory at the centre of business. What I am arguing in Tilt is that the customer is at the centre of business.
Q .So where does the title of your book Tilt fit into this?
Tilt is a shift in the centre of gravity from the upstream to the downstream. And I am arguing because costs, value and competitive advantage have shifted from the upstream to the downstream, management attention and strategy need to be focussed on the downstream rather than the upstream. And that is why the title. Q. Do you see companies tilting?
I do see companies tilting. There are a lot of examples of things that companies can do to tilt. But I don’t see one single company doing all of those things. In other words, there are lots of opportunities even for companies that are doing one or two things well, to do the other things well. So Tilt is an incomplete project. It is happening but it is far from complete. Q. You also talk about some marketing myths in your book. Let’s talk about some of those myths. Does a better product always win?
No, a better product does not always win. If you look at the innovation graveyard, it is full of better products. What matters is the ability of a company to change and influence the customer’s criteria of purchase. Let me give you an example. For the last 25 years, everybody has known that Gillette’s next product will be a razor with one more cutting edge. Why is it then that competitors have not pre-empted Gillette and come up with the next cutting edge before Gillette? Introduce five cutting edges when Gillette only had four.
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. Q. Any other examples?
In case of mobile phones, very recently the chip has become very important just like it became important in the PC industry during the 1990s. Now people are suddenly paying attention to questions like is it a single core or a dual core? In fact, now we are up to quad core. Why are the cores important? There are technical reasons why they are important. For example, a mobile phone can shut down half the CPU if you are making a phone call rather than using graphics. Why is that important in a mobile phone? Because it saves battery life. And it allows you to have more functionalities with less battery life. You don’t have to recharge it as often. If you have a dual core, it is a battery saving feature. If you have a quad core, it is an even better battery saving feature because you can shut down three cylinders and run on only one cylinder when you don’t need the other three. When you need the other three, they fire up quickly and you have all the four cylinders running. Q. What is the point you are trying to make?
Right now, we are up to quad core. And everyone wants a quad core phone. In China, there is a company called Meizu and it has just launched an octa core phone. Consumer acceptance for octa core phones, even though everyone knows that the next logical step is octa core, is not there unless Samsung or Apple introduce octa core phones. Then it will become a criterion. Exactly like the blades. So what is more important? Is it technology? Or is the consumer’s criteria of technology? The answer is marketing. It is the downstream not the upstream. Q. The next marketing myth I wanted to ask you about is does it make sense to listen to your customers?
Not always. For a long time, we were told that you needed to go and ask customers what they wanted. So you had focus groups. You ran surveys. You had questionnaires. All these were ways of finding out what does the customer want. That is really old technology. Today, you find out what the customer wants primarily based on customer behaviour. What do they click on? Which products do they compare? Which pictures do they look for? How much do they pay today? How much are they going to pay tomorrow for the same product? What is their price elasticity of demand? What is their cost elasticity of demand? You need to get deep into customer behaviour today simply by observing behaviour as opposed to asking. Q. Can you give us an example?
So Zara, for example, places products on the shelf. They will put 300 units in the store across 10-15 stores. If these units fly off the shelf, then they put in 30,000. If they don’t sell, they stop that product. They put in hundreds of new products every month. What flies, they put in more of. What doesn’t fly, they cull. This approach is different from asking the customer what he wants. It is cheaper and quicker for Zara to make the product and put it on the shelf and see if it sells. Q. But the thing with Zara may be that it has a short turnaround time, which may not be possible for other industries…
The answer is that it is becoming possible for more and more industries. In the textile business, the lead time used to be six months to a year. You had to plan the next winter season in January. And showed that the model could be broken. They went down to a lead time of three weeks. I think there are many industries which are sitting ducks because of the long lead times that they have. They are still using the old technology of what do you think customers will want. And that is not viable.
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(This story appears in the 07 March, 2014 issue of Forbes India. To visit our Archives, click here.)