In the book Tilt: Shifting your strategy from products to customers, author
Niraj Dawar, a professor at Ivey Business School, argues that conventional
wisdom says that competitive advantage resides in products and their innovation.
However, in today’s times the competitive advantage is increasingly “tilting”
towards downstream activities that are aimed at reducing customers’ costs and
risks. On the other hand, the traditional upstream activities like sourcing,
production, logistics are increasingly being commoditized or being outsourced.
Author proposes that to compete effective companies need to shift their
strategic focus and emphasize on how they define their competitive set,
influence customer’s activities, innovate to solve customer problems and build
advantage by harnessing networks that address these issues.
The idea is that the center of
gravity in business is shifting from the products to the needs of the customer.
Therefore, strategic question for driving businesses is not “what else can we
make?” but “what else can we do for our customers?” the author emphasizes this
point by using the classic thought experiment in branding. It is to ask what
would happen to Coca-Cola’s ability to raise financing and restart operations
if all of its physical assets around the world were to mysteriously go up in
flames. The most common answer is that Coca-Cola would have little difficulty
finding the funds to get back on its feet. The company would survive such a
crisis because the value of its brand would attract investors looking for
future returns.
On the other hand, asking what
would happen if instead of the loss of the physical assets, seven billion
consumers around the world were to wake up one morning with partial amnesia and
could not remember the brand name Coca-Cola or any of its associations. In this
latter scenario, despite Coca-Cola’s physical assets remaining intact, most
reasonable business people agree that the company would find it difficult to
attract significant further investment. The loss of the downstream asset, the
brand or indirectly the customer, is a more severe blow to the company’s
ability to continue business than the loss of upstream assets.
In order to define the strategy focused
on downstream activities managers need to focus on three major tasks. First is shaping
customer perception. Firms need to understand that they have the power to
change customers’ purchase criteria. When Steve Jobs was asked about market
research that was done for iPad, he replied “None. It’s not the job of customer
to know what they want.” It might be cliché but building trust and brand
loyalty is important. It is getting even more relevant as companies begin to
compete for a very small slice of space in consumers’ minds.
Second is innovation. Companies have
traditionally invested in innovating products and setting up R&D labs.
However, in this tilting situation innovation is more important in terms of how
service is provided and how consumer’s costs and risks can be reduced. Hyundai
innovated an excellent sales model during the 2008-09 recession. Auto sales
tanked, and companies were struggling. Hyundai, instead of lowering their
prices, asked the consumers why they are not buying cars. Hyundai found that
the risk of buying a car is too high given the uncertainty in jobs. Hyundai
innovated a Hyundai Assurance Program where if people who bought cars lose
their job or income within one year of buying the car, they can return it with
no penalty to their credit rating. At the time when industry sales declined
37%, Hyundai doubled it sales.
Third is to build accumulative
advantage. When competitive advantage lies in products, it is lost over time as
competitors catch up. However, when competitive advantage lies in downstream
activities it grows as the number of consumers served grows. Companies that
gain competitive advantage in downstream activities do so by creating barriers
for consumers to switch platforms. Facebook has created and harnessed a network
of consumers. It has services like time lines, photo sharing, games, and apps. These
services make sure that users stay on Facebook and the more users stay on
Facebook, the more likely their friends will stay on Facebook.
Author argues that this “downstream
tilt” is relevant to three types of companies: those in product-based
industries like pharma, those in maturing industries, and those seeking to move
up in the value chain. Developing downstream competitive advantage will allow
companies to create unique differentiation for themselves, and this is
something that can be nurtured and accumulated over time.
References:
- Tilt: Shifting Your Strategy from Products to Customers, Niraj Dawar, HBR Press 2013
- When Marketing is Strategy, Niraj Dawar. HBR December 2013
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