Dr. Peter Wilton teaches strategy, marketing, and international management at the Haas School of Business, UC Berkeley. He is the Faculty Director for Berkeley Executive Education's Digital Transformation Strategy program.
EXEC ED: What do you think is the biggest marketing challenge facing organizations in the digital age?
WILTON: The biggest marketing challenge facing organizations in the digital age is to accept that the organization’s current success and market position is only temporary. For years, we have taught managers to believe that if they build market dominance, perfect a set of finely honed core competencies, and stick to their core business, then long-run success is guaranteed. Unfortunately, all of these assumptions are now under attack.
First, market dominance, as measured by scale or market share is no longer the most effective path to profitability. Much recent evidence suggests that driving differentiated customer experience and proactive customer loyalty within one or more niches of customers with overlooked or underserved needs will have a dramatically greater contribution to profitability and market leadership than market share or scale. Indeed, in today’s world of agile competition, scale can become a liability, since it makes the organization sluggish and slow to react.
Second, core competencies, which are the unique skills and assets of the organization that are supposed to give it an unfair advantage over competitors, can likewise lead to a loss of organizational flexibility. As new customer needs emerge, the firm may find it difficult to react. At the extreme, its core competencies can become irrelevant and prevent the firm from shifting to new business and value creation models. Witness, for example, the challenges faced by established leaders in the auto, finance, health care, hospitality, telecommunications, and retailing industries, to name a few, as new customer value models, and associated new core competencies, have emerged.
Third, sticking to the core business can lead to missed growth and customer loyalty opportunities. Experts at leading global product design firms have noted a dramatic shift over the past decade from the need to design differentiated products to the need to design and deliver differentiated customer experiences. Designing customer experience starts by identifying a problem or aspiration of a customer at the highest possible level, mapping the journey of the customer through every part of that experience, and then assembling an ecosystem of partners and collaborators that share information and coordinate the different elements of the experience in a seamless fashion. In short, competition is shifting from the product level to the ecosystem level. As an example, Apple’s mobile computing platform is an integrated ecosystem comprising products (smart phones, tablets), collaborators (developers), applications, content, payment systems, remote sensing and servicing, and so on. In such complex market environments, defining the core business of the firm too narrowly and sticking to it begins to limit the firm’s growth opportunities.
EXEC ED: How has the definition of customer value been redefined or, as you put it, reframed and is that reframing making incumbent leaders in certain industries more vulnerable?
WILTON: Customer value is the ability to deliver relevant outcomes and experiences to the firm’s target customers in unique ways (i.e., in ways that truly differentiate the firm from competition). Whenever the firm commits to a specific customer value strategy, it is committing to a specific set of customer needs and experiences it intends to deliver. As a result, other needs or aspirations of the customer remain overlooked or underserved. These overlooked or underserved customer problems or aspirations represent opportunities for disruptors to reframe customer value: i.e., to address needs that have not been previously addressed, or to address existing needs in fundamentally new ways.
Think Uber and other ride sharing competitors. What allowed these companies to enter the market? Clearly, customer frustration with existing transportation solutions. Think Airbnb and other home sharing services. What allowed these companies to enter the market? Clearly, dissatisfaction with existing hospitality offerings, or the aspiration for a different kind of travel experience. Think online education. What has allowed online education providers to rapidly commoditize traditional models of face-to-face learning? Clearly, the possibility for a segment of society to access knowledge that was previously out of reach, or the desire for learning experiences that are more aligned to the lifestyles of today’s students and professionals.
This is the essence of disruption: new entrants identify overlooked or underserved problems or aspirations of a segment of customers and begin thinking about how to address them in previously unattainable ways. The key lesson from this is that no matter how well a company thinks it knows its customers, there is always something they haven’t seen, or haven’t addressed. Therein lies the disruption threat, and of course, the opportunity to reframe the company’s customer value strategy to remain relevant into the future. Marketers need to be constantly on the hunt for these new customer value opportunities, and willing to explore these new approaches even if it means ultimately displacing the firm’s current business model.
EXEC ED: You speak about sustaining and reframing innovation. Could you explain the differences and the risks in relying too heavily on one or the other?
WILTON: Innovation runs a spectrum from sustaining innovation through to reframing. Sustaining innovation is a focus upon improving the firm’s existing value delivery model: - its existing products and services, support programs, communication strategies, channel relationships, brand positioning, etc. In short, sustaining innovation is the incremental or next-generation improvement of the set of activities that define the current success of the firm.
Reframing innovation is a focus upon creating value for customers and partners in entirely new ways that do not currently exist. It starts by identifying previously unrecognized or unattainable customer needs, and then creatively imaging new approaches to addressing those needs. Because the resulting solutions have never been seen in the market before, they have the potential to reframe customers’ perceptions and expectations of value, and the competitors that deliver that value.
Managers often misunderstand the risk pendulum, believing that sustaining innovation is safe (it has worked in the past and is well understood) and that reframing innovation is risky, since it has never been tried before, and is not operationally predictable. Hence the pendulum in most companies, especially those that are successful, swings heavily in favor of sustaining innovation. In our experience, it is the companies that are most successful that face the greatest challenge in reframing their customer value strategies: the more successful the company is, the more reluctant they become to challenge the existing success.
However, this focus on sustaining proven business models inevitably exposes the company to an even greater risk: - the risk of market irrelevance. As new approaches to creating customer value are created and proven by others (i.e., new ways of being relevant and unique in a market), traditional approaches can appear sluggish and less effective, leading ultimately to a declining leadership posture and customer loyalty.
Faced with two very different set of risks, managers need to build a balanced portfolio of parallel innovation initiatives, one that first reinvents and sustains the organization’s current successes and heritage, the other that discovers and develops reframing approaches to creating customer value that will project the organization’s relevance into the future. Finding the right balance in this portfolio is the critical leadership challenge. How much management attention and resources should be placed upon sustaining the firm’s current success, versus reframing customer value and business models in order to build future market relevance?
While many factors influence this decision, the primary consideration is the firm’s goals for customer loyalty and leadership reputation. In essence, the more aspirational the firm’s targets for customer loyalty and leadership reputation are, the more the firm will need to focus upon finding and supporting the reframing innovation opportunities. Think of reframing opportunities as first mover or pioneering opportunities. The firm intends to be the first to introduce a new approach that will help customers solve their problems or pursue their aspirations more effectively. This first mover advantage is key to creating customer franchise. The reframer is demonstrating its commitment to the customer by improving customer experience proactively (not waiting for competitors to force it to react), is able to introduce new decision customer decision-making criteria and experiences that become new standards against which other competitors are benchmarked, and ultimately achieves a “unique class” reputation in the market since no other comparable alternatives exist.
This shift in focus towards becoming unique class in the mind of the customer is the key to creating customer franchise: i.e., customers who are willing to enter into an exclusive commitment to their vendor and become proactive supporters of that vendor. This is the goal of reframing innovation: to go beyond “best-in-class” as the benchmark for measuring the effectiveness of the firm’s customer value strategy, towards “best imaginable customer experience” as the gold standard for market effectiveness. Managers need to be constantly envisioning these “best imaginable” experiences as the underlying driver of the firm’s reframing innovation activities.
EXEC ED: Many companies see technology as the key driver of disruption. You’ve talked about other more foundational reasons. Please explain your thinking on this topic.
WILTON: As suggested earlier, the key message, especially for marketers, is that disruption is not driven by technology. It is driven by overlooked or underserved customer needs. Think Uber, Aribnb, Facebook, Linkedin, or any other iconic innovator. What allowed these companies to enter the market was a need or an aspiration held by customers that had not been addressed by incumbents. Once that need or aspiration was identified, technology simply became the enabler of addressing that market opportunity.
Of course, once these previously unrecognized or unaddressed customer expectations have been recognized, technology can play a critical role in envisioning new approaches to understanding the customer, connecting with them, and engaging them in new experiences. But without clear insights into what underserved customer problems and aspirations the firm intends to address, its investments into digital technology are likely to yield disappointing results.