A satisfied customer is the best business strategy of all

Dear reader, On August 25, I published a blogpost referring to an article in “Business Executi

Dear reader,

On August 25, I published a blogpost referring to an article in “Business Executive”. One of the topics was both the notion and my same-titled book “Leading in Turbulent Times”.

Prof. Dr. William K. Holstein *), Professor of Strategy and IT at the Lorange Institute of Business Zurich, takes a stand on my ideas on how to lead – not only in turbulent times.

Kind regards,
Peter Lorange

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The best business strategy: a satisfied customer
by William K. Holstein, Professor of Strategy and IT Lorange Institute of Business Zurich

*

Peter Lorange’s recent blog with his article Leading in Turbulent Times got me thinking about strategic thinking, not just in turbulent times, but in general.

I have been a faculty member of Strategy and IT at Lorange and its predecessor institution for more than 15 years and taught the Strategy Block for more than ten years. The almost 800 alumni who have completed the Strategy Block with me know that a strong focus of my part of the course has always been on the customer. I introduce this point using the concept of the Business System, introduced in 1980 in a paper by McKinsey and Company staff and subsequently further developed into the Value Chain by Michael Porter.

The business system concept portrays key elements of the process by which a company delivers its product or service. Here is an example for a technology company. The elements for companies in other industries or circumstances would vary.

Being clear about the elements helps to focus management attention on each link and pushes functional managers, often operating in silos, to think about how competitive advantage can be extracted (or not extracted) from each stage of the overall process of delivering a product or service to market.

As early as 1983, while a faculty member at IMEDE, the predecessor organization of IMD, my colleagues and I played with the then-new concept of the business system. We were frustrated by the abrupt ending of the last element, usually labeled Service or After-Sales Service. My recollection is that it was Prof. Xavier Gilbert who came up with the idea of making the final element The Customer, with a diagram like the following over-simplified version. He never used the word ‘customer,’ but rather a drawing of people to show that customers are real, live people, not just a label on a box.

Key questions to ask are: On which elements can we attack? On which are we vulnerable? Where are existing rivals vulnerable? Where do we have advantages that the customer can be taught to value? (Customers don’t learn such things on their own, they have to be educated.)

I don’t talk about cost and value, but add extra words to discuss low delivered cost and high perceived value – because total cost all across the business system, all the way to the customer, not just in manufacturing, is the critical cost issue, and because value has meaning only in the perception, or the mind, of the customer, not in our or our competitor’s costs.

In 1985 Michael Porter introduced his Value Chain which made the process elements more generic and added a second dimension of Support Activities which can also contribute to the development of competitive advantage. His diagram, rather than just ending in the last element in the business system, closed the diagram with a final arrow-shaped element labeled Margin.

Of course margin is important. Where does great design, manufacturing, etc. lead if it does not lead to satisfactory margin on which competitive advantage can be built? Nonetheless, I found myself hankering for the clear indication of the customer at the end of the value chain and continue to this day to force my students to see it my way and, importantly, to understand why. The ‘why’ is, to me, quite clear. Peter Drucker, The Man Who Invented Management according to Business Week magazine, explained it in terse language much better than I could:

There is no business without a customer.

He also said:

Quality in a service or product is not what you put into it.
It is what the client or customer gets out of it.

The laser-like focus on the customer as the end, the ultimate objective, and the raison d’etre for the value chain, indeed for strategy itself, is critical in strategic thinking. And this applies not only in turbulent times, but at all times.

In his article, Peter Lorange argues that turbulent times call for special strategic vigilance and focus and that top line growth comes first. Since he was my student at Harvard many years ago, I am delighted that he also agrees with me when he says that “customer focus is paramount to achieving this.”

In the years that I taught the Strategy Block, my favorite final exam question was the following:

In a previous Strategy Block exam, a student wrote: the biggest difference between Harvard’s Michael Porter and Prof. Holstein is that Prof. Holstein focuses more on the customer. On no more than one side of one page, explain the implications of this statement on the value chain or the business system.

I couldn’t use that question more than once or twice over the years, but I wish I could have. Everyone should ponder that question and come to their own conclusions in terms of the elements of their own value chain or business system – take your pick.

All around us we see contemporary examples of failure to ‘keep an eye on the customer.’ In a subsequent blog, I will give you a dandy example.

We see something else that needs attention as well, and Peter referred to it in his article – the importance of building trust with all relevant stakeholder groups. There is more to be said about that, and many examples of how the trust aspect is being handled badly by many companies. These failures, particularly in these difficult or turbulent times, can mortally wound a company, but are absolutely unnecessary if leaders develop, execute, and communicate the right strategy.

Every good wish for success with your strategy!

(–> download a printable version)                                                            (c) William K. Holstein

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*) Dr. William K. Holstein

The former assistant at Harvard who earned his PhD in mathematical economics was (among many other teaching activities ) visiting professor at IMD.

Today, he has been an associate Partner at Crystal Partners AG, Zürich since 2008 and Senior Advisor at Lat Link-Partnership in Change Consultancy, Buenos Aires, Argentina. He is the author of three books on Information Technology, BASIC programming, Operations Management. One of his recent publications include ‘Efficient and Effective Strategy Implementation’.

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