How Increasing Value to Customers Improves Business Results

When Peter Leyland was appointed director of the European renal division of Baxter UK early in 1997, the business unit of the global health-care company was at a crossroads. The renal division was in the business of selling disposable bags used for kidney dialysis in the home. Although its market share for what is called peritoneal dialysis (PD) was close to 80%, PD was losing out to hemodialysis (HD), which removes toxic waste from blood. On a bag-for-bag basis, HD was cheaper. Meanwhile, new PD entrants were competing on price. Leyland decided to cut the margin on the bags, but he would not cut costs for fear of negative customer reaction. He moved in the opposite direction, mapping with customers all the treatment activities — before, during and after the dialysis experience. Then he added value at each critical point in that cycle (helping patients, for example, to manage their private and professional lives around treatment, to update prescriptions, to dispose of used dialysis bags or to maintain machines). Such attentions kept patients at home longer, greatly increasing the sales of dialysis bags. However, Leyland’s division was no longer thinking of itself as being in dialysis-bag manufacturing. It had started thinking like a dialysis patient caregiver. It had become a company with a customer focus. Most enterprises think they have a customer focus, but only those that have switched from traditional business thinking, which aims to extract value from products or services, really do. True customer focus means obtaining value for customers (whether or not they buy all the items they could of a company’s products and services) as well as obtaining value from customers (who voluntarily choose to stay with a company that obtains value for them).1 The problem with the conventional approach is that products and services — and the strategies designed to make and move as many such core items as possible at the maximum possible margins — are too easy for competitors to emulate and improve upon. Cost advantages appear only up to a point. And current research suggests that a customer loyalty focus based on the conventional approach leads to only short-term gains.2 Enterprises that understand and embody the vital components of customer focus can move ahead in a way that makes it difficult for others to catch up.

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References

1. Paul Romer, “Increasing Returns and Long Run Growth,” Journal of Political Economy 94, no. 5 (October 1986): 1002–1037.

2. For more on the classic notions of customer loyalty and retention, see:

F. Reichheld, “The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value” (Boston: Harvard Business School Press, 1996).

For a view on one-to-one marketing, see:

D. Peppers and M. Rogers, “The One-to-One Manager: Real World Lessons in Customer Relationship Management” (New York: Doubleday, 1999).

For research on the problems of short-term gains and diminishing returns from customer-retention strategy based on products, see:

J. Deighton and R. Blattberg, “Manage Customers by the Customer Equity Test,” Harvard Business Review 74 (July–August 1996): 137–144; and

N. Piercy, “Market-Led Strategic Change” (Oxford: Butterworth-Heinemann, 2000).

3. In his article “Marketing Myopia” (Harvard Business Review, September–October 1975), Ted Levitt asked managers, “What business are you in?” He pointed out that a railroad company, for example, is not in the railroad business but in the transportation business. Levitt provided the philosophic ground for thinking more about customers’ needs, but in the decades that followed managers translated his ideas into, “What other products should we be in? If not trains, then cars or trucks?”

4. For a managerial discussion of product-based lock-in, see:

A. Hax and D. Wilde III, “The Delta Model: Adaptive Management for a Changing World,” Sloan Management Review 40, no. 1 (winter 1999): 11–28; and

C. Shapiro and H. Varian, “Information Rules: A Strategic Guide to the Network Economy” (Boston: Harvard Business School Press, 1999), chapter 6.

5. The notion of market spaces was first discussed by S. Vandermerwe in “The 11th Commandment: Transforming to ‘Own’ Customers” (London: John Wiley & Sons, 1996).

For related reading, see:

W. Chan Kim and R. Mauborgne, “Creating New Market Space,” Harvard Business Review 77, no. 1 (January–February 1999): 83–93.

6. The customer-activity cycle as a methodological tool for customer-transformation strategies was first published by:

S. Vandermerwe, “Jumping Into the Customer's Activity Cycle,” Columbia Journal of World Business 28, no. 2 (summer 1993): 46–65.

7. The inherent abundance of intangibles and the exponential implications are discussed in:

J.B. Quinn, “Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry” (New York: Free Press, 1992).

8. J. Ford, “The Future for Virgin: Will Branson’s Cash Keep Flowing If the Music Stops?” Financial Times, Aug. 13, 1998, 5.

9. For more on the Web and increasing returns, see:

J. Hagel III and A. Armstrong, “Net Gain: Expanding Markets Through Virtual Communities” (Boston: Harvard Business School Press, 1997).

10. Conversations with Michael Mauboussin, Credit Suisse First Boston, 2000.

Acknowledgments

The author is grateful to all the executives who took part in her research project. She also wishes to acknowledge the contributions of Marika Taishoff and Sally Lansdell.