EXECUTION

 How Well Do You Understand Your Customers?

Perhaps not as well as you think. When it comes to industrial customers, for example, the buying decision is more complex than just the customer's purchasing manager who negotiates prices. The division manager of a large industrial company recently proposed a growth strategy requiring a $300 million capital investment. The strategy would adapt an existing technology to a new product that would be sold to a new set of customers. The plan he proposed was elegant in the way it answered the usual strategy questions with data about the competition, the industry, and the external environment. The CEO listened patiently for twenty minutes, an unusually long period of time for him. However, he couldn't wait any longer to ask the following questions. First, who buys this product? The division manager answered that it was the purchasing managers of customer companies. The CEO said, "Really? Let me rephrase the question. Who specifies that this product should be purchased?" The division manager answered that it was obviously the engineers. The CEO's final question, delivered in a stern tone, was, "How many engineers did you talk to?" The dead silence meant that the project was rejected.

People tend to look at their businesses from the inside out — that is, they get so focused on making and selling their products that they lose awareness of the needs and buying behaviors of their customers.

The issue is simply understanding the specific people who make the purchasing decisions and their buying behavior. At large industrial companies, for example, engineers and purchasing agents usually do the buying. But in small companies, the CFO or even the CEO will be involved, because they have to pay close attention to cash flow. This requires taking a significantly different approach to the customer.

What Is the Best Way to Grow the Business Profitably, and What Are the Obstacles to Growth?

Does your business need to develop new products? Does it need to take existing ones into new channels and to new customers? Does it need to acquire other businesses? How are its costs compared with those of its competitors — and what productivity programs do you have in place to improve your cost position?

In the early 1990s, GE Medical, the medical systems business of GE, hit the wall in the United States. It experienced no growth because reimbursement policies were discouraging hospitals from buying new equipment. The business unit manager, John Trani, and his team developed a growth plan to move into adjacent segments and supply maintenance and other services to owners of medical equipment, whether sold by GE or by competitors. There were obstacles: some of the non-GE Medical equipment was far removed from GE Medical's own high-tech diagnostic machinery, and the unit would have to persuade potential customers that its proposition had value. The unit overcame the first obstacle by acquiring a company specializing in the lower-tech equipment that GE didn't make, and by focusing on process improvement to increase the productivity of its own people. It overcame the second by taking an entrepreneurial gamble on a small hospital in Ohio: it contracted to maintain all of the equipment and guaranteed the hospital that it would save money. Once it succeeded, GE Medical was able to go to potential customers with a track record. That original growth initiative shifted a steadily increasing portion of GE Medical's revenues into high-margin services with higher levels of cash flow.

One tool that's useful in defining growth opportunities is market segment mapping. The tool is simple enough; any business can be segmented. Many consumer goods companies use it to great advantage. But many more don't, and neither do all but a few industrial companies. Planners will talk about market segments, but fewer than 5 percent of the plans we've seen contain any useful mapping.

To understand how it works, let's look at A.T. Cross's segmentation of the luxury pen market. A simple map of Cross's market segments identifies three different consumers. The first is the individual who wants to buy such a pen for herself; the second is the person who buys one as a gift for another individual; and the third is the corporation that buys thousands, with its logo on them, and uses them as institutional gifts. For each market segment the product is essentially the same, but demand is different and so is the strategy. Each requires Cross to deal with different competitors, channels, economics, and pricing. 

A new market segment in the aircraft industry has recently changed the dynamics for manufacturers and suppliers. In the past seven or eight years, as commercial airline service and schedules deteriorated and prices rose, the corporate jet business has taken off. In 1996 Executive Jets pioneered fractional ownership, which is time-sharing in the sky, with its NetJet program. The new segment it created rapidly became the fastest-growing one in the business. Among manufacturers the big winner was Bombardier of Canada, because Bombardier built planes that were right for the market — larger than the ones made by rivals such as Beech Aviation and Cessna and smaller than those of Boeing or McDonnell Douglas, and foreign competitors.

Copyright © 2002 by Larry Bossidy and Ram Charan. Published by Crown Business a division of Random House,  Inc.