I've shared some thoughts on how marketing executives should ensure the Customer
™ is as integral part of their company strategy.
Now, I'd like to delve deeper into "why?"
Specifically, we'll look at the Customer
™ from the perspective of the CFO
or VP of Finance
. I sometimes think of this role as the reality role
- the CFO sees the next year plans as related to strategy clearly and is responsible for their ability-to-reach
factor and is looking closely at this year's are-we-get-getting-there reality
The CFO is the key advisor and early warning system of the P&L leader of a business. They know when things are not and will not work and that trying the same thing year after year without fundamental change is perilous. Over the years I have found their insights to be clear and sound and they almost always can clearly see the value of the
show that CFOs are focused on four types of growth:
Core growth: Increasing market share within existing or related segments. This contributes approximately 45 percent on average to a company's growth.
Customer or markets growth: Entering new markets or customer segments that are unrelated to existing ones. This contributes 23 percent to growth.
Product and service growth: Growing an existing customer base and identifying its needs to develop new products and services, especially in new sectors. This contributes 26 percent to growth.
Value chain expansion and/or new business: Vertically integrating the value chain or expanding into a brand new business opportunity that is only loosely related to the core. This represents about 8 percent of growth.
To achieve this growth, most enterprises will leverage a multi-year investment planning mechanism in their planning calendar. This is the tool that several CFOs have used to introduce the topic of
™ into the planning process. They do this because they have been through too many underperforming strategies
, strategies that did not fundamentally alter the price compression that the product portfolio inevitably experiences as it is commoditized. Acquisitions that expand the product list (SKUs) but do not provide better profitability are just more options for making sales quotas. The same can be said for expensive product enhancements, announced with great fan fare but which only make a blip in the revenue numbers and sometimes reduce margin (R&D and go to market expenses related to new enhancements).
The list goes on and on.
Let's accept that it is very difficult to use the old business model to fundamentally change market forces of commoditization of a product line when others can catch up to anything new in a matter of months (or get ahead of us in same time frame) and often offer their products below your price point.
The very nature of a Customer Intimacy business model is based on value-creating activities
. Here are some typical characteristics of an effective Customer Intimacy practice:
Customer Intimacy implies that you are working on solving your customers' most strategic problems. Your solutions create true partnerships.
Customer Intimacy creates a sense that your organization is branded as a trusted advisor. Earlier,
we mentioned that Customer Intimacy means actual daily presence in
the trenches, solving real
client problems. Remember, customer Intimacy means your
organization becomes an extension of your clients'
Larger Deal Sizes
Customer Intimacy drives large deals - because they are more strategic and focus on solving critical business problems for your client. You are not selling point-products.
Product Pull Through
Customer Intimacy enables product pull in these large deals. Your products are not competing on features and function any more. Rather, they become part of the larger solution.
Product Lifecycle Extension
Because your products are embedded in your solutions, they are not subject to typical price-competition. We have found that this significantly extends the lifecycle for most products.
Once you understand and solve the key problems facing your clients, your ability to solve that problem for others in the industry becomes a key selling point. Your successes create further opportunities to grow.
Reduced Selling and Marketing Costs
Over time, your brand equity and reputation as a trusted advisor to the industry means you don't have to spend as much money marketing. The cost of customer interaction is greatly reduced, because you are already being paid to interact with the customer.
So where does the CFO turn to create business value?
We see that customer intimacy impacts enterprise value creation across numerous factors. Back in October 2004 Deloitte Consulting LLP surveyed 124 financial
executives about the creation of value at their companies, and
constructed eight value-creating behaviors. The study led to the creation of Deloitte's Enterprise Value Map
- a useful tool which we can use as a starting point to study the impact of Customer Intimacy on business value
Specifically, we can point how embracing a Customer Intimacy business model creates a new platform for growth by impacting Revenue Growth
, Operating Margin
. Here's how:
- Revenue Growth is driven by "volume" and "pricing." Customer Intimacy enhances your ability to attract new customers as well as retain and grow current customers. It also significantly improves your understanding of business unit performance and market values. You tailor products and services to new customer segments - with service chains that solve your customers' fiercest problems. Your pricing is strengthened because it is optimized based on the value-impact you have on your client.
- Operating Margins are improved because your SG&A costs go way down, as does your COGS. In fact there is evidence that when you co-create products and services with your client, the value creation potential is far higher at a far lower cost.
- Expectations in the market are changed as well. Your company is viewed as a thought-leader, with unique solutions and capabilities. Your partners are viewed as key contributors. In fact you build an entire ecosystem of value-creators.
Thus, we often find the CFO hosting workshops to help business leaders learn:
- What is the real impact of the Customer
™ as a business model?
- How does it truly work?
- What does it take to be successful?
- What markets/segments are most conducive to this business model?
Out of these event - almost always - an understanding is reached that the Customer
™ business model must be embraced and that the company must find a way to become proficient in the model. Usually an effort is kicked off to prioritize the market/segments and build a cost benefit analysis. This finds its way into the proper annual business plans for R&D investment for the new offers, solution practice creation, and go-to-market adjustments etc.
Another path we have seen is where the financial executive leads the company in an educational process. By this I mean the executive starts building a corporate understanding of the problems caused by innovation and need for the Customer
™. This is a mindshift approach
and allows a greater degree of flexibility for education of a leadership team and a longer period of time for analysis and planning before the effort is placed into the regular planning and budgeting cycles. You could think of this effort similar to a strategy effort where the current state is examined, options considered, education provided and then direction selected. The value of this approach is it can be begun immediately - not dependent on planning cycles and can be done at the pace and manner that enables a deeper understanding of the model and a stronger by in of the effort.
Again why is the Finance leader
an appropriate leader of this effort?
- They can clearly see when the Innovation Curve is no longer working for the company. Quarter after quarter they see the company strategy is not panning out. The CFO hears these phrases echoing in the halls: "Market share is slipping. Losing key deals on price. New features don't drive the impact we expected. Bundling our products was copied by our competitors. The length of time that our new product stays differentiated is ever shorter. Our services are leveraged almost given away to get low-margin product deals..."
- They see the entire business and have the data to support their views. No other role spends the amount of time they do examining the Financials and seeing trends.
- They are trusted and unbiased - they just want success and they do not have a dog in the hunt on a given sales approach nor are they enamored with a given product or product line.
- They can readily understand the potential financial impact of the Customer
In closing, I encourage the Finance leaders to challenge their companies views of what is possible and take the strategic steps necessary to lead the transformation. It is not easy, of course. But the payoff is immensely rewarding.