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Idea in Brief

The Problem

It isn't always obvious who your about important client is. In fact, for some companies, the nigh important customers really supply little or no revenue. Many companies, therefore, effort to hedge their bets and treat all their stakeholders every bit customers.

How It Works

When companies shy away from choosing a chief customer, they may survive for a while. But they risk beingness pushed aside sooner or later by competitors who conspicuously identify a primary customer and create a business model designed to satisfy that client alee of all others.

The Solution

Adopt a customer-driven strategy that involves four steps:

i. Place the customer group that best fits your company's civilisation and traditions, most closely matches your existing capabilities, and offers the greatest direct and indirect profit potential.

2. Understand what that primary customer values almost by tracking purchases and preferences and studying behavior.

3. Adopt the business model that all-time allows you lot to satisfy your primary customer's needs and preferences.

four. Finally, make certain you have expert systems in place to identify and reply to shifts in those needs.

All companies claim that their strategies are customer driven. But the term "client" is among the almost rubberband in management theory. A working definition might exist that your customers are the people or entities that buy your products and services and supply your acquirement. That includes any number of actors in a company'southward value chain: consumers, whole­salers, retailers, purchasing departments, so forth. Some companies get as far as to label internal units as customers: Manufacturing is a customer of R&D, for instance, and both are customers of 60 minutes.

Other definitions don't fifty-fifty crave that a client supply revenue. Pharma giant Merck'south near of import customers are not the patients who utilise its drugs or the physicians who prescribe them. Instead, Merck has chosen research scientists in labs and universities around the world equally its primary customer. Accordingly, its business model relies on encouraging its own earth-class researchers to act like university scientists by conducting basic enquiry, publishing papers, and presenting results at conferences, all with the intent of discovering groundbreaking compounds that can and so be commercialized by Merck'south marketing and sales group. The business is even configured like a inquiry university—a simple functional construction in which a powerful, centralized R&D unit of measurement receives the bulk of organizational resources.

Amazon devotes its resource to pleasing consumers, even if that means sellers or content providers sometimes feel shortchanged.

Unsurprisingly, perhaps, many executives are reluctant to define their customers every bit narrowly every bit Merck has. By non singling out any group as the primary customer, executives can sidestep hard choices that might plough out badly—a temptation that's particularly strong in new, rapidly evolving markets. What's more than, many business leaders believe that treating all value concatenation partners as customers improves internal coordination and responsiveness.

But past not identifying one master customer, companies that consider themselves "client focused" shortly become anything simply. Consider the contrasting fortunes of Yahoo and Google. Yahoo began as a wide-based net portal supported by proprietary editorial content. To attract users, information technology hired journalists to write entertainment stories and created utilities such as Yahoo finance, Yahoo movies, and Yahoo sports. Over time, Yahoo executives began to spread resources among many boosted initiatives, including social networks, products, media, and advertisement. As a result, they nether­invested in search, and the website became messy and confusing.

Then Google entered the field. From the starting time, Google focused on users who appreciated applied science and its ability to unlock new opportunities and applications. Like Merck, Google allocated the lion's share of its resources (and prestige) to its technologists and engineers, who were given freedom to innovate. The aim throughout the business was to build the best technology in the world—whether in search, Android, or maps. With that sharply focused value proposition and business concern model, Google quickly leapfrogged Yahoo in the competitive marketplace.

The bottom line is this: The strategic choice of primary customer—with special accent on "principal"—defines the business. This is certainly true at Amazon, which serves iv very dissimilar types of customer: consumers, sellers, enterprises, and content providers. You might think that it considers all four customer groups to be as of import. But the visitor's pick of primary customer is reflected clearly in its well-known mission "to be the world'due south most consumer-axial visitor." Amazon devotes maximum resources to pleasing consumers, even if that means sellers or content providers sometimes experience shortchanged (sellers whose storefronts are hosted on the Amazon platform accept been known to sue Amazon for more resource). This unwavering focus on consumers has created innovations such as prime gratis shipping, detailed product reviews (including negative ones), await-inside-this-book, and the listing of lower-priced products from off-site competitors. These practices take often been criticized as inherently unprofitable or injurious to Amazon'southward other constituents. Merely the main results of the company's pick are the ones that count most: unparalleled customer loyalty and stratospheric stock valuations.

In the following pages I'll nowadays a truly customer-driven framework that can help executives build winning business models for their companies. The framework lays out four steps: identifying the best chief customer for your business concern, creating processes to larn what that customer values, allocating resource accordingly, and edifice an interactive command process to monitor the assumptions that underlie your pick.

Stride ane: Identify Your Chief Customer

Every bit the cases of Merck, Google, and Amazon illustrate, your most important customers are non those that generate the nearly revenue merely those that can unlock the nearly value in your business. For some businesses, the primary customer volition be the end user or consumer of the product or service. For others, an intermediary (such equally a reseller or a broker) will be the critical customer to which organizational resources should exist devoted.

Merely how can executives exist confident that they're making the correct choice? Identifying the best primary customer for your firm involves assessing each group of customers along iii dimensions: perspective, capabilities, and profit potential. Allow'south wait briefly at each.

Perspective refers to the civilization, mission, and folklore of a business, often revealed in stories about important events or people in the company'southward history. It is the lens through which executives consider opportunities and strategic direction. Steve Jobs's obsession with perfection in production blueprint created a legacy that frames the opportunities Apple tree managers will (and volition not) consider. Walmart's Sam Walton was famously frugal in his own life. And Amazon founder Jeff Bezos is a zealot virtually delivering a superior experience to shoppers. "When [executives of other companies] are in the shower in the morning, they're thinking most how they're going to get ahead of one of their top competitors," he told Fortune in 2012. "Here in the shower, nosotros're thinking about how nosotros are going to invent something on behalf of a customer." Clearly, the choice of primary customer must reverberate a visitor'due south perspective; otherwise the visitor will be unable to leverage the energy and creativity of its people in service to the customer.

Capabilities refers to the embedded resource of the firm. Some firms excel at engineering science (Apple, Google, Airbus), some at logistics (Walmart, Amazon, Dell). Others provide superior brand marketing (Ralph Lauren, Nestlé, P&G) or accept industry-­specific capabilities (original content production at HBO and Netflix, mining at BPH Billiton). Such capabilities, which are built upwards over time and are often difficult to copy, position a business to serve the needs of certain customers meliorate than others. Dell in its early years built a formidable depression-cost logistics operation to back up its direct-to-consumer sales model. Today, the visitor is attempting to change its primary customer by refocusing on CIOs of big enterprises. This pivot has proved difficult for Dell because CIOs await for a prepare of capabilities—integrated hardware, software, and services solutions—very different from what end consumers need.

Customers frequently don't know exactly what it is they value. Uncovering the total truth almost their needs requires systematic research at multiple levels.

Profit potential refers to a client'south ability to deliver profits. Techniques such as Michael Porter's 5 forces analysis can provide insight into the relative profitability of various customer types—and help weed out those that would exist a poor pick for primary customer. Consider HBO. Cable operators that purchase HBO'southward content might seem to be the obvious pick. Merely cablevision operators have low switching costs—they can easily buy content from a variety of producers. Thus HBO would have little market power and would be unable to extract loftier margins from cable operators. But by targeting filmmakers every bit the primary customer and devoting significant resources to their needs, HBO tin create the unique products that viewers demand, allowing it to charge premium prices that cable operators cannot negotiate. Of course, profit potential isn't always about customers who can pay premium prices; becoming the preferred destination for price-conscious customers tin evangelize substantial profits through volume, equally Walmart has demonstrated.

LinkedIn is one successful company whose primary client conspicuously fits all three dimensions. For more than on how it settled on individuals (rather than job recruiters or advertisers), see the exhibit "How LinkedIn Chose Its Principal Customer."

Identifying your primary customer involves assessing each group of customers along three dimensions: perspective (your company's civilization, mission, and sociology), capabilities (distinctive embedded resources), and turn a profit potential (the customer's ability to deliver profits). The grouping that best satisfies all 3 weather should exist the primary customer.

Consider LinkedIn. In deciding where to focus, executives had to choose among three kinds of customers that all had the potential to generate substantial revenue: job recruiters, advertisers, and individual members.

Pace two: Empathise What Your Primary Customer Values

Once you've determined who your primary customer is, the next step is to identify which product and service attributes the customer values. Within the same marketplace and industry, different chief customers may value dissimilar things: Some need the lowest possible toll, others want a dedicated service relationship, and still others are looking for the all-time technology or brand or other specific attribute. To complicate matters, customers oftentimes don't know exactly what it is they value. Uncovering the total truth about their needs requires systematic research at multiple levels.

Let's take the easy part first. Assume you have already chosen the best primary customer and have a good working idea of what the customer wants. There's still plenty of room for comeback. You can refine your understanding past leveraging today's like shooting fish in a barrel and cheap access to data on customer ownership habits, preferences, and search activities. Data analytics is an important tool in uncovering and rapidly responding to changing customer needs. At Google, separate analytics teams for display, search, and maps spend untold hours in their labs with customers studying eye movement and other variables to gauge their reactions to subtle production modifications such as changes in color. Nestlé has a war room where analysts monitor social media to track churr that relates to or affects the acceptance of its products. The analysts use the intelligence to inform product research and marketing decisions and to evaluate in real time how well their value propositions are meeting the needs of the primary customer.

Such data can help you fine-tune a product or a website's functionality to amend see your customer's known needs. They're unlikely, though, to help you identify what your customers desire but aren't getting. For that, you need to actually inquire them. Smart companies ready up systematic dialogues with their primary customers. Managers at FedEx, for instance, hold twice-yearly summits where they bring in a sampling of business customers (the house'southward primary customer) to ask them where FedEx is doing a adept task of meeting their needs and where competitors are doing amend. At Germany's Henkel, the world'southward leader in adhesives, CEO Kasper Rorsted has created a "tops to tops" program in which all executives are required to meet regularly with their counterparts at major customers to ensure that their needs are understood and the company is responding appropriately. Other companies, especially those with rapid product cycles, manage the dialogue through new-product testing. Google'south Gmail, for example, was released afterwards five years of beta testing by more than 1,000 applied science opinion leaders.

Finally, you should set up processes for identifying products or services that customers may non know they need. This can be challenging—and expensive. Smart companies typically rely on ethnographic methods. At P&M, for instance, where consumers are the master customer, executives inquire their managers and market researchers to spend days at a time accompanying consumers on shopping trips and sitting at the family dinner tabular array to more than fully understand the extent to which various products run across consumer needs. CEO A.G. Lafley recounts in his book The Game Changer how the experiences of P&G executives living with lower-centre-class families in Mexico Urban center produced Featherlike Single Rinse, a cloth softener that is simpler to utilize for markets where water is in brusk supply.

Most companies presume that their products and services meet the needs of their customers. Simply surprisingly few actually exam this assumption. So ask yourself, What are the processes nosotros use to make sure that nosotros truly sympathise what our customers value and that we tin can deliver value better than our competitors do?

Pace three: Allocate Resources to Win

As nosotros saw with Merck and Amazon, your choice of primary client and your agreement of what the customer values provide all the information you need to brand the critically important decision of how to organize your company's resources—in other words, what kind of business model to adopt. There are five bones configurations you can choose from.

Low price.

If your primary customer is looking for the lowest possible price, centralized operating functions (such as merchandising and distribution) should receive the majority of organizational resources, in order to create economies of calibration and scope. Customer-facing units, such equally stores or restaurants, should receive relatively few resources. This is the configuration used past Walmart.

Local value cosmos.

If your customer values products and services that are customized to local tastes, preferences, and regulations, you should organize similar Nestlé. It pushes resources out to regions and then that local managers can customize product offerings, while operating cadre functions are express to corporate-level back up activities.

Global standard of excellence.

If your customers are looking for the best possible technology or brand no affair where they are located, you should organize resource around global business units that are defined by production lines. This configuration allows focus and leverage in R&D, brand marketing, and distribution. Microsoft, for example, has dissever business organization units for Windows, servers, MSN, mobile, and Xbox. Each unit of measurement has full revenue and profit responsibleness and its own R&D. (Notation: Microsoft has recently announced that it intends to change its structure to more than of an expert knowledge organization—described beneath—to emulate Google.)

Dedicated service human relationship.

If your customer is looking for an ongoing, securely embedded service relationship, y'all should organize like IBM. Customer teams in industry-based "verticals" marshal and coordinate product and service commitment from centralized, product-based "horizontal" units.

Expert knowledge.

Finally, if your primary client is looking for expert technical knowledge, you should follow the example of Google and Merck, where R&D sits prominently on top of product organizations that receive the lion's share of the visitor'south attention and resources, with other functions playing a supporting role. These R&D-led product units, which may be distributed in centers around the world, have no acquirement responsibility: They are focused entirely on product evolution and on creating breakthrough technology. All sales acquirement is routed through a centralized, stand-alone sales sectionalisation that is configured equally a distinct part.

Of grade, various permutations and combinations of these five basic configurations are possible. Many companies will want to leverage the advantages of several models at once. Some companies experiment with matrix structures that tin can simultaneously emphasize, say, geography and function or business unit and region. This "split the difference" approach tin can exist appealing if, for case, y'all are an applied science company like ABB and your primary customer is government purchasers that need both the best technical features (global standard of excellence) and customized content (local value creation). But it should be noted that matrix organizations are notoriously difficult to manage; all too frequently, a matrix structure reflects an inherent confusion near who the master client is rather than an effective response to the customer's needs and preferences.

As a general proposition, when a business finds that it has more than than 1 primary customer, it should be split up into divide units and prefer for each the configuration that best allows it to focus resources on the needs of its principal customer ("the rule of one"). At Nestlé, for example, although most of the business is structured using a local value configuration, the visitor'southward strategy differs for ii of its brands: Nespresso and Mövenpick. Customers want a consistent, premium experience from those brands regardless of location. Accordingly, those businesses are managed using a global standard of excellence configuration in which resource are centralized and managed globally.

In reviewing a business model, the central question executives should ask is this: Do the choices we accept made about the company's construction reflect our choice of primary customer? If the answer is no, competitors whose business models are consequent with their chosen main customer will most certainly be outplaying you lot.

Step 4: Make the Control Process Interactive

As adept as your business model may be today, it cannot and will not survive forever. Customer tastes will change, new technologies will supersede old, unforeseen competitors will enter the market, and regulations and population demographics will evolve over fourth dimension. That means you lot must constantly gather information on shifts in your competitive surroundings, especially those that might affect the beliefs of your main client. You must exist alert to emerging threats and opportunities that volition redefine what your customer values and that customer'southward turn a profit potential. If the changes are dramatic, y'all may need to fundamentally reorient your business organisation model—and even, in the near radical situations, select a different principal customer.

The all-time way to get the information you demand is to make sure that your visitor'south command systems are interactive. Everyone in the organization should be using the aforementioned performance measures every bit the basis for learning and debate. Monitoring changes in customer behavior and the competitive environs, in particular, is non a function to be delegated to a special department. As a technology executive recently told me, "Companies that get information technology wrong are those that build departments with 'innovation' in their titles. We need to have everyone in the concern innovating."

Depending on your business concern strategy and industry, you can choose to use whatsoever of your current management systems interactively—your turn a profit planning system, your brand acquirement system, your orders-on-book or new bargain system. At HBO, for example, executives constantly rail the visitor'southward success rate in bidding for new shows from filmmakers and utilize that measure to prompt a word among managers throughout the business virtually changes in the competitive market that could affect their strategy. Amazon's category managers use their Mon morning time meetings every bit a forum to written report data near production assortment choices, revenue growth, client orders, and inventory turnover. Reflecting the firm's leadership principles (customer obsession; bias for action; earn trust of others; dive deep; and have backbone, disagree, and commit), these meetings are highly interactive every bit managers from a diverse array of functions work together to interpret the data and come with activeness plans. Some of these actions may, over time, plant the seeds of a new strategy.

Companies that hedge their bets commonly find themselves looking at the taillights of their more decisive competitors.

Systems that work well interactively—like those at HBO and Amazon—share three essential characteristics: They evangelize data almost uncertainties that could undermine the assumptions of a current strategy and require attention from the highest levels of management; they are widely used in the organization, receiving frequent and regular attention from operating managers at all levels; and they involve contiguous meetings that focus on emerging data, assumptions, and action plans. There is no substitute for the energy and inventiveness that menstruum from open debate when participants leave their titles at the door.

In using interactive control processes, managers should continually inquire iii questions: What has changed? Why? and, most important, What are nosotros going to practice well-nigh it? If you place changes in your customers' turn a profit potential, for instance, you lot might want to rethink your choice of your primary customer. Changes in tastes, regulations, technology, or competition may change what it is that your chief client values—resulting in a need to reallocate resource or redesign your business structure. If you have significant get-go-mover advantage cheers to a new technology—or if competitors are evolving and struggling to detect their way—y'all may be able to duck making a choice of primary customer, opting instead to stay fluid and focus on experimentation. Simply the entrepreneurial landscape is littered with the carcasses of companies that tried to be everything to everyone. Similar Yahoo, they muddled along until they were overtaken by crisis, often bringing in a new leader in a terminal-ditch effort to impose subject and focus on a failing business. It is, I believe, ultimately less risky to be proactive and make the fundamental strategic bet of choosing a primary customer. Companies that hedge their bets usually find themselves looking at the taillights of their more decisive and committed competitors.

A version of this article appeared in the March 2014 result of Harvard Concern Review.