The Challenges of Growth:

(Be prepared to answer questions based on this reading. You will be asked for summary.)

Sara Johnson owns a pet store. She started this small business out of a passion for helping people take care of their pets. The store is off to a good start, but she really worries about how she will grow the business. The competitive environment that surrounds her store is challenging, with the big-box stores having full-blown pet departments, specialty stores improving, and Web-based operations providing access to low-priced supplies. In addition, customer needs seem to change over time. In contrast, Ken Smith is a brand manager for a $900 million division of a major consumer products company. Ken worries about the exact same things as Sara, just on a different scope and scale. He has customers who have supported 8% growth of his product lines in each of the last 2 years. His challenge, though, is how to maintain that growth rate (representing $72 million in sales) in markets where competitive imitation over time has led the products to become very similar and competitive advantage more difficult to come by. The context and magnitude of these problems are quite different, but, at the root, they are the same.

Whether you are Sara or Ken, the general manager of an insurance company seeking to increase policies sold, a United Way director seeking to increase donations, or a human resource director wishing to increase business with internal staff in their hiring decisions, your question is, how do we successfully position against the competition and grow our business? While a complex matter, the task of building growth strategy has some simple foundational ideas. The goal of this book is to teach these fundamental concepts to you so that you can implement them and then teach others. The teaching requires breaking down what seems like a complex task into simpler component parts. While you will have no trouble understanding the component partssuch as customer value, competitive position differences, and firm capabilitieswhat most firms struggle with is how youintegratethem in building effective growth strategy. In this chapter, we will consider the fundamentals of competitive strategy at the heart of the framework we use and the reasons why integrating these principles is difficult and rare. Yet we will also point out that businesses that practice such integration make more money. At the core of all this is the notion that you cannot grow your company (or your school, your nonprofit, your relationships, the happiness of your volunteers, for that matter) without really understanding the value your "customers" seek and the value that you can create for them.

Challenge 1: Limited Integration of Strategy Perspectives

It turns out that it is difficult for an individuallet alone a complex organizationto simultaneously hold the three principles of strategy in mind. Multiple goals imply multiple, often costly, efforts to achieve them. Potential conflict between, and trade-offs among, the three goals of beating the competitor, creating value for customers, and leveraging our capabilities make it natural for firms to treat them separately. Illustrative of this is a study of strategic focus in decision making, conducted by George Day and Prakash Nedungadi of the Wharton School, which found that 77% of the organizations studied had a "singleminded" focus;[5]that is, the organizations largely focused on either customers, competitors, or the internal workings of the company but rarely any of the three together. Three distinct types of firms were identified in the study: self-centered firms (i.e., focused on internal factors; 33%), customer centered firms (31%), and competitor-centered firms (13%).

These single-minded views are suboptimal, however. Day and Nedungadi found that 16% of the firms they studied were market driven, that is, focused jointly on competitors and customers, and that these firms reported significantly superior financial performance relative to the other firms in the study. Similarly, other research has found that a more integrated view of company, customers, and competitors leads to greater profitability. Yet the striking point is that firms that do an effective job of integrating are in the minority. The more common tendency to be single-minded limits the search for growth opportunities and may be self-perpetuating.

Challenge 2: Knowing Customers:

Most decisions that involve customers are made without customer research. Firms have neither the time nor the resources to devote to every customer-related decision. Interestingly, though, even when sophisticated, large-sample research is conducted for particular decisions, it may frequently fall by the wayside because the research is shouted down by managers with prior agendas that contradict research findings.

Challenge 2a: Truly Understanding Customer Values and Beliefs:

Although they may at times dismiss formal research, we know that smart managers talk to customers and know them, often over many years. So it is fair to say more informal research is the norm. In this sense, it is difficult for managers to believe that they "don't know" customers. Yet there is much research that suggests the opposite. To understand why, consider a particularly telling study from University of Chicago researchers Harry Davis, Steve Hoch, and Easton Ragsdale. Davis and his colleagues asked pairs of experimental subjects to estimate each other's preferences for new product concepts. The new product concepts were a mix of higher-priced durable goods, lower-priced durables and nondurables, and services. For each concept, each subject was asked to estimate both the probability that they would purchase the concept in the future and the probability that the person they were paired with would purchase the concept. Across four studies, which varied the amount of information provided for the concepts (verbal description only vs. verbal description and pictorial representation) and the dependent measure used, the authors found the same results. Despite showing confidence in their estimates, the subjects showed substantial error in predicting their partners' preferences. Only about half of them predicted more accurately than a nave forecast that used the average of the gender-specific preferences. The authors found a strong tendency for a person to use their own preferences for the new concept to predict the preferences of their partner.

The most remarkable thing about this research, however, is that the subject pairs were not strangers. Across all the studies, husbands were paired with wives. In spite of intimate familiarity with each other, spouses demonstrated significant error in projecting each other's preferences, with error coming largely from two sources. First, the husband (or wife) tried to project their own preferences onto the other, when in fact their preference was not similar to their spouse's. Second, when the husband-wife preferences were similar, error was introduced when the spouse over adjusted for what he or she thought would be a difference in his or her mate's preference relative to their own. This leads us to a key question: If people who live together and know each other intimately make such errors in predicting each other's preferences, how can product and marketing managers NOT be subject to the similar errors in predicting customers' values? There is a fair amount of academic research that finds significant error in managerial judgment of consumer attitudes, beliefs, and behavior.[9]Further evidence of this comes from surveys of our own executive students and clients. They predict customer beliefs with good confidence yet express significant surprise (and opportunity!) when they subsequently conduct primary research with customers.

In fact, this should not be surprising. In the day-to-day operation of a business, the immediate challenges often center on internal concerns, which tend to be very concrete, top of mind, and unavoidable. Managers spend most of their time inside, managing people and resources. The capacities within the firm need to be organized, people need to be developed, budgets need to be met. There may in fact be a bias against spending time to understand the customer's perspective on our products and services because hearing bad news would mean that our products, processes, people selection and development, and execution would have to be changed, which is no easy task. Instead, it is very easy to assume "we know the customer."

Challenge 2b: Understanding Customer Evaluations of Competitors:

While most companies ask customers how their company is doing, many do not seek comparative customer views of competitors. One firm, which we will call Food Supplier, Inc., for example, happily foundthrough interviews in a 3-Circle project with one customer segment (independent restaurants) that the company was hitting on a number of important points of value for customers, many relating to delivery, warehousing, and sales support. Consistent with their expectations, this suggested that the company was providing customers a great deal of value. Yet the research also explored customer perception of competitor value. This produced the startling conclusion that the key competitor matched every point-of-value provided by Food Supplier, Inc., but it was also perceived as having far superior accuracy in deliveries and invoicing, as well as premium food quality at competitive prices. This analysis opened the executive team's eyes to opportunities for a new process improvement program in operations and sales to enhance competitive superiority in key functional areas, as well as a new marketing program to clearly communicate the differential customer value created by these new internal programs. Since that implementation, the company has experienced increases in same-store sales and has extended these standardized processes to other areas of the company.

Common Strategic Mistakes in Evaluating Competitive Differences:

Most of us face the difficulty of integrating relevant competitive, company, and customer facts, as well as the challenge of truly knowing customers' natural biases. Some may argue that these difficulties work themselves out through learning and experience. But what seems to happen is often the oppositethese biases can lead to flawed judgment about competitive advantage. This is because we anchor our beliefs in these early observations and we are not likely to change them.

In companies we work with, we see, over and over, the following three strategic errors that result from the biases discussed earlier:

1. We think we are different from competitors, but we are not really different in the customer's eyes.
2. We are different from competitors, but in ways that are not really important to customers.
3. We are different from competitors in ways that matter to customers, but we do not have the resources or capabilities to build and sustain those differences.

In fact, what is needed is a way of thinking and a process that helps us to simultaneously think aboutcustomers, competitors, and the company, and that puts our existing beliefs to the test.

Based on your reading of the material posted in the course regarding the challenges of growing a company and its market position, write summary of the key concepts presented and your perspectives regarding growth. Use in text citations and references from the readings.