9.4: Adopting a Customer Centric Strategy
After reading this chapter, you should be able to do the following:
- List three characteristics of a strong customer service vision.
- State three questions you can ask employees to determine if they are engaged with the company’s customer service vision.
- Describe three habits of a customer-centric leader.
- Describe how to empower employees to deliver excellent customer service.
- List three sources for establishing quality standards.
- Discuss why it is important for contact centers to use the right metrics when measuring customer service quality.
- Describe three things a leader can do to make customer experience a company priority.
9.4.1 Build a Customer-Centric Structure and Culture
“The uniquely cross-functional nature of effective customer-experience efforts puts a premium on smart governance. Adequately addressing the challenge requires a dedicated effort on three levels. First, a customer-centric leadership structure must ultimately report to the chief executive and should be designed to stimulate cross-department activity and collaboration. Second, leaders must commit to demonstrating behaviors and serving as role models to deliver customer-experience goals to frontline workers and refine and reinforce those goals over the long term. Finally, it is necessary to put in place the correct metrics and incentives that are critical for aligning typically siloed units/departments into effective cross-functional teams.”(Bhattachariee, D., Müller, L., Roggenhofer, S. 2016).
Contact center leaders cited poor cross-departmental collaboration and lack of understanding and respect for the center as two of the top three challenges they’re currently dealing with (the No. 1 challenge being agent attrition). (Hash, S. 2018).
Research conducted by customer service provider Arvato revealed that businesses tend to rate the customer experience their company delivers higher than consumers do. (Hash, S. 2018,).
Despite the attention to customer experience that is widely stated in corporate missions, visions, and values, actions speak louder than vision statements. When it comes to resources and budget, CEOs tend to prioritize technology over people or process. Even when company leaders recognize that customer service could be better, they often will look to the latest technology to provide the solution without delving deeper into customers’ true wants and needs, or gathering insights from frontline staff. (Hash, S. 2018).
Leaders have a huge impact on building a customer-centric culture. The leader must be customer obsessed and share those values and goals with the company employees. Does the leader walk the talk? Does the leader put customers first? Are products, services, and processes created with customer needs and wants shaping results? If the company is focused on short-term results or is investing in areas that do not improve the customer experience, employees will pick up on this and leaders will get behaviours from employees that are not customer focused. Leaders who want to deliver exceptional customer experiences need to invest in employee incentives that will steer performance toward exceptional service.
Watch “A Customer-Centric Culture Needs a Leader” YouTube video below to learn why leadership is so important to creating a customer-centric culture. (Customers That Stick. 2020). Transcript for “A Customer-Centric Culture Needs a Customer-Centric Leader” Video [PDF–New Tab]. Closed captioning is available on YouTube.
9.4.2 Make Customer Experience a Priority
Leaders in customer experience pursue a range of approaches to overcome the complexities of making the customer experience a priority. Several elements form the core of their successful efforts. They include the following: (Bhattachariee, D., Müller, L., Roggenhofer, S. 2016).
- Set up a dedicated team for customer experience. This allows a company to maintain a continuous focus on customer experience across segments, brands, geographies, and functional areas.
- Establish C-suite engagement. Given the cross-functional collaboration required, the CEO must make the customer experience an active priority.
- Fit the customer-experience team into the organizational fabric. If not, customer experience transformation efforts may drown in a sea of organizational confusion.
“Disney makes use of a simple leadership framework that links the delivery of business results to customer satisfaction and measures that satisfaction via two key indicators: “propensity to return” to a Disney experience and “propensity to recommend.” Disney’s framing also stipulates that the way to satisfy customers is through engaged employees. For Disney’s business leaders, the logic is clear: their task is to develop excellent employees, who in turn help to create satisfied customers, leading to business results.” (Bhattachariee, D., Müller, L., Roggenhofer, S. 2016).
9.4.3 Apply Leadership Principles
To create a customer-centric organization, leaders apply the following principles:
- Model specific behaviours. Managers must walk the walk. Customer centricity is taught to agents and should be supported in the company vision, mission, and values as well as modelled by management.
- Foster understanding and commitment among employees and managers. Making a connection between improved customer satisfaction and bottom-line financial results will help all employees understand the importance of exemplary customer service.
- Develop capabilities and skills. Train agents in customer-centric behaviours, but also train management so they are able to coach and support the team. Hire for fit.
- Reinforce behaviours through formal mechanisms. Financial incentives can help, but nonfinancial recognition schemes are more powerful.
Watch “The 8 Habits of Customer-Centric Leaders” YouTube video to learn what customer-centric leaders do. (Skillsoft. 2020). Transcript for “The 8 Habits of Customer-Centric Leaders” Video [PDF–New Tab]. Closed captioning is available on YouTube.
9.4.4 Create a Customer Service Vision
Companies with strong service cultures take the time to clearly define what outstanding service means to them. They do this in their mission and vision statements, in their employee training, in their advertising, and in the behaviour of their managers and leaders. They ensure their products, services, and processes are designed with consumer wants and needs in mind. Being customer centric means that every department in the company understands that the customer comes first and everything they do is to obtain, retain, and build relationships with customers.
A customer service vision is a shared definition of outstanding service that gets all employees working in the same direction. A strong customer service vision has three characteristics: (Toister, J. 2018).
- It’s simple and easy to understand. A vision should not be too complicated or too long; it should bring clarity so all employees can understand it and act accordingly.
- It’s focused on customers. Focusing on profit or expanding market share may be the end goal, but customer-centric companies achieve those goals by focusing on their customers.
- It reflects who the company is now, and who the company aspires to be in the future. It should be grounded in reality so the vision feels authentic to employees. It’s about what is working for the company now and what the company will build upon in the future.
Example vision statements:
Amazon – “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.” (Law, T. 2021).
Disney – “To make people happy.” (Brex. 2020).
IKEA – “To create a better everyday life for the many people.” (Law, T. 2021).
Loreal – “To provide the best in cosmetics innovation to women and men around the world with respect for their diversity.” (Law, T. 2021).
Microsoft – “To help people throughout the world realize their full potential.” (Brex. 2020).
Starbucks – “To inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.”Law, T. 2021).
Zappos – “To provide the best customer service possible. Deliver ‘WOW’ through service.”(Brex. 2020).
9.4.5 Engage Employees with the Customer Service Vision
Employees need to know that organizational success is defined by the customer service vision. Engaged employees help fulfill the vision with the customers they serve. There are three questions you can ask employees to evaluate employee engagement in a customer-centric organization. (Toister, J. 2018).
- What is the customer service vision? Employees need to know it and where it is. It may be in a book, online, written on a poster, or in some other location.
- What does the customer service vision mean? Employees should more than just memorize it, they should be able to explain it in their own words.
- How do you personally contribute? Employees should be able to describe how their individual role contributes to fulfilling the vision.
The customer service vision should be formally announced or introduced by the CEO or a high-ranking manager. Companies must hire for the right fit; hire candidates who agree with or have personal goals aligned with the company vision. Training should then be provided to employees to help them understand how their role aligns with the company’s customer service vision. Ensure employees receive some one-to-one coaching from their immediate supervisor as needed. The goal is to verify that employees can answer all three of the above questions consistently. Finally, empower employees to enable them to provide excellent customer service and care and be sure that company leaders are demonstrating their belief in the vision through their everyday behaviors, discussions, and decisions they make.
9.4.5 Empower Employees to Deliver the Customer Service Vision
Employee empowerment means giving employees the authority, the right technology, systems, and the freedom to go the extra mile to make customers happy. This requires thorough training of customer service teams to enable employees to identify and act on the opportunities to enhance the quality of support. Giving employees ownership for their own work will not only boost motivation but also increase service quality, team productivity, and quick decision-making.” (Patel, S. 2021).
Empowerment doesn’t mean allowing employees to do whatever they want. It means enabling them to deliver service that’s consistent with the customer service vision. Empowered employees need resources to serve their customers, the best-known procedures for serving consistently and efficiently, and the appropriate level of authority to handle unusual or unexpected situations. (Toister, J. 2018).
Empower employees in the following ways:
- Educate the frontline call center agents on branding, culture, and values so they deliver service that is consistent with these values.
- Provide agents with a 360-degree view of customers so they can make data-driven decisions.
- Equip agents with the right tools so they can resolve issues at the first point of contact.
- Cultivate innovation by encouraging autonomy and creative problem-solving.
- Make agents integral members of the organization so they are proud to provide amazing service. (Geraghty, S. 2014).
Watch the “Customer Experience: Empower Employees with Decisions” YouTube video below to learn more about employee empowerment. (Emanuele, G. 2020). Transcript for “Customer Experience: Empower Employees with Decisions” Video [PDF–New Tab]. Closed captioning is available on YouTube.
9.4.6 Set SMART Goals Aligned with the Customer Service Vision
Set goals that are SMART – Specific, Measurable, Attainable, Realistic (Relevant), and Time-bound. Goals for agents should be clear and attainable. Goals for the contact center should be realistic. All goals should be time-bound and performance measured.
If agents are rewarded, for example, for the number of calls they complete each day, then employees may rush to finish a call to take another one. This may reduce customer satisfaction and may leave some customers without their problems resolved. That would be an example of setting a bad goal. If time is measured on each call and an expectation or limit is set, then some agents might transfer the call or end the call before the customer issue is resolved, leaving the customer with a poor image of the company’s customer service. Again, an example of a bad goal. Good goals rely on intrinsic or internal motivation while bad goals rely on extrinsic motivation like incentives.
An IVR can help streamline interactions by getting customers through to the right agent the first time they call. But if the IVR is not configured effectively it can result in an endless stream of frustrated customers connecting to your agents. (CallCenter Helper. (n.d.). Top 10 smart contact center goals.
If your agents are not happy or satisfied this will come across to your customers. Happy employees = happy customers. Get every day off to a great start by getting the basics right. Comfy desk chairs, clean toilet facilities, and tasty food in the cafeteria can all help to keep a smile on everyone’s faces. No agent will be giving their best if they are trying to balance on a broken chair, having just had a bag of chips for lunch! (CallCenter Helper. (n.d.). Top 10 smart contact center goals.)
9.4.7 Create Quality Standards
- The organization’s mission, vision, and values. Quality standards should support or align with these.
- Stakeholders such as government, suppliers, employees, shareholders, industry associations, community (and customers, but customers are in a category of their own).
“Customers frequently rank consistency as a primary driver of good customer service. To monitor the quality and consistency of your team’s replies, consider implementing quality assurance or conversation reviews. Providing ongoing feedback through reviews can ensure that your entire team is delivering excellent customer service.” (Chambers, S. (n.d.).
Sometimes there is resistance to creating quality standards as some managers feel these standards are too rigid and unnecessary. The best way to combat resistance is to demonstrate what quality is and the costs when quality is lacking.
9.4.8 Use Metrics that Matter
“Enhancing your call center’s customer centricity would be next to impossible without data. In order to make decisions that will positively impact your customers, your call center agents, managers and executives must be referencing real-time and historical data. Enhance customer-centricity by doing the following. (Geraghty, S. 2014, July 18).
- Utilizing call center software that provides comprehensive metrics.
- Empowering agents with real-time and historical data so they can make informed decisions that enhance the customer experience.
- Analyzing KPIs and making decisions based on these metrics.
- Creating a culture of continuous data-driven improvement.
- Ensuring that metrics are aligned to the customer lifecycle and key touchpoints (e.g., Customer Lifetime Value, Net Promoter Score, etc.).
- Connecting agent feedback and performance evaluations to metrics.
Historically, contact centers focused more on quantitative metrics such as Average Handling Time (AHT) and Calls per Hour. However, modern contact centers recognize the importance of measuring customer experience and agent behavior more than quantitative metrics. Adopting a customer-centric approach to contact center management does not imply that there should be no productivity-based measures in place. Instead, it means that service centers should emphasize more on improving customer satisfaction than relying on increasing the number of calls.” (The Reporting Engine. 2020, June) 5 traits of a customer-centric contact center. [Blog].
Watch the “How to Reduce AHT in a Call Center” YouTube video below to learn more about reducing average handling time in a call center. (CareforCustomers. 2012, July 21). How to reduce AHT in a call center. Transcript for “How to Reduce AHT in a Call Center” Video [PDF–New Tab]. Closed captioning is available on YouTube.
Of course, every company should measure performance in alignment with quality standards, and much of this is done through metrics and using technology. There are other ways to assess the quality of service interactions, some of which include: observation, role-play, coaching sessions, recorded interactions, customer input, and mystery shoppers who use services and provide reports.
When measuring the degree to which quality standards are being met it is important to consider the scoring system as it should directly reflect your quality standards and behaviours you want to encourage. A flawed system may, in practice, under-emphasize critical behaviors and over-emphasize non-essential skills. You’ll need to test and modify accordingly. (Cleveland, B. 2016, December 12). Quality standards in customer service. [Video].
Key Takeaways
- A customer-centric leadership structure must ultimately report to the chief executive and should be designed to stimulate cross-silo activity and collaboration. Leaders must commit to demonstrating behaviors and serving as role models to deliver customer-experience goals to frontline workers and refine and reinforce those goals over the long term. Finally, it is necessary to put in place the correct metrics and incentives that are critical for aligning typically siloed units into effective cross-functional teams.
- Leaders in customer experience pursue a range of approaches to overcome such complexity of making the customer experience a priority. Several elements form the core of their successful efforts. They include the following: Set up a dedicated team for customer experience, establish C-suite engagement, and fit the customer-experience team into the organizational fabric.
- To create a customer-centric organization leaders apply the following principles: Model specific behaviours, foster understanding and commitment among employees and managers, develop capabilities and skills, and reinforce behaviours through formal mechanisms.
- Being customer centric means that every department in the company understands that the customer comes first and everything they do is to obtain, retain, and build relationships with customers.
- A customer service vision is a shared definition of outstanding service that gets all employees working in the same direction. A strong customer service vision has three characteristics: It’s simple and easy to understand, it’s focused on customers, it reflects who the company is now, and who the company aspires to be in the future.
- There are three questions you can ask employees to evaluate employee engagement in a customer-centric organization: What is the customer service vision? What does the customer service vision mean? How do you personally contribute?
- Employee empowerment means giving employees the authority, the right technology, systems, and the freedom to go the extra mile to make customers happy.
- Customer service standards refer to the performance that customers can expect from the company. It encompasses various factors, like speed, accuracy, transparency, accessibility, empowerment, efficiency, and friendliness of the staff. There are three sources for establishing quality standards: Customer expectations, the organization’s mission, vision, and values, and stakeholders such as government, suppliers, employees, shareholders, industry associations, and the community.
- Previously, contact centers focused more on quantitative metrics such as Average Handling Time (AHT) and Calls per Hour. However, modern service centers recognize the importance of measuring customer experience and agent behavior more than quantitative metrics.
End-of-Chapter Exercises
- Contact Center Goals. Search the Internet for examples of good and bad goals for a customer service contact center. Take a few notes then share your findings with your classmates and professor.
- Customer Service Standards. Review the list of 7 Commonly Used Customer Service Standards. Which standard do you feel is the most important? Why? Discuss with your classmates and professor.
- Cross-Departmental Service. Why is it important for quality customer care/service to be a cross-functional objective? Provide an example of serving a customer where cross-departmental input may be needed. Discuss with your classmates and professor.
- Reinforce Employee Behaviour. Search the Internet for ways to reinforce employee behaviour beyond financial incentives. Would these strategies work for every employee? Why or why not? Discuss your findings with your classmates and professor.
- Model Behaviour. Search the Internet for ways in which managers can model customer-centric behaviours. Make a list and share it with your classmates and professor.
- Leadership Quiz. Take a leadership quiz to determine your leadership style.
- Customer Service Quiz. Take a quiz to evaluate how well your team delivers customer service.
Additional Resources
- 15 Steps to Becoming the Best Team Leader in the Call Center Industry, YouTube Video
- Contact Center Trends for 2021, YouTube Video
- How Many Agents Do You Need? YouTube Video
- How Companies Can Achieve True Customer Centricity, YouTube Video
- An Introduction to Customer Centricity at Google, YouTube Video
- Customer Centric Culture Change, YouTube Video
- Beyond the Trends: Developing a Customer-Centric Retail Mindset in B2C & B2B
- Service Metrics for Customer Service, LinkedIn Learning
- Leading a Customer Centric Culture, LinkedIn Learning
- Customer Service Leadership, LinkedIn Learning
References
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Bhattachariee, D., Müller, L., Roggenhofer, S. (2016, March 11). Leading and governing the customer centric organization. https://www.mckinsey.com/business-functions/operations/our-insights/leading-and-governing-the-customer-centric-organization#
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Hash, S. (2018, August). Leading customer centric change. https://www.contactcenterpipeline.com/Article/leading-customer-centric-change
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Hash, S. (2018, August). Leading customer-centric change. https://www.contactcenterpipeline.com/Article/leading-customer-centric-change
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Hash, S. (2018, August). Leading customer centric change. https://www.contactcenterpipeline.com/Article/leading-customer-centric-change
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Customers That Stick. (2020, January 7). A customer-centric culture needs a leader. [Video]. YouTube. https://www.youtube.com/watch?v=zwTih30Qr2
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Bhattachariee, D., Müller, L., Roggenhofer, S. (2016, March). Leading and governing the customer-centric organization. https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Operations/Our%20Insights/Leading%20and%20governing%20the%20customer%20centric%20organization/Leading%20and%20governing%20the%20customer%20centric%20organization.pdf
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Bhattachariee, D., Müller, L., Roggenhofer, S. (2016, March). Leading and governing the customer-centric organization. https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Operations/Our%20Insights/Leading%20and%20governing%20the%20customer%20centric%20organization/Leading%20and%20governing%20the%20customer%20centric%20organization.pdf
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Skillsoft. (2020, April 14). The 8 habits of customer-centric leaders. [Video]. YouTube. https://www.youtube.com/watch?v=Iqo6IEgnD2E
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Toister, J. (2018, August 29). Leading a customer-centric culture. [Video]. LinkedIn Learning. https://www.linkedin.com/learning/leading-a-customer-centric-culture-2018/guide-employees-with-a-vision?u=2167290
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Law, T. (2021, June 10). 17 seriously inspiring mission and vision statement examples. [Blog]. Oberlo. https://www.oberlo.com/blog/inspiring-mission-vision-statement-examples/
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Brex. (2020, August 28). 22 vision statement examples to help you write your own. [Blog]. https://www.brex.com/blog/vision-statement-examples/
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Law, T. (2021, June 10). 17 seriously inspiring mission and vision statement examples. [Blog]. Oberlo. https://www.oberlo.com/blog/inspiring-mission-vision-statement-examples/
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Law, T. (2021, June 10). 17 seriously inspiring mission and vision statement examples. [Blog]. Oberlo. https://www.oberlo.com/blog/inspiring-mission-vision-statement-examples/
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Brex. (2020, August 28). 22 vision statement examples to help you write your own. [Blog]. https://www.brex.com/blog/vision-statement-examples/
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Law, T. (2021, June 10). 17 seriously inspiring mission and vision statement examples. [Blog]. Oberlo. https://www.oberlo.com/blog/inspiring-mission-vision-statement-examples/
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Brex. (2020, August 28). 22 vision statement examples to help you write your own. [Blog]. https://www.brex.com/blog/vision-statement-examples/
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Toister, J. (2018, August 29). Leading a customer-centric culture. [Video]. LinkedIn Learning. https://www.linkedin.com/learning/leading-a-customer-centric-culture-2018/guide-employees-with-a-vision?u=2167290
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Patel, S. (2021, June 23). How to empower your team to deliver great customer service success. [Blog]. Revechat. https://www.revechat.com/blog/empower-customer-service-team/
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Toister, J. (2018, August 29). Leading a customer-centric culture. [Video]. LinkedIn Learning. https://www.linkedin.com/learning/leading-a-customer-centric-culture-2018/guide-employees-with-a-vision?u=2167290
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Geraghty, S. (2014, July 18). 7 essentials of a customer-centric call center. [Blog]. Talkdesk. https://www.talkdesk.com/blog/7-essentials-of-a-customer-centric-call-center/
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Emanuele, G. (2020, October 26). Customer experience: Empower employees with decisions. [Video]. YouTube. https://youtu.be/_fpVNX3oPC8
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Toister, J. (2018, August 29). Leading a customer-centric culture. [Video]. LinkedIn Learning. https://www.linkedin.com/learning/leading-a-customer-centric-culture-2018/guide-employees-with-a-vision?u=2167290
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CallCenter Helper. (n.d.). Top 10 smart contact center goals. https://www.callcentrehelper.com/top-10-contact-centre-goals-82427.htm
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CallCenter Helper. (n.d.). Top 10 smart contact center goals. https://www.callcentrehelper.com/top-10-contact-centre-goals-82427.htm
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CallCenter Helper. (n.d.). Top 10 smart contact center goals. https://www.callcentrehelper.com/top-10-contact-centre-goals-82427.htm
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Outsource Accelerator. (2021, July 30). The 7 C’s to improve customer service standards. https://www.outsourceaccelerator.com/articles/customer-service-standards/#:~:text=%20Improving%20customer%20service%20standards%20%201%20Courtesy.,to%20provide%20a%20customized%20customer%20service…%20More%20
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Cleveland, B. (2016, December 12). Quality standards in customer service.[Video]. LinkedIn Learning. https://www.linkedin.com/learning/quality-standards-in-customer-service-2016/defining-quality-in-customer-service?contextUrn=urn%3Ali%3AlearningCollection%3A6569259166630768640&u=2167290
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Chambers, S. (n.d.). How to set customer service goals (+7 example goals. [Blog]. Help Scout. https://www.helpscout.com/blog/customer-service-goals/
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Geraghty, S. (2014, July 18). 7 essentials of a customer-centric call center. [Blog]. Talkdesk. https://www.talkdesk.com/blog/7-essentials-of-a-customer-centric-call-center/
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The Reporting Engine. (2020, June) 5 traits of a customer-centric contact center.[Blog]. https://thereportingengine.com/blog/5-traits-of-a-customer-centric-contact-center/
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CareforCustomers. (2012, July 21). How to reduce AHT in a call center. [Video]. YouTube. https://www.youtube.com/watch?v=HysPD1vpkiU
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Cleveland, B. (2016, December 12). Quality standards in customer service.[Video]. LinkedIn Learning. https://www.linkedin.com/learning/quality-standards-in-customer-service-2016/defining-quality-in-customer-service?contextUrn=urn%3Ali%3AlearningCollection%3A6569259166630768640&u=2167290
Source:
Section 9.4: Adopting a Customer Centric Strategy is edited and adapted from the chapter ‘Leading a Customer Centric Strategy’ appearing in the textbook ‘Customer Centric Strategy’ by Kerri Shields, Toronto, CA published by eCampusOntario, Copyright Year: 2021.
Learning Objectives
After reading this section, students should be able to …
- explain why companies export products
- state the benefits of exporting
- state the risks of exporting
Exporting is defined as the sale of products and services in foreign countries that are sourced or made in the home country. Importing is the flipside of exporting. Importing refers to buying goods and services from foreign sources and bringing them back into the home country. Importing is also known as global sourcing.
An Entrepreneur’s Import Success Story
Selena Cuffe started her wine import company, Heritage Link Brands, in 2005. Importing wine isn’t new, but Cuffe did it with a twist: she focused on importing wine produced by black South Africans. Cuffe got the idea after attending a wine festival in Soweto, where she saw more than five hundred wines from eighty-six producers showcased. Cuffe did some market research and learned of the $3 billion wine industry in Africa. She also saw a gap in the existing market related to wine produced by indigenous African vintners and decided to fill it. She started her company with $70,000, financed through her savings and credit cards. In the first year, sales were only $100,000 but then jumped to $1 million in the second year, when Cuffe sold to more than one thousand restaurants, retailers, and grocery stores. Even better, American Airlines began carrying Cuffe’s imported wines on flights, thus providing a steady flow of business amid the more uncertain restaurant market. Cuffe has attributed her success to passion as well as to patience for meeting the multiple regulations required when running an import business.
Exporting is an effective entry strategy for companies that are just beginning to enter a new foreign market. It’s a low-cost, low-risk option compared to the other strategies. These same reasons make exporting a good strategy for small and midsize companies that can’t or won’t make significant financial investment in the international market.
Companies can sell into a foreign country either through a local distributor or through their own salespeople. Many government export-trade offices can help a company find a local distributor. Increasingly, the Internet has provided a more efficient way for foreign companies to find local distributors and enter into commercial transactions.
Distributors are export intermediaries who represent the company in the foreign market. Often, distributors represent many companies, acting as the “face” of the company in that country, selling products, providing customer service, and receiving payments. In many cases, the distributors take title to the goods and then resell them. Companies use distributors because distributors know the local market and are a cost-effective way to enter that market.
However, using distributors to help with export can have its own challenges. For example, some companies find that if they have a dedicated salesperson who travels frequently to the country, they’re likely to get more sales than by relying solely on the distributor. Often, that’s because distributors sell multiple products and sometimes even competing ones. Making sure that the distributor favors one firm’s product over another product can be hard to monitor. In countries like China, some companies find that—culturally—Chinese consumers may be more likely to buy a product from a foreign company than from a local distributor, particularly in the case of a complicated, high-tech product. Simply put, the Chinese are more likely to trust that the overseas salesperson knows their product better.
Why Do Companies Export?
Companies export because it’s the easiest way to participate in global trade, it’s a less costly investment than the other entry strategies, and it’s much easier to simply stop exporting than it is to extricate oneself from the other entry modes. An export partner in the form of either a distributor or an export management company can facilitate this process. An export management company (EMC) is an independent company that performs the duties that a firm’s own export department would execute. The EMC handles the necessary documentation, finds buyers for the export, and takes title of the goods for direct export. In return, the EMC charges a fee or commission for its services. Because an EMC performs all the functions that a firm’s export department would, the firm doesn’t have to develop these internal capabilities. Most of all, exporting gives a company quick access to new markets.
Benefits of Exporting: Vitrac
Egyptian company Vitrac was founded by Mounir Fakhry Abdel Nour to take advantage of Egypt’s surplus fruit products. At its inception, Vitrac sourced local fruit, made it into jam, and exported it worldwide. Vitrac has acquired money, market, and manufacturing advantages from exporting.
- Market.The company has access to a new market, which has brought added revenues.
- Money.Not only has Vitrac earned more revenue, but it has also gained access to foreign currency, which benefits companies located in certain regions of the world, such as in Vitrac’s home country of Egypt.
- Manufacturing.The cost to manufacture a given unit decreased because Vitrac has been able to manufacture at higher volumes and buy source materials in higher volumes, thus benefitting from volume discounts.
Risks of Exporting
There are risks in relying on the export option. If you merely export to a country, the distributor or buyer might switch to or at least threaten to switch to a cheaper supplier in order to get a better price. Or someone might start making the product locally and take the market from you. Also, local buyers sometimes believe that a company which only exports to them isn’t very committed to providing long-term service and support once a sale is complete. Thus, they may prefer to buy from someone who’s producing directly within the country. At this point, many companies begin to reconsider having a local presence, which moves them toward one of the other entry options.
Ethics in Action: Different Countries, Different Food and Drug Rules
Particular products, especially foods and drugs, are often subject to local laws regarding safety, purity, packaging, labeling, and so on. Companies that want to make a product that can be sold in multiple countries must comply with the highest common denominator of all the laws of all the target markets. Complying with the highest standard could increase the overall cost of the product. As a result, some companies opt to stay out of markets where compliance with the regulation would be more costly. Is it ethical to be selling a product in one country that another country deems substandard?
Exporting is a easy way to enter an international market. In addition to exporting, companies can choose to pursue more specialized modes of entry—namely, contracutal modes or investment modes. Contractual modes involve the use of contracts rather than investment. Let’s look at the two main contractual entry modes, licensing and franchising.
The above content was adapted from International Business. Authored by: anonymous. Provided by: Lardbucket. Located at: . License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
Learning Objectives
- Explain how PESTEL analysis is useful to organizations.
- Be able to offer an example of each of the elements of the general environment.
The Elements of the General Environment: PESTEL Analysis
An organization’s environment includes factors that it can readily affect as well as factors that largely lay beyond its influence. The latter set of factors are said to exist within the general environment. Because the general environment often has a substantial influence on an organization’s level of success, executives must track trends and events as they evolve and try to anticipate the implications of these trends and events.
PESTEL analysis is one important tool that executives can rely on to organize factors within the general environment and to identify how these factors influence industries and the firms within them. PESTEL is an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly (Figure 3.3 "PESTEL").
P Is for “Political”
The political segment centers on the role of governments in shaping business. This segment includes elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments (Figure 3.4 "Political Factors"). Immigration policy is an aspect of the political segment of the general environment that offers important implications for many different organizations. What approach to take to illegal immigration into the United States from Mexico has been a hotly debated dilemma. Some hospital executives have noted that illegal immigrants put a strain on the health care system because immigrants seldom can pay for medical services and hospitals cannot by law turn them away from emergency rooms.
Proposals to provide support to businesses are often featured within political campaigns.
Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to employ only legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall, any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many other organizations.
E Is for “Economic”
The economic segment centers on the economic conditions within which organizations operate. It includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy (Figure 3.5 "Economic Factors"). The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic tightening of credit markets. This dealt a huge blow to home builders, for example, who saw demand for new houses plummet because mortgages were extremely difficult to obtain.
Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts, such as Dollarama and Walmart, enjoyed an increase in their customer base as consumers sought to find ways to economize. Similarly, restaurants such as Subway that charge relatively low prices gained customers, while high-end restaurants such as The Keg worked hard to retain their clientele.
S Is for “Social”
A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States. This change reflects the social segment of the general environment. Social factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer activism (Figure 3.6 "Social Factors"). The exploding popularity of salsa reflects the increasing number of Latinos in the United States over time, as well as the growing acceptance of Latino food by other ethnic groups.
Sometimes changes in the social segment arise from unexpected sources. Before World War II, the American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to fight in the war, however, organizations had no choice but to rely heavily on female employees. At the time, the attitudes of many executives toward women were appalling. Consider, for example, some of the advice provided to male supervisors of female workers in the July 1943 issue of Transportation Magazine:
- Older women who have never contacted the public have a hard time adapting themselves and are inclined to be cantankerous and fussy. It’s always well to impress upon older women the importance of friendliness and courtesy.
- General experience indicates that “husky” girls—those who are just a little on the heavy side—are more even tempered and efficient than their underweight sisters.
- Give every girl an adequate number of rest periods during the day. You have to make some allowances for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair tidied, apply fresh lipstick, and wash her hands several times a day.
The tremendous contributions of female workers during the war contradicted these awful stereotypes. The main role of women who assembled airplanes, ships, and other war materials was to support the military, of course, but their efforts also changed a lot of male executives’ minds about what females could accomplish within organizations if provided with opportunities. Inequities in the workplace still exist today, but modern attitudes among men toward women in the workplace are much more enlightened than they were in 1943.
Beyond being a positive social change, the widespread acceptance of women into the workforce has created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual-income families to purchase take-out meals rather than cook at home.
T Is for “Technological”
The technological segment centers on improvements in products and services that are provided by science. Relevant factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery (Figure 3.8 "Technological Factors"). One key feature of the modern era is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore offered an idea that has come to be known as Moore’s law. Moore’s law suggests that the performance of microcircuit technology roughly doubles every two years. This law has been very accurate in the decades since it was offered.
One implication of Moore’s law is that over time electronic devices can become smaller but also more powerful. This creates important opportunities and threats in a variety of settings. Consider, for example, photography. Just a decade ago, digital cameras were relatively large and they produced mediocre images. With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital cameras are, in essence, minicomputers, and electronics firms such as Panasonic have been able to establish strong positions in the market. Meanwhile, film photography icon Kodak has been forced to abandon products that had been successful for decades. In 2005, the firm announced that it would stop producing black-and-white photographic paper. Four years later, Kodachrome colour film was phased out.
Successful technologies are also being embraced at a much faster rate than in earlier generations. The Internet reached fifty million users in only four years. In contrast, television reached the same number of users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other tablet devices, for example, are able to target a fast-growing population of users. At the same time, organizations that depend on technologies that are being displaced must be aware that consumers could abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for example, demand for cable modems may plummet.
Although the influence of the technological segment on technology-based companies such as Panasonic and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In 2009, Subway started a service called Subway Now. This service allows customers to place their orders in advance using text messages and avoid standing in line at the store. By offering customers this service, Subway is also responding to a trend in the general environment’s social segment: the need to save time in today’s fast-paced society.
E Is for “Environmental”
The environmental segment involves the physical conditions within which organizations operate. It includes factors such as natural disasters, pollution levels, and weather patterns (Figure 3.10 "Environmental Factors"). The threat of pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals increase the safety of the water but detract from its taste. This has created opportunities for businesses that provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many consumers purchase bottled water. Indeed, according to the Agriculture and Agri-Foods Canada, bottled water amounts to 10.9 percent of the market share of Canadian non-alcoholic beverage market.
As is the case for many companies, bottled water producers not only have benefited from the general environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles end up in landfills. This has led some socially conscious consumers to become hostile to bottled water. Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut personal expenses due to economic conditions. In sum, bottled water producers have been provided opportunities by the environmental segment of the general environment (specifically, the spread of poor-tasting water to combat pollution) but are faced with threats from the social segment (the social conscience of some consumers) and the economic segment (the financial concerns of other consumers).
L Is for “Legal”
The legal segment centers on how the courts influence business activity. Examples of important legal factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws (Figure 3.11 "Legal Factors").
Intellectual property rights are a particularly daunting aspect of the legal segment for many organizations. When a studio such as Pixar produces a movie, a software firm such as Adobe revises a program, or a video game company such as Activision devises a new game, these firms are creating intellectual property. Such firms attempt to make profits by selling copies of their movies, programs, and games to individuals. Piracy of intellectual property—a process wherein illegal copies are made and sold by others—poses a serious threat to such profits. Law enforcement agencies and courts in many countries, including the United States, provide organizations with the necessary legal mechanisms to protect their intellectual property from piracy.
In other countries, such as China, piracy of intellectual property is quite common. Three other general environment segments play a role in making piracy a major concern. First, in terms of the social segment, China is the most populous country in the world. Second, in terms of the economic segment, China’s affluence is growing rapidly. Third, in terms of the technological segment, rapid advances in computers and communication have made piracy easier over time. Taken together, these various general environment trends lead piracy to be a major source of angst for firms that rely on intellectual property to deliver profits.
Key Takeaway
To transform an avocado into guacamole, a chef may choose to use a mortar and pestle. A mortar is a mashing device that is shaped liked a baseball bat, while a pestle is a sturdy bowl within which the mashing takes place. Similarly, PESTEL reflects the general environment factors—political, economic, social, technological, environmental, and legal—that can crush an organization. In many cases, executives can prevent such outcomes by performing a PESTEL analysis to diagnose where in the general environment important opportunities and threats arise.
Exercises
- What does each letter of PESTEL mean?
- Using a recent news article, identify a trend that has a positive and negative implication for a particular industry.
- Can you identify a general environment trend that has positive implications for nursing homes but negative implications for diaper makers?
- Are all six elements of PESTEL important to every organization? Why or why not?
- What is a key trend for each letter of PESTEL and one industry or firm that would be affected by that trend?
References
1943 Guide To Hiring Women. (2007, September–October). Savvy & Sage, p. 16.
Agriculture and Agri-Food Canada. (2012). The Canadian Bottled Water Industry, Appendix B. Retrieved from http://www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-market-information/by-product-sector/processed-food-and-beverages/the-canadian-bottled-water-industry/?id=1171644581795
Image descriptions
Figure 3.3 image description: PESTEL.
Examining the general environment involves gaining an understanding of key factors and trends in broader society. PESTEL analysis is a popular framework for organizing these factors and trends and isolating how they influence industries and the firms within them. Below we describe each of the six dimensions associated with PESTEL analysis: political, economic, social, technological, environmental, and legal.
- P: Political factors include elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments.
- E: Economic factors include elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy.
- S: Social factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitude toward obesity and consumer activism.
- T: Technological factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery.
- E: Environmental factors include, for example, natural disasters and weather patterns.
- L: Legal factors include laws involving issues such as employment, health and safety, discrimination, and antitrust.
Figure 3.4 image description: Political Factors.
Examples of several key trends representing political factors in the general environment are illustrated below.
- The extent to which companies developing clean energy sources should be subsidized by the government versus being left on their own to compete with providers of traditional energy sources is currently a hotly contested political issue.
- The use of child labour was once commonplace in industrialized nations. Now firms face political scrutiny when using overseas suppliers that employ children.
- The word tariff derived from an Arabic word meaning "fees to be paid." By levying tariffs and implementing other trade restrictions, governments can—to some extent—protect domestic firms from international competition.
- The stability of the Canadian government provides a source of confidence for foreign firms who want to do business in Canada. Countries that face frequent regime change and political turmoil have a harder time attracting foreign investment.
- Once of the most important duties of elected officials in Canada is to debate and set new monetary policies.
Figure 3.5 image description: Economic Factors.
Examples of several key trends representing economic factors in the general environment are illustrated below.
- Housing starts in an economic indicator that measures the number of houses, apartments, and condos on which new construction has been started. Because construction involves a wide array of industries—concrete, steel, wood, drywall, plumbing, banks, and many others—housing starts are a carefully watched measure of economic conditions.
- The unemployment rate is the percentage of the labour force actively looking or employment within the last four weeks. During the Great Depression of the 1930s, Canada's unemployment rate was 30% of the working force, and one in five Canadians became dependent on government relief.
- Gross domestic product (GDP) refers to the market values of goods and services within a country produced in a given time period and serve as a rough indicator of a country's standard of living. The United States has a much larger GDP than China, but China has enjoyed a much high GDP grown in recent years. Canada's GDP is about one tenth that of the USA, but in the top 15 economies in the world.
- Canada's banking system is considered to be the world's soundest banking system according to the World Economy Forum. Canada's chartered banks have over 8,000 branches and almost 18,000 automated banking machines (ABMs) across country, the highest number of ABMs per capita in the world, an the highest penetration levels of electronic channels such as debit cards, Internet banking, and telephone banking.
- Discretionary income refers to the amount of money individual have to spend after all necessary bills are paid. As discretionary income increases, firms such as boutique clothing retailers that sells nonessential goods and services are more likely to prosper
Figure 3.6 image description: Social Factors.
Examples of several key trends representing social factors in the general environment are illustrated below.
- The rise of upscale cupcake outlets reflects a current trend in North American eateries: pricey specialty stores are very popular among some consumers.
- About five per cent of the Canadian population are active hunters, but ranks may be shrinking due to an aging population and more urban dwellers. Hunting providers, including guides and outfitters, rural hotels and restaurants, plus provincial licensing all make a large contribution to each province's GDP. Wildlife agencies worry about the loss of licence fee revenue may affect their ability to manage land and water resources.
- In the 1800s, most Canadian couples raised many children. Farmers, for example, took this approach because it supplied labour that small farms needed in order to operate. Today, most families are smaller.
- Twenty-five per cent of Canadians are obese: one in four people. Obesity is a risk factor for many chronic illnesses, and is attributed to the increase prevalence of fast-food meals, and the popularity of sedentary activities such as playing video games.
- Hemline theory contends that women's skirt length predicts stock market increase and declines. The idea was born in the 1920s when economist George Taylor noticed that many women raised their skirts to reveal their silk stockings when times are good, but lower their skirts to hide the fact that they weren't wearing stockings when times are rough.
- The tendency to collect material items while being reluctant to throw them away has led to a rise in self-storage outlets as well as awareness of a hoarding epidemic.
Figure 3.8 image description: Technological Factors.
Examples of several key trends representing social factors in the general environment are illustrated below.
- Unsuccessful technological innovations such as Smell-O-Vision (a system that would release different odours that match the events shown on screen) highlight the risk associated with the technology sector. Imagine watching a show on horse stables!
- The adoption rate of new technology is closely monitored by market research firms. The Internet reached 50 million users in 4 years. To teach the same number of users took 13 years for TV and 38 years for radio.
- The dramatic changes in video game industry over the past 25 years highlighted the need to constantly adapt to technological factors to maintain market leadership. Once-mighty Atari has given away to current leader Sony, Nintendo, and Microsoft.
- Moore's law suggests that the performance of microcircuit technology roughly doubles every two years.
- The amount of government spending for research and development affects numerous industries. The government's decision to dramatically scale back R&D programs or funding may reduce the pace of scientific breakthroughs.
Figure 3.10 image description: Environmental Factors.
Examples of several key trends representing environmental factors in the general environment are illustrated below.
- In 2012, DuPont Building Innovations succeeded in becoming a landfill-free enterprise. The company went from producing 37 million kilograms of landfill waste annually, to producing zero. This was achieved by reducing, reusing, and recycling manufacturing byproducts and wastes at its 15 global manufacturing sites, including its plant in Thetford Mines, QC.
- Debate has raged over climate change in recent years. To the extent that more policy makers and consumers believe that human activity is increasing temperatures on the Earth, opportunities could increase for solar energy companies.
- Individuals embracing the three Rs of green living – reduce, reuse, recycle – has fuelled new business concepts such as Recycle Match, a firm that brings together waste products with businesses that need those materials.
- Concern about the environmental effects of burning fossil fuels has contribute to the growing popularity of scooters.
- The increase in the number of food cooperatives reflects growing interest in sustainable, natural foods that are produced with a high degree of social responsibility.
Figure 3.11 image description: Legal Factors.
Examples of several key trends representing legal factors in the general environment are illustrated below.
- Electronic recycling laws are creating opportunities for "green collar jobs". All Canadian provinces apply environmental fees for collection and recycling of designated electronic products, as well as energy-intensive auto accessories such as air conditioning.
- Canada's federal competition law regulator is the Competition Bureau which administers and enforces The Competition Act is a law to ensure equal opportunity to individuals who may be victims of discriminatory practice based on a set of prohibited grounds such as sex, disability, or religion.
- The role of the Canada Occupational Health and Safety Regulations is to prevent work-related injuries, diseases, and fatalities by creating and enforcing standards for workplace safety and health.
- Health Canada requires nutrition labelling for all pre-packaged foods to protect consumers and help them make informed choices.
Learning Objectives
After reading this section, students should be able to …
- define contract manufacturing
- explain the advantages and disadvantages of contract manufacturing
In contract manufacturing, a hiring firm makes an agreement with the contract manufacturer to produce and ship the hiring firm’s goods.
A contract manufacturer (“CM”) is a manufacturer that enters into a contract with a firm to produce components or products for that firm . It is a form of outsourcing. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm’s factory, producing and shipping units of the design on behalf of the hiring firm.
Benefits
Contract manufacturing offers a number of benefits:
- Cost Savings: Companies save on their capital costs because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training, and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor.
- Mutual Benefit to Contract Site: A contract between the manufacturer and the company it is producing for may last several years. The manufacturer will know that it will have a steady flow of business at least until that contract expires.
- Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production.
- Quality: Contract Manufacturers are likely to have their own methods of quality control in place that help them to detect counterfeit or damaged materials early.
- Focus: Companies can focus on their core competencies better if they can hand off base production to an outside company.
- Economies of Scale: Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.
Risks
Balanced against the above benefits of contract manufacturing are a number of risks:
- Lack of Control: When a company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product. They can only suggest strategies to the contract manufacturer; they cannot force them to implement those strategies.
- Relationships: It is imperative that the company forms a good relationship with its contract manufacturer. The company must keep in mind that the manufacturer has other customers. They cannot force them to produce their product before a competitor’s. Most companies mitigate this risk by working cohesively with the manufacturer and awarding good performance with additional business.
- Quality: When entering into a contract, companies must make sure that the manufacturer’s standards are congruent with their own. They should evaluate the methods in which they test products to make sure they are of good quality. The company has to ensure the contract manufacturer has suppliers that also meet these standards.
- Intellectual Property Loss: When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it. The recent increase in intellectual property loss has corporate and government officials struggling to improve security. Usually, it comes down to the integrity of the employees.
- Outsourcing Risks: Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences, and long lead times. This could make the management of contract manufacturers more difficult, expensive, and time-consuming.
- Capacity Constraints: If a company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high production periods. Thus, they may not obtain the product they need when they need it.
- Loss of Flexibility and Responsiveness: Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.
KEY POINTS
- A hiring firm may enter a contract with a contract manufacturer (CM) to produce components or final products on behalf of the hiring firm for some agreed-upon price.
- There are many benefits to contract manufacturing, and companies are finding many reasons why they should be outsourcing their production to other companies.
- Production outside of the company does come with many risks attached. Companies must first identify their core competencies before deciding about contract manufacture.
Terms
- Contract manufacturing: Business model in which a firm hires a contract manufacturer to produce components or final products based on the hiring firm’s design. A business model where a firm hires another firm to produce components or products.
The above content was adapted from Boundless Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike under a Creative Commons Attribution-NonCommercial-ShareAlike License.
Image of Circuit Boards. Authored by: JayHand. Located at: https://en.wikipedia.org/wiki/Electronics_manufacturing_services#mediaviewer/File:Electronic_Printed_Circuit_Board.jpg. License: CC BY-SA: Attribution-ShareAlike
Doblins 10 Types of Innovation Transcript
Chapter 6 Learning Outcomes
After reading this chapter, you should be able to do the following:
- Explain what it means to "know where the company is going" when aligning innovation to growth strategy.
- Explain why it is important to do market research during the first step of the innovation process.
- Describe the Ansoff Matrix and the amount of risk associated with each growth strategy.
- Explain why the alignment between business strategy and innovation might break down as well as how companies can avoid these breakdowns.
- Describe five of the Ten Types of Innovation®.
- Discuss three ways to spot opportunities for innovation.
Aligning Innovation to Growth Strategy
Know Where the Company Is Going
Innovation strategy is about mapping an organization’s mission, vision, and value proposition for defined customer markets. It sets boundaries for innovation performance expectations by simplifying and structuring the innovation work to achieve the best possible outcome. For a business to thrive in today's world of intensified competition it is critical that innovation initiatives are aligned with corporate strategy. For this to happen, senior management needs to take a leadership role in implementing innovation initiatives. In order to align innovation with strategy, leaders need to review and analyze how well the company is meeting its strategic objectives. Leaders need to attend to the current needs of the company and its present performance, optimize current business, and build within its core. This might include taking current products to new markets, adding new models to refresh existing product lines, or improving margins on best-selling products/services. That takes care of current needs, but what about the future? Thinking about the future means developing entirely new avenues for growth that are often outside the current business, building beyond its core. Activities here might include, launching products or services that are unprecedented in the company or perhaps even unprecedented in the market.[1] For example, Amazon continually innovates its core retail business, such as launching AmazonBasics, their private labeled line of essential products. But, at the same time, they are also exploring well beyond their core. The Amazon Echo is a good example of this. Taking them into the consumer Internet of things (IoT) and artificial intelligence (AI) arenas, and pretty far from their original retail business.[2]
Watch the Innovation Strategy YouTube video by Kuczmarski below to learn more about innovation strategy. You may be surprised to learn that many companies do not have an innovation strategy because they have not taken the time to figure out what strategic role they are trying to fill by pursuing new innovations. Learn about the four key components of an innovation strategy: 1) What is the Innovation vision? 2) What is the financial revenue gap the company is trying to fill? 3) How to screen one new idea from the next? 4) What is the investment level the company is willing to make toward innovation? [3] Transcript for "Innovation Strategy" Video [PDF--New Tab]. Closed captioning is available on YouTube.
https://youtu.be/B-tY6citUHw
Make an Innovation: Plan and Test It
Every organization is nothing more than a series of processes. How a product is designed, is a process. How it's manufactured is another process. How it's shipped around the world, is yet another process. If a company can make its processes work faster, cost less, and/or result in a higher quality product/service most likely that company will see higher profits and increasingly happy customers.
Many companies come up with great ideas simply by taking ideas from one aspect of the business and applying it to another. Often creativity is simply a mix of disciplines. Companies create cross-departmental teams, teams that mix employees with customers or partners, and teams that include experts in the field or various fields in order to get a wide variety of ideas from various stakeholder perspectives.
During brainstorming sessions, it is important to let everyone know that no idea is bad and all innovation comes with some risks. Once ideas have been evaluated, each feasible idea should be reviewed for ways to reduce risks. Develop a rough strategy. What needs to happen before the next thing can happen? Which paths are not obvious? Are there skills or resources the team already possesses that can help execute the innovation vision? Consider who can help the team put ideas into action. Do experts need to be included? Trouble-shoot with the team.
Create a prototype and run a pilot (test-run) implementation to show others that implementing this innovation is possible. Try it on a small scale first to see how it works. Gather input from others and make adjustments as needed. Refine and get the details right. Bring in others to help finalize the innovative concept and put it into action. Partners should contribute in ways the team cannot.
Launch the Innovation
After the team has refined drafts and prototypes, it’s time to get this innovation out to the world. Consider how the company will release this new product, process, service, business model, etc. Does the company have a way to build hype and anticipation? What tools and channels will be used to share it? Who does the company want to see/use it? Plan the rollout strategy and then execute it. If that plan starts to look too complicated, simplify. Getting the company's innovation out to the world as something tangible or experiential is ultimately proof-positive of the company's ability to be creative and competitive.
Watch the Innovation Process YouTube video by Kuczmarski below to learn more about how the innovation Process should be systematic and predictable. The first step of the process is doing market research, the second step is solution generation, the third step is business case development (figure out how to monetize the innovation), the fourth step is to scale up (get ready for launch), and the last step is to launch the innovation in the marketplace.[4] Transcript for "Innovation Process" Video [PDF--New Tab]. Closed captioning is available on YouTube.
https://youtu.be/L1mDi3NIZ18
The Ansoff Matrix for Strategic Planning
The Ansoff Matrix is a strategic planning tool that organizations use to plan and analyze strategies for growth. Each strategy for growth carries a different level of potential risk. Each strategy is determined by focusing on whether the products are new or existing and whether the market is new or existing. Each quadrant corresponds to a different product-market strategy.
When a company seeks to grow using its existing offerings in its existing markets, the company is pursuing a market penetration strategy. An example of this would be the introduction of the Kindle Fire. It was a new generation of products in a category where Amazon had already established the original Kindle line.
When a company seeks to grow using its existing offerings in a market that the company is not currently in, the company is pursuing a market development strategy. This is actually how Amazon began, by developing the market for online book sales. Others were already doing this, simply not with the scale or scope envisioned by Bezos.
When a company seeks to grow using new offerings in its existing markets, the company is pursuing a product development strategy. This is where AmazonBasics would fall.
Finally, when a company seeks to grow by presenting new offerings in a market the company is not currently in, the company is pursuing a diversification strategy. This is the highest-risk option, as it requires both product and market development. This is where Amazon web services would be placed. Other companies were already providing these services in a variety of ways, but it was both a new market and a new service for Amazon to address.
Below are some examples from Indeed of how a company might achieve each of the four growth strategies.[5]
1. A business may achieve market penetration by:
-
Increasing their promotional efforts
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Decreasing their pricing
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Running sales and specials to get new customers
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Merging with or acquiring a competing business in the same market
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Making product improvements to appeal more to consumers
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Refining their distribution process
2. With market development, a business may:
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Establish different segments of its customer base
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Appeal to foreign markets
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Expand its customer base to include a different part of the market previously not used, such as expanding from B2C to B2B
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Partner with another company to offer an additional product or to increase distribution
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Buy the rights from a company to produce and sell their product
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Use budget dollars to research what the market needs and develop products that will fill a void in their customers' lives
3. As part of their product development plan, a business may:
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Partner with another company to offer an additional product or to increase distribution
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Buy the rights from a company to produce and sell their product
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Use budget dollars to research what the market needs and develop products that will fill a void in their customers' lives
4. There are two types of diversification:
-
Related diversification: Related diversification is when a company's new offerings complement the products they already produce or at least exist in the same sphere. For example, a company that builds computers may then make a device that hides computer cords from sight.
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Unrelated diversification: Unrelated diversification is when a company's new offerings are outside of its known capabilities. For example, if a company has been making notepads and pens for 10 years but then decides to delve into producing reusable water bottles.
The pace and impacts of technology have grown tremendously since the Ansoff Matrix was first devised so an expanded matrix was created. The expanded Ansoff matrix delineates new growth strategies beyond market development to market innovation and beyond product development to product innovation. It also gives us advanced diversification, where we are combining both development and innovation, and outright industry disruption where we are innovating deeply on both market and offering. Amazon's original launch of the Kindle ebook and store qualifies as an industry disruption. Whereas, subsequent incremental Kindle launches do not. The Echo represents product innovation in a market that is new to Amazon, so it would land in advanced diversification.[6]
Breakdowns Between Business Strategy and Innovation
Why does the alignment between business strategy and innovation break down? Below are five reasons misalignment might occur.
- Exploring solutions for the wrong reasons - Not aligned with strategy.
- Changes in leadership - May bring changes in goals.
- Poor communication of corporate vision and strategy - “Strategic clarity accounts for 31% of the difference between high and low performing organizations in terms of revenue growth, profitability, customer satisfaction, and employee engagement.”[7]
- Poor communication of innovation strategy - Goals, outcomes, and expectations with regard to innovation are not clear.
- Context - Dissolving projects prematurely because they may not appear, at first, to fit with business goals and strategy.
How can companies avoid these breakdowns?
In order to ensure that strategic alignment is occurring across all innovation projects, organizations must continually work to do the following:[8]
- Understand Customer Pains – Pursuing solutions based on new technologies or deciding to discontinue a product are decisions that need to be made based on customer evidence. Relentlessly seeking to understand the customer will help innovation teams better align innovation strategy with corporate strategy in the long run.
- Create a Feedback Loop – The business strategy should inform the innovation strategy and vice versa. Keeping these two engines running simultaneously and continuously feeding both sides with key learnings will ensure that they are working in harmony.
- Communicate Vision and Strategy Clearly – It is important for management to ensure everyone is on the same page with regard to company vision and strategy by taking as much time as needed to explain these concepts. Leaders should connect regularly with team members to make sure everyone is still aligned and focused on big-picture goals.
- Consider the Context – Not all innovation projects that are misaligned today will be misaligned in the future. There are times when innovation projects should be left alone and given time to develop. Ending projects too early can lead an organization away from true innovation and keep it from producing high-impact projects that help the company reach its goals.
Spotting Opportunities
To spot opportunities for innovation, managers and employees first need to understand the company and how it works. Whether you are the CEO or an employee working the front line (directly with customers/clients), you can spot opportunities for improvement by learning about the company's problems and goals. This may mean reviewing company policies and values/mission/vision, talking with other department managers and employees, gathering customer feedback as well as spotting trends in customer complaints. Ask yourself if there are processes that take a long time, and if so, could they be automated for improvement? Are employees or customers complaining about specific systems, communication, or processes, and do these need to be given more thought in how they could be made more efficient and/or effective? Also, consider what works well and can be replicated in other areas? It is important to understand who the company's target customers are and always be thinking about how the company can better help them. Focus groups, mystery shoppers, buyer personas, and observing the customer journey from the pre-sale stage to the sale stage and into the after-sale stage can help companies better understand customer needs and wants. Identify what is working well and what is not working well, and consider how things might be improved.
These seven sources of innovative opportunity were listed by Peter Drucker in his book “Innovation and Entrepreneurship. If you are unaware, Peter Drucker is considered one of the truly great management consultants. He wrote 39 books and is considered a seminal thinker in the field of management.[9]
Unexpected Success and Failures
The marketplace is the number one area to look for opportunities. A good manager should be studying the market by conducting environmental scans (e.g. PEST, competitive analysis, trends, SWOT). Is a particular product or service in greater or lesser demand than anticipated? Why? For example: If a competitor is having unexpected success in a particular market segment, management must find out why this is happening. They must ask themselves what it would mean to their company if they exploited the same opportunity. They must consider what has to happen to convert this opportunity into a success.
Incongruity Between What Is and What Should Be
One of the best places to look for incongruity is through the customers' voices. Their complaints and unmet wants are all the hints a company needs to determine if there is a discrepancy between what is and what should be. Identifying incongruity is key to developing wildly successful businesses, but it’s tricky. Facebook is a company that got it right. Prior to the social network’s prolific rise, Myspace was the dominant player, but it had its downfalls. Facebook wisely noted what Myspace was versus what it should be and then built a better platform. The end result is that many people don't even remember Myspace, but most of the world knows and uses Facebook.
Process Need
Process need involves identifying the company’s process weak spots and correcting or redesigning them. This source of innovation comes from the company's existing capabilities and ways of doing business. An example might be a restaurant that identifies that people wait too long for their entrees and so decides to hire another chef to speed up creation times. Essentially, a company will want to look for all weak links and eliminate them.
Industry and Market Structure Change
The industry and the market are in continual flux. Regulations change and some product lines expand while others shrink. Firms should continually be on the watch for this. One example is deregulation. When a previously regulated industry becomes open there is historical precedence for companies that enter early to be very successful. Other things to watch out for are the convergence of multiple technologies and structural problems that occur from time to time (often immediately following an industry boom).
Demographics
We continually see changes occur in populations, income levels, human capital (education), and age ranges. Smart firms are constantly paying attention to this. When it comes to the baby boomers, businesses have been following them as they got older. At present, they are one of the largest as well as the most affluent demographic groups, with high levels of disposable income. Combining demographic data with segmentation and targeting is a powerful method of accurately meeting a target market’s desires.
Changes in Perception, Meaning, and Mood
Over time populations and people change. The way they view life changes, where they take their meaning from, and how they feel about things change over time and smart companies must pay attention to this in order to capitalize (and avoid becoming forgotten, a relic of ages past). For example, a principle called “down aging” refers to people who look at 50 as being the new 40. Industries have responded to this, most notably in the cosmetic and personal care industry which provides plenty of solutions to help these people look younger. Full industries are creeping up that make people feel younger. Have you spotted any lately?
New Knowledge
As the speed of the technological revolution increases, there will be an ever-increasing number of opportunities that open up. The internet has been the most notable one in the last couple of decades but there have been a plethora of other industries and opportunities that have popped up as a result of this technological revolution. New knowledge is about more than just technology though, it’s about finding better ways of doing things and improving processes. Companies should look to this new knowledge for ways to make incremental improvements. Intel does this continuously, and it’s a major part of why the company is the leading processor manufacturer today. By paying attention to the latest in academic research and investing heavily in its own R&D, the company has managed to find continual sources of innovation.
Ten Types of Innovation®
Innovation is all about coming up with new things that create value for your customers, and the organization. There are many types of innovation, although when we hear about a company innovating we often hear about new products or services. The most common innovation types include product, service, and process. The real problem with innovation is that people think too incrementally and often too exclusively about products and services and do not consider the many targets for innovation that are all around us. There are many ways for companies to innovate to remain competitive in their industries. There are many reasons companies innovate, some of which include reducing costs, increasing profits, staying ahead of the competition, attracting talent, creating a leadership image, attracting investors/funding, and more.
The Ten Types of Innovation® Framework captures the entire innovation ecosystem, from essential organizational structures and processes to critical aspects of the product or service being introduced. Doblin's Ten Types of Innovation® analyzes 10 key areas to consider when you are innovating:
- Profit Model
- Network
- Structure
- Process
- Product Performance
- Product System
- Service
- Channel
- Brand
- Customer Engagement
Watch this 3-minute video by MindTools explaining Doblin's 10 Types of Innovation®.[10] Transcript for "Doblin's 10 Types of Innovation® Video [PDF--New Tab]. Closed captioning is available on YouTube.
https://youtu.be/Q3sfmDkrAI0
Key Takeaways
- Innovation strategy is about mapping an organization’s mission, vision, and value proposition for defined customer markets. It sets boundaries to innovation performance expectations by simplifying and structuring the innovation work to achieve the best possible outcome.
- The innovation process should be systematic and predictable. The first step of the process is doing market research, the second step is solution generation, the third step is business case development (figure out how to monetize the innovation), the fourth step is to scale up (get it ready to be launched), and the last step is to launch the innovation in the marketplace.
- The Ansoff Matrix is a strategic planning tool that organizations use to plan and analyze strategies for growth. Each strategy for growth carries a different level of potential risk.
- There are a number of reasons misalignment can occur, including Exploring solutions for the wrong reasons, Changes in leadership, Poor communication of corporate vision and strategy, Poor communication of innovation strategy, and Context.
- In order to ensure that strategic alignment is occurring across all innovation projects, organizations must constantly work to Understand Customer Pains, Create a Feedback Loop, Communicate Vision and Strategy Clearly, and Consider the Context.
- The seven sources of innovative opportunity are Unexpected success and failures, Incongruity between what is and what should be, Process need, Industry and market structure change, Demographics, Changes in perception/meaning/mood, and New knowledge.
-
Doblin's 10 Types of Innovation® analyzes 10 key areas to consider when you are innovating:
- Business Model
- Network and Alliances
- Enabling Process
- Core Process
- Product Performance
- Product System
- Customer Service
- Channel
- Brand
- Customer Experience
End-of-Chapter Exercises
- Spot Innovation Opportunity. Can you spot an opportunity for innovation? Think about your college or university, or your place of employment. Are there things that could be better, such as products, processes, or services? Discuss with a partner the opportunities you spotted and brainstorm some things that could be done to make improvements. Share your thoughts with the class and/or professor.
- Expanded Ansoff Matrix. Search the Internet to locate information on the Expanded Ansoff Matrix. This extends the base matrix so that there are nine strategies instead of four for growth opportunities. Discuss these additional five strategies and research an example that would fit into each of these five strategies. Share your findings with the class and/or professor.
- Doblin's Ten Types of Innovation®. Search the Internet to read more about Doblin's Ten Types of Innovation® then locate an innovation for each of Doblin's Ten Types. Which companies have innovated in which of the ten types of innovation? Share your findings with the class and/or professor.
- Failed Innovations. Search the Internet to locate one, or more, of the ten types of innovations that have failed. Why happened that caused the failure? What could have been done differently? Discuss these findings and remedies with your class and/or professor.
- Failed Diversification. Search the Internet to locate companies that failed at diversification. What did they try to do and why did they fail? Share your findings with your class and/or professor.
- Successful Diversification. Search the Internet to locate companies that were successful in implementing a diversification strategy. Why were they successful? Share your findings with your class and/or professor.
Additional Resources
- What is innovation strategy? Discover best practices, definitions, tools, and examples
- What Is Innovation Strategy With Examples
- Business Innovation Strategy: 9 Key Pillars for Success
- Business Diversification: The Best Examples
References
(Note: This list of sources used is NOT in APA citation style instead the auto-footnote and media citation features of Pressbooks were utilized to cite references throughout the chapter and generate a list at the end of the chapter.)
