Increasingly, firms are finding themselves at the mercy of their suppliers or, at a minimum, finding their negotiations with suppliers more protracted and onerous.
On the other hand, suppliers are also attempting to gain a better understanding of their manufacturing customers. To this end, one supplier, a provider of components used in the manufacturing process by industrial firms, conducted a detailed analysis of its customer organizations.
The analysis was conducted by a team or task force composed of individuals from a variety of functional areas. As the analysis progressed, the team identified several key questions:
- What do we provide our customers?
- What do our customers buy from us?
- What is our product?
- How do we learn about our customers?
- What do we know about our customers?
- What do we need to know about our customers?
- What is the nature of our relationship with customers?
WHAT DO WE PROVIDE?
The team quickly decided that this was the appropriate point of departure for their analysis.
As the team began to explore this question, however, it became evident the question was better asked in the following way: What is it that the customer buys from us? The way the question was originally posed, the team noted that the viewpoint or perspective they were adopting was that of their own organization and not that of their customers – which the rationale for embarking upon the analysis was.
WHAT DOES THE CUSTOMER BUY?
As with many of the questions that were addressed in this analysis, the answer largely turned on the specific product considered. However, a number of broad generalizations did emerge.
First, customers bought the products to satisfy some functional need: “to facilitate manufacturing operations” in the lexicon of the team.
Second, customers bought a bunch of “services” that were required either to install the product, to make it more functional, or to adapt and improve the product (or, more specifically, the product’s performance) over time.
Third, in the case of some products, what the customer was buying was knowledge-a knowledge base that it did not have itself (and would probably find too difficult and expensive to develop) and which it could obtain only from a few suppliers-at best two or three. This knowledge base resided in the firm’s technical and engineering staff. Its existence and value was conveyed to the customers’ personnel through discussions, on-site visits, product specification details, project proposals, etc.
Fourth, some members of the team, as they spent more time contemplating what it was that the customer really purchased, began to suggest that it was something beyond simply a product or bunch of related services.
They argued that what customers ultimately were acquiring was something on the order of peace of mind: a long-term relationship without which it would be difficult to produce their own products as efficiently or with the quality they desired.
WHAT IS OUR PRODUCT?
Some team members, echoing sentiments widely held within the firm, thought that this question was not worth asking-the answers were obvious. Everyone knew what products the firm produced and sold.
However, as they probed along the lines noted above in trying to deter mine what it was that customers bought, it became readily apparent that many misconceptions abounded in the firm as to what “products” they provided their customers.
Principal among these misconceptions was that many individuals in the firm defined each product as simply the sum of its tangible attributes. In the vernacular of the firm, a hardware conception of the product was emphasized.
Stated differently, the services component of the product received relatively little attention; the knowledge element received almost no attention; and, the nature of the ongoing relationship between provider and customer was ac corded no attention at all.
HOW DO WE LEARN ABOUT OUR CUSTOMERS?
One other question persistently raised its ugly head in the team’s deliberations how does the firm acquire its knowledge about customers?
The team intentionally decided to raise this question before it asked “what do we know about our customers?” The thinking behind this sequencing of questioning was that a familiarity with the way in which the firm learned about its customers (and how that information was disseminated within the firm) would temper what otherwise might be extravagant claims about what they actually knew about customers.
Team members created a long enumeration of items, each of which represented a means by which someone in the firm was able to gain a better understanding of customers. The list was then pared down to what the team considered the most significant items.
Personal contacts with customers was rated as the most important and most reliable source of information about all aspects of the customer’s business. While this did not come as a great shock to team members, they were surprised to discover the variety of contacts they had with many of their customers, particularly their larger customers. The following contacts were deemed to be the most valuable access points:
- Design/engineering staff working in conjunction with the customers’ counterparts.
- Salespeople (most of whom are engineers) calling on customers (generating among other things a profile of different customers’ needs, current operations characteristics, etc.).
- Line management and finance/accounting staff negotiating contract terms.
- Various personnel speaking with customers at product or trade shows.
Although they were not deemed nearly as important as personal sources of information, the team did develop a long laundry list of secondary (i.e., non-personal) sources of data about customers.
The team did note, however, that different individuals or functions tended to utilize different secondary sources. For example, the engineering staff culled data from very different types of publications than did the marketing/sales function.
As the team began to examine the nature of the data that could be extracted from secondary sources, two conclusions emerged.
- Such data could be used to reveal much more about customers than most team members had realized. For example, it quickly became evident that trade literature pertaining to customers often revealed significant details about customers’ competitive strategy-what the strategy was, why it was being pursued, what results it had generated or were expected, etc.
- Such information could prove useful to the firm’s personnel in preparing to meet with customers. For example, salespeople could be provided with a greater understanding of each major customer’s competitive strategy and how they could help the customer to execute the strategy.
WHAT DO WE KNOW ABOUT OUR CUSTOMERS?
To grapple with this question, the team identified different types of customers, and then developed another list of those things which they were reasonably confident they knew about each type of customer. In order to give the analysis a specific anchor, the team zeroed in on the one or two largest customers in each customer class.
To focus the analysis, the team asked a series of questions about each of the following customer aspects:
- Manufacturing processes
- Technology capability
- Engineering capability
- Product strategy
- Key personnel
- Organizational policies
- Financial condition
- Purchasing criteria
A number of conclusions emerged from this analysis.
First, it became apparent to the team that a lot of information about customers already existed within the firm, but it was highly disjointed and distributed across various functions. In other words, it had never previously been pulled together and analyzed.
Second, in the words of one member of the team, “the vast preponderance of the data about customers: its manufacturing, technology, engineering, etc. There was very little data about the customer’s overall competitive or business strategy.”
Third, the team realized that in order to negotiate effectively with its customers, the firm needed a much broader base of knowledge about its customers than had previously been appreciated. Indeed, this question became a large and very significant part of their analysis.
WHAT DO WE NEED TO KNOW?
In the view of most members of the team, answering this question proved most enlightening.
A large portion of the enlightenment stemmed from the recognition that this question could only be answered by placing it in a broader context. That broader context was identifying and assessing the firm’s strategic options. Asking what they needed to know about their customers compelled the team to assess the firm’s own strategic options, and then to ask what customer knowledge was required not just to assess strategic options but to identify the options.
To provide a framework for assessing customers within the broader context, the team identified the following questions as the most important inputs to effectively linking customer knowledge and strategy analysis: what is its
- What is the customer’s business or competitive strategy? (i.e., strategy in the marketplace?)
- What are its market share goals?
- How does it price its products?
- What non-price elements are important?
- What role does product development play?
- What contribution does each functional area make to the business or competitive strategy?
- What is expected of manufacturing? Is it product quality, production flexibility, or cost efficiencies?
- How important is control in its strategy? Where is cost control accorded most attention-product development, engineering, manufacturing, marketing, general administration, etc.?
- What is the role of the engineering function in product prototype testing, manufacturing, etc.?
- What role does the finance/accounting function play? When are the finance/accounting personnel brought into the decision-making process? Are finance/accounting criteria strictly adhered to?
- What is the decision-making process within customers with regard to the firm’s products?
- Who is typically involved in the decision process?
- What role does each play?
- What is the duration of each phase in the decision process?
- Where does authority to make the decision reside?
- Who are the most significant influencers in the decision process?
- When the decision process becomes protracted, who or what tends to be the cause?
WHAT IS OUR RELATIONSHIP WITH CUSTOMERS?
As the team considered each of the questions noted so far, it became increasingly clear that customers could only be fully understood in the context of their relationship with the team’s own firm.
Not surprisingly, the team determined that the firm had a wide range of relationships with its customers, spanning a spectrum from what various team members described as “friendly, close, cordial, and close-working” to “hostile, distant, arms-length, and disfunctional.”
The team concluded that two factors seemed largely to determine the nature of the firm’s relationship with customers: the degree of dependency between the firm and the customers and the character of the relationship that had evolved over time between their respective personnel. In assessing the extent of dependency between the firm and specific customers, the team raised the following questions:
- What percentage of the customer’s product requirements are accounted for by our firm’s sales?
- What percentage of our sales (by product is accounted for by each customer (and customer type)?
- How critical are our firm’s products to the operations of each customer Are they critical to the customer’s efforts to produce a (superior) quality product? What contribution do they make to the customer becoming more cost-efficient?
- What options do customers currently or potentially possess with regard to other suppliers? Is the firm a single source supplier, one of a few, or one of many?
In assessing the nature of the interpersonal relationships the firm has with different customers, the team asked the following questions:
- Who are the key contact persons within our own firm? The importance of this question became manifest when it transpired that some key individuals within their own firm (engineers, salespersons, line managers) seemed to do a much better job at “cultivating” appropriate individuals within customer organizations.
- What key events seem to have influenced the relationship? A wide range of events were identified as having positively or negatively influenced how the firm and customers viewed each other. Negative events included protracted bargaining between the parties, problems about credit terms and payment, personality clashes between personnel, and post-installation product problems.
A greater awareness of the importance of these concerns led the team to conclude that the firm needed to develop an explicit strategy or approach to managing its multiple relationships with customers.
MAKING USE OF CUSTOMER KNOWLEDGE
The team continually emphasized that gaining knowledge about customers was not an end in itself. The ultimate intent was to use that knowledge to formulate better strategies to strengthen customer relationships. Although the team identified innumerable ways in which such knowledge could be used, three uses were accorded most significance:
- Identifying strategic (product) options
- Assessing strategy options
- Managing customer relationships
In large part because of the nature of the firm’s products, knowledge of the operations of customer’s organizations was a key input to developing new products and modifying existing products. In many instances, the products had to be developed or modified around a customer’s specific needs. Such custom products could not be first developed and adapted to fit customers’ unique requirements.
This was not news to the team. What did come as a surprise was how little effort was expended by the firm in studying customers (or more precisely working with customer personnel) with the specific intent of identifying new product options.
The firm has now developed project teams to work closely with customers in product development, particularly in the development of products new to the firm.
Also, stemming from its broader understanding of what the customer buys (or what product the firm provides), the firm is now developing different “product packages” for each customer type (and, in some cases, for specific customers). Different service mixes are now being made available.
The firm now specifically “tests” product options by asking how and why customers may respond to them. For example, they now ask how the product will help the customer. How does it meet the interests of individual functional areas within the customer organization?
Members of the analysis team also claim that their better understanding of customers is also helping them to anticipate how customers may respond to the offerings of competitors, and how the firm itself should respond to competitive threats.
The firm is also now establishing some programs to manage all aspects of its relationships with customers. At the broadest level, the firm is developing a strategy to exert maximum leverage upon some large customers. This includes proposals to develop products jointly, perform assessments of the customer’s needs, and provide alternative service options. The intent is to make customers as dependent as possible upon the firm.
At a more specific level, it involves the provision of training and development programs for all personnel that interact with customers. For example, salespeople and engineers are being trained in negotiating and bargaining tactics.
The firm is now extensively refocusing its approach to doing business with customers. In line with that effort, the team has decided to continue to work together as a means of formalizing ongoing learning about customers.
