When Marketing Is Strategy - Harvard Business Review

Why you must shift your strategy downstream, from products to customers. ... and develop strategic market positions as sources of competitive advantage. Youhave1freearticlesleftthismonth. Youarereadingyourlastfreearticleforthismonth. Subscribeforunlimitedaccess. Createanaccounttoread2more. Marketing WhenMarketingIsStrategy Whyyoumustshiftyourstrategydownstream,fromproductstocustomers by NirajDawar by NirajDawar FromtheMagazine(December2013) Tweet Post Share Save GetPDF BuyCopies Print Summary.    Reprint:R1312G Fordecades,businesseshavesoughtcompetitiveadvantagein“upstream”activitiesrelatedtomakingnewproducts—buildingbiggerfactories,findingcheaperrawmaterials,improvingefficiency,andsoon.Butthoseeasilycopiedsourcesofadvantagearebeingirreversiblyeroded,andadvantageincreasinglylies“downstream”—inthemarketplace. Todaythestrategicquestionthatdrivesbusinessisnot“Whatelsecanwemake?”but“Whatelsecanwedoforourcustomers?”Thisnewcenterofgravitydemandsarethinkoflong-standingstrategyprinciples: First,thesourcesandlocusofcompetitiveadvantagenowlieoutsidethefirm,andadvantageisaccumulative—ratherthanerodingovertimeascompetitorscatchup,itgrowswithexperienceandknowledge. Second,it’snolongerabouthavingthebetterproductbutabouthowyoupositionyourselfinthemarketandwhichcompaniesyouchoosetocompeteagainst. Third,thepaceofchangeinmarketsisnowdrivenbyshiftsincustomers’purchasecriteriaratherthanbyimprovementsinproductsortechnology. Tweet Post Share Save GetPDF BuyCopies Print Leerenespañol Leremportuguês It’snosecretthatinmanyindustriestoday,upstreamactivities—suchassourcing,production,andlogistics—arebeingcommoditizedoroutsourced,whiledownstreamactivitiesaimedatreducingcustomers’costsandrisksareemergingasthedriversofvaluecreationandsourcesofcompetitiveadvantage.Consideraconsumer’spurchaseofacanofCoca-Cola.Inasupermarketorwarehouseclubtheconsumerbuysthedrinkaspartofa24-pack.Thepriceisabout25centsacan.Thesameconsumer,findingherselfinaparkonahotsummerday,gladlypaystwodollarsforachilledcanofCokesoldatthepoint-of-thirstthroughavendingmachine.That700%pricepremiumisattributablenottoabetterordifferentproductbuttoamoreconvenientmeansofobtainingit.Whatthecustomervaluesisthis:nothavingtoremembertobuythe24-packinadvance,breakoutonecanandfindaplacetostoretherest,lugthecanaroundallday,andfigureouthowtokeepitchilleduntilshe’sthirsty. Downstreamactivities—suchasdeliveringaproductforspecificconsumptioncircumstances—areincreasinglythereasoncustomerschooseonebrandoveranotherandprovidethebasisforcustomerloyalty.Theyalsonowaccountforalargeshareofcompanies’costs.Toputitsimply,thecenterofgravityformostcompanieshastilteddownstream. YetbusinessstrategycontinuestobedrivenbytheghostoftheIndustrialRevolution,longafterthefactoriesthatusedtobetheprimarysourcesofcompetitiveadvantagehavebeenshutteredandoff-shored.Companiesarestillorganizedaroundtheirproductionandtheirproducts,successismeasuredintermsofunitsmoved,andorganizationalhopesarepinnedonproductpipelines.Production-relatedactivitiesarehonedtomaximizethroughput,andmanagerswhoworshipefficiencyarepromoted.Businessesknowwhatittakestomakeandmovestuff.Theproblemis,sodoeseverybodyelse. Thestrategicquestionthatdrivesbusinesstodayisnot“Whatelsecanwemake?”but“Whatelsecanwedoforourcustomers?”Customersandthemarket—notthefactoryortheproduct—nowstandatthecoreofthebusiness.Thisnewcenterofgravitydemandsarethinkofsomelong-standingpillarsofstrategy:First,thesourcesandlocusofcompetitiveadvantagenowlieoutsidethefirm,andadvantageisaccumulative—ratherthanerodingovertimeascompetitorscatchup,itgrowswithexperienceandknowledge.Second,thewayyoucompetechangesovertime.Downstream,it’snolongerabouthavingthebetterproduct:Yourfocusisontheneedsofcustomersandyourpositionrelativetotheirpurchasecriteria.Youhaveasayinhowthemarketperceivesyourofferingandwhomyoucompetewith.Third,thepaceandevolutionofmarketsarenowdrivenbycustomers’shiftingpurchasecriteriaratherthanbyimprovementsinproductsortechnology. Let’sconsidermorecloselyhowcompaniescanusedownstreamactivitiestoupendtraditionalstrategy. MustCompetitiveAdvantageBeInternaltotheFirm? Intheirquestforupstreamcompetitiveadvantage,companiesscrambletobuilduniqueassetsorcapabilitiesandthenconstructawalltopreventthemfromleakingouttocompetitors.Youcantellwhichofitsactivitiesafirmconsiderstobeasourceofcompetitiveadvantagebyhowwellprotectedtheyare:Ifthecompanybelievesitsedgeliesinitsproductionprocesses,thenplantvisitsarestrictlycontrolled.IfitbelievesthatR&Dsetsitapart,securityarounditsresearchlabsisairtightandarmiesoflawyersprotectitspatents.Andifitprizesitstalent,you’llfindhipworkspacesforemployees,gourmetlunches,yogastudios,napnooks,sabbaticals,andflexibleworkhours. Onahotday,consumersgladlypaya700%pricepremiumfortheconvenienceofbuyingacoldcanofsodafromavendingmachine. Downstreamcompetitiveadvantage,incontrast,residesoutsidethecompany—intheexternallinkageswithcustomers,channelpartners,andcomplementors.Itismostoftenembeddedintheprocessesforinteractingwithcustomers,inmarketplaceinformation,andincustomerbehavior. AclassicthoughtexperimentintheworldofbrandingistoaskwhatwouldhappentoCoca-Cola’sabilitytoraisefinancingandlaunchoperationsanewifallitsphysicalassetsaroundtheworldweretomysteriouslygoupinflamesonenight.Theanswer,mostreasonablebusinesspeopleconclude,isthatthesetbackwouldcostthecompanytime,effort,andmoney—butCoca-Colawouldhavelittledifficultyraisingthefundstogetbackonitsfeet.Thebrandwouldeasilyattractinvestorslookingforfuturereturns. Thesecondpartoftheexperimentistoaskwhatmighthappenif,instead,7billionconsumersaroundtheworldweretowakeuponemorningwithpartialamnesia,suchthattheycouldnotrememberthebrandnameCoca-Colaoranyofitsassociations.Long-standinghabitswouldbebroken,andcustomerswouldnolongerreachforaCokewhenthirsty.Inthisscenario,mostbusinesspeopleagreethateventhoughCoca-Cola’sphysicalassetsremainedintact,thecompanywouldfinditdifficulttoscareupthefundstorestartoperations.Itturnsoutthatthelossofdownstreamcompetitiveadvantage—thatis,consumers’connectionwiththebrand—wouldbeamoresevereblowthanthelossofallupstreamassets. Establishingandnurturinglinkagesinthemarketplacecreatesstickiness—thatis,customers’(orcomplementors’)unwillingnessorinabilitytoswitchtoacompetitorwhenitoffersequivalentorbettervalue.Millionsorbillionsofindividualchoicestoremainloyaltoabrandoracompanyadduptorealcompetitiveadvantage. MustYouListentoYourCustomers? Acompanyismarket-oriented,accordingtothetechnicaldefinition,ifithasmasteredtheartoflisteningtocustomers,understandingtheirneeds,anddevelopingproductsandservicesthatmeetthoseneeds.Believingthatthisprocessyieldscompetitiveadvantage,companiesspendbillionsofdollarsonfocusgroups,surveys,andsocialmedia.The“voiceofthecustomer”reignssupreme,drivingdecisionsrelatedtoproducts,prices,packaging,storeplacement,promotions,andpositioning. Buttherealityisthatcompaniesareincreasinglyfindingsuccessnotbybeingresponsivetocustomers’statedpreferencesbutbydefiningwhatcustomersarelookingforandshapingtheir“criteriaofpurchase.”WhenaskedaboutthemarketresearchthatwentintothedevelopmentoftheiPad,SteveJobsfamouslyreplied,“None.It’snottheconsumers’jobtoknowwhattheywant.”Andevenwhenconsumersdoknowwhattheywant,askingthemmaynotbethebestwaytofindout.Zara,thefast-fashionretailer,placesonlyasmallnumberofproductsontheshelfforrelativelyshortperiodsoftime—hundredsofunitspermonthcomparedwithatypicalretailer’sthousandsperseason.Thecompanyissetuptorespondtoactualcustomerpurchasebehavior,rapidlymakingthousandsmoreoftheproductsthatflyofftheshelfandcullingthosethatdon’t. Indeed,marketleaderstodayarethosethatdefinewhatperformancemeansintheirrespectivecategories:Volvosetsthebaronsafety,shapingcustomers’expectationsforfeaturesfromseatbeltstoairbagstoside-impactprotectionsystemsandactivepedestriandetection;Febrezeredefinedthewaycustomersperceiveacleanhouse;Nikemadecustomersbelieveinthemselves.Buyersincreasinglyusecompany-definedcriterianotjusttochooseabrandbuttomakesenseofandconnectwiththemarketplace.(Seethesidebar“HowCialisBeatViagra.”) HowCialisBeatViagra Redefiningcustomers’purchasecriteriaisoneofthemostpowerfulwayscompaniescanwrestmarketleadershipfromcompetitors. Thestrategyservesincumbentsandchallengersalike.Consider,forexample,the$5billionmarketforerectiledysfunctiondrugs.Pfizerlaunchedthefirstsuchdrug,Viagra,inApril1998,witharecord600,000prescriptionsfilledthatmonthalone.Atapriceof$10perdoseandagrossmarginof90%,Pfizercouldaffordtosplurgeonmarketingandsales.Itrolledouta$100millionadvertisingcampaign,andsalesrepsmadeawhopping700,000physicianvisitsthatyear.Intheprocess,Pfizercreatedanentirelynewmarketonthebasisofonekeycriterionofpurchase:efficacy.Thedruggotthejobdone. By2001annualsaleshadreached$1.5billion,andotherpharmaceuticalcompanieshadtakennoteofthesize,growth,andprofitabilityofthemarket.In2003,BayerintroducedLevitra,thefirstcompetitortoViagra.ThedrughadaprofileverysimilartoViagra’sandaslightlylowerprice—classic“metoo”positioning. Soonafter,LillyIcos,ajointventurebetweenEliLillyandthebiotechfirmICOS,enteredthemarketwithanewproduct—Cialis—thatwasdifferentfromitscompetitorsintwoways.First,whereasViagraandLevitrawereeffectiveforfourtofivehours,Cialislastedupto36hours,makingitpotentiallymuchmoreconvenientforcustomerstouse.Second,producttrialsshowedfewerofthevision-relatedsideeffectsassociatedwithViagraandLevitra. Atthetime,thekeycriteriathatphysiciansconsideredinprescribingadrugforerectiledysfunctionwereefficacyandsafety.Thosetwocriteriaaccountedforarelativeimportanceof70%.Durationhadarelativeimportanceoflessthan10%. ThestrategicquestionforLillyIcoswaswhetheritcouldinfluencehowphysiciansperceivedtheimportanceofthecriteria.Thepositioningwashotlydebatedpriortolaunch:ShouldthecompanycenteritsmarketingstrategyonCialis’slackofsideeffects,giventhatsafetywasalreadyoneofthetwokeycriteria?Orshoulditattempttoestablishdurationasanewcriterion? Themarketingteamdecidedtoemphasizethebenefitsofduration—beingabletochooseatimeforintimacyina36-hourwindow—initslaunchcampaign,anditsetthepriceforCialishigherthanthatforViagratounderscoretheproduct’ssuperiority. Thenewcriterionofpurchase—marketedasromanceandintimacyratherthansex—caughton.ABusinessWeekarticlereportingonanearlypositioningstudystated,“Viagrauserswhohadbeeninformedoftheattributesofbothdrugsweregivenastackofobjectsandaskedtosortthemintotwogroups,oneforViagraandtheotherforCialis.Redlaceteddies,stiletto-heeledshoes,andchampagneglasseswereassignedtoViagra,whilefluffybathrobesanddownpillowsbelongedtoCialis.” In2012CialispassedViagra’s$1.9billioninannualsales,withdurationsupplantingefficacyasthekeycriterionofpurchaseintheerectiledysfunctionmarket. Thosecriteriaarealsobecomingthebasisonwhichcompaniessegmentmarkets,targetandpositiontheirbrands,anddevelopstrategicmarketpositionsassourcesofcompetitiveadvantage.Thestrategicobjectiveforthedownstreambusiness,therefore,istoinfluencehowconsumersperceivetherelativeimportanceofvariouspurchasecriteriaandtointroducenew,favorablecriteria. MustCompetitiveAdvantageErodeoverTime? Thetraditionalupstreamviewisthatasrivalcompaniescatchup,competitiveadvantageerodes.Butforcompaniescompetingdownstream,advantagegrowsovertimeorwiththenumberofcustomersserved—inotherwords,itisaccumulative. Forexample,youwon’tfindFacebook’scompetitiveadvantagelockedupsomewhereinitssparklingofficesinMenloPark,orevenroamingfreeonthepremises.Theemployeesaresmartandveryproductive,butthey’renotthekeytothecompany’ssuccess.Rather,it’stheonebillionpeoplewhohaveaccountsonthewebsitethatrepresentthemostvaluabledownstreamasset.ForFacebook,it’sallaboutnetworkeffects:Peoplewhowanttoconnectwanttobewhereeverybodyelseishangingout.Facebookdoeseverythingpossibletokeepitspositionasthepreeminentvillagesquareontheinternet:ThedatathatuserspostonFacebookisnotportabletoanyothersite;thetimelines,events,games,andappsallcreatestickiness.ThemoreusersstayonFacebook,themorelikelytheirfriendsaretostay. Networkeffectsconstituteaclassicdownstreamcompetitiveadvantage:Theyresideinthemarketplace,theyaredistributed(youcan’tpointtothem,paintthem,orlockthemup),andtheyarehardtoreplicate.Brands,too,carrynetworkeffects.BMWandMercedesadvertiseontelevisionandothermassmedia,eventhoughfewerthan10%ofviewersmaybeintheirtargetmarket,becausethemorepeopleareawedbythesebrands,themorethoseinthetargetmarketarewillingtopayforthem. Indeed,theverynatureofnetworkeffectsisthattheyareaccumulative.Butotherdownstreamadvantages—particularlythoserelatedtoamassinganddeployingdata—areaccumulativeaswell.ConsiderOrica,anexplosivescompanymiredinacommoditybusinessinAustralia.Theprimaryconcernofitscustomers—quarriesthatblastrockforuseinlandscapingandconstruction—wastomeetwell-definedspecificationswhileminimizingcosts.Becausetheproductsonthemarketwerevirtuallyindistinguishable,thequarriessawnoreasontopayapremiumforOrica’soranyothercompany’sexplosives.Atthesametime,Oricaknewthatblastingrockisnotasstraightforwardasitmayappear.Manyfactorsaffecttheperformanceofablast:theprofileoftherockface;thelocation,depth,anddiameteroftheboredholes;eventheweather.Messupthecomplexformulaforlayingtheexplosivesoftenenoughandyourprofitscrumbleintodustandgetblownawaybythewind. Oricarealizedthatcustomersharboredmuchunspokenanxietyabouthandlingtheexplosiveswithoutaccidents,nottomentiontransportingandstoringthemsafely.Ifitcouldsystematicallyreduceevensomeofthosecostsandrisks,itwouldbeprovidingsignificantnewvalueforthequarries—farinexcessofanypricereductionthatcompetitorscouldoffer.SoOrica’sengineerssettoworkgatheringdataonhundredsofblastsacrossawiderangeofquarriesandfoundsurprisingpatternsthatledthemtounderstandthefactorsthatdetermineblastoutcomes.Usingempiricalmodelsandexperimentation,Oricadevelopedstrategiesandproceduresthatgreatlyreducedtheuncertaintythat,untilthen,hadgonehandinhandwithblastingrock.Itcouldnowpredictandcontrolthesizeoftherockthatwouldresultfromablastandcouldoffercustomerssomethingitscompetitorscouldnot:guaranteedoutcomeswithinspecifiedtolerancesforblasts.QuarriessoonshiftedtoOrica,despitelowerpricesfromcompetitors.Notonlyhadthecompanydevelopedanedgeoverrivals,buttheadvantagewasaccumulative:AsOricaamassedmoredata,itfurtherimprovedtheaccuracyofitsblastpredictionsandincreaseditsadvantagerelativetoitscompetitors. CanYouChooseYourCompetitors? Conventionalwisdomholdsthatfirmsarelargelystuckwiththecompetitorstheyhaveorthatemergeindependentoftheirefforts.Butwhenadvantagemovesdownstream,threecriticaldecisionscandetermine,oratleastinfluence,whomyouplayagainst:howyoupositionyourofferinginthemindofthecustomer,howyouplaceyourselfvis-à-visyourcompetitivesetwithinthedistributionchannel,andyourpricing. Ifyou’reinthebeveragebusinessandyou’vedevelopedarehydratingdrink,youhaveachoiceofhowtopositionit:asaconvalescencedrinkfordigestiveailments,asahalf-timedrinkforathletes,orasahangoverreliever,forexample.Ineachinstance,thecustomerperceivesthebenefitsdifferently,andislikelytocomparetheproducttoadifferentsetofcompetingproducts. Inchoosinghowtopositionproducts,managershavetendedtopayattentiontothesizeandgrowthofthemarketandoverlooktheintensityandidentityofthecompetition.Downstream,youcanactivelyplaceyourselfwithinacompetitivesetorawayfromit.Britafilterscompeteagainstotherfilterswhentheyareplacedinthekitchenappliancessectionatbig-boxstores,forinstance.ButBritachangesbothitscomparisonsetandtheeconomicsoftheconsumerdecisionwhenthefiltersareplacedinthebottled-wateraisleatsupermarkets.HereBritafiltershaveacompetitivecostadvantage,deliveringseveralmoregallonsofcleanwaterperdollarthanbottledwater.Ofcourse,notallbuyersofbottledwaterarebuyingsolelyforthecriterionofcost(somearebuyingforportability,forexample),butforthosewhoare,Britaisanattractivechoice. Britachangesitscompetitivesetwhenitisplacedinthebottledwateraisleatthesupermarketinsteadofwithkitchenappliancesatabig-boxstore. Ifyouwouldprefernottobecomparedwithanyotherbrands,thenyou’rebetteroffmarketing,distributing,andpackagingyourproductsinwaysthatavoidfamiliarcuestocustomers.Atriptothegrocerystoreoraglanceatonlinecatalogsshowshowsimilarmanyproducts’packagingis:Mostyogurtsaresoldinexactlythesamepacksizeandformat,andtheircommunicationsareoftensoindistinguishablethatconsumerscannotrecallthebrandafterhavingseenanadvertisement.Thelackofdifferentiationencouragescompetition,whenmanyofthesebrandswouldbebetteroffavoidingit. Finally,pricinghasastronginfluenceonwhomyoucompetewith.WhenInfinitilauncheditscomebackcar,theG35,in2002,itwashailedasaBMW-beater.Thecar,looselybasedonthelegendaryNissanSkyline,rivaledtheBMW5seriesintermsofinteriorspaceandenginepower,butitwouldhavestruggledtocompeteforacoupleofreasons:The5seriesisaimedatexperiencedBMWbuyers—oratleastbuyerswhohavepreviouslyownedaluxuryautomobile.Also,the5seriesisveryexpensive,andwhencustomersareshellingoutthatkindofmoney,they’renotlookingforvalue—they’relookingforanestablishedbrandandvalueproposition.InfinitichosetopositiontheG35againsttheBMW3seriesinstead.Therightpricingaccomplishedthatobjective:Manyconsumers,especiallycarbuyers,usepriceasakeycriterioninformingtheirconsiderationset. Althoughchoosingtoavoidcompetitorsmayminimizehead-oncompetition,thereisnoguaranteethatyouwon’tstillhavetocontendwithcompetitorsyoudidn’twantoraskfor.Butifyou’vedoneyourhomeworkandestablisheddominanceonyourcriterionofpurchase,me-toocompetitorswillbeputtingthemselvesinanunfavorablepositioniftheychoosetofollowyou. Surprisingly,youhavemoresayindeterminingwhoyourcompetitorsareifyou’realaterentrantinamarketplacethanifyoubreaknewground.Alaterentrantcanchoosetocompetedirectlywithanincumbentortodifferentiate,whereasanincumbentissubjecttothedecisionsoflaterentrants.Butanincumbentisnothelpless:Itcanstayaheadofcompetitorsbycontinuallyredefiningthemarketandintroducingnewcriteriaofpurchase. DoesInnovationAlwaysMeanBetterProductsorTechnology? Likeprimerealestateinacrowdedcity,customers’mindspaceisincreasinglyscarceandvaluableasbrandsproliferateineverycategoryandexistingonesareslicedwafer-thin.Companiescompeteferociouslyagainstoneanothernottoprovesuperioritybuttoestablishuniqueness.VolvodoesnotclaimtomakeabettercarthanBMWdoes,northeotherwayaround—justadifferentone.Incustomers’minds,Volvoisassociatedwithsafety,whileBMWemphasizesthejoyandexcitementofdriving.Becausethetwoautomakersemphasizedifferentcriteriaofpurchase,theyappealtoverydifferentcustomers.Inaglobalstudyaimedatfindingoutwhat“excitement”meanttocustomers,respondentswereaskedto“describethemostexcitingdayofyourlife.”Whentheresultsweretallied,itturnedoutthatBMWownersdescribedexcitingthingstheyhaddone—white-waterraftinginColorado,attendingaRollingStonesconcert.Incontrast,themostexcitingdaybyfarinthelivesofVolvoownerswasthebirthoftheirfirstchild.Brandscompetebyconvincingcustomersoftherelativeimportanceoftheircriterionofpurchase. Thatisnottosaythattheupstreamactivitiesassociatedwithbuildingsaferorfastercarsdon’tmatter.Theproductremainsanessentialingredientindemonstratingthebrand’spositioningonitschosencriterion.Theproductanditsfeaturesturntheabstract,intangiblepromisesofthebrandintorealbenefits.Volvo’sproductinnovationsreallydomakeitscarssafer,reinforcingalastingbrandassociationwithitscustomers.Buttheproductitselfdoesnotoccupyamoreprivilegedpositioninthemarketingmixthan,say,therightcommunicationordistribution. WhereElseDoesInnovationReside? Thepersistentbeliefthatinnovationisprimarilyaboutbuildingbetterproductsandtechnologiesleadsmanagerstoanoverrelianceonupstreamactivitiesandtools.Butdownstreamreasoningsuggeststhatmanagersshouldfocusonmarketplaceactivitiesandtools.Competitivebattlesarewonbyofferinginnovationsthatreducecustomers’costsandrisksovertheentirepurchase,consumption,anddisposalcycle. ConsiderthecaseofHyundaiinthedepthsoftheGreatRecessionof2008–2009.Astheeconomyfaltered,Americanjobprospectslookedpainfullyuncertain,andconsumersdelayedpurchasesofdurablegoods.Automobilesalescrashedthroughthefloor.GM’sandChrysler’slong-termfinancialproblemsresurfacedwithavengeance,andbothcompaniessoughtgovernmentbailouts.Hyundai,whichprimarilytargetedlower-incomecustomers,wasparticularlyhardhit.Thecompany’sU.S.salesdropped37%. Asoveralldemandplunged,theimmediateresponseofmostcarcompanieswastoslashpricesandrolloutdiscountsintheformofcash-backoffersandotherdealerincentives.Hyundaiconsideredtheseoptions,butiteventuallytookadifferentapproach:Itaskedpotentialcustomers,“Whyareyounotbuying?”Theresoundinganswerwas“Theriskofbuyingduringthefinancialcrisis—whenIcouldlosemyjobatanytime—issimplytoohigh.” Soinsteadofofferingapricereduction,Hyundaidevisedarisk-reductionguaranteetotargetthatconcerndirectly:“Ifyouloseyourjoborincomewithinayearofbuyingthecar,youcanreturnitwithnopenaltytoyourcreditrating.”CalledtheHyundaiAssurance,theguaranteeactedlikeaputoption,addressingthebuyer’sprimaryreasonforholdingbackonthepurchaseofanewvehicle.TheprogramwaslaunchedinJanuary2009.Hyundaisalesthatmonthnearlydoubled,whiletheindustry’ssalesdeclined37%,thebiggestJanuarydropsince1963.HyundaisoldmorevehiclesthatmonththanChrysler,whichhadfourtimesasmanydealerships.CompetitorscouldeasilyhavematchedHyundai’sguarantee—yettheydidn’t.Theycontinuedtoslashpricesandoffercashincentives.TheHyundaiAssurancewasadownstreaminnovation.Hyundaididn’tinnovatetosellbettercars—itinnovatedbysellingcarsbetter. Reducingcostsandrisksforcustomersiscentraltoanydownstreamtilt—indeed,itistheprimarymeansofcreatingdownstreamvalue.Notsurprisingly,manyofthecaseswe’veexaminedillustratethis:Facebookreducesitscustomers’costsofinteractingwithfriends;Oricareducesquarries’blastrisks;Coca-Colareducesthecustomer’scostsoffindingacool,refreshingdrinkthemomentshe’sthirsty. IsthePaceofInnovationSetintheR&DLab? Theproductinnovationtreadmillisanupstreamimperative.Infact,technologyinnovationsaresometimesthoughttobethegreatestthreattocompetitiveadvantage.Butsuchchangesinthemarketarerelevantonlyiftheyupenddownstreamcompetitiveadvantage.Youdon’tneedtosweateveryproductlaunchandeverynewfeatureintroductionbyacompetitor—justthosethatattempttowrestcontrolofthecustomers’criteriaofpurchase.Afterall,itwasnottheadventofdigitalphotographythatultimatelydoomedKodak—itwasthecompany’sfailuretosteerconsumers’shiftingpurchasecriteria. Bycontrast,aftermorethanacenturyofshavingtechnologyinnovation,Gillettestillcontrolswhenthemarketmovesontothenextgenerationofrazorandblade.Eventhoughforthepastthreedecadescompetitorshaveknownthatthenext-generationproductfromGillettewillcarryoneadditionalcuttingedgeonthebladeandsomeaddedswivelorvibrationtotherazor,they’veneverpreemptedthatthird,fourth,orfifthblade.Why?Becausetheyhavelittletogainfrompreemption.Gilletteownsthecustomers’criterion—andtrust—sotheadditionalbladebecomescredibleandviableonlywhenGillettedecidestointroduceitwithabillion-dollarlaunchcampaign.Fourbladesarebetterthanthree,butonlyifGillettesaysso.Inotherwords,technologicalimprovementsdon’tdrivethepaceofchangeintheindustry—marketingcloutdoes. Highfailureratesfornewproductssuggestthatcompaniesarecontinuingtoinvestheavilyinproductinnovationbutareunabletomovecustomers’purchasecriteria. Marketchangecanbeevolutionary,generational,orrevolutionary,andeachtypecanbeunderstoodintermsofconsumerpsychology.Evolutionarychangespushtheboundariesofexistingcriteriaofpurchase:higherhorsepowerorbetterfuelefficiencyforcars,fasterprocessingspeedsforsemiconductorchips,more-potentpills.Generationalchangesintroducenewcriteriathatcomplementoldones,oftenopeningupnewmarketsegments:sugar-freesoftdrinks,hybridvehicles,pull-updiapers,once-a-daymedicationswheremultiplepillswerepreviouslyrequired.Revolutionarychangesdon’tjustintroducenewcriteria,theyrendertheoldonesobsolete:Thenewvideo-gamecontrollersfromNintendoWiichangedhowpeopleinteractwiththeirgames;touchscreensandmultitouchinterfaceschangedwhatcustomersexpectfromasmartphone;avaccinefortuberculosis,AIDS,ormalariawouldmakecurrenttreatmentsalmostredundantwithinacoupleofdecades. Thepowerrequiredtopusharevolutionarychangethroughthemarketisgreaterthanthatrequiredtomoveamarketthroughagenerationalchange,andthatpowerinturnisgreaterthanthemarketmusclerequiredtointroduceanevolutionarychange.Ineachcase,thequalityoftheproductinnovation—theincreasedbenefitsrelativetocurrentproducts—helpsmovethemarket,butitdoesnotguaranteeashift.Highfailureratesfornewproductsinmanyindustriessuggestthatcompaniesarecontinuingtoinvestheavilyinproductinnovationbutareunabletomovecustomerpurchasecriteria.Technologyisanecessarybutinsufficientconditionintheevolutionofmarkets.It’sthedownstreamactivitiesthatmovecustomersthroughevolutionary,generational,andrevolutionarychanges. Tilt Anongoingdownstreamtiltinindustryafterindustrycallsintoquestionmanyingrainedassumptionsaboutbusiness—inparticular,thoseaboutcompetitiveadvantage,competition,andinnovation. Thedownstreamtilthasparticularresonanceforthreekindsofcompanies:Thefirstiscompaniesthatoperateinproduct-obsessedindustries,suchastechnologyandpharmaceuticals.Thepossibilitiesofdownstreamvaluecreationandthepotentialforbuildingcompetitiveadvantageinthemarketplacetendtobeeye-openingforsuchfirms.Thesecondiscompaniesoperatinginmaturingindustrieswhoseproductsareincreasinglycommoditized.Thesefirmsarekeentofindsourcesofdifferentiationthatdonotrelyoneasilyreplicatedproductsorproductionadvantages.Thethirdiscompaniesseekingtomoveupthevaluechain.Downstreamactivitiesprovideawaytobuildnewformsofcustomervalueandlastingdifferentiation. Thecriticallocusofbothvalueandcompetitiveadvantageincreasinglyresidesinthemarketplaceratherthanwithinacompany.Activitiesthatattractcustomersbyreducingtheircostsandrisksandrepelrivalsbybuildingunassailablesourcesofdifferentiationrepresentthekeytocompetingdownstream.Thedownstreamplayingfieldhasitsownsetofrules,andmanagerswholearntoplaythegameachieveanearlyadvantage. AversionofthisarticleappearedintheDecember2013issueofHarvardBusinessReview. ReadmoreonMarketing orrelatedtopics CompetitivestrategyandCustomerexperience ND NirajDawarisaprofessorofmarketingattheIveyBusinessSchool,Canada.HeistheauthorofTILT:ShiftingyourStrategyfromProductstoCustomers(HarvardBusinessReviewPress,2013). Tweet Post Share Save GetPDF BuyCopies Print ReadmoreonMarketing orrelatedtopics CompetitivestrategyandCustomerexperience PartnerCenter Diversity Latest Magazine Ascend Topics Podcasts Video Store TheBigIdea Data&Visuals CaseSelections