April 10th, 2013
The late Ted Levitt, professor at Harvard Business School, used to tell this apocryphal story: The CEO of a tool manufacturer gathers his executives into a meeting and says, “People, I have bad news. I’ve discovered our customers don’t want quarter-inch drill bits — they want quarter-inch holes.”
What we sell vs. what they buy
In my view, that would count that as good news — since the executive has figured out that there is an important distinction between what our customer buys and what we make. Your company makes and sells a product or service; your customer buys value – a benefit as he defines it. They may be the same thing — your product may completely (or at least sufficiently) satisfy the customer’s need. But when they diverge, you’re in trouble if you don’t realize it and adjust quickly. Some companies never catch up when such a value shift occurs.
To play out Levitt’s example: You make and sell a ¼” drill. What your customer needs and buys is ¼” hole. Hypothetically there are other ways to get that ¼” hole:
- hire a handyman who has a drill;
- buy a pre-drilled piece of lumber; or
- buy something that can be assembled with clamps instead of holes, thereby doing away with the need for holes altogether.
The point is that, on a value basis, these are also your competition (in addition, of course, to the other drill makers.) You should keep them on your radar, and maybe even borrow from what they do to compete with yourself — and thereby pre-empt them from doing so.
A current example: the PC industry
Companies and whole industries make this mistake over and over. A textbook example is currently playing out in the personal computer industry. Personal computers as we know them became common business tools in the 1980s. The growth figures roared along, and with them star companies like Dell and Hewlett-Packard. Both of these companies now seem to have lost their bearings, and could now be seen as fallen angels — largely due to the shifts in technology that went on around them.
What happened? Most of what happened was that, of the total pie of ‘computing’, many slices migrated to other devices — first laptops (where the technologies were similar to desktops), then to smart phones, and now to tablets — where the technology is different enough under the hood that it requires new (non-‘WinTel’) operating systems. But similar enough — and this is key — that we can use it to do many of the same things.
Uber-analyst Mary Meeker’s graph above illustrates this ‘value wave’ beautifully. It shows how the WinTel portion went from dominating the market in the 1990s and 2000s to being currently about one-third of all OS shipments — a value ‘tidal wave’ that hit hard within a five-year window.
Under the radar
When I got my first iPhone, at first I wondered why they even called it a phone, albeit a ‘smart’ one. It could also take photos, take dictation, play music, make music, read email, make presentations, search the Internet, run applications, even crunch numbers (in a pinch). It was a computer in all but name, disguised in that sexy mobile form factor.
In retrospect, I wonder if it was a cagey bit of ‘under-the-radar’ positioning. By not calling itself a computer, it might avoid being seen as a threat to the computer (desktop and laptop) manufacturers. “Yeah, it’s cool, but it’s just a phone…and we’re not in that business” is something you might have heard at Dell and HP around 2007, when the first iPhone was released.
But, as Mary’s graph so clearly demonstrates, the customer didn’t care what you called it. I remember going on my first business trip with a tablet, but no laptop. It worked well enough for most purposes, with the added benefit that it was relatively inexpensive and portable. For the most part I stopped lugging my laptop around.
The competitive runway
When What We Sell (WWS) converges with What They Buy (WTB), the customer is ‘ours’ and everyone is happy (as at left). When WWS diverges significantly from WTB (as below), our customer — no matter how loyal to us and to our product — is primed to migrate to a new solution. His value framework has already shifted such that he is open to the alternative solution, and when that better solution appears — as it usually does — he is quickly gone as our customer.
IAC chief Barry Diller recently referred to this as a ‘competitive runway’ — a term I love for its killer descriptiveness. By not being aware of this WWS-WTB gap, and how it may be changing, companies set themselves up to have a rival ‘fly into’ their value space and disrupt their business model. This is often someone with a substitute product that provides similar customer value, but using a different core technology and/or business model.
Clearly it’s important that we find ways to know about this gap in advance. You might reasonably think that asking customers if they are ‘satisfied’ with your offering would provide a solution. There’s a large research industry in doing this, which I was part of myself for a time.
And I felt that our research was adding competitive value to our clients. Until I began to realize that it doesn’t work as advertised. The customer often doesn’t understand and/or can’t articulate how her value framework is shifting, or has already shifted. She will honestly report being ‘extremely or very satisfied’ with your product — right until the morning she ditches it for a better solution to her need.
[ADDENDUM February 2015: Venture capitalist Mark Andreeson refers to this as Product-Market Fit (PMF), and rightly claims that it is more important than either Product or Team in creating successful new companies.]
A faster horse
I recently started a discussion on the SCIP LinkedIn forum about Steve Jobs. The topic was how he could have built the most successful company in the history of the world while being openly disdainful of corporate research (market research and competitive intelligence.) He said it wasn’t the customers’ job to know what they want, that the market has to be led to embrace innovations.
Jobs was fond of paraphrasing Henry Ford’s notorious saying to the effect, “I don’t bother asking my customers what they want, because if I did, they’d say a faster horse.” What Ford’s customers really wanted was faster, cheaper transportation — which his Model T provided. Ford understood that, and was able to convert that insight into a wildly successful business model using assembly line manufacturing.
Ford, like Jobs after him, understood customer value at its most fundamental level.
Intelligence focus: PRODUCT versus VALUE
What are the implications for how we conduct intelligence? If you focus your intelligence only on those who make what you make (PRODUCT focus), you’ll miss those potential destroyers of value that come from outside your ‘sphere of awareness’. These can come in the form of disruptive technologies or business models that are literally not on your radar.
Activities by rivals within our own industry are relatively easy to spot — we all read the same trade sources; go to the same trade shows; talk to the same analysts; hire from the same pool of executives. Outside your home sphere of awareness, things are not so easy.
The guy who ends up eating your lunch is often not the rival who makes what you do — it’s somebody you don’t know who satisfies your customer’s need, but in a new way. If your intelligence is VALUE focused — as in customer value — you’ll be much better prepared for these potential intrusions into your value space.
Don’t make the biggest mistake in market intelligence. Focus your intelligence and strategies on what they buy (VALUE), not on what you make (PRODUCT). These comments are based on a talk I recently gave to the Institute of Management Consultants. For more on this, please read “Competitive Myopia.”