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“What business are we in?” is often the starting point of a business school case study discussion. The answer seems obvious at first. We make cars. We sell diapers. We are lawyers. Soon the discussion turns to “What is the customer buying from us?” That is often a harder question to answer. Yet the success of both small and large companies depends on a deep understanding of what business you are in and what customers believe they are buying from you.

Satisfy Demand Rather than Produce a Product

My Harvard Business School professor, Ted Levitt, developed the idea that to survive over time business leaders have to see themselves as satisfying a customer demand rather than producing a product. Henry Ford was not mass producing cars. He delivered a $500 automobile. Not just a car but a $500 car that millions could afford to buy. Mass production was one element of Ford’s business model to match the customer demand for a $500 car. Today, Levitt would challenge Exxon and other “oil companies” to consider whether they are in the oil production business or the energy business. Your company may be manufacturing and selling blue jeans, but what is your customer buying?

What Business Are We In - Rick WilliamsHBS Prof. Clay Christensen describes in his new book, Competing Against Luck, the huge effort McDonald’s made to increase sales of their milkshakes by adjusting the flavor, topping the shakes with whipped cream, changing the size of the cups, all with no impact on sales. A team working with Christensen watched customers buying the milkshakes and asked why.  Many of the milkshake sales were before 9 AM. The purchasers were often alone in a car. The customers were buying a shake rather than a donut, a banana or a bagel. The customers were hiring the milkshake to be their companion on a lonely drive to work and to keep from getting hungry until mid-morning. With that understanding, McDonald’s made buying the shakes faster and thickened the drink so it would last longer in the car. Sales improved significantly.

Whether your company is a startup or a giant international corporation, understanding what is in your customer’s mind when she is buying – or as Clay Christensen would say “what your customer is hiring your product to do for them” is essential to success and even survival long term. Ford, BMW and Tesla manufacture cars. But are their customers “buying cars?” The Tesla buyer is buying something different, in his mind, than the Ford buyer. Ford, BMW and Tesla are communicating very different value messages – features and branding. Ford – tough, BMW – performance, Tesla – luxury and eco-friendly.

What Business Are We In - Rick Williams

The leaders of these companies now know that many millennials in urban areas are not buying cars. Uber has made going carless a realistic option. Driverless cars are less than a decade away from coming on the market. Owning a car will be seen as an option but not a necessity for millions of people worldwide who today own cars. What business will the automotive companies be in 10 – 20 years from now?

What is the Customer Buying?

Leading a successful company is difficult. Operations, sales management, financing, HR, R&D, manufacturing, marketing and everything else require constant attention. Asking what business we are in when customers are buying your products can seem like a silly question. If you are a young growing company or perhaps a startup, you may have gotten into the business because you love making dining room tables and chairs. You founded a company to make furniture and customers are buying them. What business you are in seems obvious. But the easy answer may be the wrong answer. TV ads promoting furniture as an expression of your unique personality tell us that the buying decision is not just about tables and chairs.

Prof. Jonathan Byrnes teaches Supply Chain Management at MIT. He tells the story of a company selling IV solution – saline – to hospitals. The purchasing department of a hospital would call for bids and the difference between the winning and losing bid could be $0.02 per liter on a total price of about $1.00. The company explored whether there was a different product that they could offer the hospitals that would differentiate them from other commodity sellers of saline.

By looking at what happened to the bottles of IV solution inside the hospitals, the company discovered that the bottles were inefficiently stored and distributed to the departments requiring the saline. The total cost to the hospital of putting a bottle in the hands of a nurse was about $5.00 of which $2.00 was just storage and handling. The company approached the CEO of the hospital and proposed an operating partnership under which the company, as a service, would manage the ordering, inventory and distribution of the bottles within the hospital. The savings to the hospital would be about $1.00 on each liter of saline. The product purchased by the hospital was the reliable supply of saline to the medical staff when needed and at a cost far below the hospital’s current costs. The $0.02 difference in the cost of the bottle of IV solution was no longer a consideration.

I recently spent time with an impressive young man who had founded a company in Fort Lauderdale, FL, finding private aircraft charters for individuals. The customers were individuals who wanted a private charter flight for vacation or business 2 to 6 times a year. His company would search the charters available for the best price and make the reservations. While his company had some success because he had good access to planes available for charter, he had difficulty holding onto the customers and differentiating his product from other travel options.

This company founder talked to his clients about what they were buying and what they wanted to buy.  Was his company a specialized version of Travelocity selling quick access to charter bookings or was the company like Disneyland selling “happiness?” He moved the company towards providing a luxury travel experience – fast, top quality, safe, no hassles, everything provided, everyone knows your name – as an alternative to commercial airline travel. In addition to selecting and arranging the charter flight, the package includes all of the land transportation to and from the plane on the tarmac – not just dropping off at the airport. All of the baggage and other logistics are included. And everyone knows the client’s name! Clients now stay with the company and total revenues have grown strongly.

Michael McGrath, president of Newman’s Own, recently described the difficulty his company had moving away from relying on Paul Newman’s celebrity to support the company’s brand of salad dressings. Younger consumers do not know Paul Newman. The products and messaging had to change to match the values of consumers who do not attach importance to the Paul Newman image. The new message had to be – tastes good, natural ingredients, profits go to charity. Without change, Newman’s Own would gradually become an also-ran on the grocery shelves.

One more example. Several years ago, the Procter and Gamble’s Pampers brand of diapers lost its #1 position to Kimberly Clark’s Huggies and a number of big box stores dropped  Pampers. Ellen Di Resta was brought in as a product strategy consultant and asked how they could regain their #1 position. Diapers were mostly promoted to mothers on the basis of how much water the diaper could absorb – remember ads of cups of water poured into the diaper. Asking what business you are in when you are selling hundreds of millions of diapers may not seem like a good use of your time if you are in charge of the diaper division. But that is what the P&G leaders did.

Talking to mothers of young babies revealed that they were hiring the diaper to make their babies healthy and happy. P&G adjusted the form of the diaper to make the baby more comfortable and make it easier for the mom. The messaging to moms went from wet diapers and ducks to nurturing and to healthy and happy babies. As a result, the Pampers Cruisers product line became P&G’s first billion-dollar product and Pampers became a $6 billion brand.

What Business Are We In - Rick Williams

Improve Your Chances for Success

These few words can summarize what happened at each of these successful companies. What actually happened was not easy and the path that proved successful was not obvious at the beginning. In each company, a few creative and courageous leaders asked questions that often challenged “the way we do things here.” False steps and approaches that do not work are part of the creative process. But not asking the question “What business are we in?” is a sure path to poor performance and eventual failure.

Leaders of every organization including non-profits and governments must challenge themselves and their team with the question, “What business are we in? And what are our customers hiring our company to do for them today, next year and five years from now?”

Here are steps you can take to improve your chances for success.

  1. Build a customer focused culture within your organization. Jack Welch, former CEO of General Electric, once said “in a hierarchical organization the staff has their face to the boss and their ass to their customers.” Which way is your staff facing?
  2. Become the chief advocate for understanding your customer’s point of view.
  3. Periodically take the Steve Jobs challenge and look forward to where technology, consumer trends, IT, cultural values, demographics, etc., could create opportunities for new products that your customers themselves cannot imagine.
  4. Within your leadership team, develop an understanding of the barriers to different points of view and to change. Often the barriers to change are your company’s strengths: your sales organization; existing production processes; preferences of existing customers; expectations of your most demanding customers; expectations for short term profits; and the interests of the R&D staff. Move to an understanding that your strengths can also be a barrier to change and to adaptation. Get comfortable with both ideas.
  5. Periodically, create a task force with the specific charter to ask the “What business are we in?” question. Include outside consulting to better understand the customer point of view. Understanding why customers are buying your product today and developing possible options for the future should be the focus.
  6. As the CEO or division manager, have the task force present its findings and recommendations to the senior leadership and the board. All of the reasons why you are doing OK and should not change will come forward. Your team will need to know the implications of the primary options for sales, profits, R&D, manufacturing, staffing, financing, etc.
  7. The question posed to the business school class at this juncture is “What should the CEO do?” Options have been developed. Information is not perfect and competing centers of influence have conflicting views.
  8. “There is no right answer” is often the case study bottom line. But choices must be made. By action or inaction, you and your team will choose the way forward. Use all of the risk reduction techniques to test your approach with smaller groups of customers before making big commitments. But in the end, your company’s success depends on how well your products satisfy real customer demand today and in the future.

Your company may be doing OK today. You have paying customers and are making a profit. The bromide of “if it ain’t broke, don’t fix it” comes to mind. Yet your job as leader of a large or small company – representing your employees, your customers, your investors and your community – is to position your products and your company for where your customers will be tomorrow – 2, 5 even 10 years from now.