When Marketing Is Strategy

 It’s no secret that in many industries today, upstream activities—such as sourcing, production, and logistics—are being commoditized or outsourced, while downstream activities aimed at reducing customers’ costs and risks are emerging as the drivers of value creation and sources of competitive advantage. Consider a consumer’s purchase of a can of Coca-Cola. In a supermarket or warehouse club the consumer buys the drink as part of a 24-pack. The price is about 25 cents a can. The same consumer, finding herself in a park on a hot summer day, gladly pays two dollars for a chilled can of Coke sold at the point-of-thirst through a vending machine. That 700% price premium is attributable not to a better or different product but to a more convenient means of obtaining it. What the customer values is this: not having to remember to buy the 24-pack in advance, break out one can and find a place to store the rest, lug the can around all day, and figure out how to keep it chilled until she’s thirsty.

Downstream activities—such as delivering a product for specific consumption circumstances—are increasingly the reason customers choose one brand over another and provide the basis for customer loyalty. They also now account for a large share of companies’ costs. To put it simply, the center of gravity for most companies has tilted downstream.

Yet business strategy continues to be driven by the ghost of the Industrial Revolution, long after the factories that used to be the primary sources of competitive advantage have been shuttered and off-shored. Companies are still organized around their production and their products, success is measured in terms of units moved, and organizational hopes are pinned on product pipelines. Production-related activities are honed to maximize throughput, and managers who worship efficiency are promoted. Businesses know what it takes to make and move stuff. The problem is, so does everybody else.

The strategic question that drives business today is not “What else can we make?” but “What else can we do for our customers?” Customers and the market—not the factory or the product—now stand at the core of the business. This new center of gravity demands a rethink of some long-standing pillars of strategy: First, the sources and locus of competitive advantage now lie outside the firm, and advantage is accumulative—rather than eroding over time as competitors catch up, it grows with experience and knowledge. Second, the way you compete changes over time. Downstream, it’s no longer about having the better product: Your focus is on the needs of customers and your position relative to their purchase criteria. You have a say in how the market perceives your offering and whom you compete with. Third, the pace and evolution of markets are now driven by customers’ shifting purchase criteria rather than by improvements in products or technology.

Must Competitive Advantage Be Internal to the Firm?

In their quest for upstream competitive advantage, companies scramble to build unique assets or capabilities and then construct a wall to prevent them from leaking out to competitors. You can tell which of its activities a firm considers to be a source of competitive advantage by how well protected they are: If the company believes its edge lies in its production processes, then plant visits are strictly controlled. If it believes that R&D sets it apart, security around its research labs is airtight and armies of lawyers protect its patents. And if it prizes its talent, you’ll find hip work spaces for employees, gourmet lunches, yoga studios, nap nooks, sabbaticals, and flexible work hours.

Downstream competitive advantage, in contrast, resides outside the company—in the external linkages with customers, channel partners, and complementors. It is most often embedded in the processes for interacting with customers, in marketplace information, and in customer behavior.

A classic thought experiment in the world of branding is to ask what would happen to Coca-Cola’s ability to raise financing and launch operations anew if all its physical assets around the world were to mysteriously go up in flames one night. The answer, most reasonable businesspeople conclude, is that the setback would cost the company time, effort, and money—but Coca-Cola would have little difficulty raising the funds to get back on its feet. The brand would easily attract investors looking for future returns.

The second part of the experiment is to ask what might happen if, instead, 7 billion consumers around the world were to wake up one morning with partial amnesia, such that they could not remember the brand name Coca-Cola or any of its associations. Long-standing habits would be broken, and customers would no longer reach for a Coke when thirsty. In this scenario, most businesspeople agree that even though Coca-Cola’s physical assets remained intact, the company would find it difficult to scare up the funds to restart operations. It turns out that the loss of downstream competitive advantage—that is, consumers’ connection with the brand—would be a more severe blow than the loss of all upstream assets.

Establishing and nurturing linkages in the marketplace creates stickiness—that is, customers’ (or complementors’) unwillingness or inability to switch to a competitor when it offers equivalent or better value. Millions or billions of individual choices to remain loyal to a brand or a company add up to real competitive advantage.

Must You Listen to Your Customers?

A company is market-oriented, according to the technical definition, if it has mastered the art of listening to customers, understanding their needs, and developing products and services that meet those needs. Believing that this process yields competitive advantage, companies spend billions of dollars on focus groups, surveys, and social media. The “voice of the customer” reigns supreme, driving decisions related to products, prices, packaging, store placement, promotions, and positioning.

But the reality is that companies are increasingly finding success not by being responsive to customers’ stated preferences but by defining what customers are looking for and shaping their “criteria of purchase.” When asked about the market research that went into the development of the iPad, Steve Jobs famously replied, “None. It’s not the consumers’ job to know what they want.” And even when consumers do know what they want, asking them may not be the best way to find out. Zara, the fast-fashion retailer, places only a small number of products on the shelf for relatively short periods of time—hundreds of units per month compared with a typical retailer’s thousands per season. The company is set up to respond to actual customer purchase behavior, rapidly making thousands more of the products that fly off the shelf and culling those that don’t.

Indeed, market leaders today are those that define what performance means in their respective categories: Volvo sets the bar on safety, shaping customers’ expectations for features from seat belts to airbags to side-impact protection systems and active pedestrian detection; Febreze redefined the way customers perceive a clean house; Nike made customers believe in themselves. Buyers increasingly use company-defined criteria not just to choose a brand but to make sense of and connect with the marketplace. (See the sidebar “How Cialis Beat Viagra.”)

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