My previous post on the topic of “transactionships” has clearly struck a chord based on the number of calls and emails that I have received.  The feedback has revealed a fundamental schism in attitudes:

• Some argue that businesses are purely commercial enterprises with which it is impossible to have a true “relationship” – the best you can hope for is to be efficiently targeted and processed
• Some believe that businesses exist in the context of communities and, in order to retain their legitimacy, must develop the capacity for relationships rather than just transactionships

These points echo my earlier post about the “balancing act” of business – that you need to find a sustainable balance between creating customer value (a.k.a “being a valued contributor to the community”) and shareholder value (a.k.a “capturing enough of the customer value to keep your investors happy”).   A cynic might argue that, for a business, a “relationship” is the way in which to maximize the value of a transactionship over time.  He/she would say that businesses need to demonstrate just enough concern about diversity, the environment, and the other components of corporate social responsibility in order to keep customers transacting with them.

The proof of this particular pudding is beautifully illustrated by the current practice of ”green washing”.  Businesses with even the most dubious track record of environmental performance are falling over themselves to stress their “green” credentials.  Their motive is transparent – while a few may have genuinely had a “Damascus road” epiphany about the virtues of sustainability, the majority are just motivated by the desire to keep their customers transacting with them.

So – is it realistic to expect businesses to have real “relationships” ?  And why would they want to do so?

I have some thoughts to share – but I would welcome your input before doing so.  Keep comments coming to me at j.knowles@type2consulting.com

Tagged as: Business Value, Customer Value, rational

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I have been having a fascinating dialogue over the past few months with Chris Kenton, the founder of SocialRep and former BusinessWeek journalist, about the strategic significance of social media.

One issue we have debated at length is the relationship of social media to CRM (customer relationship management), especially as a number of companies (including Oracle) are now actively describing their social media technologies as “Social CRM.”

I observed to Chris that CRM is a misnomer.  Only a Vulcan would refer to a system that only captures information on the commercial interactions between two parties as a “relationship” management system.  It should be called CTM (customer transaction management) because what the technology enables is a “transactionship.”   A relationship requires understanding who a person is, not just what a person does.

This struck a chord with Chris – he shared the results of some research he led while at the CMO Council that suggested that marketers believed that CRM has contributed to a decline in their “customer intimacy”.  They were spending more time analyzing customer behavior than actually speaking with them!

Both Chris and I are huge fans of CRM.  We believe that CRM technology has enabled companies’ ability to serve their customers better (through improved information) and more efficiently (through reduced cost).  Personally, I thank the CRM Gods every time that a company “recognizes” me when I call their call center or access their website because I know that I will not have to waste my time reminding them of my preferences and recent purchases.

We also value the impact that CRM has had on marketing – Chris is eloquent on the subject of how CRM has enabled “scientific marketing” to replace the “just go with your gut” approach so celebrated in “Mad Men.”

But, as a customer and an Earthling, I want to deal with companies that offer a relationship, not just a transactionship.

Tagged as: Business Strategy, Customer Value, Earthlings, Vulcans

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I have just come across an old (October 2000) paper by Millward Brown, the research firm, about the determinants of a brand’s elasticity.  It may be nearly 10 years old, but its analysis is evergreen.

As expected, the analysis shows that it is easiest for brands to extend into categories that are functionally similar.  It also shows that the other determinant of successful brand extension is the degree to which the brand’s value proposition transcends purely functional considerations, and the extent to which this augmented “meaning” is relevant in the new category.  Hence the title of their paper “Does your brand mean enough to diversify?”

As noted extensively in this blog, customer value in an Earthling world is driven by more than purely functional considerations.   Customer want answers both to the question “what can you do for me?” and to the question “what can you mean to me?” – being a strong brand means having a compelling answer to both questions.  A Vulcan will select you on the basis of the first alone, but an Earthling will require a compelling answer to both.

The Millward Brown paper illustrates how the answer to the second question also determines the extent to which your “augmented” value proposition could support an extension of your brand into additional areas.

Tagged as: Brand Equity, Business Strategy, Customer Value, Earthlings, Vulcans

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I am nearing the end of a series of client workshops that will have taken me to 13 locations around the world over the past month.

The thing that has most struck me about the experience is that a corporate culture can be every bit as strong as a national culture, even for a firm that focuses on hiring locally in each market and that has made a number of significant acquisitions.  I have been amazed by the way in which all of the operations that I have visited are united by a set of shared values and culture.

That is not to say that there is not something distinctively French about their French operations, and something distinctively Japanese about their Japanese operations.  These operations clearly manifest their local cultures and customs – but the dominant impression that you take away from meeting them is the similarity of their aspirations and values.

The usual explanation for this phenomenon is that the national operations have become “Americanized” (my client is headquartered in the US).  I believe this is wrong.  I have worked with many American companies that are way more formal and hierarchical than the stereotypical German or Japanese company.  I believe that the truth is that the company has recognized the importance of creating a corporate culture that transcends national culture.

By articulating a way of doing business and demonstrating a set of behaviors that embodies a consistent set of values, the company has created a corporate culture that is the same across the globe, and that is enriched – not threatened – by national “interpretations” of these underlying values.

It is a remarkable thing to behold.

It is also a powerful source of competitive advantage – this commonality of beliefs was a major factor in allowing the company to respond swiftly and effectively to the market meltdown last year, and in facilitating its ability to integrate a number of recent acquisitions.

Tagged as: Business Strategy, Earthlings, Vulcans

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The significance of the dawning of a new year is another topic on which Vulcans and Earthlings disagree.

To a Vulcan, it is illogical that the changing of a single digit (or two) in the year should be considered to be so meaningful.   But for an Earthling, the rituals associated with the passage of time and the changing of the seasons form the context in which we measure the progress of our lives.

A new year means a new beginning.  After the hardships that 2009 imposed on most of us, it is understandable that the dawning of a new year should be greeted with more than average enthusiasm.

So long as humans measure the significance of things in ways that go beyond the purely functional, there will always be a disconnect between the Vulcan and Earthling world view.

So Happy New Year, Earthlings!   And happy 40,179 (Excel’s coding of 1/1/2010), Vulcans!

Tagged as: Customer Value, Earthlings, rational, Vulcans

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This is the first holiday season in which my tally of eCards exceeds the number of physical holiday cards.

I have to admit that I am deeply conflicted about the merits of eCards.  I recognize that they are more ecologically responsible than their physical counterparts - they do not require any trees to be cut down and they generate minimal carbon emissions in their production and delivery.  I also recognize that they provide the same function of expressing seasonal greetings, and offer the same opportunity for personalization (if desired).  So the Vulcan in me considers them a sensible replacement for physical holiday cards.

But the Earthling in me regards eCards as a debased currency.  Yes, an eCard fulfills the same function as a physical card but it fails to match the meaning of a physical card that has been personally inscribed.   I know that the marginal cost of an eCard is effectively zero because it consists of no more than checking an additional box in an email list.  Including me on your eCard list requires little thought, minimal effort and zero cost. 

By contrast, the marginal cost of a physical holiday card is the about the same as the average cost – and that cost is relatively high.  I am acutely conscious of the effort that it takes to include me in your physical holiday card mailing.  I recognize that there is the financial cost of the card and the postage, plus the investment of your time in writing my name and signing yours.  And I appreciate that you put yourself to this expense and effort on my behalf.  It tells me that you truly are thinking of me this holiday season.

For that reason, physical holiday cards still have a place in my world.  I send them because it is my way of telling clients, colleagues, acquaintances and friends that I am thinking of them this holiday season and that I want them to know that my life has been enriched by their presence in it over the past year.  I am happy to put in the extra effort of addressing each card personally and to endure the inconvenience of visiting the post office because I know that each recipient understands that this is what is involved in sending them a personalized, physical holiday card.

An eCard may replicate the function of a physical card (and is clearly superior from a “green” perspective) but it fails to match the meaning of a physical card.

A Happy New Year to the Vulcan and Earthling in us all!

Tagged as: Customer Value, Earthlings, rational, Vulcans

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Continuing my theme of Reason and Emotion as complementary sources of customer value, this post deals with the problems that arise when the two are deemed to be at odds with one another.

A belief that Reason and Emotion cannot coexist leads directly to two fallacies:

• The first is that “good products sell themselves”
• The second is that marketing is there to compensate for some weakness in the product

The first is what I call “The Field of Dreams” fallacy because it is based on the belief that “if you build it, they will come” – this may work for mythical baseball players, but it is the reason why many technologically superior products have failed to gain traction in the market.

The second is the “Lipsticking the Pig” fallacy – the belief that the role of marketing is to create an emotional appeal for products that are functionally inferior (as is “this product is not selling well – let’s get marketing to produce a glossy brochure and a promotional event so we can shift our inventory”).

As I mentioned in my last post, the mark of good brands is that they offer a value proposition that is as compelling to our heads as it is to our hearts.  Reason and Emotion are both sources of customer value.

Tagged as: Brand Equity, Brand Strategy, Business Strategy, Earthlings, rational

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Another week on the whistlestop world tour (the chosen continent for this week being North America) and the observation about the (mis)characterization of Emotion as the opposite of Reason has been emphatically reinforced.

Once again, the groups seemed rather uneasy at the prospect of having to articulate the emtional component of their value proposition to clients.  It is easy to see why – in companies with a strong finance culture it is a grave rebuke to be told “you are being emotional” as it means that you are not thinking straight.

It is a magical moment when the participants realize that the value proposition of a high performing service can be lifted from “buy ours because we have the fastest feeds and speeds” to “ours is uniquely able to meet a wider set of needs” through the acknowledgement of the functional and emotional drivers of the customer’s decision.

The head and the heart do NOT represent mutually exclusive forms of logic.  Rather, they are complementary forms of logic – one focusing on “what does this product do for me?” while the other focuses “which one feels right for me?”

This debate reminds me of the observation by the seventeenth century French philosopher, Blaise Pascal, that “le coeur a ses raisons que la Raison ne connait pas” (the Heart has reasons that Reason does not recognize).  This statement is generally understood to mean that the heart is irrational.  I think this is wrong.  What Pascal is actually saying is that the heart has a logic of its own, and it is different from “rational” logic.

The goal of good branding is to craft value propositions that have both rational logic AND emotional logic, not just one or the other.

Tagged as: Brand Equity, Brand Strategy, Business Strategy, Customer Value, Earthlings, rational

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I have just returned from a whistlestop tour of Europe doing a series of brand definition workshops for a large financial services provider.

I was struck by how deeply embedded the notion is that emotion is the opposite of reason.  Given this, I quite understood why the workshop participants were initially reluctant to talk about the emotional dimension of their value proposition to clients.  If emotional = irrational, then branding is little more than deceit.

By the middle of each workshop, a light bulb would go off as the participants realized that the opposite of rational is irrational, and the opposite of emotional is unemotional.  They came to see that reason and emotion represent different - but equally valid – dimensions of the customer purchase decision. 

They saw that reason focuses on the transaction and asks “does this product or service meet my needs?” in terms of technical performance.  Emotion focuses on the relationship and asks the more visceral question of “does this feel right for me?”.  Both are important sources of value for customers.

Armed with this insight, they saw that there were two fallacies that needed to be corrected:

• First, the belief that marketing is the panacea for generating sales for an undifferentiated and even substandard product (a tactic known as “perfuming the pig”);
• Second, and perhaps even more harmful, the belief that a superior product or service will achieve success without marketing support (also known as the “build it and they will come” mentality)

By the end of the workshops we were on a roll about what their services can both do for customers and mean to them!

Tagged as: Brand Equity, Brand Strategy, Customer Value, Earthlings, Vulcans

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One of the struggles in working with senior management groups on complex topics is the danger that the discussion begins to focus narrowly on one specific aspect of the topic on which a number of those present have deep expertise or strong opinions (or both).  It is totally natural that people want to find a way to simplify the complexity of the topic but the risk is that, all of a sudden, a decision about the whole strategy looks like it will be made on the basis of one relatively minor dimension.

I have found that a useful technique for preventing this is to attach an explicit financial value to the individual items on the agenda.  The number represents the additional financial value that could be generated by an insightful group discussion of that topic.  So item 1 “Minutes of the last meeting” will have a modest notional value attached to it but item 3 “Sources of incremental growth” might have a $500 million notional value.

I have found that this approach has two benefits:

• It ensures that the allocation of time in the meeting is in closer proportion to the financial importance of the topic than might otherwise be the case (participants will often cut short an unproductive discussions with the remark ”why are we wasting our time on a topic that has little financial value when there are other, more valuable items yet to discuss?”)
• It ensures that the discussion of a truly important topic is not allowed to hinge on a single, relatively minor aspect – even if there is strong debate about that aspect (participants will make a remark like “we are not going to let a $500mn decision hinge on the choice of stationery supplier”)

I encourage marketers to adopt this technique when presenting to senior leadership teams.  Begin your presentation as follows ”Our first topic – strategic positioning – is potentially a $50mn topic, so we would welcome a detailed discussion.  Our third topic – social media strategy for our holiday sales promotion – has a more modest upside value of $5mn but we would still welcome your input.” I guarantee that jaws will drop and your career prospects will rise…

Tagged as: Business Strategy, Business Value, Marketing Accountability

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I cannot decide whether I think that JC Larreche’s book “The Momentum Effect” is ground breaking – or banal.  Oddly, I feel the same way about Chan Kim and Renee Mauborgne’s “Blue Ocean Strategy.”  As an alumnus of INSEAD, I am proud to see the faculty achieve such recognition but I wish that I was convinced that their books represented a major breakthrough in business thinking. 

Both books have achieved an impressive degree of traction in the marketplace based on the same basic insight – namely, that business success is based on understanding the sources of customer value, and on crafting your product/service offering in a way that delivers unique value to customers.  I think Peter Drucker made this observation over 50 years ago.

Kim and Mauborgne phrase the opportunity in terms of “creating uncontested market space” while Larreche talks in terms of “shifting from compensating strategy to momentum strategy”.  I find Larreche’s take on the topic to be more appealing because it is explicit about what companies should stop doing (spending their time pushing products that do not offer compelling customer value) as well as what they should do more of (creating “power offers”).

Net net, I am delighted that the “marketing mindset” is once again being recognized as a powerful source of value creation for business.  To my mind, the fundamental challenge of business is how to create a business culture that places equal value on the insights that come from a “marketing mindset” with the operational efficiencies that comes from a “finance mindset”.

Tagged as: Business Strategy, Customer Value, marketing and finance

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I came across an interesting post by BNET’s Steve Tobak called “Aspiring Managers: Learn to Act Like Adults” in which he lists the five skills at which managers have to become adept:

• Finance
• Selling
• Presenting
• Negotiating
• Communicating

His comment about Finance was spot on:  “I don’t care if you manage engineering, HR, IT, sales, whatever, you need to learn about finance. Why? Because that’s how companies are run and how business works. Period.”

Finance is the language in which business is “scored” so you need to be aware of how success is going to be measured.  This is especially true for marketers who often mistake their objectives of high awareness, strong brand equity, loyal customers as ends in themselves.  These objectives are important – but their importance comes from the fact that these are the things that ultimately produce strong and stable cash flow.

That is why it is so important to maintain a healthy dialogue between the Earthlings in the marketing department and the Vulcans in the finance department.  Without an understanding of what drives customer value, it is impossible for a company to deliver shareholder value on a sustainable basis.

Tagged as: Business Strategy, Business Value, Earthlings, marketing and finance, Vulcans

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Today’s breakfast briefing hosted by the Council of Public Relations Firms on “Strategy, Leadership and Communications” went well.  Following a brief presentation of the research findings, we had a lively debate about the role of communications in strategy formation and execution. The research finding that generated the most discussion was that CEOs favor a more active role for communicators in the strategy formation process, but that communicators themselves hold a narrower view of their role, preferring to define it in terms of providing a “sounding board” rather than fully-fledged participation in strategy development.

It helped that the organizers had put together a diverse panel of communicators and strategists from different industries – Chris Atkins (Standard & Poor’s), Ray Jordan (Johnson & Johnson), Herb Muktarian (BAE Systems), Ana Maria Delgado (Organizacion Corona), Emily Yoo (Tokio Marine) and yours truly.  The diversity certainly led to a richness of perspective on the various issues.

I personally was heartened by the extremely articulate views that Herb and Chris expressed about the importance of communicators to define what specific skills/perspectives they were bringing to the top table, and the circumstances under which good communications were most valuable.  Their point was that it was a mistake to believe that the value of communications was intuitively obvious to senior management.

It was nice to hear the Vulcan/Earthling conundrum articulated by others!

Tagged as: Business Strategy, Earthlings, Vulcans

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By my calculation, I have sat through close to thirty presentations over the past two days at the Marketing Sciences INFORMS conference.  Each of the seven 1 1/2 hour sessions has comprised 4 or 5 individual presentations.  It is a bewildering amount of information to absorb – but the conference functions very effectively as a form of intellectual “speed dating,” allowing you to get a great overview of the body of research that is currently underway in any one of the 15 topic areas that the conference covers.

So, who did well in the dating stakes?  The best received presentations seemed to share the following characteristics:

• Outline an interesting hypothesis that seems intuitively reasonable
• Create an elegant, but robust, way of testing the hypothesis
• Draw clear implications for how the resulting information can be used

A common factor among the presentations that were less well received was, curiously, not the absence of the second and third elements.  It was the presumption that the importance of your topic was self-evident to your audience.

This reminded me of why the dialog between Marketing and Finance is often so difficult – it is because we make the mistake of assuming that the importance of marketing is self-evident.  We need to be more adept at articulating the basic hypothesis for how marketing adds value to the business.

Tagged as: Causal Model, marketing and finance

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 I have been reminded over the past week about how fundamental trust is to all forms of commerce.  Separate discussions with three clients in three different industries all ended up in the same place – “what do we need to do to regain the trust of our customers and partners?”

I did an analysis of the dimensions of trust back in 2003 in the wake of Enron and WorldCom.  Based on the correlates of the attribute “trustworthy” in the BrandAsset Valuator database, I identified four dimensions – reliability, integrity, empathy and familiarity (the results are in my piece “Credit for Credibility” that was published in McKinsey’s special report for the World Economic Forum that year). 

However I think that Stephen Covey has come up with a more actionable framework in his “Business at the Speed of Trust” (published in 2006).

His key point is that trust has two dimensions – competence and character.  We need to know that the person is not only able to help but also willing to do so.  Helpfully, Stephen Covey also suggests that each of these two dimensions has two aspects.  Competence is about both capabilities and proven results; character is about both integrity and intent.

What can be done to regain trust?  Some good places to start:

• Ensure that you are communicating your capabilities in a clear, honest way
• Share the data/case studies that demonstrate the results you have achieved
• Talk about the values of the organization, and the behaviors that you encourage
• Signal your intent to help your customers/partners by offering them something of value (perhaps some data, or an insight into the market) without looking for anything in return

Tagged as: Brand Equity, Customer Value, Earthlings

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So long, Bob Nardelli.  Today you hand over the reins at Chrysler to Robert Kidder.  You are now 2 for 2 in terms of showing how damaging a Vulcan mindset can be to the management of a consumer business.

First at Home Depot, now at Chrysler, you displayed a lack of insight into the relationship between a company’s economic costs and the level of customer benefit that it delivers.  To you, it would appear that cost cutting is a philosophy.  What earns you my nomination as a Vulcan is your failure to discriminate between “bad” and “good” costs.

“Bad” costs are those that deliver an insufficient level of benefit to customers so that cutting them improves the ratio of customer benefit to economic cost (customer benefit declines but economic cost declines proportionately more).

But you have shown a frightening propensity to cut “good” costs – first in replacing the experienced hardware guys who used to man (yes, generally, they were men) the aisles at Home Depot; and, now, in starving the product development pipeline at Chrysler (did you really believe that having only four new models in the next five years was a viable business strategy?).  Both are classic Vulcan errors – they are based on the failure to understand the nature and scale of the customer benefit that these costs support.

Question: On what planet does it make sense to severely damage your ability to deliver customer service and product innovation?

Answer: On the planet Vulcan where superior beings can navigate unerringly through the aisles at Home Depot and never require guidance about which product they need.  Furthermore, these superior beings regard cars as nothing more than a functional device to get them from A to B.

I have news for you, Mr Nardelli – this is the planet Earth and we humans value things like service and styling.  And we will continue to take our business elsewhere when Vulcan thinking like yours destroys the value proposition of the brands that we once loved to buy.

Tagged as: Business Strategy, Business Value, Customer Value, Earthlings, rational, Vulcans

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I am fascinated by the subject of why the market value of companies exceeds their book value, often by a factor of 3 or more. I can understand why there are differences between industries (a manufacturing company requires more physical assets than a law firm) but what I find particularly fascinating is why these multiples differ so widely between firms within the same industry (and therefore subject to similar economics).

This suggests that something very interesting is going on at the individual firm level. The difference between how effectively or otherwise a firm uses its physical assets is a direct consequence of human ingenuity. This ingenuity is what lies behind the creation of all forms of intellectual property. And it is the quantity and quality of this intellectual property that largely explains the differences between the valuation of companies.

Given that intangible value (the excess of market value over book value) represents 2/3 of the market value of the S&P500, it is an important topic. My ambition is to provide some rules of thumb about the relative importance of different forms of intellectual property across different industries so that companies can start to manage these intangible assets more effectively.

BTW the title of this post is taken from a wonderful passage in “The Little Prince” by Antoine de St Exupery where the Little Prince realizes that, in order to understand what is really going on, he needs to “see with the heart because the most important things are invisible to the eye.”

Tagged as: Business Strategy, Intangible Value, Intellectual Property, IP

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Whatever the rights and wrongs of Rick Wagoner’s ousting from GM, he provides a wonderful example of the difference between Vulcan and Earthling thinking. On what planet is it acceptable behavior to take your private jet to a meeting where you are asking for a hand-out of billions of dollars?

You might be surprised to learn that the answer is “on the planet Vulcan.” From a narrowly rational point of view, it makes sense for Rick Wagoner to argue that ”my time is so valuable that I will not waste it by waiting in line at an airport for a commercial flight to Washington.”

On the planet Earth, however, things are not that simple. A man who is asking for money needs to avoid creating the impression that even a single cent of the money will be used to subsidize his lifestyle as opposed to saving what was once one of the world’s great companies.

It seems obvious – but this failure to consider the human dimension of business is repeated on a daily basis by companies that really should know better.  We do business on planet Earth and that means that we need to recognize that our customers are never satisfied with an answer to just “what will you do for me?” – they also want to know “what can you mean to me?”

Tagged as: Brand Equity, Earthlings, rational, Vulcans

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