Build a Customer-Driven Technology Strategy

An Activant Industry Consultant Article

Features

E-mail This Page

Where we've been

Was it only 18 months ago that there was widespread uncertainty about the impact of the Internet on the metals industry? Many people forecast the demise of service centers as customers easily accessed comparative bid information and placed on-line orders. Service centers would be "disintermediated," as customers and mills dealt directly with each other.

Many uncertainties have been resolved during the past 12 months. With the benefit of hindsight, we can now see that the greatest competition for on-line exchanges came from existing ways of doing business, not from other exchanges. Once again, we have learned that customers are reluctant to disrupt systems that work, even if those systems are partially uneconomic or somewhat inefficient.

This is particularly true in the metals industry because the stakes are so high. Metals buyers must procure supplies to keep factories running without disruption or downtime. A "first mover advantage" vs. another exchange is relatively meaningless compared with the hurdle of competing against a functioning, in-place system of buyers, service centers, mills, brokers and other players.

An inability to predict change does not mean that we should not try to prepare for it. Unfortunately, too many executives plan and invest based on extrapolations of past trends into a single "most likely" future. Over and over again, we have seen companies that plan for a single future and find themselves ill prepared when the world evolves in a different direction. Often, the forces leading to that alternative future were apparent, but ignored.

No one deliberately ignores important trends that might influence their company when developing strategic plans. However, psychological research has demonstrated a natural human tendency to interpret new information in terms of our existing beliefs, generalizations and hidden assumptions about how the world works.

There's nothing wrong with this approach. The problem comes from the fact that your assumptions may be unarticulated, unstated and untested. Even if there are hints of future change, you may not perceive or acknowledge the fundamental shifts that are occurring.

Where customers are going

As part of our research for this year's Facing the Forces of Change report, we studied the ways in which customers will be using the Internet in the year 2006. We interviewed and surveyed executives from all parts of the supply chain. There is a broad consensus that technology, not just the Internet, will enhance but not replace prior technological and non-technological systems for interactions with customers.

For example, we found that the Internet will be a common, but not dominant, method for receiving orders from customers. By 2006, the Internet will be another way in which a customer can communicate with a supplier, just as the introduction of the fax machine and EDI systems created additional options for customers. We found that industrial customers send 10 percent of their orders electronically today.

By 2006, distributors selling to industrial customers expect to receive 37 percent of their orders on-line. Much of this growth is expected to come at the expense of phone and fax orders. Thus, either customers will not be placing all of their orders on-line or there will be a split among customers. Traditional methods of ordering will remain despite the Internet and new technologies. The phone, fax and sales rep will still be common modes of order placement.

Order placement will not be the only element of the order process to migrate to the Internet. Even today, many participants see the value of technology for communications. Order tracking is a clear winner, followed by inventory management and order management. For instance, manufacturers and distributors both expect the Internet to be the most common way in which customers find new suppliers by 2006. Obviously, conducting an on-line search process is simpler, faster and cheaper than a phone or fax search.

The Internet provides a mill with an affordable means to provide information to both distributors and customers. Customers are increasingly coming to expect up-to-date product information, regardless of the site that provides that content. Customers will seek product specifications, technical information and standard pricing information.

In fact, metals service centers could become less critical as a resource to help identify and select appropriate products. Some customers may be willing to perform these tasks for themselves as the Internet makes it easier to search for and obtain product information. A manufacturer's Web site might provide information such as technical specifications, rebate information, potential suppliers and inventory availability directly to customers.

If you talk to your customers, you will see hints of this trend that are already apparent today. In the industrial products channel, more than 80 percent of manufacturers have (or plan to have) their product catalogs, product and technical specifications, and material safety data sheets on-line.

The Internet is clearly a viable source of content. However, it may be poorly suited to the buying behavior and requirements of customers in the metals industry. We don't yet know if customers will become accustomed to viewing and receiving product information on-line. Despite widely shared expectations that customers will use the Internet as a tool, there is also great uncertainty about how customers will actually use the technology. The uncertainty derives from the fact that the Internet is a low-cost mode of communication and does not mean that it is appropriate for all purchasing situations.

Becoming customer-driven

Thus, customers will use technology when it benefits them (searching, ordering, sourcing) and limit technology usage when it is not as directly beneficial to them. Customer expectations and capabilities will set the pace for the evolution and transformation of marketing channels and the supply chain in the metals industry.

Savvy companies can only participate fully in the "bricks and clicks" era if they become truly customer-driven. Resource-intensive technology investments require dual strategies that balance current and future needs. You must optimize strategic fit and performance for the present business, while simultaneously positioning yourself to compete in an uncertain future.

A customer-driven company is one that demonstrates a superior ability to understand, attract and keep valuable customers. In particular, you need to understand how end-user customers buy and what they want, not just what products they buy or who they are. Customer demographics and a list of products purchased are not sufficient to understand the true requirements for a technology strategy.

Not all customers are equal. It is important to understand who your key accounts are today, and who they are likely to be in the future, so you focus on the right segment(s) instead of trying to be all things to all people. Here are a few representative questions that can get you started on this understanding:

Which of today's customers are most important to your business? How many active accounts are profitable on an annualized basis? What proportion of your sales and profits do the best 20 percent of your customers account for?
Why do your customers choose you over a competitor? What has been the deal closer on new accounts?
How many large customers have you lost in the past year? Why did you lose them?

These questions deserve fact-based answers and reasoning. If you are like many executives, you may believe that you "know it all." Perhaps you do. When was the last time that your management team tested their understanding with external, objective data from customers?

Next, you must ensure that your company is oriented to continuously learn more about customers. If customers' preferences and requirements are stable, then competitive strategy is relatively straightforward--understand these preferences and then develop ways to serve customers better, faster or cheaper.

What happens when customer priorities change? What will influence changes in customer preferences? How can you give customers what they want if what customers want depends on what you give them?

Ideally, your key customers would tell you how to anticipate their needs. Realistically, their crystal ball doesn't work any better than yours, so you must keep an ongoing dialogue with them. For example, you should regularly communicate with the customer contact personnel in your company to determine what they are learning about the unarticulated needs and unserved requirements of customers.

Your company's management team should discuss and try to understand how business will be different in the future. Here are the specific questions for which your management team should have a clear, well-articulated vision:

What will be the top three priorities of our customers in 2006? What are their most important future needs?
What will customers pay a premium for in 2006? Which customer needs will be mature and require a highly cost-effective solution?
Who do we want as our customers in 2006? Which accounts will be most profitable?
Which of our services will no longer be necessary in 2006?
Who or what will influence changes in customer preferences?
Will our technology systems reflect our customers' current needs--or incorporate their future needs and requirements?

Focus on injecting interesting and challenging data into your discussion. In a group composed solely of insiders, it will be harder to achieve breakthrough insights into the changing requirements of customers. Outsiders may be customers, suppliers, distributors or consultants.

The true collaboration potential of the Internet for the metals supply chain has barely been tapped. Stop trying to indiscriminately acquire customers simply to spread the fixed costs of technology investments. Instead, focus on the retention of your most valuable customers.

Becoming a customer-driven company means commitment, vision and a ruthless focus on genuine customer needs instead of just products. In this challenging economic climate, there is no greater source of competitive advantage

Adam J. Fein is President of Pembroke Consulting, Inc., a strategy and marketing consulting firm. He can be reached at (215) 523-5700 or on the Web at www.PembrokeConsulting.com. He is the author of Facing the Forces of Change: Future Scenarios for Wholesale Distribution, which can be purchased on-line at http://www.nawpubs.org.