Apple's recent launch of the iPad was met with much hoopla. When the product was first announced in January, some critics called it underwhelming, even stupid, while for the others, the brand could do no wrong. Nevertheless, Apple was entering into a new product category and analysts were in two minds about how it would fare. On the one hand, the iPad seemed like a larger version of an older product, the iPod Touch. On the other hand, it seemed to offer a more immersive experience because of its larger screen. Be that as it may, more than 500,000 iPads were sold within the first week of its launch.
According to the company, demand for the iPad was a lot higher than they had anticipated, and so, Apple announced a push back of the iPad's international launch. Sceptics, of course, can choose to see this as a public relations strategy to extend the product's hype. For Rajendra K. Srivastava, Provost and Deputy President for Academic Affairs at Singapore Management University, this episode highlights the importance of carving out that sweet spot between marketing, innovation and operations. Apple, he said, draws from the innovation of other products and companies, such as Singapore's Creative Technology. However, they do better than most of their competitors, even in product categories that they did not pioneer. If you look at Apple, they don't have that much technology that is unique to them; others have access to those types of technology, Srivastava noted. But their design is iconic.
Companies may enjoy a competitive advantage when they are first to bring a new innovation into the market. However, this competitive advantage expires once other businesses engineer similar innovations. Then it sort of becomes an efficiency game; who can produce better, keep the costs lower, and so on. What sustains performance in the long run is an understanding of how various organisational capabilities can complement different phases of the product life cycle.
Capabilities are complex bundles of skills and accumulated knowledge, exercised through organisational processes that create positional or competitive advantages for the firm which are not easily imitable by competitors, Srivastava wrote, together with Sridhar N. Ramaswami, a professor of marketing at Iowa State University, and Mukesh Bhargava, an associate professor of marketing at Oakland University. Their paper, 'Market-based capabilities and financial performance of firms: insights into marketing's contribution to firm value', recently picked up the Sheth Foundation Best Paper Award in the Journal of the Academy of Marketing Science.
Here, the researchers refer to 'market-based' capabilities - competencies essential in knowledge-driven economies where 'market-based' assets, like brands, customers, and channels have the ability to drive future cash flows and market capitalisation. This includes expertise in areas like marketing, operations and innovation. The source of competitive advantage has shifted from physical, tangible assets to intellectual and knowledge-based resources or capabilities, they wrote. So if firms like Creative Technology or Apple want to keep driving their business performance, they will have to identify, ex ante, which of their capabilities to develop, and how to exploit them.
A new perspective on risks
Business success can be based on product differentiation, cost leadership or market focus - according to Michael Porter, a Harvard professor who specialises in competitive strategy. Put simply, every company has to know who their customers are, what they want, and how to deliver it. The marketing experts are expected to understand (and manipulate) customer behaviour, the R&D specialists design what customers want, and the operations experts are supposed to figure out how to get the products to the customers.
The problem many companies face, however, is an understanding of when best to tap on these capabilities so as to drive business performance, and ultimately, shareholder value. What has happened is that people are straddling only their respective areas. So people in marketing might not be paying enough attention to the benefits that logistics might bring to the company, for instance, and they might also not be involved in R&D, because their approach to product launches are from the 'customer management' viewpoint, not 'product development', Srivastava said.
Shareholders expect companies to be good at (a) making more money, (b) making money grow faster, and (c) making sure that the money doesn't go away by making the necessary investments and managing risks. One way of managing risks, he said, is through good customer management: People don't necessarily equate customer loyalty to lower risk, but that's exactly what it is - because if my customers are not available to you, my competitor, then my business risk is lower. To confirm this, Srivastava, Ramaswami and Bhargava studied the financial performance of 51 US firms, tracking parameters like Sales, Profitability, Market Share, Net Operating Margins and Return on Assets.
The figures were studied in relation to three core capabilities: New Product Development, Customer Management and Supply Chain Management. Results showed that Customer Management performance influenced both price-to-book ratio and growth in market value indirectly through its positive impact on sales growth, they reported. When customers are offered differentiated products and services and when they show satisfaction and loyalty to firms based on how firms involve them in understanding and responding to their needs, the net impact is a higher level of financial performance by the firm.
Customer management for sales growth
One would assume that sales growth would be driven by New Product Development, because that's the thinking; that if you develop new technology and new products, it will drive a company's growth. But we found that growth was really driven by how well you link with your customers, Srivastava noted. Good Customer Management performance relies on (a) customer satisfaction; (b) customer retention; (c) the firm's ability to charge a price premium for products or services; (d) the firm's ability to increase customer relationships through cross-selling; and (e) the firm's reputation. In the study, the researchers found that companies did better if they were able to solicit the 'right' set of customers, or rather, High Value Customers (HVCs).
Results show that [loyalty and satisfaction metrics] are influenced critically by a firm's capabilities in targeting high value customers. The result is consistent with the prescription of most Customer Management pundits that companies need to achieve focus in selecting customers and serve high value customers rather than all customers. It appears that skills with respect to targeting high value customers represent conditions for staying ahead in the game, the researchers wrote - a unique competitive advantage that would be difficult for others to replicate.
To identify HVCs, companies first need to identify who these people are. This means developing, managing and analysing customer databases and data warehouses. Srivastava shared an example: Think of how a luxury hotel might treat a HVC, say for example, a frequent guest - they are likely put in the effort to greet this guest by name, and if there is a potential upgrade available, they are likelier to offer it to this guest than to the next person who stays at the hotel a lot less often. By focusing on HVCs, you can strengthen customer relationships, but in order to do that, information is a fairly important consideration because you have to know who the HVCs are.
Capabilities, considerations and outcomes
It is not enough for marketers to focus on customers as business performance also hinges on supply chain and innovation. Good customer relations may bode well for sales growth, but the researchers found that it was efficiency (supply chain management) that drives a company's market valuation. You make real money around the peak of the product life cycle curve, and that's when efficiency is critical, said Srivastava. Similarly, if growth in profitability is key, then the size of the firm becomes an important consideration.
Compared to large companies, small firms may not enjoy economies of scale or have a large portfolio of product offerings to facilitate scope benefits. But, they have speed and adaptability. Results indicate that smaller firms benefit from synergy much more than larger firms. Higher performance in both Customer Management and Supply Chain Management processes yield better performance for such firms, the researchers wrote. Larger firms, however, showed competencies in their scale of influence, so when they manage customers well, they will likely receive more bang for their buck.
Between older and newer firms, the study showed that older firms were likelier to benefit from positive synergy from operations and innovation processes while younger firms may not necessarily enjoy such synergies. Younger organisations typically have less knowledge about markets and customers; they may engage in efficient practices until they learn; they need time to forge relationships with external partners, including customers and channel members; and they may also not know about what they can do or should do, the researchers wrote. As a result, process synergies may be more difficult to achieve for newer firms, and this has an impact on their ability to perform competitively.
Older firms, on the other hand, enjoy what the researchers call a knowledge advantage, and may fire on all cylinders on the processes front, so that operations, product development and customer management efficiencies complement each other. The interaction effects of these processes, in Srivastava's opinion, highlight the significance of this study because it presents a multi-process perspective on performance. In this paper, we've highlighted that innovation, operations and marketing are not independent, but rather, interdependent. Put simply, if I had a better product, it'll be easier for me to sell it; and it'll be easier for me to sell it if I have more customers; and it's possible for me to be more efficient because I now have economies of scale.
The results highlighted, for instance, that when interaction was bolstered between 'Differentiated Products' and 'Customer Management Performance', firms' financial performance improved: What the study says is that, on the average, your chances of success are higher when you have good marketing coupled with good innovations. In retrospect, you can say you already know that, but the thing is that people are either looking at the impact of new product development on performance, or they are looking at the impact of marketing on performance. This paper says that you need to look at both. In order words, marketers need to start paying attention to other capabilities within the organisation to drive financial performance and shareholder value.
So when Apple does a good job of blending marketing capabilities with new product development, the company lowers its risks because customers are pledging their loyalty - despite the supposed kinks in the iPad's availability, i.e., delays in shipments. Singapore's Creative Technology, on the other hand, might be a frontrunner at churning out innovative products, but they will stand to compete a lot better if that capability was matched with other capabilities - such as great marketing.
Until then, customers will gladly stick their necks out for lesser products.