Excellent book!! I suspect many markets would be happy if their top management took interest in the book 🙂 The book’s site positions the book as a “A Powerful Antidote to Product-centricity” – and it is so wonderfully correct.
My notes (though it was hard to take reasonably concise notes – so many concepts a excellent by themselves and deserve attention):
- For many companies the product is their business (building a better product is the path to a less competitive future… is the perception)
- However, the answer to the question “Why do customers buy from us?” is answered usually not based on the product, but on the “downstream” values.
- While customers buy because of the downstream values, most of the resources are concentrated in the “upstream” product area.
- Firms have goals “increase revenue by X” and use strategies how to create value for customers, what may not be concentrated on a product, can include service, emotions (piece of mind, etc.).
- Firms seek “competitive advantage” – building a way of creating value for customers that competitors can not easily duplicate.
Where is your company’s competitive advantage or “center of gravity” – upstream or downstream?
- 20th century: competitive advantage used to be in upstream (production lines, teams of engineers, etc. Walmart network). However, upstream competitive advantage is disappearing as production, logistics, design, and innovation can be outsources.
- Downstream tilt:
- Competitive advantage tilts downstream
- Activities that add value
- primary fixed costs in the business
- Why is it happening? Commodization – anybody can re product the product relatively quickly.
- Importance of “downstream” example: pharmaceutical companies at one point offered significant price reduction for the AIDS drubs to African countries, but the countries were not interested. There was no infrastructure to distribute the medications and monitor the use. “almost free” product had no value…
- Parity in products still important, but to “win” a company has to have a downstream focus.
In the 21st century markets are maturing faster than managers
- Upstream costs are becoming variable, as outsourcing becomes possible
- Downstream costs are becoming fixed (and increasing)
- customer acquisition
- customer satisfaction
- customer retention
The question is not “how much more of what we make can we sell?” but the question is “what else our customers need?” Transition from the economy of scale to the economy of scope. Manufacturing cost is not a smaller percentage of the product price; downstream costs have increased.
Example: computer game to help 7-19 year old ADHD patients developed by a pharmaceutical company as part of “beyond the pill” initiative.
Identifying customers’ costs and risks:
Example: Vine in UK seem to be too intimidating for the customers to select – too complicated product. Solution was a simple limited collection of Vines with easy to understand color-coding. UK vine consumption increased.
Example: Honda during recession. Why customers do not buy cars? They are afraid to loose their jobs. Offer: you can return a car if you loose your job. Sales double, while the rest of the industry saw sales decline 37% (2009).
Example: explosives for the quarries – a commodity with practically no switching costs; competition on price – commodity product. Solution to escape price competition was to reduce the risk of the customer in buying the product. The customers (quarries) needed “crushed” rock rather than the explosives. The risk of the customers were very high – if the blast was unsuccessful, the rock might be too large, what will require additional efforts or the rock might be too small, and their customers won’t buy it. The explosives company started charging the quarries not for explosives, but for “crushed rock” guaranteeing that certain percentage of the rock will be proper size. The company used its extensive blast data to guide quarries in proper use of explosives and was able to sell premium and highly differentiated product.