session 9 target

8/12/2019 Session 9 Target

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Targets

Differentiation Strategy

James Oldroyd

Kellogg Graduate School of Management

Northwestern University

[email protected] TNRB
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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1

To Date

Dual Advantage

Willingnessto Pay

Supplieropportunity

cost

Differentiation

GoldmanSachs

MerrillLynch

McDonaldsBurgerKing

Low Cost

Wal-mart

K-mart

Momand Pop

Store


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Dimensions of Value

Value

Price

Differentiation

Product

Service

Bottom LineValue

Top Line

Value

Willingness to Pay

Cost

Price

Value Captured byCustomer

Value Capturedby Firm

Value Capturedby Supplier

Supplier Opportunity Costs


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Achieving Differentiation Advantage

How one goes about obtaining a differentiation advantagedepends upon the nature of the product/service:

Observable Goods: the buyer can easily form accuratejudgements about the quality of a product.

Experience Goods: the buyer finds it difficult and/or costly todetermine the quality of the product prior to purchase and use.

Communication/Network Goods: the value to the buyer rises asthe number of buyers and users increases.

And it embraces the whole relationship between supplier andcustomer


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Differentiating Observable GoodsBy differentiating an observable good the producer acts to reduce the totalcost of use to the buyer. Very often this requires an increase in productprice. But in successful differentiation the price increase is more thanoffset by a reduction in the costs experienced by the buyer. The aim is notbe the low cost producer but TO BE THE LOW COST PROVIDER.

Manufacturer'sValue Added

EngineeringLaborMarketingDistributionAdministration

ProductPrice

RawMaterials

Buyers Costs

SearchLearningSwitchingRisk/lossPerformanceService

Total Cost ofUse to Buyer


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Differentiation-Based Strategy

Users Total Cost of New Software

Product

Price

Search Learning Risk

Utility Software

Resources


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Firm A:

Firm B:

Price

Price

Total cost to buyerProducers cost Producers margin Buyers cost

Firm A has acost advantage

Value Chains for Cost Advantage

and Differentiation Advantage

Firm C:

Firm B:

Price

Firm C has adif ferent iat ion

advantage

Price


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Strategic Positioning

The essence of strategic positioning is to

make choices that are different from thoseof rivals

Strategy is not a race to one ideal position ---it is the creation of a different position

Differences in positioning are necessary butnot sufficient for sustainable competitive

advantage

Sustainable advantage depends on barriers toimitation

Advantage is magnified by mutual reinforcementacross activities


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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRM

Strategic Framework for CRM

Why CRM Fails

Lock-in vs. LoyaltyThe Dark Side of Market FocusTargets Market Focused Strategy and the

Challenges of Implementation

Conclusion


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Multiple Data Sources

People have typically sought an

understanding of their customerby using one or twoof thesesourcesindependently

CustomerResearch

Market Data

Internal

Data

Observation

DataWhat is purchased,

notwhyBehavioral not

attitudinal

Attitudinal

notbehavioral

or fact-based

Marketconditions,

notcustomer

preferences

GAP

Source: Arthur Anderson, 2002


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Customer Relationship Management

v To deepen customer relationships.

v To build customer loyalty

v To increase profitability

Purpose of CRM

The Proliferation of CRM

161 CRM companies funded since 1998$1.3 billion raised by CRM companies

Source: Red Herring May 2002 p. 27


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Sources of Expense:Typically $5,000 a seat and $2 million to $5

million per deployment.CRM systems required data conversion when

consolidating data from multiple legacy systems.At the enterprise level, CRM software is justplain difficult.

Additional Investments of $100,000 to $1million.

Need to hard-wire and hard-code the twosystems together to connect the Siebel suite to

the mainframe.Time and money running data reconciliations.

Custom coding to pay for, too. Source:Computerworld Inc. Dec 3, 2001

And FallSurveys show 55 per cent of NorthAmerican executives don't believethey've seen a return on their CRM

investments.

Gartner Group

Major Players:

Siebel Systems

26%

Oracle andBroadvision

6% share

Despite the troubles CRMsoftware sales are expectedto rise 10% to $4 billion in

2002 and to rise 33% to $29.4

billion in 2003


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Road Map



Why CRM Fails



Conclusion


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Customer Management Loop

Respond

Identify

Dialogue

Interpret

1. Decide what you will do with the information. Make it a part of your overall customer plan.2. Establish customers as the information pivot in your organization. Gather the right Customer

Information (Who what when where and WHY) from the right customers through the right means(not the most expensive).

3. Make this information useable, available and actionable throughout the organization where it isneeded.

4. Add context to the information. Interact with customers and understand their needs.


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Case Study: Harrahs

Created a Total Rewards program to track players atelectronic gaming machines. These machines account

for 80% of operating profits

Links 40,000 machines in 12 states

The goal is to create brand loyal customers

Comps(comps) good

toward shows,meals or hotel

rooms.

Identify
https://www.harrahs.com/index.html


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Customers Are Not Created Equal

Frequency:Numberof

CustomersatEachValueLevel

Value Per Customer

MeanStandard Deviation

Why are theyunprofitable?Can behavior orcost be changed?Should wedisengage?

Unprofitable

Modestlyprofitableor breakeven

Modestlyprofitable

What can be done todevelop the profitabilityof these customers?

Who are thesecustomers? How dowe keep them, attractmore like them?

Veryprofitable

Identify


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Tufts Plan

As the pie shrinksthe table manners

get worse.

A prominent physician onthe current state ofphysician satisfaction

.01% = $7,880PMPM

5% = $1,191 PMPM

95% = $22 PerMember Per Month(PMPM)

The Problem

Information Solution - CRMPatient Identification and Treatment RecommendationWorkflow StandardizationMulti-disciplinary CollaborationAlerts care managers enables them to intervene earlyPersistently reminds and motivates patients, families andproviders to comply with proven health management careplans

Results fromsimilar programs:44% reduction in

readmission36% reduction inhospital days for

patients withcongestive heart

failure400% ROI for

pediatric asthmaprogram

12% annual costsavings for diabetes

management

Identify


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Pharmaceutical

Health Care

Physicians

Patients

Insurance/Gov.

Pharmacies

Defining your customersIdentify


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Tribunes Customers

The Reader The Advertiser

The Brick Wall

The Division Between Church and State

20% of Revenues 80% of Revenues

Identify


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General Electric Medical Systems

Customers

HospitalPurchasing

Department

The LabTechnicians

Doctors

HospitalAdministration

Patients

Identify


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Guidants Customers

Electro-Physiologists

ImplantingCardiologists

CardiologistsPrimary CarePhysicians

Patients

PrimaryRelationship

Secondary

Relationships

Referral Chain

Identify


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Respond

Identify

Dialogue

Interpret






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Using Customer Information to

Initiate Dialogue

Customized WebInterface

Customer Serviceand Support

Email

Pop-up ads

Sales Force Calls

Bulk MailersBroadcast ads

Internet Physical

Push

Pull

Dialogue


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Response Rates For

Marketing Communications

Differential Marketing6-15%range dependingon quality of marketinglists/segments defined

Relationship (1:1) Mktg.18-30%range when usinghighly targeted, one-to-onetype marketing campaigns

Traditional Marketing2-5%range for traditionaltypes of mass media type

campaigns

Informational Marketing1-3%range for customer

passively collectinginformation

Passive

Interactive

Company Initiated(Outbound)

Customer Initiated(Inbound)

Dialogue


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Respond

Identify

Dialogue

Interpret





The potential of segmentation has


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The potential of segmentation has

vastly increased in the new world

In the old world, segmentation was mostly static using demo- andsocio-graphics, attitudes and customer value. In the newworld, segmentation is behavior based, real-time and dynamic

Is there no value in static segmentations anymore and does everysegmentation have to be real-time?

Is behavioral segmentation the means to all ends and how do you

integrate it with existing (mostly offline) segmentationmethods?

Can multiple segmentations methods be used simultaneously fordifferent value creation purposes?

Interpret

Segmentation of Customers


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The Customer Pyramid

Platinum

Gold

Iron

LeadLeastProfitable

Most

Profitable DifferentiateCustomers

Depending on theLevel of

Involvement

Source: the Customer Pyramid, Zeithaml, Rust, and Lemon. Cal. Management Review, Summer 2001

InterpretPrediction toOptimize

C t B k E A l i


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Customer Break Even Analysis

Cost to Serve

Price

High

Low

Low High

Goal is tomove

Customersfrom below

the lineabove theline or tolower the

line

InterpretUnderstanding Customers patterns


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Respond

Identify

Dialogue

Interpret






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Target rightcustomers

Cross-selling

Reducelapse rate

Attractmore effective

acquisition

DevelopMore sales percustomer per

year

RetainIncreasecustomerlifetime

Source ofimpact Typical lever

Stages ofcustomerrelationshiplifecycle

Churn

Market capitalisation($ bn)

Market cap./customer ($)

5.4%

7.0

3,721

1.4%

35.3

5,883

CRM Creates Value by Improving Attraction,

Development, and Retention of Customers

Average revenue percustomer per year ($)Average assets per account

($)

130

21,000

170

102,000

Number of accountsNew accounts (Q4 1999)Average acquisition costs ($)

E-trade

1,881,000413,500

360

CharlesSchwab

6,000,000390,000

200

Respond


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Segmentation

Victorias Secret places all visitors on its slower

servers but once a customer places something in

the shopping cart they are switched to a fasterserver.

Customer Patterns

Amazon monitors browsing and makessuggestions. Customer who bought this book also

purchased a book by.

Businesses that use Differential

Treatment Respond
http://www.victoriassecret.com/


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Road Map



Why CRM Fails



Conclusion


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Organizational Barriers to Customer

Information

1. Information Flow

2. Channel Obstacles

3. Company Barriers to Entering theData


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Why CRM Fails: Strategy & Organization

What CRM is:

A strategyA cross functional and crossdivisional initiative

Difficult both costly and time

consuming

What CRM is not:

a technologyA software package

A marketing departmentinitiative

Easy

55% of CRM implementations dont produce results

(Gartner Group)

20% Damage long standing customer relationships

(Bain Report)

Implement a CRM without a strategy

Implement CRM before readying the organization

The perception that more is better

Staking not wooing customers

Source: Avoid the four perils of CRM by Rigby, Reichheld and Schefter. HBR, February 2002.


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Road Map



Why CRM Fails



Conclusion


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10% beneficial change in increases NPV by %

Targets Differentiation Strategy:

Loyalty

New customer acquisition cost

New customer conversion rate

New customer revenue change

Cost of repeat customer

Conversion 0.84

2.32

4.64

0.69

Repeat customer revenue change

Repeat customer conversion rate

Customer churn rate

Retention 5.78

9.49

6.65

Visitor acquisition cost

Visitor growth

Attraction 0.74

3.09


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Source: Frederick Reichheld and W. Earl Sasser, Customer Retention: A New Star to Steer By, Working Paper, Bain & Company,November 1999.

10

20

30

40

50

60

Auto ServiceChain

BusinessBanking

CreditCard

CreditInsurance

InsuranceBrokerage

IndustrialDistrib.

IndustrialLaundry

OfficeBuilding

Management

Software

PercentIncreasein

Profit

28%35%

125%

25%

50%45%

55%

40%

35%

And Profits

Profit Impact of 5% Increase in Retention

Loyalty


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Loyalty

Loyalty has been hijacked and

tortured by opportunisticmarketeers. Your search willreveal more than 100,000

(1,620,000 actual) loyalty relatedpages overwhelmingly dominatedby loyalty cards, loyalty marketing,loyalty programs, and my personalfavorite loyalty schemes. It seemsthat loyalty has been reduced to apotpourri of marketing gimmicksdesigned to manipulate customer

behavior with cheap bribes.

Frederich Reichheld,Loyalty Rules!

Loyalty obviously demands

superior profits, but it demandsmore. It requires that those

profits be earned through thesuccess of partners, not at

their expense. Loyalty can beearned only when leaders put

the welfare of their customersand their partners ahead of

their own self-serving interests.

IsntIs

Data = Satisfaction = Loyalty

Lock-in vs. Loyalty


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Lock in vs. Loyalty

Truly Loyal Accessible

Locked-in High Risk

Attitude

BehaviorPositive Negative

High

Low

Source: Stakeholder Power, 2001 Steven Walker and Jeffrey W. Marr Perseus Publishing

Purchase Dont Purchase

Enjoy

Despise

Loyalty Programs


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Loyalty Programs

American StoresNeiman MarcusJ.C. PenneyToys R UsOffice Max

StaplesKohlsTargetSaksSearsCVS

CitgoRite AidDaytonsNordstromFederatedMedicine Shoppe

Amoco Conoco Exxon Phillips Shell Ultramar A&P Albertsons

TJXKroger

ZellersTalbots

SafewayValue CityFood Lion

Foot LockerVictorias Secret

Source: The Price of Loyalty by James Cigliano, Margaret Georgiadis, Darren Pleasance, and Susan Whalley. The McKinsey Quarterly 2000 number 4.

US Retailerswith LoyaltyPrograms

Costs:$1.2 Billion tied up inannual customer discounts

Entitlement:The programsare nearly impossible tostop

Dont work: most customersare looking for an alternative

Non-value Reward: Ifcustomer spends $500 peryear most programs wouldonly give $5.

Most Programs Fail Because:

1Dual Purpose programs. (Targets TakeCharge of Education donates 1% of Purchases)

2Built to provide customerinformation. (Grocery Stores use to obtain information)

3Align the Organization!!

Successful programs are:

R d M


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Road Map



Why CRMFails

Lock-in vs. LoyaltyThe DarkSide of Market FocusTargets Market Focused Strategy and the


Conclusion

The Perils of Market Focus
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The Perils of Market Focus

Listen to the wrongcustomers:

Too manymessages:

everyone isapproachingcustomers

withrelationship

Companiesoffer intimacy

but are notable to

reciprocatewith custom

offerings

Focus on

too smallof a groupwhile

alienatingmany

customers

1

2

3 4

Data = Satisfaction = Loyalty = Payback

Customers actuallymiss the days whena transaction was

just a transaction,when purchasing abar of soap didnt

mean entering into alifetime value

relationship.

The Hotelasks me for

detailedinformationevery time I

check in.

The rental carshuttle made

me walkbecause I

wasnt club

member. But I

was a loyal

customer

Sony Walkmanand ChryslerMinivan wereboth products

that customersin focus groupssaid they did

not want.

Source: Torment Your Customers (theyll love it) by Stephen Brown. Harvard Business Review, October 2001. And Preventing the Premature Death of RelationshipMarketin b Susan Fournier Susan Dobscha and David Glen Mick. HRB Jan-Feb1998.

E l


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Examples

Sure they can call me at dinner, but I cant reach

them on the phone. They can send me 100 piecesof mail per year, but I cant register one meaningful

response with them. Companies claim that theyre

interested in the customer. But the focus is on thecompany

From Preventing the Premature Death

of Relationship Marketing Fournier,

Dobscha, and Mick, HBR 1997.

Th M th f M C t i ti


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Build to OrderBuild to Replenish

Build to Forecast0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1992 1994 1997 1999

From Dealer

Stock

Via Dealer

Out of

Distribution

Centers

Build to Order

McKinsey estimates

that in automanufacturing aloneBTO could save $80

Billion a year inreduced excesses

stock

Why the Clamor? Sales of mass market cars in Britain

While BTO haseluded many firms,

others have madesignificant progressby using

ChoiceBoards.

The Myth of Mass Customization

DELLs ChoiceBoard Options

Source: A long march The Economist, July 14, 2001

F M t i t C bi O i ti


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Chaos

Conflict

Coordination Failure

Ownership and Accountability

From Matrix to Cubic Organization

CEO

North America Europe Asia

Production

Service

Sales

Marketing

Geography

2X 3X

1

2

3

1

2

Matrix2

R d M


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Road Map



Why CRM Fails



Conclusion

Th D lit f M k t D i


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The Duality of Market Driven

Organizations

Accountability Coordination

Decentralized Centralized

Product Focused Market Focused

Vs.

Vs.

Vs.

I t l Ch ll I f ti


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Internal Challenges - Information

Wall Street doesnt care how much product

we sell to a particular customer.

A Corporate Executive

Getting the information from the business silos andcombining it to see all interaction with a customer

Coordinating

Mechanism

Unified View ofthe Customer

Aggregate theinformation

BusinessSilos

We had 86 internal

accounts for IBM

We aggregatedall IBM

information

One view of the

big picture of IBM

Challenges Coordination


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Challenges - Coordination

Give and Take

A B C A B C

Product Silos Solution

Clients dont care if a certain business line is losing money.They view the account in its entirety. Clients want

accountability. They want you to run the relationship asbusiness not a product

Account Manager

External Challenges


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External Challenges

New Sales Methods Alignment

Economics Mega Aggregators

Channel Conflicts

Information Can Be Consolidated at a


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Information Can Be Consolidated at a

Any Level

No SegmentsThe Organization

Level

Some SegmentsVarious Types of

Customers

1-2-1 DirectThe Individual

Customer

Customer Segmentation Continuum

AverageCustomer theSoccer Mom

Club WedLullaby Club

Target.direct

Targets Vendor Club


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Targets Vendor Club

6 Premium CharterMemberships

Exclusive opportunity to partner

Guest centric analytics

Targeted offers

Target Visa - electronic offers andmarketing support

Club Redexclusive offersNowSeptember 2003

$1.5 Million

10 CharterMemberships

Target Visaelectronic offers andmarketing support

Club Redexclusive offers

NowSeptember 2003

$750,000 Million

Vendors input $16.5 million

Target will offer:

Other Benefits of the Vendor Club
http://www.target.com/index.jhtml


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Other Benefits of the Vendor Club

Build a Competitive Advantage

18 month limited access

Guest Data Base

Analytics Suite

Focused Attention

New Channels

Vendor Opportunities

1. Offer a $ or % off oneor more items bought

in a singletransaction

2. Offer $ or % off one

or more items boughtin multipletransactions

3. Offer free item withsingle or multi

purchase

Access to Guest Specific Data

Whos Buying What

Who Are Your Key Segments

Market Basket Analysis

Geographic Profile

Case Study: The Problem of Complexity-
http://www.target.com/index.jhtml


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Case Study: The Problem of Complexity-Who Owns Customer Loyalty?

Median Age (female) in 2001

Median Income

% College Graduate +

% Professional/ Managerial

% with Children


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The Role of The Chief Guest Officer

Chief Guest Officer

Vendors

Information

Merchants

StoreManagers

Other relationships are much more difficult

Trade Offs


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Trade Offs

High

Low

Independent Integrated

Road Map


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Road Map



Why CRM Fails



Conclusion

Differentiation Advantages


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Differentiation Advantages

Differentiation allows a firm to command a premium price for its product orservice.

Competitive advantage is realized if the value of the price premium is greater thanthe cost of differentiation.

Differentiation strategies require a deeper understanding of the customers needs

(customer value chain) than cost-based strategies. This typically requires anin-depth customer segmentation analysis.

Differentiation strategies often require a different firm value chain withappropriate linkages between the value chain of the firm and that of thecustomer (e.g., Dell provides desired customization for each customer).

Differentiation may be more sustainable than cost leadership because it is buildon features that are harder to imitate.

CRM and Loyalty


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CRM and Loyalty

Respond

Identify

Dialogue

Interpret

Truly Loyal Accessible

Locked-in High Risk

Attitude

BehaviorPositive Negative

High

Low

Purchase Dont Purchase

Enjoy

Despise

Challenges


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Challenges

Accountability Coordination

Decentralized Centralized

Product Focused Market Focused

Vs.

Vs.

Vs.

New Sales Methods Alignment

Economics Mega Aggregators

Channel Conflicts

Internal

External


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Examples

CRM Best Practice: Williams - Sonoma


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CRM Best Practice: Williams - Sonoma

Source: Adapted from 2000 Annual Statement

Seek to own the home through multi-channel retailing

Become the single most dominant force in

home furnishings by selling great products instores, through catalogs, and on the Internet.

Williams-Sonoms delivers on this visionthrough powerful brands, consumer

satisfaction, channel synergy, vertical

integration, and operating efficiency.

Williams-Sonoma knows their consumers, and understands how themarketing they do impacts their behavior. For example, they know

that mailing a new catalog boosts traffic in the retail stores. Thestores in turn provide consumer data that is leveraged by thecatalog, Internet, and merchandising groups to deliver better

solutions to consumers.

CRM Best Practice: Ford


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CRM Best Practice: Ford

Source: Accenture Consulting

The company began by building a data warehouse to provide a single, integratedview of each consumer.

The second step was analyzing the consolidated data to achieve superiorconsumer understanding as a basis for one-to-one marketing. The result:unprecedented ability to understand consumers and differentiate and targetmarketing messages.

The third step was leveraging the results of data analysis to create highly targeted

marketing campaigns. They also developed metrics to gauge campaigneffectiveness, as well as procedures to ensure that all data collected in campaignsare captured by the company's data warehouse for continual enrichment ofconsumer profiles.

The company now has a rich,constantly expanding data source forpredicting consumers' long-term valueand developing appropriate, targetedcampaigns for every stage of itsrelationship with a consumer.

1

2

3

CRM Best Practice: DuPont Agricultural


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CRM Best Practice: DuPont Agricultural

Products

DuPont project team that began by interviewing employees to gaininsight into their needs for serving consumers and to help themunderstand the multi-level consumer base resulting from DuPont'sacquisition of Pioneer. Then the team designed and built a datawarehouse, seeing it as the strongest solution for gaining consumerinsight and the best basis for building consumer offers.

The data warehouse consolidated and cleaned existing consumerinformation from all sources and was equipped to capture new data fromtransactions and to permit updates.

The next step: leveraging the warehouse with TruChoice, a marketingapplication with built-in incentives for farmers to encourage purchasesand for dealers to encourage data sharing.

TruChoice launched at the end of 1999, and results have beenoutstanding. DuPont expects sales growth in their corn and soybeanoperations; dealers and distributors have overcome their distrust andbegun providing consumer data; and farmers are so sold on TruChoicethat in areas in which it's not offered they're demanding dealers make itavailable.

session 9 target

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