S POTLIGHT ON R EINVENTION Because Companies Can Now .
www.hbr.orgSPOTLIGHT ON REINVENTIONBecause companies can nowinteract directly withcustomers, they mustradically reorganize to putcultivating relationshipsahead of building brands.Rethinking Marketingby Roland T. Rust, Christine Moorman, andGaurav Bhalla Included with this full-text Harvard Business Review article:1 Article SummaryIdea in Brief—the core idea2 Rethinking MarketingCompliments of:Reprint R1001F
SPOTLIGHT ON REINVENTIONRethinking MarketingIdea in BriefCompanies have powerful technologiesfor understanding and interacting withcustomers, yet most still depend on massmedia marketing to drive impersonaltransactions.To compete, companies must shift frompushing individual products to buildinglong-term customer relationships.The marketing department must bereinvented as a “customer department”that replaces the CMO with a chiefcustomer officer, makes product andbrand managers subservient to customermanagers, and oversees customer-focusedfunctions including R&D, customer service,market research, and CRM.COPYRIGHT 2009 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.These changes shift the firm’s focusfrom product profitability to customerprofitability, as measured by metrics suchas customer lifetime value and customerequity. This organizational transformationwill uproot entrenched interests and somust be driven from the top.page 1This article is made available to you with compliments of VeraCentra.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
Because companies can now interact directly with customers, theymust radically reorganize to put cultivating relationships ahead ofbuilding brands.SPOTLIGHT ON REINVENTIONRethinking MarketingCOPYRIGHT 2009 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.by Roland T. Rust, Christine Moorman, andGaurav BhallaImagine a brand manager sitting in his officedeveloping a marketing strategy for his company’s new sports drink. He identifies whichbroad market segments to target, sets pricesand promotions, and plans mass media communications. The brand’s performance will bemeasured by aggregate sales and profitability,and his pay and future prospects will hinge onthose numbers.What’s wrong with this picture? This firm—like too many—is still managed as if it werestuck in the 1960s, an era of mass markets,mass media, and impersonal transactions.Yet never before have companies had suchpowerful technologies for interacting directlywith customers, collecting and mining information about them, and tailoring their offerings accordingly. And never before havecustomers expected to interact so deeply withcompanies, and each other, to shape theproducts and services they use. To be sure,most companies use customer relationshipmanagement and other technologies to geta handle on customers, but no amount ofharvard business review january–february 2010technology can really improve the situationas long as companies are set up to marketproducts rather than cultivate customers.To compete in this aggressively interactiveenvironment, companies must shift theirfocus from driving transactions to maximizing customer lifetime value. That meansmaking products and brands subservient tolong-term customer relationships. And thatmeans changing strategy and structure acrossthe organization—and reinventing the marketing department altogether.Cultivating CustomersNot long ago, companies looking to get amessage out to a large population had onlyone real option: blanket a huge swath of customers simultaneously, mostly using one-waymass communication. Information about customers consisted primarily of aggregate salesstatistics augmented by marketing researchdata. There was little, if any, direct communication between individual customers and thefirm. Today, companies have a host of optionspage 2This article is made available to you with compliments of VeraCentra.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
Rethinking Marketing S POTLIGHT ON R EINVENTIONRoland T. Rust (rrust@rhsmith.umd.edu) is a Distinguished UniversityProfessor and the David Bruce SmithChair in Marketing at the Universityof Maryland’s Robert H. Smith Schoolof Business. Christine Moorman(moorman@duke.edu) is the T. AustinFinch, Sr., Professor of Business Administration at Duke University’s FuquaSchool of Business in Durham, NorthCarolina. Gaurav Bhalla (gaurav.bhalla@knowledgekinetics.com) isthe president of Knowledge Kinetics,based in Reston, Virginia.at their disposal, making such mass marketingfar too crude.The exhibit “Building Relationships” showswhere many companies are headed, and allmust inevitably go if they hope to remaincompetitive. The key distinction between atraditional and a customer-cultivating company is that one is organized to push productsand brands whereas the other is designed toserve customers and customer segments. Inthe latter, communication is two-way and individualized, or at least tightly targeted atthinly sliced segments. This strategy may bemore challenging for firms whose distributionchannels own or control customer information—as is the case for many packaged-goodscompanies. But more and more firms nowhave access to the rich data they need to makea customer-cultivating strategy work.B2B companies, for instance, use key accountmanagers and global account directors to focuson meeting customers’ evolving needs, ratherthan selling specific products. IBM organizesaccording to customer needs, such as energyefficiency or server consolidation, and coordinates its marketing efforts across productsfor a particular customer. IBM’s InsuranceProcess Acceleration Framework is one example of this service-oriented architecture.Customer and industry specialists in IBM’sinsurance practice work with lead customersto build fast and flexible processes in areaslike claims, new business processing, and underwriting. Instead of focusing on short-termproduct sales, IBM measures the practice’sperformance according to long-term customermetrics.Large B2B firms are often advanced in theircustomer orientation, and some B2C companies are making notable progress. Increasingly,they view their customer relationships asevolving over time, and they may hand offcustomers to different parts of the organization selling different brands as their needschange. For instance, Tesco, a leading UKretailer, has recently made significant investments in analytics that have improved customer retention. Tesco uses its data-collectingloyalty card (the Clubcard) to track whichstores customers visit, what they buy, and howthey pay. This information has helped Tescotailor merchandise to local tastes and customizeofferings at the individual level across avariety of store formats—from sprawlingharvard business review january–february 2010hypermarts to neighborhood shops. Shopperswho buy diapers for the first time at a Tescostore, for example, receive coupons by mail notonly for baby wipes and toys but also for beer,according to a Wall Street Journal report. Dataanalysis revealed that new fathers tend to buymore beer because they can’t spend as muchtime at the pub.On the services side, American Express actively monitors customers’ behavior andresponds to changes by offering differentproducts. The firm uses consumer data analysis and algorithms to determine customers’“next best product” according to their changing profiles and to manage risk across cardholders. For example, the first purchase of aupper-class airline ticket on a Gold Card maytrigger an invitation to upgrade to a PlatinumCard. Or, because of changing circumstancesa cardholder may want to give an additionalcard with a specified spending limit to a childor a contractor. By offering this service,American Express extends existing customers’ spending ability to a trusted circle of family members or partners while introducingthe brand to potential new customers.American Express also leverages its strategic position between customers and merchantsto create long-term value across both relationships. For instance, the company might usedemographic data, customer purchase patterns,and credit information to observe that a cardholder has moved into a new home. AmExcapitalizes on that life event by offeringspecial Membership Rewards on purchasesfrom merchants in its network in the homefurnishings retail category.One insurance and financial services company we know of also proved adept at tailoringproducts to customers’ life events. Customerswho lose a spouse, for example, are flaggedfor special attention from a team that offersthem customized products. When a checkingaccount or credit-card customer gets married,she’s a good cross-selling prospect for an autoor home insurance policy and a mortgage.Likewise, the firm targets new empty nesterswith home equity loans or investment products and offers renter’s insurance to graduatingseniors.Reinventing MarketingThese shining examples aside, boards andC-suites still mostly pay lip service to customerpage 3This article is made available to you with compliments of VeraCentra.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
Rethinking Marketing S POTLIGHT ON R EINVENTIONrelationships while focusing intently onselling goods and services. Directors and management need to spearhead the strategy shiftfrom transactions to relationships and createthe culture, structure, and incentives necessary to execute the strategy.What does a customer-cultivating organization look like? Although no company has afully realized customer-focused structure,we can see the features of one in a varietyof companies making the transition. Themost dramatic change will be the marketingdepartment’s reinvention as a “customerdepartment.” The first order of business is toreplace the traditional CMO with a new type ofleader—a chief customer officer.The CCO. Chief customer officers are increasingly common in companies worldwide—there are more than 300 today, up from 30in 2003. Companies as diverse as Chrysler,Hershey’s, Oracle, Samsung, Sears, UnitedAirlines, Sun Microsystems, and Wachovianow have CCOs. But too often the CCO ismerely trying to make a conventional organization more customer-centric. In general, it’s apoorly defined role—which may account forCCOs’ dubious distinction as having the shortest tenure of all C-suite executives.Building RelationshipsProduct-Manager DrivenCustomer-Manager DrivenMany companies still depend onproduct managers and one-way massmarketing to push a product to manycustomers.What’s needed is customer managerswho engage individual customers ornarrow segments in two-way communications, building long-term relationshipsby promoting whichever of the company’s products the customer wouldvalue most at any given time.PRODUCTCUSTOMERCUSTOMERharvard business review january–february 2010PRODUCTTo be effective, the CCO role as we conceive it must be a powerful operationalposition, reporting to the CEO. This executiveis responsible for designing and executingthe firm’s customer relationship strategy andoverseeing all customer-facing functions.A successful CCO promotes a customercentric culture and removes obstacles to theflow of customer information throughoutthe organization. This includes getting leadersto regularly engage with customers. At USAA,top managers spend two or three hours a weekon the call-center phones with customers.This not only shows employees how seriousmanagement is about customer interactionbut helps managers understand customers’concerns. Likewise, Tesco managers spend oneweek a year working in stores and interactingwith customers as part of the Tesco Week inStore (TWIST) program.As managers shift their focus to customers, and customer information increasinglydrives decisions, organizational structuresthat block information flow must be torndown. The reality is that despite large investments in acquiring customer data, mostfirms underutilize what they know. Information is tightly held, often because of a lack oftrust, competition for promotions or resources, and the silo mentality. The CCOmust create incentives that eliminate thesecounterproductive mind-sets.Ultimately, the CCO is accountable for increasing the profitability of the firm’s customers, as measured by metrics such as customerlifetime value (CLV) and customer equityas well as by intermediate indicators, such asword of mouth (or mouse).Customer managers. In the new customerdepartment, customer and segment managers identify customers’ product needs. Brandmanagers, under the customer managers’ direction, then supply the products that fulfillthose needs. This requires shifting resources—principally people and budgets—and authority from product managers to customer managers. (See the sidebar “WhatMakes a Customer Manager?”) This structure is common in the B2B world. In its B2Bactivities, Procter & Gamble, for instance,has key account managers for major retailerslike Wal-Mart. They are less interested inselling, say, Swiffers than in maximizing thevalue of the customer relationship over thepage 4This article is made available to you with compliments of VeraCentra.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
Rethinking Marketing S POTLIGHT ON R EINVENTIONlong term. Some B2C companies use thisstructure as well, foremost among them retail financial institutions that put managersin charge of segments—wealthy customers,college kids, retirees, and so forth—ratherthan products.In a customer-cultivating company, aconsumer-goods segment manager might offercustomers incentives to switch from lessprofitable Brand A to more-profitable Brand B.This wouldn’t happen in the conventionalsystem, where brand and product managerscall the shots. Brand A’s manager isn’t going toencourage customers to defect—even if thatwould benefit the company—because he’srewarded for brand performance, not forimproving CLV or some other long-termcustomer metric. This is no small change:It means that product managers must stopfocusing on maximizing their products’ orbrands’ profits and become responsible forhelping customer and segment managersmaximize theirs.Customer-facing functions. As the nexusof customer-facing activity, the customerdepartment assumes responsibility for someof the customer-focused functions that haveleft the marketing department in recent yearsand some that have not traditionally been partof it.CRM. Customer relationship managementhas been increasingly taken on by companies’IT groups because of the technical capabilityCRM systems require, according to a HarteHanks survey of 300 companies in NorthAmerica: 42% of companies report that CRMis managed by the IT group, 31% by sales, andonly 9% by marketing. Yet CRM is, ultimately, atool for gauging customer needs and behaviors—the new customer department’s central role.It makes little sense for the very data required to execute a customer-cultivationstrategy to be collected and analyzed outsidethe customer department. Of course, bringingCRM into the customer department meansbringing IT and analytic skills in as well.Reimagining the Marketing DepartmentThe traditional marketing department must be reconfigured as a customer department that puts building customer relationships ahead ofpushing specific products.To this end, product managers and customer-focused departments report to a chief customer officer instead of a CMO, and support thestrategies of customer or segment managers.CEOCHIEF CUSTOMEROFFICERCUSTOMER SEGMENTMANAGERSA B CPRODUCT MANAGERSCUSTOMER RELATIONSHIPMANAGEMENTMARKETRESEARCHRESEARCH ANDDEVELOPMENTCUSTOMERSERVICEharvard business review january–february 2010page 5This article is made available to you with compliments of VeraCentra.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
Rethinking Marketing S POTLIGHT ON R EINVENTIONMarket research. The emphasis of market research changes in a customer-centric company.First, the internal users of market researchextend beyond the marketing departmentto all areas of the organization that touchcustomers—including finance (the source ofcustomer payment options) and distribution (the source of delivery timing and service). Second, the scope of analysis shiftsfrom an aggregate view to an individualview of customer activities and value. Third,market research shifts its attention to acquiring the customer input that will driveimprovements in customer-focused metricssuch as CLV and customer equity.Research and development. When a productis more about clever engineering than customer needs, sales can suffer. For example, engineers like to pack lots of features into products, but we know that customers can sufferfrom feature fatigue, which hurts future sales.To make sure that product decisions reflectreal-world needs, the customer must bebrought into the design process. IntegratingR&D and marketing is a good way to do that.Few companies have done this better thanNokia in Asia, where its market share exceeds60%. In an industry where manufacturersmust introduce scores of new offerings everyyear, the group’s ability to translate customerinput about features and value into hit product offerings is legendary. Among its cus-tomer-focused innovation tools is Nokia BetaLabs, a virtual developer community thatbrings users and developer teams together tovirtually prototype new features and products, inviting even “wacky ideas” that maynever make it to the marketplace. (Nokiaadopted a different strategy in the UnitedStates, using far less customer input, and hasseen its market share slide.)Examples abound of companies that createnew value through the collaboration of usersand producers: Mozilla’s Firefox in the webbrowser category, P&G’s Swiffer in the homecleaning category, and International Flavorsand Fragrances’ partnership with B2B customers like Estée Lauder in the perfumemarket. In a world in which the old R&Ddriven models for new product developmentare giving way to creative collaborations likethese, R&D must report to the CCO.Customer service. This function should behandled in-house, under the customer department’s wing—not only to ensure that the quality of service is high but also to help cultivatelong-term relationships. Delta Airlines, forexample, recently pulled out of its call centersoverseas because cultural differences damaged the airline’s ability to interact with NorthAmerican customers. Delta concluded that thenegative impact on the quality of customerrelationships wasn’t worth the cost savings.Now, when customer service gets a call, a rep-What Makes a Customer Manager?In a sense, the role of customer manager isthe ultimate expression of marketing (findout what the customer wants and fulfill theneed) while the product manager is morealigned with the traditional selling mind-set(have product, find customer).Jim Spohrer, the director of Global University Programs at IBM, hires what UCalBerkeley professor Morten Hansen calls “T-shaped” people, who have broad expertisewith depth in some areas. Customer managers will be most effective when they’reT-shaped, combining deep knowledge ofparticular customers or segments with broadknowledge of the firm and its products. Thesemanagers must also be sophisticated datainterpreters, able to extract insights from theincreasing amount of information aboutcustomers’ attitudes and activities acquiredby mining blogs and other customer forums,monitoring online purchasing behavior,tracking retail sales, and using other types ofanalytics. While brand managers may besatisfied with examining the media usagestatistics associated with their product, brandusage behavior, and brand chat in communities, customer managers will take a broaderand more integrative view
Rethinking Marketing by Roland T. Rust, Christine Moorman, and Gaurav Bhalla Included with this full-text Harvard Business Review article: Idea in Brief—the core idea 1 Article Summary 2 Rethinking Marketing Because companies can now interact directly with customers, they must radically reorganize to put cultivating relationships
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