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The way a company responds to demands for customized products or services can make the difference between performance that leads a sector and performance that lags that of industry peers.
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| Consulting-Times E-zine
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Companies that create value by customizing while also managing the added costs it imposes outperform their competition two-to-one in revenue growth, and have profit margins five to ten percent above competitors, according to a new study by management consulting firm Booz Allen Hamilton.
These findings fly in the face of the striking customer popularity and financial success of companies such as Southwest Airlines, Nucor Steel and Commerce Bank, which has led many to proclaim that focus is the one and only way to fend off competitors and achieve above-average shareholder returns. In fact, the opposite is true – inevitably, a narrow market becomes saturated, which sharply limits growth. Booz Allen's research found that companies that effectively customize are more likely to generate superior returns than those that do not.
The study found that higher-performing companies understand four key lessons:
— You don't have to be focused to outperform your peers.
Successful companies take an approach that Booz Allen describes as “Smart Customization” – improving their performance by effectively defining customer needs, offering the right level of customization of products and services, and tailoring delivery to provide the greatest value at the lowest cost to serve customers.
“Focus is not the only answer,” said Booz Allen Vice President Les Moeller. “Adding customization smartly is the key. Two-thirds of those who try typically fail, but those who can get it right stand to achieve great results.”
— Companies improve performance by effectively separating customers into segments, understanding what each segment values most and offering the right mix of products and services to the right segments.
Although Smart Customization seems like common sense, the study revealed that comparatively few companies are successfully balancing the value of customization with the cost of complexity. However, by focusing simultaneously on strategies that create value for customers and align delivery approaches, Smart Customizers outperformed their industry peers by a 2-to-1 revenue ratio and had profit margins 5% to 10% above those of competitors.
— You can more effectively control costs by making as much of the delivery system as standardized as possible and ONLY adding increased complexity in an intelligent way.
Most customization programs that fail are either too focused on growth at the expense of margin, or overly concerned with cost reduction without also emphasizing revenue growth. Booz Allen found that most companies don't target customer needs well enough to provide products and services that are “order winners” – offerings that set one company apart from another.
— You must relentlessly measure growth and profitability of your activities.
The study's authors designed the Booz Allen Smart Customization Index to measure how companies are handling the increased demand for customization, and to quantify its value in driving profitable growth. This diagnostic tool uses 36 best-practice criteria in customization's two component dimensions: 1) customer value creation; and 2) delivery alignment between cost drivers and account value. Booz Allen found a very strong fit between a company's score and its revenue growth and profit margins compared to peers.
For those companies who make the effort needed to get it right, the payoff of Smart Customization is substantial: they can increase their enterprise value by up to four times.
The mobile telecommunications industry provides a good example of how customization can result in a profit draining “arms race” among companies. Most carriers offer consumers and businesses a seemingly infinite number of calling plans, along with new programs, rebates and free minutes to keep up with rivals. At the same time, however, operating margins for publicly traded wireless carriers in the U.S. fell from an average of 10 percent in 2000 to -13 percent in 2002.
“The rising demand for customized products and services offers a road to growth for many companies,” said Moeller. “How companies respond to this demand will separate industry leaders from the also-rans.”
The Booz Allen study examined business units with sales from $1 billion to more than $20 billion at 50 companies split evenly between North America and Europe, in industries including consumer goods, chemicals, telecommunications, media and financial services. The companies in this cross-industry, 50-company sample were then compared to their industry peers, a total universe of 600 companies in 15 sectors.
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