‘There is only one valid definition of business purpose: to create a customer…. Because its purpose is to create a customer, the business enterprise has two—and only these two—basic functions: marketing and innovation.’ — Peter Drucker
Peter Drucker’s words are frequently used – and perhaps over-used – to justify a business focus on the customer. While characteristically direct and insightful, Drucker’s approach to customers and more generally to business and management was hardly one-dimensional. His core thinking, in fact, turns on a vital and ongoing interaction between customer and business that is today often understated.
A Necessary Corrective
We might start from the simplified view that many firms traditionally neglected a fuller understanding of customers, their wants, needs and situations. That firm-centric approach had too many businesses instead looking largely or even exclusively at their own capabilities and priorities as the basis for competing successfully with other firms in given industries or markets. Setting strategy and brand, designing processes and operations, hiring and developing talent, and fixing and growing financial targets were largely outgrowths of a guiding internal vision intended to achieve greater market share. The resulting ‘inside-out’ approach had leaders and firms optimizing their resources and pursuing efficiencies and innovations in the belief that customers (clients of B2B enterprises) and markets would respond. To take a familiar historical example, the engineering culture of mid-century IBM celebrated its own technical achievements as a basis of continuing growth and left customer or client service as a secondary priority.
More recently, an ‘outside-in’ approach has gained prominence. User-, customer- and client-informed or -driven processes increasingly shape product and service design and business model innovation. For entrepreneurs and established firms alike, the changed perspective on designing, developing and delivering better products and services has been transformative. At the heart of the change are the customer’s needs and ‘jobs to be done’. In ‘Who Do You Want Your Customers to Become?’, MIT’s Michael Schrage illuminates a century of far-reaching innovations, including Henry Ford’s automobile, Sam Walton’s Walmart, George Eastman’s Kodak, and even Sergey Brin and Larry Page’s search algorithm. ‘Long-term innovation success doesn’t revolve around what innovations “do,”’ Shrage observes, ‘it centers on what they invite customers to become. Successful companies have a “vision of the customer future” that matters every bit as much as their vision of their products.’
As a long overdue corrective to the often single-minded approach of established businesses that presumed to define what their customers want, adopting a customer-centric view provides an invaluable re-orientation. Of course, some areas and approaches to creative problem solving and strategic development arguably benefit less from that perspective than others. For example, many in brand communications would claim that creative content development does not benefit from customer-driven or co-creation in the same way as products. Yet overall, the outside-in perspective represents a profound change that has enabled many businesses to be more innovative by better understanding and creating value for customers.
Translation and Fit
Building on his words about ‘business purpose’ in Management: Tasks, Responsibilities, Practices, Drucker affirms that ‘any serious attempt to state “what our business is” must start with the customer, and her realities, situation, behavior, expectations, and values.’ Yet he then observes that such a ‘basic definition of the business and of its purpose and mission have to be translated into objectives.’ These are the bases for key activities, decisions, capital and other resource allocations, and the structure of the firm itself. Without them, the understanding of the customer remains only ‘insight, good intentions, and brilliant epigrams that never become achievement.’ In other words, any insights drawn from adopting an outside-in, customer-informed view need to be set in the context of a business, with its particular resources and capabilities, if anything productive is to be made from them.
For Alex Osterwalder, who helped popularize the business model canvas, translation involves the connection or ‘fit’ between observed customer needs and the designed value offer that enables business success. He has observed that the most common mistake people make in designing products and services that people really want is to fail to see how customer needs and the firm’s value offer are two separate but vital ‘building blocks’ of the value proposition. Put more broadly in assembling elements of the business model canvas, Osterwalder calls for reconciling the desirability of a product or service, the feasibility of a firm to bringing it to market, and the viability of maintaining those operations. The often heady rush to identify novel opportunities that are desirable to customers is too infrequently accompanied by rigorous attention to the operational, strategic, and especially financial realities of re-casting the business models needed to deliver them.
It is the practical question of how to enable and sustain the translation or fit generated by analyses that proves most difficult for businesses and their leaders to answer and act upon. Charles O’Reilly and Michael Tushman’s continuing research on ambidextrous leadership offers one proven approach. In Lead and Disrupt, they show how executives can work successfully at the intersection of traditional internal task-development and problem-solving and of increasingly external communities that can drive co-creation. Among the implications of re-thinking how to integrate digitalization, sharing, and platform economies is the advantage accruing to organizations with increasingly fluid boundaries. Here again, the customer-driven view is necessary but not sufficient for the complex analyses and agile decision-making needed to generate business value.
An anecdote nearly as familiar as Drucker’s epigram above celebrates Henry Ford’s entrepreneurial understanding of the customer. If Ford had asked what prospective customers of the early 1900s wanted, the saying goes, their answer would have been ‘a faster horse’ for their buggies. A variation on the quip that emphasizes the need for effective marketing is that the customer’s further response to Ford’s offer could have been, ‘What’s an automobile?’ However, the more important and neglected lesson for many creative business leaders is the innovative breakthrough that allowed Ford to move beyond the product insight he shared with literally dozens of other contemporary and would-be automakers. Unlike his fellow early inventors, Ford produced an affordable automobile for an emerging mass market (rather than higher-priced, luxury vehicles) through the innovation of the assembly line. That breakthrough aligned the (human and process) resources and objectives of his business with potential customers and created one of the century’s great markets.
The challenge for many firms today is digital business transformation. How to integrate and leverage new data and insights? How to incorporate new digitally enhanced products and services? While change projects seeking to do both often start with the digital customer experience, they often fail in dedicating sufficient time to developing the corresponding aspects of what Forrester calls ‘digital operational excellence’. Joining together customer experience and operational activities can drive innovations ranging from brand communities and payment platforms to internal budgeting and on-demand learning. In a related summary of the transformations required to build ‘the future of intelligent enterprise’, digital strategist Vala Afshar cited ‘business agility’, ‘data-driven decision making’, and ‘customer-centricity’ (in that order). Those changes ultimately require leaders whose priorities and capabilities turn on discernment, values, and openness.
Drucker had it right: well-led businesses don’t find or discover customers fully formed and position them centrally – they create them. ‘The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself,’ he wrote. Of course, customers are essential to a business and the starting points to understanding their purpose and defining their objectives. Yet identifying opportunities with or for customers is only part of an ongoing process. Going forward, neither the customer nor the business is always and everywhere central to analyses, decision-making or other activities. Rather, it is situation-centricity that more flexibly and fully embraces customers and employees, opportunities and enterprises, resources and purpose. Part of the hard work of leadership is to avoid fixing on any one center – even customers – and, instead, to assess and respond to specific, dynamic situations in order to continue creating value and delivering on purpose.