Outside-in analysis: customer view as strategy input

On the basis of modern systems theory, transformis understands organisations as highly complex social communication systems. Their basic element is communication, and the most important communicative event is the decision. Organisations are operationally closed and self-referential. They cannot be changed from outside and pursue one goal: to survive.

To remain capable of acting, organisations have to reduce complexity. They select which environments are relevant to them, such as customers, competitors, suppliers, employees or banks, and develop their own frames of observation and evaluation for them. The established routines for dealing with external impulses pick out those impulses that confirm the internal images of the environments. Deviating impulses are filtered out.

An organisation sees what it sees, and as a rule it does not see that it does not see what it does not see. Economic history knows many misjudgements that go back to this organisational blindness: established providers underestimated new competitors or noticed changes in their customers’ buying behaviour too late.

In transformis’s understanding, strategy is a joint leadership achievement. It develops a perspective for the future, defines the strategic positioning in the market and translates both into a strategy map with effectiveness monitoring. The strategy process follows the basic mechanisms of self-renewal: variation, selection and re-stabilisation.

Outside-in analysis belongs in the first phase. When determining the starting situation, the organisation generates information and deliberately allows itself to be irritated from outside. What is fed in are trends and market developments, market segments and their attractiveness, customer segments with threshold values and potential, the competition and the company’s own core competencies. Sources are customers, experts and employees. From this emerge challenges, key questions and strategic options.

This is linked to questions about the organisation’s own observation. Which topics need to be observed, and on what basis is this selection made? How can the significance of trends be assessed, and how can a critical mass be recognised? What routines and structures are needed to organise and process irritation?

An outside-in process arises from a new look at markets and customer segments. Arnoldo C. Hax of MIT found a pointed formula for this: products can be a commodity, but a business never. What needs to be clarified is in which markets a company wants to operate, which target customer segments it focuses on and what value it offers these customers in order to stand out from the competition.

The customer view requires a deep understanding of customers’ logic and needs, close networking with them and clear priorities among the strategically relevant target customer segments. The benefit lies in fully recognising customer needs and customer potential, exploiting the company’s own performance potential, reducing its own interchangeability and better positioning its own value contribution.

The concept of the customer should not be defined too narrowly. The starting point is therefore the industry value chain: which stages and which players are there, how do they interact, who sets the pace, and what position does the company itself occupy in relation to that player?

Many companies segment their customers from the inside view: by size, turnover, profit or region. Outside-in analysis changes the perspective. The distinguishing criteria are now customers’ needs, behaviours, bottlenecks, expectations and other characteristics. Market segmentation and customer segmentation must be kept apart.

transformis describes this step as observing observation. In everyday business, an organisation looks at its customers through its lens, the observation frame of customer segmentation. In the analysis, it turns its gaze to the lens itself and checks whether the points of observation and evaluation still fit the management of the business.

Using the defined criteria, customers are characterised and grouped into clusters whose particular nature has to be worked out clearly. Sometimes no clusters emerge, only significant individual customers. A common mistake becomes visible in this step: customers with completely different needs receive an identical offering.

The core value expectations are determined for each customer segment. transformis uses seven value criteria for this: product and service portfolio, time, price, quality, service, relationship and brand. The product alone is not sufficient as a yardstick.

There are guiding questions for each criterion. The time criterion concerns the time spans that are particularly relevant for the segment when using the service. For quality, what counts are the critical aspects of quality, keeping the performance promise and the handling of deviations. For the relationship criterion, the interest lies in the intensity and variety of contact options and in customer care.

For each segment, the answers are divided into basic expectations and additional expectations. This produces a profile that shows what a segment takes for granted and what can additionally win it over.

The value expectations and offerings worked out by the management group initially remain the company’s own assessment. It is therefore checked with current and potential customers. transformis uses a tailor-made online platform for this. It is designed to take up little of respondents’ time, allows an unlimited number of participants and permits a differentiated evaluation by customer segment and region. Threshold values and value creation potential can thus be determined in detail.

In the evaluation, the company’s own assessment is set against customer feedback, criterion by criterion. The points at which the two diverge are revealing. Feeding in valid data on the views of customers and external stakeholders is often accompanied by a massive process of irritation. This is used deliberately to attack organisational blindness, so that risks and growth opportunities are recognised early and brought into the strategy discussion.

Before offerings are developed, a generic strategy is chosen for each target customer segment. Drawing on Hax, Kaplan/Norton, Treacy/Wiersema and Porter, transformis distinguishes cost leadership, product leadership, price-value strategy and customer intimacy, plus system lock-in as a special case. The basis is an analysis of core competencies as defined by Prahalad and Hamel: they must create customer value, differentiate from the competition and be transferable to other fields of business.

The value proposition is the unique and precisely fitting combination of value criteria. The generic strategy sets the focus of differentiation. In all other criteria, the offering must meet a threshold value that results from the minimum requirements of the segment in question.

If the threshold value is not met, the customer is dissatisfied or ends the business relationship. If it is set too high, resources are wasted because the customer sees no added value in the additional service, and the strategic focus loses clarity. Threshold values differ from segment to segment and do not mean a low level of performance.

With the results, management makes selection decisions. Focus target customers are the segments on which the company deliberately concentrates and for which it provides resources. Incidental target customers can be served without any particular additional effort. Other segments are deliberately no longer served, for example because they are permanently loss-making or greatly increase internal complexity.

The strategy map, based on Kaplan/Norton, connects the outside view and the inside view. The value proposition in the customer perspective determines what is needed in the internal process perspective and in the learning and growth perspective to achieve the goals of the financial perspective.

This is followed by the question of an organisational architecture segmented by customer. What needs to be clarified is which elements require a differentiated alignment with customer segments and generic strategies, and which can be organised uniformly for reasons of efficiency. During implementation, impact and measures monitoring continuously observes whether the agreed measures are working.