Downstream strategy: The why and the what

A good strategy is central to keeping a company focused and guiding its actions from top to bottom. Aiming to create as wide a gap as possible between a company’s costs and what its customers will pay, the strategy is the intellectual foundation stone for policies, targets and procedures. Yet any strategies evolve over time rather than being designed, and they are seldom properly evaluated.

The time has come when all companies need to look carefully at their strategies. Modern companies live and die by their brands. Customers, whether other businesses or individual consumers, are buying into a whole package of product, image, and relationship with the company when they decide to engage from a purchase transaction perspective.  It’s at the downstream end of the business, where customers and marketing interact, that success or failure happens.

Yet marketing, the mechanism by which we control that downstream activity, is often peripheral to the way business is planned and run. The most essential part of the chain of business activity is treated as something tagged on at the end.

Niraj Dawar has made a case for the need for companies to integrate marketing into their strategic thinking, to build their whole approach around it. But building strategy around marketing brings out what David Hood describes as the core dilemma of marketing – whether you are putting the organization first or its customers. Why is this approach so important?

Why create a more downstream oriented strategy?

Bradley, Dawson and Smit have shown that for most companies the battle for success is one of small increments. Every advantage must be pressed if a company is to become a business leader, or to maintain that position in the face of competition.

Yet according to Dawar we still see high levels of failure in new product launches, caused by companies focusing too much on the product that they want to unveil and not enough on what customers want. They are focused on the upstream processes of production and delivery, not the end of their value stream.

So why do companies who focus downstream do so much better?

Building links

Customer choices and loyalty are increasingly determined by the circumstances of consumption, pulling the focus of business away from production and into the marketplace. This means that businesses need to focus on what they can do relative to customers’ specific concerns, not just what they can do for themselves or compared with competitors.

As Dawar has explained, in these circumstances the main sources of competitive advantage lie not in a company but in the external elements with which it interacts – both individual customers and the wider patterns of the market. External links with customers, partners and other parts of the value chain give a company its edge downstream, near the real bustle of the consumer market.

Succeeding in this area relies on gathering information on and from customers. Understanding what engages customers becomes more important than improvements in products for building the right strategy, even if the two are not entirely separate. A mediocre product successfully taken to market will triumph over a good product customers remain disinterested in, and strategy must be built around this insight.

Profit has become about selling the whole package, not just the central object or service. This is demonstrated by the success Hyundai achieved during the economic downturn not through innovating on their cars but through innovating on their finance. The product itself is still important, and makes the brand’s promise into a reality, but it is no more important than communication or distribution.

But this is about more than just data gathering or putting out adverts. As Hood says, ‘brand management is interface management’.

Sustainable improvement

Aside from the growing power of consumers, making downstream activities central to your strategy brings other advantages. Building links with your customers encourages loyalty, which creates repeat business. This means that downstream competitive advantage is not eroded as competitors catch up, but grows as a brand is developed and customer relationships strengthened.

By changing the tone of conversation in the marketplace, marketing creates the sense of acceptance that can give innovative products success. They help to carry your grand dreams to reality, and pave the way for sustainable success in product launches.

Building in the brand

It is not enough to plaster an appealing brand across an old-fashioned way of working. The cracks will show and affect the way customers view your products. Aligning the brand and corporate practices allows the sort of success that came to Apple by making simplicity not just a marketing feature but a driving method and philosophy of their business. By building the tone they wanted downstream into the very core of their business they ensured that every activity supported a consistent, authentic presentation to the market, and with it came huge success.

Three approaches

There are three main tactics in downstream planning which can be used separately or in combination. These approaches are:

  • Shaping customer desires
  • Understanding customer desires
  • Choosing your competition.

We’ll now look at each one in turn.

Shaping customer desires

The approach

Many companies are gaining an advantage by shaping customer preferences and demands, trying to control the nature of the market they encounter downstream. By setting the criteria for brand choice companies such as Nike and Lilly Icos define how customers understand and interact with the market. It’s how Cialis surpassed Viagra to dominate the market for erectile dysfunction pills, making customer choices about duration rather than efficacy, and how Apple continue to lead the mobile device market.

In understanding how this control works it’s helpful to think in terms of French philosopher Michel Foucault’s model of power. Rather than an outside influence, the power of companies over people comes from those people internalizing the power relationship. They see the products as important and so buy them. In this situation, the role of the company is to create that power dynamic by influencing the taste of consumers.

This makes for a top-down approach to downstream business, in which strategy revolves around influencing the purchase criteria of customers.

Advantages

The potential success of this approach can be seen in the rise of Facebook. The leading social networking site achieved its current position by persuading Internet users that they wanted to participate in its social platform. It now provides games, apps and features that they might not otherwise want but which become appealing through their presence on Facebook, thus keeping them using the site. Though backed up by a more coercive power mechanism in the way that data cannot be transferred off its site, the core of Facebook’s strategy lies in shaping the downstream market.

The advantage of this approach is that you don’t need to worry about every innovation from a competitor, just those that might change customers’ criteria for choice and so reshape the market in a way you don’t want. It allows companies to build strategies around their existing strengths, identified by Broughton as one of the steps to strategic success.

This is the approach implicitly advocated by Steve Jobs in his dismissal of focus groups as a part of design. He held the belief that people didn’t know what they wanted until they were offered it, and so companies should try to create a product with integrity and then sell it, rather than creating something soulless by trying to please everyone.

It allows a company to focus on itself, and so is more in keeping with old-style upstream strategies.

Disadvantages

This sort of strategy relies heavily on having special capabilities or resources that competitors don’t and making customers want those unique things. Without this, it’s hard for a company to shape the market in a way that works better for them than their competitors.

The very presence of smart competitors also creates a problem for this sort of strategy. If several companies are all trying to pull the market in different directions then the best they can achieve is to fragment it, giving each of them a small, separate slice, and in the worst case scenario they may foster an in-between situation that suits none of them.

This approach can also fall down if customers are not responsive to the shape of market you want. Sony’s attempt to shape customer needs by selling the PlayStation 3 as an all-round entertainment system became a setback for them in the console marketplace, as that was not what console customers wanted at the time.

But Hood points out a further problem with this sort of strategy. Trying to control communications, to exert a strong influence over what customers want, often alienates customers, especially the innovators and taste shapers. It’s a problem that the next approach, that of understanding the customer, helps to move away from.

Understanding customer desires

Whereas the first approach is about controlling your customers, this sort of strategy is about understanding them.

The importance of understanding customer preferences and building them into your strategy is shown by the case of Wikileaks. Having previously released information with little impact, they realized that the public wanted more than just data in a crowded informational space – they wanted data legitimized as knowledge by major news sources. Wikileaks started working with the Guardian and New York Times, organizations further down the value stream of information consumption, to give this to the customer, and so became a global phenomenon.

Building a successful strategy around this sort of downstream approach involves providing marketers with accurate real-time data and the powerful tools of predictive analytics, so that the process can be proactive rather than reactive. By finding ways for information from customers and market patterns to swiftly flow back up the value chain, and for that value chain to respond to it, you can achieve an incredible degree of flexibility. But this involves viewing the customer in a different way, as an agent to work with in the process rather than an adversary to overwhelm with your influencing powers.

Not just about questions

Though surveys and feedback have their place in this process, it’s about much more. A truly downstream strategy will tap into unconscious desires and turn ordinary business processes into feedback mechanisms.

The fashion retailer Zara achieves this through a lean approach, only stocking small numbers of products for short periods, changing what is available in response to what customers actually buy. They don’t even have to ask what customers want – the customer feedback is built into the system.

Hood advocates taking this even further, creating customer-pulled digital marketing delivery, feeding customers new marketing according to what they have already responded to, building the feedback mechanism into the marketing process.

Big analytics can also be very important. Customer desires can be unconscious, or real priorities not be raised by those asking about the market. Explosives company Orica realized this when it successfully moved from competing on cost and efficacy to focusing on safety and certainty, and it’s reflected in unexpected connections, like links between drivers’ car choices and what they consider the best days of their lives.

Big analytics, looking at broad patterns of data, can spot these unconscious trends and allow strategy to be built around unexpressed market desires. This sort of analysis can also allow companies to look into the future, planning a forward-looking strategy using predictive analytics.

Advantages

One of the seven key building blocks of strategy identified by Bradley, Dawson and Montard is evolution, adapting and learning from what has happened. Without learning from its customers a business can never successfully adapt to their requirements, making some aspects of this approach absolutely fundamental to strategic thinking.

This is reflected in work by Bradley, Hirt and Smit who found that companies who understand their customers’ world view develop better strategies. They also found that the adaptive nature of these responsive strategies created the flexibility for companies to commit their resources in the most advantageous time and place.

Disadvantages

The biggest problem in fully embodying this approach is an internal one to organizations – what Broughton identifies as the ‘not invented here’ mentality. Many people will see ideas that come from outside as less valid than those they invent themselves, and this applies equally to the group thinking of companies. But hard as it might be, learning to throw off this mindset can help improve internal relationships within a company as well as relationships with the market.

Choosing your competition

Successful strategy isn’t just about winning your battles; it’s about picking which battles to fight. We’re used to thinking of our competitors as a set group in the same field, but by building a strategy around the downstream consideration of who your customers are you can position your product to compete against different companies.

Case one: mobile phones

Mobile phones are a great example of how this looks in practice. To a certain extent the handset companies are all competing with each other. But focusing on that competition isn’t how they succeed. Nokia and HTC focus on their phones’ role as digital cameras, competing for the attention of those keen to take photographs. The Blackberry is positioned as a business tool, competing for the budgets of businesses and restless executives. Sony increasingly leans on their place as a gaming system, while Apple focuses on music.

These are more than just unique selling points. They put them in competition with other products, so that consumers see their value relative to their products, not just each other. It’s like putting a can of mid-priced organic beans on an organic shelf instead of one for beans in the supermarket – suddenly that product is competing to be the cheap option for feeling virtuous rather than the expensive way of eating beans.

Advantages

Bradley, Hirt and Smith have found that successful strategies emphasize what’s different about a company or product, and that’s what this approach is built on. With 80% of the difference in financial growth coming from where a company competes rather than how it competes, this positioning approach has the potential for the biggest wins.

Disadvantages

Wherever you move your focus to, you can’t prevent competitors moving onto your turf and choosing to compete with you. If your strategy relies on this approach then you’ll need to keep an eye out for competitors moving into the same zone as you. But at least this will give you the home ground advantage, having established yourself in the niche, gathered information, built reputation and created a position from which you can define what that market is about.

Case two: games consoles

As Frick has shown, other competition moving in is a big challenge for games console manufacturers, whose stiffest competition increasingly comes from mobile games and cloud-based gaming. Their attempts to retain control within their niche by obstructing cloud gaming, and so maintaining an entrance barrier to their market, are leaving them vulnerable to different sorts of competitors who choose to compete for the same customers on the terms that those customers want.

No company can afford to ignore this sort of strategy. You may not be using it, but it’s where your next competitors will come from.

Looking at the cat

Any attempt to deal with the market has an element of Schrödinger’s cat to it. By looking at the market and responding to it with a strategy you once again change the market. This is part of why planning your strategy around downstream functions is so important. It lets you readily adapt to the changes that you yourself create.

A new media venture by Glenn Greenwald, a leading figure in the Edward Snowden leaks, is a good example. Described by Henry Farrell in the Washington Post, it shows the way that consumer demand is undermining old modes of control, with public knowledge shifting outside the control of governments and established news outlets to which they have ties. This is just one high profile example of control giving way to consumer demand, of providers exhibiting flexibility to maintain their market space and consumers responding by demanding more flexibility.

 A downstream future

This shift downstream involves making use of customers’ desires for reduced costs and risks. It means that for companies to succeed they must give some financial ground to the customer in order to stay ahead of similar businesses, however they chose their competitors. This involves a change of mindset in which the customer is no longer treated as the competition, with the aim of squeezing as much money from them as each one can give, but instead cooperating with the customer, treating them as part of your value stream, in order to out compete other businesses.

Hood’s solution to the marketer’s dilemma of serving customers or the organization is to take a more strategic, process-based approach to marketing, and this fits with Dawar’s vision of marketing-focused strategy. By combining the two, shifting the focus and locus of control outside of the organization, a business can achieve great things.

Building strategy around marketing and brand allows innovations such as Nike’s GreenXChange, in which the trainer company openly shares insight into materials with other organizations, giving up some technical ground in exchange for improving its whole brand image. This would not be possible in a more product and production focused company.

But some approaches to downstream strategy work better than others. Fruk, Hall and Mittal have shown that organizations with the flexibility to reorganize quickly have substantially higher returns and a much better survival rate. Defining the market might seem like a strong approach but it lacks flexibility. Understanding and responding to the market, building this aspect of marketing into the core of your strategy, builds the intelligent flexibility needed not just to survive but also to flourish.

This is about changing more than just the focus of your business. It involves shifting the whole culture of the organization, to ensure a coherent approach and integrity in the eyes of customers. As Power has shown, using cultural change as a driver for business improvement, rather than a result of it, involves a big shift in thinking but can reap fast results. And it’s that sort of big shift that will create the flexible, downstream focused companies of tomorrow.

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