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In the case of new-market footholds, disrupters create a market where none existed. Put simply, they find a way to turn nonconsumers into consumers. For example, in the early days of photocopying technology, Xerox targeted large corporations and charged high prices in order to provide the performance that those customers required.
School librarians, bowling-league operators, and other small customers, priced out of the market, made do with carbon paper or mimeograph machines. Then in the late s, new challengers introduced personal copiers, offering an affordable solution to individuals and small organizations—and a new market was created. From this relatively modest beginning, personal photocopier makers gradually built a major position in the mainstream photocopier market that Xerox valued.
A disruptive innovation, by definition, starts from one of those two footholds. But Uber did not originate in either one. It is difficult to claim that the company found a low-end opportunity: That would have meant taxi service providers had overshot the needs of a material number of customers by making cabs too plentiful, too easy to use, and too clean.
But disrupters start by appealing to low-end or unserved consumers and then migrate to the mainstream market. Uber has gone in exactly the opposite direction: building a position in the mainstream market first and subsequently appealing to historically overlooked segments. These improvements can be incremental advances or major breakthroughs, but they all enable firms to sell more products to their most profitable customers.
Typically, customers are not willing to switch to the new offering merely because it is less expensive. Instead, they wait until its quality rises enough to satisfy them. This is how disruption drives prices down in a market. Booking a ride requires just a few taps on a smartphone; payment is cashless and convenient; and passengers can rate their rides afterward, which helps ensure high standards. Furthermore, Uber delivers service reliably and punctually, and its pricing is usually competitive with or lower than that of established taxi services.
And as is typical when incumbents face threats from sustaining innovations, many of the taxi companies are motivated to respond. Applying the theory correctly is essential to realizing its benefits. For example, small competitors that nibble away at the periphery of your business very likely should be ignored—unless they are on a disruptive trajectory, in which case they are a potentially mortal threat.
And both of these challenges are fundamentally different from efforts by competitors to woo your bread-and-butter customers. As the example of Uber shows, identifying true disruptive innovation is tricky. Yet even executives with a good understanding of disruption theory tend to forget some of its subtler aspects when making strategic decisions. Disruption is a process. The first minicomputers were disruptive not merely because they were low-end upstarts when they appeared on the scene, nor because they were later heralded as superior to mainframes in many markets; they were disruptive by virtue of the path they followed from the fringe to the mainstream.
Most every innovation—disruptive or not—begins life as a small-scale experiment. Disrupters tend to focus on getting the business model, rather than merely the product, just right.
This process can take time, and incumbents can get quite creative in the defense of their established franchises. For example, more than 50 years after the first discount department store was opened, mainstream retail companies still operate their traditional department-store formats.
Complete substitution, if it comes at all, may take decades, because the incremental profit from staying with the old model for one more year trumps proposals to write off the assets in one stroke. This strategy may be more challenging for firms whose distribution channels own or control customer information—as is the case for many packaged-goods companies.
But more and more firms now have access to the rich data they need to make a customer-cultivating strategy work. Many companies still depend on product managers and one-way mass marketing to push a product to many customers. IBM organizes according to customer needs, such as energy efficiency or server consolidation, and coordinates its marketing efforts across products for a particular customer.
Large B2B firms are often advanced in their customer orientation, and some B2C companies are making notable progress. Increasingly, they view their customer relationships as evolving over time, and they may hand off customers to different parts of the organization selling different brands as their needs change.
For instance, Tesco, a leading UK retailer, has recently made significant investments in analytics that have improved customer retention. Tesco uses its data-collecting loyalty card the Clubcard to track which stores customers visit, what they download, and how they pay. This information has helped Tesco tailor merchandise to local tastes and customize offerings at the individual level across a variety of store formats—from sprawling hypermarts to neighborhood shops. Shoppers who download diapers for the first time at a Tesco store, for example, receive coupons by mail not only for baby wipes and toys but also for beer, according to a Wall Street Journal report.
For example, the first download of a upper-class airline ticket on a Gold Card may trigger an invitation to upgrade to a Platinum Card. Or, because of changing circumstances a cardholder may want to give an additional card with a specified spending limit to a child or a contractor. American Express also leverages its strategic position between customers and merchants to create long-term value across both relationships.
For instance, the company might use demographic data, customer download patterns, and credit information to observe that a cardholder has moved into a new home. AmEx capitalizes on that life event by offering special Membership Rewards on downloads from merchants in its network in the home-furnishings retail category.
Customers who lose a spouse, for example, are flagged for special attention from a team that offers them customized products. These shining examples aside, boards and C-suites still mostly pay lip service to customer relationships while focusing intently on selling goods and services. Directors and management need to spearhead the strategy shift from transactions to relationships and create the culture, structure, and incentives necessary to execute the strategy.
What does a customer-cultivating organization look like? Although no company has a fully realized customer-focused structure, we can see the features of one in a variety of companies making the transition. The traditional marketing department must be reconfigured as a customer department that puts building customer relationships ahead of pushing specific products.
To this end, product managers and customer-focused departments report to a chief customer officer instead of a CMO, and support the strategies of customer or segment managers. Chief customer officers are increasingly common in companies worldwide—there are more than today, up from 30 in But too often the CCO is merely trying to make a conventional organization more customer-centric.
A successful CCO promotes a customer-centric culture and removes obstacles to the flow of customer information throughout the organization. This includes getting leaders to regularly engage with customers. At USAA, top managers spend two or three hours a week on the call-center phones with customers. As managers shift their focus to customers, and customer information increasingly drives decisions, organizational structures that block information flow must be torn down.
The reality is that despite large investments in acquiring customer data, most firms underutilize what they know. Information is tightly held, often because of a lack of trust, competition for promotions or resources, and the silo mentality. The CCO must create incentives that eliminate these counterproductive mind-sets.
Despite large investments in acquiring customer data, most firms underutilize what they know. The CCO removes obstacles to the flow of customer information. This requires shifting resources—principally people and budgets—and authority from product managers to customer managers. They are less interested in selling, say, Swiffers than in maximizing the value of the customer relationship over the long term.
Each style has advantages and disadvantages, and no style is inherently better than another. An organizational culture can be defined by the absolute and relative strengths of each of the eight and by the degree of employee agreement about which styles characterize the organization. Integrated Culture: The Framework On the basis of decades of experience analyzing organizations, executives, and employees, we developed a rigorous, comprehensive model to identify the key attributes of both group culture and individual leadership styles.
Eight characteristics emerge when we map cultures along two dimensions: how people interact independence to interdependence and their response to change flexibility to stability. The relative salience of these eight styles differs across organizations, though nearly all are strongly characterized by results and caring.
The spatial relationships are important. Proximate styles, such as safety and order, or learning and enjoyment, will coexist more easily than styles that are far apart on the chart, such as authority and purpose, or safety and learning.
Achieving a culture of authority often means gaining the advantages and living with the disadvantages of that culture but missing out on the advantages and avoiding the disadvantages of a culture of purpose. Although each style can be beneficial, natural constraints and competing demands force difficult choices about which values to emphasize and how people are expected to behave. It is common to find organizations with cultures that emphasize both results and caring, but this combination can be confusing to employees.
Are they expected to optimize individual goals and strive for outcomes at all costs, or should they work as a team and emphasize collaboration and shared success? The nature of the work itself, the business strategy, or the design of the organization may make it difficult for employees to be equally results focused and caring.
In contrast, a culture that emphasizes caring and order encourages a work environment in which teamwork, trust, and respect are paramount. The two styles are mutually reinforcing, which can be beneficial but can also present challenges. The benefits are strong loyalty, retention of talent, lack of conflict, and high levels of engagement. Savvy leaders make use of existing cultural strengths and have a nuanced understanding of how to initiate change. Integrated Culture: Leader Statements Top leaders and founders often express cultural sentiments within the public domain, either intentionally or unintentionally.
Having a deeper, more transcendent purpose is highly energizing for all of the various interdependent stakeholders. And when we are setting the rules for the securities markets, there are many rules we, the SEC, must follow. In the battle with lions, wolves have terrifying abilities. With a strong desire to win and no fear of losing, they stick to the goal firmly, making the lions exhausted in every possible way. We have arrived at the following insights: When aligned with strategy and leadership, a strong culture drives positive organizational outcomes.
Consider the case of a best-in-class retailer headquartered in the United States. The company had viewed its first priority as providing top-notch customer service. It accomplished this with a simple rule—Do right by the customer—that encouraged employees to use their judgment when providing service.
In measuring the culture of this company, we found that like many other large retailers, it was characterized primarily by a combination of results and caring. Unlike many other retailers, however, it had a culture that was also very flexible, learning oriented, and focused on purpose.
As the retailer expanded into new segments and geographies over the years, the leadership strove to maintain an intense customer focus without diluting its cherished culture.
Although the company had historically focused on developing leaders from within—who were natural culture carriers—recruiting outsiders became necessary as it grew. The company preserved its culture through this change by carefully assessing new leaders and designing an onboarding process that reinforced core values and norms.
Culture is a powerful differentiator for this company because it is strongly aligned with strategy and leadership.
Delivering outstanding customer service requires a culture and a mindset that emphasize achievement, impeccable service, and problem solving through autonomy and inventiveness. Not surprisingly, those qualities have led to a variety of positive outcomes for the company, including robust growth and international expansion, numerous customer service awards, and frequent appearances on lists of the best companies to work for.
Selecting or developing leaders for the future requires a forward-looking strategy and culture. The chief executive of an agriculture business was planning to retire, spurring rumors about a hostile takeover.
The CEO was actively grooming a successor, an insider who had been with the company for more than 20 years. Our analysis revealed an organizational culture that strongly emphasized caring and purpose.
Given the takeover rumors, top leaders and managers told the CEO that they believed the company needed to take a more aggressive and action-oriented stance in the future. The board decided to consider the internal candidate alongside people from outside the company. Cultural dynamics are a frequently overlooked factor in postmerger performance. Three external candidates emerged: one who was aligned with the current culture purpose , one who would be a risk taker and innovative learning , and one who was hard-driving and competitive authority.
After considerable deliberation, the board chose the highly competitive leader with the authority style. Soon afterward an activist investor attempted a hostile takeover, and the new CEO was able to navigate through the precarious situation, keep the company independent, and simultaneously begin to restructure in preparation for growth.
In a merger, designing a new culture on the basis of complementary strengths can speed up integration and create more value over time. Mergers and acquisitions can either create or destroy value. Numerous studies have shown that cultural dynamics represent one of the greatest yet most frequently overlooked determinants of integration success and postmerger performance.
An assessment of the cultures revealed shared values and areas of compatibility that could provide a foundation for the combined culture, along with important differences for which leaders would have to plan: Both companies emphasized results, caring, and order and valued high-quality food, good service, treating employees fairly, and maintaining a local mindset.
But one operated in a more top-down manner and scored much higher on authority, especially in the behavior of leaders.
Because both companies valued teamwork and investments in the local community, the leaders prioritized caring and purpose.