Shift #1: New goal: From inside-­out to outside in

Traditional management has encountered problems, not because managers have forgotten how to manage, but rather because the world has changed and management practice hasn’t. Among the most important changes in the marketplace is the shift in the balance of power from seller to buyer. Fifty years ago, large corporations were essentially in control of the marketplace. No longer. The advent of
global competition, customers’ access to reliable information and their ability to communicate with each other has meant that the customer is now in command.

To succeed in this marketplace, Reorganize for Resilience makes the case that firms must shift from an inside-out perspective (“We make it and you take it”) to an outside­-in perspective , “We seek to understand your problems and will surprise you by solving them.” The shift goes beyond the firm paying more attention to customer service: it means orienting everyone and everything in the firm on providing
more value to customers sooner.

The shift was foreshadowed in 1973, by Peter Drucker when he wrote: “There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in
existence.”

In 1973, it was enough for an organization to have a customer—someone who is willing to pay for the good or service. In today’s more intensively competitive world, merely having a customer who is willing to pay for the good or service is a precarious existence for any firm. The key to an enduring future is to have a customer who is willing to buy goods and services both today and tomorrow. It’s not about a transaction; it’s about forging a relationship. For this to happen, the customer must be more than
passively satisfied.

Different writers have described the shift in different terms but still related to this outside-in perspective. In one version, the firm must delight the customer (The Leader’s Guide To Radical Management). In another, the firm must deliver happiness (Delivering Happiness) or even joy (Peak). Clayton Christensen talks about “perfectly performing the job that the customer wants done.” Marc Benioff at Salesforce talks about “making the customer successful.”

In essence, what all these leaders are saying is that the organization must do more than meet customer expectations: the firm must generate a continuous stream of new value to its clients that generates surprise by meeting needs that the customers may not even know that they had. Time assumes a new importance: if value can be delivered sooner, it is more likely to generate delight. As reformulated, the goal of the firm accurately mirrors the fundamental transformation in the power structure of the marketplace—or as Roger Martin has called it, a transition from shareholder capitalism to customer capitalism.

In this perspective, the purpose of the firm shifts from making money for shareholders to customer primacy. The firm makes money, but this is the result of delighting the customer, not the goal. As Roger Martin has pointed out, when the firm aims single-­‐mindedly at making money for its shareholders, then it is drawn towards doing the very things that will lose money for the shareholders in the medium term. As Julian Birkinshaw in Reinventing Management notes, the principle of obliquity applies: an indirect goal (delighting clients) is more apt to make money than a direct focus on money-­‐making.

Continuously generating more value for customers is not just the goal for the CEO or the marketing department: it becomes the operational goal of everyone in the organization.

For most people, the most familiar example of the shift will be Apple, which over the last ten years has with a stream of products—iPod, iMac and iPad—has delighted its customers and increased its market capitalization more than tenfold. Increasingly, the way to delight customers is not just to offer a product, like a phone, but to offer a phone like the iPhone which is a platform on which users can choose their own Apps and so customize the product to their specific needs.

An exemplar on a smaller scale is Zappos.

Zappos is a web-­‐based shoe store that became a billion dollar company in ten years by focusing on delighting the customer. Its CEO, Tony Hsieh, explains how this works: Zappos runs its warehouse 24/7 which isn’t the most efficient way to run a warehouse but it is the way in which Zappos can delight its customers. When a customer orders by midnight EST, and asks for (free) two-­day shipping, they are pleasantly surprised when the order shows up on their doorstep eight hours later. Everything that happens in Zappos is aimed at creating a “Wow!” experience for their customers.

In the business-­‐to-­‐business world, Ranjay Gulati in Reorganize for Resilience cites Lafarge North America as an exemplar. (Lafarge is a French industrial company specializing in cement, construction aggregates, concrete and gypsum wallboard. It currently is the world’s largest cement manufacturer by mass.)

Lafarge North America went from an inside-­‐out attitude (You buy the cement we sell) to an outside-­‐in perspective of solving customer problems. As they learned more about their customers’ needs, they discovered a mix of products and services that would help solve
customers’ problems, as well as opportunities to create new offerings. Some offerings were customized for particular customers, while others were scalable platforms for large groups of customers.

Some writers assume that if management gets out of the way then empowered workers will automatically direct their energies towards adding new value for clients. However a more sustainable approach recognizes the reality that human beings are a varied bunch. Several books, including The Leader’s Guide to Radical Management and The Ultimate Question insist that the firm should trust but also verify, by making the goal of adding new value for clients explicit and systematically measuring whether it being met.