Designing the Customer-Centric Organization by Jay R. Galbraith

March 16, 2008 at 7:37 pm Leave a comment

Designing the Customer-Centric Organization

“Studies show that sales to existing customers are more profitable than sales to new customers.” With three years of research with McKinsey Organization Design Practice under his belt, Galbraith is the authority on organizational design. The book is a comprehensive customer-centric model for any organization designed to show business leaders an effective means of creating the right infrastructure for truly organizing around the customer.

Part I: The Customer-Centric Imperative

Galbraith starts by showing the differentiators between product-centric and customer-centric organizations.

Product-Centric won’t succeed in the long run because stand-alones commoditize rapidly and destroy profits. The drawbacks to this type of organization are examined from the perspectives of strategy, decision making, and sales.

Strategy:

  • Stand-alones commoditize rapidly and destroy profits
  • Customer must be highly advanced
  • Enterprise must stay on the cutting edge
  • Develop new (and improved) products
  • Price is determined on the basis of the market and competition

Decision making:

  • Revolves around setting priorities for a portfolio of products
  • Facilitated by an organizational structure based on product-line profit centers.
  • Planning/budgeting, and business review focus on products – those of the company and competition
  • Product-development process is paramount

Sales:

  • Salespeople rewarded with commissions/managers are rewarded with bonuses based on market share
  • Technical employees are rewarded with assignments to create the next product
  • Innovative types with in-depth products knowledge are the ones selected and nurtured
  • Transaction oriented

On the other hand, customer-centric organizations are the new foundation for profitability, and this means that companies must organize around the customer so as to manage these relationships effectively and profitably. Galbraith also examines this type of organization with the same criteria:

Strategy:

  • Strives to provide the best solution for the customer’s needs
  • Solution may, or may not, include the best products
  • Solution will involved a customized/personalized package of reliable products, services, support, education, and consulting, so as to make the customer more effective

Decision making:

  • Leaders manage customer or customer-segment profit centers
  • Plans, information systems, and business reviews are geared toward a portfolio of customers around which the company sets priorities
  • Most important processes are CRM and solutions development
  • Success is measured by the share of customer spending in the market segment and customer satisfaction and retention

Sales:

  • Commissions and bonuses are tied to customer satisfaction, retention, and asset growth
  • Relationship managers, serving the most important customers, are the most powerful people
  • Focus is on developing general managers for accounts rather than salespeople for products
  • Relationship oriented

In the new world of business, global, knowledgeable, and powerful customers are saying, “Give us what we’d like, with a side of customization.” While this means forming long-term relationships with the most valuable customers, this can only happen if organizations become customer-centric, assigning strategic priority to this dimension of the business in order to find and integrate as many products and services as possible for their existing customers. But the people in an organization have to be incentivized around the customer-centric goals if they are to be successful.

Part II: Determining how much customer centricity is enough

Many customers want relationships with their key suppliers and this allows astute suppliers to discover unmet customer needs/requirements and expand their offerings to include more products/service packages that make the customer more effective. the more effective the customer, the more the customer will use the supplier and engage in even more dialogue.

Companies that follow a relationship strategy, leading to this kind of solutiosn package, create more value for the customers than customers can create for themselves when they buy stand-alone offerings.

There are four major dimensions of solutions strategy (two major & two minor):

  1. Scale and scope of solutions (major)
  2. Degree of product/service integration (major)
  3. Types of solutions (minor)
  4. Percentage of total revenue deriving from solutions (minor)

There are five cumulative levels of complexity when determining how you will interface with a company:

  1. Informal networks and e-coordination
  2. Formal teams
  3. Integrator
  4. Matrix organization
  5. Separate customer line organization

The IBank example provides many key lessons and guidelines in the application of a solutions strategy:

  • Different customers want to do business differently
  • Managing complexity provides and advantage
  • Customization leads to growth
  • Managing customer interactions at all touch points is key
  • Customer-centric units are a major step toward creating a customer-centric capability
  • Link the customer units with products units

Conclusion

Firms hesitate to take the plunge into full customer-centricity for two reasons: First, many underestimate the transformations needed to implement this kind of solution. Second, many operate under the misapprehension that they are already customer-centric, simply because they have worked so hard over the past 10 or 15 years to become customer focused.

The role of leadership is critical to how an organization becomes customer-centric. Nokia, P&G, Citibank are examples of the competencies that enable leaders to think about the relationship of their companies to the customer in order to provide breakthrough strategies. There are modesl of competencies that show leaders how to take decisive action and energize teams ot execute their business strategies rapidly.

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Entry filed under: Leadership.

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