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CUSTOMERS DRIVE DISRUPTION

F ILENE’S BASEMENT WAS A Boston institution—tourists even came to watch customers digging through the messy bins of designer clothes. Famous for its markdowns that increased by 25% each week, Filene’s Basement was the first discount retailer in the country to focus on high-end clothes. At its Running of the Brides events, excited women searched for bargain-priced wedding gowns. But most of the customers were boomers and Generation Xers and, by 2011, the famous bargain basement closed forever, like many other department stores around the country. Though people blame Amazon and online retailing for the demise of these once popular stores, the real reason is that customers’ needs are changing and department stores don’t meet them anymore.

It’s partly that baby boomers are spending less, both because they are shrinking as a generation and because they are downsizing. So millennials are outstripping them in total spending. The two generations’ needs are very different. Consumerism and buying frenzy driven by sales are foreign concepts to millennials. Name brands don’t impress them the way they impress boomers and Gen Xers—millennials value service, personalization, and speed.

Retailers that are slow to bring new designs to market, can’t help with style questions, and lack tailors to fit clothes—or charge extra for styling and tailoring—will never be popular with millennials. This generation, while large, doesn’t have much disposable income. Millennials would rather shop at stores that charge less and address their needs better than department stores do—so they choose upstart companies. And customer needs in all industries are changing just as much—look at how Uber and Lyft disrupted the taxi and black car companies worldwide.

Every industry is at risk of disruption due to changing customer needs, and most business leaders are ill-prepared for the challenge. They don’t focus on customer needs. Instead, they focus on technology, regulations, or investors. But even companies that try to focus on customers find millennials and Gen Z challenging. They are still structured around selling only to boomers and Gen X, who will pay for products, for bells and whistles, and are often swayed by advertising. But millennials would rather pay for experiences than products and features.

This 180-degree change in customer needs requires an entirely different approach on the part of companies. We can look, for example, at the automotive industry, which is still trying to sell customers new cars every year, based on new features. But as car sharing replaces car ownership, that’s not going to work, no matter what upgrades new models have. Do passengers care if an Uber car is self-driving? All they want is a comfortable, safe ride in a clean car with a pleasant driver. But the car companies keep pushing self-driving vehicles. And across industries, it’s the same: companies push products and services that don’t match customer needs.

There are exceptions. Some companies are successfully differentiating among the generations and are addressing millennials’ need for personalization. Zozotown, an undisputed leader in Japanese online fashion, introduced the Zozosuit to take 3-D scans of customers’ bodies. They use the measurements to recommend sizes and sell clothes such as suits, jeans, and T-shirts made from precut patterns. Orders are sent out within two weeks. Masahiro Ito, a board member who oversees engineering at the firm, says the fashion industry has not yet adapted to meet the needs of a generation accustomed to buying everything online, to their specifications, and at their convenience. “We offer exactly that,” he says. ¹ The company’s continued success will depend on whether it can make its clothing affordable, a key concern for millennials. We will cover the topic of personalization and cost in chapter 4. However, unlike many retailers in the United States and Japan, Zozotown has taken steps to address personalization, one of the millennials’ needs.

Thinking about (or finding out!) the answers to the following questions will give you a sense of how likely your company is to be disrupted.

•   How well do your company’s products or services address customer needs?

•   How effective is your company in selling to both baby boomers and millennials?

Your answers to these questions will indicate how focused on customers your company really is. It’s not technology or innovation from your competition that will disrupt your business; it’s your customers. If you’re not focused on them, they will leave as soon as they find a viable alternative, and their departure is only a matter of time.

FOCUS ON CUSTOMER NEEDS, NOT WHAT’S ARTICULATED

Understanding customers’ needs is the first and most crucial step in dealing with disruption, and many companies don’t try hard enough to reach that understanding. They focus on what their customers tell them they want. As Steve Jobs said, “Some people say, ‘Give the customers what they want.’ But that’s not my approach. Our job is to figure out what they’re going to want before they do. I think Henry Ford once said, ‘If I’d asked customers what they wanted, they would have told me, A faster horse!’ People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.” ²

Not everyone can be as brilliant (or as lucky) as Jobs was in doing this, but any company that tries can understand what’s driving customers’ statements, and companies that don’t do this will fail. Companies have to figure out the drives behind the needs and think outside the box to meet them.

Take for example Jobs’s approach to the iPhone. Other mobile phone companies reacted to customers’ need for internet connectivity by trying to duplicate their desktop experience. But that didn’t work on their phones’ small screens. Jobs saw a new way to give customers what they wanted (connectivity)—make the screen bigger and create apps. The iPhone was so radically different that Steve Ballmer, the Microsoft CEO, dismissed it, saying, “There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60 percent or 70 percent or 80 percent of them, than I would have 2 percent or 3 percent, which is what Apple might get.” ³ Other competitors dismissed the iPhone, too.

But customers loved the iPhone. Apple’s revenue increased from $38 billion in 2008 to $229 billion in 2017. Most of the growth came from the iPhone. As figure 2 shows, the iPhone’s contribution to Apple revenue increased from 5% to 62%. Most other handset manufacturers went out of business within four to seven years, except for Samsung, which unabashedly copied iPhone features. Though Ballmer later regretted his comment, Microsoft eventually withdrew its Windows Phone, and as of 2018, it has no presence in the smartphone market.

FIGURE 2 Apple revenue trends and iPhone contribution. Source: “Financial Information: Earnings Releases and 10K Annual Reports,” Apple Investor Relations, https://goo.gl/1tqAi6.

RECOGNIZE THAT CUSTOMER NEEDS VARY BY COUNTRY AND GEOGRAPHY

In the past, American companies could count on people all over the world wanting the same products that their American customers wanted. The typical American company’s strategy for overseas sales was to take what they were selling in the United States, make small packaging modifications, and sell it worldwide. At one time, customers in emerging markets were fine with that, since the U.S. brands were better than local ones. But the old approach to selling U.S. products in developing markets doesn’t work anymore. The customers in developing markets are demanding products that are more suited to their own cultures and tastes. Multinationals aren’t catering to these needs and thus are losing market share to domestic players.

To deal with disruption, you have to understand customers in your own county and you have to recognize that customers in different countries have different needs and figure out how to meet those. For example, a few years ago, customers in developing markets were looking for devices that provide connectivity on the go, but they couldn’t afford what Apple and Samsung offered—and they didn’t care about some of the fancy features. Global sales of smartphones priced below $200 increased from 35% in 2013 to 47% in 2017. Apple and Samsung didn’t understand this and kept trying to sell the phones their American customers loved. That strategy didn’t work. Starting in 2015, most new iPhones were priced at over $500 (see figure 3).

This gave Chinese manufacturers their opportunity. Chinese handset manufacturers, like Huawei, started creating the smartphones that customers in developing markets wanted. Their phones have such strong reception that calls could be made from basements and parking garages. OPPO focused on selling cheaper phones in rural China. Vivo, the second-largest smartphone manufacturer in China, focused on cameras in a market that’s obsessed with selfies. Xiaomi had a smaller share and concentrated on selling high-end phones at a lower cost. Once these companies perfected their phones in China, they took them to other developing markets and to Europe. By 2018, Huawei had surpassed Apple.

FIGURE 3 iPhone pricing and global smartphone sales, by price range. Sources: Jamie McKane, “How the Price of an iPhone Has Changed Over the Past 10 Years,” Mybroadband, September 15, 2017, https://goo.gl/HsCLtM; Timothy W. Martin and Eric Bellman, “Samsung Joins Race to the Bottom for Global Smartphone Prices,” Wall Street Journal, September 4, 2018, https://goo.gl/Do3yRU.

Chinese manufacturers won in developing markets because they were price competitive and focused on local needs—and not only in China. A little-known Chinese company, Transsion Holdings, captured a 40% share in African countries by offering four SIM slots to avoid out-of-network calls, a battery life of fifteen days, and a camera that’s tuned to darker skin tones. ⁴ Combined global market share of Apple and Samsung declined, from 49% in the first quarter of 2013 to 33% in the second quarter of 2018, while Chinese manufacturers increased market share from 4% to 34% in the same time period (see figure 4).

According to Counterpoint Technology, most of the world’s smartphone sales growth in the first quarter of 2017 was driven by India, the Middle East, and Africa. Chinese smartphones made up half of India’s sales in 2017, compared to 15% a year earlier. Xiaomi had the same market share as the leader, Samsung. Apple’s response? They began manufacturing the older-generation iPhone SE in India, without modifying it in any way for the needs of the Indian market. Needless to say, sales were low. And the Chinese are gaining market share in Europe, too. As of the first quarter of 2018, they have 25% of the European market. According to the research firm Canalys, Samsung and Apple sales are declining while Huawei and Xiaomi sales are soaring. ⁵

FIGURE 4 Global smartphone market share of Apple and Samsung compared to Chinese manufacturers, including Huawei, Xiaomi, and Oppo. Source: “Global Market Share Held by Leading Smartphone Vendors from 4th Quarter 2009 to 4th Quarter 2018,” Statistica, January 2019, https://goo.gl/2DxEzK.

The same sort of thing is happening all over the world in consumer goods, fast food, telecom, and banking—local companies are gaining market share, multinationals are losing it. Multinationals’ old copy-and-paste strategy for selling their products and services abroad doesn’t work anymore. If multinationals fail to cater to local needs, not only will they lose customers abroad but also their competitors will develop products and sell them in the West and in developing markets. Chinese smartphone manufacturers like Xiaomi and OnePlus are making an effort to enter the United States, despite significant U.S. opposition to Huawei. ⁶

GENERATIONAL CHANGES WILL DRIVE FUTURE DISRUPTIONS

While local companies are taking market share away from multinationals, generational changes are accelerating the process, both in emerging markets and in the West. This is because some products from emerging markets are attractive to younger generations worldwide, and in all countries, baby boomers are downsizing. This is a huge change for most corporations, which are structured around selling to boomers and must now learn to sell to younger generations.

Even Apple sells the iPhone by focusing on features like larger screens, OLED glass, facial recognition, and faster processors. These may appeal to boomers, but they mean nothing to millennials and Gen Z. If companies want to stay in business, they need to figure out what would have meaning to millennials and Gen Z. I like my iPhone, but my Gen Z daughter loves all the ways she can personalize her Android phone. Like many in her generation, she is into photography and can fine-tune her Android phone far better than she could fine-tune an iPhone. Different things appeal to different generations, and companies have been slow to understand this and to develop products and services that reflect it.

The following will briefly summarize the broad buying habits of different generations and discuss (in very broad terms) what companies need to do to retain or attract them.

Baby Boomers

Baby boomers, born between 1945 and 1963, have long been the powerhouse behind the U.S. economy, accounting for half of all U.S. spending. ⁷ Boomers buy an estimated 50% of the computers and 66% of the cars sold in the United States. They grew up during an economic boom and, despite the Great Recession, some still enjoy the benefits of decades of stock market growth. Boomers believe in brand names and credentials and will spend more on products, services, and employees that have them. For example, the blind application of Six Sigma principles in areas like research and development (R&D) proved disastrous. ⁸ This reliance on the known and the proven is one reason that boomer executives struggle with new business models, ideas, and diversity.

In many ways, boomers are different from previous generations. They are living longer, retiring later, carrying more debt (including student loans for their children and sometimes even grandchildren), and maintaining discretionary spending. They like to travel, visit family members, take a cruise, or tour foreign destinations. And, as they age, they spend more on health care, pets, and home. Although they like to shop in-store, they are comfortable with online purchases, too. As the generation ages, they are spending more time watching TV. They are more open to traditional TV, newspaper ads, and celebrity endorsements.

In general, companies are adept at selling to this group, although it would benefit boomer executives to become more open to new ideas instead of relying upon what has worked in the past. For example, they would serve their companies and customers better if they relied more on personalization and flexibility than on scale and lowering unit costs. Relying on old ways of doing things and expecting different results doesn’t work.

Generation X

Generation X, born from the mid-1960s to the early 1980s, is smaller in size than the boomers or the millennials, and in many ways they are like the neglected middle child when it comes to marketing efforts—few campaigns are directed solely at them. They exhibit characteristics of both boomers and millennials. On the one hand, they are comfortable with technology and respond well to personalized offers tailored to their interests. On the other hand, they love loyalty programs and typically buy from stores for which they have loyalty cards. They also are loyal to their favorite brands. They spend money on travel and luxury products.

Gen X shoppers are more down to earth and are less likely than boomers to be influenced by fashion trends. Maybe because many grew up in divorced families, maybe because many came of age during a recession, they tend to be more cynical and streetwise than boomers. Though Gen Xers are as brand loyal as baby boomers, they heavily research online before buying and then stick with their choices. Gen X loves to eat out (as do millennials), but they will also use coupons and, like boomers, will cook at home. ⁹

Millennials

Millennials were born from the early 1980s to the mid-1990s and now outnumber the boomers. Millennials grew up with technology and are very comfortable with it. They have high levels of student debt, and the Great Recession had a disproportionate impact on their finances. With less money to spend, they are putting off commitments such as marriage and home ownership. Many of them are unable to afford their own apartments and still live with their parents. ¹⁰

Once you understand that millennials have less disposable income than other generations and like to express their individuality, you begin to understand their most important needs and basic buying habits. They are reluctant to buy items such as cars, luxury goods, or music. Instead, they prefer to use services that provide access to products without the burdens of ownership—think of Spotify. Their preferences gave rise to the so-called sharing economy. When it comes to retail, millennials value the quality of their shopping experience over specific brands and products. Though millennials don’t have the same coffee fixation as baby boomers, they do love Starbucks (despite the prices!), because they enjoy the whole experience of being there. ¹¹

Millennials check reviews and compare prices on their smartphones while shopping, rather than buying by brand. They listen more to their peers than to celebrities. They are more comfortable with online shopping than most boomers are. However, although they are price sensitive, they still value quality—and are willing to take the time to look for it at an affordable price. Younger millennials will buy at stores because they love personalized services and are willing to pay for them.

Millennials of all ages are seriously into wellness. They exercise more, buy healthy foods to prepare at home and choose them when eating out, and smoke less than previous generations. You are more likely to find them at a farmers’ market than in a grocery aisle. ¹² They also are socially conscious and value companies that put purpose over profit.

The values of millennials are similar across the globe. Japanese millennials don’t drink, don’t drive, and don’t spend a crazy number of hours in the office. ¹³ They don’t even buy wristwatches—they use their smartphones. They are not into the things that their parents considered sacrosanct. They prefer a simple lifestyle and they’re thrifty, whether they’re buying cosmetics or hotel rooms. Japanese millennials, in short, are like U.S. millennials and millennials the world over—they want value for their yen, like their peers all over the world.

Generation Z

Generation Z is now the largest generation in the United States, and the most diverse. They were born between 1995 and the mid-2000s and thus grew up with technology. They don’t trust large corporations or brands, but the Great Recession didn’t impact Gen Z, so they focus less on price than millennials do. ¹⁴ But, in many ways, those in Gen Z are millennials on steroids.

Gen Zers are less likely to go to college than Gen Xers and millennials—they want to avoid racking up education-related debt. They thus are more entrepreneurial and less likely to work for large corporations. ¹⁵ They are more socially sophisticated than other generations and more skillful than boomers in using the media. Many of them are rebels with a cause, and their social and media skills make them more effective in their rebellion than, say, the boomers were. And those in Gen Z may disrupt higher education and corporations more thoroughly than the millennials have.

HOW GENERATIONAL CHANGES AFFECT BUSINESSES

All these shifts in the population and changing demographics have of course changed customer needs, and this is a big challenge for most businesses. Few large corporations know how to research Gen Z, let alone reach them with advertising. Changing tastes that companies didn’t anticipate are disrupting entire industries.

For example, millennials’ preference for healthy food has completely disrupted the food and beverage industry. Millennials value—and will pay for—organic, natural, sustainable, and locally sourced food. Packaged food sales are decreasing while sales of healthier, fresher foods are increasing. Major food giants—Kraft, Kellogg’s, Mondelez, and the Campbell’s Soup Company—are struggling. ¹⁶ Because they failed to react to these changing needs, their revenues have declined significantly. And ever since the links between sugar and obesity—and companies’ cover-ups—have come to light, millennials have been shunning sugary drinks. Even industry giants like Pepsi and Coca-Cola have seen declines in revenues.

Companies in the food and beverage industry are trying to reduce costs with mergers and acquisitions. They’re replacing top executives; General Mills, Hershey’s, and Mondelez all named new CEOs. Now the conflict is brewing between retailers and food companies. Retailers are reducing shelf space for packaged foods and increasing aisle space for fresher foods. The industry is caught in a vortex and is struggling to find a way out.

If you want to avoid disruption, focus on the new generations and their new needs. The longer you wait, the harder it will be for you catch up. Keep up with the generational changes in all markets or you will be left behind.

REALIZING THAT TECHNOLOGY AND INNOVATION DO NOT DISRUPT COMPANIES

Most people attribute disruption to technology, thinking of the iPhone, 3-D printing, robotics, and artificial intelligence. However, technology alone does not cause disruption. The iPhone didn’t succeed because of its technology. The iPhone’s technology came from Nokia, which sued Apple for infringing on its patents. (Apple settled.) The iPhone succeeded because it met customer needs better than any other product at the time did. If we’re all driving electric cars in five years, we will point to Tesla’s technology as disruptive—yet, according to Wikipedia, the electric car was invented in 1834. Customer needs and demand, even if practically subconscious at times, are the real source of disruption. Electric car technology was not disruptive in 1834, or even in 1934, because customers didn’t want it.

Realizing that technology and innovation do not disrupt markets but merely enable solutions is the fourth step in dealing with disruption. Technology is only a means to an end. Customers’ needs have driven every past marketplace disruption, and they will drive future disruptions, too. The technology and innovation that deliver on customer needs will be adopted; technologies that don’t—no matter how innovative they are—will be discarded. Yet blindly investing in technology, thinking it will save them and their organizations, is a mistake too many leaders make.

The only way leaders can avoid disruption is by focusing their attention on customers, figuring out what they need, and investing only in technologies or innovations that serve those needs. Only by accepting such realities can leaders cheat death and keep their companies alive.

DISCONNECT BETWEEN CUSTOMER NEEDS AND TECHNOLOGY DEVELOPMENT

When facing disruption, some leaders grab onto new technologies as a drowning person clutches a straw. They actually believe that inventing the next new gadget in their field will revive their declining revenues. So they invest in technology without focusing on customer needs.

Much of this false reliance on technology and innovation is motivated by business research, such as Stanford Business School’s 2017 report on technological innovation and total wealth. ¹⁷ They analyzed eighty-five years’ worth of patents and concluded that companies with the most patents experienced the most growth. If this is true, then how did IBM—which has more patents than any company in the world—lose its market share and decline so much in revenue? IBM filed 8,023 patents in 2016—an increase of 7.8% from 2015. Yet its revenue declined in both 2016 and 2017. The other companies on Stanford’s top 10 list—including Canon and General Electric (GE)—are also struggling. The report—like most corporate leaders—doesn’t understand that innovation is just a means to an end. Filing patents doesn’t guarantee success. You can only grow by focusing on customer needs and then investing in technologies that deliver on those needs.

Examples abound. Look at car companies’ investment in electric and self-driving technology. Customers are looking for fast, affordable, and safe transportation. The need hasn’t changed much over the years, except that customers are additionally asking that their cars be less polluting. Though cars have to meet minimum safety and pollution standards, customers have choices between speed and affordability. They have the option of dedicated transportation, ride-sharing, or public transportation. Of course, a faster ride is more expensive.

The most significant constraint, even for a supposedly faster ride, is the road network and congestion, not vehicle speed. Flying taxis could address customers’ need for a faster ride or commute better than all three of these, since flying removes dependence on roads or congestion. However, none of the car companies in the United States are investing in this technology—even though flying taxis are already being tested in Dubai (you can watch them on CNN and YouTube). They are being developed by Boeing, Airbus, and start-ups. The challenge is to make them affordable. However, due to Federal Aviation Administration regulations, we may see them introduced in Dubai, Japan, or Europe before they appear in the United States. ¹⁸

Instead of investigating and investing in a technology that seems poised to meet customers’ needs, car companies are pursuing electric and self-driving cars, which don’t get people to their destinations any faster but are likely to be more expensive—and to have other problems, too. Autonomous vehicles have significant safety issues. Waymo, Google’s autonomous vehicle company, is reinstalling safety drivers behind the wheel. Scientific American says that electric cars are not necessarily clean and battery-powered vehicles are only as green as the electricity supplier. ¹⁹ Electric vehicles merely move pollution from cities to rural utilities, and the level of pollution will not be reduced unless utilities start using renewable energy sources. These technologies are unlikely to be the game changers that they are made out to be, and lukewarm customer demand is an early indicator of that.

So why are car companies still investing in autonomous cars and electric cars but not in flying taxis? It’s partly because they’ve fallen for the buzz created by Tesla (for electric cars) and Google (for autonomous vehicles). It’s partly their fear of regulations. And it’s partly that they remain too focused on investors, who have fallen for the buzz, too, and think their stock prices will go down if the car companies don’t invest in these technologies. But the fact is that car companies will be disrupted if customers find better options elsewhere. Flying taxis—with their entirely new way of addressing customer needs—could do to the auto industry what the iPhone did to the smartphone industry. The same sort of thing could occur in all industries—from pharmaceuticals to financial services to cable. Companies that invest in technologies and innovations that address customer needs will be successful; those that invest in technology for its own sake will fail, despite the billions of dollars they’ve spent.

WALMART VERSUS AMAZON

Big companies are failing, creating economic uncertainty and job insecurity, because they aren’t focusing on customers. This is as true for companies that serve end users as for those that serve other businesses. All businesses get disrupted, no matter how far downstream in the supply chain they may be. If you ignore customer needs, your company will be disrupted—and the longer you’ve delayed disruption’s impact, the greater its damage will be.

When business leaders understand and address their customers’ needs—including the different needs of different generations and cultures—their companies succeed. When they don’t, their companies get disrupted. As Sam Walton, the founder of Walmart, famously said, “There is only one boss—the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

Walton focused on high-volume products, kept prices low, and revolutionized the retail industry. His company has more revenue and has employed more people than any other company in the world. Because of Walton’s conviction about the importance of his customers, you would expect Walmart to have the best customer service rating, too. Ironically, the American Customer Satisfaction Index consistently gives Walmart the lowest customer service rating of any retail store. ²⁰ It’s no surprise that Walmart is now failing—not because of Amazon but because their customers are choosing to buy somewhere else. This is happening to companies across industries, including GE, IBM, P&G, and Hewlett-Packard. They once were leaders; now they are being disrupted.

The reason, in nearly all cases, is their lack of customer focus. That is the recipe for disruption, especially now, as customers are becoming ever more informed and ever less loyal. Your talk of innovation will not sway them. Advertising will not sway them. Only when your products and services address their needs will even your old customers buy from you. It’s ironic that although Sam Walton understood this so well, his heirs don’t seem to get it. And thus their company, once the leading corporation in the United States, is steadily losing customers while Amazon—with its unwavering focus on customer needs—is gaining customers and seems poised to continue to do so. Is your company more like Walmart or Amazon in its customer focus and willingness to embrace change?