It's important to seek out new customer preferences, even if that means moving away from your core business.
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To differentiate, you need privileged insights. These come from moving from high-level trends all the way down to “investable pockets”— specific and addressable business opportunities.
Sometimes, developing the privileged insights requires investing in proprietary data. For decades, B2C companies have invested in loyalty programs (such as airline miles or retail store cards), which often provide a price discount in return for customer data.
Those data allow them to derive deeper, monetizable insights. Supermarkets are now able to segment customers by several dimensions at a time (e.g., geography, demography, basket size, shop frequency, promotion participation, premium
product mix, etc.). We’re no longer talking about eight segments; we’re talking about thousands.
Supermarkets can now personalize their marketing campaigns; can tailor range by store; can understand which categories are more or less price-sensitive; can see which brands carry more loyalty; can conduct A/B testing on online channels; and so on.
So, while the macro trend might say “retail is shifting toward online,” it’s the granular view of the customer and investable pockets that makes the shift effective.
You can also collide macro and micro insights to identify which trends are real and which are just hype or fads. In 2010, incumbent wooden shipping pallet supplier CHEP was under threat from the adoption of plastic, RFID-enabled pallets that were aggressively marketed by disruptor iGPS.
Investors saw a macro trend that would mark the end of wooden pallets and encouraged CHEP to make a major investment in plastic to replace the existing pool. CHEP’s micro insight was built on a detailed understanding of which customers were switching and why.
CHEP recognized the underlying trend that had opened the door for the plastic threat—increased use of automation in FMCG manufacturing processes meant pallets needed to fi t stricter dimensional criteria.
CHEP saw that plastic was suitable for only a niche set of customers and economically unfeasible for large scale (based on a much higher capital cost for plastic versus wood).
Instead of replacing its existing $2 billion capital base and using a more expensive plastic option, CHEP responded to the underlying customer need and invested in stricter quality and repair processes. CHEP also used a dispatch algorithm that made sure that those customers that depended on the highest-quality pallets had access to them.
CHEP’s margin suffered slightly; iGPS went bankrupt after losing several vital customers, including PepsiCo, and was eventually picked up by a private equity firm.
Acting on the writing on the wall
Having established just how important it is to get ahead of trends, we now hit the biggest snag of them all. It is often the very same things that make companies successful that also make it hard for them to act on trends. Incumbency can make it difficult to deal with disruptions.
Industry leadership can make it hard to act on the writing on the wall—but not impossible.
A decade ago, Norwegian media group Schibsted made a courageous decision: to offer classifieds—the main revenue source for its newspaper businesses—online for free. The company had already
made significant Internet investments but realized that to establish a pan-European digital stronghold it had to raise the stakes. During a presentation to a prospective French partner, Schibsted executives pointed out that existing European classifieds sites had limited traffic.
“The market is up for grabs,” they said, “and we intend to get it.” Today, over 80 percent of their earnings come from online classifieds.
About that same time, the boards of other leading newspapers were also weighing the prospect of a digital future. No doubt, like Schibsted, they even developed and debated hypothetical scenarios in which Internet start-ups siphoned off the lucrative print classified ads that the industry called its “rivers of gold.”
Maybe these scenarios appeared insufficiently alarming—or maybe they were too dangerous to even entertain. But very few newspapers followed Schibsted’s path.
From the vantage point of today, when print media has been shattered by digital disruption, it’s easy to talk about who made the right decision. Things are far murkier when one is actually in the midst of disruption’s uncertain, oft-hyped early stages.
In the 1980s, steel giants famously underestimated the potential of mini-mills. In the 1980s and 1990s, the personal computer put a big dent in Digital Equipment Corporation, Wang Laboratories, and other minicomputer makers.
More recently, web retailers have disrupted physical ones, and Airbnb and Uber technologies have disrupted lodging and car travel, respectively. The examples run the gamut from database software to boxed beef.
What they have in common is how often incumbents find themselves on the wrong side of a big trend. No matter how strong their balance sheets and market share going in—and sometimes because of those very factors—incumbents can’t seem to hold back the tide of disrupters.
The good news is that many industries are still in the early days of disruption. Print media, travel, and lodging provide valuable illustrations of the path that increasingly more will follow. For most, it’s early enough to respond.
What’s the secret of those incumbents that do survive, and sometimes even thrive? One aspect surely relates to the ability to recognize and overcome the typical pattern of response (or lack thereof) that characterizes companies in the incumbent’s position.
This most often requires foresight and a willingness to respond boldly before it’s too late, which usually means acting before it is obvious you have to do so.
As Reed Hastings, the CEO of Netflix, pointed out—right as his company was making the leap from DVDs to streaming—most successful organizations fail to look for new things their customers want because they’re afraid to hurt their core businesses. “Companies rarely die from moving too fast, and they frequently die from moving too slowly,”1 he said.
Sven Smit, Martin Hirt and Chris Bradley are all leaders in McKinsey’s Strategy Practice. They have worked together over the last decade on a mission to advance the state of the art in strategic management, while serving corporate leaders around the world to help them beat the odds.
Sven Smit is a Senior Partner in Amsterdam. He leads McKinsey Western-Europe and, before that, led McKinsey’s Strategy Practice. He is the co-author of the best-selling book Granularity of Growth.
Martin Hirt is a Senior Partner in Greater China. He is the Leader of McKinsey’s Global Strategy & Corporate Finance Practice.
Chris Bradley is a Partner in Sydney. He is the leader of McKinsey’s Business Strategy Service Line.