The Seller’s Hidden Advantage

Sellers know things about their customers’ businesses that the customers don’t know and can’t find out on their own, yet value immensely. Because they come into contact with many and varied buyers, sellers have a bird’s-eye view of the forest — the industry’s competitive landscape — in contrast to customers, who often see only the trees. And they can use their wide range of experience to teach customers about their own businesses.

This isn’t a matter of divulging confidential aspects of clients’ businesses to their competitors. The challenge is to translate an industrywide perspective into knowledge that customers can use. Companies that can do this successfully reduce their customers’ costs or operating risks and are rewarded in turn with customer loyalty, pricing flexibility or both.1

Knowledge generated by having a view of the forest can be as simple as an anecdote or as complex as a cause-and-effect model tested on large data samples. Such knowledge should help a company answer one of three questions that it cannot address on its own: What is going on elsewhere in the forest? What is my location? What will happen if … ? Customers want an answer to the first question so that they can learn from the experience of others; they seek to avoid the cost, time and effort needed to reinvent the wheel. The second question arises because customers’ restricted view prevents them from precisely locating their current position in the forest. Customers find it difficult and expensive to gauge how they stack up against competitors or peers on key dimensions, such as productivity levels or market prospects. The third question relates to issues that lie outside the experience of any single company. Sellers are in a position to extrapolate answers to “What if … ?” from the collective experience of their customers.

For suppliers to capitalize on their bird’s-eye view, they must establish systems to collect, aggregate, adapt and share customer experiences. That process by itself is neither unique nor revolutionary, but what makes it remarkable is how few players in the industry are able to develop and use their unique perspective to build customer value. Perhaps because most companies are so busy pushing product out the door, they are unable to step back and systematically develop such systems. Yet those that do are often able to earn a respite from the ravages of commodity competition or to build a sustainable differentiation that generates customer loyalty.

There are three strategies a company can adopt to turn a view of the forest into value for customers and competitive advantage for the business. Each strategy answers one of the questions that customers pose. To carry out the first, the supplier simply relays experience from one part of the forest to another. To implement the second, the company establishes benchmarks, rankings and maps for the players in the forest that allow them to understand their position along key dimensions. To engage in the third, the supplier uses aggregated customer experiences to help customers predict outcomes that they would find too costly or risky to attempt on their own. See Sidebar.

Relaying Experience

This approach is the simplest way to create value with a bird’s-eye view, as a supplier transfers learning that took place in one part of the forest to customers in another. This seems like it should be a relatively straightforward process — and on an ad hoc basis it is. But as a strategy, relaying experience requires more than a onetime transfer of a solution from one customer to another. Customers will reward suppliers for their view of the forest only if they can consistently and systematically bring innovative solutions to thorny problems. Companies seeking a competitive advantage with this approach must institutionalize the relaying function across a network of customer and market contact points.

Hilti Corp., the Liechtenstein-based maker of high-end power tools and fastening systems, is a master of this strategy. Virtually all of Hilti’s $1 billion in sales goes to professional builders, contractors and construction companies. Although several of its customers are larger than Hilti and some are even global, the construction industry remains essentially confined to national boundaries owing, among other things, to national building codes and local needs. Hilti’s customers thus lack the geographic span to continually monitor building and maintenance practices elsewhere, although the problems they face do not vary much from one location to another.

With a presence in more than 120 countries, Hilti can help its customers fill their experience gaps. Indeed, many Hilti employees refer to the company as an information network that just happens to sell tools and building systems. A cornerstone of Hilti’s relaying capability is its direct sales system in which more than 11,000 of its 14,500 employees work and exchange information with customers, logging more than 100,000 customer contacts each day. And Hilti has purposely defined its business processes uniformly around the world; as a result, its sales representatives and customer support engineers can routinely find solutions developed in another part of the network for its local customers.

One customer, a Brunei-based operator of more than 200 offshore oil and gas production platforms, faced a persistent nuisance and safety hazard. The walkways on its platforms required continual repair and renovation because of corrosion and severe weather. Of particular concern were the walkways and gratings in the “wave zone” — those parts of the structure that are washed over by powerful waves. An obvious but costly solution was to install newly welded metal gratings.

Hilti is not in the business of selling walkways. But once Hilti’s local reps learned of the problem, they turned to the company’s global information network. Hilti North America identified a supplier of fiberglass walkways that had approached Hilti to find a way to fasten its walkways to construction platforms. Fiberglass was a natural solution to the problems of corrosion and excessive wear, but not one that had been extensively tried. Hilti’s Singa-pore office combined data on Hilti’s fastening experience on Europe’s North Sea platforms with the North American source information; it then conducted pilot tests to adapt the solution to local conditions. The customer soon had fiberglass walkways that could withstand the pressures of weather and waves while far out at sea. Hilti supplied the system that fastened the gratings to the platform and retained a satisfied customer.

Few other suppliers can match this kind of information integration. Hilti and its customers consider Hilti’s customer orientation, application know-how and advisory skills to be strengths that justify its premium prices.

The relaying of experience is most valuable when physical or perceptual barriers prevent customers from learning from one another. In the second case, competitors may naturally shy away from developing solutions that would benefit everyone in the industry. But they should take advantage of such opportunities, especially when they are in areas that are tangential to the core of their business. With their wider reach or unique expertise, suppliers can make it relatively easy and inexpensive for their customers to use solutions developed elsewhere. And in a virtuous cycle that benefits all parties, those companies that are best at relaying experience will get the most opportunities to learn from their customers.

A good example of this process at work can be found at Algorithmics Inc., a $100 million Toronto-based company that provides enterprisewide risk measurement and management software to some of the world’s largest banks and financial institutions. Enterprise-wide risk management is a nascent area, and Algorithmics, despite being a global leader in the field, does not have all the answers. But it has astutely positioned itself at the nexus of information flow about risk management in the industry. For example, it established Algolab, a skunk works where clients from around the world bring their thorniest problems to Algorithmics’ best financial engineers and software programmers. Once the people at Algolab have solved one client’s problems, they include the solutions in the next version of the program for all clients. Since each customer has the potential to benefit, more are willing to share what they know, and Algorithmics’ experience base grows.

A few years ago, Algorithmics’ main competition was from in-house risk management departments at banks and financial institutions. Now those departments are a shrinking breed, not least because of the information sharing and relaying advantages that Algorithmics’ approach provides. While the company continues to concentrate its resources on solving cutting-edge problems, it is also in the lead position to develop packaged solutions to common problems. Thus it is well placed to fend off competitive threats.

Benchmarking

Customers often lack the information they need to map their own position or performance level in their industry. Benchmarking allows them to draw that map, showing them where they stand in comparison with peers. It helps them answer such questions as, Is my productivity above or below industry standard? and Am I spending more or less than others on information technology?

Internal benchmarking efforts to answer such questions take a lot of time, and the data may not be easily obtainable. For those reasons, such projects are often abandoned or found to be unsatisfactory when they are completed. But the value that companies place on comparative data is evident in the growth of the third-party benchmarking industry. Prominent examples include the J.D. Power and Associates evaluations of car quality and the Socrates index of corporate social responsibility. Seller-conducted benchmarks are even more valuable to companies, as suppliers often have access to data that third parties have difficulty obtaining.

The example of Agricore United, a leading supplier of farm inputs based in Winnipeg, Canada, helps illustrate how suppliers can create value for customers through benchmarking. As a former cooperative that is now a listed company, Agricore has deep roots in the farming communities it serves. Yet over the past several years, the company encountered increasing competition both from global players and from locally owned independent distributors. Agricore also faced the potential threat of disinter-mediation if manufacturers chose to circumvent the distribution channel and sell directly to farmers. To avoid being rendered redundant, the company had attempted to improve service levels by training and motivating field sales and service representatives. But heightened service levels only added to its costs, and it still found itself competing on price.

To break out of the competitive vise, Agricore turned to benchmarking as a way of adding value to its offerings. Drawing on its roots as a cooperative, the company established a team of agronomists to collect and study data from farms across many regions. The team’s task was to determine the effects of various inputs and farming practices (such as seed varieties, fertilizer usage and irrigation practices) on key output measures, such as yield rates and output quality, for a large variety of crops and field conditions. The data analysis helped Agricore’s sales reps show farmers where they stood in relation to other farmers of similar size and characteristics on various input and output dimensions. Farmers were able to adjust their farming practices in response, and some even indicated that it helped them understand what they were doing right or wrong. The system has helped Agricore return to profitability and remain a valuable player in the industry, important to both farmers and manufacturers.

While benchmark data help customers figure out their competitive position in an existing market, it can also help those that are trying to assess their prospects for success with new strategies or in new markets. For instance, companies interested in leveraging the Internet are often unsure whether the potential benefits will outweigh the costs. Drawing on its experience with hundreds of companies, Cisco Systems Inc.’s Internet Business Solutions Group developed benchmarking tools that enable potential customers to compare themselves against Internet leaders and to diagnose their own situation.2 The tools also give Cisco influence with these companies. Those that proceed with an Internet strategy will find many Cisco products and services available that can make them more agile, efficient and competitive on the Net.

When executed successfully, benchmarking can begin to drive customer behavior and even the agenda and behavior of entire industries.3 The benchmarking measures can quickly become proxies or indicators of performance for the industry. The choice of variables is therefore critical: The seller must select those that resonate with their customers’ understanding of their key business drivers. It must also have credibility in the way it processes and presents the data. BusinessWeek, for example, was a recognized source of business information long before it began ranking business schools. Because of the magazine’s credibility, its rankings have altered the competitive landscape for business schools. Many prospective students and recruiters now use the metrics established by BusinessWeek to evaluate schools.

Uncovering and Predicting

At the most sophisticated end of the spectrum, companies can combine their knowledge of customer experiences into a bigger picture of the industry — one that customers on their own cannot construct. In this sense, each customer possesses a piece of a larger puzzle, but the picture is evident only when all of the pieces are assembled. Suppliers add value by bringing together the disparate pieces of information that customers hold, assembling the puzzle and interpreting its meaning.

Consider a problem facing grocery retailers: Which type of in-store consumer promotion will produce the optimal outcome, whether it’s an increase in sales, margins or customer loyalty? Retailers rarely have complete data to help them decide among such options as two-for-one offers, cents-off coupons or bundles of complementary products. At best they might have data relating to the outcomes of promotions they have run in the past. But they would be hard-pressed to predict the impact of a promotion they had never run, let alone be able to compare its impact to other types of promotion.

McCain Foods Ltd., one of the world’s largest manufacturers of french fries and frozen food products, is very good at these puzzles. Among other channels, McCain sells its products through the major grocery retail chains (such as Carrefour, Tesco and Kroger) around the world. Using the data it has gathered and analyzed from customers around the world, McCain Foods can confidently advise retailers on the best frozen food promotion to run for a specified outcome. Its customers can now statistically predict the outcomes of promotions without having to try them.

McCain Foods operates in a branded-goods business in which customers expect a high level of service and value-added advice from their suppliers. In such businesses, investments in systems to support the view of the forest are justified on the basis of the need to stay ahead of the competition. But in commoditylike markets with tight margins, it is far more difficult to justify those investments. Paradoxically, it is precisely in those industries that uncovering and predicting systems can create a seismic shift in the industry and provide windfall rewards to the first mover.

Consider the experience of Orica Ltd., formerly ICI Australia, which competes in the cutthroat commercial-explosives business. Orica’s customers include quarries that use explosives to blast solid rock face into aggregate of a specified size. These quarries operate in a highly competitive commodity business, in which the cost of explosives has to be minimized. As a supplier to the quarries, Orica realized a few years ago that significant value could be created for its customers if the efficiency of the blasts could be improved: The higher the proportion of rock of the desired size produced by an explosion, the lower the costs to the quarries and the higher their margins.

Orica engineers established that up to 20 different parameters influenced the success of a blast, including the density and shape of the rock face, the chemistry of the explosive charge and even the weather. But each quarry could experiment with only a few of those parameters, within a fairly limited range, because of the costs and risks involved. Partly in response to the competitive pressures that Orica itself was feeling, the company began collecting data from customers on the input parameters as well as the outcomes of individual blasts. By collating the data, Orica engineers came to understand the conditions that produced different outcomes. The company then began to offer customers a contract for “broken rock” that would more or less guarantee the desired outcome.

Rather than sell commodity explosives, Orica took charge of the entire blast at a price that was less than it would cost the quarry to do on its own. This approach not only differentiated Orica from competitors, it also provided access to better data that, in turn, allowed Orica to continually improve its information base and its own blast performance and efficiency. The success of Orica’s approach firmly entrenched the company as the world’s leading supplier of commercial explosives. Today, contract blasting dominates the industry. Competitors have followed Orica, but they will find it difficult to match the first mover.

The Orica experience illustrates how a supplier can add value to customers, differentiate itself and create customer loyalty by aggregating data from customers, analyzing it and packaging the results. In most industries, pieces of the puzzle abound, but puzzle solvers are scarce. Scarcity makes them valuable, and profits flow from the value they create.

Building a “View of the Forest” Capability

Although the three strategies vary in their degree of sophistication, a common step-by-step procedure for implementation underlies all three.

Variable Selection.

Managers seeking to build this capability must first choose which variables to monitor and measure. Aside from the obvious need to concentrate on issues of importance to customers, there are two important considerations.

First, both input and output variables need to be measured, although not necessarily in equal degree. For suppliers whose main emphasis will be relaying experience, information about inputs is more important — new developments or approaches occurring in other parts of the forest. Since those are often onetime events, directional output analysis (it succeeded or failed; it saved or lost money) may be sufficient. At the other extreme, companies seeking the advantage that comes with uncovering and predicting need to put equal emphasis on inputs and outputs. The value to customers comes from the complete model of how deployment of certain inputs translates into outputs.

Second, the supplier should bear in mind that customers will place the highest value on information that is difficult, costly or impossible for them to obtain. There are three natural vantage points to consider. In an industry made up of companies operating locally or regionally, sellers like Hilti can benefit by offering a global perspective. In an industry in which competition restricts cooperation among customers, sellers like Algorithmics can be honest knowledge brokers. And where industries and technologies collide, sellers like Cisco add experience from outside the customers’ industry.

The choice of variables deserves considerable thought, not just because those selected will eventually affect product sales, but also because there is a first-mover advantage to capturing the most salient measures. Competitors entering the market for data later may be denied access or be perceived as mere me-too players. Several publications, for example, have followed BusinessWeek in compiling business school rankings, but they have not been as influential. Moreover, schools suffering from “ranking fatigue” have refused to give new entrants access to their data.

Data Collection.

Collecting data on variables is one of the most difficult and time-consuming setup tasks. Data on the same variable often have to be collected and reported on repeatedly in order to establish a database. Customer buy-in is key, as it is often the customer’s employees who will collect and report the data. Trust is paramount, but sometimes the customer demands an immediate payoff. To satisfy such demands, the supplier might, for example, set up a troubleshooting center that customers can call for solutions.

The seller’s frontline personnel are critically important in making sure that data flows from customers to the internal corporate network and then back again to clients. Frontline employees must be given training and incentives to use and contribute to the information network because such work lies outside their traditional tasks of selling and conveying product knowledge. But gaining a comprehensive view of the forest does not happen on the front lines alone. In order to capture the stream of relevant data and turn it into usable information, companies must provide central organization, structure and managerial guidance. For example, Hilti’s move to standardize internal systems worldwide has been an important factor in the company’s ability to use knowledge as a point of differentiation.

Data Aggregation and Analysis.

The key to this step is maintaining a focus on finding customer solutions. For the simplest strategy of relaying information, the supplier matches a customer problem against a similar one experienced by another customer or set of customers. This kind of matching presumes the existence of an information network with a wide span so that field personnel can draw on the experience of the entire network.

Benchmarking is a form of data aggregation that ranks customers on key variables. A ranking of inputs relative to outputs will often suffice, as those data help customers determine productivity measures. Such information allows the customer to diagnose problems by comparing itself to subsegments of companies facing similar challenges. It can then use the data to adjust internal processes and systems.

Finally, uncovering and predicting requires the seller to piece together data from each customer into a coherent picture that can be correlated with other variables. This activity is often supported by more sophisticated modeling techniques that sift through relatively large pools of data aggregated across customers. Companies may supplement the often incomplete collection of customer experience with hypothesis testing and experimentation. This supplemental information enables managers to simulate possible outcomes according to different decision variables; for example, it can be used to predict the outcomes of various types of retail promotion.

Deployment.

In this step, the solutions developed through data analysis are adapted and applied to customer problems. A major consideration is that information or knowledge is not the same kind of commodity as a product. Suppliers can demonstrate the merits of a product to their customer before a transfer takes place. If prices or other conditions are not agreed upon, the supplier can take back its product and the customer leaves with nothing. Information and knowledge, on the other hand, are transferred at the time they are shared. There are no takebacks.

There are three types of deployment alternatives. The most common approach is simply the “free” sharing of knowledge, exemplified by Hilti’s or McCain Foods’ interactions with customers about situations, events and patterns noted elsewhere in the network. The supplier tells the customer what it has learned and relies on the goodwill it generates to increase loyalty or justify premium prices. The prospect of receiving valuable insights in the future encourages customers to foster the relationship.

The second alternative involves embedding the knowledge into a product or service to create a new, differentiated offering. The supplier endeavors to keep the knowledge to itself while allowing customers to receive the benefits. Essentially, the customer is outsourcing the application of the knowledge gleaned from a view of the forest. Orica’s move to writing “broken rock” contracts versus selling explosives and Algorithmics’ regular sharing of knowledge with its network of customers through program updates are examples of this approach.

The third alternative involves the writing of contracts that share the risk and rewards that accrue from deploying the view of the forest — even though the knowledge transfers to the customer. For example, Allegiance (formerly part of Baxter International Inc.) has been writing capitated supply agreements with health-care institutions for almost 10 years. These agreements typically cap the cost of basic hospital supplies like gloves and syringes regardless of the number used. In addition, they stipulate that customers agree to work with Allegiance to reduce the usage rate of these products; any savings are shared equally. Allegiance uses its vast collection of benchmark data on many aspects of the hospital experience to make the delivery of medical services more efficient.

Feedback and Updating.

A system designed to develop competitive advantage through a view of the forest should also be designed to learn and adapt. If it isn’t, its value will vanish once the initial prescriptions are delivered. Continuous feedback from the application of solutions allows suppliers to improve the precision of the knowledge they create and the advice they deliver. At Agricore, the sales and service representatives continually adapt and update the databases and monitor the outcomes of the advice they provide. This not only keeps their advice up-to-date, it also builds further credibility with customers about the sincerity of the company’s efforts. At Orica, new developments in blasting technology are constantly monitored and actively tested for their impact on the company’s data models. This allows Orica to regularly improve the terms of its blasting contracts.

Tapping the Network

The three strategies for turning a view of the forest into competitive advantage take as a starting point a simple but powerful insight about organizations: A company is a network of nodes in which each node is a source of information that can be productively applied at other nodes.4 The picture that emerges from the collection of nodes is a valuable source of insight for customers. While both size and global reach contribute to a company’s ability to build a unique and valuable perspective, neither is a necessary condition for this task. Algorithmics is not larger than its customers, and Agricore United does not have global reach. Yet both companies have a perspective that is different from their customers’ and have used it to develop valuable insights for them.

Turning a view of the forest into a competitive advantage, however, demands more than creating value for customers. It demands that this view, once in place, be unique and difficult for competitors to replicate.5 Everyone in business today knows that information is valuable, and industry groups and consultants are always seeking to fill any perceived void. Aside from the fact that there are first-mover advantages for the company that establishes data norms in an industry, the uniqueness of a company’s network affords it a strong measure of protection from imitation. Each supplier’s span of activity, or network, is different from that of any other organization, including customers and competitors.

The key requirement is for the company to establish organizational systems that allow the network to function as a network rather than as a collection of unrelated nodes. As companies move beyond simple relaying functions, organizations need not only to gather knowledge from customers but also to aggregate it, analyze it and turn it into solutions. Success in creating a view-of-the-forest capability is also contingent on having a visionary management team willing to make near-term investments in systems and processes. While such systems and processes cannot be put into place overnight, it pays to begin early by thinking in terms of the value to customers and the sustainable competitive advantage that a view of the forest can create.