Ignore Your Customers

I know what I said last week.  It still applies in most situations.  But in a climate of disruptive innovations, listening to your customers can cost you industry leadership.

Your customers know what they need now.  But if you always base your plans off of what your customers think they want in the future you will lose your position of industry leadership.

Your customers are chasing markets with higher sales and higher margins.  They should and you should.  But there are new businesses trying to expand from their markets to yours.

An example from the steel industry over the last 20 years in the United States is a prime example of this problem.

The steel industry has made a shift over the past 35 years from large integrated mills that have input of ore, coal, and limestone to make various steel shapes to minimills that essentially recycle scrap metal to make steel shapes.  The cost of an integrated mill is in the billions of dollars, while a minimill was in the hundreds of thousands.

In the mid-1970s, minimill steel started at the low end of the totem pole in steel mill profitability.  They melted down other things and made it into rebar.  The integrated mills were more than happy to be rid of the rebar business.  Rebar customers are the least faithful, they are most price sensitive, and the profit margins were the lowest.

The minimills saw rebar differently.  They sold it as fast as they could make it.  And because their cost structure was so much smaller, they beat the large integrated mills on price.  All the minimills had to do for sales was have a phone and fax.

By 1980, minimills then saw an opportunity to move upmarket.  They improved quality to make other kinds of bars, angle iron, and rods.  Again, the integrated steel mills were happy to be rid of these products.  It was their least profitable.

The same thing happened with structural steel by the late 1980s.  Minimill technology improved and their quality improved enough to make structural steel.  Getting rid of this line of products again increased integrated mill profitability.

The integrated mills were left to focus on the most profitable of their products: rolled sheet steel for appliances, cars, and cans.  Then it happened again.  Someone developed a process and the machinery for minimills to make sheet steel.  The integrated mills gladly let them have the low profit end of this market: corrugated steel, culverts, and Quonset huts.

In 1989, the integrated steel mills posted record profitability – just before minimills developed the ability to generate the smooth, defect-free rolled steel surface needed by makers of cans, cars, and appliances.

Now the only integrated steel mills in the world are in rapidly developing countries like Korea, China, and India.

So is chasing your most profitable customers and meeting their needs going to leave you vulnerable to attack from below?

(This is summarized from the book, The Innovator’s Dilemma.  Just in case you were wondering, I have really enjoyed this book.)

Tags: Business Development, Creativity, Innovation, Leadership

This entry was posted on June 23, 2010 at 2:42 pm and is filed under Innovation, Strategy. You can follow any responses to this entry through the RSS 2.0 feed.