Developing a Demand-Driven Business

Developing a Demand-Driven Business

Are you basing your business on what your customers need today? If so, your business model may be dangerously outdated.

"There's an old Wayne Gretzky quote that I love," Steve Jobs said in 2007. "I skate to where the puck is going to be, not where it has been.' And we've always tried to do that at Apple. Since the very very beginning. And we always will."

Figuring out where that puck is headed -- in other words, what customers will want in the future -- may seem like wishful thinking to some manufacturers. After all, it can be difficult enough to determine what current demands are. But Rick Kash says understanding what your customers want today is not enough. He argues that the pursuit of latent and emerging demand -- spotting trends early and predicting where demand will go -- represents a new business model that is essential to success in a global economy with shorter product cycles fueled by instantaneous information.

Kash, the chairman and founder of the Cambridge Group and co-author of "How Companies Win" with Nielsen. CEO David Calhoun, says the relationship between supply and demand has fundamentally changed. Long-term, chronic oversupply is the new norm, says Kash, and may be exacerbated as China and India continue to build manufacturing capacity. An excess of supply means flat or even declining demand where companies lack pricing leverage in many cases. The way to overcome that, he believes, is to go beyond simply understanding current customer needs.

"Customer need is a necessary but wholly insufficient level of consumer or customer understanding in order to compete," says Kash. "What one needs is to understand not just current demand but latent and emerging demand. If you wait to ask your customer what they need, you are already too late because they are telling your competitor the same thing they told you. You're at parity."

Rick Kash:
"Customer need is a necessary but wholly insufficient level of consumer or customer understanding in order to compete."
Instead, Kash recommends that companies use a variety of analytic tools to delve into untapped demand. He argues that traditional approaches to segmentation rely on either demographics or behaviors. He says this approach tells you "who is buying but not why they are buying." Companies should instead employ more precise tools, he says, such as "demand profit pools," which organize customers into groups based on the "demand they want to satisfy, on the why' behind the decisions they make and on the profitability they represent."

As an example, Kash cites work the Cambridge Group did for Anheuser-Busch. Cambridge's analysis of the demand for beer included a look at related product categories. There, the firm identified the fast rise of sweeter alcohol products such as flavored vodka. It then developed a demand profit pool that segmented beer drinkers, such as those who enjoy craft beers. The analysis also examined "need states," which means that consumers will purchase different products in different circumstances. The research showed that there was a latent demand by people who drank beer outdoors for a sweeter beer.

Anheuser-Busch had developed a light beer flavored with lime. Extensive testing ensued and, convinced that this beer met the latent demand for a sweeter beer, Bud Light Lime was launched in May 2008. It was Anheuser-Busch's most successful product launch in years, and has earned the company $250 million in profit to date.

Innovation Made Difficult

Kash says companies make innovation "too damn hard" because they treat it as a creative exercise. They create a supply of a new or revised product and seek demand in the market, resulting in a high rate of failure. Kash says companies should instead see innovation as an exercise in finding unsatisfied profitable demand. Once they have identified it, they can then work to fulfill the demand.

That happened when one of Kash's partners worked with Mastercard. At a meeting of their top executives, she asked them, "Who are your competitors?" They listed several major credit card companies. She replied, "Wrong. Your biggest competitor is cash and checks." In fact, credit cards only accounted at the time for 9% of total purchases by consumers. "Within three days, the debit card was conceived," Kash says.

How to Predict Where Demand Will Emerge Next

In "How Companies Win," Rick Kash and David Calhoun argue that key business advantage comes from understanding the future of demand while it is still forming. Ways that companies can do this include:
  • They use macro-economics to look across multiple markets to draw lessons to apply in their own markets.
  • The look at customer and consumer trends (lifestyle, workstyle, fads, demographics) to anticipate how to interact with emerging trends.
  • They look at adjacent categories to see what they can learn from best practices, successes and failures from businesses similar to their own.
  • They look at the most profitable segments of their own customers to detect even small variations in their behavior and buying patterns.
  • They take advantage of the real-time ability to monitor buzz on the internet to get an "over-the-horizon" view of emerging opportunities.
Through a deeper understanding of demand, manufacturers can work collaboratively with retailers and media companies to share information and understand and fulfill customer demand. Kash calls this the demand chain. He says the demand chain allows companies to deliver the right product more precisely. For example, Anheuser-Busch sells 93 brands across 11 channels in 500,000 stores. Using powerful business analytic tools, the company can determine store by store which brands to offer, what package choices are most appropriate, what to charge and what promotions should be run.

Social media is an important tool for understanding and fulfilling demand, Kash contends. "The real implication of social media is that it is going to change how demand is formed individually and then aggregated across huge groups of people," he says. Social media provides companies with insights into rapidly changing customer attitudes and needs. That helps them understand demand before their competitors and that, Kash contends, is how companies will win in the future.





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