what does it take to innovate?

I was thinking a lot about innovation today. Part of it was inspired by recalling an exercise in TRIUM's corporate finance class, taught by the amazingly well-organized Paul Brown, in which we had to match up twenty different income statements with companies from twenty different sectors. The exercise showed how one can develop an instinct to identify the "right" financial characteristics for a given sector. 

In the context of innovation, though, part of a company's job is to ask, "How can I change the economics of my sector to win more opportunity, or limit my risk, than my competitors can?" The degree of disruption is measured in part by the degree to which the economics can change. (This is why Apple should not discount. As soon as it builds products that must be discounted to sell, it is on a slippery slope to have economics "just like" their competitors.) Think Blockbuster vs Netflix. Netflix competed on customer analytics: Tell us what movies you like and we'll tell you what you can rent that you're likely to enjoy. They didn't have retail outlets. So, while you couldn't just walk in and get a video on the night you wanted to see it, you could have a queue of videos on the way that would be ready for you "reasonably quickly" which you chose beforehand. It changed the "satisficing" conditions of Blockbuster to the "delighting" conditions of Netflix -- without the need for retail storefronts. 

But the argument can be made that Netflix's innovation was not just economics, but the combination of economics with customer analytics. Which is more important to innovation? 

In fact, you may be able to exercise your innovation around a three legged stool: Finance innovation, process innovation, and customer innovation. Can any one of those give you a significant, disruptive model? Or, like Netflix, do you have to look at all three, and combine them in a nuanced way to create that disruption? 

In any event, the final analysis is that innovation doesn't matter if it's not adopted. So, you must have that third leg: Why does this new idea really matter to the customer? 

will social media change the banking experience?

Consumer perceptions of the banking industry have shifted from being a stalwart institution backed by the government to a fee-hungry, profit-driven, risky sector more eager to “monetize the customer” than provide a secure, sophisticated service provider.

And this didn’t happen with the financial crisis. The shift in trust happened a lot earlier.

Most people trust other people (more than they trust companies or banks, for sure). It would make sense for banks to examine how to incorporate social strategies into their marketing to leverage a social network’s trustworthiness. After all, you may not trust Bank of America, but since twenty of your office workers and best friends do, perhaps you’ll give BofA a chance to be your bank.

Or so the conventional wisdom among Social CRM folks might go.

Frankly, the Social CRM contingent usually overplays its hand, or rather, it thinks in terms of lingo and tools, with which it stitches together a pat but difficult-to-execute solution to trust-building in the banking sector.

One commenter, Jay Deragon, said on the blog, The Relationship Economy: “Banks could set up a ‘social network’ exclusively for banking customers to create profiles about who they are and what they do as well as a listing of their products and services. Banks could establish a ‘community’ for customers to integrate their social media which would create a ‘digital marketplace’ of conversations.” Mr. Deragon was nice enough to put his buzzwords in quotation marks to make sure we didn’t miss them.

Sadly, these buzzwords have become disconnected from their underlying realities. You cannot have a social network without a group of people you want to get to know, whose values you share, with whom you can regularly interact, and who, over time, prove their trustworthiness. A social network emerges from interactions with people you are likely to want to get to know.

A key component of the real social network is the strength of non-directed communications. If everything ever posted on a social network remained focused on only one topic, it’s not a social network, it’s a user forum.

Certainly a social network is not a software platform. You cannot just launch a piece of software and call it a social network. It requires an underlying reality to be created from the people who show up.

A “community for customers” is also an interesting phrase that I think fails the utility test for banks. Frankly, as long as customers define themselves as customers, they are framing any online communications in the transactional aspect of their relationship to a bank. I’m reminded of an early critique of CRM: Why is it, really, that a customer would seek out a relationship with a company? Don’t people just want to interact with companies to the extent that it’s useful to facilitate a sale?

We don’t do ourselves any favors by glibly shifting from CRM to Social CRM unless we get at the heart of what relationships mean and how people interact socially. We’ve compounded the problem.

And the lure of “digital marketplace” is equally odd. The real value of a digital marketplace is speeding up finding the right purchases at a good price. Google is the biggest digital marketplace there is.

If you go to a bank’s site and look over their products, compare investment returns, investigate fees, and look up where branches and automatic teller machines are located, do you think that makes the bank’s site a “digital marketplace” where you are magically going to avail yourself of a bank’s services without visiting Google to compare all this information? Will you ignore the advice of friends or even of strangers and instead prefer a bank’s “digital marketplace” to your own thinking?

Ultimately, this concept fails to inspire any strategist really focused on answering the question: How can banks be trusted again?

The nature of trust, and customer experience managementThe global economic meltdown has taken its toll on people’s trust in banking worldwide. Edelman’s reporting on the topic shows that trust in banks has dropped since the crisis, even while trust in companies globally has risen. (Check here for a recent Edelman study on trends in trust for banks, comparing US and UK bank brand trust levels. The US is rebounding a little bit, and the the UK has dropped, but the trust levels are still extremely low).

When someone wants to learn about a company, the most trusted sources are stock analyst reports and articles in business magazines, trumping conversations with employees, newspaper articles, or social networking sites. The reason is that these sources are specialized. Academics (64%), experts, and analysts (52%) are trusted more often than “people like yourself” (44%), according to Edelman’s executive summary. In my framework, the five forces of customer experience management, networks of data and networks of people are two sources most highly trusted in the customer ecosystem. And people with access to data invisible to you can be doubly trusted.

In particular, in banking, you need specialized advice if you’re going to make up for any losses you suffered in the last three years. “Trust in banks in the last three years has plummeted,” says Edelman, falling from the third most trusted to the ninth most trusted sector in the United States.

Even if you didn’t lose anything, you may feel lucky you escaped the downturn and, in the context of our times, you may well want ensure you make the right decisions in the future. The last thing you’ll trust is the bank’s advertising, according to studies -- and “social networks” are just barely above that, according to Edelman’s analysis.

Of course, I’ve just made the argument that “social networks” aren’t just pieces of software. The deeper reality remains: Will you trust a network of people who know more than you do? Who can give you just-in-time advice? Who are always there for you? In short, is a real social network valuable to you?

If people don’t trust banks, then don’t be (just) a bank

Banks need to borrow trust from somewhere right now. The best place to find that trust is in the institutions and relationships that their local customers trust. Most banking is still largely local, so look for local "trust resources".

The key is to transform the customer’s perception of your bank, to make it a player within a trusted and trust-building community.

In fact, a bank must do so, because this is the normal evolution of business today. The bank’s imperative is to adopt “transformational leaders” with the goal of enhancing its brand. In short, a bank must become a trusted brand in a community, in which its role is demonstrably transformational.

The study titled Impact of Corporate Social Responsibility and Transformational Leadership on Brand Community: An Experimental Study (Chaudhry/Krishnan, Global Business Review, 2007), posits:

“A brand community, like other communities, is characterized by qualities like shared consciousness (we-ness among members), rituals and traditions, and sense of moral responsibility (Muniz and O’Guinn 2001). Transformational leadership transforms followers’ self-interest into collective concerns and engages the full person of the follower... [T]ransformational leadership is moral in that it raises the level of human conduct and ethical aspiration of both leader and follower”.

Furthermore, the study states, “Transformational leadership offers a solution to the above problem as it has been linked to the implementation of large-scale innovation programs.” On social responsibility, the study concludes, “it shows that corporate social responsibility is becoming more of a necessity by the day. It is very important to the way the firm is perceived by the customers, and becomes all the more important to firms facing stiff competition.”

While companies in general might embrace a “triple bottom line” strategy for positioning themselves relative to competitors, banks in particular must urgently adopt the trend. They’ve flouted good sense -- and possibly the law in some cases -- by behaving in risky and irresponsible ways.

But this is not just about compensating for skirting good judgment and regulations. Chaudhry/Krishnan continues: “There are a couple of things, which need to be mentioned about corporate social responsibility. First, corporate social responsibility is not just about abiding by law but extends to ethical and volitional activities of the firm as well. Even though discretionary responsibilities are left to the businesses’ judgment and choice, social expectations do exist for businesses to assume greater responsibility over and above the explicit ones.” The customer ecosystem brings expectations about banks’ behaviors in general, and it is only within a community response managed by the bank that it can take control of that conversation.

A society of networks

Embedding a bank in a community may not seem like news, given the concept of “community banking”, but building a community in the Internet age has two key components: a local strategy (because people really do build trust when they’re physically together), and the ability to create a “society of networks” groups of businesses and people that are broadly aligned with the business’ vision (not necessarily just to make it profitable, per se).

In Heading Toward a Society of Networks (Journal of Management Inquiry, 2009), the authors, Jörg Raab and Patrick Kenis, define such societies of networks as, “consciously created groups of three or more autonomous but interdependent organizations that strive to achieve a common goal and jointly produce an output.”

For financial services firms, the questions to answer are:

• Whom do we invite to join our network? These participants should either convey trust to customers already, or be able to create trust within the network.
• How do we handle the participants and their customers/stakeholders, particularly relative to operations, regulatory requirements, and sales/marketing?
• Is it open (essentially the same question as, “Does it cost nothing to enter or leave the network?)
• How does it create value for participants?
• How does it advance the values of participants and their customers/stakeholders?
• How do all these answers define “who are we as a network”?

I have advised banks in the past to create a social network in which businesses close by, or well known to, a customer contribute to a body of knowledge about business success. This topic is about financial management - which is precisely what the bank wants you to think about. Credit, loans, savings, insurance - all these products contribute to the outcome of business success. (For more insight, do a Google search on outcome-based marketing.)

Even if a customer is not in business in the normal sense, he or shee will see the parallels between managing a business and managing personal lives - and they will see that a local bank is helping everyone to succeed.

In a “society of networks”, such businesses become networks of their own, with their own customers and prospects being drawn into the conversation - but the overall society has greater value than any individual network could create on its own. The local strategy is to get the bank’s customers and prospects to see that the bank is serving “Main Street” - they are concerned about the success of the restaurants, drug stores, flower shops, and dry cleaners that you see every day.

Extending the brand boundary, but creating exclusivity

The challenge in creating a society of networks relates to the bank’s brand. Where does it begin and end? What promises can it make, and which “implied” promises in the society of networks is it making about which it should be aware? Such explicit and implied promises may introduce legal and regulatory issues. And such fuzziness may also make the brand cloudy, particularly if the philosophy of the platform is to welcome individuals in the community who may also have an agenda in opposition to the bank’s brand and reputation.

But that risk may be worth it. The alternative is a tightly bounded network that doesn’t permit the bank to invite new people to see that it is a trustworthy, transformational leader of the community.

Still, boundaries - in the sense of values and “membership” responsibilities - are critical. Raab/Kenis, again in Heading Toward a Society of Networks, comment broadly:

“[If] one asks ‘who are we as a network,’ it is implicitly assumed that it is clear, who or what ‘we’ is, i.e. a social entity that is bounded. Therefore, identity formation can only take place on the basis of inclusion. This in turn means that there must also be exclusion, i.e. a definition of who or what does not belong to the social entity. The development of ‘network for itself’ thus goes to a certain degree against the notion of high connectedness emphasized in the network society but rather re-emphasize the notion of inclusion and exclusion. As a consequence, bounding the social system is (again) of central concern, although as we argue below, boundaries very often remain flexible and fluid for whole networks.”

A bounded society of networks has identity - a kind of meta-brand - and in that meta-brand the bank can borrow the community’s trust to restore its position. When a person leaves that community, it stands to lose a lot of information, connection, and utility. This creates a switching cost that is real, even though it is largely psychological. Switching away from such a network would cause a participant some stress, because it is filled with people and companies they trust. Including - and potentially at the center - a bank with a local branch not far from where person lives. They just won’t want to end that relationship.

And that’s exactly what banks need right now.

Wal-Mart: Why Did It Fail in Germany?

CEM Strategy Case Study

Wal-Mart in Germany: What Failed?

Case information drawn primarily from Why Did Wal-Mart Fail in Germany (so far)?, Knorr, Andreas and Andreas Arndt, University of Bremen, Department of Business Studies and Economies, Institute of World Economics and International Management.

Wal-Mart’s rise as a retailer is historic. From its first store opening in 1962, it has become the largest private-sector employer in the world, with 1.38 million people on its payroll. Its revenues outstrip General Motors and Exxon. It built this powerful position by promising everyday low prices (EDLP), which it delivered using powerful supply chain integration and automation systems, even forcing its suppliers to change their systems and holding Wal-Mart inventory in their warehouses – and on their accounting books.

Internationally, Wal-Mart’s success has been greatest in Mexico and Canada. But its track record in Indonesia includes serious losses. A few of its outlets in Asia, including China, are profitable, but it has been struggling. Its experience in Germany, however, has been a “fiasco”, according to analysts. In fact, Wal-Mart has left the German market, despite the unprecedented resources it can bring to bear, including: 

1. Arguably the leading inventory management and logistics system in the world, which tracks more data than any other civilian database 
2. The world’s biggest private satellite system, used to track sales, replenish inventories and process payments 
3. Revenues three times higher than its next competitor, Carrefour. These revenues are equivalent to those of Germany’s top 30 retailers, combined. 

Entering the market

Wal-Mart built its presence in Germany through acquisitions, buying 85 stores for about 2 billion Euros over the course of 1998-1999. These acquisitions made Wal-Mart the fourth largest hypermarket operator in Germany. Nevertheless, its turnover only represented 1.1 percent of the market. And while its non-food sales were profitable, it overall was accumulating losses, which at one point exceeded $1 billion Euros. It was so cash poor it could not move quickly to refurbish the stores it bought, and even had to close two big stores and lay off 1,000 staff members.

The customer and the competitors

Wal-Mart’s success depends on customers. Who were they and what was Wal-Mart offering them?

Customers had three key characteristics: first, they purchased only a small amount of goods on each purchase. Second, they were not very mobile – which makes sense given the cost of transportation in Europe. Third, they were uninformed about the availability, quality and price of products of the retailers in their vicinity.

The five forces of customer experience management (Copyright (c) 2004-2012, pkward.com) create a framework for measurement and management. Economic value can be created and destroyed along these dimensions, according to substantial research in consumer styles, reputation management, brand metrics, perceived customer value, and social media.

Target customers in Germany typically wanted lower prices, an accessible or nearby location, superior product selection and superior customer service. In general, they prefer price and value to service and quality. McKinsey surveyed German consumers and learned that price-sensitive customers constitute 42 percent of the market, while only 13 percent cared more about service and quality. Brands matter to 45 percent of the population, as do the preferences of a consumer’s peer group. 

Competitors, both local and foreign, succeeded in retail markets internationally by following a straightforward formula:

1. Grow by acquisition 
2. Rely on differentiating the store’s offerings 
3. Tune core strengths such as logistics or product ranges to fit local preferences 
4. Keep local managers in charge to leverage their knowledge of the customers and the culture 

Consolidation of retail competitors in Germany now is such that the top five retailers control 63 percent of the market, and the top ten control 84 percent. This concentration of sales has led these companies to introduce their own brands in many cases, allowing them some relief from price competition and given them the ability to shift their pricing offerings to remain competitive. Hard discounters offer 600 to 700 products, with very low margins, including food products. In fact, these merchants in Germany control over three times more of the food market than in the UK, and four times more than in France.

Such competition and product range hasn’t left much room for Wal-Mart to compete. Even when Wal-Mart slashed prices as a loss leader to encourage store traffic, it was surprised to see many of its competitors matching its low – even loss-inducing – prices.

Strategy and Failure

1. Wrong acquisition strategy: Wal-Mart bought run-down stores from Spar and did not substantially improve them 
2. Poor merger management (four CEOs in four years) drove away the best store and regional managers 
3. Wal-Mart in the United States employs virtually no union employees (12 out of 1 million employees are union), so it had no financial or cultural experience in handling layoffs – it even engaged in “union bashing” in the German press when describing its problems in Germany, which created terrible public relations in a country that has long integrated union and management cultures across most sectors
4. Wal-Mart in the United States carries notorious influence with its suppliers, but when it demanded unlimited access to its suppliers’ facilities, the vast majority of the suppliers refused to supply this access. 
5. It could not regularly win price battles, eliminating the credibility of its “everyday low price” guarantee 
6. Its customer service was regularly rated below average – in part because it had trained its employees in US-style service: within three meters, a Wal-Mart employee was required to greet shoppers, which felt to Germans like harassment, generating actual complaints 
7. To provide US-style service, it had too many service personnel in the store, far more than Germans expected or needed, keeping the store’s costs simply too high to compete 
8. Violations of German regulations led to poor PR 

Your Conclusions

Which of the following characteristics were most responsible for Wal-Mart’s failure in Germany? 

1. Everyday low price guarantee not credible
2. Everyday low price guarantee not relevant
3. Distant locations
4. Culturally inappropriate customer service
5. Unattractive stores

If you were to guess, how would Wal-Mart rate on these issues?

1. Word-of-mouth regarding Wal-Mart in Germany
2. Reports in news and online media
3. Perception of the company’s character and values

Finally, which of these two issues do you believe was more relevant to Wal-Mart’s failure in Germany?

1. The customer experience strategy
2. The profitability strategy

Additional discussion questions 

Does a profitability strategy for any company exist without a customer experience strategy? 

Name sectors where a differentiated, attractive customer experience is highly relevant, and where it is less relevant.

Name two examples where a company in a sector where customer experience had been viewed as less relevant decided to innovate, and succeeded to win marketshare and/or profits beyond their peer benchmarks.

Apply Porter's Five Forces and a resource-based strategic view of the firm to this case study. How explanatory are they? How does customer experience management fit, or not, with these other frameworks? If you treat "customers" as stakeholders, how do the government, unions, suppliers, and the press fit into CEM? Look in particular at the cognitive/affective/conative and behavioral psychological elements of CEM for each of these stakeholders. Which of these stakeholder groups are most rational? Least rational? Which use emotion in their communications and interactions, potentially as a strategic resource of their own?

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¹ A study intended to confirm for German consumers the Sproles/Kendall consumer styles index, originally formulated for US consumers, showed that six of the main drivers were confirmed, while two were not, including the value driver (i.e., low price). Variety-seeking seemed more relevant to German consumers than low prices. See German Consumer Decision-Making Styles, Walsh, Mitchell, & Hennig-Thurau, 2001, p. 73.

open vs closed innovation: the wrong question

I'm a Quora member. It's a great platform. One question posed there was from someone who asked,

Innovating within the company is not possible nowadays for even big companies. [Not uniformly true, by the way, but a good general statement.] Collaboration with universities, different research institutions are becoming kind of mandatory. Is this the future paradigm.... of innovation? ... What are the examples of technologies that have grown out of spin-offs, or technologies that have collaborated in an open innovation model?

Here's my answer.

India typically encourages open innovation. The rationales include faster time to market, faster development of families of patents, and less need to use patents to restrict competition in a growing market. However, some of these rationales are rationalizations that emerge from poor IP rights protections. The reality of India's commitment and excellence in innovation in the BRIC economies is still unclear. I hope they continue to explore deliberate attempts to create hubs that bring in different companies and institutions to create families of new ideas. They'll be facing stiff regional competition from China and other Asian countries in innovation, and a good number of these countries are truly leaning into the problem, since they realize innovation is key to owning markets and reducing price sensitivity. Asia, in fact, seems to be ready to stop being the low-cost provider of commodities. 

The US, where the market is not growing as fast and where a tradition of IP as a barrier to competition is very strong, would have a hard time adopting true open innovation, unless it's in an "open source" context. Red Hat, or standards bodies, etc., come to mind.

The real problem to solve has two components: Reducing the cost of R&D on the balance sheet, while speeding time to meaningful innovation in your market.

Off-balance-sheet solutions, and networks of partners who are incented to leverage new IP, can create strong ROA, very quickly, and still maintain competitive advantage. In the first case, I would create a PE fund with companies in a vertical (transportation, logistics, cloud, retail design, FMCG suppliers). That fund buys or invests in IP, and co-owns it. Buying IP can sometimes be done very inexpensively. Returns from licensing further reduce overall costs, and may return profits back to participants. This reduces or eliminates many costs associated with R&D, and allows the PE fund participants to have discussions about how to create value in the vertical chain with those innovations.

This combines off balance sheet techniques with "open collaboration" that still results in protectable IP and control of competition. I'm unclear how Xerox intends to leverage what's coming out of their open innovation program in India. Inventing new things is great, but how will Xerox measure the return to their shareholders?

To expand the view of innovation, you can also look at the opportunity that multinational enterprises have: By functioning across different cultures, they can (and have to) break down their value propositions to find out what is local, what is global, and how those satisfy local market needs. Filling gaps in local markets provides information that can be fed back into future products and platforms. In short, the market principle + agile innovation + international challenges = new information about designing and delivering value propositions. (Here's an interesting, related article.)

Other resources

Lead Market Factors for Global Innovation: Emerging Evidence from India. 

India: Decade of Innovations. 2010-2020 Roadmap. 

Starbucks: The Modern Globalization Imperative

Be very local and very global

Lately Starbucks has been faltering. It expanded too fast, many say And its brand has stumbled. It lacks focus, and some consumers have rejected it outright. They aren't clear any more about whether the company is about coffee, or music, or adult shakes such as Frappucinos. And some doubt the company's reputation as being eco-friendly, considering that as just corporate posturing to mask the high price of their coffee. (See Bryant Simon's "Everything but the Coffee: Learning about America from Starbucks" for an interesting analysis.) 

Starbucks, ultimately, is more than coffee. "Starbucks ... sells experience." (Starbucks Global Advisory Council meets in Dubai, AMEInfo.com, 4/30/2006). You don't update Starbucks by updating the coffee. You update the brand values delivered in the in-store experience. It's long past time for Starbucks to ramp up its local relevance - city by city, country by country -- while also exploiting its uniquely global resources and abilities.  

Emotional and cultural intelligence

To get at how local markets such as China, Germany, and France view Starbucks requires emotional intelligence and cultural sensitivity. 

Partnerships help moderate market entry risk. Starbucks partnered with Alshaya Group to help them grow their Middle East and Turkey markets. KarstadtOuelle AG assisted Starbucks' entry into Germany. KarstadtOuelle's 82 percent interest in the German venture was later bought back by Starbucks after the company learned what it needed from German consumers. Similarly, Starbucks just announced that it is buying back interest in its French market from Spanish partner Sigla, S.A. (Sigla will retain its Starbucks portfolio in Spain and Portugal.) The pattern: Risk a little in a co-venture, and learn from your partners' internal (often implicit) knowledge of, and experiments in, the target market. 

Some global CEM strategy basics

My own CEM framework turns Michael Porter's five forces work inside out by shifting corporate strategy from a sector orientation to a customer ecosystem perspective. One consequence of this approach is that the strategist must build his work on what drives consumer choice and behavior. International strategy requires that the strategist analyze systems of meaning and value that dominate a consumer's world view. 

To do this (as Sidney Levy and Phil Kotler implied as long ago as 1969), the strategist must understand how a company advances the conversation about the symbolic characteristics of a market's world of meaning. Customers live in a world of symbols and signs, and if a company wants to be one of those symbols or signs, it has to deeply understand and work within that world. After all, a company does not define its brand alone. The brand is granted meaning by its customers. 

Tactically, companies must start with measuring customer behaviors and attitudes at touch points to see how experiences at these touch points create or destroy passion for the brand. A smart company innovates these touch points by exploiting the company's unique resources to design touch points, or to add them, or even take some away, to create competitive positioning. 

Fundamentally, the multinational must answer two broad questions: how do cultural values, signs and symbols influence touch point design from region to region? And, how can the product, service, and touch point experience create defensible value? 

The backstory

Starbucks is a high-end coffee retailer and product brand originating from the Pacific Northwest of the United States. It has grown to more than 15,000 stores globally in just over 30 years of operations. 

It sourced coffees internationally and blended them to turn a commodity - coffee beans - into something difficult for competitors to copy. 

Starbucks, in fact, has created an entirely new vocabulary about coffee which, although it might seem Italian with terms like grande latte, is a semantic space all its own. 

Posted under Creative Commons License. Copyright by Nicki Dugan.

Starbucks marketers have been developing this language since the 1980s about coffee beans, evoking a mythical world filtered with the domestic U.S. view of consumption and foreign lands. "Although Starbucks proudly serves its coffee around the world, the company's sense of geography is refracted through a commodified Western lens... [One] journalist carped that unsuspecting consumers must choose from 'beans from countries that college graduates cannot find on a map'." (Charlene Elliott, Consuming Caffeine: The Discourse of Starbucks and Coffee, Consumption, Markets & Culture, Volume 4, Number 1.) And the language was filled with Western-biased terms: "Orientalism pivots on the notion of the 'mysterious East'... and often portrays the foreign as primitive," says Elliot. "Coffees are 'magical', 'intriguing', 'fleeting', 'elusive', 'nearly indescribable' (i.e., mysterious), and 'wild' and 'earthy' (i.e., primitive). And as with Orientalism, these descriptors exist to be observed and consumed by the West." 

Indeed, Starbucks' ability to create an exotic, Orientalist world in the minds of educated domestic U.S. consumers relied upon sourcing coffees from far-flung - mysterious - parts of the planet. The mystery is elemental to the coffee experience. Not surprising, then, that Starbucks sourced beans from non-Chinese sources when it entered China (Ibid.). 

This exoticism - a key part of creating the Starbucks brand - needed to be protected. Could a local coffee shop actually source, roast, and blend consistently beans from the Pacific Rim and Africa to create a unique, trademarked offering? "A commodity of Yemen is ground with a commodity of Indonesia to create a non-commodity product: Arabian Mocha Java^TM. Similarly, the beans of East Africa mix with those of Latin America to become Siren's Note Blend^TM." (Ibid.) 

Exporting Brand Values

When faced with Europe, Starbucks faced a unique challenge for its exotic beans and language: What Americans find exotic doesn't translate well to Europe. Europe has been the trading center for some of the world's most exotic goods from far-flung locales for centuries. Angola is just not exotic in Europe. And European familiarity with coffee preparations - even specific Italian styles of coffee - make the faux-Italian language of Starbucks' main menu confusing, even laughable. Even the "third space" concept that Starbucks innovated in the United States is what France has enjoyed enthusiastically since World War II - thirty years before Starbucks was more than a glimmer of a brand concept. 

To get a hint of how Starbucks' unique set of brand values is being into something relevant and uniquely defensible in the French context, something I've been tracking for several years now. 

The initial positioning echoed the US approach: a coffee shop/restaurant offering a "branded Starbucks experience" (even today near the entrance to rue Mouffetard at rue de Bazeilles, for example, remains a classic American experience). Over time, I noticed Starbucks employees on the sidewalk educating passersby in how to "create your own coffee", attempting to appeal to a classically French sense of artistry and creativity - perhaps as a form of self-expression. I saw the company's positioning shift. (You can see the France Starbucks site here: http://www.starbucks.fr. It has memorialized the positioning shift in its language about legacy, personalization, and values.)

Recently, the Starbucks strategy in Paris seems to be promoting purchases of its coffees as an endorsement - and economic support -- of the foreign producers of the coffee beans that capture the unique characteristics of the soil and light. This blends the classic French concept of métier (pride in one's skill as an artisan or professional), terroir (land-specific produce), with a "green and sustainable" brand promise. 

Of the brand values Starbucks has established over the years, in France it is reinforcing the few which make it powerfully relevant to French consumers: Métier, terroir, sustainability. In fact, since Howard Schultz (once CEO and then Chairman of the company) regained the position of CEO in January 2008, the company has been moving rapidly towards an eco-friendly image. 

Positioning is only meaningful in business terms if it can be defended. And Starbucks can defend itself well. It has committed to specific recycling and energy-efficiency goals on an aggressive timetable. Starbucks just introduced double-flush toilets in Australia. "Studies of dual flush toilets show that using a dual flush system as opposed to a conventional one can reduce water consumption by up to 67%," according to ServiceMagic.com. "[People] come out of those coffeehouses and that's what they're talking about - the dual-flush toilets," according to Starbucks Corporate Architect Tony Gale (Starbucks brews global green-building plan, renovates Seattle shop, by Sarah Van Schagen, 6/30/2009, Grist). And they partnered with GE to create a new low-cost light. And Starbucks is not going to let you forget its commitments: "Starbucks is adding explanatory signage through [its] stores to highlight the sustainable elements." [Ibid.] 

Outlocal the locals?

Sustainability and eco-friendliness is a huge differentiator for Starbucks when its chief competition is a local mom-and-pop coffee shop which can never have the accumulated impact of a multinational corporation. 

And yet local owners don't have Starbucks' big-corporation, multinational baggage. Ethiopia accused Starbucks in 2007 of "coffee colonialism" (Simon, page 17), and the National Labor Relations Board (US) discovered consistent violations of the National Labor Relations Act in some US-based stores (Huffington Post). While the company has been rewarded with international ethical management recognition (Covalence Ethical Ranking, 2006, places Starbucks #3 globally compared to all other companies), Starbucks' organic and fair trade practices have been a source of ridicule by some who believe that it has not gone far enough. Many consumers may have the impression from Starbucks signage that it treats its coffee purveyors fairly, but its use of fair trade coffee is only a tiny fraction of all the coffee it sources. 

Starbucks' brand for many of its former core audiences has been sullied.  

Two strategies emerge. If you determine that you're better off being local, be as local as you can be, by leveraging uniquely local resources. And second, hide your global brand as much as possible. Starbucks has embraced them both. 

The company recently launched a series of new stores and revamped existing ones, that barely hint at their association with Starbucks. They simultaneously create a distinctive, well-calibrated local offering. And to differentiate themselves from local competition, customers can also enjoy difficult-to-copy coffee products in a pleasing space designed by some of the most sophisticated architects in the world. 

Sara Kiesler reports in SeattlePi.com that three rebranded stores in Seattle, called "un-Starbucks", or "stealth stores, have a local focus, and even break from Starbucks' well-tuned processes, products, equipment and training." "In order to have relevance, I said, how about we name it after the street," said D. Major Cohen, senior project design manager for the 15^th Avenue Coffee and Tea, a wholly-owned Starbucks shop. Using French presses and small-batch brewers, the store also features whole-leaf teas and "no Frappucinos whatsoever," says Kiesler. Even the beans have been rebranded with the local store name (Seattle Times). 

You can still get a hard-to-copy Guatamalan Antigua blend. That's important because competitors cannot offer the same level of exoticism, which remains hard to copy, but you can also get Seattle-specific goodies, such as smoked salmon, local entertainment, and sandwiches from a local bakery with an excellent reputation. You can even get wine and cheese in the afternoon. Cohen says that it's all about giving the neighborhood what it wants. 

Plus, 15^th Avenue Coffee and Tea is eco-friendly. 

You can bet that 15^th Avenue Coffee and Tea is still known as a Starbucks shop, even if it's only via word-of-mouth. But consider what is surely in the back of the consumer's mind: only Starbucks has the size needed to make a huge impact on the environment. And Starbucks isn't really trying to ram its brand down the fatigued, cynical consumers throat. The company seems to be saying that its branding is not as important as its eco-friendly commitments and desire to be your locally-focused coffee shop. 

Will global consumers buy it? One thing's for sure: Starbucks has made an effort to change the conversation. And both Levy and Kotler would agree that it cannot succeed unless Starbucks advances the conversation about the symbolic characteristics of how we view the company, the brand, the store - and what our money is used for beyond just buying a cup of coffee.

After a period of stress, Starbucks' former CEO returned to the company in 2008. Some wondered whether he had what it would take to reinvigorate the brand, particularly as the economic crisis worsened.  

Whether or not the brand is improving, the company is doing well since Mr. Schultz returned, outperforming the market consistently. Take a look. What's helping? 

the ace hotel: how a low-margin, highly-competitive business gets a CEM makeover

“I love the Ace Hotel,” says Miriam, an executive with a major dot.com. “Let’s meet there for breakfast.”

Whenever Miriam and I are in the same town (recently, New York, Paris, and Washington DC) we like to catch up on all things social networks, user generated content,  and customer experience management. You’d be hard-pressed to find a more savvy person than Miriam in judging both tastes and people.

So when Miriam recommends the Ace Hotel in New York City for some of their famous scrambled eggs, I don’t hesitate to put it in my iPhone calendar.

Not just a hotel, but a scene

When the New York Yellow Cab dropped me in lower Manhattan at the designated corner, I had trouble finding the entrance. Under normal circumstances, my CEM alarms would have been going off: after all, creating a strong sense of arrival is an important part of establishing a baseline for your branded hotel experience, right?

But I’d been hearing about the Ace Hotel for a while. Starting on the West Coast of the United States in decidedly hip cities of Seattle, Washington and Portland, Oregon, I knew that they’d been trying to reinvent the hotel experience, and I accepted the lack of arrival experience as – possibly, anyway – a piece of their new brand.

In fact, there’s something decidedly upside down about the Ace Hotel’s brand. It doesn’t try to be what many hotels are. It’s trying to evoke a hip, music- and fashion-oriented “scene” where you immerse yourself in culturally iconic signs and symbols. The rockster semiotics of the place make it work.

The challenge in the brand is that everyone feels like a rock star (or wants to), and yet they also have to make a brand desirable – out of reach, if you will – so that people will pay attention and seek out what they don’t have. (All great brands generate desire.)

Entrepreneur Magazine hints their approach: “The Ace Hotel brand is so cool, it even has its own special-edition Converse high tops [sneakers]. Alex Calderwood, co-founder and creative mastermind behind the industry's hippest hotel properties, is showing off a pair to his business partners, Wade Weigel and Doug Herrick, in the airy, stripped-down lobby of the Seattle Ace.”

“Once the kicks [sneakers] go on sale next month--$100 for the midnight blue two-toned, gummy-soled style, with only a few hundred pairs available exclusively at the hotel's shops--Calderwood will join a short list of people deemed cool enough for the privilege, like designer John Varvatos and Outkast rapper Big Boi. This is rock-star status, without the rock star.”

Converse brand high tops are a perfect brand pairing with Ace. It’s downscale and retro – and currently still hip in many youth culture circles. Hipness is enhanced by the high price and collectability of the Ace Hotel model. But most importantly, the shoes echo the hotel brand’s devotion to cultural icons, music, and fashion. At the same time, the Ace Hotel sticks with its Pacific Northwest roots by offering great seafood and Stumptown coffee – a coffee so good and so un-Starbucks that it becomes a connoisseur brand, while remaining completely common-man and hip.

Meet your new concierge, whose funkiness resets expectations and boosts profits

When most luxury, hip hotel brands – take the W Hotel for example – greet you at the door or concierge desk, you still interact with “hotel professionals” whose very uniforms alert you to their training.  The valet team can wear long green coats with gold epaulettes. The concierges wear business attire and look very well put-together.

Not at the Ace. The entire brand concept gets communicated from the curbside: it’s a hidden hotel, with non-uniformed hipsters opening car doors and hailing cabs, and hotel clerks who look like they are actually interesting people in their own right. Well, I say it's non-uniform. But it’s uniform in the sense that Ace hotel personnel have a disciplined style guide for their hipness. But it doesn’t look buttoned-up like W Hotel, or for the now-tragically unhip Four Seasons. And the valet guys and gals can just hang out at the door, slouching and chatting, and it's just fine - for them and for the brand.

One benefit of resetting expectations for the Ace Hotel chain is that it can redefine the economics of running a hotel. That’s a critical advantage given the notoriously slim margins made by many hotels.

The advantage comes from reinventing the standards to which you are held. Other hotels are likely to live or die by “customer satisfaction,” and so probably have some sort of playbook inspired by a boilerplate “hotel quality standards” list from JD Power (see for example the J.D. Power and Associates 2006 North America Hotel Guest Satisfaction Study). Luxury hotels in the J.D. Power recommendations must feature high speed internet access, pillow-top mattress, and WiFi. As you move downscale from luxury, through upscale and mid-scale full service to economy or budget, the must-have lists actually get longer (complimentary breakfast, big-screen TVs, and so on). With lists like this putting all hotels onto the same road to customer satisfaction, it’s not surprising that most hotels end up feeling alike with tight margins that reflect their sameness.

In fact, the existence of a funky concierge makes it completely acceptable to customers that the Ace offers bunk beds in some of the rooms. Other rooms have functioning turntables (yes, you can spin your own vinyl). The very hipness and hominess allows Ace Hotel to actually be a little bit sloppier and friendlier than other hotels. And, maybe, cheaper to design, appoint, and maintain.

Not just about keeping costs down, but keeping profile up

Luxury trends in hotels, according to Karen Weiner Escalera in her December 2007 article in Hospitality Industry, hold true today.  We see it in our own business activities in my partnership, which does investment advisory for luxury hospitality brands. These trends include many that Ace Hotel is leveraging:

1. Interests and connoisseurship dominate hotel choices.
2. Stealth wealth: boutique hotels that offer one-of-a-kind objects and more personalized service attract the wealthy.
3. Creativity. Ace Hotel featured the creative French band Revolver and broadcast them live from their New York Hotel. The fact that you have a turntable in your room means you are creative, too.
4. Products are out; experiences are in. The Ace Hotel Converse high-tops are not luxury products. In fact, they could never be mistaken for luxury products. The point is to evoke a self-image, and in doing so create a unique and memorable experience.

For Calderwood, the big brand value to deliver is “cool”. For him, you can only do that if you create intimacy, include everyone at every economic level and acknowledge their interests and essential dignity, be interesting, and be original.

What is remembered is as important as what is bought

If you want proof that the J.D. Powers satisfaction approach doesn’t yield memorable branded moments, just take a look at the cloud tag I generated from the top 30 Yelp reviews of the Ace Hotel in New York. Of course the biggest words are the ones used most often – and they’re pretty common words, as is expected from tag clouds. The ones in middle sizes become more important. So look past the biggest words (Hotel, Ace, Room, Lobby). What are people talking about?

If I were to put together sentences from these mid-sized words, they would read like this: The Ace Hotel is a great, comfortable place, with friendly people, helpful staff, comfortable couches, and coffee. It’s cool, you can have a really good time between the bed and bar, and there’s nothing like it.” If you go to the really small text, you’ll see how the hotel elicits these comments: the restaurant, shop, bunk beds, fridges, and details in the bathroom. There’s also something in there about dog food, which I bet you is a compliment.

Notice, nothing about WiFi, high speed internet, pillow-top mattresses or complimentary breakfast.

My friend Miriam loves the Ace Hotel. And now, so do I. Given that the first Ace Hotel in Seattle was cash flow positive before its first year was over, you can bet owner Alex Calderwood loves the Ace Hotel, too.  It pays to be original.

Why India Matters: A Social Science Perspective from TRIUM

TRIUM Webinar: "Why India Matters: A Social Science Perspective" from TRIUM Global EMBA on Vimeo.

Your Retail Strategy: LuLu, Minnie, and SouthWest

Effective In-Store Experience

With all the buzz around e-business, it still remains a small part of overall worldwide transactions. Only 22 percent of the world is online, and many of those cannot reasonably conduct business given their age, their economic situation and their local infrastructure – not to mention preferences! Even in the United States, the most connected country in the world with more than seventy percent of its population online, online retail sales were not even three percent of total retail volume.

Brick-and-mortar retail drives economies. Given that customer experience management (CEM) when done correctly pulls levers in people's hearts and minds to create satisfaction, improve word-of-mouth and instill loyalty, the potential impact of good CEM for generating profit is enormous.

In a tough economy, when traditional corporate communications are both distrusted and increasingly focused on profit-stealing “bargains”, CEM can be a better investment than demand-generating investments such as advertising. If a big box store spends millions trying to convince customers they care, the investment can be completely undermined if the sidewalk in front of the store is littered with trash, has grass growing up in cracks, and is cluttered with shopping carts.

Add to this the brand destruction flowing from surly clerks and poor service recovery when customers complain, and retailers will see that a shift towards CEM investments could well be the right approach to competing better in challenging economic times.

The principles of good CEM are easy to grasp, and while it is always better to implement more of them, and to do it in a measurable, comprehensive way, just a few beginning steps towards creating effective in-store experiences can have an impact for retailers seeking differentiation, loyalty and positive brand equity.

It Started with Disney

Michael Lingerfelt, vice president of architecture and design for McGillivray Consulting Group, is one of the nation's leading retail architects. We worked together when I was leading strategy engagement for the American Institute of Architects, for which we were designing a knowledge management capability at AIA for retail architects. At the time he was the director of project architecture and engineering at Walt Disney Imagineering.

“Before 1955,” Michael tells me, “all big retailing looked like K-Mart. You had a warehouse, 'blue light' type specials.” And what happened in 1955? “Disneyland opened,” he said.

And so, in a way, themed retailing came from Walt Disney (“Walt,” as Michael still calls him). It was the beginning of customer experience management, because themes create value in the minds and hearts of customers by stimulating senses, evoking emotions, and setting people in an environment where stories come to life.

It's no surprise that Disney's innovations are still touted today in customer experience management books in the popular business press, and even consumers instinctively understand what Disney was going for: embedding the buying experience in stories, myths and common needs. In this context, buying is an expression of identity that fulfills emotional and spiritual needs.

“First and foremost,” Michael says, “you have to remember that retail is an emotional experience. It solves a problem that has emotional components.” What are the key drivers of retail success in customer experience terms? Michael refers me to a guide to amusement park design devised by Marty Sklar (his former boss at Disney). Mr. Sklar called them Mickey's 10 Commandments. Michael can recite them from memory, which gives you a sense of the power of Disney's culture. They all map well into core customer experience management principles.

1. Know your audience
2. Wear your guest's shoes
3. Organize the flow of people and ideas
4. Create visual icons
5. Communicate with visual literacy
6. Avoid overload
7. Tell one story at a time
8. Avoid contradiction
9. For every ounce of treatment, provide a ton of fun
10. Keep it up

While these might seem prescriptive, even simplistic, they capture the fundamental insight of customer experience management: Brands drive business success, and they are created in the mind. A consequence of this insight is that companies must learn how customers think, feel, and remember before they can create sustainable business value. Applying customer knowledge across channels, and improving that knowledge over time, is what makes customer experience management a science.

Managing Retail Experiences

In the growing field of customer experience management, a key challenge is to create methodologies that work in as many customer channels and scenarios as possible. This approach lets companies be systematically sensitive to customer demands, instead of putting out fires at the call center or the returns counter.

CEM methodologies go beyond merchandising experiences within a store, or how to theme displays. CEM must accommodate the interplay among channels, and measure the effectiveness of cross-channel processes and designs. When a prospect or customer walks into your shop, they've had their expectations set by your advertising, your website, and their past experiences with your customer service representatives. Your brand – and their loyalty to it – depends on how well you manage expectations every time they interact with you. 

CEM differs from the way past customer management specialties work. For example, customer relationship management as it is normally practiced normally does not directly address the fundamental CRM question: Why on earth would a customer even want a relationship with your company? CRM systems normally do well at automating sales processes and measuring customer satisfaction, but that's hardly the kind of approach that guarantees the kind of customer engagement that generates consistent profits from loyalty and word-of-mouth marketing.

Similarly, customer value management, even when combined with predictive analytics based on loyal customer behavior, usually is so focused on transactional data and financial metrics that it becomes easy for a company to become obsessed with their own customers behaviors instead of their target market's aspirations, organizing values and emotional needs.

Walt Disney would definitely not approve.

So, what makes CEM different – and better – than traditional approaches to retail? While studying store traffic, shelf use and exterior design will always matter, CEM embeds these traditional retail strategies into a larger framework. Let's take a look at two key components to a CEM retail strategy: metrics and segmentation.

You cannot manage what you do not measure.

A good retail CEM strategy starts with the right measures. Fundamentally, CEM is about creating a branded, differentiated impression that results in a memory that serves the customer and your business. Memories don't have to be “good” ones – you can interact with an aloof service representative at a Prada store, and the moment will be branded to the point where you actually desire Prada more. But an aloof service representative at Nordstrom will annoy you, risk a sale and possibly generate some bad word-of-mouth.

These examples reveal that managing customer experiences is not about ever-improving quality of service. It's about advancing your brand values in the network of customers, prospects and other stakeholders who matter to you. When experiences accomplish this, you have created an effective, branded experience that correlates with profit, good reputation and improved loyalty.

CEM, then, is all about how the brain works to create the right impression. CEM metrics flow from measuring that process and its effects. Key to understanding CEM in the retail environment is the following:

1. Who are you targeting?
2. How do they value the world? (Look at Myers-Brigg, DISC, and SDI as frameworks)
3. How are these values framed in terms of actors, stories and desired outcomes?
4. What cultural, psychographic or demographic characteristics matter in the ideal experiences your customers want?
5. What traditional merchandising and branding approaches must be reconsidered based on the above questions?

Understanding how people think, what makes them remember something, and how they make decisions of course impacts marketing and communications, but the implications for our new knowledge include a new, more ethical and powerful grounding for marketing and communications theory. In particular, scientists have found that people think in frames that capture story structures, values and meaning in the deepest sense. We organize reality with these frames. They are built into the brain, and therefore into the mind. The consequence for marketing and communications is that every business must successfully answer the question: What meaning are we creating in the marketplace? Are we offering something beyond mere products and services? Are we living out a story in our mission and behaviors that people can truly care about?

These issues map perfectly into Marty Sklar's recommendations about knowing your customers and telling consistent stories, one at a time.

From Minding Things in the Store to Storing Things in the Mind

What makes CEM such a comprehensive approach to customer management science is its focus on how the mind works to create meaning. The mind has in the past been a proper domain of branding professionals, but now understanding the mind is critical to overall organizational design, incentives, and competitive strategy.

Take a look at retail banking for example. Kathleen Khirallah, research director for TowerGroup, got it half right when she said, "An ongoing source of frustration for customers and bankers alike is the inability of customer contact personnel to interact with customers in a manner that demonstrates knowledge of the customer and their value to the institution.” (Chordiant Software establishes core leadership in retail banking; Leading provider of Customer Experience (Cx) solutions now serves ten of top twenty global banks. M2 Presswire, May 2006.)

Demonstrating knowledge of the customer is critical to the customer's emotional response to the company. The information is useful as well, as it helps the customer service staff person act on the customer's preferences to solve problems, offer the right services, and so on. But it's the emotional response that gives customers a more powerful foundation for memory, and for creating meaning in interactions.

Knowledge of the customer's problems is a leading indicator of satisfaction – it even generates a sense of intimacy. But how do you get from intimacy to satisfaction?

Many customer research firms offer solid research that can help the retailer. Carlson Marketing's framework features trust, commitment (an emotional measure), and a two-way expression of mutuality and alignment.  Some studies have shown that mutuality and alignment flow from the extent to which companies and their customers believe they share values, aspirations and desired outcomes. Carlson shows that high scores on their relationship framework are strongly correlated with the behaviors that retailers want: recommendation intention, loyalty and interest in buying more products.

Notice that loyalty – both as an attitude and as a behavior – is now a derivative metrics. The prior, independent variables of trust, commitment and mutuality/alignment are chiefly shaped by emotions. To get from customer knowledge to intimacy requires the design of processes, use of technology and employment of people aligned around trust-building, commitments and a sharing of values, aspirations and outcomes.

Beyond emotion, CEM metrics focus on both memory and story telling. Both of these metrics indicate the extent to which a customer's experiences reinforce a frame used unconsciously in the customer's mind with which they understand, measure and remember value and values.

Frank Capek, a CEM consultant from Atlanta, Georgia, USA, reinforces some key cognitive psychology points (some coming from Daniel Kahneman's groundbreaking work for which he won the Nobel Prize). If you ask people to tell you the last four digits of their Social Security Number (SSN) or phone number, they may subsequently guess the price of a bottle of Cotes du Rhone red wine they've just tasted as high (if the last four of their SSN were high), or low (if the last four digits were low). Of course, consumer decisions are more complex, but the effects Capek describes are real, and must be considered in designing a retail experience. Another topic that Capek discusses is one of my favorite themes in my CEM teaching: storytelling. Capek had worked with a champion high-altitude mountain climber, Christine Boskoff, who wanted to attract more customers to her company, Mountain Madness, which offered outdoor adventure travel. His suggestion? At the end of an adventure, have participants gather around to tell stories.

This is what is sometimes called elaborative rehearsal, which is, in a nutshell, getting people to practice the behaviors you want them to repeat. After rehearsing stories, your customers have already imprinted in their minds the key messages, values and emotions that frame their experience. They're more likely to tell stories – effective and authentic stories – than without such rehearsal.

CEM's point of view on management science, as a result, elevates the customers spiritual, emotional, cultural and other psychic needs to the forefront of process design, environmental design (merchandising, for example), and human resource strategies. Metrics such as speed, efficiency and quality of service – as objective as they sound – in fact are not key performance indicators unless they are correlated with key experience metrics. So, even though Kathleen Khirallah of TowerGroup seems to espouse customer intimacy, she – and many other analysts, continue to provide tactical retail strategies based on the wrong measures. “Customer interactions,” she says, “still fail to meet customer expectations -- for speed, efficiency and quality of service.” Unless by quality of service she is referring to outcomes such as memorability, storytelling, brand reinforcement, and emotional engagement, Ms. Khirallah is still firmly in a pre-CEM management paradigm.

The benefits of measuring the right things in your CEM strategy are plain. Better relationships build more value. Carlson Marketing studies show that a 5 percentage point improvement in their relationship skill improves customer value by 25 percent. Focusing on emotion isn't just a good thing; it must become a core competency of your company.

People Want to Feel Different Things

Segmentation is critical to business success. The more a company such as McDonalds tries to be all things to all people, the more their experience – and differentiation – will converge on an average. (G-CEM's analysis of McDonalds vs Burger King provides some analytical meat to this proposition, and is well worth the study.)

In CEM, segmenting your customers based on desired experience helps you focus on the investments you have to make to generate effective outcomes. If you want to be remembered, if you want to build your brand, and if you want to create real engagement, you cannot offer the same experience to everyone.

Many companies already do this without a formal program. Best customers, regular customers, complainers, friends of the boss – they all get different treatment. But if you segment your customer experiences this way you're not necessarily being strategic for the firm.

Even in CRM, which presumably is more rational about organizing a business's response to a customer based on their value, you will see non-strategic behavior. A classic example is providing discounts to most valuable customers. Companies do this because they feel they can “afford” to do it, and the customer will be “less likely” to bolt to a competitor.

Is that true? Probably not. Recall that a key CEM metric is the extent to which a customer feels understood by a company. In B2C, this is an emotional bond. In B2B, sharing risk and aligning with a customer’s road map prove it. Where do discounts even matter in these cases? Netflix appreciates this and in fact provides worse service to loyal customers – because it can leverage the emotional bond to allow them to ship faster to new customers who are not yet loyal. Thus, Netflix is measuring and acting appropriately within the CEM paradigm. And in the case of Procter & Gamble, their commitment to retailers in their channels is legendary: they want retailers to profit from selling more Procter & Gamble products based on factors such as product placement, assortment, choice – not necessarily discounting.

In CEM, you have to do some serious study to determine which customers are most valuable to you, and what kinds of experiences you want to give them.

Sometimes your customers' experience preferences break down nicely along demographic lines. For example, the IBM Institute for Business Value did a comprehensive study of the differences between how teenagers (teens) and Baby Boomers (boomers) shop (Retail Opportunities in a World of Extremes: Understanding today's teens and boomers. 2006). In the study, IBM looked at the role of shopping for these two groups, what influenced purchases, shopping styles, how technology affected shopping, and the drivers of successful experiences.

As you might expect, for teens, the social network matters. When shopping online, thirty percent of those surveyed use “email to a friend” links, and the vast majority of teenagers respect and follow the advice of friends – and celebrities. Boomers trust brands – and their parents. These trends show how different generations frame authority and trust differently. As a result, teens view the success or failure of an in-store experience as depending on the people. Boomers are less patient. A single bad retail experience means they reject not only the customer service person's behavior, but also the entire store and the brand.

Thus, the moments of truth for these two segments differ dramatically. Just this basic knowledge can help retailers train staff to deal more effectively with service failures, and to even create more positive experiences proactively.

Teens investigate products online, but buy in-person. This suggests one set of cross-channel opportunities, involving social networks, checking for products in-stock, and even embedding your retail experience in the teen's social calendar (buy more than $100, get a free movie ticket at the neighboring theater, for example). Boomers may buy online more often because they have credit cards, but they may want to return or exchange products in person. If that's the case, you will want to design a returns and exchanges process that is fast, respectful and brand-reinforcing. Train the customer service people to be especially aware of signs of frustration for boomers.

Sometimes, however, demographics don't help you much. Some people just have different tastes and shopping styles. This matters tremendously to the success of a retail experience. Wal-Mart customers in Germany notoriously rejected Wal-Mart's cheerful in-store culture. They didn't appreciate Wal-Mart's anti-labor attitudes. And, ultimately, German shopping styles have been shown in various studies to be driven more by variety than by price alone. So Wal-Mart's values, operations, HR training and fundamental offering were wrong for Germany, and it cost the global giant billions of dollars before they closed up shop and left the country.

Setting Your Retail Strategy

The Apple Store doesn't have lines, it has clumps. Instead of waiting to be rung up, customers assemble in groups around computers, phones and iPods, engage in conversations, assisted by an Apple Store employee. When it comes time to make a purchase, the Apple Store employee doesn't guide the customer to a line. He or she brings out from the storage room the customer's purchases along with  a mobile wireless device, takes the customer's order, emails the receipt.

Does the customer wait? Yes. But is there a line? Absolutely not – and that's the key. Because the physical characteristics of the purchase experience are different from what customers expect in the retail experience, the Apple store customer never feels like they're waiting pointlessly. It's interactive, friendly, bump-free – all earmarks of a well-conceived, differentiated customer experience.

This is a simple example of how process design and technology  can help reconfigure customer perceptions and expectations in ways that matter to them, and that are easy for them to describe in stories to their friends.

Beyond Technology: Embedding Experience in the Brand

It's not just the technology that matters. Sustainable differentiation comes in the brand values that are expressed in your overall processes, and in what makes up those processes (signage, queuing, restrooms, merchandising, environment, and so on). These subprocesses bring technology, people, process and design together to reinforce your brand values.

As innovative as Apple's retail strategy is – and it is surely the most successful of any single-line computer retail operation in history – Lulu Lemon' Athletica's strategy surpasses it. LuluLemon Athletica  opened its first store in Vancouver, Canada in 2000. They offer sportswear that leads the industry in quality, design innovation and use of sustainable materials. Their products are expensive and they make no apologies about it. But their real innovation is how they engage their store employees and local organizations, including yoga studios.

Just as Apple claims to be a product company but is instead a customer delight company, LuluLemon Athletica has claimed to focus on offering the highest quality, most innovative yoga and sportswear apparel in the world – but it's really a luxury version of the Southwest Airlines strategy of exploiting their most expensive assets for competitive advantage.

Consider Southwest. Their key strategy is to keep their airplanes in the air. To do this they abandoned the spoke-and-hub model of scheduling flights, instead finding direct routes to allow their planes less downtime. They've eliminated meals, so they don't have to spend time stocking food on each flight. And they let their customers choose their own seats for one reason: people get in their seats faster, which lets the planes get off the ground faster.

Southwest compensate for its lack of food and Wild West seating system by hiring and training the best staff that knows how to make flights fun, creating a customer experience that consistently receives industry-leading customer satisfaction scores. In business terms, their strategy is about improving the income they can make on their planes, boosting their return on assets compared to competitors.

Now look at LuluLemon's use of its key assets. First, it doesn't do what competitors (which include Nike Store) might do: view its assets as its inventory. LuluLemon defines its key assets as its store clerks and “engagement partners” -- primarily local yoga studios. Second, it finds ways to leverage these assets at a very low cost.

In the case of its own staff, that leverage comes from creating a differentiated customer experience by creating a compelling interaction between customers and LuluLemon staff.

LuluLemon's philosophy is that store employees are not clerks. They educate customers, they don't sell to them. Even better, these educators know the products well because they use them. They will  show you how to use yoga clothing to do yoga by actually performing yoga moves for you in the store. Assuming that a customer aspires to a yoga-driven lifestyle, this creates the kind of alignment that Carlson's relationship index measures.

LuluLemon's staff obviously must be carefully hired to make sure they live a yoga-driven life as well, but the store takes no chances – it makes sure staff members have a chance to use its products in yoga class, by actually having yoga classes at the stores.

At a local LuluLemon in Bethesda, Maryland (one of three in the Washington DC region), every Sunday night the store closes, employees shove product displays to the side, and a local yoga instructor offers a free yoga class to anyone who wants to show up, free of charge. In Bryant Park in New York, Lulu Lemon has free yoga classes outside. This generates what Carlson's index might call mutuality, as well as commitment: both employees and customers perform yoga side-by-side, showing that they have mutual interests, and dedication, to the yoga-driven life.

In terms of return on assets, all this exemplary marketing takes place in a fixed-cost facility, with employees “off the clock”. With no additional expenditure, a surprising amount of customer equity is built – even if customers never act on the knowledge that LuluLemon offers free yoga. It's the offer that counts in reinforcing the customer's perception of commitment, mutuality and alignment.

When it comes to “engagement partners”, LuluLemon has also turned local yoga studios into customer channels using a classic win/win formulation: the studios can teach free classes at LuluLemon to win students, and the LuluLemon store can win lifestyle customers.

As a side benefit to this strategy, it is likely that staff stay with the company longer, reducing the costs of employee churn. Compared to Nike Store staff, LuluLemon educators are probably more effective in selling products – even the expensive line that LuluLemon features.

So, while Apple Store employees may be equally enthusiastic and knowledgeable about the products they sell, it is LuluLemon that is leveraging its staff, facilities and yoga studio partners to create community engagement, to prove the value and values of the brand, and to show that LuluLemon lives up to its claim to be about fitness and wellness. The products, the people and the stores are all aligned around making those claims memorable, branded, and positive.

Experience matters so much for LuluLemon that they've reinvented the whole concept of the retail store. They aren't selling products on racks. They're selling you on an idea:  You can have the health and happiness you seek. For Nike, “just do it” is a slogan. For LuluLemon, all across North America – even after hours – people come together to truly just do it.

Conclusion

Companies like Escalate Retail have helped Brooks Brothers win retailing awards for their cross channel customer experience, leveraging customer insight. Yantra, a Boston, Massachusetts vendor of supply chain informatics, offers visibility in the supply chain to help retailers fulfill orders.

But these suppliers only solve part of the problems faced by retailers. Better supply chains help. More customer information helps. But in the end, the goal for any retail operation is to create an effective experience, and it cannot be effective unless it is branded, remembered, and meaningful. Apple continues to polish its image and ring up profits in its stores, even when online retailers such as MacMall offer steep discounts. Why? Because the experience matters.

My colleague Michael Lingerfelt has moved on from Disney, now working for a global retail design firm. His current project is a themed experience that evokes Paris, one of the most emotionally evocative places in the world. Even today his enthusiasm for creating emotionally inspiring customer experiences is real. He talks about “Walt,” recites statistics on how long trash stays on the ground in a Disney park (about 23 seconds), and passionately recites Marty Sklar’s ten commandments.

Stores like LuluLemon understand that an authentically great customer experience needs to be as much in their culture as it is in Disney's. Its business trade-offs are driven by this passion. In fact, LuluLemon doesn't even offer its clothes online. You can get the full experience through that channel – and, after all, online retail is still only a drop in the bucket. Our economy is built on bricks, held together by mortar – and increasingly by the kind of retail passion exemplified by LuluLemon.

With innovative customer experience strategies, designs, processes, technologies and training, retail customers can have their brains lighted up exactly the way you want them to be. Your brand will trigger mental fireworks, different customers will enjoy you in different ways, and they will keep coming back, willing to pay fair prices, and ready to say good things about you to their friends. In a down economy, that's what retailers could really use. So before you rush into discounting, start planning how to craft a terrific customer experience. Then just do it. And, as Michael Lingerfelt, Marty Sklar, and surely Walt Disney would urge you, keep it up.

Chinese water torture

An early observation on this excellent interview: Of course Yamaha did not have an "aha!" moment to spur a customer experience program. Big companies have set up systems that mute and manage customer voices and that don't report long-term trends in customer engagement as a competitive advantage. 

creating product value with "backstory"

Do I need to explain this?

Well, at least let me offer two questions:

1. If you saw one of the artworks here and heard the backstory about the (fictitious) artist, would the art have more meaning and value to you?

2. Knowing that the artists were all invented by an artist, how much value these objects have with this "meta-backstory"? More? Or less?

luxury, desire, and pain

I'm involved in a heated discussion among luxury-focused professionals on LinkedIn. The question we're approaching relates to typical failures in luxury retail customer service. The general consensus among most is that customer service personnel should, in a phrase, cater hand and foot to everyone who walks in. After all, they argue, you cannot tell just by looking at people whether they are your target customer. 

Note the implied syllogism: "Anyone can be our customer, so we must make them all happy from the moment they walk in." 

Luxury marketing, however, makes this seemingly logical conclusion incorrect.

I think the important point for luxury brands has to do with desire, which implies a distance. That distance can be "distance between one's reality and the brand's fantasy", or "distance between one's power and the brand's power as expressed in the store," and many nuanced variations. This distance - which CREATES desire - is essentially painful. It is what creates immense delight when that distance is overcome; for example, when you finally walk out of the store with a $5K LV bag. The brand does not exist without desire, with distance, and without pain.

Power distance, individualism, culture, and pain

A useful analysis of power distance in culture - across cultures - is to ask, in which countries is there large power distance? Do these countries produce luxury goods generally, or desire them? Why? Check out this excerpt (thanks to Google Books).

Power distance in many developed countries such as the United States and Germany is moderate. In Asian countries, it is high. This is in part cultural, and in part economic. This relates directly to how and why people spend money on luxury items. Check out this excerpt. (Interesting sections follow on Country of Origin effect, by the way.)

If you think this power distance construct isn't useful for figuring out your luxury strategy, take a look at this:

Notice where France lies in the chart. Now, in analyzing the Brazilian company Natura's strategy in entering France to sell its cosmetics and lotions, do you think Natura would be well-advised to consider that contrast in power distance between Brazil and France? 

Power distance is not just imposed from above, either. We unconsciously adopt that construct in our own societies; it is a core belief. In fact, some researchers call the phenomenon "power distance belief." You don't want to offend your customers by violating their beliefs, do you? Then perhaps you should reconsider your attempts to overcome the power distance between you and a customer. Interesting, odd conclusion: Perhaps that distance is affirming of your customer. (This analysis applies to all kinds of consumer brands.)

Pain

Now, pain is negative, right? 

My answer is, yes it is, and no it is not. That is, the right kind of pain makes the brand both desirable and memorable (unique). The wrong kind of pain (from failed service experiences) is to be avoided. But it does not follow that any service experience that is free of pain is a good service experience. In fact, it is plainly wrong that this is the case. 

1. If all luxury stores catered perfectly to customers to avoid a painful experience, their in-store experiences would be undifferentiated. Given, as you say, that the associate and the retail store is often the face of the brand, then such painless experiences are a waste of money. If everyone kisses everyone, you might as well be kissing no one. 

2. The pain one feels in a luxury store should focus on desire; if the customer enters the store and does not feel an almost painful level of desire to participate in the brand, something has failed. Think of the goal as "almost kissing." 

3. The differentiable elements of the in-store experience should be on-brand, and in fact the brand should be defined in large part based on how target customers will respond emotionally (affectively), cognitively (rationally), and conatively (driven to act). So, compare perfumes that appeal to sexuality vs elegance. Both are perfumes. But the brands, and the stores, should elicit responses in the customer that generate "pain" (distance between customer and brand) in different ways. One brand asks, "Are you sexually powerful enough to follow through when you wear this perfume?" The other brand asks, "Are you elegant enough to cause others to desire your world-view and lifestyle? If so, this perfume is yours." 

This notion of pain being a positive element in an experience design seems counterintuitive, but that's because our intuitions were developed when we were quite young, when pain is bad and pleasure is good. Pain was useful then as a way of determining what was safe. But as we grow up, without realizing it, we replace this hedonic view of the world with another view, one that Victor Frankl might characterize as driven by meaning. Pain and suffering, caused by a desire to participate in a brand's vision or essence (which by implication we do not currently participate in), is made meaningful through a purchase - and sometimes display - of a product. 

The meaning in our lives that we attempt to create in a luxury purchase can be generally broken down into two characteristics: the quantity of power distance we overcome in the purchase; and the amount of knowledge needed for others to decode the meaning of the purchase. Stew on those two variables for awhile, and I expect you'll discover a whole range of strategies for your luxury brands.

Training for luxury differentiation

How would you train customer service personnel to generate distance between the customer and the two perfumes mentioned above?  The question becomes:

For each brand, how do you accent the sexual (or elegance) power distance between the prospective customer and the brand while in the retail store? How do you show the prospective customer that people who "really know" perfumes, sexuality (or elegance), and personal power will understand - and even desire - what this brand represents? 

empathy, desire, the brain, and post-modern branding

Empathy is an interesting thing. It's built into (most) people's physical brains - you can actually identify the central area in the brain where empathy resides.

Desire is an interesting thing as well. Many brands use empathy (a limbic response to external emotional states) and desire (a state of craving) together to create a customer's brand desire.

On desire/craving: 

http://www.sciencedaily.com/releases/2004/11/041108025155.htm

A survey of fMRI use in "reward paradigms":

http://www.stanford.edu/group/neuroeconomics/pdfs/bk05con.pdf

For example, how much MORE would a brand be desired if the model, company, spokesperson was genuinely empathetic?

And then there's the opposite: How much MORE empathy would a customer feel for a brand if the spokesperson, company, or model was desired?

And then, finally, the post-modern switch-around:

1. Make the brand desirable by making the model, company, spokesperson UNEMPATHETIC. (Diesel.)

2. Make the brand EMPATHETIC by making fun of the model, company, or spokesperson. (Old Spice Guy.)