And you thought you knew your customers

Mike Lenahan (EMBA ’09) was frustrated.

For months, the CEO of Resource Recovery Corporation of West Michigan had been trying to land a client for his company’s foundry-waste recycling services. Multiple times he’d met with the prospect’s chief environmental engineer and other managers. He’d shown them he could save the company money, but no contract had resulted.

He couldn’t figure out why until he did his homework.

Literally.

Enrolled in the Notre Dame Executive MBA Program, Lenahan was taking a marketing course with a semester-long research project. Students had to develop strategies for growth using a model known as 3-Circles. One of the steps involved sitting down with existing or potential clients and asking them why they chose the student’s company or competitor for a particular product or service.

Lenahan sat down with the environmental engineer and discovered why the company was so reluctant to sign: Management was worried about the size of his firm relative to its principal competitor, a well-known multinational that was already handling the company’s materials-disposal needs. The company considered what would happen if Resource Recovery went under; the multinational would have them over a barrel.

Lenahan never knew such concerns existed. He thought customers appreciated his company’s small size because it promised more individualized service. So he explained that his company had a long-term contract with the second-largest landfill company in the country. That allayed their concerns about stability, and Resource Recovery landed the account.

The CEO says that deal added 10 percent to Resource Recovery’s annual revenues. Since then, his former homework assignment has become a routine part of growth-strategy research. He attributes a return of nearly $3 million on his company’s application of the 3-Circle model.

The model was developed by Marketing Professor Joe Urbany and former Mendoza professor James H. Davis, now a professor and chair of the management department at Utah State University. They first wrote about it in the November 2007 Harvard Business Review and have since published a book, Grow by Focusing on What Matters: Strategy in 3-Circles (2010).

In the five years that the 3-Circles exercise has been part of the EMBA Program’s Introduction to Marketing class, dozens of students have endorsed its effectiveness as a tool for growing their businesses.

Briefly, 3-Circles is a way of mapping the intersections between what customers desire and how customers perceive the offerings of your company and those of your competitor. One circle would represent the customers’ desires, the second would be what they see as your strengths, the third would be what they see as your competitor’s strengths.

What makes this such a useful visualization is it allows managers to see how well or poorly their product or service aligns with what customers value and whether the offering stands out from the competition.

Ideally, a company’s perceived-strengths circle would rest squarely on top of the circle representing customers’ desires without any part of the circles overlapping the competitor’s circle. That would mean your company is producing only goods and services of the type or quality your target customers value, and your offerings are unique—at least in the eyes of customers, who are the only ones that matter.

Such perfect alignment may be impossible, but seeing how much unmet need exists—where your company circle doesn’t overlap your target customers—instantly points the way to growth opportunities.

If all this sounds more like a management concept than marketing, don’t worry. Urbany explains why the first day of the course.

About seven years ago, the strategy and technology consulting firm Booz Allen Hamilton and the Association of National Advertisers surveyed 2,000 executives about the responsibilities of their marketing departments. As Urbany explains, they found that the overwhelming share of the departments handled duties popularly associated with marketing, such as managing advertising 
and PR campaigns. But one type of marketing department, found at only 9 percent of companies, was 20 percent more likely to be associated with superior revenue growth and profitability.

In those rare organizations, the study’s authors said, marketing went beyond trying to sell whatever product or service their company had come up with. They actually led or helped guide development of new and improved products or services. They relied on research focused on understanding customer needs and a more systematic set of marketing processes focused on value-creation and measurable outcomes. The authors called organizations with this type of marketing function “Growth Champions.”

“We teach marketing,” Urbany tells his class, “because we want you to be Growth Champions.”

Urbany has studied customer decision making and found that a wide gulf typically exists between what managers think their customers want and what customers actually value. EMBA students—managers themselves—are in for a humbling experience. As part of the 3-Circles project, they’re asked to predict what customers will say matters most to them as customers when deciding between the product or service offered by the student’s company or that of a competitor.

Then the students sit down with the customers.

“People come back like they’ve gotten religion,” the professor says.

How can so many managers be so out of touch with customers? Urbany thinks a conventional wisdom tends to develop within organizations about why people buy their product or service. The wisdom might have been correct at some point in the past, but now it’s out of date. As long as sales remain sufficient to keep the company in business, no one thinks to challenge it, much less test it by asking customers to explain their decision-making process.

With every semester of Introduction to Marketing, however, another 60 or so executives-turned-graduate-students discover the power of asking.

Current student Ben Chrnelich, chief financial officer for NYSE Technologies in New York City, believed that the global investment banks, hedge funds and brokerages that used his company’s trading software and services cherished the proprietary software the company had developed at great expense.

When he sat down with senior executives at global investment banks, however, he found they were wary of being wedded to any particular supplier because of the rapid pace of change in technology. In response, NYSE Technologies, which is owned by the New York Stock Exchange, has redirected more than $100 million in technology-development funding, he says.

Chicago EMBA student David Erickson says of the client interviews he conducted, “You think you know what your client is going to say, you think you know how he operates, and you think you know what’s best for him.” Often, he says, you turn out to be wrong.

A partner in S&E Investments LLC of Chicago, Erickson thought brokers who used his firm’s trading services valued the price of trades over any other factor. However, they told him that the speed of execution mattered more.

Likewise, Erickson thought home builders cared most about price when looking to buy land for sale by S&E. In interviews, the builders told him that price mattered less than finding property to develop in areas with highly regarded schools.

The investment executive says these conversations were humbling and also had their humorous moments. He recalls sitting down with a long-time client and launching into his questions. At one point, the client interrupted to say, “We’ve been doing business for how long, and you’re just asking us this now?”

“I said, ‘Well, that’s why I’ve gone back to school.’”
 

How 3-Circles Works

The 3-Circle model lets you see how well or poorly your offerings align with customers’ needs and desires, and whether customers see your products/services as unique from those of your competitor.

Plotting reality this way points out multiple opportunities for growth, including:

• Introducing new products or services that customers want and your competitor doesn’t provide (shift your circle further into the Unmet Needs area)
   
• Abandoning your products or services that customers value little or not at all (shrink Your Non-Value area)
   
• Raising customer awareness of your products or services that they would value, but currently don’t know about (grow the Points of Parity or, even better, the Points of Difference area).

In a 3-Circles analysis, executives discover opportunities to grow sales (or some other measurable outcome) by focusing their company’s efforts on what really matters to target customers.

To find that out what really matters, students interview real-life clients. Using a precise method of questioning called “laddering,” students dig down to the root reasons why the client chooses their (the student’s) firm or a competitor for a particular good or service.

But the interviews are only one step—No. 3 of seven, actually—in the 3-Circles project. Step 1 involves writing a Context Statement, which lays out the goal of the research.

It’s a matter of filling in the blanks, as follows:

“My goal is to figure out how in (a specific time frame), we (our business) can grow (whatever metric we’re seeking to grow) by (a specific amount) by creating more value for (the targeted customers) than (our competitor) does.”

Here’s an example of a completed Context Statement:

“My goal is to figure out how in six months McDonald’s can grow morning revenues 10 percent by creating more value for breakfast customers than Starbucks does.”

In this example, the student would now need to find out what customers value by interviewing them. It could be anything from free WiFi to French toast.

From a management perspective, the path forward would then be clear: Provide more of what customers value and less or nothing of the rest. This can be a profitable experience, but also a painful one if a feature or service your organization takes great pride in providing turns out to hold little or no value to targeted customers.

In the past, students have done 3-Circles projects analyzing a wide variety of competitive situations of which they had first-hand knowledge. Here are some examples:

Target Customer              Business                Competitor

Core runners                      Nike                        Asics

Leisure travelers                American Airlines      United Airlines

Golfers                              areagreens.com        twoguswhogolf.com

Internal HR customers        Internal HR dept.      Head-hunting firm

Psoriasis sufferers              Drug 1                     Drug 2

Air Force Recruits              Air Force Academy     College Air Force ROTC

Wife and Family                Tom at work              Tom at home