Why customer-led beliefs matter

The purpose of business is to create a customer.

Peter Drucker

Tesco: Propelled and derailed by its beliefs

The remarkable rise of a British retailer, which began life as a market stall in East London and went on to become a bank, a mobile phone network, the recipient of £1 for every £7 spent on the British high street and the third largest retailer in the world, is a story of why customer-led beliefs matter. Tesco’s growth story takes us on two decades of expansion, from the 1980s to the 2000s, powered by courage and a belief that doing the right thing for customers was also the right thing for the business. And like all the best stories, there is a narrative arc, a struggle and a stumble as Tesco falls from its dizzying heights.

A significant step in Tesco’s journey happened in 1992, when the retailer faced a crisis of confidence. In a drooping economy and under fierce competition from new discounters Aldi and Lidl, the supermarket was struggling to fulfil a long-held ambition to overtake Sainsbury’s.

Terry Leahy, Tesco’s first marketing director and subsequently chief executive from 1997-2011, went on the offensive. He declared that they were not being bold enough:

Successful companies do not just focus on what customers want but put the customer at the centre of all they do. The customer should drive the entire business. We ... were not thinking as customers.'

On the back of the biggest piece of consumer research in its history, Tesco learned that supermarket customers were broadly happy with products and prices, but they didn’t care much for the experience of shopping. If Tesco could do something about the shopping experience, it would finally be in a position to take the initiative over its rivals. Customers were telling Tesco how to overtake Sainsbury’s.

Leahy launched a package of measures, the so-called ‘bricks in the wall,’ to address 200 issues that customers had told researchers they had with the supermarket experience. The bricks were swiftly assembled. The first was Tesco’s Value Lines range, a couple of hundred Tesco-branded products that were cheaper than Aldi. In stores, a programme of ‘new look refits’ addressed a whole collection of bricks in one makeover, all improving aspects of the customer’s shopping experience. One of the biggest, and something customers disliked most, was queuing. A new approach was developed that became the ‘One-in-Front’ initiative, eventually introduced in 1994. Tesco’s promise was that if any line had more than two customers waiting, an extra checkout would be opened. They would keep on opening checkouts until the queues subsided or until every till was manned. The costs would be significant - an estimated £60 million in a year when Tesco reported pre-tax profits of £528 million.2 But what about the benefits? Would customers come more often, spend more per visit, or just smile and do exactly as they had before, providing no return on the investment? For a while the senior management team hesitated, unable to agree whether this was a good decision.

While the debate was still being had, the board learned that Sainsbury’s was also poised for a big launch. Faced with the prospect of being trumped by its arch-rival, and gnawed by the burning desire to win, the board’s insistence on a better business case evaporated. Within a week, Tesco committed the funds, bought the media and publicly announced the One-in- Front initiative for the following Sunday.

One-in-Front was what we call a Moment of Belief - a commitment to a customer-led innovation that unmistakably signalled to the organisation the leadership’s belief that being customer-led results in business success. Illustrating to the organisation what it meant to ‘think as a customer,’ it was a turning point. Tesco was leading, not following.

Like most customer-led initiatives, One-in-Front put customers first, even though it might be costly for the business, at least in the short term. Yes, it was clear that customers didn’t like queuing. It was also clear that it would cost the business £60 million a year to fund. What was not clear in advance was precisely what customers would do in response. It took a degree of conviction, of belief, to incur the cost of a customer-led initiative such as One- in-Front because there was no guarantee of a financial return.

Belief determines whether a customer-led action gets taken - belief in it being the right thing for the business to do, and belief that over time it will deliver a measurable return on investment for the business as a result.

Tesco came to embody what it means to be customer-led - understanding what customers value and finding new and better ways to create it, looking from the outside-in, not from the inside-out. Building on the success of One-in-Front, Tesco’s subsequent customer-led moves propelled it from a poorly placed number three in UK food retailing in 1982 with a 12% market share to the undisputed leader with a 33% UK share and third in the world in 2012. By then, Tesco was a grocer, a general merchandiser, a mobile phone network, a bank and more. It operated in 13 countries and generated profits of £3.8 billion on revenues of £72 billion. It was all the more shocking, then, when after more than 30 years of uninterrupted growth, the Tesco success story abruptly ended.

In 2014, Tesco reported its first profit decline in 20 years, an unprecedented 3.7% reverse in like-for-like sales in the first quarter, two profit warnings, an admission that it had overstated half-year profits by £250 million, and later that it had suspended four senior UK executives. The loss that year amounted to £6.4 billion pre-tax, one of the largest in UK corporate history.

Tesco’s rise and fall illuminates what’s at the heart of our story - by creating customer value and allowing business value to follow, a company can achieve exceptional and sustained profitable growth. But this way of operating is harder to sustain than it is to achieve in the first place.

The burning desire that leads a business to become customer-led, to take the first risky steps through the early Moments of Belief, is hard to maintain after a decade or more of success. When a competitor arrives from an unexpected angle, creating value for customers in new and better ways, are the incumbent leaders still curious enough, hungry enough, and brave enough to challenge what works? If they listen more to other stakeholders - easy to do when you’re now a hero - it is terribly difficult to spot cracks emerging in your business’s competitive edge. This is like a gradual and imperceptible force pulling an organisation back to earth, back to being inside-out and, like gravity, it is irresistible in the absence of countermeasures.

As a result, despite seeming obvious, and despite being valuable for customers and businesses alike, this outside-in way of working is unnatural.

What it means to be customer-led and why it matters

A customer-led organisation is one that understands what customers value - the problems they are really looking to solve or the outcomes they want, not necessarily the product or service they are buying - and creates this value in new and better ways - they innovate based on what matters to customers, not just what’s established as the competitive battleground in the market.

It matters because we are describing an organisation that succeeds by doing a fundamentally better job for customers. It means the enterprise takes its lead from customers and then trailblazes on their behalf. As a result, more customers are attracted, more return, and over time each one on average buys more. It matters because it’s good for business.

Yet, as we saw with Wells Fargo, there is often a disconnect between the degree to which businesses believe they are in touch with customers and their customers’ experiences in reality. A study from IBM and Econsultancy revealed that while the majority of leaders ‘strongly agree’ they are providing a superior customer experience offline, online and on mobile, only one in three customers believe their favourite brands understand them.3

The ‘customer first’ literature has influenced the climate for what is said. But it has not penetrated far into what is done. This disconnect is exacerbated by the tension faced by many business leaders in their desire to listen to all stakeholders. Executives are acutely aware that their performance is judged by a range of audiences - shareholders, customers, employees, suppliers, regulators, local communities and society. These stakeholders comprise the ecosystem within which a corporate strategy is implemented and in different ways they legitimise the activities of the corporation. Executives go to great lengths to ensure all are aware of their efforts to address each of their interests - but there is no doubt that over time shareholders have become the dominant stakeholder.43 To keep shareholders happy on a quarter-by-quarter basis, the natural way of thinking has to be inside-out - targets to hit and a push to hit them repeatedly.

We also believe that some stakeholders are more important than others. But our position is in line with Peter Drucker who argued that success starts with and is led by the customer. The broad thrust of Drucker’s argument is that all value in a business ultimately flows from attracting and retaining customers, so customer-value creation should be central to all activities.6

This sounds dull and familiar. But our position, in a crowded field of executives claiming the same thing is that very few do it - very few companies are truly customer-led.

 
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