The inevitability of falling from outside-in to inside-out

This chapter is about the inevitability of being pulled back down to Earth from the soaring heights of customer-led success. It is about being extraordinary and then becoming ordinary - not through incompetence or hubris, but as a natural process. 02, the airline Virgin Atlantic, US retailer Market Basket, and Nokia, the Finnish mobile handset and technology company, all achieved great things in ways that were entirely customer-led, based on deeply-held shared beliefs. Yet their exceptional customer-led success was temporary, and all of them eventually came crashing back to earth.

The rise and fall of these companies shows that even when they appear unchallengeable, outside-in beliefs are never secure. Being customer-led took all four companies to market leadership and enviable levels of performance. Yet, despite this great success, the shared beliefs behind what led to that success proved fragile. Some recovered to have another period of customer-led success but only after rescue and turnaround.

Why is this arc inevitable? We have uncovered three types of challenge to a company’s belief system, issues that over time, if unaddressed, will undermine even the most strongly held outside-in beliefs. As Gerald R. Salancik once said, ‘Success ruins everything.’2 The more the company’s approach seems to work, the more the ‘burningness’ fades. As success becomes taken for granted, the pull of the comfort zone increases, and the appetite for remaining in the customer’s orbit shrinks. There is strategic and operational drift as managers switch their attention from the customer’s quest for better quality and higher value to the less stressful option of exploiting their current happiness to please investors. In time their out- performance, as judged by customers, erodes with inevitable but delayed consequences for market share, earnings and valuation.

A company’s shared beliefs are constantly under attack from three different quarters:

  • 1. The inside, as common sense and the natural way of seeing the world from behind an office desk every day attempt to reassert themselves.
  • 2. The outside, as newcomers join the pioneering group of leaders and blur their customer focus by bringing conventional doubt and risk aversion into the mix.
  • 3. The competition, as it keeps on improving and eventually throws up something better than the model used by what is now an incumbent. The first two factors will have taken the edge off the company’s customer-led zeal, prompting a defensive, protectionist response in place of previously confident customer innovation.

These challenges emerge seemingly naturally in different ways, sometimes to dramatic effect, as the examples in this chapter show.

Virgin Atlantic was an exceptional, entrepreneurial challenger to the traditional flag carrying airlines on long-haul routes. It was created in the mid-1980s and broadly had two eras - the first where it punched well above its weight and created a pioneering series of innovations that customers welcomed in the long-haul air travel sector. And the second as the business grew to another level of scale, ownership changed, objectives became more commercial and the whole enterprise matured. As newer competitors produced their own market-leading innovations, Virgin Atlantic retained its identity but applied it in more professional ways. Compared to its heyday, it lost its maverick spirit and it was no longer an outright market leader, but it remains a good business - more conventional but with more substance too.

Market Basket was an outstanding grocery retailer with a way of working that both customers and colleagues revered. It had strong leadership and a family ownership structure, but many of these owners were distant from the reality of the way the business operated. These shareholders couldn’t see or didn’t appreciate the way the outside-in beliefs led to the performance they enjoyed, and many of the ways of doing things at the retailer looked expensive. So they pushed for higher margins, greater efficiency, becoming preoccupied with faster and better financial returns. They could only see the golden eggs, not the goose that was laying them. And as a result, they almost killed it.

Nokia was an apparently impregnable global market leader. But even though it had insight into what customers cared about in a traditional mobile handset back in the 1990s and early 2000s, it became attached to the particular solution to what it saw as its customers’ problem. When it asked about phones, its customers talked about phones - buttons that were easy to press, batteries that lasted forever, sending texts and making calls. It was drifting from being customer-led to becoming product- led, unaware of the ways new types of competitors saw the opportunity for mobile technology and many different kinds of data. It only became obvious when Apple launched the iPhone. Now what mattered was the operating system, the way data could be shared across devices, plus an interface that was visual ... the rules had changed, and for Nokia, it was too late to respond.

02 faced all of these challenges. Its success meant it was highly valued, and it was acquired by Telefonica, a traditional ex-public sector telecom player that wanted to learn from 02’s magic touch. For a while, Telefonica gave the 02 team space, but when the financial crash of 2008/9 arrived, there was a need for urgent financial contributions from every quarter, and all involved were forced to prioritise cashflow and question investment. Now the 02 business faced significant inside-out financial targets that needed short-term, financially led action to hit them.

In parallel, the success and power of its reputation led its people to subtly shift from focusing on customers and the essentials of what they cared about to focusing on the 02 brand, trying to expand it into multiple markets from its mobile network base.

While this was going on, the competition moved on, and the forces of Apple’s and Google’s operating systems, global handset brands and punishing commoditised competition for supplying bandwidth meant 02’s performance at the core lost its edge.

Telefonica’s involvement unavoidably led to bureaucracy increasing, causing management to look inwards. The well-intentioned innovation efforts were less effective than in 02’s heyday. Resources were diverted from the core. Despite all of this, 02 is still a strong player in its market, but it is closer to being a utility than the pioneer it envisaged in its youth.

 
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