RESEARCH & IDEAS

The Outside-In Approach toCustomer ServiceQ&A with: Ranjay GulatiPublished: February 16, 2010Author: Sarah Jane Gilbert

Is your enterprise resilient or rigid? In thisQ&A, HBS professor Ranjay Gulati, an experton leadership, strategy, and organizationalissues in firms, describes how companies canevolve through four levels to become morecustomer-centric. Plus: book excerpt fromReorganize for Resilience: Putting Customersat the Center of Your Business. Key conceptsinclude:• Companies with an outside-in perspective

aim to provide solutions for customers.Those with an inside-out orientation, on theother hand, just focus on products, sales,and the organization.

• Customer-centric companies tracked byGulati between 2001 and 2007 deliveredshareholder returns of 150 percent whilethe S&P 500 delivered 14 percent.

• Companies evolve through four levels whenthey aim to become more customer-centric.

• To develop an outside-in orientation, it isessential to translate awareness of an issueinto action toward solving it.

• Silos must be bridged, not necessarilybusted. Best Buy is an example of acompany that developed an outside-inorientation by tackling its own internalsilos.

Times are tough for many businesses, yetsome are holding their own, even thriving. BestBuy, Cisco, Target, Starbucks, and Jones LangLaSalle come to mind. How do they do it?According to a new book by Harvard BusinessSchool's Ranjay Gulati, it is customer-centricfirms—those with a so-called outside-inperspective—that are most resilient duringturbulent markets.

An outside-in perspective means thatcompanies aim to creatively deliver somethingof value to customers, rather than focus simplyon products and sales. And Gulati's research,including interviews with 500 executivesspanning industries and geographies, assertsthat outside-in success is not confined to anyone sector.

"I see the move toward customer-centricityas a journey," explains Gulati. "It doesn'thappen overnight. Based on my observation of

companies for almost a decade, I map out fourlevels that exemplify distinct stages throughwhich companies may evolve on this journey."

In our e-mail Q&A, we asked Gulati todescribe what managers can learn from his newbook, Reorganize for Resilience: PuttingCustomers at the Center of Your Business(Harvard Business Press). Gulati, whoseresearch explores leadership and strategicchallenges for building high growthorganizations in turbulent markets, is the Jaimeand Josefina Chua Tiampo Professor at HarvardBusiness School. A book excerpt follows.

Sarah Jane Gilbert: Your book focuseson how companies can profit, regardless ofmarket conditions, by immersing themselvesin the lives of their customers. Pleasedescribe the business model of looking"outside-in" versus "inside-out."

Ranjay Gulati: The difference between theoutside-in and inside-out perspectives is centralto the book's arguments. When I began thisresearch, I naively assumed that all firms mustindeed have an outside-in orientation wherebythey put their customers first in all theirdecisions and actions. After all, that is whatbusiness is about. Much to my surprise, I foundthat this was the exception rather than the rulefor most businesses.

"As I delved deeper intocompanies seeking tobecome morecustomer-centric, thebiggest gap I discovered wasthe one between awarenessand action."Most companies with an inside-out

perspective become attached to what theyproduce and sell and to their own organizations.In contrast, the outside-in perspective startswith the marketplace and delves deeply into theproblems and questions customers are facing intheir lives. It then looks for creative ways tocombine its own capabilities with those of its

suppliers and partners to address some of thoseproblems. The goal is to bring value tocustomers in ways that are beneficial for themwhile also creating additional value for thecompany itself.

Q: Could you give an example?A: Sure, bagged salad. Bagged salad would

not have risen to what is now, a$2.5-billion-a-year industry, without arevolutionary shift to outside-in thinking thatallowed companies such as Fresh Express torealize that busy consumers wanted companiesto make the whole salad for them rather thansimply continue to tweak the packaging of theirlettuce.

It's worth noting that the companies andbusiness units in my study were trackedbetween 2001 and 2007. I picked these firms forno other reason than their genuine commitmentand actions toward embracing an outside-inperspective. In that period these companieshave delivered shareholder returns of 150percent while the S&P 500 has delivered 14percent. They've also grown their sales 134percent while the S&P 500 has grown just 53percent. Clearly, these firms have foundsomething that allows them to be resilient inboth good times and bad.

If you look at this data for the period 1999to 2007, the results are even more striking:These companies delivered shareholder returnsof over 130 percent while the S&P delivered 0.6percent. They grew their sales 233 percentwhile the S&P 500 has grown just 10 percent.

Q: What are some of the institutionalbarriers to developing an outside-inorientation?

A: Developing an outside-in orientation isdifficult to achieve because it requires bothinsight and action. Gaining real insights intocustomers' needs demands more of companiesthan those arising from typical market research.The questions you ask of customers must bemore profound and open-ended, with an intentnot only to discover how your customersengage with your products or services but alsoto understand some of the broader parameters ofthe constraints they are facing in their own

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lives.Collating and making sense of all that you

learn about your customers is just the startingpoint. From here, firms have to make a creativeleap to discover the unique combination ofproducts and services that may address thoseneeds. No customer gave Steve Jobs and Applethe design for the iPhone or the iPad. Rather,they came about from intense listeningcombined with a creative leap within their andtheir partners' potential to tackle customers'perceived needs. And in some instances, firmsmay be ahead of those needs and driving them.

As I delved deeper into companies seekingto become more customer-centric, the biggestgap I discovered was the one betweenawareness and action. Much to my surprise,even if an organization and its employeesbecame consummate listeners and tried to makesense of what they were hearing, they wereoften immobilized to do much with theirinsights. Why? The more I researched, the moreit became apparent that the problem had to dowith internal silos. Most organizations today arestill typically built around product andgeography, and do not have a clear line of sightto the customer. These silos not only createproverbial blind spots for firms but also impedecoordinated action toward addressing what maybe identified as central for their customers.

As I show in my book, you don't alwayshave to bust silos; in most instances, yousometimes have to simply find ways to bridgethem. Ultimate success cannot come without asupple organization that has fluid internal andexternal boundaries.

Q: What is an example of a company thathas been on this journey?

A: Best Buy, the largest dedicated consumerelectronics retailer in the United States,provides a good example of a company thatdeveloped an outside-in orientation by tacklingits own internal silos. Best Buy came tounderstand that true customer centricity cannotbe achieved by simply listening to customersabout their experiences with Best Buy; thecompany has to commit to owning thecustomers' problems and working creatively tosolve them.

Faced with increased price competitionfrom retailers like Walmart as well as onlineretailers like Amazon, last decade Best Buybegan with a comprehensive segmentation of itscustomers. As part of this initiative, thecompany realized that although 55 percent of itscustomers were women, most of these womendid not enjoy their shopping experience at BestBuy. This was a store designed by guys forguys! Not only did the store layout not conformto the buying behavior of many women, butalso the store support staff were not alwaysoriented to providing help in ways womenwanted to be helped. For example, whilewomen were interested in learning about thefunctionality and interoperability of various

pieces of electronics, they would instead bebombarded with technical specifications.Furthermore, most women sought installationhelp from store staff but were turned away.

Best Buy responded by reengineering thedesign of its stores and training some of its staffto be generalists who could help womentraverse their stores. In addition, Best Buyacquired Geek Squad to broaden its footprintinto installation of equipment. The companyapplied the same concerted effort towardserving other valuable customer segments it haddiscovered, including small business ownersand music aficionados.

All this helps explain why Best Buy is stillaround while its main competitor Circuit City isin its grave. But this misses an important pieceof the story that is documented in Reorganizefor Resilience. None of this would have beenpossible had Best Buy not undertaken, first, amassive internal effort to educate its employeesabout the benefits of an outside-in perspective(it even launched a "customer- centricityuniversity" for employees) and, second, amonumental effort to mobilize action. Frombuilding cross-functional customer segmentunits to creating additional teams that cut acrossmerchandizing, store operations, and segmentowners, senior leadership at Best Buy saw to itthat the entire organization embraced anoutside-in approach.

Q: How long does this process generallytake? And what are the benchmarks ofsuccess?

A: I see the move towardcustomer-centricity as a journey. It doesn'thappen overnight. Based on my observation ofcompanies for almost a decade, I map out fourlevels that exemplify distinct stages throughwhich companies may evolve on this journey. Iwould like to emphasize that this is not ajourney to nirvana where every firm must seekto be at the fourth level, but it does provide aroad map of the steps along the way that firmsmay either traverse or stop at.

Level 1: Companies at level 1 are veryproduct focused and have an "if I build it, theywill buy it" mindset. The focus is ontechnological excellence with some diffuseunderstanding of customers who may buy theproduct.

Level 2: Companies at level 2 have a basicunderstanding of their customers, typicallycoming from some market research andsegmentation studies. Many firms get lulled intocomplacency at this stage. They start talkingabout customers and distinct segments andbelieve that this alone is an indicator that theyhave now made the shift toward an outside-inperspective. Frequently such firms still remainfundamentally oriented toward pushingproducts, albeit in a more refined and targetedway. Their market research starts to permeatetheir sales efforts but does not have much of animpact on their product development and other

upstream activities.Level 3: The move from level 2 to level 3 is

a major shift in both mindset and actions. Thefocus here migrates from selling productstoward solving customer problems. In so doing,firms become adept at comprehending whattheir customers' deep-rooted issues are and lookfor ways to position themselves to address thoseissues. In trying to go from insight to action,these firms seek to make their internal silosmore permeable while also building bridgesacross them wherever necessary. They shifttheir culture so that some of these ideas begin topermeate and shape the behaviors and actions oftheir employees.

Level 4: At level 4, firms become agnosticabout whether they produce all the inputs theyprovide to their customers and, akin to a generalcontractor in construction, look for ways toassemble the appropriate pieces that may gointo tackling customers' challenges. A level 4firm is more attached to producing solutions tocustomers' problems than it is to the productsand services it offers. This intellectual,structural, and emotional transition means thatthe company is no longer concerned whetherthe inputs it uses to solve customers' problemsare its own or assembled through a network ofpartners.

Q: You've talked primarily aboutbusiness-to-consumer firms so far. Howabout businesses that aren't facing theircustomers over display racks?

A: My study encompasses firms that spanindustries and geographies, leading me tobelieve that what I was observing werefundamental shifts that transcended manysectors.

The global real estate company Jones LangLaSalle [JLL] is one of a number ofbusiness-to-business companies I studied thatwas able to make a successful transition acrossthe levels just discussed. One of JLL's mainclients, Bank of America [BofA], told JLL in2001 that it no longer wanted to deal with eachof JLL's business units independently. BofAasked not only for a single point of contact butalso wanted JLL to take care of its entire realestate needs worldwide. JLL saw this as anopportunity to develop integrated solutions thatwould (1) serve other global corporate clientsand (2) develop capabilities in terms of bothglobal and local services.

"The role of employees isabsolutely critical ascompanies strive for anoutside-in perspective."The transformation took several years. The

results speak for themselves. Over the nextseveral years, close to 75 of some of the largestfirms in the world signed on with JLL for

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similar services. None of this would have beenpossible without a concerted effort on the partof management to build up an entire unit ofboundary spanners whose primary role was tointerface with their clients and make theirexperience with JLL seamless. As JLLexpanded its client base, the company realizedthe limitations of trying to connect its distinctservice silos through such account managersand eventually reconfigured its internal unitsaround customers and markets.

Q: Obviously, this process involvessubstantial changes in the way companies dobusiness. What can executives and managersdo to motivate employees and ease thetransition for the business to become morecustomer-centric?

A: The role of employees is absolutelycritical as companies strive for an outside-inperspective. If the organization does not havepeople who can explore, comprehend, and meetits customers' needs, the pursuit ofcustomer-centricity is doomed from the start.To me, a key distinction for managers to focuson is the one between coordination andcooperation.

Coordination—the ability to worktogether—involves the alignment of "hard"phenomena: activities, processes, andinformation. Most companies begin with thisand simply assume that mandating shared tasksand information exchange will suffice. It doesto a degree but can be severely limiting in howmuch firms can achieve. At best, they are ableto respond in a somewhat coordinated fashionwhen customers come to them. What they don'tget is proactive development of new ideas thatcan be taken to the market before the marketcomes to them. To achieve this loftier goal, youneed the second half of collaboration, which iscooperation.

Cooperation—the willingness to worktogether—involves the alignment of "soft"phenomena: goals, attitudes, and behaviors,people-related issues. Most companies focus oncoordination among silos and pay insufficientattention to encouraging employees tocooperate. And when they do considercooperation, they rely too heavily on incentivesalone as the panacea. Those who get it rightrecognize that changing behavior requires a

multipronged effort that ultimately shifts theculture of the organization.

Q: What are you working on now?A: I'm researching how companies can

leverage adversity for advantage and come outof a recession stronger. Some of this research isfeatured in a forthcoming article titled "RoaringOut of Recession" in the March 2010 issue ofthe Harvard Business Review. I am alsocontinuing my research on collaboration withinand between firms.

Excerpt from Reorganize forResilience by Ranjay Gulati

Today's customers expect solutions to theirconsumption problems, and they are utterlyagnostic as to where those solutions come from.To meet these customers where they are,companies, in turn, must become less focusedon what they themselves produce and morefocused on their customers' most pressingneeds—even when that carries them wellbeyond their own borders, even indeed whenthat means in essence dissolving themselvesinto broader partnerships. They must ensure thattheir organizational silos have beenreconfigured, leveled, or spanned sufficiently toguarantee an unimpeded line of sight to thecustomer. Most important, they must alsoguarantee precisely the reverse: that the line ofsight from the customer into the organization isequally unimpeded, and in a final twist that thecompanies see themselves from the outside,with their customers, so that they can helpwherever their customers are, in their hours ofgreatest need.

The Resilience Toolkit: The five levers• Coordination—Alignment of activities,

processes, and information across units withinan organization

• Cooperation—Alignment of goals, attitudes,and behaviors across units within anorganization

• Clout—Assignment of power and decisionrights to customer-facing individuals as wellas those responsible for integration ofactivities across units within the organization

• Capabilities—Development ofcustomer-facing generalists along withproduct specialists

• Connections—Expand the source of inputsand also complementary offerings beyondinternal production units to external strategicpartners

Coordination aligns tasks and informationaround a customer axis but doesn't necessarilylead to a collaborative environment, a hallmarkof systemic integration. That requires the leverof cooperation—the alignment of goals. Whenmembers of disparate or competing siloscooperate around a common set of goals, theymake adjustments more quickly and at lowercost than in organizations in which the needs ofthe silo come first. Cooperation, in turn, doesnot solve the inevitable problems associatedwith the redistribution of power. To makesystemic integration work, clout must be in thehands, and the capability to develop neworganization-spanning skills must be fosteredand strengthened so frustrated managers don'tfall back on their own silo-protecting skills.

Last, the capstone of all this work, and thepoint where the need for resilience is greatestand the greatest resilience is achieved, isconnection: shrinking the core and expandingthe periphery to join seamlessly with externalpartners to identify and solve customerproblems. The first four levers are the tactics forintegration that rebuild an organization around acustomer axis. Connection is what finally bustsdown the silo of the company itself. Only whenthat is completed to an appropriate degree—atthe intellectual level, the enterprise level, andthe emotional level—do firms achieve theshape-shifting holy grail of outside-in actions.And, in achieving that, they achieve theresponsiveness and nimbleness that enablesurvival in the roughest of oceans.

About the authorSarah Jane Gilbert is a Web product

manager for Harvard Business School'sKnowledge and Library Services.

Excerpted with permission from HarvardBusiness Press. Reorganize for Resilience:Putting Customers at the Center of YourBusiness by Ranjay Gulati. Copyright 2009Harvard Business School PublishingCorporation. Purchase the book.

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