Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern...

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Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University [email protected] 801-422-7888 650 TNRB

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Page 1: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

Target’s Differentiation Strategy

James OldroydKellogg Graduate School of ManagementNorthwestern University

[email protected] TNRB

Page 2: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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To Date

Dual Advantage

Willingness to Pay

Supplier opportunity

cost

Differentiation

Goldman Sachs

Merrill Lynch

McDonald’sBurger King

Low Cost

Wal-mart

K-mart

Mom and Pop

Store

Page 3: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Dimensions of Value

Value

Price

Differentiation

Product

Service

Bottom Line Value

Top Line Value

Willingness to Pay

Cost

Price

Value Captured by Customer

Value Captured by Firm

Value Captured by Supplier

Supplier Opportunity Costs

Page 4: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

Achieving Differentiation Advantage

How one goes about obtaining a differentiation advantage depends upon the nature of the product/service:

• Observable Goods: the buyer can easily form accurate judgements about the quality of a product.

• Experience Goods: the buyer finds it difficult and/or costly to determine the quality of the product prior to purchase and use.

• Communication/Network Goods: the value to the buyer rises as the number of buyers and users increases.

And it embraces the whole relationship between supplier and customer

Page 5: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Differentiating Observable Goods

By differentiating an observable good the producer acts to reduce the total cost of use to the buyer. Very often this requires an increase in product price. But in successful differentiation the price increase is more than offset by a reduction in the costs experienced by the buyer. The aim is not be the low cost producer but TO BE THE LOW COST PROVIDER.

Manufacturer's Value Added

EngineeringLaborMarketingDistributionAdministration

Product Price

Raw Materials

Buyer’s Costs

SearchLearningSwitchingRisk/lossPerformanceService

Total Cost of Use to Buyer

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Differentiation-Based Strategy

User’s Total Cost of New Software

Product

Price

Search

Evaluation

Learning Risk

Adaptation

Utility Software

Resources

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Firm A:

Firm B:

Price

Price

Total cost to buyer Producer’s cost Producer’s margin Buyer’s cost

Firm A has a cost advantage

Value Chains for Cost Advantage and Differentiation Advantage

Firm C:

Firm B:

Price

Firm C has a differentiation advantage

Price

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Strategic Positioning

The essence of strategic positioning is to make choices that are different from those

of rivalsStrategy is not a race to one ideal position ---

it is the creation of a different positionDifferences in positioning are necessary but

not sufficient for sustainable competitive advantage

• Sustainable advantage depends on barriers to imitation

• Advantage is magnified by mutual reinforcement across activities

Page 9: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

Page 10: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Multiple Data Sources

People have typically sought an understanding of their customer by using one or two of these sources…independently

Customer Research

Market Data

InternalData

Observation Data

What is purchased,

not whyBehavioral not

attitudinal

Attitudinal

not behavioral

or fact-based

Market conditions,

not customer

preferences

GAP

Source: Arthur Anderson, 2002

Page 11: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customer Relationship Management

v To deepen customer relationships.

v To build customer loyalty

v To increase profitability

Purpose of CRM

The Proliferation of CRM 161 CRM companies funded since 1998 $1.3 billion raised by CRM companies

Source: Red Herring May 2002 p. 27

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Sources of Expense:Sources of Expense:• Typically $5,000 a seat and $2 million to $5

million per deployment.• CRM systems required data conversion when

consolidating data from multiple legacy systems. •At the enterprise level, CRM software is just

plain difficult. •Additional Investments of $100,000 to $1

million. •Need to hard-wire and hard-code the two

systems together to connect the Siebel suite to the mainframe.

•Time and money running data reconciliations. Custom coding to pay for, too. Source:

Computerworld Inc. Dec 3, 2001

And FallSurveys show 55 per cent of North American executives don't believe they've seen a return on their CRM

investments.

Gartner Group

Major Players:

Siebel Systems 26%

Oracle and Broadvision

6% share

Despite the troubles CRM software sales are expected to rise 10% to $4 billion in

2002 and to rise 33% to $29.4 billion in 2003

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

Page 14: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customer Management Loop

Respond

Identify

Dialogue

Interpret

1. Decide what you will do with the information. Make it a part of your overall customer plan.

2. Establish customers as the information pivot in your organization. Gather the right Customer Information (Who what when where and WHY) from the right customers through the right means (not the most expensive).

3. Make this information useable, available and actionable throughout the organization where it is needed.

4. Add context to the information. Interact with customers and understand their needs.

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Case Study: Harrah’sCreated a Total Rewards program to track players at

electronic gaming machines. These machines account for 80% of operating profits

Links 40,000 machines in 12 states

The goal is to create brand loyal customers

Comps (comps) good toward shows, meals or hotel

rooms.

Identify

Page 16: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customers Are Not Created EqualFre

qu

en

cy:

Nu

mb

er

of

Cu

sto

mers

at

Each

Valu

e

Level

Value Per Customer

MeanStandard Deviation

Why are they unprofitable?Can behavior or cost be changed?Should we disengage?

Unprofitable

Modestly profitable or break even

Modestly profitable

What can be done to develop the profitability of these customers?

Who are these customers? How do we keep them, attract more like them?

Very profitab

le

Identify

Page 17: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Tuft’s PlanAs the pie

shrinks the table manners get

worse.

A prominent physician on the current state of physician satisfaction

.01% = $7,880 PMPM

5% = $1,191 PMPM

95% = $22 Per Member Per Month (PMPM)

The Problem

Information Solution - CRM•Patient Identification and Treatment Recommendation•Workflow Standardization •Multi-disciplinary Collaboration •Alerts care managers enables them to intervene early •Persistently reminds and motivates patients, families and providers to comply with proven health management care plans

Information Solution - CRM•Patient Identification and Treatment Recommendation•Workflow Standardization •Multi-disciplinary Collaboration •Alerts care managers enables them to intervene early •Persistently reminds and motivates patients, families and providers to comply with proven health management care plans

Results from similar programs:• 44% reduction in

readmission• 36% reduction in hospital days for

patients with congestive heart

failure• 400% ROI for

pediatric asthma program

• 12% annual cost savings for diabetes

management

Results from similar programs:• 44% reduction in

readmission• 36% reduction in hospital days for

patients with congestive heart

failure• 400% ROI for

pediatric asthma program

• 12% annual cost savings for diabetes

management

Identify

Page 18: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Pharmaceutical Health Care

Physicians

Patients

Insurance/Gov.

Pharmacies

Defining your customersIdentify

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Tribune’s Customers

The Reader

The Advertiser

The Brick Wall

The Division Between “Church and State”

20% of Revenues 80% of Revenues

Identify

Page 20: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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General Electric Medical System’s Customers

Hospital Purchasing

Department

The Lab Technician

s

Doctors

                              

Hospital Administrati

on

Patients

Identify

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Guidant’s Customers

Electro- Physiologists

ImplantingCardiologists

CardiologistsPrimary Care

Physicians

Patients

Primary Relationship

Secondary Relationships

Referral Chain

Identify

Page 22: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customer Management Loop

Respond

Identify

Dialogue

Interpret

1. Decide what you will do with the information. Make it a part of your overall customer plan.

2. Establish customers as the information pivot in your organization. Gather the right Customer Information (Who what when where and WHY) from the right customers through the right means (not the most expensive).

3. Make this information useable, available and actionable throughout the organization where it is needed.

4. Add context to the information. Interact with customers and understand their needs.

Page 23: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Using Customer Information to Initiate Dialogue

Customized Web Interface

Customer Service and Support

EmailPop-up ads

Sales Force CallsBulk Mailers

Broadcast ads

Internet Physical

Push

Pull

Dialogue

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Response Rates ForMarketing Communications

Differential Marketing

6-15% range depending on quality of

marketing lists/segments defined

Relationship (1:1) Mktg.

18-30% range when using highly targeted,

‘one-to-one’ type marketing campaigns

Traditional Marketing

2-5% range for traditional types of mass media type

campaigns

Informational Marketing

1-3% range for customer passively collecting

information

Passive

Interactive

Company Initiated(Outbound)

Customer Initiated(Inbound)

Dialogue

Page 25: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customer Management Loop

Respond

Identify

Dialogue

Interpret

1. Decide what you will do with the information. Make it a part of your overall customer plan.

2. Establish customers as the information pivot in your organization. Gather the right Customer Information (Who what when where and WHY) from the right customers through the right means (not the most expensive).

3. Make this information useable, available and actionable throughout the organization where it is needed.

4. Add context to the information. Interact with customers and understand their needs.

Page 26: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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The potential of segmentation has vastly increased in the new world

In the old world, segmentation was mostly static using demo- and socio-graphics, attitudes and customer value. In the new world, segmentation is behavior based, real-time and dynamic

Is there no value in static segmentations anymore and does every segmentation have to be real-time?

Is behavioral segmentation the means to all ends and how do you integrate it with existing (mostly offline) segmentation methods?

Can multiple segmentations methods be used simultaneously for different value creation purposes?

Interpret

Segmentation of Customers

Page 27: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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The Customer Pyramid

PlatinumPlatinum

GoldGold

IronIron

LeadLeadLeast Profitable

Most Profitable

Differentiate Customers

Depending on the Level of

Involvement

Source: the Customer Pyramid, Zeithaml, Rust, and Lemon. Cal. Management Review, Summer 2001

Interpret Prediction to Optimize

Page 28: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customer Break Even Analysis

Cost to Serve

Price

High

Low

Low High

Goal is to move

Customers from below

the line above the line or to lower the

line

Break

Eve

n Poin

t

InterpretUnderstanding Customer’s patterns

Page 29: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Customer Management Loop

Respond

Identify

Dialogue

Interpret

1. Decide what you will do with the information. Make it a part of your overall customer plan.

2. Establish customers as the information pivot in your organization. Gather the right Customer Information (Who what when where and WHY) from the right customers through the right means (not the most expensive).

3. Make this information useable, available and actionable throughout the organization where it is needed.

4. Add context to the information. Interact with customers and understand their needs.

Page 30: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Target right customersTarget right customers

Cross-sellingCross-selling

Reduce lapse rateReduce lapse rate

Attractmore effective acquisition

Attractmore effective acquisition

DevelopMore sales per customer per year

DevelopMore sales per customer per year

RetainIncrease customer lifetime

RetainIncrease customer lifetime

Source ofimpactSource ofimpact Typical leverTypical lever

Stages ofcustomerrelationshiplifecycle

Stages ofcustomerrelationshiplifecycle

Churn

Market capitalisation ($ bn)

Market cap./customer ($)

Churn

Market capitalisation ($ bn)

Market cap./customer ($)

5.4%

7.0

3,721

5.4%

7.0

3,721

1.4%

35.3

5,883

1.4%

35.3

5,883

CRM Creates Value by Improving Attraction, Development, and Retention of Customers

Average revenue percustomer per year ($)Average assets per account ($)

Average revenue percustomer per year ($)Average assets per account ($)

130

21,000

130

21,000

170

102,000

170

102,000

Number of accountsNew accounts (Q4 1999)Average acquisition costs ($)

Number of accountsNew accounts (Q4 1999)Average acquisition costs ($)

E-trade

1,881,000413,500

360

E-trade

1,881,000413,500

360

CharlesSchwab

6,000,000390,000

200

CharlesSchwab

6,000,000390,000

200

Respond

Page 31: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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SegmentationSegmentation

Victoria’s Secret places all visitors on its slower servers but once a customer places something in

the shopping cart they are switched to a faster server.

Customer PatternsCustomer Patterns

Amazon monitors browsing and makes suggestions. Customer who bought this book also

purchased a book by….

Businesses that use Differential Treatment Respond

Page 32: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

Page 33: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Organizational Barriers to Customer Information

1. Information Flow

2. Channel Obstacles

3. Company Barriers to Entering the Data

1. Information Flow

2. Channel Obstacles

3. Company Barriers to Entering the Data

Page 34: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Why CRM Fails: Strategy & Organization

What CRM is:

•A strategy

•A cross functional and cross divisional initiative

•Difficult both costly and time consuming

What CRM is not:

• a technology

•A software package

•A marketing department initiative

•Easy

55% of CRM implementations don’t produce results (Gartner Group)

20% Damage long standing customer relationships (Bain Report)

Implement a CRM without a strategy

Implement CRM before readying the organization

The perception that more is better

Staking not wooing customers

Source: Avoid the four perils of CRM by Rigby, Reichheld and Schefter. HBR, February 2002.

Page 35: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

Page 36: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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10% beneficial change in … 10% beneficial change in …

… increases NPV by %… increases NPV by %

Target’s Differentiation Strategy: Loyalty

New customer acquisition costNew customer acquisition cost

New customer conversion rateNew customer conversion rate

New customer revenue changeNew customer revenue change

Cost of repeat customerCost of repeat customer

ConversionConversion 0.84

2.32

4.64

0.69

Repeat customer revenue changeRepeat customer revenue change

Repeat customer conversion rateRepeat customer conversion rate

Customer churn rateCustomer churn rate

RetentionRetention 5.78

9.49

6.65

Visitor acquisition costVisitor acquisition cost

Visitor growthVisitor growth

AttractionAttraction 0.74

3.09

Page 37: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

37Source: Frederick Reichheld and W. Earl Sasser, “Customer Retention: A New Star to Steer By,” Working Paper, Bain & Company, November 1999.

10

20

30

40

50

60

Auto ServiceChain

BusinessBanking

CreditCard

CreditInsurance

InsuranceBrokerage

IndustrialDistrib.

IndustrialLaundry

OfficeBuilding

Management

Software

Perc

en

t In

cre

ase in

Pro

fit

28%

35%

125%

25%

50%45%

55%

40%

35%

And Profits

Profit Impact of 5% Increase in Retention

Page 38: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Loyalty…

Loyalty has been hijacked and tortured by opportunistic

marketeers. Your search will reveal more than 100,000

(1,620,000 actual) loyalty related pages overwhelmingly dominated by loyalty cards, loyalty marketing, loyalty programs, and my personal favorite loyalty schemes. It seems that loyalty has been reduced to a potpourri of marketing gimmicks

designed to manipulate customer behavior with cheap bribes.

Frederich Reichheld, Loyalty Rules!

Loyalty obviously demands superior profits, but it demands

more. It requires that those profits be earned through the

success of partners, not at their expense. Loyalty can be earned only when leaders put the welfare of their customers

and their partners ahead of their own self-serving interests.

Isn’t Is

Data = Satisfaction = LoyaltyData = Satisfaction = Loyalty

Page 39: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Lock-in vs. Loyalty

Truly Loyal Accessible

Locked-in High Risk

Attitude

BehaviorPositive Negative

High

Low

Source: Stakeholder Power, 2001 Steven Walker and Jeffrey W. Marr Perseus Publishing

Purchase Don’t Purchase

Enjoy

Despise

Page 40: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Loyalty Programs

American Stores Neiman MarcusJ.C. PenneyToys “R” UsOffice MaxStaplesKohl’sTargetSaksSearsCVSCitgoRite Aid Dayton’s NordstromFederatedMedicine Shoppe Amoco Conoco Exxon Phillips Shell Ultramar A&P Albertson’s

TJX KrogerZellersTalbots

Safeway Value CityFood Lion

Foot LockerVictoria’s Secret

Source: The Price of Loyalty by James Cigliano, Margaret Georgiadis, Darren Pleasance, and Susan Whalley. The McKinsey Quarterly 2000 number 4.

US Retailers with Loyalty Programs

Costs: $1.2 Billion tied up in annual customer discounts

Entitlement: The programs are nearly impossible to stop

Don’t work: most customers are looking for an alternativeNon-value Reward: If customer spends $500 per year most programs would only give $5.

Most Programs Fail Because:

1 – Dual Purpose programs. (Target’s Take Charge of Education donates 1% of Purchases)

2 – Built to provide customer information. (Grocery Stores use to obtain information)

3 – Align the Organization!!

Successful programs are:Successful programs are:

Page 41: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

Page 42: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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The Perils of Market Focus

Listen to the wrong Listen to the wrong customers:customers:

Listen to the wrong Listen to the wrong customers:customers:

Too many Too many messages: messages: everyone is everyone is approaching approaching customers customers

with with “relationship”“relationship”

Too many Too many messages: messages: everyone is everyone is approaching approaching customers customers

with with “relationship”“relationship”

Companies Companies offer intimacy offer intimacy

but are not but are not able to able to

reciprocate reciprocate with custom with custom

offeringsofferings

Companies Companies offer intimacy offer intimacy

but are not but are not able to able to

reciprocate reciprocate with custom with custom

offeringsofferings

Focus on Focus on too small too small of a group of a group

while while alienating alienating

many many customerscustomers

Focus on Focus on too small too small of a group of a group

while while alienating alienating

many many customerscustomers

1111

2222

3333 4444

Data = Satisfaction = Loyalty = PaybackData = Satisfaction = Loyalty = Payback

Customers actually miss the days when a transaction was just a transaction, when purchasing a bar of soap didn’t

mean entering into a lifetime value relationship.

The Hotel asks me for detailed

information every time I

check in.

The rental car shuttle made

me walk because I

wasn’t “club member”. But I

was a loyal customer

Sony Walkman and Chrysler Minivan were both products that customers in focus groups said they did not

want.

Source: “Torment Your Customers (they’ll love it)” by Stephen Brown. Harvard Business Review, October 2001. And “Preventing the Premature Death of Relationship Marketing” by Susan Fournier, Susan Dobscha and David Glen Mick. HRB Jan-Feb1998.

Page 43: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Examples

“Sure they can call me at dinner, but I can’t reach them on the phone. They can send me 100 pieces of mail per year, but I can’t register

one meaningful response with them. Companies claim that they’re interested in the customer. But

the focus is on the company”

From “Preventing the Premature Death of Relationship Marketing” Fournier,

Dobscha, and Mick, HBR 1997.

Page 44: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Build to Order

Build to Replenish

Build to Forecast0%

10%20%30%40%50%60%70%80%90%

100%

1992 1994 1997 1999

From DealerStock

Via Dealer

Out ofDistributionCenters

Build to Order

McKinsey estimates that in auto

manufacturing alone BTO could save $80

Billion a year in reduced excesses

stock

Why the Clamor?Why the Clamor? Sales of mass market cars in BritainSales of mass market cars in Britain

While BTO has eluded many firms, others have made

significant progress by using

ChoiceBoards.

The Myth of Mass Customization

DELL’s ChoiceBoard Options

Source: “A long march” The Economist, July 14, 2001

Page 45: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Chaos

Conflict

Coordination Failure

Ownership and Accountability

From Matrix to Cubic Organization

CEO

North America Europe Asia

Production

Service

Sales

Marketing

Geography

Function

Customer

2X 3X

1

2

3

1

2

Matrix2

Page 46: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

Page 47: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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The Duality of Market Driven Organizations

Accountability Coordination

Decentralized Centralized

Product Focused Market Focused

Vs.

Vs.

Vs.

Page 48: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Internal Challenges - InformationWall Street doesn’t care how much

product we sell to a particular customer.

A Corporate Executive

Getting the information from the business silos and combining it to see all interaction with a customer

CoordinatingMechanism

Unified View of the Customer

Aggregate the information

Business Silos

“We had 86 internal accounts for IBM”

We aggregated all IBM

information

One view of the “big picture” of IBM

Page 49: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Challenges - Coordination

Give and Take

AA BB CC A B C

Product Silos Solution

Clients don’t care if a certain business line is losing money. They view the account in its entirety.

Clients want accountability. They want you to run the relationship as business not a product

Clients don’t care if a certain business line is losing money. They view the account in its entirety.

Clients want accountability. They want you to run the relationship as business not a product

Account Manager

Page 50: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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External Challenges

New Sales Methods Alignment

Economics Mega Aggregators

Channel Conflicts

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Information Can Be Consolidated at a Any Level

No Segments The Organization

Level

Some SegmentsVarious Types of

Customers

1-2-1 DirectThe Individual

Customer

Customer Segmentation Continuum

Average Customer the “Soccer Mom”

Club Wed Lullaby Club

Target.direct

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Target’s Vendor Club

6 Premium Charter 6 Premium Charter MembershipsMemberships

•Exclusive opportunity to partner

•Guest centric analytics

•Targeted offers

•Target Visa - electronic offers and marketing support

•Club Red – exclusive offers

•Now – September 2003

•$1.5 Million

10 Charter 10 Charter MembershipsMemberships

•Target Visa – electronic offers and marketing support

•Club Red – exclusive offers

•Now – September 2003

•$750,000 Million

Vendors input $16.5 million

Target will offer:

Page 53: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Other Benefits of the Vendor Club

Build a Competitive Advantage

18 month limited access

Guest Data Base

Analytics Suite

Focused Attention

New Channels

Vendor Opportunities

1. Offer a $ or % off one or more items bought in a single

transaction

2. Offer $ or % off one or more items bought

in multiple transactions

3. Offer “free” item with single or multi

purchaseAccess to Guest Specific Data

Who’s Buying What

Who Are Your Key Segments

Market Basket Analysis

Geographic Profile

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Case Study: The Problem of Complexity- Who Owns Customer Loyalty?

Median Age (female) in 2001

Median Income

% College Graduate +

% Professional/ Managerial

% with Children <18 at Home

Target Wal-mart Kmart44 46 47

$51 $44 $42

40

38

41

32 29

31 29

38 35

Guest

Location: The Store Managers own this Dimension

MULTIBRAND – Target, Mervyns, Marshall Fields

Item The Merchants Own the Item

Dimension

MULTICHANNEL- Store, Web, Mail

Transaction Need to introduce the guest dimension without losing the

Item and Location dimension

Page 55: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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The Role of The Chief Guest Officer

Chief Guest Officer

Vendors

Information

Merchants

Store Managers

This

Relationship

is Easy to

Execute

Other relationships are much more difficult

This

Relationship

is Easy to

Execute

Page 56: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Trade Off’s

High

Low

Independent Integrated

Ability to Coordinate Activities

Accountability

Page 57: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Road Map

CRM= Customer + Relationship + ManagementThe Rise and Fall of CRMStrategic Framework for CRM

Why CRM Fails Lock-in vs. LoyaltyThe Dark Side of Market Focus Target’s Market Focused Strategy and the

Challenges of ImplementationConclusion

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Differentiation Advantages

Differentiation allows a firm to command a premium price for its product or service.

Competitive advantage is realized if the value of the price premium is greater than the cost of differentiation.

Differentiation strategies require a deeper understanding of the customer’s needs (customer value chain) than cost-based strategies. This typically requires an in-depth customer segmentation analysis.

Differentiation strategies often require a different firm value chain with appropriate linkages between the value chain of the firm and that of the customer (e.g., Dell provides desired customization for each customer).

Differentiation may be more sustainable than cost leadership because it is build on features that are harder to imitate.

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CRM and Loyalty

Respond

Identify

Dialogue

Interpret

Truly Loyal Accessible

Locked-in High Risk

Attitude

BehaviorPositive Negative

High

Low

Purchase Don’t Purchase

Enjoy

Despise

Page 60: Target’s Differentiation Strategy James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu 801-422-7888 650.

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Challenges

Accountability Coordination

Decentralized Centralized

Product Focused Market Focused

Vs.

Vs.

Vs.

New Sales Methods Alignment

Economics Mega Aggregators

Channel Conflicts

Internal

External

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Examples

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CRM Best Practice: Williams - Sonoma

Source: Adapted from 2000 Annual Statement

Seek to own the home through multi-channel retailing

“Become the single most dominant force in home furnishings by selling great products in stores, through catalogs, and on the Internet.

Williams-Sonoms delivers on this vision through powerful brands, consumer

satisfaction, channel synergy, vertical integration, and operating efficiency.”

Williams-Sonoma knows their consumers, and understands how the marketing they do impacts their behavior. For example, they know

that mailing a new catalog boosts traffic in the retail stores. The stores in turn provide consumer data that is leveraged by the catalog, Internet, and merchandising groups to deliver better

solutions to consumers.

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CRM Best Practice: Ford

Source: Accenture Consulting

The company began by building a data warehouse to provide a single, integrated view of each consumer.

The second step was analyzing the consolidated data to achieve superior consumer understanding as a basis for one-to-one marketing. The result: unprecedented ability to understand consumers and differentiate and target marketing messages.

The third step was leveraging the results of data analysis to create highly targeted marketing campaigns. They also developed metrics to gauge campaign effectiveness, as well as procedures to ensure that all data collected in campaigns are captured by the company's data warehouse for continual enrichment of consumer profiles.

The company now has a rich, constantly expanding data source for predicting consumers' long-term value and developing appropriate, targeted campaigns for every stage of its relationship with a consumer.

1

2

3

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CRM Best Practice: DuPont Agricultural Products

DuPont project team that began by interviewing employees to gain insight into their needs for serving consumers and to help them understand the multi-level consumer base resulting from DuPont's acquisition of Pioneer. Then the team designed and built a data warehouse, seeing it as the strongest solution for gaining consumer insight and the best basis for building consumer offers.

The data warehouse consolidated and cleaned existing consumer information from all sources and was equipped to capture new data from transactions and to permit updates.

The next step: leveraging the warehouse with TruChoice, a marketing application with built-in incentives for farmers to encourage purchases and for dealers to encourage data sharing.

TruChoice launched at the end of 1999, and results have been outstanding. DuPont expects sales growth in their corn and soybean operations; dealers and distributors have overcome their distrust and begun providing consumer data; and farmers are so sold on TruChoice that in areas in which it's not offered they're demanding dealers make it available.

Source: Accenture Consulting