article notes

Beyond Better Products: Capturing Value in Customer Interactions

S U M M E R 2 0 0 2 V O L . 4 3 N O. 4

R E P R I N T N U M B E R 4 3 4 3

Mark Vandenbosch & Niraj Dawar

MITSloan Management Review

P l e a s e n o t e t h a t g ra y a re a s re f l e c t a r t w o rk t h a t h a s b e e n i n t e n t i o n a l l y re m o v e d . T h e s u b s t a n t i v e c o n t e n t o f t h e a r t i c l e a p p e a rs a s o ri g i n a l l y p u b l i s h e d .

alk to the senior executives of any progressive company today and they will tell you

about its huge investments in innovation, bulging new-product pipelines, proprietary tech-

nologies and relentless drive to shrink time to market. They’ll also admit that these efforts

have not helped them outrun the competition. Although businesses are moving faster than

ever, competitors are constantly nipping at their heels, emulating new products, replicating

entire product-development systems and processes, and keeping pace on the same tread-

mill. New products may generate hefty returns, but the advantage is short-lived. These

days, a company’s rivals are likely to be world-class sprinters.

SUMMER 2002 MIT SLOAN MANAGEMENT REVIEW 35

In a world of mobile

talent, open markets and

brutal competition,

it’s increasingly difficult

to maintain an advantage

over competitors through

product innovation. As

a result, some companies

have figured out how

to outdistance rivals

through customer-focused

strategies that are

virtually imitation-proof.

Mark Vandenbosch and

Niraj Dawar

Mark Vandenbosch is an associate professor of marketing at the Richard Ivey School of Business, University of Western Ontario, London, Ontario, and a visiting professor of marketing at IMD in Lausanne, Switzerland. Niraj Dawar is the Nabisco Professor of Marketing at the Ivey School. Contact the authors at [email protected] and [email protected].

Beyond Better Products: Capturing Value in Customer Interactions

T

Eroding competitive leads are the result of forces that are

equalizing companies’ ability to innovate: the increasingly rapid

and free flow of information and knowledge, the movement to

global standards and the advent of open markets for compo-

nents and technologies. Today, a company such as Handspring

can appear and, within a few months, launch a hand-held orga-

nizer similar to the Palm Pilot in design, functionality and per-

formance. Thanks to open markets and open standards,

Handspring has access to the same product designers and man-

ufacturers that Palm uses.

This example is not the exception, and it raises profound

questions about the sources of sustainable competitive advan-

tage. If product parity is relatively easily achieved in today’s

world, customers will turn to new criteria when deciding to buy

one company’s products over another’s. We have attempted to

establish the nature of these criteria over the past three years by

collecting data from more than 1,500 senior executives in inter-

views and group discussions. In particular, we have focused on

this question: “Why do your customers choose to buy from you

rather than from your competition?”

Despite the vast range of industries represented by the exec-

utives, their responses were remarkably similar. They agreed

almost universally that offering great products, technologies or

services is merely an entry stake into the competitive arena.

Most spoke of the need to maintain an edge in the way their

companies interact with customers; that is, they recognized that

customers often value how they interact with their suppliers as

much as or more than what they actually buy. As the main driv-

ers of customer choice, the executives cited cost-oriented factors

like convenience, ease of doing business and product support, as

well as risk-oriented factors like trust, confidence and the

strength of relationships.

Although many managers realize the need to pay attention to

cost and risk factors that influence customer choice, our

research data indicate that companies are usually at a loss when

it comes to translating this conceptual understanding into prac-

tice. We did find counterexamples, however: companies that are

using one of five strategies to build competitive advantage

through their approach to customers. (For a quick overview

that also gives a sense of the range of companies involved in our

research, see the table “Five Strategies for Building Advantage

with Customers.”) These strategies are not easy to devise or

implement; they require creativity, imagination, hard work

(inevitably) and a willingness to take risks. But as we’ll demon-

strate, strategy by strategy, the rewards are more than worth the

effort. Before we turn to the strategies, we’ll take a closer look at

how perceptions of cost and risk affect customers.

Manipulating the Levers of Cost and Risk When product improvements can be matched quickly by com-

petitors, companies have only two remaining levers available to

influence purchase decisions: They can reduce customers’ inter-

action costs or make the purchase and subsequent product own-

ership a less risky proposition. Fortunately, these levers provide

enormous and largely untapped potential to increase the gain that

customers expect from a transaction.

Start with the issue of lowering costs. A buyer incurs a variety

of costs in the course of learning about a seller’s products and

services, acquiring them, using them and finally disposing of

them. In addition, to extract value from the product, the buyer

must configure the product to his or her needs. That can be as

simple as chilling a beer before drinking it and as complex as

integrating a new organizationwide software system with the

existing IT infrastructure. Finally, when a customer buys a prod-

uct or service, he or she commits to a rigid seller-defined bundle

and forgoes the benefits of other potential bundles available in

the marketplace. For example, when someone buys a family

minivan, he or she obtains roominess and comfort but can

never, with that product, enjoy the psychological benefits that

come from driving a convertible. Most companies never attend

to such costs, but they are real. Managers who give thought to

ways to reduce these interaction costs will likely uncover innov-

ative ways of increasing customers’ gain.

In addition to the generally hidden costs that customers face

when they try to decide on a supplier, buyers also take on con-

siderable risk and uncertainty. They implicitly consider the

range of possible outcomes from the interaction and the likeli-

hood that such outcomes will occur. Can I trust the seller’s

promises? Will the product perform as expected? Will I be able

to implement it successfully? Will I lose money? Will the seller

be around for repair and maintenance? When potential cus-

tomers feel that the risk is high that their expectations will not

36 MIT SLOAN MANAGEMENT REVIEW SUMMER 2002

To create value beyond products, companies have to recognize that tangible goods are rigid, inflexible packages that impose an opportunity cost on the customer.

be met, they quite naturally choose not to buy. Many companies

have been in situations in which customers stick with the indus-

try leader’s product even though their new product is either of

superior quality or cheaper or both — in their calculus of risk,

customers prefer to wait until the new offering has been clearly

recognized as superior for some time before they make a switch.

Of course, the buyer can engage in due diligence to address

questions of risk, but due diligence costs time, effort and money

— in other words, it raises the interaction costs. For customers,

it is greatly preferable to buy from a trusted seller.

Some of the companies in our research have figured out cre-

ative ways to earn their customers’ trust. They’ve reconsidered

exactly what it is they are selling, they’ve leveraged strengths to

make customers’ lives easier, they’ve worked with other organi-

zations to provide an optimal (and unique) bundle of products

and so on. A review of the strategies they’ve followed can pro-

vide managers in almost any industry with new ways of think-

ing about building advantage with customers.

Unlock Economies of Interaction All companies recognize the power of

economies of scale, scope and experi-

ence in producing better or cheaper

products. They should also recognize

their ability to leverage those same

economies in the process of interact-

ing with customers. Consider that

suppliers often have many interac-

tions of the same type with different

customers (scale), many interactions

with the same customer (scope), and

access to information that makes it

easier for them to gauge the risks

involved in an activity for a particular

customer (experience). To increase

their customers’ sense of expected

gain from a transaction, companies

can reconfigure their activities to

lower buyers’ interaction costs and

perceived risk. For example, a supplier

may be able to identify tasks that its

customers have in common and

decide that it can perform them more

cheaply or effectively. By taking re-

sponsibility for the tasks, suppliers can

save their customers time and money

and effectively lock them in.

Consider Master Builders’ recent

launch of its MasterTrac system. Master Builders sells chemical

admixtures that are used to improve the performance charac-

teristics of concrete; its customers include concrete producers

that have many locations and either a regional or national pres-

ence. Until the new system was put in place, managers at each of

the producers’ locations independently ordered and maintained

inventory of each type of additive to suit their local require-

ments. For Master Builders, this decentralized approach meant

that it had to ship many small orders of different additives at

infrequent intervals to geographically dispersed sites. The small

shipments were not cost effective, and emergency shipments

were often necessary when customers failed to anticipate their

needs correctly.

To meet this challenge, Master Builders developed a remote

tank-monitoring system for immediate and seamless inventory

control. The MasterTrac system consists of additive storage tanks

fitted with wireless sensors that, when queried, relay inventory

information to a Web site accessible to both Master Builders and

SUMMER 2002 MIT SLOAN MANAGEMENT REVIEW 37

Five Strategies for Building Advantage With Customers

Lower your customers’ costs by taking on functions that are simi- lar across your customer base.

■ Example: Chemical supplier Master Builders

Explore new business models when specific products do not efficiently fulfill the benefit.

■ Example: Premier Auto Group (Ford)

Coordinate or combine activities with the customer to lower oper- ating and transaction costs.

■ Example: Behind-the-scenes automobile manufac- turer Magna Steyr

Lowering Costs

Unlock Economies of Interaction

Integrate Activities

Simplify the Route to Benefits

Be the Nexus

Form the Future

Reducing Risk

Use your lower threshold of risk to reduce the risks faced by your customers.

■ Example: ABB’s tubular products business

Reduce customers’ risk by conducting tasks that are not in their capability set.

■ Example: ICI Explosives

Integrate to improve the flow of information and to make it possible to make changes while processes are still fluid.

■ Example: AXIS, manufacturer of production machinery

Act as a conduit to bring related offers and complementary systems to current customers. This lowers search, evaluation and transaction costs. It also reduces risk as customers deal with the same trusted source.

■ Examples: NTT DoCoMo, Intuit

Reduce your customers’ risk by working to create or define the industry standard or by cooperating with key complementors (or by doing both). This approach also lowers the lifetime cost for customers, as their investments are protected.

■ Example: SAMSys Technologies, developer of radio frequency identification technology

the customer. Using that information, Master Builders was able

to effectively manage inventory levels at individual locations on

nearly a just-in-time basis. Under the new system, the customer

realizes major savings from reduced inventory financing,

reduced order and payment processing, and reduced inventory

management time. Competitors that seek to win over the cus-

tomer now face a much harder task.

Suppliers may also gain a sustainable advantage by reducing

their customers’ risk, especially if they leverage their experience

and reach. Asea Brown Boveri found a way to do that in its

tubular products business. ABB supplies drilling pipe to ocean-

based oil- and gas-drilling rigs around the world. As wells are

drilled, pipe is threaded together and placed down the well.

Although the product requires some technological know-how

to manufacture, it is basically a pipe with threading welded onto

it. In 1999, ABB was the world leader in this market but was fac-

ing increased competition from low-cost welding shops.

Since oil rigs can be located anywhere in the world (from

Siberia to Vietnam to Chile), the industry convention was to

price the product at the factory gate. Drilling companies would

then take ownership and arrange to have the product delivered

to the rigs. Their headaches began at this point since delays in

getting the pipe to the drilling site were very expensive: Rental

prices for an ocean-going drilling rig are $150,000 per day.

Although the threat of delays was not ABB’s problem per se, the

company recognized an opportunity to shift the terms of the

business away from cost.

ABB’s managers knew that the greatest obstacle to on-time

delivery was in getting through the importation and customs pro-

cedures of the country where the drilling site was located. ABB was

uniquely positioned to take on that task for its customers. Because

of its many business units in various industries, the company had

a well-established presence in more than 100 countries, and its oil

and gas unit understood the import regulations worldwide for the

drilling business. For some key customers, ABB began offering

contracts for drilling pipe that included delivery to a rig — with

guaranteed delivery times. It essentially took on the risk of cus-

toms and importation delays. Even though ABB charged for these

deliveries at cost, the increased value to the customer in terms of

lower risk was much more significant.

Over time, ABB’s position as the market leader solidified

because competitors lacked the global reach and expertise

required to offer contracts that guaranteed delivery. ABB suc-

ceeded by looking at its interaction pattern with customers in all

its businesses and finding an area where its risk was lower than

that of its customers and competitors. ABB’s product hasn’t

changed, but the new way of offering it has increased its cus-

tomers’ expected gain from their purchases.

Simplify the Route to Benefits It’s a given that companies must offer high-quality products if

they want to succeed. It’s also a given that the products them-

selves, even when they’re very good, rarely provide all the bene-

fits that customers are looking for. They must be combined with

other elements before customers can realize their full value. The

trick for companies is to redefine their offerings in ways that

make it easy for customers to get the benefits they seek.

The Australian division of ICI Explosives took an innovative

approach to helping its customers reap the benefits of one of the

most unglamorous products imaginable: pieces of rock. ICI, like

its competitors, had long sold commodity explosives to quar-

ries. The quarries used these explosives to blast solid rock into

aggregates of equal size. The customers’ challenge is to turn the

rock face into a product that can be sold; an ineffective blast will

yield large chunks of rock that are much harder to break down.

As such, designing a successful blast requires considerable

expertise and has a major effect on profitability. As many as 20

parameters affect the performance of the blast, including the

profile of the rock face, the depth and diameter of the drill

holes, and the weather. ICI, recognizing the risk that customers

face, began a program to quantify what had previously been

considered an art. Using computer models and experimenta-

tion, ICI engineers developed strategies and procedures that

narrowed the uncertainty of blast performance. Instead of sell-

ing this new expertise as an added service, however, ICI began

performing the blasts for the quarries and writing contracts for

“broken rock.” Customers are now billed for the amount of bro-

ken rock of a size specified in the contract that is produced from

a blast carried out by ICI.

The new contracts significantly reduce the business costs and

risk faced by customers in two ways. First, they turn fixed costs

(primarily quarry employees and drilling equipment) into vari-

able ones and second, they set the performance of a blast at an

acceptable minimum level. The customer pays only for the out-

come, not for the commodity that goes into creating it. ICI is no

longer simply a supplier of commodity explosives; it has

become an integral part of its customers’ business. The redefin-

ition of ICI’s role not only generated much higher margins for

the business, it also gave ICI a much more defensible competi-

tive position.

To create value beyond products, companies have to recog-

nize that tangible goods are what they are: rigid, inflexible pack-

ages that impose an opportunity cost — the cost of forgoing

alternatives — on the customer. Premier Auto Group, the lux-

ury arm of Ford that manages brands such as Jaguar, Land

Rover and Volvo, understands that its product offering may be

too much of a constraint for its customers. The unit is preparing

38 MIT SLOAN MANAGEMENT REVIEW SUMMER 2002

to offer a new kind of automobile customization that is based

on usage. Customers will not purchase a car but rather a

“mobility contract” from PAG that will allow them to use a

sedan, a limousine, a sport utility vehicle or a convertible,

depending on the customers’ needs. Redefining the offering in

this way does not alter the fact that Ford will still make cars, but

it changes how customers will buy and extract benefits from

those cars.

Companies can systematically configure offerings that create

value by simplifying the route to the benefits that customers

seek. And suppliers can find a new source of competitive advan-

tage if they can better perform certain tasks or better absorb

related risks or costs than their customers can, all while pro-

ducing the same benefits.

Integrate Activities It’s not always feasible to take on particular customer tasks alto-

gether. Companies can avoid the need to be wholly responsible

by taking a collaborative approach — that is, by integrating var-

ious activities with their customers as a means of lowering risk

and costs. The Internet has made such integration both possible

and, by many accounts, essential. Suppliers must be prepared to

offer an array of capabilities and resources that their customers

can draw on as needed; both sides must be willing to integrate

communications and form intercompany project teams.

A division of Magna International has integrated its activi-

ties with one of its major customers, DaimlerChrysler, to help

the automobile giant meet its production needs. Magna

International is one of the world’s largest and most diversified

automobile parts suppliers; it has 166 manufacturing divisions

and 31 product-development and engineering centers in 18

countries. Its initial success was driven largely by meeting the

needs of automobile plants that it served through small facto-

ries located near its customers’ assembly operations. Radical

changes in the automotive industry, however, have forced the

company to change as well. Product and model life cycles have

been drastically reduced; consumers are more fickle than ever;

and competitors are aggressive in their pursuit of market share.

Not surprisingly, demand for any given model of car is notori-

ously difficult to forecast, and automobile manufacturers need

to be agile enough to respond rapidly to changes in the market.

To help manufacturers attain such operational flexibility,

Magna International created Magna Steyr. This division is not

merely an arms’ length parts supplier. Instead, the parent com-

pany has brought together all the capabilities required to engi-

neer, design, produce and assemble entire vehicles. A few years

ago, Magna Steyr was able to solve DaimlerChrysler’s enviable

problem of excess demand for the Mercedes-Benz M-class

sport utility vehicle. Magna Steyr had already been involved

with DaimlerChrysler in the production of E-class Mercedes

sedans and the Jeep Grand Cherokee and was accustomed to

working closely with DaimlerChrysler engineers and regularly

receiving information on demand forecasts. So when at the end

of 1998 worldwide demand for the M-class SUV outstripped

total capacity at DaimlerChrysler’s plant in Tuscaloosa,

Alabama, Magna Steyr was called in to provide backup. Within

nine months, M-class SUVs were rolling off the Magna Steyr

line in Graz, Austria. Magna Steyr’s integration with

DaimlerChrysler was so seamless that the company might be

confused for a division of DaimlerChrysler. Yet Magna Steyr

has achieved this level of integration with each of its key cus-

tomers, including BMW (for the X5 and X3 SUVs) and Audi

(for the TT Roadster).

Having processes that are transparent to customers can have

advantages for all involved, as a small Italian manufacturer

recently demonstrated. AXIS specializes in the production of

machinery for the manufacture of electric motors used in the

automotive, domestic appliance, and power tool industries, and

it has a reputation for quality and technical expertise. But in a

mature and competitive industry, those strengths were proving

insufficient. Customers like Black & Decker and Philips were

increasingly concerned with their ability to reduce time to mar-

ket and meet peak-season demand and were, as a result, turning

a critical eye on their suppliers. In response, AXIS radically

changed its approach to project management by opening up the

entire process to its customers.

After AXIS’s managers had made that decision, a power tool

manufacturer contracted with the company to supply a new

production line for a nonstandard electric motor needed to

make a new product. The first challenge was to fit the new line

into the customer’s facility. Space was limited and labor costs

were a concern, so the line had to be relatively compact and

SUMMER 2002 MIT SLOAN MANAGEMENT REVIEW 39

By being the link between customers and the sellers of complementary products and services, a supplier can increase the number of customer “touch points” and thus its claims on customer loyalty.

highly automated. Using a Web-based three-dimensional CAD

system, AXIS worked with the customer’s engineers to optimize

design concepts and help the customer create performance met-

rics under different operating circumstances and configura-

tions. After the basic concept was agreed on, AXIS engineers

designed the production line, sharing drawings, specifications

and other data in real time with the customer’s engineers.

Midway through the design process, the customer’s engi-

neers, seeing plans for a machine designed by AXIS, realized that

the machine’s capabilities enabled them to develop a more effi-

cient motor. An improvement on that order normally would

have been integrated into the next version of the product, but

now it could be built into the original design.

Once the production machinery design was completed and

approved, the documents were sent to the production team and

stored online in a folder open to everyone involved in the project.

Later, as the production team began work on building the line,

they realized that the engineers had been optimistic about the

amount of work needed to construct one of the peripheral

machines. To prevent triggering a slippage notice, they informed

the designers in both organizations and referred them to drawings

produced for an earlier project that might prove to be an adequate

fix. The designers studied the drawings online and agreed on the

changes. Production delays were minimized, and the customer

was able to get the product to market on schedule. Documents

from the production phase were also stored online and made

accessible to in-field maintenance people in both companies.

The sharing of information and business-process integration

at every step of the way were major factors in the customer’s

successful launch of the new product. The customer enjoyed

unprecedented control over the design and creation of the new

production line and is likely to return to AXIS for related needs

in the future.

Be the Nexus A trusted supplier can turn itself into a market maker for many

products and services that it doesn’t actually produce — and

make money in the process. By being the link between cus-

tomers and the sellers of complementary products and services,

the supplier reduces buyers’ search and acquisition costs by “cer-

tifying” only qualified contacts. At the same time, the supplier

increases the number of customer “touch points” and thus its

claims on customer loyalty.

NTT DoCoMo is the nexus for many suppliers and cus-

tomers that produce and use mobile Internet products and ser-

vices. Its i-mode service, which had more than 28 million

subscribers in early 2002, is by far the most successful mobile

Internet service in the world. The foundation for i-mode’s suc-

cess is DoCoMo’s coordination of all aspects of the mobile

Internet experience: hardware, access, services and billing. Such

coordination lowers interaction costs and risks for customers by

making it easy to use the service while guaranteeing consistency.

In terms of hardware, for example, DoCoMo has worked

closely with suppliers like Sony, Panasonic and Fujitsu to stan-

dardize i-mode handsets. The company has simplified access

and use by building the service around a single portal that is

available only through i-mode-enabled phones and by making

it easy to navigate through 1,600 DoCoMo-certified sites from

the portal. Web sites are keen to be endorsed by DoCoMo and

are willing to adapt their offerings to DoCoMo standards for the

privilege of being able to reach millions of users — who, in turn,

get instant access to a critical mass of content and services.

Finally, billing and payment are also easy with i-mode.

Subscribers receive a single, itemized monthly bill, and because

they get only one invoice from a trusted source, they are more

apt to try new services than they would be through fixed-line

Internet connections, where payment and verification are

required for each site independently. By earning the trust needed

to occupy the center of the mobile Internet, DoCoMo is offering

value to hardware suppliers, content providers and millions of

i-mode users. In the process, it is building an impressive com-

petitive position for itself.

Intuit is another company that has leveraged its trusted posi-

tion to become a nexus, in this case for small-business software

applications. Intuit’s QuickBooks has an 85% share of the small-

business-accounting software market and a 98% customer loy-

alty rating. But the more interesting story is how Intuit has been

able to capitalize on its success with QuickBooks to capture an

ever bigger share of small-business expenditures on information

and data handling. Services such as QuickBooks Site Solutions

(an Internet tool that enables small businesses to create a profes-

sional Internet presence) and QuickBooks Online Payroll have

40 MIT SLOAN MANAGEMENT REVIEW SUMMER 2002

A necessary strategy for any company developing a new technology is to seek ways to lower the risks and costs even before a polished product is ready for a mass audience.

deepened its interaction with customers while reducing their

risk and cost. And on an annualized basis, these new services

generate four times and ten times more revenue per customer,

respectively, than the original QuickBooks software.

More recently, Intuit has opened up access to the application-

programming interfaces for the QuickBooks products. Third-

party developers are now able to create software applications

that are integrated into the QuickBooks platform. As a result,

specific types of small businesses — architectural firms, medical

groups and so on — can purchase customized solutions for

applications, such as project billing or record keeping, while

maintaining the same accounting core. Intuit’s move signifi-

cantly reduces the small business’s cost of obtaining these solu-

tions, since integration with its own internal procedures is

guaranteed. The QuickBooks seal of approval also reduces the

customer’s risk incurred in the selection of a new supplier or

software. By allowing third-party developers to trade on its plat-

form of trust, Intuit has placed itself at the nexus of suppliers

and buyers in the industry.

Form the Future Companies often have to collaborate with other organizations to

help “form the future” — in other words, to shape businesses

and products that will change the way commerce happens. This

is especially true for new technologies in the networked econ-

omy, which are rarely the product of a single company. And what

any business today has to realize is that the customer’s sense of

risk is nowhere greater than when it is contemplating large cap-

ital outlays for a new technology. A necessary strategy

for any company developing a new technology, then,

is to seek ways to lower the risks and costs from the

early stages of product development onward — that

is, even before a polished product is ready for a mass

audience. Sometimes, as the story of SAMSys

Technologies indicates, that even means giving up on

your core product.

SAMSys is a small company with a radical vision

for the future of radio frequency identification

(RFID). The technology works like this: Objects are

tagged with semiconductors that emit radio frequen-

cies and can then communicate with one another

and with people. The range of potential applications

is staggering — for example, RFID could be used to

inventory entire warehouses at the touch of a button

or to get information about the contents of transport

trucks and containers without opening them. A

recent Accenture study found that RFID technology

could save $70 billion in the supply chain by reduc-

ing inefficiencies in inventory carrying costs, shrinkage and

labor. Despite its revolutionary potential, customer buy-in to

RFID has been slow. The hesitation has been caused by the lack

of universal frequency and protocol standards, as well as the

rapid evolution of tag technology.

SAMSys was an early entrant in the RFID industry, and by

1998 it had developed a complete solution of tags and reader

hardware. When the company realized that RFID adoption was

slow relative to its potential, it moved to boost sales in the

industry as a whole rather than focus on promoting its own

solution. It recognized that customers would value a tag reader

that was agnostic in terms of frequency and protocol so that

they could invest in any RFID system without fear of incompat-

ibility. To prevent obsolescence, the reader would also have to be

easily upgraded with the appropriate software. SAMSys decided

to develop such a reader, but it knew that to succeed it needed

to convince large players of its vision: tag suppliers, package

makers and RFID system users.

To influence tag suppliers like Texas Instruments, Philips and

Motorola, SAMSys had to position itself as a complementor

rather than a competitor. To do that, it took the bold step of exit-

ing the tag business and focusing entirely on making standard-

free readers. Even though the large tag suppliers had their own,

proprietary line of readers, they saw the SAMSys vision of uni-

versal readers as a way of decoupling their tag and reader prod-

uct lines and significantly growing the tag business. Texas

Instruments and Philips are now SAMSys’s alliance partners

rather than its competitors.

SUMMER 2002 MIT SLOAN MANAGEMENT REVIEW 41

About the Research

The research conducted for this article includes the following:

■ In-depth interviews with founders, CEOs and senior managers

of such companies as Algorithmics, AXIS, BMW, Cobalt

Networks, SAMSys Technologies, SC Johnson, McCain Group,

Nestlé, National Semiconductor, PMC-Sierra, E.piphany, QLT,

SüdChemie and J. Walter Thompson

■ Group sessions with senior management teams charged with

developing strategy at such companies as Cisco Systems,

Nortel Networks, Lucent Technologies, Nokia, British Telecom,

Allianz, KLM Royal Dutch Airlines, ABB, E.ON, Corus, Lafarge,

Master Builders, BMW, Nestlé, Canon, Euro RSCG, Deloitte

Touche Tohmatsu, PricewaterhouseCoopers and Tetra Pak

■ An extensive review of secondary sources, including case

studies and published materials from leading business

schools, consulting firms and the business press

SAMSys next focused on the package suppliers — the compa-

nies that make the packages that house the RFID tags. Over a

period of several months, SAMSys persuaded International Paper,

one of the largest packaging companies in the world, to enter into

a strategic alliance. International Paper now sees SAMSys’s RFID

solution as a way to add value to its paper-packaging products.

The alliance gives SAMSys access to standards-creating bodies and

to research consortia (such as the Auto-ID Center at MIT); more

importantly, it gives the company a credible platform for commu-

nicating with such potential customers as Procter & Gamble,

Revlon and Dell.

Finally, SAMSys, in collaboration with its partners, developed

a series of pilot projects to demonstrate the power of its standard-

free RFID vision. For example, SAMSys and International Paper

are running seven demonstration supply-chain projects — all of

which require different readers. SAMSys has created multiproto-

col readers that can be configured to fit each project. And a proj-

ect with Revlon on “smart shelving” caught the eye of

Wal-Mart, which is now testing SAMSys’s RFID technology.

SAMSys’s vision of a RFID future based on common readers

looks increasingly plausible.

Shifting the Traditional Mind-Set As products from competing companies become increasingly

similar, differences in the way rivals interact with their cus-

tomers are becoming more and more important. There’s no

doubt in our minds that strategies built around reducing cus-

tomers’ interaction costs and risk are central to these differ-

ences; they offer a systematic way to tap into new sources of

customer value. Make no mistake: It is easy to underestimate

the difficulties involved in shifting a company’s focus from

products to customer interactions. Tactical marketing responses

can’t get the job done because they do the opposite of what is

needed, adding to interactions rather than streamlining them.

But the tremendous untapped opportunities for creating value

and establishing long-term advantage should, we believe, be

enough to convince any senior executive of the superiority of a

mind-set that starts with customers rather than products.

ACKNOWLEDGMENTS We would like to thank Chris Barrow, Tony Frost and Rod White for their helpful comments on earlier versions of the paper and Gavin Brown for his assistance in data collection.

Reprint 4343 Copyright  Massachusetts Institute of Technology, 2002. All rights reserved.

42 MIT SLOAN MANAGEMENT REVIEW SUMMER 2002

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