Required Reading: Amazon Can Be Beat with the Right Focus

In his new book, Choose Your Customer: How to Compete Against the Digital Giants and Thrive, Jonathan Byrnes, a senior lecturer at MIT and founder and chairman of Profit Isle, a software company that spun off from MIT, says companies can survive and win against powerhouses like Amazon and Google by building a uniquely targeted business that these companies just can’t match. CRM editor Leonard Klie delved into this further with him.

CRM: You hold up Amazon as a digital behemoth. What is it doing right to earn that moniker?

Byrnes: Amazon and several others have a very tightly focused strategy: selling products to small customers at arm’s length supported by an information-rich, highly networked environment. This customer segment was previously woefully underserved by the big mass-market companies, which focused mainly on larger customers. Amazon stuck to this strategy and relentlessly innovated to provide better and better service to this segment.

How can companies survive and win against that?

The key is not to compete against Amazon and other digital giants. It is to do what they did: Choose a high-profit, high-growth segment of the market that is defensible against strong competitors; align resources; relentlessly innovate to out-compete other firms seeking to penetrate your target market; manage your business to focus on the single task of being the best at serving your target market; and scrupulously avoid getting distracted from this core focus.

You say that one of the keys to success is to identify and focus on customers who are the most profitable. How can that be done?

The first step is to understand where you are profitable. The problem is that traditional financial accounting categories, like revenue and costs, aggregate all transactions. They tell you whether you are making money, but not where you are making money.

The answer is to employ new transaction-level profit metrics and analytics that couple each increment of revenue with the all-in cost of providing it. Each transaction can be characterized by customer, product, store, sales associate, distribution method, and so on, and show the profitability of literally every nook and cranny of a complex company.

The next step is to project changes coming over the next several years from factors like competitors or product innovations. Because transaction-level profit metrics show the baseline profitability of each segment, managers can easily determine which segments will be threatened or helped by each force of change and project which segments will be profitable into the future.

You suggest providing services and experiences that can’t be replicated by the tech giants. What can’t these giants do?

The key is to bear in mind that the tech giants all have the same core strategy: provide arm’s-length services to small customers in an information-rich manner. This leaves open a wide range of higher-service segments, like a small local business selling and fitting shoes for serious athletes or larger companies delivering products to production lines within factories.

How can companies create value in unexpected ways?

The most important step is to develop an ongoing set of profit-showcase projects, essentially a journey of discovery in which a small team literally spends a week or two with a willing, innovative customer (or supplier) developing an understanding of its entire product cycle, from deciding what to buy; to ordering, receiving, using the product; and after-sale service. Based on this understanding, the team can develop creative ways of working together.

Often this process involves developing a channel map that traces the product cycle and attributes time and cost to each stage. Channel mapping is especially important because it shows the largest pools of cost and potential value.

Every company should have at least one profit-showcase project in process all the time. This is how managers can systematically ensure they are always pushing the envelope on enlarging their customer value footprint.

What else would you recommend to company leaders looking to succeed?

The key to business success is developing “pounds per square inch” of market power. That means focusing on a tightly defined market segment that will provide high-profit growth that is defensible. Once you have clarity on your focus segments, choose customers who fit and say no to the others; align resources to completely focus on winning target segments and increasing customer value footprint; and mange to systematically avoid diffusing focus.

In short, do what Amazon and the other success stories did and stay focused on target customers with relentless innovations that ensure they never have a reason to think about turning to another vendor.