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(originally published by Booz & Company)


Follow the Customer, Follow the Car

In our current economic crisis, the global financial community has fallen into the same set of traps; its members did not recognize the dangers of excess supply. A surplus of financing drove the excess supply in the industrial sector, which, in turn, drove fierce competition to fulfill future demands. That is why the damage caused by the collapse of the bubble was not limited to the financial sector.

Customers as Scarce Resources
After the collapse of the Japanese bubble, leading industrial companies had to rethink their assumptions about growth opportunities. Once they recognized that customers are scarce resources, they began to do more business with their existing customers, rather than churning their customer base.

Consider the Japanese automotive companies, for whom “follow the customer” has been a core strategy — especially valuable when demand for new cars is declining. Japanese auto companies in their home market emphasize revenues from the products that often accompany the purchase of a car, including insurance, loans, inspections, maintenance, parts, and accessories. Those revenues, stable even in recessionary times, are essential to keeping the dealer network alive. 

“Follow the car” was the core of the strategy of the Japanese construction machinery manufacturing industry. (Construction vehicles are known as “cars” within their industry.) In addition to selling new construction vehicles, these manufacturers built an overseas business selling used equipment. Secondhand Japanese vehicles have good brand value and are sold at premium prices. The used machines exported to Asia engendered a good reputation for product durability, and they generated business opportunities as well: Manufacturers secured downstream revenues by selling parts and maintenance to those who might become customers for new machines in the future. 

Today’s global companies are not necessarily doing a good job of following the customer or following the “car.” Throughout the early 2000s, they enjoyed revenues generated by a booming economy in the U.S., Europe, and the so-called BRIC countries (Brazil, Russia, India, and China). As Japanese companies had done 15 years earlier, they accelerated their investments in advance of real demand, pursuing the familiar business model of churning customers by focusing on new sales. 

Now they must redefine their global business models, changing the focus from making and selling to making, selling, and servicing. The business opportunities in the near and mid-term will come from longer-term customer relationships, not just in existing markets but also in new markets. As established companies enter such countries as Vietnam, Turkey, South Africa, and Argentina, as well as “frontier markets” such as Mongolia, Uzbekistan, Iraq, and Libya — they need to understand that the customers in those countries are very price-conscious. Therefore, like Japan's construction vehicle makers, companies should consider competing on quality and customer relationship; for example, offering high-quality used products to compete with the inexpensive new machines being introduced by upstart Asian competitors. This strategy would not only be effective in attracting new customers, but would help maintain a durable brand image. By contrast, if a global company launched a new line of cheap, non-durable machines, it could jeopardize its established brand image. 

Even with relatively inexpensive goods, the same lesson applies: a strategy based on retaining repeat consumers is possible and desirable. Printer toner cartridges, razor blades, and mop heads are all examples of complementary products that provide follow-on sales.   

In short, global leaders will need to redefine their business models to pursue more revenue from the same customer base rather than chasing new — and uncertain — growth. Competition and oversupply have already eaten up demand for the near future. The number of customers will not increase. Making the most of an existing customer base is an effective strategy in a recession, and it will remain effective even in growing markets, especially for the long term.

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  1. Shumeet Banerji, “Navigating Through the Financial Crisis,” Booz & Company white paper, October 2008: Why the downturn may lead to a saner financial system, and create opportunity.
  2. Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation (Plume, 2000): Why people continue to make the same mistake with bubbles.
  3. Lawrence M. Fisher, “The Prophet of Unintended Consequences,” s+b, Fall 2005: Profile of a pioneer of system dynamics modeling who predicted this type of economic crisis precisely because of the problems of excessive financial growth. 
  4. John Kenneth Galbraith, A Short History of Financial Euphoria (Penguin, 1994): Galbraith analyzed historical bubbles (from Dutch tulip speculation to the Japanese bubble) and concluded that the common root cause is leverage.
  5. Klaus-Peter Gushurst, Ivan de Souza, and Vanessa Wallace, “Taking a Calmer View,” Booz & Company white paper, October 2008: For the financial-services industry, out of the severity of the downturn will emerge a sustainable new regime.
  6. Evan R. Hirsh, Louis F. Rodewig, Peter Soliman, and Steven B. Wheeler, “Changing Channels in the Automotive Industry: The Future of Automotive Marketing and Distribution,” s+b, First Quarter 1999: Introduced the concept of “follow the car” and “follow the customer.”
  7. David Magee, Turnaround: How Carlos Ghosn Rescued Nissan (Collins Business, 2003): Well-written account of the Nissan-Renault “constructive consolidation.”
  8. Steven Wheeler and Evan Hirsh, Channel Champions: How Leading Companies Build New Strategies to Serve Customers (Jossey Bass, 1999): Emphasizes the importance of downstream revenues and customer retention. 
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