The striking customer popularity and financial success of Southwest Airlines, Nucor Steel, and Commerce Bank have led many business executives and corporate strategists to proclaim that focus is the only viable approach to fending off competitors and achieving above-average shareholder returns. We disagree. At some point in a firm’s evolution, its focused market—whether premised on geography, product, service, or segment—will inevitably become saturated.

The challenge for companies is not achieving a single point of focus. It is harmonizing multiple points of focus. In industry after industry, customers are demanding ever-higher levels of customization—products and services tailored to their needs—and they’re confident that, in an economy characterized by greater and greater information transparency and sophisticated purchasing, they stand an excellent chance of getting it.

The way a company responds to demands for customization can make the difference between performance that leads a sector and performance that lags that of industry peers. Indeed, companies that more effectively balance the value that customization brings to their customers with the complexity costs it can impose generate organic sales growth and profit margins significantly higher than their industry average, according to a Booz Allen Hamilton study of product and service companies in North America and Europe.

The study, which benchmarked business units with sales from $1 billion to more than $20 billion at 50 companies, found striking differences between companies that adapted and aligned their customer strategies and fulfillment operations, and those that constructed more ad hoc responses to customer demands. Although no company studied had achieved complete alignment between its demand side and its supply side, the study revealed a two-to-one performance gap between “Smart Customizers” and “Simple Customizers.” (See Exhibit 1.)

The research encompassed such industries as consumer goods, chemicals, telecommunications, media, and financial services. The Booz Allen study, conducted over six months and involving such companies as Unilever, Campbell Soup, Rohm & Haas, BP Castrol, Sprint, Ericsson, Time Warner, Hearst Magazines, Fleet, and SunTrust banks, among many others, found that higher-performing companies consistently focus simultaneously on the same three best practices. Smart Customizers:

• Understand the sources of value that customization provides their customers
• Find the “virtuous variety”—the point at which customization adds value to both company and clientele alike
• Tailor their business streams—product development, demand generation, production and scheduling, supply chain, customer care, etc.—and align them to the sources of demand, to provide customer value at least cost

Although Smart Customization seems like common sense, our study reveals that comparatively few companies are successfully balancing the value of customization with the cost of complexity. Our research showed that roughly two-thirds of companies with customization programs have failed to increase both their top-line and bottom-line performance. For the most part, we found that superior strategies were not matched by superior execution.

This is not a challenge that can be addressed solely by investing in an expensive CRM information system, or by reorganizing a sales force. Smart Customization requires striking an overall balance between the value of product or service variety in the market and the cost of complexity in provision across multiple business functions. And not just for today: Companies also need ways to refresh the solution as they evolve new growth strategies—from the addition of new products and services to entry into new market segments.

Differentiation With Scale
By aligning their sales, marketing, and operations strategies with customer value, leading companies are able to provide some customers bespoke solutions that truly drive organic growth, and provide “transactional” approaches to more routine customer demands. This ensures that a company’s cost structure is not distorted by the high-customization needs of specific segments, and that differentiation is obtained without compromising scale.