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Published: 6/16/04
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The Challenge of Customization: Bringing Operations and Marketing Together

Conflict also arises because each function is compensated differently. Operations executives make their money on cost reduction, not volume. Marketing and sales incentives are typically built around unit sales. Often, even sales incentives aren’t calibrated to maximize profitability. Leonard Lodish, a professor of marketing at Wharton, says he knows of one snack-food company where delivery drivers and salespeople are still compensated on per pound sales, rather than on the profitability of a particular product line.

“Activity-based costing systems are essential to ensure managers make decisions about customization that are analytical rather than political.”
Communication between sales and marketing and operations is made still more complex by the fact that each function is generally run by people who lack a common background and vocabulary. Operations leaders are often engineers and technically oriented. They usually don’t have MBAs. Sales and marketing executives, whether or not they have business degrees, are not attuned to technical costs and tend not to sweat the details the way the engineers do.

As a result, says Egol, “the Ops guys think that the sales guys just don’t understand the cost implications of what they’re doing, and the sales guys think that the operations guys don’t understand that the customer is king.”

Given the challenges of achieving what Booz Allen has dubbed “smart customization” — making an intelligent balance between more choices for the customer and the costs of complexity for the company — it might be tempting to take a page out of Henry Ford’s book and offer customers “any color they want as long as it’s black.”

But in today’s society, not offering the appropriate range of choices isn’t an option. When operations-focused cost-cutters reduce the number of choices without consulting marketing, it can be just as bad as having too much variety. In fact, Wharton’s Lodish says that such operations-driven decisions can lead to trouble if, for instance, a company decides to cut its lowest-selling 10 percent of SKUs without considering the impact to the company’s sales and fixed costs. “If you don’t have all the pieces, and you concentrate on one side and not the other, you end up making very bad decisions,” explains Lodish.

A Nontrivial Challenge
Some of these misunderstandings can be resolved through more dialogue, but it won’t happen without encouragement from the top, says Stephen Hoch, a marketing professor at Wharton. What’s needed is “leadership at the top that recognizes that there’s a conflict and is focused on resolving it,” Hoch says. That “doesn’t necessarily mean caving one way or caving another,” but it does require encouraging discussion.

Regrettably, Oliver says, most companies lack an easy way to encourage such dialogues. Although marketing and operations teams typically talk to each other all the time in the ordinary course of business, there tends to be no forum for strategic discussions.

Yet even these occasional dialogues may not be enough. “The companies that do well with customization often have well-developed cross-functional teams,” Egol says. At the level of execution, “functions need to speak about how to reduce the complexity of the system and how to cost-effectively add variety and increase focus regarding what variety to add. The team is the focal point for making such trade-offs.”

Finding a common set of data for those groups to discuss is another key to cross-functional success. Wharton’s Lodish argues that activity-based costing systems are essential to ensure managers make decisions that are analytical rather than political. Otherwise, he says, “they’re flying in the dark.”

Booz Allen’s Moeller says most companies find it difficult to do sophisticated cost-analysis. “To get them to think that there are different fixed costs that are fixed over different time horizons against different segments in different ways…is a very hard thing to do. The traditional business organization is just not set up today to do that,” he says.

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