Stanford Business

FEBRUARY 2007


Customization—A Seller's Survival Strategy


Haim Mendelson, the Kleiner Perkins Caufield & Byers Professor of Electronic Business and Commerce and Management
Photo by Mark Halper

by Kathleen O'Toole

Retailing, both online and off, evolves as merchants glean information from every transaction to better the next.

Winter is here and I’m freezing mornings on the BART platform because the wool slacks I ordered on the internet never arrived. Who knows why—perhaps I put hyphens in my phone number and the company’s website demanded the area code be placed in a separate information box. On the business page of the New York Times, I read that this is the Age of the Customer. So how come as a customer, I’m shivering? It’s time to pay a visit to Haim Mendelson.

Mendelson is the Business School’s electronic commerce guru. He codirects the School’s executive program in strategic uses of information technology. I’ve heard he believes that companies face formidable challenges from smart customers who can only be kept at bay with something called “dynamic customization.” So I ask him, Why don’t I feel I’m part of this consumer-terrorist threat?

He wants specific gripes. I’m loaded. I start with the 45 minutes it took me on a website to order a simple gift, ultimately with a feature I didn’t want because I couldn’t figure out how to get back to where I started designing the blasted thing. I continue with the call to the computer company where the umpteenth step in the phone tree gives me an automated voice telling me they are closed and I should call back during the hours in which I am calling. (This is at the customer-conscious maker of the iPod!) There is the nonexistent cell phone for my dad with arthritic fingers. Shall I tell him, I wonder, about the needless emails tracking the route across the country of a picnic basket my husband ordered, or would that make the company sound too virtuous?

Mendelson sums it up this way: Customers like me are “more demanding than ever before because you have better information.” Thanks to information technology, especially the internet, more companies offer more options and provide more information about them. Furthermore, the products and information are beginning to be customized to me. By customized, he means that Amazon’s technology recalls that I bought a book last year on the birds of North America and lets me know when a new bird book comes out. Netflix compares my taste to others and recommends movies I will like. Such “transparency” has increased my expectations everywhere I shop. “Because some sellers are very good at offering you information and options, you expect more choices and quality from others, and at better prices,” he says.

OK, I concede, I used to pay more for the wool pants and I did learn tons about hard disks from the internet when preparing to buy one. But I still would rather turn to a real person for help when some gadget doesn’t work, and I didn’t buy that bird book from Amazon for myself, so I really don’t want to know about more birds. Besides, I say, even Amazon’s website is tedious to use if you don’t go to it once a week.

Secondly, he says with a grin, I shouldn’t be so selfish. “You ought to be happy because in the process of ordering something through a customizing company, you are helping make other customers happy.”

Huh? Give me an example.

“If you order a shirt online from Lands’ End, they will ask you to fill out information for a database which has millions of similar orders in it. If you go through the upfront process of giving them your data, you should have a better chance of getting the right shirt. But even if you don’t like the shirt and return it, they will ask you what was wrong with it, match your data with that of future customers, and give the future customers who are similar to you much better shirts.”

Great, I say, but I’ve wasted my time and postage sending the shirt back.

“Think about it from a shirt-seller’s perspective,” he says. “How would you like to be running a shirt company in a few years that had not collected the kind of detailed customer data that Lands’ End is collecting and putting to use now? Do you think you would still satisfy your customers?”

I’m starting to get his drift. The information technology that folds, spindles, and mutilates customer data is giving me heartburn now but it puts companies in a better position tomorrow.

Does everybody in business have to do dynamic customization or die? I ask.

“Everybody has to worry about it, but not everybody has to do it,” he says. “You need to go through the mental exercise. Let’s take three companies as examples—Wal-Mart, which is not customized; Best Buy, which has a form of static customization; and Amazon, which has dynamic customization.

“If you are Wal-Mart, you can see that Best Buy, by customizing its stores, has found a way to take some customers away, and you can ask, ‘How am I going to respond?’ Wal-Mart is doing a little bit of customization, but in general, they are not and probably don’t have to if they can keep their costs down. In fact, my research shows that even though customization can be very powerful in attracting customers, a cost advantage is even more powerful. So, if you don’t want to do customization, you ask yourself what to do instead. Maybe you should push harder on the cost side, or get out of markets where you can’t compete effectively.”

Best Buy, on the other hand, has done better than many of its competitors by customizing the design of its stores and training its sales force to better serve their “segmented” clienteles, Mendelson says. The clientele in some neighborhoods is dominated by tech-savvy electronic gamers and music aficionados and in others, by graying mortgage brokers or moms with toddlers in tow. The stores are designed around local customer needs; but also, when someone walks in the door, the salesperson tries to size up the type of customer and respond appropriately, Mendelson says. Best Buy also has added the popular Geek Squad, oxygen-breathing humans who rescue technophobes like me when we can’t make our gadgets work.

“You can customize your stores, but it’s expensive,” he says. “And when people provide service rather than an automated system, they customize their service to you, but they can only do so much per hour. So when you want to scale up, you have to hire more people. [In three years, Best Buy grew its Geek Squad from 20 to 11,000.] And when your customers change or move or you add customers in different niches, you have to redesign or build new stores.”

Not everyone is prepared to customize quickly, however. There are three elements to customization, Mendelson tells me. It requires investments of time and money in information technology, reorganizing around customers, and developing a network of suppliers and business partners.

“In general, you need to organize by customer segment and change your incentive metrics to support that,” he says. “You need to restructure the information flows and business processes to support that organization, and you need to open up the company to make a broader supply chain and a network of business partners so you don’t have to make all the product variants yourself.”

Mendelson thinks the organizational restructuring is the most difficult. “On the technology side, many components are readily available. The organization front is where I would be most fearful, because I don’t think you know whether that part works until you do it, and it usually doesn’t when you start.”

Could you skip building business networks? Not really, he says, citing the example of automaker networks in Brazil that permit buyers to customize their car orders on the internet, as can buyers of personal computers. American automakers can’t offer that level of customization, he says, because they haven’t built networks that produce interchangeable modules.

I’m still dubious about the value of dynamic customization from the consumer’s perspective. I prefer a Geek Squad member helping me fix my computer to some automated system through the internet. And while some men might disagree, I think most of my women friends would be happier with a shirt they tried on for color and fit than with one selected for them by a computer.

There’s the rub, I guess. We want the best of everything—for free. Yes, I would prefer a business-class seat at a coach price, but the market doesn’t offer it and, unfortunately, it doesn’t look like customization can eliminate those kinds of tradeoffs in other realms.

Given that reality, I ask Mendelson if big companies or small companies are likely to be better survivors in technology-driven markets. “I think it will be a combination of sizes,” he says. “Going back to the structure you need for this, you will want a large number of small companies in your network, but there still is the advantage of scale to the company that integrates them because you want to have a large number of data points. The data and network allow you to create the custom solution. For example, Lands’ End, Tommy Hilfiger, Target and JC Penney all sell custom apparel online. They use the same database at the back end, and a single technology company, Archetype Solutions, calculates the fit and combines the data from all of them to gain scale.”

There you have it, folks. A formula for success. All you have to do is provide the money, change your organization, build the technology, and do the detail work. A piece of cake.

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knowledge network

Recipe for customizers

Dynamic customization requires attention to three elements: organization, information, and business networks. To be successful, Haim Mendelson says companies must:

Reorganize around customer segments, which means changing incentives, performance evaluations, and metrics.

Strategically develop information systems to support customer-centered information flows and business processes.

Build a network of suppliers and business partners in order to offer an ever-changing mix of customized products and services.
 

customizing Information

Executive Program: Strategic Uses of Information Technology [Details]

“Competitive Customization” and “Product Line Competition: Customization vs. Proliferation,” two working papers by Haim Mendelson and Ali Parlakturk

Survival of the Smartest by Haim Mendelson and Johannes Ziegler, John Wiley & Sons, 1999 [Details]

GSB case studies available through the website www.gsb.stanford.edu/cases/