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The Daily Sabbatical/Stanford | Nov 23, 2012 | 6414 views

Putting the Customer First

Stanford Graduate School of Business Professor Hayagreeva Rao explains why innovation is about more than just new technology

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n 1987, Chip Conley, MBA '84, made an unusual business decision: he bought a rent-by-the-hour hotel in San Francisco's Tenderloin district. But instead of running it for its past clientele, he asked his employees what new customer segment they should go after. The question generated a mixed bag of ideas, so Conley asked each person to come back in several days with a magazine that he or she thought would be read by the hotel's potential future customers. When six of seven came back with Rolling Stone, Conley relaunched the hotel for a clientele of hip musicians and their followers. Later, he would create, and then sell, Joie de Vivre, a chain of 40 boutique hotels for more than a billion dollars. The original themes for other hotels in his chain were based on magazines such as The New Yorker, Wired, Outdoor, and Elle.

Conley's successful concept highlighted an inconsistency in the way people tend to think about innovation. Often, we think of it as building new products and services based on the latest technology, says Stanford Graduate School of Business Professor Hayagreeva Rao. Conley's approach to an age-old business, by contrast, illustrated how customer-focused innovation can be either about creating products or services that delight new customer segments, says Rao, or about removing things that drive customers away.

But how to achieve this goal? He suggests CEOs and other executives fill out a simple two-square-by-two-square framework developed by his former colleague Lisa Fortini-Campbell of the Kellogg School of Management. The two left squares are for things that generate negative customer emotions, and the right squares are for things about your business that generate positive emotions. The top squares are for emotions that are very strong — disgust and delight — and the bottom squares are for mild emotions — annoyances and niceties people consider frills.

Don't waste time on annoyances or frills, Rao says. "You want to focus on finding solutions to disgusters. The best definition of a disguster is something that people curse about."

To be concrete, he cites examples from the airline industry. An upgrade from coach to business class falls into the category of delighter for most people in this age of tight space in coach. If an airline adds an inflight magazine, you might enjoy it, but if you are like most people, it's a frill. You won't let it affect which airline you choose for your next flight. Similarly, if you are served Pepsi when you asked for Coke, you might be annoyed, but you are not likely to remember it by the time you reach the street. But if the airline loses your bags on a flight from Buenos Aries to San Francisco, that is a disguster. You are likely to curse and tell a bunch of other people about it.

The reason companies should worry most about disgusters is that "the most negative experience matters, and the most recent experience matters," to customers, Rao says. "If you remove the disgusters, people will come to you. They will pay more."

Eliminating disgusters is not always intuitive, however. Rao cites the example of a drugstore chain that found unhappy customers among women who shop with small children. Keeping two children under control in a drugstore chockfull of bottles and baubles was a major reason that Mary did not shop there. At first, executives thought they could do nothing with the analysis because Mary's problem was not something they controlled. But by adding a drive-through window they solved her problem. In the meantime, they also eliminated an annoyance for Ed and Angie, senior citizens who enjoy children but nevertheless don't need them underfoot while shopping for medicines. Once the toddlers were secured in their car seats, store managers were also able to re-sign the store aisles, tailoring them more to seniors' needs.

"The larger point of this example is that what is a disguster to one person won't be to another person," Rao says, "so you always have to think about your proposed solution from the point of view of the user or customer."

How do companies zero in on disgusters? Rao eschews surveys and focus groups, opting instead for an easily adapted approach used by the design firm Ideo. It includes putting a diverse team together and giving them time and cost limits, not unlike what Conley did. But it also involves having the team go out to observe people in a relevant environment. The team members identify customer problems, propose solutions, vote to select the best one, and with minimal materials physically construct a prototype of their favored solution. The prototype is then tested with strangers and revised based on the feedback. A 2011 ABC Nightline video of an Ideo team attempting to redesign the ubiquitous grocery cart in five days, with the constraint of no higher cost than the current shopping cart, is available to watch on YouTube. In that case, the team tries out Rao's best design on supermarket shoppers, clerks, and security officers.

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