Advanced Introduction To Marketing Strategy

Advanced Introduction to Marketing Strategy
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John D. Brewer George S. Day
Advanced Introduction to
Marketing Strategy
GEORGE S. DAY
Geoffrey T. Boisi Emeritus Professor, The Wharton School,
University of Pennsylvania, USA
Elgar Advanced Introductions
Cheltenham, UK • Northampton, MA, USA

© George S. Day 2022
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Contents
About the authorvii

Prefaceix
1 Marketing strategy: the guiding premises 1

Guiding premises 4
Persistent dilemmas shaping marketing strategy 8
My plan for this book 10
Summary12
2 Marketing strategy: looking back to see ahead 13

Influences on strategy making 17
Looking toward a more turbulent future 19
Looking ahead 22
3 Achieving customer value leadership 24

What is customer value? 25
Customer value priorities 28
4 Sustaining customer value leadership 35

Changing value priorities: the threat of commoditization 36
Integrating outside-in and inside-out considerations 40
Summary43
5 Innovating new value for customers: the

full-spectrum approach 45
Full-spectrum innovation 46
Pathways to faster growth 47
v
vi ADVANCED INTRODUCTION TO MARKETING STRATEGY
Summary: outside-in innovation 58
6 Innovating the business model 60

Which way to grow? 65
7 Strategy formulation starts from the outside in 70

Which path to strategy? 71
Cognate concepts 73
An iterative approach to strategy formulation 78
8 Enabling outside-in strategy making 81

Leadership emphasis and role modeling 82
Performance gains from outside-in approaches 89
Summary of the performance effects 91
9 Preparing marketing for greater turbulence 93

Digital turbulence 95
Market turbulence 96
Implications for marketing organizations 99
Bringing the future forward 102
The changing role of the C-suite 103
Implications for marketing 105
Summary108
Appendix: what role for marketing leaders?109

References113
Index123
About the author
George S. Day is the Geoffrey T. Boisi Emeritus Professor in The Wharton

School at the University of Pennsylvania, USA. He was previously the
Executive Director of the Marketing Science Institute, and the Founder
and Co-Director of the Mack Institute for Innovation Management.
He has been a consultant to corporations such as General Electric, IBM,

Unilever, W.L. Gore, Boeing, LG Corp., Best Buy, Merck, Johnson &
Johnson, Agilent and Medtronic. He is the past Chairman of the American
Marketing Association. He has also served on ten boards of directors.
Dr. Day has authored nineteen books including Strategy from the
Outside-In: Profiting from Customer Value, with Christine Moorman
vii
viii ADVANCED INTRODUCTION TO MARKETING STRATEGY
(2010), Innovation Prowess (2013), and See Sooner, Act Faster, with Paul
Schoemaker (2019).
He has won ten best article awards and one best book award. He was
honored with the Parlin Award in 1994, the Converse Award in 1996, the
Sheth Foundation award in 2003, the Mahajan Award in 2001 and the
William L. Wilkie award in 2017. In 2003 he received the AMA/Irwin/
McGraw-Hill Distinguished Marketing Educator Award. In 2011 he was
chosen as one of eleven “Legends in Marketing.” In 2021 he received the
Sheth Medal.
Preface
The purpose of a business is to create and keep customers at a profit.

(Peter F. Drucker, 1954)
Welcome to this advanced introduction to marketing strategy. If you are

reading this preface, you will be familiar with the essentials of marketing
that are the foundations of a marketing perspective on strategy. These
essentials include: the four Ps, STP (segmentation, targeting and posi-
tioning), the product life cycle, customer lifetime value and marketing
metrics. You’ll also know about the marketing concept, which holds that
the purpose of a business is to profitably create and keep customers.
These staples of marketing are sound starting points for formulating

a strategy, but offer limited guidance for dealing with the cross-cutting
forces shaping the markets of the future. These forces include the digital
transformation of all business activities, increasing global trade tensions,
customer’s rising expectations for a personalized and integrated experi-
ence, the emergence of powerful platforms and, perhaps, a new medium
of exchange with crypto-currencies. Meanwhile the societal demands
on businesses to respond to ESG (environmental, social, governance)
issues are mounting. A next-generation marketing approach is needed
to help businesses navigate and profit from mounting turbulence and the
resulting uncertainty, and ensure the marketing function contributes fully
to the strategy dialogue with deep insights and the capabilities needed to
deliver marketing activities better than their rivals.
An advanced approach to marketing strategy starts from the outside

in, by taking the point of view of key market stakeholders (customers,
consumers, competitors and channel partners) to view the firm and its
future prospects objectively. The aim is to find the best ways to offer
superior value to the customers the business chooses to serve, and then
innovating new customer value to stay ahead of rivals. These are the
ix
x ADVANCED INTRODUCTION TO MARKETING STRATEGY
integrating themes of an advanced approach to marketing strategy, and

answer the fundamental strategy questions of “where to play, and how to
win.” We’ll situate this outside-in approach within the cognate fields of
competitive strategy and design thinking, and presume some familiarity
with strategy-making processes, activity systems, value chains, the struc-
tural analyses of industries, as well as the emerging stakeholder view of
business.
Our vantage point on these strategic issues will be the leadership team
or C-suite, in their roles as strategy advisers to the chief executive officer
and the board of directors, with responsibility for executing the chosen
strategy and meeting the performance objectives. Within this top team,
the advocate for taking an outside-in approach should be the chief mar-
keting officer whose credibility is derived from deep market insights and
wide-ranging knowledge of the strategic moves that prepare the business
for a more turbulent future.
The quote by Peter Drucker that starts this Preface has been a touchstone
for marketers for almost 70 years, and we are still guided by his wisdom.
Drucker did not see himself as a marketer; but because he saw marketing
as a core responsibility of management his thinking continues to shape
the field of marketing. He also said: “Marketing is so basic it cannot be
considered a separate function within the business … it is the whole busi-
ness seen from the customer’s point of view” (Drucker 1954). This is the
essence of the outside-in approach to strategy.
This advanced introduction is another milestone in my career-long

journey to develop and apply new ways of thinking about business strat-
egy and the capabilities of organizations, to the daunting task of sustain-
ing competitive advantages in a turbulent world. This journey began in
1977 when I diagnosed the flawed assumptions of the Boston Consulting
Group (BCG) portfolio model that compromised the strategic insights
and distorted the allocation of resources, to the cash cows, problem chil-
dren and stars in the portfolio of products.
Since then I have evolved my thinking with the support of many col-
laborators, co-authors, colleagues and clients, and built upon the broad
advances in the fields of marketing and strategy. During this journey
I have accumulated many debts, well beyond what can properly be rec-
ognized here, so I truly hope my debts to them will be partly repaid by
PREFACE xi
their recognition and citation throughout this book. A special acknowl-

edgment is due to my friends and close colleagues Paul Schoemaker, Tom
Donaldson and Harbir Singh, and to the extended community of the
Mack Institute for Innovation Management at the Wharton School.
Above all, I am grateful for the inspiration and support of my dear wife,
Alice, who sustained me during this writing journey. This book is dedi-
cated to her.
George S. Day
Villanova, Pennsylvania
2022
1 Marketing strategy: the
guiding premises
Marketing functions at the interface of a business and its markets, and

absorbs a great deal of the turbulence in those markets. This turbulence
keeps mounting as all markets have been assailed by a global pandemic,
trade uncertainties, and the digital transformation of every business
activity. How does a well-conceived marketing strategy help a business
navigate this turbulence and make the right decisions, to ensure the
organization can accomplish its performance objectives? The answer
depends on what is meant by “marketing” and “strategy.”
What is marketing? There is no straightforward answer, because mar-

keting plays a variety of roles with activities that are increasingly shared
within the organization (Webster 1992) or with partners. There are three
distinct meanings that are mutually reinforcing, which take different per-
spectives on the strategic issues of the organization and apply at different
levels. Their collective meaning is captured in Figure 1.1.
The first meaning of marketing is that it is a distinctive feature of an

organization’s culture; an external orientation and decision approach
putting the understanding and meeting of needs of customers first. This
meaning comes with many designations and identities: as a market orien-
tation (or being market driven/focused/driving) or customer orientated
(or being a customer centered/focused/led) organization. These are
mostly distinctions without a difference (Day 1999). Each has a genesis
in Drucker’s (1954) insistence, “There is only one valid definition of
business purpose: to create a customer … Concern and responsibility for
marketing must therefore permeate all areas of the enterprise.”
Marketing is also a general management responsibility, for choosing,

“where to play” and “how to win” (Lafley and Martin 2013). There are
challenging questions, because they require the leadership to make
1
2 ADVANCED INTRODUCTION TO MARKETING STRATEGY
Figure 1.1 What does marketing mean?
defensible choices about the future of their organization. The answers are
a shared responsibility of the chief executive officer (CEO) and the lead-
ership team. This responsibility is best discharged by approaching these
defining choices from the outside in. We delve more deeply into what this
means later in this book, and we argue it is better to start the process of
making a strategy by first stepping outside the boundaries, resources and
constraints of the organization as it is, and viewing it objectively through
the eyes of customers, competitors, channel partners and other players in
the market.
The third and most visible role of marketing is as a separate function, organ-
ized around a core set of activities to carry out the market-facing aspects
of an outside-in strategy. Since marketing is the most context-dependent
function, these activities and their relative importance can range from
the go-to-market activities in capital-intensive manufacturing firms to
the social media and messaging themes for consumer goods companies.
Paradoxically, the deeper marketing is embedded within an organization
and customer value leadership becomes the distinguishing theme of the
strategy, the more likely the functional role of marketing is likely to be
blurred and obscured.
What is strategy? There is no agreed-upon definition of strategy that

describes the field and limits its boundaries (Freedman 2013), so it has
become an elastic term: there is strategic supply chain management …,
MARKETING STRATEGY: THE GUIDING PREMISES 3
strategic human resources …, strategic (fill in the blank). Sometimes strat-

egies are confused with objectives; for example: “Our strategy is to be the
dominant competitor in our markets.” Good strategies require integrated
and coherent choices about how to achieve the objectives that are set,
allocate resources, and align diverse interests and activities throughout
the organization. Think of a strategy as a resonating theme that mobilizes
the organization.
A strategy expresses the aspirations of a firm and the set of choices that
lead to an advantageous position in a market (Porter 1996). Another
definition that captures the reality of making strategic choices is, “the
alignment of potentially unlimited aspirations with necessarily limited
capabilities … whatever balance you strike, there’ll be a link between
what’s real and what’s imagined; between your current location and your
intended destination” (Gaddis 2018, p. 21). The kernel of this strategy
(Rumelt 2011) has a sound diagnosis of the situation, a guiding policy
specifying how the firm will deal with the threats and opportunities iden-
tified with this diagnosis, and a coherent set of actions.
What is marketing strategy? This is a core aspect of a competitive strategy

answering the questions, “where to play?” and “how to win?” by achieving
customer value leadership and continually innovating new value for cus-
tomers. These are the customer value imperatives of a marketing strategy
and they focus the firm on creating and profiting from superior customer
value. This benefits the firm through superior financial performance and
the creation of valuable customer and brand assets. These assets also shape
the marketing strategy through actions taken to protect and capitalize on
these assets (Day and Moorman 2010). This strategy is formulated from
the outside in, and enabled by deep market insights. It works in tandem
with the financial, talent and operations strategies. This integrated view
of marketing strategy incorporates the orchestration of the resources and
capabilities of the form, and expands the domain beyond that which chief
marketing officers (CMOs) and marketers spend most of their time and
effort in practice (Varadarajan 2010; Morgan et al. 2019).
This perspective on marketing strategy is consistent with the usual dis-

tinctions between the content of a strategy, the process of strategy making,
and the implementation activities. While these are useful distinctions, they
are, in practice, highly interdependent, with the implementation choices
both enabling and constraining the strategic choices, and vice versa.
The marketing strategy is the collective responsibility of the leadership

team and requires that all parts of the firm’s governance and operations
– incentives, hiring decisions, outsourcing, partnering and beyond – be
aligned to the pursuit of superior customer value. Yet, if everyone in the
C-suite is responsible, then no one may be accountable for these choices
and actions. Increasingly, firms are facing this reality and holding the
CMO or chief commercial officer (CCO) accountable for orchestrating
the firm’s activities on behalf of customer value.
Summary. The benefits of a marketing perspective on strategy depend on

the orientation of the firm toward customers, and the emphasis placed by
leadership on achieving and sustaining superior customer value. To com-
plete this chapter, we translate these themes into the four guiding prem-
ises underpinning this book. They are the product of a path-dependent
evolution of the field of marketing, in that we build on what we know.
In the next chapter we assess pertinent influences from the past to better
appreciate the current state of the field, and then anticipate how mar-
keting should best contribute to strategy formulation when markets are
increasingly turbulent.
Guiding premises
Four guiding premises are the basic building blocks upon which market-
ing strategies are built, and establish the scope and structure of this book:
• Achieving and sustaining superior customer value is the goal and the
integrating theme of a marketing strategy.
• Innovating new value for customers requires the disciplined search
and selection of opportunities.
• Strategy-making starts from the outside in.
• Outside-in organizations are better prepared for increasing market
turbulence.
Premise one: achieving and sustaining superior customer value

is the goal of a marketing strategy
Customer value is about the trade-off between the benefits customers
perceive they get from an offering, versus the perceived total life-cycle
costs of these benefits, after adjusting for the riskiness of the offer. The
emphases on perceived benefits has been imprinted on marketing thinking
since Ted Levitt (1960, p. 28) famously observed, “People don’t want to
buy a quarter-inch drill. They want a quarter-inch hole.”
An effective marketing strategy specifies how a business intends to

achieve customer value leadership in the market segments it chooses to
serve. It is a direction set by three choices:
• Arena: the markets to serve and the customer segments to target.

• Advantage: the customer value positioning theme that differentiates
the business.
• Activities: the scale and scope of activities to be performed by the
organization or with partners.
These choices are highly interdependent; a change in one means changes

in the others.
The pandemic of 2020 accelerated a shift toward a multiple stakeholder

model, embracing the concept put forward by the Business Roundtable
(2019, p. 2) that, “While each of our individual companies serve its own
corporate purpose, we share a fundamental commitment to all of our
stakeholders.” Received doctrine among marketers (Challagalla et al.
2014), enshrined in slogans such as “Customer is King” is that customer
should be primus inter pares relative to other stakeholders, implicitly sub-
ordinating employees, suppliers, communities and equity shareholders.
This message was reinforced during the turnaround of Procter & Gamble
(P&G) when A.G. Lafley became CEO in 2009. He found a demoralized
organization where the pace of innovation had declined dramatically.
To center the organization, he adopted the mantra “Consumer is boss.”
With intense repetition and his personal commitment, Lafley was able to
embed this notion into the cultural values of the company. Despite the
success of the P&G turnaround, and decades of endorsement, there is still
resistance to the primacy of the customer in the stakeholder model.
Premise two: innovating new value for customer requires

discipline
Why are some firms consistently able to grow faster than their direct
rivals? First, growth leaders follow a disciplined outside-in approach to
probing all the possible growth pathways to identify the best opportuni-
ties, choose among them carefully, and then implement those that best
serve the growth strategy. They eschew a reactive posture that waits for
the opportunities to come to them or emerge from the firm’s technology
development process. A full-spectrum approach to growth stretches and
reimagines every dimension of the customer value proposition and the
enabling business model.
Growth leaders maintain a healthy tension between the creative,

risk-taking and experimenting part of the innovation process, and the
disciplined, rigorous and results-orientated part. An innovative organ-
ization needs both right-brained and left-brained functions. If one side
dominates, overall innovation performance will suffer. When exploratory
and creative thinking are emphasized, ideas will flow, but the develop-
ment process will be clogged with too many projects competing for scarce
resources.
Discipline is also exercised by the leadership team when they accept

well-intentioned failures, occurring for unexpected and unforeseen
reasons, and emphasize drawing lessons from these failures to improve
the process and the next round of innovations. Without this tolerance and
ability to learn, the people proposing new ways to deliver value to custom-
ers will avoid risk; they will be encouraged to play it safe and keep a low
profile. This creates a conservative, fault-finding culture that subverts the
innovation process.
Premise three: strategy making starts from the outside in

The essence of an outside-in approach to strategy formulation is an
iterative learning process, initiated with wide-angle scanning and sensing
of the environment. The benefits of this approach are most fully real-
ized within a supportive organization with four defining properties.
The first property is a leadership team endorsing this approach as
a decision-making priority, and embracing it within their mental model.
This leadership commitment is fully realized within an empathetic
organization that is catalyzed by collective curiosity and supported with
a system-wide emphasis on gaining insight.
This approach to strategy formulation will not produce superior perfor-

mance unless it is grounded in deep market insights. An insight is a “new
understanding of some facet of marketplace change that makes a differ-
ence” (Fahey 2018, p. 2). Insights are a means to an end, not an end in
themselves. They should inform and encourage deeper thinking and yield
better and earlier decisions that can be implemented. They are an antidote
to formulaic thinking and business-as-usual approaches. Genuine market
insights are novel; to be valuable they cannot be common knowledge.
Valuable insights are obtained with a diversity of inputs, which helps
overcome the centripetal pull of inside-out thinking.
Premise four: outside-in organizations are better prepared

Marketing has never been more complex, and the future will be even more
turbulent. Sweeping advances in digital technologies are transforming
markets and the practice of marketing. Societal issues emerging from
the climate crisis, inequality and the aftershocks of the pandemic are
increasing uncertainty. Consumers are becoming more concerned about
the wider consequences for their consumption choices, and gravitate
toward less wasteful products. This is probably an enduring generational
change, as younger consumers are driving this shift in priorities. These
societal shifts are interacting with, and being accentuated by, digital and
e-everything: e-browsing, e-shopping, e-payments and e-media con-
sumption. These profound changes are paralleling changes in the role of
the CMO, and abetted by new organizational designs. The emerging mar-
keting organization will be more customer-centric, composed of smaller
structural units and highly networked both inside and outside the firm.
Market-driven organizations that approach their strategy making from

the outside in, are much better prepared to anticipate and adapt to
this cascade of societal changes and stay ahead of digital advances. The
properties of outside-in organizations feature an empathetic orienta-
tion, catalyzed by collective curiosity, while building superior foresight
capabilities. These outside-in organizations behave more like “foxes,”
with wide-ranging curiosity, than “hedgehogs” who know one big thing
and extend the explanatory reach of that one big thing to new domains.
Tetlock (2005) found that foxes were far more proficient predictors,
because they stitched together diverse sources of partial information,
instead of relying on deduction from unquestioned mental models.
Turbulent markets are best navigated by foxes who ensure their organiza-
tions are better prepared.
Persistent dilemmas shaping marketing strategy
Some of the best thinking on strategy making comes when practice illu-
minates theory, and vice versa. Progress is made when there is a robust
and mutually informed, two-way dialogue between thoughtful practition-
ers and theorists. Not only are managers in new practice companies at
the leading edge of developing issues, but their ongoing experimentation
with ways to address these issues yields valuable theories-in-use that are
the basis for more general explanations. A theory-in-use is a manager’s
mental model of how things work in a particular context (Zeithaml et
al. 2020), envisioned as a set of if-then relationships among actions and
outcomes. The managers become co-creators of a situational theory,
by sharing their beliefs about the constructs that matter, and practices
that work. This is an especially useful approach when the constructs are
ambiguous and/or practice is changing.
Further progress also means the field will tackle the persistent dilemmas
that create pulls from seemingly opposite directions. These dilemmas
were first identified by Prahalad (1995) when he characterized the state
of research as a silent, ongoing battle between weak signals from practice
and well-developed paradigms in fields of scholarly inquiry. The follow-
ing are among the most entrenched and intractable dilemmas shaping
strategic marketing.
Strategy content versus process. There are two camps here, making dif-
ferent assumptions. The strategy content camp uses rigorous modeling
and large data-sets to study well-defined issues. By contrast, the process
camp sees strategy making as a complex stream of trial-and-error moves,
reactions and reflections rather than discrete choices. Strategy process
research is akin to streaming video, whereas strategy content research
is most often a still image. While strategy content and process should be
complementary, they are usually studied separately. Within the totality of
marketing strategy research the process of making strategy is rarely inves-
tigated (Morgan et al. 2019). This imbalance is problematic as, according
to the process point of view, strategies are more likely to emerge from
piecemeal, interim responses to events over which management has
little control, than through the analytical process of matching opportu-
nities with capabilities. Mintzberg (1994) summed up this perspective
by arguing that strategy making requires insight, creativity and learning.
In this view the world is too complex and uncertain to allow strategies to
be formulated all at once. Instead, a strategy emerges in small steps as an

organization learns and adapts.
Rules versus exceptions. An enduring question is how to interpret empir-

ical findings when they are distorted by industry rules. The observed
results of strategic moves reflect behavior constrained by industry rules,
norms, and conventional wisdom, and are susceptible to a survivor bias.
We are usually unable to observe the results of either failed processes or
strategies. Not only are we mostly studying organizations that survive, but
the resulting theories are based on those firms that survive and are willing
to be studied. Another problem is that any first-order economic law, such
as “invest to increase market share in rapid growth markets” cannot be
acted upon as it contradicts the economic principle of rational expecta-
tions. Since everyone can be expected to use this general rule in the same
way, it does not offer a basis for differentiation. This is leading scholars
and insightful entrepreneurs to seek exceptions to the general rules.
Objective versus enacted reality. The normative strategy literature implic-

itly assumes that market environments are objective and waiting to be dis-
covered, and that managers are rational and well-informed information
processors, using their conceptual frameworks to formulate and choose
strategies. This assumption is being challenged by a revisionist view that
what matters is how managers interpret their environment in the mental
models they use to simplify and make sense of their environment (Senge
2006). Proponents argue that constructs such as markets, segments,
competitive force, and entry barriers are abstractions given meaning
through processes of selective search and attention, selective perception,
and simplification. These processes are shared through industry conven-
tional wisdom, warped by functional biases and tempered by the ready
availability of data. Thus far this competing view has had little influence
on research in marketing strategy, despite persuasive evidence that these
enactments of reality matter.
Established versus embryonic markets. Strategy researchers are most

comfortable studying established markets where the product features are
known, customers usage patterns can be observed, and the market is (rea-
sonably) specifiable. There are many concepts and procedures for analyz-
ing consumer trade-offs using conjoint analysis, identifying competitive
forces with industry structure analysis, and developing incremental new
products with stage-gate systems.
We are less secure with emerging markets being created or transformed by

disruptive or radical innovations, such as recombinant deoxyribonucleic
acid (DNA), facial recognition, machine learning or crypto-currencies,
in a bewildering array of combinations. These are such a different game,
with their evolution beset by uncertainty, that available concepts and
methods are poorly suited.
General versus contingent. There is an implicit, and sometimes overt,

presumption that marketing strategy is the responsibility of the CMO and
the marketing team. This is only reasonable if there is a CMO or CCO
with credibility and membership in the C-suite. However (as we discuss
in the Appendix to this book), it is more likely that the marketing function
serves more as a market advocate (bringing the voice of the customer to
the organization) or a service resource, than a true top-line leader. What
is needed is a contingency theory to explain this variance in roles and
assert the reality that the best way to devise and implement a marketing
strategy depends on the situation. This is a longstanding and durable issue
in the field of strategy.
My plan for this book
The terms “plans” and “planning” have not been used thus far, so why
now? In some circles these terms have fallen into disrepute and elicit
a sense of overly linear, formalized and unimaginative thinking. Yet,
strategic processes and choices must eventually yield plans that formalize
the consequences: budgets, resource allocations, staffing priorities, and so
on, supported with responsibilities and time lines. That is, these plans lay
out the details of how the goals and choices will be attained.
The sequencing and scope of the chapter plan for this book is the reali-
zation of my objectives for this book, the choice of topics and how each
is treated, and most importantly how I meet your needs as a reader/
consumer. Here is what you can expect as we explore more deeply the
four guiding premises: (1) the primacy of superior customer value, (2) the
need to continually innovate new value for customers because advantages
are increasingly transitory, (3) starting the strategy-making process with
a wide lens, outside-in approach, and (4) building an outside-in organiza-
tion to better prepare for increasing market turbulence.
Chapter 2, “Marketing strategy: looking back to see ahead,” completes

the introduction to the topics of this book by looking back to the evolu-
tion of the adjacent fields of strategy and strategy making, to appreciate
why the influence of marketing has waned, albeit from a high level. The
antidotes that could bring marketing strategy back to a more central role
are a renewed emphasis on marketing excellence that meets the needs
for organizations to navigate ever more turbulent markets. The sources
of this turbulence are suggested by the main zones of uncertainty that
collectively create potential opportunities as well as looming threats in
the future.
Chapter 3 on “Achieving customer value leadership,” develops the central

theme or organizing principle of a marketing strategy. This chapter
addresses two defining questions. The first is, “What is customer value?”
The answer is a customer value equation that specifies the trade-off
between the perceived benefits and the perceived costs, adjusted for
the riskiness of the offer. The second question is, “How do customers
choose?” The answer is represented by the value vector model that reflects
the trade-offs between three types of value: performance, price, and
relational. The underlying message of this chapter is that customer value
leaders do not succeed by being, “all things to all customers.” Strategy
formulation is about making choices.
Chapter 4 asks an even tougher question: “How do customer value leaders

sustain their advantage?” When markets are evolving at a faster pace and
customer value priorities are changing, there is a constant threat of com-
moditization, so it is becoming more difficult to sustain value leadership.
Outside-in strategists have answers, based on deep insights into the forces
of value erosion and a willingness to make audacious defensive moves.
These responses mean mobilizing a business model to deliver and capture
the customer value.
Chapters 5 and 6 address two challenges to customer value leaders: (1)

the increasing rate of erosion of their value advantage under relentless
competitive pressure, and (2) the economic imperative to grow faster
organically than their rivals. We show how organic growth leaders use
a disciplined approach to finding their best opportunities and pursuing
them ahead of others. They don’t wait for opportunities to emerge before
reacting. Instead they systematically explore the possibilities for inno-
vation revealed by stretching and reimagining every dimension of their
strategy. Growth leaders balance divergence – to widen their search across

the full spectrum of 12 possible growth pathways – with convergence on
those that best support their growth strategy. These leaders also know that
the less traveled growth pathways may offer opportunities for innovation
that can change the basis of competition.
In Chapters 7 and 8 we turn from understanding the content of cus-

tomer value leadership strategies, to the iterative process by which they
are formulated. This shift in perspective helps to better understand
the outside-in approach, as an iterative learning process, initiated with
wide-angle scanning and sensing of the environment. The benefits of this
approach are fully realized within a supportive organization that has four
defining properties. The first property is a leadership team adopting this
approach as a decision-making priority and embracing it as their mental
model. This leadership commitment is fully realized within an empathetic
organization that is catalyzed by collective curiosity and supported with
a system-wide emphasis on gaining foresight.
The purpose of Chapter 9 is to re-emphasize the central role of an effec-

tive marketing organization in ensuring there is an informed outside-in
perspective during the strategy dialogue. Meanwhile, marketing organiza-
tions are being transformed by digital technologies and increasing market
turbulence. These profound changes are occurring in tandem with changes
in the role of the CMO and abetted by new organizational designs. The
emerging marketing organization will be more customer-centric. Within
this evolved organization, the priorities for the marketing leader will be to
build superior marketing capabilities, integrate digital technologies ahead
of competitors, tighten the alignment with sales, and take accountability
for the returns on marketing investments.
Summary
Our guiding premises will serve as foundational themes and handrails

for readers to stay in tune with the plan for this book. The core themes of
achieving and sustaining superior customer value, and starting the strat-
egy dialogue from the outside in, pervade and anchor each chapter. When
these themes are firmly in place, the organization will be better prepared
to navigate the market turbulence that is sure to increase.
2 Marketing strategy:
looking back to see ahead
Histories serve many functions. They reveal our origins, celebrate our
successes and remind us of our debts to our intellectual forbears. Histories
also help to interpret the past by identifying the reasons for important
transitions. They may provide clues about the future. If we project where
the current momentum is carrying the field of marketing strategy, then
some troubling questions arise. The ancient Chinese saying, “Unless we
change our direction, we are likely to wind up where we are headed,” is
a warning. However, momentum is neither irreversible nor irresistible,
and many forces will shape further progress.
A compressed history of scholarship and thinking about competitive

strategies over the past 50 years shows four phases of evolution, beginning
in the early 1970s with research on the outcomes of strategic choices and
working back along the “food chain” to study the sources of the advan-
tages that were gained. Throughout this evolutionary process the aim was
to understand how firms behave and why they are different (Rumelt et
al. 1994). From this stream of research, strategy was defined as the match
between what a firm could do with its strengths and weaknesses, given the
threats and opportunities in the environment. However, managers were
given little guidance on how to assess either side of the equation.
During phase one of the development of systematic approaches to strat-

egy, the focus was largely on the performance outcomes of strategy. In this
early work much was made of portfolio models that prescribed market
share strategies based on market attractiveness and business strength,
such as the growth-share matrix developed by Bruce Henderson and
the Boston Consulting Group. The experience curve relationship of
costs with cumulative output was a significant building block, and so the
relationship of market share and profitability became a matter of heated
13
debate. This entailed the search for the underlying or third factor influ-
encing both share and profits.
Toward the end of this first phase, industry structure analysis became
influential through Michael Porter’s (1980) work on competitive
strategy. His model of the “five forces” of competition built on the
structure-conduct-performance paradigm of industrial organization
economics. The emphasis of this approach was on understanding the
industry context, and finding attractive positions within the industry that
minimized direct rivalry.
The second phase shifted attention to the positional advantages the firm
had created in order to achieve lower delivered costs or superior customer
value through differentiation. This phase peaked in the mid to late 1980s
and led to active interest in strategic typologies, generic strategies, and the
dimensions of advantage such as quality or channel relations. Research on
the Profit Impact of Market Strategy (PIMS) database (Buzzell and Gale
1987) helped clarify the importance of relative quality, as a measure of dif-
ferentiation, and demonstrated there was not a cost penalty from higher
quality levels. There was increasing use of economic theory, ranging
from transaction cost analyses of integration and governance questions,
to game theoretic studies of entry and exit strategies and the influence of
producer reputations.
A third phase emerged in the 1980s as the focus shifted from outside to
inside the firm. The shift in attention to the sources of advantage was
a recognition that positional and performance superiority achieved in the
market was derived from relative superiority in the skills, assets, collective
learning, and prevailing values and culture embedded in the firm, and
the ability of management to mobilize them (Collis and Montgomery
1995). This was belated recognition that what really matters is the specific
actions that management takes to innovate in products and processes,
enhance product and service quality, shorten time-to-market, and build
strong customer and channel relationships.
The transition to phase three was signaled by the enthusiastic reception

given to the concepts of core competence (Prahalad and Hamel 1990) and
competing on capabilities. Since capabilities proved so difficult to iden-
tify, most attention was on self-contained aspects, such as coordinating
diverse production skills, harmonizing streams of technology, and organ-
MARKETING STRATEGY: LOOKING BACK TO SEE AHEAD 15
izing work processes. This proved a very internal view of competencies,

susceptible to a circular logic that dealt with only a part of the chain of
causality. The early work stopped at the point of observing that successful
businesses out-perform their rivals because they have superior resources
(Porter 1991) – hardly a solid basis for prescription. These problems are
being addressed by specifying the conditions under which capabilities are
valuable, such as scarcity (is it imitable or substitutable, and is it durable?)
and appropriability (who owns the profits?). This led to a significant
stream of research on the sustainability of competitive advantages.
The interest in capabilities exercised within processes and the associated

resource-based view (RBV) of the firm (Barney and Clark 2007) fit well
with the emphasis of the early 1990s on delayering, restructuring, and
reengineering, since they required reconceiving the firm as a collection of
linked processes. The basis of the RBV is that scarce, inimitable, and valu-
able resources exist to be used, and the task of management is to improve
and fully exploit these resources (Makadok 2001). This leads to an empha-
sis on internal efficiency improvements and short-term cost reductions.
As a starting point for strategic thinking, however, it myopically narrows
and anchors the dialogue prematurely. Nonetheless, the RBV continues to
influence marketing thinking (Kozlenkova et al. 2013).
A fourth phase, built on the cumulative insights gained during the pro-
gression from:
This phase coincided with growing doubts about the pursuit of sustaina-
ble competitive advantage as a strategic priority. The “end of competitive
advantage” was pronounced (McGrath 2013), or more precisely the end
of defensible, permanent, and durable advantages. The emerging theme
of transient, temporary, and short-lived advantages was presaged by
D’Aveni (1994), who addressed hypercompetitive market environments
in which advantages are rapidly created or eroded.
There have been ongoing concerns about ambiguity of the notion

of competitive advantage. Did it mean, achieving the highest profit,
above-average profit, positive economic profit, the low-cost position, or

the largest value gap in a segment or market? We should regard com-
petitive advantage as a conceptual umbrella. It is also contended that
the introduction of value-gap concepts (where a competitive advantage
is a gap between customer value and cost that is larger than the gap of
competitors) has compounded these ambiguities. In the next chapter,
we see that the value-gap concept is flawed and susceptible to inside-out
thinking.
The core of these contrarian positions was that basing strategy on the
search for sustainable competitive advantages has become less meaning-
ful for most companies. Instead of extracting maximum value from com-
petitive advantages, companies should emphasize their capacity to “surf
through waves of short-lived opportunities” (McGrath 2013, p. 20). In an
environment of temporary advantages, firms need to be able to reconfig-
ure themselves continually, and dynamically renew their advantages. The
enabler for this process is provided by dynamic capabilities that create,
adjust, and keep relevant the stock of capabilities.
Dynamic capabilities enable organizational fitness and help shape the

environment advantageously by (1) sensing organizational changes that
could be threats or opportunities by scanning, searching, and exploring
across markets and technologies, (2) responding to the changes by com-
bining and transforming available resources in new and different ways or
even adding new resources through alliance partnerships or acquisitions,
and (3) selecting the organizational configuration and business model
for delivering economic value to customers, and then capturing the eco-
nomic profit (Teece 2009). A dynamic capability is not an ad hoc solution
to a problem, but a repeatable and deeply embedded set of skills and
knowledge exercised through processes. An example of dynamic capabil-
ities in action is the way IBM took its existing competencies in technology
and quality, and added to them the capability to learn better how to serve
their customers’ needs, transforming from a product company to one that
integrates systems to solve customers’ problems (Harreld et al. 2007).
During this fourth phase and into the present, the field of strategy has
returned to its roots and emphasized the role of purpose – the core reason
for being – that clarifies what a business stands for and is aspirational. The
aim is to reshape the value proposition and widen the scope to include
the broader ecosystem. Within marketing, Vargo and Lusch (2004, 2017)
advocated a transition from a goods-centered to a service-centered logic

that emphasized solutions that expand markets by assisting the consumer
in the process of value co-creation. While this service-dominant (S-D)
logic (as it is known) holds promise of providing an expanded and inte-
grative view of marketing, its current development seems confined to an
interdisciplinary group of service researchers (Fehrer 2020).
Influences on strategy making
Concerns about marketing’s influence were first raised in Day (1992)

with a forecast that the trajectory of slow erosion of the strategic role of
marketing (albeit from a high level) might be reversed. The reasons were
grounded in the fit of the issues, trends, and fashions in strategy making
with the distinctive knowledge, skills, and competencies of marketers.
When the fit is close, then marketing gains influence by contributing
superior insights. As the fit loosens and/or other disciplines and func-
tions are more attuned to emerging issues, then marketing loses relative
influence during the strategy dialogue. These concerns have been made
episodically from the 1990s to date, for diverse reasons.
Within firms, the direct influence of marketing on the strategy dialogue

has diminished for two good reasons. Among market leaders, market ori-
entation or customer-centricity attitudes and behaviors have been infused
throughout the organization and embedded deeply within the culture.
Meanwhile, the locus of strategy making is shifting to the leadership team,
with the support of a strategy group. The influential members of this team
are strong communicators with sound judgment, serving as credible advi-
sors to the chief executive officer (CEO) on strategic issues. Significantly
more than advocates for their functional group, they are team players
who can overcome their natural tendency to protect the interests of
their functional silo and focus on immediate tasks. As marketing leaders
subsume their functional biases and evolve to being team members, they
face challenges from rapid digital advances, intensifying competition, and
orchestrating an integrated customer experience. Meanwhile, academic
marketing has not kept up. Among the reasons (Reibstein et al. 2009; Key
et al. 2020; Wierenga 2020) are:
• A shrinking domain, owing to pre-emption of marketing frameworks,

concepts, and methods by adjacent fields of academic enquiry.
• The inherent limitations of reductionist, narrowly specified and frag-
mented research studies are ill-suited to the dynamic, multifaceted
problems of managers.
• The predominant academic research paradigm begins with a new
methodology, data-set or behavioral hypothesis, rather than starting
with a managerial problem. This leads to a variant of the “streetlight
effect” (Du et al. 2021) on enquiries, owing to an overreliance on what
is readily available.
A possible antidote to this degradation is a renewed emphasis on market-

ing excellence (Moorman and Day 2016; Homburg et al. 2020). Excellence
is defined as a superior ability to carry out essential customer-facing
activities that enhance performance, especially emphasizing organic
growth achieved through sustainable revenue increases. This excellence
is achieved through an organization’s marketing culture, capabilities,
and configuration, and these in turn influence the seven key marketing
activities in the marketing-strategy process.
These seven As (7As) comprise the contributions of marketing to:

Anticipating marketplace changes; Adapting the firm to such changes;
Aligning processes, structures, and people; Activating efficient and effec-
tive individual and organizational behaviors; creating Accountability for
marketing performance; Attracting important financial, human, and
other resources; and engaging in Asset management that develops and
deploys marketing assets.
Activities are the basic ingredients of organizations and are central to

strategy, beginning with value-chain analysis and strategy maps (Porter
1996) and advancing to the contemporary view that organizations are
systems composed of choices of activities that interact to create a com-
petitive advantage (Zott and Amit 2007). The field of marketing treats the
concept of activities very loosely, with the activities ascribed to marketing
mostly confined to the four Ps (4Ps) of product, price, place, and promo-
tion. This narrow framework fails to capture many of the vital roles that
marketing plays. Mastery of the seven activities is essential for marketing
to fully contribute to the strategy dialogue. Their functions and roles are
woven throughout this book.
Looking toward a more turbulent future
Marketing grew up in an era of manageable uncertainty, where the

future was relatively predictable and changes were more measured.
The mental models and organization designs favored by many current
marketers are a legacy of this era. Most marketing strategy models and
efficiency-orientated tactical moves are still predicated on a modicum
of predictability of technological, socioeconomic and geopolitical trends
(Rust 2020).
Uncertainty comes from not knowing with confidence which forces and
trends will matter in the future. The possible outcomes and/or the prob-
abilities of these forces occurring are unknown. It is tempting to project
past trends forward, but experience reminds us that these projections will
not be the biggest shapers of the future. Instead, the future will emerge
through the resolution of a myriad of uncertainties. Even seemingly
inexorable technological trends can create uncertainty owing to the
unpredictability of simultaneous advances in complementary digital
technologies, sharp declines in their costs, new functionalities, and new
platforms that put them to work (Day and Schoemaker 2019).
A scenario approach is needed to reveal and organize the underlying

uncertainties. Scenario learning is a way of rehearsing the future to avoid
surprises by breaking through the “illusion of certainty” (Fahey and
Randall 1998). Unlike traditional strategic planning, which presumes
there is a most probable answer to a strategic issue, scenario learning
considers multiple plausible futures. It meets the needs of marketers for
plans, capabilities, and organizational models that are robust across the
scenarios that reflect uncertain market realities.
The scenarios for the alternative plausible future roles of marketing

in strategy making will be synthesized from the interaction of many
uncertainties. In a VUCA (military acronym for volatility, uncertainty,
complexity, and ambiguity) world there are diverse and multiplying
sources of uncertainty. Those are clustered into the six zones of uncer-
tainty in Figure 2.1. They are informed by in-depth interviews with senior
leaders, participation in a network of chief strategy officers, informed
speculation by futurists, and ongoing studies of the capabilities of vigilant
organizations (Day and Schoemaker 2019, 2021; Schoemaker and Day
2020). The arrows linking the zones suggest some of the combinations
and interactions that could magnify systemic uncertainty. Each industry
and firm will experience the possible threats and opportunities from these
uncertainties differently. Our purpose in discussing each of the six zones
is not to be exhaustive, but to suggest the depth and ambition of a creative
consideration of the possibilities.
Figure 2.1 Illustrative zones of uncertainty for market
Digital transformation. It is presumptive to imagine what is ahead for

digital technologies, as we can never foresee human ingenuity. However,
on the horizon, advances in artificial intelligence, the Internet of things,
and blockchains will underpin an infrastructure where marketing activ-
ities will be experiential and instantaneous in a constant loop (Kumar
2021) that marketers can tap into to create an integrated customer expe-
rience. Meanwhile artificial intelligence (AI) platforms, search engines,
and digital assistants, such as Alexa, are populating homes and changing
how companies connect with their customers (Dawar and Bendle 2018).
ESG (environmental, social, and governance). The environment is the

looming climate crisis that threatens to constrain and override every strat-
egy move. One of the consequences is the impetus given to circular busi-
ness models that extend the lifespan of products through reuse, repair,
upgrading, and proactive maintenance (Frishamman and Parida 2019).
Market insights. The uncertainties of digital enablement and ESG clash

to potentially erode the value of customer data. The way this data is gath-
ered, used and regulated has changed tremendously (Brodherson et al.
2021). Tracking tools have dramatically increased both the sophistication
of personalization of advertising messages and the potential for violating
consumer privacy. Few consumers believe companies will use their per-
sonal data responsibly, so governments will continue to impose limits on
the use of the data.
Organizational model. There is considerable uncertainty about whether

the familiar self-contained, hierarchical model can adjust to rising tur-
bulence. The main argument for its continued prevalence is that it has
shown it can adapt. Shortcomings have sometimes been overcome by
patches, such as matrices or coordinating functions. The converse posi-
tion is that the forces of inertia, embedded in legacy systems and mental
models, will be too resistant to change. The principle alternatives to the
traditional model are the open network approach and the adhocracy
where action is privileged over formal position and individual knowledge
(Birkinshaw and Ridderstrale 2017). This latter model also requires a new
view of strategy based on real options and learning from experimentation.
Marketing resources. Will these resources be abundant or scarce? This

will depend on the biggest zone of uncertainty, the economic climate.
We experienced extreme volatility in demand during the pandemic,
with shortages and inflation further clouding the climate. A future envi-
ronment of scarce resources and short-term thinking forces marketing
activities into a defensive mode and strengthens the sales function which
delivers short-run revenue. Conversely, in an abundant environment
where profits are expanding, top-line growth is a higher priority and
longer horizons encourage riskier investments. This is a more favorable
setting for marketing to exercise strategic leadership.
Macro climate. Global enterprises have prospered for decades thanks

to a supportive environment of falling trade barriers, protected finan-
cial systems, adequate social and political stability, and rapid advances
in digital technologies. However, blithe assumptions about continued
economic progress have been upended by a series of geopolitical shocks
and the pandemic. Deceptive stability has been replaced with mounting
turbulence, political discontent, growing uncertainty, and leadership
anxiety. Recall the havoc wrought by the deep financial crisis of 2008,
populist autocratic leaders rising in many countries, a fast-spreading
global pandemic, trade wars with China, and the continuing cyberse-
curity breaches. These shocks introduce systemic uncertainty in every
other zone of uncertainty. The antidote is to build a superior capability
to anticipate, understand, and respond to whatever may be coming over
the horizon.
Looking ahead
The centrality of superior customer value to an outside-in strategy begs

the questions of not just how to achieve value leadership, but why it
should be the goal at all! For 50 years (Friedman 1970) the accepted goal
of a firm has been to maximize shareholder value. The enduring appeal
of this goal is a tribute to the elegance of the argument, and the speed
of the feedback from the equity markets on whether the goal has been
achieved. The reality is that shareholder value, as measured by equity
prices, is almost entirely a reflection of the market’s expectations of future
earnings, and this, in turn, is a consequence of the firm’s ability to create
new value for customers and grow faster.
Is it appropriate to rank the stakeholders in importance? We believe

that they are co-equal, and each contributes to the health of the firm
within a reinforcing system. A better approach is to select where to start
to improve this system. To guide this choice, consider the robust cor-
relation between employee and customer satisfaction (Zeithhaml 2000;
Chamberlain and Zhao 2019), which reveals a reciprocal relationship,
where an improvement in the satisfaction of one stakeholder encourages
the other to improve. The clear implication is that employee satisfaction
should be the starting point. This reinforces the meaning of strategies
as integrated actions throughout the organization that deliver superior

customer value to the chosen markets.
3 Achieving customer value
leadership1
Astride every competitive market are one or more leaders in market share,
profitability, and customer retention that confidently deliver superior
value to their target customers. They are able to maximize the benefits
perceived by their target customers, while minimizing the perceived costs
and risks, relative to their rivals. That is, they have a superior customer
value proposition (Payne et al. 2017).
The customer value proposition (CVP) has been termed the essence of
marketing strategy and, “the firm’s most important single organizing
principle” (Webster 2002, p. 61). The value proposition canvas is widely
used by firms to rethink and refresh their strategy (Osterwalder et al.
2014), and insure there is a fit between what is needed and what is pos-
sible. Becoming a customer value leader defines the strategic direction of
a business, shapes the investments the firm must make, and the capabili-
ties to be acquired, developed and nurtured.
There is more than one way to be a customer value leader, since cus-
tomers perceive value in different ways and have different requirements.
An outside-in approach is based on a deep understanding of the value
priorities of a target market segment. The ensuing value position is what
customers, competitors, and channel partners see, and determines what is
chosen by customers. In this chapter we describe a theoretically grounded
and usable concept of customer value, then discuss how customers make
choices based on their value priorities. This will never be a static picture,
so we then describe the dynamic forces creating the movie of changes in
CVPs. Marketing leaders need to have a well-informed view of the impact
of these forces and how they will shape the business model that delivers
the value proposition.
24
ACHIEVING CUSTOMER VALUE LEADERSHIP 25
What is customer value?
Perceptions of relative perceived value drive customer choices, their sub-

sequent satisfaction and loyalty, and the word-of-mouth and social media
recommendations these customers make. Ultimately, customer value is
about the trade-off between the benefits that customers perceive they are
receiving from a product or service, and the perceived cost of obtaining
these benefits – adjusted for the riskiness of the offer, as shown in this
equation:
Customer Value = (1 – Perceived Risk) [Perceived Customer Benefits –

Perceived Life Cycle Costs]
Each of the components has been the subject of much scholarly enquiry,
the focus of many consulting papers, and needs to be thoroughly under-
stood before a strategy can be formulated. This equation requires judg-
ments that are deeply informed by market insights for many reasons.
First, it is crucial to not confuse benefits with features and, second,
customers vary greatly in their perceptions of risk, benefits, and costs,
and how they judge their relative importance. This equation has to be
estimated and understood for each segment in the served market.
Perceived risk
The degree of risk the prospective buyer perceives depends (Mitchell
1999; Zhang and Yu 2020) on the buyer’s uncertainty about the answers
to crucial questions, such as: can I trust the buyer’s promises? Will the
service/product perform as expected? Will the supplier stay in business
and support the product in the future? Small vendors with unknown
brand names and no track records are at a real disadvantage – hence, the
plight of many start-ups.
The diagnostic framework in Figure 3.1 is best used to reveal the areas
where medium to high risks are perceived, when evaluating a vendor,
which then launches a search for strategic moves to reduce the risk.
Creative possibilities for countering a customer segment’s perceived risks
include:
• Performance risk. The potential customer may be afraid the offering

will not perform as promised. To allay these concerns, have an inde-
Figure 3.1 Diagnosing customer perceived risk
pendent source conduct tests; share direct feature comparisons with

the competitors; offer a warranty or guarantee and share the data on
warranty claims. Solicit endorsements by credible authorities, such as
key opinion lenders.
• Financial risk. This is an issue for high-technology products where
price declines follow technology advances, so consider an upgrade or
trade-in feature, or even a price guarantee.
• Continuity risk. Customers are usually concerned that a start-up will
not stay in business, so one option is to partner with a well-known
firm in the same market space. (Be careful to consider the strategy of
the prospective partner, and whether they really want a joint venture
or an acquisition.)
• Physical and time risk. Be sure the offering meets or exceeds all gov-
ernment and industry safety standards, and educate your customers
about safe product use with seminars, newsletters and product guide.
Make the repair or replacement process transparent and seamless.
• Psychological and social risk. The more conspicuous the product the
greater these risks. To minimize these perceived risk factors reach out
to opinion leaders for their endorsement, and ensure the salesforce is
seen as knowledgeable and professional.
These perceived risk factors will differ between individuals and product
categories. The relative weight of performance and physical risk of an
mRNA vaccine for Covid-19 protection will be very different from the
factors considered for a new enterprise software application. However,
a common theme across categories is the value of delivering a superior
customer buying and using experience which will allay any negative
perceptions.
Perceived benefits
There is a crucial difference between benefits and features or attributes,
even though they are two sides of the same coin. Features describe what
an offering is or does. They are attributes such as an electric razor with
a five-bladed head, or a memory device with 16 GB of storage. Benefits
are the outcomes or results that users will obtain – how the offering helps
them solve their problems. For example, the technical features of 16 GB
of memory enables the benefit of “holding more than 11 000 pictures.”
A benefits perspective is the core of outside-in thinking. Features are
necessary to deliver these benefits, but represent inside-out thinking. On
its own a features perspective will seldom yield deep insights into what
customers want or how they make choices.
A useful conceptualization of benefits is provided by the value pyramid in

which Almquist et al. (2016) describe 30 elements of value (corresponding
to benefits) that meet four types of need states – functional, emotional,
life changing, and social impact. These needs were derived through a lad-
dering interview technique that probes consumer’s stated preferences
to identify the underlying reasons for these choices. They found that an
emotional benefit, such as reducing anxiety, could be as important as
a functional benefit, such as saving time. The elements are ordered in
a pyramid, akin to Maslow’s hierarchy of needs with very basic needs
(security, warmth, food, and rest) at the base and more complex needs
(self-esteem and altruism) at the top.
The insights from this value pyramid that are most valuable for formu-
lating strategy are, first, that the functional elements at the base (such as
variety, reduces effort, saves time, organizes, and integrates) are easier
to measure, and consequently they are easier to match by rivals. Second,
companies with strong value propositions score high (8, 9 or 10 on a scale
of degree of descriptiveness) on multiple elements of value. Third, com-
panies that excel on multiple elements have higher net promoter scores
(NPS), which distinguish customers who are promoters, passives or
detractors. Despite the popularity of NPS metric (Colvin 2020) owing to
its simplicity, there are numerous flaws, including a disregard of segment
differences.
Customer value creation

The creation of customer value occurs throughout the stages of the
customer journey (Payne et al. 2020): (stage 1) pre-exchange activities
occur during the process of searching, evaluating and deciding, (stage
2) during the interactions needed to complete the exchange, and (stage
3) post-exchange activities, including the service/repair experience and
eventual disposal. Different forms of value are evinced during these states,
and are market-context dependent.
Customer value priorities
Customers want as much value as they can get: “Give me outstanding

products, wide selection, knowledgeable service, at the lowest price.”
They also recognize that they have to make trade-offs and prioritize the
dimensions of value to make the best choice. These trade-offs empha-
size one of three categories of value: performance value, price value or
relational value. Customers tend to sort themselves into segments based
on the type of value that is most important to them. This triad is derived
from the inside-out framework of Treacy and Wiersema (1997), which
was turned outside-in to express the customer’s viewpoint (Day and
Moorman 2010). Customer value leaders deliver superior value to one of
these three segments, with a business model tightly suited to this purpose,
while being competitive in the other types of value.
Performance value. The main concern of customers emphasizing this

type of value is whether the offering is best at meeting their demanding
requirements. This may mean having the highest quality, the best func-
tionality, or the most innovative performance features. They are drawn to
firms such as Apple computers, Tesla cars or Nike footwear. One of the
defining features of this segment is an emphasis on peerless quality, for
which they are willing to pay a premium. This is quality, not in the narrow
sense of compliance with standards, but in the broad sense of fitness for
use. For medical-device makers, such as pacemakers, this means relia-
bility (variance in mean time before malfunction and longevity) since it
is both costly and risky to replace a failed pacemaker in the chest cavity.
Price value. The priority for this price value segment is obtaining the best
price for an acceptable level of performance, service, and relational value.
Their emphasis is on the perceived total cost component of the customer
value equation. These customers are acutely aware of prices, base their
search criteria on relative price, seek bargains relentlessly, and consult
with diverse sources when comparison shopping. Their finely honed
price sensitivity does not mean they will accept cheap offerings that are
low-priced owing to subpar performance or inadequate service. As we
discuss later in this chapter, they will not usually accept less than parity
levels of performance or relational value.
Home furnishing customers in this price value segment are attracted to

IKEA and the message of “low price with meaning.” Since IKEA does not
provide in-store sales assistance, customers have to do everything from
taking their own measurements to transporting their purchase home and
assembling them. IKEA keeps their total cost below that of competitors
with utilitarian designs, and IKEA makes no pretense their products will
endure. Nonetheless, IKEA measures up on the basic service features of
the retail experience with acceptable quality.
Relational value. The decision process for customers in this segment is to

first screen the alternatives within their consideration set for acceptable
levels of price and performance and then make their choice based on the
best service or best total solution. Increasingly, customers are migrating
into this segment as the performance and price levels of their choice
options are less differentiated (approaching parity).
Edward Jones offers superior relational value, with a personal approach

to investing through a local financial advisor. Their target segment is
conservative investors uncomfortable with the prospect of making invest-
ment decisions without the guidance of a trusted adviser. Their relational
value proposition is providing “trusted and convenient face-to-face finan-
cial advice to individual investors who delegate their financial decisions.”
Edward Jones delivers this value proposition with a business model of 18
000 offices in convenient strip malls and retail areas of suburbs, with only
one financial advisor per office. An indicator of how well their strategy
works is they had the highest investor satisfaction in the 2021 J.D. Power
satisfaction survey.
How do customers choose?

Customer value leaders have deep insights into how and why their cus-
tomers choose them over other purchase alternatives. If customers see no
meaningful differences among these alternatives, they may simply take
the best deal, or stick with what they chose previously. There are three
guidelines for better understanding how customers make their choices.
Strategists ignore them at their peril.
First, they focus on a small subset of all the options. This is termed the
“consideration set” or the “evoked set.” If a brand is not in this small set,
the game is almost over before it begins. Brands are included if they are
available, meet a minimal standard of performance or are known (Roberts
and Lattin 1991). A useful way to learn about the alternatives in the
reduced set is with an unaided awareness question, which simply asks the
customer to name all the brands that come to mind in a category.
Second, customers weight the three sources of value differently, and

give greater weight to the source of value they prioritize. They do not
ignore the other sources, but simply give them less weight in their choice
decision. If a brand is judged to be very strong on performance, but is
perceived to be terrible on service, the customer may select an alternative
with an acceptable level of price and service, even if it is judged slightly
lower on performance relative to the strongest alternatives. There is an
extensive literature on consumer evaluation processes that can illuminate
this question.
Third, customers evaluate offerings relative to a parity (reference) level.

Achieving parity is more than just meeting the minimum requirements
of the category. Instead, it means at least a moderate, and often a high,
level of competence, where customers do not see a meaningful difference
among the offerings. Parity is an outside-in concept, as the prospective
customer is the arbiter of whether there is meaningful differentiation for
their purposes. The issue is not whether there is an actual difference in
performance, relational or price value, it is whether customers perceive
there is a difference that matters to them. Inside-out firms may deceive
themselves that their carefully managed differentiation efforts matter, or

are even noticed by their target customers.
The value vectors schematic in Figure 3.2 captures how customers per-
ceive the three basic types of perceived value they consider when making
a choice. They will position the choice alternatives as above or below the
parity point on each vector, to decide which of the alternatives they are
considering given the best weighted combination of the three types of
value. This is an insightful schematic for ensuring outside-in thinking
pervades a leadership team, since each functional group can quickly grasp
the implications.
Figure 3.2 The value vectors
We apply these concepts about how customers make their choices, to

understand more fully the nature of customer solutions, using the lens
of the “mutually determined customer value proposition” perspective
(Payne et al. 2017, p. 469).
Customer solutions as mutually determined CVPs
“There are products, and there are solutions. A product performs a function.
A solution fulfills a human need. People want solutions.”
(CEO, 3COM)
Solutions are bundles of products and related services that create value
greater than the sum of their parts. To offer a real solution, and not just
a repackaging of existing products and services, four criteria should be
met:
• Each solution is co-created with customers.

• It is therefore tailored to each customer.
• The relationship between customer and supplier is unusually intimate
and involves multiple relationships and connection points across the
companies.
• The supplier accepts some of the risk through performance-based or
risk-based contracts.
As with customer relationship management (CRM) best practices, the

aim is to form a one-to-one learning relationship. However, being able to
co-create a real solution requires relationships that are much deeper and
wider than those enabled by CRM systems, with social and informational
connections across many levels and functions of each partner organi-
zation. This is most feasible with high-value, long-term customers who
are big enough to warrant sizable investments of time and energy by the
supplier, and are also willing to make a reciprocal commitment.
Customers who are true partners gain from these relationships in several
ways. Overall costs may be lower and quality higher when customers are
interacting with a single supplier for multiple activities. They may see
benefits from superior performance through preferred access to the latest
technology. Their risks may be reduced by sharing them with the supplier.
There are two contrasting ways of thinking about customer solutions,

revealed in the research of Tuli et al. (2007). The inside-out view is that
“solutions are bundles of products and services that help us sell more”
(Tuli et al. 2007, p. 5). The contrasting outside-in view is that, “the
purpose of a solution is to help our customers succeed to our mutual
benefit” (Tuli et al. 2007, p. 5), by enhancing their performance, decreas-
ing their risks, and reducing their total life cycle costs. How would such
a solution appear to a business-to-business (B2B) customer? What factors

do they consider in comparing vendors?
An integrated model of customer solutions: the CVP Octagon.2 This

portrayal of the dimensions used by B2B customers is adapted from
proprietary work for a consortium of companies offering enterprise com-
puter solutions. This eight-factor model for describing, diagnosing, and
improving a CVP is portrayed in Figure 3.3.
Figure 3.3 Diagnosing a customer solution: the CVP octagon
This CVP Octagon shares many features or traits of the Worm et al.
(2017) model. According to Worm et al. (2017, p. 501): “The solutions are
(1) built on understanding customer requirements, (2) are customized to
implement customer activities and/or processes, (3) take the form of an
output-based performance contract that delivers on customer-specified
metrics, and (4) provide post-deployment support.” The CVP Octagon is
a more comprehensive portrayal by adding the perceived relative perfor-
mance of the core offering, perceived empathy (appreciation of the cus-
tomer’s strategic needs), and the integration and analysis of information
from the solution. We have subsumed their output-based performance

metrics under the broad rubric of risk reduction, which also includes
desirable elements, such as “pay for what you use” (as in SaaS offerings).
The most notable difference is the inclusion of service responsiveness, the
quality and stability of ongoing connections, and perceived trust in the
vendor (“do we believe they will do what they promised to do?”). These
latter three dimensions of the CVP Octagon are subsumed in the Worm
et al. (2017) model as moderators of the link between the solutions offer-
ing and profitability growth which was their measure of performance.
These differences are attributable to the emphasis of the CVP Octagon on
diagnosing and improving a solution versus testing a conceptual model.
Some of the key features of this eight-factor diagnostic model are:
• The data are collected from a survey of decision owners (such as the
heads of radiology in hospital systems that buy diagnostic imaging
equipment). It is important to distinguish these leaders from the influ-
ences and implementers, who are also part of the decision-making
unit (DMU).
• The survey is administered by a third party that does not reveal the
sponsor (to avoid socially desirable response biases).
• Each factor is measured with a series of scale questions about each
vendor the respondent knows (provided by an aided recall awareness
question), relative to the other vendors in the consideration set. The
scale is anchored on parity which is the respondent’s judgments of
average performance that is neither superior or inferior.
• The relative importance of each factor will vary by market type and
probably within market segments. These weights can be measured
with an importance scale or through a conjoint analysis.
In common with other conceptual models of customer solutions, the CVP

Octagon is a static portrayal. The next chapter provides deeper, systemic
understanding of the dynamic forces influencing the ability of customer
value leaders to sustain their edge, or for followers and new entrants to
get ahead.
NOTES
1. Portions of this chapter are adapted from Day and Moorman (2010).
2. This section is adapted from Day (2020).
4 Sustaining customer value
leadership
There is a law in economics that every situation bears the seeds of its own
reversal. This is the “law of nemesis” – nothing good lasts indefinitely
since others will want to share it. The corollary for customer value leaders
is that no competitive advantage is ever secure in the long run, and the
definition of the long run is shortening in almost every market. Therefore,
the leadership team must have a clear outside-in understanding of the
possible scenarios for the evolution of the market it serves, if it is to stay
ahead of rivals. There are three main forces shaping the evolution of
markets in the current turbulent era: the accelerating pace of market evo-
lution, value priorities are changing, and value leadership is increasingly
difficult to sustain.
Accelerating market evolution. The product life cycle is the reigning

framework for describing how markets are presumed to evolve through
the well-known stages of introduction, growth, maturity, and decline.
There is a misleading inevitability to this stylized treatment of market
evolution that undermines its contribution to strategic thinking. Instead,
shrewd strategists understand that each market has its own rhythm,
which is shaped by the interactions of customers, competitors, and tech-
nologies. These outside-in strategists have better and deeper insights into
the following forces.
Diminishing consumer uncertainty over time. During the introduction of

a new product or category, consumer uncertainty about quality, benefits,
and value is at its highest. Some uncertainty occurs since the first offering
of a breakthrough product may not be as good as the established products
and may be more costly to produce. Over time, customers will gain con-
fidence through experience and information sharing, and the rules of the
competitive game – the accepted assumptions about how value is created
and captured – will be clearer.
35
Coevolution of products and markets. As markets unfold, their growth

potential may be limited by what prospective customers can envision
from their experience. This usually underestimates the ultimate potential
demand, which emerges only after the market gains experience with
the product or service, and innovations improve the performance. The
market potential of an emerging technology can be especially difficult to
anticipate.
Morphing market boundaries. The traditional strategy playbook is

anchored on well-defined markets: the competitors are familiar and
stable, and the production functions and activities are established and
distinct from adjacent categories. As markets evolve and technology
advances, firms find themselves in increasingly dynamic and compet-
itive environments. In this new scenario, competition to satisfy cus-
tomers’ requirements comes from unexpected places, especially in the
fast-converging computing, social media, financial technologies (fintech),
telecommunications, and entertainment industries. Market boundaries
have evolved from fixed to fuzzy, with overlapping substitutes and
complex role reversals in which business-to-business (B2B) customers
may become competitors, and vice versa.
Changing value priorities: the threat of

commoditization
Two processes are especially influential in challenging the established
competitive order.
Customers evolve their criteria. With experience and repeat purchasing,

customers become ever more knowledgeable about the characteristics,
appropriate usage patterns, and applications of a product or service. For
many customers, the performance value that first attracted their patron-
age becomes a given, and they may feel less need for technical support
and education or quality. These buyers are increasingly confident in their
choices and may not believe that there is much difference among the
available alternatives.
When this happens, the dominant companies in the market are likely to
overshoot the requirements of segments of their target market. In their
SUSTAINING CUSTOMER VALUE LEADERSHIP 37
zeal to keep ahead of their rivals on the performance vector, these com-
panies deliver more functionality and quality than customers in the lower
tier of the market can utilize or are willing to pay for. Customers will not
keep paying higher prices for benefits that they do not need. This is the
essence of Christensen’s (2016) theory of disruptive innovation. The basic
lessons are still relevant, although the original model was formulated in
a hardware industry, which has been supplanted by software, content and
services.
Parity is a moving target. There is a well-known “herd mentality” among

incumbents that leads to continuous jockeying to establish “points of
parity” along the value vectors. From toothpaste to orthopedic devices,
or 3D printers, the degree of perceived differentiation in performance
steadily diminishes because of the relentless process of imitation. Keeping
pace with rivals in the served market is a requirement for staying in the
game. One effect of everyone keeping pace is that the parity level on each
vector steadily moves outward: performance improves, real prices drop,
and service becomes better. As parity advances, companies have to spend
more just to stay in the game. Customers, especially business customers
with dedicated purchasing resources, are more informed and more willing
to play one competitor against another. As customers’ expectations about
acceptable performance on each attribute rise, they are less willing to
tolerate below-parity performance on any dimension.
The broader context of digital turbulence. The most dynamic and uncer-
tain force shaping the balance of power between buyers and sellers in
a relationship, and shifting the competitive arena, will be the unexpected
turbulence created by advances in digital technologies. Strategists will
struggle to anticipate what may lie ahead when:
• Digital platforms help new global players to emerge in unexpected

ways. China now has a large lead in the ability to make mobile pay-
ments (roughly 50 times that of the US). In just 15 years, the number
of Chinese firms in the Fortune Global 500 has increased by more than
20 times.
• Market boundaries are blurring and dissolving. Fintech is altering the
nature of money itself, including how customers transact and secure
loans. Big bets are being made by companies on blockchain technol-
ogies that enable cryptocurrencies for the decentralized electronic
exchange of value.
• Complex ecosystems are emerging. This week’s competitor may be

next week’s supplier, customer, partner, or all of these. While Apple
and Samsung compete fiercely in the mobile phone market, Apple
relies on Samsung for key components for its phones.
• The pace of change is accelerating. Time is being so compressed that
the rate of change is exceeding the ability of traditional, hierarchical
organizations to keep up.
Meanwhile, organizations are also grappling with ongoing changes in

stakeholder and customer requirements, competitor strategies, access to
resources, and the political and regulatory environment. Digital turbu-
lence intensifies all these challenges.
Defending customer value leadership

The most likely source of an attack on a performance or relational value
leader is from the price value vector. This is readily associated with Asian
suppliers who emphasize the perceived total cost of the customer value
equation, and offer an acceptable level of quality and performance. They
seek price-sensitive customers who will not accept cheap offerings that
cut costs with substandard quality or inadequate service delivery.
Low-cost, price value rivals can emerge from any direction. European
retailers once ignored the threat from the hard-discount rivals Lidl and
Aldi, until these discounters unleashed a bare-bones price value attack.
This is a story that has been repeated in almost every maturing market,
and the same lesson is always learned by the incumbents.
The stakes are especially high for performance value leaders in maturing
markets, since the wide diffusion of technology often means that this
value vector becomes relatively less important as a differentiator. A stra-
tegic move these firms should not make is match the low-cost attacker’s
prices to drive this rival out of the market. The only sure outcome is that
the defender’s profit margins will be severely reduced, compromising
their ability to compete through innovation. There are three better
options for this firm to invest its free cash flow:
1. Keep innovating. This option best suits the genetic make-up of

a performance leader, and offers the possibility of a game-changing
breakthrough that changes the rules of competition. Depending on
the type of market these innovations could mean superior design,
a two to five times improvement in performance or a better customer

service experience.
2. Attack the attacker with a low-cost offshoot. This option is attractive
when a newly established and independent operation can share high
fixed-cost assets, such as a capital-intensive network or a production
system that is dependent on capacity utilization to lower costs.
3. Emphasize relational value superiority. This is a compelling option
(as we described in the previous chapter) when the largest customer
segment prioritizes performance value less than relational value. This
is a consequence of the shrinking differences between leaders and
average performers as technology diffuses and is copied by all the
rivals. This has occurred with digital technologies.
A common pattern of evolution in the growing importance of the rela-

tional value vector is shown in Figure 4.1. The length of each value vector
is proportional to the size of the segment that gives most importance to
the attributes of the vector. As the market matures, both the price and
relational value vectors become larger (while parity continues to move out
along each vector):
Figure 4.1 Evolving value segments
Shifting to a relational value positioning based on becoming a solution

provider is challenging for most companies. Some in the leadership team
will question whether the advantages will offset the greater risk exposure
and customer dependency. These downsides were revealed during the

demand shocks of the pandemic. Whereas an integrated solutions strat-
egy might have helped customers recover quickly, in practice they were
rendered ineffective and the providers absorbed most of the risks. Selling
a service on subscription or usage pricing is a profitless sinkhole when
factories are closed and supply chains are compromised and slow. These
setbacks are unlikely to slow the move to relational value strategies being
driven by larger trends, such as cloud platforms providing comprehensive
solutions services across the globe.
Integrating outside-in and inside-out considerations
One of the guiding premises shaping marketing strategies is that strategy

making should start with a wide-angled, outside-in view, and then iterate
to consider inside-out constraints, resources and capabilities. We delve
deeply into this process in Chapter 8, but begin here with a tool named
the value stick and introduce the business model that a firm uses to create
and capture the customer value.
This framework answers an outside-in question (“How much are custom-

ers willing to pay?”), and an inside-out question (“What is the minimum
we are willing to accept?”) The difference between the customer’s will-
ingness to pay (WTP) and the company’s willingness to sell (WTS)
is the value a firm is said to create (Brandenburger and Stuart 1996;
Oberholzer-Gee 2020). Within this stripped-down framework there are
only two ways to create more value; increase WTP or lower WTS. By
simplifying strategy to this degree, the proponents believe that strategic
thinking is improved and outcomes are better. No evidence is supplied
for these assertions.
A successful strategy move, by value-stick standards, either raises the

customer’s WTP by innovating the offering, or creates value for suppliers
by lowering their operating costs or increasing productivity. Both WTP
and WTS are evaluated relative to the firm’s price and cost, as shown in
Figure 4.2.
The value stick is a useful tool for creatively analyzing a case study in
a classroom, but overlooks most of the complexities of customer value
Figure 4.2 The value stick
creation by not considering perceived risk, market segmentation differ-

ences, and the multistage choice process that compares suppliers. The dif-
ficulties of measuring these constructs is either ignored or brushed aside.
The proponents readily concede that the concepts of WTP and WTS
are abstract, so they mostly revert to using a venerable visualization tool
known as the “value map” to reveal market realities. A value map displays
the product and service attributes used by a customer segment to: (1) eval-
uate the offerings in a competitive set – not necessarily the consideration
set; (2) rank the attributes by their importance to customers; and (3) link
those attributes judged to be most important to the business model and
key performance indicators (KPIs). The rankings by managers should
be contrasted with the insights from choice models or trade-off/conjoint
analyses. The value map can reveal opportunities to innovate with new
ways to satisfy customers and differentiate the value proposition. We
discuss this innovation path in more detail in the next chapter.
This is an overly simple way to incorporate inside-out considerations into

strategy making. A better approach is to look directly into the business
model.
The business model: creating and capturing customer value

If the value proposition is what the firm provides the target segment, then
the business model is how this value is provided profitably. The word
“model” can connote a complex and abstract representation. Good busi-
ness models are anything but abstract. They answer two enduring sets of
questions. (1) What business activities are needed to create the customer
value? How are these activities sequenced or connected to each other?
Who carries out each of these activities? and (2) How do we capture some
of the value we create in order to sustain profitability and continually
reinvest in innovation to sustain competitive leadership?
The value-creating system. This is the system of activities that a business

links together to create and deliver customer value, from acquiring the
basic inputs and services, to the channel activities required to sell, service,
and distribute an offering. These activities coalesce around capabilities
(such as order fulfilment, software design and integrity testing, or service
delivery), becoming complex bundles of skills, knowledge and system,
exercised through distinct processes that sequence the activities. There
are only a few distinctive capabilities or core competencies of a business
that really contribute to the creation of superior customer value.
Successful business models reinforce and complement the strategic

choices of segment target and value proposition. When Dow Corning,
the global leader in silicone-based products, faced a challenge to their
relational value strategy of providing high-touch design services, person-
alized sales support, and a great deal of flexibility in terms and conditions,
they reinvented their business model. The trigger was a growing segment
of price-sensitive, volume buyers that was asking for the same high
quality of resins, but at a lower price for high volume, standardized prod-
ucts, such as bathtub calking materials that did not require a high-touch
service model. This threatened to open the market to low-cost, offshore
competitors.
To prevail in the emerging low-end, standardized market segment, the

company created a separate low-cost business model within a new organ-
ization named Xiameter. Sales and distribution costs were slashed by

eliminating technical service activities, lengthening order lead times, and
limiting order-size flexibility. The company also benefited from a scalable
online ordering and fulfilment system, with all communications solely by
email.
The value-capturing system. The ultimate business model question is,

“How does the company get paid for the value it creates?” There have
been many dramatic changes over the past few decades, and for many
companies these changes have been involuntary. The media industry, in
general, has struggled with this aspect of their business model in an era of
easy downloads and file sharing.
The most common form of innovation in value capture has been the shift
from a product-sale model to a service model. Today, you can lease indus-
trial carpet as readily as a copier. To complete the system and highlight the
integration of the business model with the value proposition, recall that
when the customer pays for performance, or pays for what they use, it also
reduces their perceived risk.
Summary
Customer value leaders create superior value that their target customers
will pay for, by formulating an integrated strategy from the outside in.
This strategy answers two big questions. The first is, “what needs of which
market segments are we going to serve better than anyone else, while
being seen as competent and competitive in meeting the rest of this seg-
ment’s needs?” This choice provides a positioning theme around which
an organization can mobilize its resources and capabilities. The second
question is about the business model that consistently delivers and cap-
tures the value, “What activities are needed to create the value we promise
our target customers and how do we make money?”
The leadership team must have a well-informed view of how their target
segments will evolve, and how they should adapt to these dynamic forces
that create new opportunities and threats. This is a never-ending task.
Customer value leaders are realists; they realize they can never underesti-
mate any current or emerging competitors, or fall behind in responding to
the shifts and changes in technology and customer requirements. It takes

the sustained innovation discussed in the next two chapters, to keep both
the value proposition and business model fresh and viable.
5 Innovating new value
for customers: the
full-spectrum approach
For all the veneration of innovators in the media, few firms have demon-
strated a sustained ability to grow faster organically by innovating with
their own resources. However, these firms exist, and prosper. Growth
leaders as diverse as 3M, Airbnb, Starbucks, Amazon, LEGO and Sephora
consistently outperform their rivals by better executing their outside-in
and inside-out approaches to innovation. This chapter addresses two
principal reasons for their resilient and sustained approach to innovation.
First, customer value innovators have a more expansive approach to

innovation. They consider the full spectrum of possibilities for growth; by
reimagining and stretching every dimension of their strategy. They sur-
mount the constraints of inside-out innovation that emphasizes improv-
ing features and functions, by deeply understanding and then anticipating
the changing needs of their current and prospective markets.
Second, these growth leaders nurture a supportive climate for continuous

innovation, and promote a growth-enabling innovation narrative (Day
and Shea 2020). This climate is shaped by an externally orientated culture,
unwavering leadership support, adequate resources, and the right metrics
and rewards. Innovation cultures are based on trust; people throughout
the organization feel their ideas are valued and it is safe to pursue them.
These cultures flourish when the leadership team is fully immersed in the
execution of the growth strategy. This does not mean micro-managing
projects; instead, it requires active surveillance and interventions when
needed, while giving people permission to take “well-intended risks,”
to borrow a term that pervades the innovation dialogue within the 3M
Company.
45
Full-spectrum innovation
Few firms lack ideas to pursue. A reactive approach will sweep up a lot of
possibilities: research and development (R&D) will envision new features
and performance enhancements; distributors, salespeople, and employees
will suggest new services; there will be pressure to match or leapfrog
a competitor by copying and adapting their innovations; and changes in
strategy will require (and inspire) supporting innovations. While these
sources of ideas should always be encouraged, the chances of coming up
with a breakthrough idea by waiting and reacting are much lower than if
there is a directed search.
A directed search for opportunities, will surface better quality ideas

sooner than simply waiting for these opportunities to emerge. If the com-
petitors exploits an idea sooner, it is much harder to gain an advantage.
The benefits will be further lessened if the search is confined to familiar
places, where most of the development activity has been focused in the
past. To combat the narrowing forces of habit, the full-spectrum innova-
tion approach proposes 12 growth pathways.
The basis of the full-spectrum approach to identifying and pursuing

innovation opportunities is the questioning, challenging and reimagining
of each dimension of the strategy formulated in Chapters 3 and 4. The
departure point is challenging the customer value proposition, by posing
these guiding questions:
• Customers: what other needs of our current customers can we serve?

What other customers could we serve? How can we keep more of
them?
• Offerings: how and where can we leverage our capabilities and brand
and apply emerging technology possibilities? How can we change the
competitive game, and preempt current and possible rivals?
Applying the same logic to probe the business model, the guiding ques-
tions are:
• Value creating: what business activities are needed to create the value
we promise our present and prospective customers?
• Value capturing: how can we make sufficient money while creating
value for our customers?
INNOVATING NEW VALUE FOR CUSTOMERS 47
Asking and answering these questions generates many growth pathways.

Our full-spectrum approach to identifying the 12 potential pathways
builds on other approaches1 while applying recent advances in design
thinking, open innovation, dynamic capabilities, the contributing of
ecosystems, and business model innovation. Our emphasis is on inno-
vations that will drive superior organic growth. These growth pathways
are consistent with higher-level typology (Satell 2017) that distinguishes
four types of innovation by asking two questions: how well can we define
the problem (that innovation is to solve) and how well can we define the
skill domain(s) needed to solve it? Depending on how these two questions
are answered, an innovation could be (1) sustaining, (2) disruptive, (3)
breakthrough or (4) basic research. In my experience, the growth path-
ways approach best balances approaches that provide narrow guidance
on how to find opportunities, versus offering broad prescriptions that
lack specificity.
Pathways to faster growth
The full-spectrum innovation coin has two sides. On one side is the cus-
tomer value proposition with eight possible pathways to follow; on the
other side are the four business model pathways that spell out how the
business can profitably fulfill the promise of the value proposition inno-
vations. As Figure 5.1 shows, growth pathways can start on either side,
but success requires the two sides to be tightly linked and synchronized.
Each growth pathway can be combined with other pathways, in myriad

ways. The reach and ambition of the innovation along each pathway can
range from small-i thinking to BIG-I breakthroughs. The variety of possi-
ble combinations can be daunting, but also encouraging. Equity markets
reward a value-adding variety of growth initiatives – offering grounds for
optimism for any firm whose growth is lagging. It is unlikely that all the
best combinations have been explored and exploited. The challenge is not
a lack of attractive pathways, but finding the energy and imagination to
systematically pursue them ahead of rivals. In the rest of this chapter we
dissect each pathway and show how growth leaders use them to generate
innovations that drive growth.
Figure 5.1 The 12 growth pathways
Pathway 1: satisfy latent or emergent needs

The global pandemic jump-started or accelerated many trends, and few
were as consequential as the shift to remote working. With the aid of
faster broadband and Zoom, Slack and other collaborative platforms,
most companies were expected to downsize their offices. What does this
mean for the layout of these offices? The office furniture maker Herman
Miller drew on their deep insights into office design and anticipated that
employees would need to have more autonomy to shape their own work-
place. The company created a clever “un-system” of furniture that can be
moved easily on demand – pushed into groups or pulled away for solo
work – without getting approval or needing help.
The Herman Miller approach exemplifies a robust outside-in innova-

tion process applied by firms such as IDEO to develop new offerings in
response to a growth challenge (see Figure 5.2).
There are many variants of this process (Brown 2008; Martin 2009a),
as we saw in Chapter 2, but each gives a central role to observational or
ethnographic methods. The core idea is that latent needs are “evident
but not yet obvious.” They require skilled observers who can immerse
themselves in the target customer’s world. Many other tools can be
Figure 5.2 The design thinking process
used to extract deep customer insights with a directed search, including

in-depth interviews, structured listening, problem identification, and
metaphor-elicitation methods. In order to better hear the voice of the
customer, firms can also try these methods:
• Leverage lead users. These are users who face needs in advance of
the rest of the market, and are working to find a solution sooner.
Products such as correction fluid, sports bras, and Gatorade came
from lead users (professional typists and elite athletes, respectively).
In categories such as construction equipment or scientific test instru-
ments, most innovation ideas come from alterations to products or
workarounds made by lead users (Urban and von Hippel 1986).
• Monitor complainers and defectors. Myopia about customers can be
combated by learning from unhappy customers, who express frustra-
tion when their needs are not met or understood.
• Hunt for precursors in the parts of the country or globe where fads, fash-
ions, or technology innovations tend to appear earlier. Companies such
as the footwear-maker Converse have used “cool hunters” and trend
trackers as an early warning radar, to uncover trends, such as the rise
of retro in clothing and shoes.
Lead user analysis is especially effective at capturing rich information about

emerging needs. Another approach yielding complementary insights into
underserved needs is the “elements of value” model (Almquist et al. 2016).
There are 30 elements of value, ranging from reduces risk, connects, and
informs, to self-actualization, that address four types of needs: functional,
emotional, life changing, and social impact. In general, the more elements
of value provided by a brand, the greater the customer’s loyalty and the
higher the firm’s sustained top-line growth rate.
Pathway 2: overcome barriers to consumption

Non-customers come in many guises. One group is close to the currently
served market. They occasionally may purchase the industry’s offerings,
but could become enthusiastic customers as soon as they discover a supe-
rior alternative. Perhaps they are only buying because they have to – think
of health insurance, or taxi cab users before Uber.
The key to satisfying these non-consumers is by deeply understanding

the value they are seeking and their pain points. The fast-food chain Pret
A Manger succeeded by doing just that. They offered restaurant-quality
sandwiches made fresh daily, using superior ingredients and ready to grab
and go. By satisfying this group with a superior alternative, they attracted
more customers like them.
A more difficult group of non-consumers to satisfy, are not necessar-

ily uninterested but face barriers. Four barriers have been identified
(Anthony et al. 2008):
1. Lack of money. Existing alternatives are too expensive.

2. Lack of skills. Existing alternatives are complex, requiring expert guid-
ance or a large amount of training.
3. Lack of access. Alternatives can be consumed only in specific contexts,
locations, and so on.
4. Lack of time. Consumption of alternatives takes too long.
Microfinance overcame these barriers by offering microloans to disad-

vantaged entrepreneurs who lacked access to banks or credit facilities.
This expanded the lending industry to lift people out of poverty. The
Nintendo Wii home video game console, overcame the money and skills
barriers by offering an intuitive product that even non-gamers could
immediately enjoy, at a significant discount (about 30 percent) to other
gaming platforms.
Pathway 3: enter or develop emerging segments’ sub-categories

or geographies
This growth pathway is a set of linked hiking routes starting from
the same trail-head. Successfully traversing each trail demands a deep
outside-in immersion into the differences among (1) the benefits sought
by present and prospective customers, (2) the intensity of competitive
rivalry in the prospective segment or geography, (3) the availability of

channel intermediaries, and (4) the capabilities and financial resources
available.
Customer segment growth opportunities. There is a potential trap here:

customers can only sort themselves into benefit or choice segments by
responding to what is on offer in the product category. These are the
“what is” segments in contrast with the “might be” segments formed
by overcoming the trade-offs and compromises some customers have
to make. This creative rethinking could be a pathway to the creation of
a new sub-category (Aaker 2020). In 2008, Warby-Parker challenged the
established retail market for eyewear with an online channel that created
a new customer segment and sub-category. Their prices were 75 percent
below those charged by optometrists, to keep them affordable. To solve
the problem of getting the right fit when trying on eyewear was not possi-
ble, they sent out five frames with glasses to be returned within five days
at no charge.
What prospects in new geographies? Until recently this was an attractive

pathway, fueled by a steady advance in globalization (owing to the
increasing interconnectedness of the world economy). This interdepend-
ence of geographies and countries has continued to increase, but has been
slowed sharply by the forces of nationalism and protectionism, abetted by
the populism that led to Brexit. Looking ahead, the most likely outcome is
the evolution of the global economy into regional trading blocs (Krueger
2020) and fewer degrees of freedom to grow.
Meanwhile, the presumption that innovations developed for the demand-

ing markets of the US, Europe, and Japan will, with some adaptation,
also meet the needs of rapidly developing countries, has been challenged
on two fronts. First, stripped-down versions are not enough; consum-
ers in developing countries respond when offerings meet their unique
needs. Second, innovations focused on developing-market customers are
increasingly proving to be appealing to developed-country consumers
interested in simplicity, ease of use, or energy efficiency. The traditional
flow of innovation from rich to poor countries may move in reverse
(Govindarayan and Trimble 2012).
Pathway 4: improve the customer experience across all touch

points
Every purchase decision by a customer, from installing a medical device
to choosing and staying at a hotel, has a distinct beginning, middle, and
end, with many steps along the way that take place over time. The key to
this pathway is to first capture the complete customer experience from
the customer’s perspective, not what you hoped or expected the customer
to experience. There are many ways to map the customer experience
or journey (for example, Kalbach 2021); I prefer approaches that also
capture the emotional state of the customer during their journey. Are they
feeling “great,” “neutral,” or “upset” at each step.
Once the steps are sequenced, new customer value can be created by
asking which steps in the process could be opportunities for improvement:
• Which steps can be improved? Westin Hotels created the “Heavenly

Experience” after interviews and observations of people getting ready
for bed revealed the importance that business travelers gave to a good
night’s sleep.
• Which steps can be eliminated, combined in a different sequence, or
made smarter? Can the burden be automated, or shifted elsewhere?
• Where are the pain points?
• What factors dictate who gets included in the consideration set?
• Where can time delays be eliminated?
With an outside-in view of what the customer sees, hears, feels, and
does, companies can improve their existing offering or find white space
(unspoken, unmet needs of customers) opportunities. The key is to
rethink all points of contacts, even the prosaic ones.
The upending of the customer experience with frozen yogurt in 2010

displayed these possibilities for innovation on this pathway. When “The
Country’s Best Yogurt” (TCBY) was in ascendance, the customer went to
a counter and a server assembled a yogurt cup using pre-measured por-
tions and charging for each topping. In the early 2000s TCBY had nearly
1800 stores. By 2021 they were reduced to 300 struggling stores – replaced
by a customer self-service model started by Pinkberry. The customer
first chooses and pours the flavor of yogurt they prefer into a cup, then
decides how much of each topping to add, and pays by total weight at
the checkout counter. The lesson here is that customers really want to
be in control of their purchase journey. An obvious point, perhaps, with

powerful implications.
Pathway 5: provide integrated customer solutions

In Chapter 3 we developed four criteria to be met if a solution is creating
value for customers that is more than the sum of its parts:
1. It is co-created with customers.

2. It is tailored to each customer’s requirements.
3. It delivers superior service on the customer’s terms, including rapid
response, ready access, and clear accountability from the supplier.
4. Some of the risk perceived by customers is absorbed by suppliers
through performance- or risk-based contracts or commitments.
It is facile to label a bundle that enables one-stop shopping as a “solution.”

However, these are not valuable innovations. Competitors can copy them
easily, and so they do not typically result in growth. Growth comes from
solutions based on outside-in insights into how to solve a customer’s
problems.
The British cyber security firm Sophos saw that most of their custom-
ers were struggling to coordinate security across multiple end-points
(Raptine, mobile phone, tablet, IOS software, Android software, and so
on) when the rules were constantly changing. These firms lacked the deep
knowledge of the incessant cyber threats from hacking, or how to main-
tain a secure network across diverse end-points. To meet this pressing
need Sophos created industry-targeted sets of components that secured
both networks and devices. They were easier to deploy because they were
designed to work together. With a cost-effective and simpler solution,
Sophos was able to serve the medium to small enterprise companies that
could not afford the complex solutions. They have even released a home
version, to bring integrated security to individuals.
Pathway 6: anticipate emerging trends and issues

Fedex found great opportunities in global components handling enabled
by trends in globalized freight flows, outsourcing demands, and Internet
availability. Trends often emerge from fringe markets and extend outward.
This is how snowboarding, microbrewers, and extreme sports became
popular with mainstream markets.
These are industry-specific trends to be foreseen and monitored as

a source of opportunities and threats (Day and Schoemaker 2019). Other
possibilities will emerge with a wider lens. While, many companies
are developing sustainability strategies and adopting more sustainable
practices, this may be a precursor to bigger changes in how businesses
operate. From clean technology (cleantech), to the circular economy,
sustainability is taking a broader meaning, ESG (environmental, social,
and governance) criteria are shaping investment choices, and companies
are looking for help in meeting their obligations. These shifts will surely
rearrange the innovation landscape.
Innovating the offering. A superior capability for anticipation is an essen-

tial ingredient for success when innovating the offering aspect of the cus-
tomer value proposition. The first six pathways are about an outside-in
approach to customer opportunities, the next two pathways open the
outside-in lens wider to consider technological advances and the moves
and counter moves of competitors.
Vanguard the nonprofit investment giant, was an early adopter of arti-

ficial intelligence to bring financial guidance to its customers at a lower
cost. Its Personal Advisor Service systems automates tasks, such as rebal-
ancing a portfolio toward a target mix, or providing goals-based forecasts
in real time, while human advisers take on higher-value activities and
serve as “investing coaches.” The payoff has been maintaining lower costs
while keeping customer satisfaction high.
Pathway 7: develop innovative new products, services, or

platforms
This pathway is more like an autobahn or expressway for most compa-
nies; it is a wide pathway that absorbs the most resources. It is generally
the best managed of the innovation activities, with well-honed guidance
from tools, such as stage-gating, and real-options investments. The focus
is on the application of new knowledge and technology developments, put
in new combinations that add value to customers. (For example, think of
the Global Positioning System, GPS, or antilock braking systems, ABS.)
This pathway is most productive when it is guided by deep insights into
latent or unsatisfied needs.
The technology base for this pathway can be either sustaining or dis-
ruptive to the business. A disruptive technology has the potential to
invalidate existing advantages, and is hard for an incumbent to match as
it would compromise existing resources. This is especially a risk when the
established technology is complex and costly, relative to a disruptive tech-
nology that is cheaper and simpler while good enough to meet the needs
of most customers. This is how Salesforce.com disrupted the market for
customer relationship management (CRM) software. The incumbents,
such as SAP, sold high-priced enterprise software customized to each
customer, and charged high fees for installation. Instead, Salesforce.
com sold software as a service, and rented access to their programs in
the “cloud.” These programs were easy to use and significantly cheaper
than the incumbents’ offering, which suited most medium-size and small
customers. While disruptive technologies receive a lot of attention – they
challenge the status quo – most technology advances are of the sustaining
variety; incumbents can adopt them without undercutting their value
proposition.
Two important variants on this growth pathway are design and platform
innovations. A platform could be a set of modular components that
serve as the building blocks of a family of products or services. With
these modules, a diverse set of offerings can be created more rapidly
and cheaply than by designing each offering separately. Other general
platforms such as the AI assistants Amazon Echo/Alexa or Google
Home/Assistant are vehicles for innovation (Dawar and Bendle 2018).
These platforms provide detailed information on consumer behavior and
motivations, enabling companies to rethink their products and marketing
approaches to better meet consumers’ needs and sharpen their differen-
tiation. They will be better able to detect and respond to rapid or subtle
shifts in consumer requirements.
Design innovation seeks to create products with appearance and func-

tionality that make them instantly recognizable. The emphasis here is on
creativity, often expressed through high-quality and artistic form factors.
This is at the heart of Bang & Olufsen (B&O), the Danish maker of televi-
sions, sound systems, telephones, and other electronic devices. New ideas,
materials, and technologies made their way into B&O products when
designers put them there, and engineers then had to find ways to make
them at scale.
A false dichotomy. One trap to avoid is to treat demand-pull approaches

(finding customers’ needs and solving them) and supply-push approaches
(developing a technology then finding or creating a market for it) as alter-
native or strategic choices to be made (Pisano 2015). This has overtones
of the false dichotomy of inside-out or outside-in. They are not choices,
but iterative approaches that must be integrated.
This integrated approach helps explain how James Dyson transformed

vacuum cleaners. Consumers had every right to be frustrated with the
way their upright units quickly lost suction because the disposable bags
became clogged with dirt particles. This was an obvious design flaw, and
yet vacuum cleaners had been made that way for a century. After a great
deal of experimentation, Dyson found the solution in a novel design that
used powerful centrifugal force to separate the dirt from the air. While
this may seem like an idea that should have been implemented decades
earlier, it was enabled by advances in the formulation and performance of
polycarbonate plastics.
Innovative imitation. Imitations often can become winners, but they have
to do more than just copy. The key is to understand the appeal of the
original innovation, and the barriers to its success, with an eye to making
improvements in ways that customers will value. Thus, the iPod was not
the first digital music player, and the iPhone was not the first smartphone.
Apple took the originators’ concepts and made them far more appealing
and usable. The multibillion-dollar category of own-label, or private label,
products is based on copying well-known brands but at a much lower
price point for the same quality. Fast-fashion firms such as ZARA have
prospered by copying designs from the catwalk and getting them on to
hangers in retail stores far faster than competitors (or even the original
designers).
Followers usually have lower R&D costs, and face less risk of failure since
the product concept has already been market tested. To win, they need to
learn from the pioneer’s problems and deploy an agile organization that
can move quickly to develop a better version before other competitors
are tempted to follow. Another way for an innovative imitator to win is
to unleash a much larger go-to-market capability and cover the market
more thoroughly.
Pathway 8: challenge the value map

This pathway gained traction with the popularity of “blue ocean strategy”
(Kim and Manborgne 2014). The message is that sustained growth is best
achieved by creating new markets. This approach goes beyond growth
pathway 3, to emphasize finding untapped market spaces and creating
new demand. Paragons of this approach are Airbnb, Uber and Curves
Fitness Centers. Within the “red oceans” of established markets – tinted
red with the blood of rivals fighting for advantage within a fixed oppor-
tunity – there is arguably less potential for growth. This is an appealing
notion, with the caveat that little is known about the risks of creating new
markets versus the rewards, nor are there stories of firms that tried to
follow the guidance and failed.
To find a potential “blue ocean,” start with a value profile of the varying
levels of product or service features offered by the current players, and
challenge this profile with these questions:
1. Which of the features the industry takes for granted can be eliminated?
2. Which features could be reduced well below industry standards?
3. Which features could be raised above industry standard?
4. Which features could be created that have never been offered?
The value profile should include all the features beyond the core offering
that customers use when making a choice. The basis of the approach is
creatively challenging industry conventional wisdom and works best in
tandem with other growth pathways.
This was the approach used to design the Ginger budget hotel chain,
launched in India by the Tata Group. The chain was designed to meet the
needs of frequent business travelers who wanted a place to stay that was
not as earthy or as unpredictable as a low-price hotel, but who would not
pay the prices of a 5-star hotel. The Ginger brand promises a customer
experience that is “consistent, simple, light-hearted” at the best price.
The small rooms are strictly no-frills, with dorm-style furniture, but with
state-of-the-art new mattresses. Costs are tightly controlled by locating
the hotels in business districts, away from high-cost real estate, and using
self-check-in and minimal staff. The resulting competitive profile (shown
in Figure 5.3) clearly sets Ginger apart from the competing hotels and
aligns the hotel with the needs of its target segment.

Source: Published materials, site visits, and hotel reviews.
Figure 5.3 Innovating the budget hotel market in India
Summary: outside-in innovation

We introduced the full-spectrum approach to innovation, achieved by
stretching and reimagining every dimension of the strategy. This yields
a total of 12 growth pathways that can be pursued in a myriad of combina-
tions, and with varying degrees of ambition (from modestly incremental
to highly disruptive). The aim is to innovate to accelerate organic growth.
The customer value proposition can be innovated along eight pathways;
each is best approached from the outside in. In the next chapter we treat
the business model in the same way, but start the innovation process from
the inside out.
NOTE
1. For other ways of specifying innovation pathways see Sawhney et al. (2006),
Moore (2005), McGrath and MacMillan (2005) and Keeley et al. (2013).
6 Innovating the business
model
The four pathways for innovating the business model complete the
full-spectrum approach to accelerating organic growth.1 These pathways
start from the inside out with four questions about the system for creating
and delivering customer value, and capturing some of that value for the
firm (Osterwalder and Pigneau 2010; Birkinshaw and Ansari 2015): (1)
what activities need to be carried out? (2) How should these activities be
sequenced and connected (Porter and Siggelkow 2008)? (3) Who carries
out each activity? (4) How will the value be captured?
Peter Drucker (1994) held an expansive view of a firm’s business model,

which he named “The theory of the business” and had three parts:
assumptions about the environment, the mission, and the competencies
and activities needed to accomplish this mission. Together these three
assumptions define what an organization gets paid for, what results
it wants, and what it must excel at in order to sustain its competitive
position.
A business model is a purposeful weaving together of interdependent

activities. Some activities will be performed by the firm and others by
suppliers, partners or customers (Zott and Amit 2009). They can be
combined in a myriad of ways to create a rich set of possibilities. Let us
look at the strategic choices made by a start-up with a breakthrough in
friction-reduction technology that could be applied to any product with
moving parts. Once a target customer segment, such as automobiles, was
targeted as the best opportunity, many hard choices still had to be made.
Should they build machines that embedded and exploited the technology?
Operate a job-shop to perform surface treatment for partners? License the
technology to third parties, such as machine tool makers? Each option
required developing a different set of capabilities, within the firm or
beyond it, and set the prices, operating margins, risk exposure and profit
60
INNOVATING THE BUSINESS MODEL 61
potential. Once a choice of business model is made it is hard to reverse,

and certainly limits the array of future strategic moves.
Pathway 9: reconfigure value-creating activities

The Zara apparel chain, pioneer of the fast-fashion concept, totally
rethought its design and manufacturing processes. At most clothing
makers the value-creation process starts with designers, who plan col-
lections as much as a year in advance, and it requires long lead times
and manufacturing in Asia in order to contain costs. At Zara, fashion
and sales trends are monitored continuously to guide their in-house
designers, who then fashion what is currently popular. These designs are
sent to company-owned factories in Spain, where just-in-time systems
can move a blouse, dress, or coat from the drawing board to a store in
less than a month. Since Zara is more attuned to the latest fashion, it can
change more often and does not have to mark down large inventories of
unsold items at the end of each season. This success story suggests two
ways of thinking about this pathway: treating business model innovation
as a dynamic capability, and adopting advances in technology.
Manage as a dynamic capability (Teece 2018). Previously, we saw the

benefits of superior sensing, seizing, and transforming dynamic capa-
bilities in keeping a strategy (and the enabling business model) aligned
with the changes in the market. Firms with strong dynamic capabilities
have greater flexibility in making shifts in resources or activities. This
puts a premium on well-honed vigilance capabilities to sense and explore
subtle signals of emerging trends.
Apply advances in technology. Most business model innovations are

prompted and enabled by emerging technologies, especially those under-
pinning digital transformations that make it possible to combine and
coordinate activities and provide new functions. For example, platform
business models, such as the ride-sharing app pioneered by Uber, improve
the rider experience by quickly integrating the activities and requests of
thousands of drivers and riders.
It is not easy to get the timing of the technology right. Being too early
alerts rivals to the possibilities while the pioneer absorbs most of the risk
of market development. This explains why the shipping giant, Maersk
Line, took 20 years before adopting containerization. They waited for
standards to be set and for the technology to mature, then moved

decisively by building larger ships and modern port facilities (Pedersen
Sornn-Friese 2015).
Also, align the business model to segment realities. When Dow Corning,
the global leader in silicone-based products, faced a significant threat
to its relational value strategy of providing high-end design services,
personalized sales support, and flexibility to its buyers, they bifurcated
their business model. Price-sensitive buyers were asking for high quality,
reliability, and lower prices for the standardized items they were buying.
This opened the market to low-cost offshore competitors.
To protect their position at the price-sensitive end of the market, the

company built a low-cost business model tailored to the needs of this
segment, within a new and very lean organization called XIAMETER.
Sales and distribution costs were slashed by eliminating technical service,
lengthening lead times from hours to days, and limiting order-size flexi-
bility and custom handling. The new company used only an online order-
ing system, and all communication was solely by e-mail. Meanwhile their
high-touch model still appealed to the other 70 percent of the market.
Pathway 10: shrink the core-expand the ecosystem (Gulati 2009)

This pathway is started by deciding which activities need to be held by the
firm, and which can be outsourced, while ensuring that bottleneck assets
are closely controlled. One benefit of working with external suppliers is
that scarce resources and leadership attention are freed up for more inno-
vative activities. This is why so many firms have shifted to cloud comput-
ing providers for non-critical information technology activities. Bharti
Airtel became the second largest mobile phone company in the world by
limiting their core activities to customer care, marketing, finance, and
the regulatory interface, while outsourcing all the rest of the activities,
including providing and maintaining all their equipment.
Also, along this pathway is the practice of open innovation (Chesborough

2003; Rogers et al. 2019). This is a distributed innovation process that
purposively manages knowledge flows across the boundaries of the firm.
The choice to be open is not simply a matter of bolting on a few R&D
partners, taking stakes in early-stage companies, or posting a prize on the
Internet. Open innovation takes a change in mind-set to give up some
of the control that comes with ownership. While you must cede some
ownership, a partner outside the bounds of the firm still has to be closely
coordinated.
The shift from closed to open innovation was accelerated by the success
of Proctor & Gamble’s (P&G’s) “connect and develop” model (Huston
and Sakkab 2006). This was an explicit recognition that for every P&G
researcher, there were 200 scientists or engineers who were just as good in
their areas, and that, historically, many of P&G’s best ideas had come from
teams working across division boundaries. Top management support for
this move was crucial, capped by CEO A.G. Lafley, who set a goal that half
the company’s future new products would come from partners.
Pathway 11: enhance the go-to-market approach

The convention in business model thinking that distinguishes value crea-
tion (pathways 9 and 10) from value delivery (this pathway) is misleading.
The go-to-market approach should contribute considerable customer
value. The sales team provides useful information, diagnoses problems,
and works with the customer to create an integrated solution (pathway
5). The delivery component of the business model includes the supply
chain, but goes further to include the chain of value-adding activities in
the go-to-market system shown in Figure 6.1.
Figure 6.1 Activities of intermediaries
This pathway begins with communication and persuasion. In 2012

(Cendrowski 2012, p. 83) Nike’s CEO presciently observed that
“Connecting [with customers] used to be, ‘Here’s some product and here’s
some advertising; we hope you like it’ … Connecting today is a dialogue.”
This view explains Nike’s shift in its marketing efforts. Nike’s money
has been shifting to online activities and social media, and to supporting
communities of users with common interests, since 2011 – well ahead of
others. Some of this helps insulate Nike from celebrity endorsements that
have gone wrong, which have become so common to our era. However,
it also delivers meaningful customer value by improving the customer’s
(whether a runner, basketball player, or couch potato) experience, and
keeps Nike ahead of rivals.
There is potential for growth-enhancing innovation in every activity

a firm takes to reach, persuade, and fulfill customer requirements. Some
of these innovations respond to the growing complexity of customer
solutions and the need to rethink the role of the traditional sales force
in an era of ubiquitous access to detailed information. This rethink was
accelerated during the pandemic, with B2B customers switching to online
methods for searching, talking with suppliers and transacting routine
orders. Other innovations respond to cost pressures, more demanding
and connected customers, and global competition.
In the pharmaceutical industry, the traditional model had armies of

sales representatives fanning out to “detail” doctors, armed with tightly
scripted sales pitches on a specific (patent-protected) drug. Multiple
sales representatives from the same company might call on the same
doctor. But doctors now have less time, and even less patience, for these
sales pitches. In response, some firms are asking their representatives to
act more like resources for doctors and medical practices. This requires
innovations in how drug representatives are motivated and evaluated;
one firm no longer uses number of prescriptions written as a metric for
salespeople, focusing instead on doctor satisfaction. As with Nike, the
new focus is on entering into a dialogue with the doctors and addressing
their concerns.
Currently, the most popular word in retail and consumer goods markets
is “omnichannel,” which is the seamless integration of online and offline
shopping activities (Gallino and Rooderkerk 2020). These interconnected
channels span the physical and digital environments, include channels
that are not controlled by the firm, and require seamless integration. New
technologies, such as Alibaba’s cloud shelf and interactive fitting room,
are further blurring the line between online and offline. These shifts, plus
the ability of consumer goods companies to access customer journey data
and understand consumer choices better, open up a myriad of opportu-
nities for innovation.
Pathway 12: change how the firm makes money

The ultimate business model question is “How will the firm capture some
of the value it provides to customers?” That is, “How does the company
get paid for the value it creates?” There have been drastic changes in many
industries over the past few decades in answer to this question. For some
firms, these changes have been involuntary. The media industry has strug-
gled to innovate how firms make money in an era of easy downloads and
file sharing. While many customers are abandoning the traditional cable
package, neither the firms that produce entertainment (such as HBO) or
the firms that deliver it (such as Comcast) have been able to innovate an
à la carte approach, which customers clearly want, while making enough
money to sustain themselves.
The most dramatic innovation of the value-capture system is the shift

from a product-sale model to a service model. Now you can lease indus-
trial carpet as easily as a copier. Service models are not just about leasing.
Praxair captures the increased value of delivering gases to the point of
use in a factory instead of just dropping off a tank car. Castrol Industrial
innovated a model to share gains from reducing use of its products based
on advice it gave to a client; the firm now captures increased value by
advising its customers on how to buy less product. The pandemic accel-
erated the “Xaas” model, of converting everything including software, to
a service that can be delivered online. We saw in Chapter 2 that customers
want their suppliers to absorb some or all their risks. The Israeli firm
Netafirm, a market leader in drip-irrigation systems, faced great difficulty
in persuading smaller farmers to engage with and pay for their expensive
system. Netafirm overcame this resistance by offering farmers a free
installed system with periodic maintenance, to be paid for with a share of
each farmer’s increased crop yields. They could afford to do this because
the risks for the firm could be managed with their deeper knowledge and
ability to spread the risk. If the system should fail at one farm, Netafirm
could make up for it elsewhere.
Which way to grow?
Curves Fitness Centers became the largest fitness and health club fran-
chise in the world by challenging the value profile of the full-service health
club. Traditional health clubs catered to men and women, and offered
a full range of equipment at a high monthly fee. Curves was positioned
as a women’s gym, providing a total body workout in 30 minutes at
one-third of the monthly fee. Its equipment was especially designed for
women and arranged in a circle to encourage conversation; timed music
moved participants from machine to machine in a way that made the
overall experience more enjoyable.
The main growth pathway followed by Curves was the delivery of a differ-
ent profile of attributes from that of traditional full-service health clubs.
However, they also overcame barriers to consumption among women
and, to a lesser degree, satisfied latent or unmet needs for a disciplined
workout with social reinforcement. Their offering was an innovative
arrangement of standard elements found in many health clubs. However,
Curves offers a deeper lesson: the more growth pathways involved with
an innovation initiative, the more compelling and integrated the value
proposition, and the harder it is for rivals to copy or leapfrog.
This chapter posed a strategic choice that is usually implicit: either take
a reactive approach and wait for opportunities to arrive, or probe each
of the 12 pathways to identify the best opportunities and then pursue
them ahead of others. Growth leaders take a disciplined approach to the
12 pathways that balances divergence – to widen the search for the best
opportunities – with convergence on those that best serve the growth
strategy. The value of discipline was first highlighted by Peter Drucker
(1985), who viewed innovation as a skill that could be learned and prac-
ticed, similar to playing a musical instrument. He believed that innova-
tion was about devising a systematic way of identifying opportunities that
provide new value for customers and exploiting them with disciplined
work: “What all successful entrepreneurs I have met have in common
is not a certain kind of personality, but a commitment to the systematic
practice of innovation” (Drucker 1985, p. 110).
Successfully exercising innovation discipline requires an investment

of significant resources and leadership commitment. The process for
exercising opportunity-seeking discipline that we observe among growth
leaders is shown in Figure 6.2.
Step one: diagnose the current portfolio of growth opportunities. To assem-

ble and display this portfolio, start by casting a wide net well beyond the
Figure 6.2 Which way should you grow?
R&D projects in the development portfolio. For example, what business

model opportunities are being worked on by the supply chain team, the
sales team, and the pricing group?
When the projects are compiled (with an estimate of the potential

resources required and future gains), assign them to a pathway or combi-
nation of pathways. Helpful diagnostic questions are:
• Which pathways are getting the largest share of total resources? Why
is the dominant pathway attracting the most resources? Should it?
• What share of the opportunities are small-i, adjacencies or BIG-I inno-
vations? What does this say about the risk appetite of the business?
• What share of the growth opportunities are aligned with (and rein-
forcing of) the customer value proposition?
A revealing transition question, that helps set up the next step, is whether
the business is following or breaking away from the industry conventional
wisdom (Govindarajan and Trimble 2005)?
Step two: anticipate competitors moves. This takes a targeted version of

competitive intelligence, guided by these questions:
• Which pathways are our direct rivals emphasizing? What can we

learn from their financial and patent filings? What skill sets are they
recruiting and hiring? What clues can we gather from the pattern of
their merger and acquisitions (M&A) activity? What experiments are
they conducting? This information is often collected during routine
competitive intelligence, but needs to be interpreted with an innova-
tion opportunity lens.
• If we are not the organic growth leader in the sector, who is, and what
are they doing differently? This firm must be watched carefully for
ideas on possible better practices to adopt.
• A tougher question is the likelihood of entry from outside the indus-
try. What emerging technologies could transform our industry, and
which firms or countries are likely to use them to gain entry? Adjacent
industries need to be especially closely watched.
The primary aim of this step is to anticipate and prepare for the moves
and countermoves of the direct rivals. This will indicate which growth
projects should be accelerated to avoid missing an opportunity and
becoming an imitator.
Step three: probe new pathways. A basic premise of the growth pathways
approach to strategic innovation is that most firms in an industry will
pursue growth along the same pathways (especially pathway 7: develop
innovative new products, services, or platforms). Momentum, past expe-
rience and the need to match the moves of rivals sustain this reality. Our
counterargument is that shifting some resources to innovation pathways
no one else in the industry is pursuing, may at a minimum yield profitable
incremental growth, but could also be a game-changer. A further argu-
ment for probing a wider set of pathways is the logical extension of the
strategic thinking exercise that poses the question: “How would someone
from outside the industry attack us?” This will probably not be a direct
attack.
To carry out this step is to pick a pathway that is not being pursued, and
then conjecture how it might be pursued or combined with moves along
other pathways. This is the logic underlying a further premise of the path-
ways model, that innovations simultaneously pursuing combinations of
pathways yield larger opportunities that are harder to copy.
Reinforcing this premise is the notion that innovations are also part of
systems that are greater than the sum of their parts (Kumar 2013, p. 52):
“offerings based on integrated innovation of multiple parts of a system
are likely to have greater value.” A powerful example is the sequence
of systems innovations by Apple with the iPod and iTunes, the iPhone
and the App Store, and later the iPad. These innovations collectively
reinvented the music business, the mobile devices sector, and the tablet
computers industry.
Step four: commit mindfully. During this step, exploration and the exercise
of curiosity shifts to committing resources to attractive opportunities, but
in a careful, deliberate manner that respects the inevitable risks. The level
of risk depends on where the opportunity lies on the small i–BIG I spec-
trum. The further toward the BIG I and transformative innovation end
of this spectrum, the greater the need for mindful approaches to devel-
opment. Risks can be contained, but not eliminated, with methods such
as a trial-and-error experimentation to learn, investments in real options,
for example, small R&D projects or taking small, toehold stakes in startup
firms, or teaming up with a complementary firm in a joint venture. The
ultimate aim is to prepare the organization to act when the time is ripe for
the innovation.
When the growth-seeking process is done well, the organization will have
honed its dynamic sensing and seizing capabilities, and will be better able
to innovate with alacrity and confidence, and grow faster than rivals.
NOTE
1. There is an emerging consensus that a business model enables the coherent
implementation of a strategy (Wirtz et al. 2016). Beyond this point, there
is little agreement. Some authors (Osterwalder and Pigneur 2010) go so far
as to embed the entirety of the customer value proposition and customer
segments within the business model. This is an overly expansive approach
that blurs the important distinction between the outside-in framing of the
customer value proposition and the inside-out aspect of a business model.
See also, Girotra and Netessine (2014).
7 Strategy formulation starts
from the outside in
The limitations of traditional approaches to strategy formulation were

sharply exposed during the global pandemic, as companies had to quickly
adjust their strategies in the face of extreme uncertainty. Some companies
were more successful in making this pivot, in part because they began their
strategy making from the outside in. They assessed their fast-changing sit-
uation by first taking the viewpoint of their external stakeholders, rivals,
and key influencers to understand their strategic options and constraints.
Consequently, they were better prepared for greater turbulence. The
purpose of this chapter is to diagnose this approach to strategy formula-
tion and explain how it yields superior long-run performance.
Many organizations, including publicly traded companies, follow a pre-

scribed strategy planning process. The leadership team collectively decides
the strategies, resource commitments, budget, and operating plans once
a year, and then manages operations in accordance with these choices.
This process is often launched with a strengths/weaknesses/opportuni-
ties/threats (SWOT) analysis (Mintzberg 1990; Hill and Westbrook 1997).
The strengths and weaknesses analyses are prone to using a self-referential
internal mind-set where it is tempting to classify as a strength something
the firm does especially well, but perhaps not better than a competitor.
The opportunities and threats components bring in the outside environ-
ment, but are often framed narrowly within the context of the current
strategy.
In the traditional strategy model the questions are, “How can we sell more?
Improve our asset productivity? How else can we deploy our capabilities?”
These are important and relevant questions, but prematurely narrow and
constrain the strategy dialogue. Instead, it is better to start by stepping
outside the boundaries, resources, and limitations of the organization as it
is, and ask, “How are the needs of our present and prospective customers
70
STRATEGY FORMULATION STARTS FROM THE OUTSIDE IN 71
changing? What new competitors can meet these needs? What emerging
technologies could disrupt our industry?” These questions introduce an
outside-in perspective, and by switching the frame or vantage point they
strengthen the strategy formulation process (Brandenberger 2017).
This chapter begins by contrasting the outside-in and inside-out

approaches to strategy formulation to show the advantages of an iterative
strategy process that starts with a wide-angle, outside-in perspective.
Then we show that this process is consistent with three cognate concepts:
dynamic capabilities, design thinking, and market orientation. Finally, we
describe four supportive properties of organizations that are necessary to
fully realize the value of an outside-in approach.
Which path to strategy?
An illustration of the differences between the outside-in versus inside-out

approaches comes when an innovation process starts with a product or
technology map emphasizing product features, versus starting the same
process with a customer experience map that focuses on the benefits the
features should provide (Kim et al. 2018). A big drawback of starting
with a technology map is limiting the options to what is possible, versus
launching a broader quest for what will be needed. This perhaps explains
the difficulties of healthcare technology start-ups that received more than
$8 billion in funding in 2018, while only a few of their products have suc-
ceeded and been integrated deeply into the labyrinthine medical system.
A contributor to this string of failures is the mind-set that the develop-
ment process is primarily a technical puzzle. Successes such as Omada
Health (Unger 2018), which provides online counseling for people with
chronic diseases, resonate because they were designed by people who
were trained to think of patients first and emphasized improving their
total experience.
The outside-in approach is an orientation to strategic issues and

a decision-making priority, given direction and meaning as a mental
model that is empathetic to external stakeholders and agents. The internal
representations/mental models of both the leadership team and the key
implementers determine the way strategic choices and investments are
made (Adner and Helfat 2003; Narayan et al. 2011).
This approach to strategy-formulation is compatible with those aspects

of the dynamic capabilities framework emphasizing the need to, “define
managerial traits, management systems and organizational designs that
will keep the organization alert to opportunities and threats, enable it
to execute on new opportunities, and then to constantly morph to stay
on top” (Teece 2009, p. 206). A dynamic capability is not an ad hoc
resolution of a single problem, but a repeatable and deeply embedded set
of skills and knowledge exercised through organization processes. These
capabilities enable organizations to sense opportunities sooner than their
rivals do, seize them more effectively, and support the organizational
transformation needed to stay ahead. When guided by a clear strategic
vision, they enable the organization to adapt to turbulent and uncertain
market conditions (Teece 2007).
An early delineation of the outside-in and inside-out approaches to

strategy making was that of Emery and Trist (1965). Their causal textures
theory denoted the two-way links between an organization and its envi-
ronment as “transactional relations that were either inside out (planning)
or outside in (learning)” (Emery and Trist 1965, p. 25). They posited
that organizations influenced their situation in relation to the environ-
ment, and were influenced by this environment. This was the genesis
of the social ecology approach to understanding external environments
(Ramirez and Selsky 2016), with an emphasis on turbulence-induced
uncertainty, which is better dealt with by starting from the outside in.
Within the field of strategy, the early emphasis of influential concepts and
approaches favored inside-out thinking, with the popularity in practice
of SWOT and the early emphasis on the resource-based view (RBV) of
the firm. The basis of the RBV is that scarce, inimitable, and valuable
resources (such as patents, facilities, and brands) exist to be used (Barney
1991). It follows that the task of management is to improve and fully
exploit these resources (Makadok 2001). This leads to an emphasis on
internal efficiency improvements and short-term cost-cutting moves.
This perspective can prematurely anchor the strategy dialogue to what
exists now, versus what might be possible in the future.
The balance of emphasis began shifting toward outside-in approaches

with the advent of dynamic capabilities frameworks (as noted previously)
and a further formalization of the approach by Wind (2008) and Day and
Moorman (2010) that built upon the cumulating evidence of the perfor-
mance benefits of a market or customer orientation of an organization.

There was also a reinforcing desire to provide a counterweight to such
decision biases as overconfidence, excessive optimism and confirmation
bias, informed by only the facts that supported prevailing beliefs. Decision
theorists (Lovallo and Kahneman 2003; Kahneman 2011) found that an
inside perspective inherently neglects competitive reactions to initiatives
a company has never attempted before, such as forecasting new product
sales or estimating the profit rewards of cost cutting.
Cognate concepts
An outside-in perspective is compatible with design thinking and market

(or customer) orientation, and gains from the advances in research
into their antecedents and consequences. Design thinking (Knight et
al. 2020) takes a bottom-up emphasis on individual contributors and
projects, whereas market-orientation research takes a top-down per-
spective. Although each concept is converging on the same domain of
strategic issues, they are far from a rapprochement judging from the
lack of cross-referencing in their respective scholarship. When taken
together, these two concepts usefully illuminate and inform the outside-in
approach to strategy.
Market orientation. This concept has been a defining element of the

marketing discipline for more than 60 years. Market orientation lacked
both theoretical rigor and empirical validation until 1990 when two
teams of scholars independently established the boundaries, antecedents,
and performance consequences of the construct. Kohli and Jaworski
(1990, p. 3, original emphases), defined market orientation as, “the
organization-wide generation of market intelligence pertaining to current
and future customer needs, dissemination of the intelligence across
departments, and organization-side responsiveness to it.” This behavioral
definition has a decided capabilities emphasis, but does not address how
the insights extracted from the intelligence are to be used. Concurrently,
Narver and Slater (1990, p. 22) defined market orientation as, “the
organizational culture that most effectively and efficiently creates the
necessary behavior for the creation of superior value for buyers and thus,
continuous superior performance for the business.” They then created
a persistent confusion by proposing that a market orientation, “consists
of three behavioral components – customer orientation, competitor ori-

entation, and inter-functional coordination.” The problem is that these
three components are also embedded in the values, beliefs, and mind-sets
that shape the culture.
A resolution of the culture or behavior question was suggested by

Homburg and Pflesser (2000). Since the construct of market orientation
is generally operationalized by the behaviors that are manifested, they
propose that these behaviors reflect an underlying organization culture.
This is consistent with the literature on culture change in organizations,
which holds that behaviors reflect the prevailing culture and that the
culture slowly changes to accord with, and make sense of, the behaviors
(Kotter 2012). However, at any particular time the culture and the behav-
iors in the Kohli and Jaworski (1990) definition may not be congruent. In
an era where the rate of change is accelerating this is increasingly likely.
The center of gravity of the marketing concept has shifted toward an

emphasis on customers, rather than all the players in the market ecosys-
tem, including competitors and channel partners. This reflects the natural
gravitational pull of marketers toward the constituency they know best
and acknowledges their assigned role within the organization as the voice
of the customer. There is some recognition of the constraining role of
competitors in customer choice processes. Customer-orientated concepts
and tools, such as consideration sets, product concept tests, conjoint
analysis, and lead user analyses, incorporate the competitive set when
choice judgments are made. This does not account for the strategies and
intentions of current or potential competitors, any potential threats from
emerging businesses models, or consequences of the lowering of barriers
to entry owing to digital advances.
Notwithstanding the mounting evidence of the performance gains from

adopting or achieving a market orientation (Kirca et al. 2005; Morgan et
al. 2009; Palmatier et al. 2019) this outside-in orientation has not always
been endorsed as a guide to strategic choices and actions. Widely publi-
cized dissenting views about the primacy of customers came from Steve
Jobs (Isaacson 2011) and Howard Schultz, the CEO of Starbucks, “Don’t
just give the customers what they ask for” (Schultz and Yang 1997, p. 12).
Robert Lutz, then the Vice-Chairman of Chrysler, was especially dismiss-
ive of reliance on consumer inputs into the auto design process, “Let’s
face it, the customer in this business … is usually, at best, just a rear-view
mirror. He can tell you what he likes about the choices that are already
out there” (Flint 1997, p. 84). These thought leaders did not deny the need
to listen to customers; they simply found it deficient as a guide to action.
These visionaries were acute observers of market shifts, with an innate
understanding of the meaning and value of a superior customer experi-
ence. Some argue that these firms teach rather than learn, “by (building)
consensus for innovative concepts of value rather than analyzing and
reacting to buyers” (Humphreys and Carpenter 2018, p. 145; 2019). More
likely, visionaries both learn and teach.
A limitation of marketing and strategy research has been the focus on

successful survivors. Archival studies tracking all entries and exits into
a market find the failure rate among “visionaries” to be high (Golder and
Tellis 2002). The successes were blessed with leaders who were highly
observant of customer reactions while learning from the failures of their
predecessors. Thus, Howard Schulz envisioned his original concept of
a third place by observing customer communities in Italian coffee houses
(Schultz and Yang 1997). Similarly, Steve Jobs saw more deeply the possi-
bilities of the personal computer.
Design thinking. At the heart of this approach is the motivation to

improve an organization’s offering and interactions with key stakehold-
ers, through an iterative process of creative problem solving. While there
are many variants of the design-thinking process (Brown 2008; Martin
2009), all embody the same principles and adopt the same general process.
There are typically four iterative steps in the human-centered process of
generating new ideas and insights through empathetic listening and then
narrowing the focus through testing (O’Reilly and Binns 2019):
1. Empathize by deeply understanding customer’s problems, often

through observation. The focus is on achieving connection and even
intimacy with users (Bason and Austin 2019).
2. Define the real problem the customer has while being open to chang-
ing this definition as new insights emerge.
3. Ideate using brainstorming and other tools to generate alternative
solutions. The aim is to get beyond satisficing answers to find truly
innovative ideas.
4. Prototype and test with users, listen carefully to their reactions, and
use their reactions to redefine the problem.
The dominant feature of design thinking is user-centeredness and

involvement. Empathy is considered the primary means of achieving
this user-centeredness (Micheli et al. 2019), where empathy is referred
to as “the core value of human-centeredness” (Carlgren et al. 2016,
p. 42). For design thinkers, empathy means taking the perspective of
another and understanding what they regard as meaningful. Beyond
being a people-first approach, design thinking is also an antidote to the
inherent constrictions of linear problem-solving, by using trial-and-error
learning and encouraging a tolerance for ambiguity and failure. This
approach is best followed by a diverse team representing different skills,
interests and capabilities.
Design thinking is sometimes termed “outside the box” thinking, as

designers seek to overcome the constraints of dominant designs and
approaches. One feature is the falsification of previous assumptions based
on inside-out thinking, setting the stage for ideas that reflect the genuine
constraints and facets of the problem. The design process is firmly
based on generating a holistic and empathetic understanding of the real
problems people face, and inherently involves ambiguous and subjective
considerations. This contrasts with a solely scientific approach to testing
user’s needs and emotions.
Design thinking has evolved independently from marketing, while sharing

many aspects with market orientation. First, is an obvious commonality
of methods: market research and design research share many qualitative
methods (Beckman 2020), but design thinkers could certainly benefit
from advances in customer experience mapping, latent needs analysis
methods, and focus groups. Second, the effective implementation of both
approaches/mind-sets requires strong leadership (Bason and Austin
2019) to help their organizations think differently: practice empathy,
change mind-sets, and navigate ambiguity. Leaders must be advocates
of the respective approaches and encourage adoption through example.
Finally, although design thinking appears coherent and cohesive, it shares
with the concept of market orientation the problem of diverse perspec-
tives and critics. Some view design thinking as an organizational attrib-
ute, while others conceive it at the individual or team level; some focus
on design as culture, while others highlight the tools and the process.
A recent review (Micheli 2019) characterized the construct as suffering
from polysemy (the existence of many possible meanings).
Other cognate approaches. The soil for outside-in perspectives on stra-

tegic issues is fertile, judging by the level of activity. Two approaches –
“jobs-to-be-done” and “working backwards” – have arisen independently
with little acknowledgment of either market orientation or design think-
ing. Yet both share many features and tackle similar issues.
The basis of the “jobs-to-be-done” approach is that: “our long-held maxim

– that the crux of innovation is knowing more and more about the customer
is wrong … Understanding customers does not drive innovation success…
understanding customer jobs does.” (Christensen et al. 2016a, 2016b, p. 10,
original emphasis). According to these advocates a well-defined job is,
“very different from the traditional marketing concept of ‘needs’ because it
entails a much higher degree of specificity about what you’re solving for…
needs are important to consumers, but they generally provide only the
vaguest of direction to innovators as to how to solve them” (Christensen et
al. 2016a, 2016b, p. 22, original emphasis).
Jeff Bezos, the founder and Chairman of Amazon.com advocates what

he calls a “working backward” mentality (CB Insights 2020, p. 2, original
emphasis): “Rather than ask what we are good at and what else can we do
with that skill, you ask, who are our customers? What do they need? And
then you say we’re going to give that to them regardless of whether we have
the skills to do so, and we will learn these skills no matter how long it takes.”
Bezos attributes this approach to the success of Amazon in meeting
the needs of customers for Web services by offering access to its cloud
computing network and for a more convenient reading experience with
the Kindle. This is a central element of their stated mission to be “Earth’s
Most Customer Centric Company (or EMC3).”
The apparent origin of this approach was Steve Jobs, who once said that,
“you have to start with the customer experience and work backwards
towards the technology.” It is put to work within Amazon when they are
developing or updating new products, by first requiring the writing of an
internal, two-page or less press release describing the end product, based
on solving a specific customer problem. The press release has to be written
without technical jargon and is focused on the benefits to the target
customers. The results are greater empathy and deeper understanding of
customer needs, and a more effective communication of the offering. It is
worth noting, in contrast to other approaches, that there is little emphasis
on customer life-time value and more emphasis on creating an emotional
connection across the portfolio of offerings. It has been credited with

Amazon becoming the third ranked, “most innovative” company based
on the innovation premium investors grant them (Dyer and Gregersen
2017).
An iterative approach to strategy formulation
Strategy making seeks the best balance of exploratory and exploitative

activities (March 1991; Benner and Tushman 2003) to generate superior
current earnings while funding continued growth. This is not an either/
or dichotomy as implied by the advice to choose either a supply-push
approach to innovation – developing technology and then finding or
creating a market – versus a demand-pull approach by surfacing the latent
problems of customers and then solving them (Pisano 2015). This false
choice is premised on the assumptions that customers lack imagination
and that a demand-pull approach raises the “risk of missing out on tech-
nologies for which markets have not yet emerged” (Pisano 2015, p. 49).
Instead, both approaches need to be effectively combined and sequenced
for maximum effectiveness.
The process starts with outside-in questions to frame a broad context for
inside-out considerations of resources to be leveraged, capabilities to be
exercised, and constraints to be overcome. Outside-in thinking respects
but subordinates these inside-out factors within a wider setting. Each iter-
ative cycle begins with a wide-angle, outside-in lens, creating new insights
and deeper questions to feed the next cycle through cumulative learning.
This strategy process is shown in Figure 7.1, with illustrative questions
from the outside-in versus inside-out perspectives.
A wide outside-in lens (Adner 2017) encourages looking further into the
future and considering all the players in the surrounding ecosystem, and
their next moves and countermoves. It overcomes the myopic emphasis
of inside-out companies on the short-run moves of their direct rivals,
while overlooking their long-run positioning moves or the threat of
potential entrants from adjacent sectors. By starting with a wide-angle
lens the leadership team has a more deeply informed view of the past
actions, intentions, and likely reactions of the most influential elements of
the ecosystem, and how they will interact with one another. This requires
Figure 7.1 An iterative approach to strategy formulation
an objectivity (and skepticism) about the future that challenges comforta-

ble assumptions and illusions.
The benefits of an expansive outside-in approach were illustrated by

Tuli et al. (2007) in their study of how B2B firms define a customer solu-
tion. They found the prevailing inside-out view was that, “solutions are
bundles of products and services that help us sell more” (Tuli et al. 2007,
p. 6). By contrast, the emerging outside-in view was that, “the purpose
of a solution is to help our customers succeed to our mutual benefit, by
enhancing performance, decreasing their risks, and reducing their total
life cycle costs” (Tuli et al. 2007, p. 6). A subsequent test of their model of
customer solutions (Worm et al. 2017), described solutions as: (1) built on
deeply understanding customer requirements, (2) taking the form of an
output-based performance contract that delivers on customer-specified
metrics, (3) customized to customer activities and/or processes, and (4)
providing post-deployment support.
Superior strategic moves emerge when the outside-in approach is closely

integrated with inside-out considerations, so they reinforce each other.
The dualism of yin and yang in ancient Chinese philosophy is an apt
expression of the desired interaction. This dualism describes how seem-
ingly contrary forces or approaches are complementary; one giving rise
to the other. In order to achieve organizational balance, both approaches
need to be deployed, but always starting from the outside in. Each iterative
cycle that begins from the outside in creates new insights and generates
deeper questions that feed the next cycle through cumulative learning.
Constraints to consider. In the dynamic capabilities framework, the move

from “sensing” from the outside in, to “seizing” the potential opportuni-
ties must consider the inside-out capabilities and resources potentially
available to pursue and exploit the opportunities (Teece 2007). What an
organization can realistically accomplish is both enabled and constrained
by the trajectory of the organization (creating path dependencies) and
prior commitments to strategies and resources. Future strategic choices
also involve investment commitments that become future constraints to
the extent they are irreversible. Jeff Bezos emphasized this in his letter
to Amazon shareholders in 2016: “Such decisions are consequential and
irreversible or nearly irreversible – one-way doors – and these decisions
must be made methodically, carefully, slowly, with great deliberation and
consultation. If you walk through and don’t like what you see on the other
side, you can’t go back to where you were before.”
Commitments to past strategic choices also impose constraints on exist-

ing routines, structures, culture norms, beliefs and behaviors, and human
resources. Seizing future opportunities requires deeper commitment that
put constraints on future actions, so it may be expedient to maintain
flexibility with methods such as partnering, outsourcing, and building
multipurpose facilities and capabilities.
Strategy as an input and outcome of the process. The mutual dependency

of the strategy formulation process and the content of the strategy is
revealed in the Rumelt (2011) specification of a “good” strategy. What he
terms the “kernel” of this strategy has a “diagnosis, a guiding policy, and
a coherent action” (Rumelt 2011, p. 7). The guiding policy specifies how
the obstacles and opportunities identified in the diagnosis are to be dealt
with. “It is like a signpost, marking the direction forward, but no defin-
ing the details of the trip” (Rumelt 2011, p. 7). Thus the guiding policy
is either constricted, or expanded and enriched by the breadth of the
diagnosis. Coherent actions are the integrated policies, resource commit-
ments, and functional actions needed to implement the guiding policy.
By contrast, bad strategies fail to recognize or interpret the challenges to
the organization and confuse goals with the specific actions to be taken.
8 Enabling outside-in
strategy making
Many properties potentially distinguish the organizations best equipped

to successfully formulate and implement outside-in strategies. Some
were originally investigated as the antecedents of market orientation.
However, there was scant recognition in the original formulation of
market orientation (Jaworski and Kohli 1993) of the possibilities and
limitations inherent in the portfolio of ordinary and dynamic capabilities.
The antecedents that were studied at that time were: (1) top management
emphasis, (2) interdepartmental dynamics of conflict and connectedness,
and (3) the degree of formalization and centralization of organizational
systems and rewards. This reflected the state of organizational research of
the era, which was static and structural. This conceptualization spawned
a number of empirical studies. A meta-analysis of 114 of these studies
(Kirca et al. 2005) concluded that leadership emphasis and internal pro-
cesses had more influence than organizational structure variables.
Advances in the cognate fields and organization theory have since found
three further properties of organizations that are conducive to the suc-
cessful formulation of strategies from the outside in: (1) an empathetic
orientation, (2) catalyzed by collective curiosity, and (3) an emphasis on
gaining foresight and looking forward. These three properties are depend-
ent on the role modeling and emphasis placed by the leadership team on
outside-in approaches. These hypothesized relations are illustrated in
Figure 8.1.
We diagnose these properties to identify the indicators and relationships

to be assessed at the organizational level. For example, there is suggestive
evidence that, because curiosity and empathy are closely interwoven at
the personal level, they might be related at the organizational level. The
argument is that empathy occurs when a person is deeply curious about,
and invested in, the experience of someone else.
81
Figure 8.1 Properties of outside-in organizations
Leadership emphasis and role modeling
An outside-in mind-set and orientation to strategic issues should not be

the sole purview of the chief executive officer (CEO). In order to be effec-
tive at guiding the organization, this mind-set needs to pervade the senior
leadership team, to express the tone at the top, and consistently convey
this decision priority. The qualities that distinguish vigilant leadership
teams (Day and Schoemaker 2008) are very applicable. These teams focus
externally and are open to diverse views; they apply strategic foresight and
probe for second-order effects, and encourage others to explore widely
by creating a culture of discovery. These leadership teams create the psy-
chological space and give permission to all levels of the organization, to
share perspectives about relevant issues beyond their immediate domain.
Employees at the periphery of the organization are often closer to the
early signals of looming threats or latent opportunities, and must feel
comfortable that they will have an open hearing when raising concerns or
suggesting strategy initiatives.
ENABLING OUTSIDE-IN STRATEGY MAKING 83
The most influential members of vigilant leadership teams are strong

communicators who collaborate with other functions and serve as cred-
ible advisors to the CEO on strategic issues (Leinwand and Mainardi
2013). Within this leadership team there are many competing demands
on their scarce collective attention (Ocasio 1997), so there needs to be
a credible advocate for an outside-in approach. This could be the chief
marketing officer (CMO) (Boyd et al. 2010) or the chief strategy officer.
The position and influence of this advocate will vary between firms,
depending on how siloed the organization is with their strategic activities.
Role modeling entails leading by example, adopting behaviors and actions

that endorse, affirm and validate an outside-in orientation, and being
regular and consistent. Unless the entire organization sees a continued
commitment and receives a consistent signal from the leadership team
about this orientation, it will probably revert to making strategic decisions
from the inside out. Many centripetal forces converge to encourage employ-
ees to look outward from their firm-based positions: (1) positive reinforce-
ment, from seeing the immediate, positive results gained by increasing
the efficiency of existing resources; (2) competing priorities – within the
organization internal concerns about resource allocation, budgeting, and
functional turf wars can easily become the most pressing priorities; and (3)
self-preservation. This primordial instinct naturally reinforces an inside-out
orientation since the outside-in approach may require the firm to reinvent
itself, and this change will probably be disruptive and threatening.
An example of the ability of a forceful leader to shape the orientation is

the transformation of Ryanair. This European ultra-low-cost airline has
been among the most profitable airlines in the world by offering the best
price, achieved by a relentless focus on fixed asset utilization (the amount
of time airplanes are in the air). High utilization was achieved with an
operating model that did not permit allocated seating while imposing
rigid boarding procedures and harsh baggage limits (Meehan 2017).
Their rigid cost containment model was seen by customers as harsh and
unfriendly, but was defended by the combative CEO Michael O’Leary
who argued, “People say the customer is always right, but you know
what – they’re not. Sometimes they are wrong and they need to be told so”
(Meehan 2017, p. 3). A challenge to this approach began during the 2013
shareholder meeting when some investors questioned whether the macho
culture and strict service policies were deterring customers. These blunt
critiques and the reality that rival easyJet was gaining ground with more
customer-friendly policies, prompted the hiring of their first CMO. The

new CMO was also charged with developing the airline’s digital capabil-
ities which had fallen behind minimum acceptable levels. The CMO was
persuaded to join the airline by Michael O’Leary’s sincerity and commit-
ment to addressing the problems and the willingness of the leadership
team to experiment and change.
A rapid series of changes – notably the move to allocated seating – culmi-

nated in their December 2014 statement of “Always Getting Better” that
aspired to, “fix the things customers did not like … [while] improving
the customer and digital experiences.” Three years after launching this
initiative and building a superior digital capability, Ryanair revenues
had increased by 37 percent, and profits more than doubled. During this
period the load factor rose from 87 percent to 95 percent, while Ryanair
continued to offer the lowest fares. O’Leary summed up the success of this
outside-in transformation by saying, “If I’d know it would work so well,
I’d have done it years ago” (Meehan 2017, p. 6).
An empathetic orientation
This orientation is manifested when a competitor analysis begins by trying
to see the company through the eyes of the competitor’s leadership team.
The starting point is a deep immersion in available intelligence followed
by role playing of each of the leaders of the competitor to anticipate their
likely response to possible strategic moves (Zenko 2015). This is a variant
of the “red team” exercise used by the military, and sensitizes the organ-
ization to threat indicators before they reach top management’s radar.
Empathy is implied in becoming market oriented, often with the exhorta-

tion to stand in the customers shoes or “staple yourself to an order,” but
this connection needs to make explicit as suggested by the following quote
(Young 2015, p. 3):
Empathy is an understanding you develop about another person. Empathizing

is the use of that understanding – an action … Empathy gives you the ability
to try on that person’s perspective … But empathy is hard to achieve, …
People try to act empathetic – to take some’s perspective, to walk in his shoes
– without first taking the time to develop empathy.
Empathy is an elastic term and becomes imprecise when stretched to

apply to organizations. It could mean a supportive workplace culture,
built on skills of empathic listening to colleagues that collectively inspires

openness and trust. This requires (Kets de Vries 2016) an enhanced
ability to imagine the emotional reactions and experience of others. An
instrumental application of empathy is the training of customer-contact
representatives to appreciate customer’s feelings and understand their
frustrations, to improve the customer experience. This is advocated as
a way of making the customer feel valued.
A more relevant use of empathy is a shared sense of what is going on in

the environment, guided by connecting with people outside the organ-
izational boundaries and adopting their perspective (Patnaik 2009).
This diagnostic application of empathy requires an external orientation
throughout the organization. When embedded in an organization it
becomes a strategic priority and a cultural value.
Catalyzed by curiosity
Collective curiosity encourages the asking of questions to be explored,
and directs attention outside the company (Gino 2018). It is a key
ingredient for understanding the past (what were the real reasons for
our success?), a stimulus for a deeper understanding of present realities
(what are the reasons for the marketplace anomalies we are seeing – are
they an indicator of changes in customer needs and requirements?), and
a more informed anticipation of the future. Isaac Asimov, the prolific
science writer, caught the essence of curiosity with his observation, “The
most exciting phrase to hear in science, the one that heralds new dis-
coveries, is not ‘Eureka (I found it)’ but ‘That’s funny’” (Applewhite and
Frothingham 2003, p. 469).
Sustained curiosity throughout an organization creates strategic options

to be exercised when the time is right. This helped Sephora, the global
beauty retailer, keep its momentum during the pandemic. In the lock-
down period their unique blend of in-store ambience, personalized
experience and sample-as-you-go was no protection from challenges by
rival Ulta or Amazon. Fortunately, Sephora’s management had long been
intrigued by the adoption of gamification in the adjoining life-style cate-
gories of exercise clubs and dating sites. Adding the game mechanisms of
point-scoring, friendly competition with others, and rewards, increased
engagement, which they had confirmed with several tests. They had also
experimented with ways to further engage clients through online and
mobile platforms; their Virtual Artist helped clients “try on” make-up
products through their mobile phones.
Sephora’s disciplined exercise of curiosity gave them an edge over rivals

in pivoting their strategy to respond to an online retail world. They accel-
erated their investments in Augmented Reality and facial recognition to
fast track a project to gamify beauty. Sephora clients could try make-up
with friends in different locations, experiment with new products, walk
through a virtual store, and talk with a live beauty consultant.
Collective curiosity is shaped by the actions of the leadership team. They

can encourage curiosity by being inquisitive themselves and approaching
the future with an openness to new possibilities. Conversely, leaders can
discourage curiosity in the mistaken belief they will avoid making the
organization harder to manage, and seeking efficiency to the detriment of
curiosity-driven experimentation.
Abductive reasoning (Dong et al. 2016) can enhance collective curios-

ity. The aim of abduction is to generate new knowledge by generating
competing hypotheses, and by abandoning old convictions and seeking
better ones. As Martin (2009b, p. 25) observed, “When you are facing
something that doesn’t obey the previous rules or have some data (but not
enough to be inductive), you make an inference to the best explanation
of what is going on.” This logical leap of the mind leads to new ideas,
and these ideas can only be proven to be correct or valid by the unfold-
ing of time and future events. That is, abductive reasoning encourages
organizations to pursue ideas beyond the tried and true. There are two
types of abduction: explanatory and innovative. In either type, there is
an observation which could be an anomalous or surprising event, or
a desired, intended outcome. With explanatory abduction, a new rule is
inferred to explain the surprise. With innovative abduction, a new stra-
tegic move is imagined that will possibly achieve the result. Also in either
type, curiosity is aroused to find the new rule or strategy move. The aim
is to generate with the most plausible and parsimonious explanation for
the observation. This explanation becomes a hypothesis to be tested with
deductive reasoning.
Forward looking
An outside-in approach is more about preparedness (to capture oppor-
tunities faster than others while parrying threats) than prescience. The
aim is to anticipate and understand events and trends, to avoid losing
later degrees of freedom of strategic action and then being forced to act
defensively. Foresight tools and approaches help organizations to under-
stand, absorb, and adapt to the inherent uncertainty of environmental
trends and forces. We can distinguish between state uncertainty (how will
the environment change, how will attitudes toward privacy of customer
data change, and will autonomous vehicles dominate the market?), and
response uncertainty about the likely impact of strategic moves such
as launching a new business model or change to a subscription pricing
model (Vecchiato 2015). Whereas state uncertainty demands foresight
through the detection and interpretation of weak signals, response uncer-
tainty may be resolved by hindsight approaches that seek patterns in big
data or a series of market experiments. However, the utility of hindsight
approaches depends on whether the environmental forces operating in
the past are likely to persist into the future. Given the mounting turbu-
lence in markets accentuated by digital technologies, the emphasis of
strategic thinking should shift toward foresight.
To achieve a forward-looking posture, organizations invest in foresight.

These investments are first made in the organizational arrangements
(for example, creating a separate foresight unit, forming global scouting
teams, or installing precursor units in geographic outposts). A return
on these investments is realized through further investments in the dis-
ciplined search for opportunities, anticipatory competitor analysis, sce-
nario development, and monitoring or creating a portfolio of experiments
and early-stage investments.
The nature of these foresight investments depends on the firm and the
industry requirements. Unilever, the global consumer goods giant, pri-
oritizes investments in insights and analytics capabilities (ranging from
monitoring social media to mining data from their consumer hot lines),
and then interpreting and widely disseminating the insights (Van Den
Driest et al. 2016). They have an advanced AI platform for querying their
databases with natural language questions from all parts of the organiza-
tion. The insights group reports directly to the leadership team as a signal
of their commitment to outside-in thinking.
This forward-looking property of organizations embeds an outside-in

approach within the more general, dynamic sensing capability (Teece
2009). This capability enables an organization to spot, interpret, and
pursue potential opportunities. This entails the exercise of constant
vigilance through scanning, searching, and exploring, including probing
latent customer needs, monitoring competitive threats from adjacent
sectors, and collecting timely intelligence about every aspect of the
market ecosystem. Successful sensing is achieving through two interre-
lated learning processes that serve as dynamic sub-capabilities (Day and
Schoemaker 2016). The peripheral vision sub-capability is activated to
capture sooner than rivals the early signals of potential opportunities and
nascent threats. This sub-capability determines how widely to scope (and
what issues to address first), and how actively to scan. All managers scan,
but often do so passively. They are continually exposed to a wealth of
data, from the fuzzy impressions of trade rumors to firmer evidence from
their dashboard of performance metrics. By contrast, active scanning is
often abductive, reflecting intense curiosity that pushes the scan out to the
periphery of the organization.
The vigilant learning dynamic sub-capability enables interpreting and

understanding the weak signals of threats and opportunities, and requires
a willingness to act on partial information. Vigilance means a heightened
state of awareness and alertness that helps decision making and the
allocation of attention to the future. Thus, learning about new market
opportunities requires a willingness to be immersed in the lives of past,
present, and prospective customers to learn how they process data, an
open-minded approach to exploring latent needs and learning from lead
users, and extracting early insights from data analytics.
The close parallelism of outside-in approaches, market orientation, and

dynamic capabilities thinking is suggested by the following quote: “The
three basic routines of the sensing capability are: (i) generating market
intelligence, (ii) disseminating market intelligence (Kogut [and] Zander,
1992), and (iii) responding to market intelligence (Teece, 2007). These
routines are related to kindred routines in the dynamic capabilities liter-
ature” (Pavlou and Sawny 2011, p. 250). This quote takes us full circle to
our earlier conclusion about the convergence of cognate concepts toward
the same outside-in approach to strategy making.
Performance gains from outside-in approaches
There is no single conclusive study of the benefits of adopting an

outside-in approach to strategy formulation. Fortunately, there has been
an accumulation of positive results that are steadily filling in the missing
pieces of the jigsaw puzzle picture of a multifaceted relationship. These
supportive results can be grouped by the predominant performance
parameter being studied: organizational resilience and agility, vigilance
and foresight, and market and financial performance.
Organizational resilience and agility

The concept of resilient organizations was initially based on studies of
companies that had successfully emerged from sharp economic down-
turns (Gulati 2009). Those companies with an inside-out mind-set were
found to be less resilient in turbulent times, “than those organized around
an outside-in mindset that starts with the marketplace, then looks to cre-
atively deliver on market opportunities. Outside in maximizes customer
value – and produces more supple organizations” (Gulati 2009, p. 231).
The emphasis of this study was on designing organizations to become
more resilient by breaking down barriers that impede action, building
bridges across divisions, and crating networks of collaborations.
The architecture of inside-out organizations dictated a strategic focus on

the attributes of offerings, and an orientation toward selling products or
services rather than towards customers and the problems they are trying
to solve. Gulati proposed five levers for organizational transformation:
coordination (to connect and restructure silos to enable swift responses),
cooperation (among employees), clout (that redistributes power to cus-
tomer champions), capability (by developing employees’ skills) and
connection (with partners).
Resilient organizations will also be more agile and able to make timely,
effective and sustained changes to stay ahead of the competition in
a fast-changing business context (Worley and Pillans 2015), or “(having)
the ability to successfully manage uncertainty” (Teece et al. 2016, p. 8).
Vecchiato (2015) applied a strategic foresight lens to propose that agile
organizations outperform their rivals since they are better equipped to
pursue first-mover advantages and build the skills to act on their learning,
especially in turbulent environments. They are equipped with the neces-
sary dynamic capabilities for efficiently and effectively redirecting their

resources to higher-yielding activities. They are better able to innovate,
adapt to turbulence and create change that delivers superior customer
value (Teece et al. 2016).
Strategic foresight and vigilance

Persuasive evidence of the performance gains resulting from superior
foresight – a dynamic sensing capability – comes from a longitudinal
study by Rohrbeck and Kum (2018). They assessed the future prepar-
edness of 85 European multinationals in 2008, then waited eight years
to measure the gain in market capitalization in 2015. This time lag was
judged long enough to see tangible performance differences from strate-
gic foresight. Their measure of the foresight capability was derived from
a study of the peripheral vision of organizations (Day and Schoemaker
2004) incorporating outside-in indicators.
The foresight capability was measured relative to the need for vigilance,
based on the complexity and volatility of the environment. Multiple meas-
ures were used to score each firm along these two dimensions; reasonable
cutoffs were then used to place firms in one of four categories. This classi-
fication yielded 36 percent of firms deemed vigilant by the researchers in
2008, owing to their superior foresight capabilities in a turbulent environ-
ment. This group was 33 percent more profitable in 2015 (measured as
earnings before interest, tax, depreciation, and amortization) than the rest
of the firms. The vigilant firms also had a 75 percent gain in their market
capitalization since 2008, whereas those deemed vulnerable gained only
38 percent over the same seven-year period.
Innovation and firm performance

There have been enough studies of the effects of market and outside-in
orientations on innovation and firm performance to populate two
meta-analyses. The results are generally supportive of the hypothesized
performance benefits, subject to qualifications owing to the usual diffi-
culty of untangling the interdependencies of a firm’s internal resources,
capabilities and market position (Henderson and Mitchell 1997).
A meta-analysis of the effect of outside-in orientation (Saeed et al. 2015)

was based on a database of 232 studies reported in 15 marketing and
management journals. This study found that an inside-out orientation

had a greater impact on innovation performance (number of new prod-
ucts, new product success rates, and pioneering activities) than did an
outside-in orientation. However, an outside-in orientation had a stronger
effect on firm performance measures (profitability, growth in sales and
market share, and shareholder equity). Some of the differences between
innovation and firm performance may be owing to the breadth, compara-
bility, and quality of the latter measures.
A sharper picture of the relationship emerged from the meta-analysis by

Kirca et al. (2005) of the performance consequences of a market orien-
tation. This study had the advantage of a consistent usage across studies
of the same specification of market orientation, as defined by Kohli and
Jaworski (1990). Kirca et al. (2005) found a mean value of the expected
effect on revenue performance of r = .32. They also found that a market
orientation enhanced firm profits (r = .27), after accounting for the cost of
implementing a market orientation, and the relationship was consistently
stronger in the manufacturing versus the service sector. They posited that
a market orientation may function more as a failure preventer in service
companies and as a success inducer in manufacturing firms.
To buttress the findings on the overall relationship of market orientation

and profitability there have also been investigations of the influence of
outside-in marketing capabilities on firm performance (Vorhies et al.
2009). These capabilities represent the ability of a firm to sense market
changes, engage with customers, and link with partners. These are also
essential ingredients of a dynamic sensing capability. Both specialized
(task-specific) and architectural (directing the coordination of specialized
activities) marketing capabilities were strong and positive mediators of the
relationship of the product-market strategy and cash flow performance.
Summary of the performance effects
The weight of evidence about performance is strongly supportive of the

gains from an outside-in orientation. This evidence further reveals that it
is the interconnections of outside-in and inside-out approaches that also
matter. This returns us to an initial premise of this book, that strategy
formulation is an iterative learning process that yields superior results

when begun from the outside in.
The purpose of this diagnosis was to identify the properties that distin-
guish organizations best able to successfully formulate and implement
strategy from the outside in, and explain how and why this approach
yields superior long-run performance.
The achievement of these purposes was a path-dependent process build-

ing on cumulative progress in the research domains of dynamic capabili-
ties, market orientation, and design thinking. The basis of the outside-in
approach is an iterative learning process starting with a wide-angle
sensing of changes in the conditions in the ecosystem, including external
stakeholders, present and potential rivals, and key influencers. For this
strategy-making process to yield superior results, it must be conducted
within a supportive organization with four properties, starting with the
essential ingredient of leadership commitment to this decision-making
priority and mental model. This leadership commitment is realized
through the further properties of an empathetic orientation, catalyzed by
collective curiosity, with a system-wide emphasis on developing superior
foresight. The outcome is an organization with a strategy that is agile and
resilient amid rising turbulence.
9 Preparing marketing for
greater turbulence
Marketing is at the interface of the firm and its current and prospective
markets, and is the organizational function that absorbs a large amount
of the environmental turbulence. How will the activities, responsibilities,
and design of the marketing organization evolve in the future? The
answers to these questions will emerge from the interplay of the unique
features of a firm’s strategy, legacy, and market dynamics, with three
driving forces: (1) the impact of digital technologies, (2) intensifying
market turbulence, and (3) emerging organizational designs. The chief
marketing/commercial/customer officer will be our lens to assess the
impact of these driving forces on the practice of marketing. Through
this lens we see why so many firms will have to reinvent their marketing
organizations and become more outside-in in their approach to strategy.
When thinking about the future of marketing, five years is a long time. To
appreciate what can happen in five years, think back to 2016–17: block-
chains were mostly about crypto-currencies, and the rapid acceptance of
social media platforms had glossed over the concerns about privacy and
misinformation which are now emerging. The external shocks from the
global pandemic of 2020–21 that revealed the fragility of global supply
chains, were barely foreseen. We can be sure that five years from now
there will be equally dramatic surprises. Yet there are some predictable
changes – the consequences of the three driving forces – that are already
at work, and that chief marketing officers (CMOs) and their C-suite part-
ners can prepare for with confidence that they will be realized.
The forces of change are causes, as well as consequences, of the environ-

mental turbulence coursing through all markets. This wider setting can
be more fully appreciated by mapping the zones of uncertainty facing
the firm in the future. Figure 9.1 is a map of these zones developed for
a global business-to-business (B2B) manufacturing firm, with a lengthy
93
and vulnerable supply chain. These and other sources of uncertainty may
combine in unpredictable ways to increase turbulence. Leaders naturally
wonder what else may be coming over the horizon. It is in the nature of
uncertainty that it defies precise predictions about the likelihood, timing,
and impact of future shocks. Answers to the questions of when, where,
and how will be shrouded in doubt. Still, it is quite possible to explore the
various zones of uncertainty and prepare in advance.
Source: Day et al. (2021).
Figure 9.1 Mapping zones of uncertainty
The most immediate impression from Figure 9.1 is the extent of the inter-
actions among the seven zones. Our emphasis in this chapter is on those
zones most directly contributing to digital and market turbulence. One
message is that no single digital technology promotes digital turbulence.
Instead, it is an effect of the simultaneous maturing of multiple core
technologies, dramatic declines in their costs, new functionalities, and
new platforms to put them to work. The unpredictability of these pro-
cesses creates turbulence which is further accentuated by surprises from
disruptive events, the looming threat of climate change, and impediments
to further globalization.
PREPARING MARKETING FOR GREATER TURBULENCE 95
Digital turbulence
Marketing is one of the most technology-dependent functions in the firm.

By 2018, CMOs were spending more on digital technologies than were
chief information officers. Approaches for analyzing markets and inter-
acting with customers that were at the cutting-edge a few years ago are
fast becoming obsolete, and new approaches emerge regularly. The broad
nature of these new approaches is widely known. What is less appreciated
is how they are changing marketing practice.
New ways of understanding and connecting with customers. Next prac-

tice marketers are using customer analytics, predictive analytics, and
customer experience mapping to deliver integrated experiences that are
compelling, personalized, and consistent across all the points at which the
firm touches their customers. They have many ways of connecting with
these customers (video, Short Message Service or SMS, social media, web-
sites, and mobile devices) as well as familiar direct mail, sponsorships, and
traditional media. Some chief executive officers (CEOs) say that digital
marketing investments are the most important commitments their firms
can make because they reshape the firm’s relationship with their custom-
ers. Also, these investments enable competitors to gain an advantage if the
firm responds too slowly.
This burst of technology innovation is proving hard to manage effec-

tively. In addition to established platforms for customer relationship
management (CRM), content management, and marketing automation,
there are many new platforms for social media management, content
marketing and customer-facing engagement. Their impact is felt differ-
ently in different industries; banking is being transformed by mobility and
blockchain-enabled payment systems, as well as the ability to personalize
offers. Conversely, building products manufacturers serving only B2B
markets will pay attention to CRM, salesforce control models, and social
media.
Advances in decision tools. Fortunately, there is progress in methods

for absorbing, interpreting, and acting on the avalanche of data being
generated by fragmenting markets and the proliferation of digital media
and channels for reaching customers (Wedel and Kannan 2016). Whereas
marketers once had to exert significant effort to gain feedback from their
customers; now they struggle to absorb the feedback from user-generated
content and social media channels. In many markets we are close to being
able to tailor the message and offer to each customer and prospect. The
fuel is the plummeting cost of bandwidth, storage, and computing, and
the consequence is that available data is doubling every 18 months.
There is an ever-widening gap between the ability of firms to comprehend

and use the data and the growing amount of data they are receiving (Day
2011). Advances in digital technology will help narrow this gap, at least
for those firms able to master the technology and build an organization
capable of using expert systems and artificial intelligence approaches.
Consider the potential of IBM’s Watson, a cognitive technology that is
a natural extension of what humans can do. Watson can read and under-
stand natural language, which is important in analyzing the unstructured
data that currently make up as much as 80 percent of data.
Market turbulence
A story of one company’s response to the disruption owing to the

pandemic reveals why firms must build more agile organizations.
When Medsys (disguised), a global life sciences firm, rethought their
go-to-market strategy, as the uncertainty of the pandemic abated, they
built on what they had learned during their adjustment. The Commercial
Director was about to appoint a taskforce of sales leaders to plan the
resumption of their direct sales model as soon as travel was possible.
Instead, the leadership team called for a timeout to rethink their costly,
traditional approach. Two internal teams were formed, each with a sales-
person, a customer service manager, and a product specialist, to make
virtual visits to large accounts. They were to listen to what their customers
had experienced, to learn what they liked and disliked about all their
suppliers, and how they saw the future. They learned that most customers
were comfortable with the online contacts and enthusiastic about contin-
uing with digital connections for their routine interactions.
Meanwhile, markets have become more turbulent and marketing has

never been more complex. Leadership teams struggle to anticipate what
may lie around the corner when:
• Digital platforms help new global players to emerge in unexpected

ways. China now has a large lead in the ability to make mobile pay-
ments (roughly 50 times that of the US). In just 15 years, the number
of Chinese firms in the Fortune Global 500 has increased more than
20 times.
• Market boundaries are blurring and dissolving. Financial technologies
(fintech), are altering the nature of money itself, including how cus-
tomers transact and secure loans. Big bets are being made by compa-
nies on blockchain technologies that enable cryptocurrencies for the
decentralized electronic exchanges of value.
• The pace of change keeps accelerating. With the compression of time,
the gap between the rate of change and the ability of traditional, hier-
archical organizations to keep up is widening.
Why are some firms more adept at anticipating the opportunities and
threats from digital and market turbulence, while others struggle to keep
up? One answer is that the winners have developed superior vigilance
capabilities they can routinely exercise through deeply embedded organi-
zational processes (Day and Schoemaker 2019). Even though nearly every
organization will be blindsided at some time in the next year, the vigilant
firms are better prepared to respond. They know that the narrative “it
is not going to happen to us” offers false comfort. To avoid the trap of
complacency, leaders in vigilant firms keep the following three navigation
principles in mind.
Navigation principle 1: paying attention is a deliberate act. Vigilant organ-

izations carefully manage which of the bewildering array of external and
internal issues they need to attend to, and which can be ignored. They
know that attention is the scarcest of all organizational resources since it
constrains the capacity to focus on, and respond to, pressing issues each
day. To pay attention to everything is equivalent to paying attention to
nothing. As Herbert Simon wrote in 1971 (p. 39), “[A] wealth of informa-
tion creates a poverty of attention. More information is not always a good
thing if it leads to blinkered thinking and analysis paralysis.”
So, how should leaders allocate their organization’s limited attention,

including their own? Within vulnerable firms, leaders direct most of their
attention inward toward current operations to meet short-term perfor-

mance targets, using any scarce remaining time to react to unexpected
events, unwelcome surprises, or internal political tensions of the moment.
These leaders seldom have time left to reflect on the bigger picture and
discuss what really matters in the future. Hence, their response to unex-
pected change tends to be weak, fragmented, and rushed.
Navigation principle 2: adopt a new perspective on speed. Once organi-

zations have sensed an incipient change and are starting to understand
what it could mean, the question becomes, what action to take? Amid
digital and market turbulence, speed is an especially useful creed. First,
delays usually increase the damage and narrow the opportunity range, if
someone gets to them sooner. Second, seeing sooner gives more time to
create strategic options to be exercised when the time is right – thus avoid-
ing hasty, irreversible investments. Finally, there are well-documented
benefits from moving first (Stalk 1990; Torbert 2004).
Just because the clock of business is whirring faster does not mean that
leaders must operate in haste. Acting faster than rivals is about being
ready for action when needed, and this starts with early detection and
learning through probing questions and exploratory forays. Only after
sufficient clarity has been achieved about key issues can leaders orches-
trate better organizational preparedness in the form of multiple options
and contingency plans. The aim of seeing sooner is to have more degrees
of freedom later, when quick or bold actions are called for, without being
boxed in by rivals’ moves. Most managers prefer to act on their own terms
rather than be forced to react to someone else’s initiative.
Navigation principle 3: vigilance capabilities foster agility. Organizations

at the bleeding edge of digital and market turbulence are moving from
a comfortable and known risky environment (where decision outcomes
can be specified and probabilities calculated) toward the deep uncer-
tainty of unknown unknowns. Familiar and predictable environments
can usually be navigated by “doing things right,” and using ordinary
capabilities for the proficient execution of current processes. To navigate
deep uncertainty, in contrast, requires a more vigilant toolkit based on
two dynamic capabilities: sensing change sooner than rivals and seizing
opportunities more effectively.
Which dynamic sub-capabilities to emphasize depends on the situation.

When there are many high-risk, capital-intensive opportunities to con-
sider, such as those DuPont faced when exploring alternative energies that
could leverage their biotechnology expertise, a mastery of the real-options
analysis sub-capability is essential. However, when deploying digital tech-
nologies that are widely available and require smaller investments within
tight time frames, leaders must emphasize different sub-capabilities.
For example, when Novartis equipped its sales representatives with
interactive digital devices so they could engage in consultative two-way
dialogues with prescribing doctors, they needed to rely on a highly tuned
vigilant learning sub-capability (Day and Schoemaker 2016). In these two
examples, at least six multiple sub-capabilities were used, ranging from
peripheral scanning and real options analysis, to organizational redesigns
and culture changes. However, the relative weights given to each compo-
nent varied by circumstance.
With the correct set of dynamic capabilities, an organization becomes

agile when turbulence is high. Agility here means being able to move
quickly and adroitly shift resources to higher-value activities sooner
than rivals can. For example, agile strategies are activated when a scrum
is formed to tackle an emerging opportunity or address a recent threat.
A small team or scrum of three to nine people is quickly assembled with
all the diverse skills needed to carry out the initiative. They function as
self-managing teams, following a transparent process, using design think-
ing methods (Carlgren et al. 2016; Beckman 2020) to develop and test
prototype solutions, and learn quickly. These features are the antithesis
of cumbersome, top-down innovation processes with repetitive meetings,
extensive documentation, and other impediments to progress.
Implications for marketing organizations
A marketing organization has four reinforcing elements (the 4Cs). The

first element is a firm’s marketing capabilities, which are the complex
bundles of firm-level skills and knowledge that guide marketing activities
and the adaptation of a firm to marketplace changes. Second, by creat-
ing values, norms, and behaviors that facilitate a focus on the market,
a market-orientated culture guides thinking and actions throughout the
firm. Third, the marketing configuration comprises the organizational
structures, metrics, and incentives/control systems that influence mar-

keting activities. This configuration is the organizational setting within
which marketing capabilities are exercised and culture is activated.
Fourth, marketing leaders and employees are the (human) capital that
creates, implements, and evaluates a firm’s strategy. These four market-
ing organization elements should be reinforcing, as when a supportive
culture attracts superior talent (Moorman and Day 2016).
Companies are being pulled by their strategies and pushed by digital

turbulence and assertive customers to rethink their organizations. The
objective is to enable the effective exercise of the dynamic marketing
capabilities of: vigilant market learning (to see threats and opportunities
sooner), adaptive experimentation and risk taking, and open marketing
(Day 2011). In response, they are flattening (or delayering) to remove
layers in the traditional closed hierarchy (Wulf 2012), and augmenting
this structure with an open-network approach that shrinks the core of the
organization while expanding the periphery. The emerging organization
will have the following three features.
Customer-centric structures. Customer-centric structures – defined as

a structural design where a firm’s highest-level business units are aligned
to distinct customer groups rather than to product groups – can serve as
the means to building a fluid organization. A customer-centric structure
generates “accountability for managing customer relationships,” creates
a shared, within-unit focus on customers and improves responsiveness
to customer needs (Lee et al. 2015, p. 75). A customer-centric structure
allows each business unit to quickly sense the shifts in the market and
foster cross-functional activities, and enables employees to better navigate
changing technologies and customer data (for example, social media
marketing, discussions in online communities, and digital contents), and
to act on the new information more effectively. By contrast, within a firm
with product-based units, multiple units might target the same customers,
creating confusion for customers and disrupting relationship-building
efforts (Day 2006).
Aligning units to mirror customer groups also comes with a cost. To

deliver offerings to customers as an integrated experience, the front-end
and back-end offices need to converge to provide seamless customer solu-
tions. This process requires a duplication of infrastructure and functions,
so structural complexity arises and must be resolved through sophisti-
cated internal coordination mechanisms. For example, Cisco Systems

reverted from a customer-centric structure to a product-centric structure
owing to the unbearable resource duplications and costs of: “the same or
similar products [to] different customer segments” (Gulati 2009, p. 102).
Yet, digital connectedness can lower the coordinating costs associated
with a customer-centric structure; firms can find more efficient ways to
combine and reconfigure their resources, allowing them to better navigate
rapidly shifting technologies and customer voices.
Structural granularity. Structural granularity is the extent to which

a firm divides itself into small structural units. While a customer-centric
structure involves significant organizational changes in the structural
archetype, which determines groupings and coordination of resources,
structural granularity involves smaller-scale changes, such as additions,
deletions, and new combinations of structural units. Disaggregating
a firm into smaller structural units increases agility by allowing each
unit to be closely engaged with target customers, improving employees’
responsive to customers’ changing needs. In addition, granular units can
be more effective at launching smaller-scale experiments that can position
the organization to seize fleeting opportunities while learning from these
trials and errors. This type of structure empowers individuals and allows
them to quickly identify any minuscule changes in the market (Blenko et
al. 2010; Berlin et al. 2017).
Some of the agility benefits may be offset by sacrificing economies of scale,

creating functional redundancies, and encouraging resource competi-
tion among units. Smaller units inherently provide customer-centricity
benefits, but some customers still may need to interact with multiple
units, which would require firms to institute additional customer-centric
processes (for example, sales programs) that reduce the customer’s com-
munication burden (Kumar et al. 2008).
Networked teams. Networked teams – an interconnected cluster of

project- or task-based teams whose activities last a short period of time
– increase learning agility of employees by increasing flexibility of knowl-
edge transfers, and fostering informal communication. A network struc-
ture might not have an organizational chart. It often consists of voluntary
ad hoc groups but also can be designed as part of a formal structure.
Network structures enhance cross-boundary (for example, customer-firm
and cross-functional) knowledge sharing and cooperation, and improve

innovation performance (Lee et al. 2015).
It is difficult to implement this form of structure in the organization as

coordination imposes complexities, since firms can constantly change
units’ responsibilities; this often means more confusion within the firm.
The key is to clarify accountability when employees work as a network
of teams. Indeed, “degree of complexity of an organizational structure or
form (e.g. tall vs. flat; matrix, virtual matrix, network form) impacts the
nature, rate, and diffusion of different activities within an organization,
such as information processing, knowledge sharing, routine replication,
and capability development” (Felin et al. 2012, p. 1365). Perhaps block-
chain technologies can reduce transaction costs so the organizational
boundaries will become more fluid and porous; by reducing the costs
of search in the firm and finding resources in a timelier manner. For
example, ConsenSys, a venture production studio, used a blockchain
technology to flatten the structure; works and contributions are codi-
fied in smart contracts, and the structure functions as a hub-and-spoke
arrangement where the technology provides supporting services.
Bringing the future forward
The turbulence and uncertainty owing to the pandemic has also accel-
erated trends in organization design that were already in motion. In the
post-coronavirus future, leaders will have to find a balance between what
worked before and what needs to be happen to succeed in the future. The
following four trends are especially pertinent.
Trend 1: the future of work. Most executives were pleased with how well
their organizations pivoted to working remotely. This also required organ-
izations to rethink how they enabled, trained, and socialized employees.
However, more than 70 percent of jobs cannot be performed entirely off
site. Thus, the challenge will be to institutionalize what worked, become
more decentralized, and depend less on top-down command-and-control
decision making. The trend will continue toward agile teams that are
allowed to make day-to-day decisions, while reserving the big-bet deci-
sions to the leadership team. Routine decisions will be made much lower
in the structure, to good effect.
Trend 2: “more is not better”. This was in the title of Roger Martin’s
(2020) incisive book, with the prescient sub-title “Overcoming America’s
Obsession with Economic Efficiency.” He shows that optimizing for
profits can, intentionally or unintentionally, create brittle systems that are
not versatile or sustainable. When the separate components of a system
are individually optimized, the overall system becomes less resilient. This
reality certainly impacted marketers who had to deal with supply-chain
problems that interfered with their ability to meet commitments to cus-
tomers. Their highly optimized and increasingly lengthy supply chains
proved more fragile than expected. Reliance on a few, highly specialized
suppliers with scale advantages, limited their degrees of freedom when
they experienced unexpected shocks. These problems are being exac-
erbated by the political and social resistance to globalization (Day et al.
2021).
Trend 3: evolving ecosystems. As firms become more interconnected,

unexpected partnerships are emerging. There is an incentive to form eco-
systems through partnerships and joint ventures to expand capabilities.
Inevitably these ecosystems will compete; this week’s competitor may be
next month’s supplier, customer, partner, or all of these. Although the
Apple and Samsung ecosystems compete fiercely in the mobile phone
market, Apple also relies on Samsung for key components for its devices.
Trend 4: The digital transformation of industries. This transformation

accelerated during the pandemic. The transition to remote work and
virtual meetings is one of many profound changes. Another is “TeleXaas”
or the rise of “everything” as a service that can be delivered online, and
sometimes replacing traditional in-person experiences. These digital
capabilities are the product of breathtaking advances in computer
system performance, including processing, storing, and communicating.
Artificial intelligence – which can learn from its environment and take
autonomous action – has profound implications for marketing. Some
provocative possibilities are described by Kumar (2021).
The changing role of the C-suite
When people reach the C-suite, the skills and functional mastery that got
them there matter less than their leadership skills and general business
acumen (Groysberg et al. 2011). The chief information officer, chief

technology officer, or CMO who thrives in the C-suite will be a team
member who can lead without rank, with an organizational behind them
that has earned the respect of the rest of the organization. The skills that
are increasingly in favor in the C-suite are strong communications, a will-
ingness to partner with other functions, and strategic thinking. Successful
members of the C-suite will advise the CEO on key decisions and strategic
choices, but also offer their own well-informed insights.
For marketing leaders to thrive and survive in a collaborative C-suite,

they will have to adopt a general management mind-set and earn the
respect of their peers with fact-based analyses. They will achieve the status
of a trusted advisor to the CEO by:
• Being the acknowledged voice of the customer and consumer, and

ensuring the strategy is built and executed from the outside in. That is,
standing in the customer’s shoes and viewing everything the firm does
through the customer’s eyes.
• Being the steward of the brand as a valuable asset, and rallying the
entire organization to support and enhance the brand promise.
• Driving profitable organic growth, by continually searching for new
ways to innovate new value for customers. They consider the full
spectrum of possibilities for growth, instead of limiting themselves to
the narrower possibilities of product innovation.
• Taking accountability for the returns on marketing investments.
They will gain further credibility by building a marketing organization

that is fluid, agile, and informed by data and deep insights into the current
and potential customers – and that is demonstrably superior to the rivals.
This model of a CMO flourishes in business-to-consumer (B2C) firms
with big global brands.
Within B2B companies, we are likely to find marketing leaders serving

as market advocates. Their main roles are to be advocates for outside-in
approaches, and to serve as a credible source of market insights (Fahey
2018). While their aspirations may be expansive, they are primarily
coordinators and communicators, although they may have an increased
influence as an integrator of digital strategies to enhance the customer
experience. In other B2B companies this role is even more limited and
even less influential. Service resource marketers also have sundry admin-
istrative responsibilities, such as monitoring compliance with brand
or trademark guidelines. This model of a strictly supportive marketing

function is found at science-based and high-technology firms, with strong
research and development cultures, in which product managers have
complete profit and loss responsibility. Marketing often plays a limited
sales support role in smaller B2B firms that are reliant on intermediaries.
In these firms, sales usually prevails in the battle over budget allocations
(Kotler et al. 2006). The relative power of sales is strengthened further if
the most powerful customers, such as Walmart, expect to be served by
multifunctional teams coordinated by sales.
Implications for marketing
Fluid organizations continuously scan for potential opportunities in

markets, emerging white spaces, and changing customer needs. They
win by seeing opportunities sooner than their rivals do. This will take an
experimental mind-set, a willingness to learn quickly from mistakes, and
the ability to identify, test, and deploy new business models. They will
achieve this goal when the marketing leader acts on five priorities.
1. Build superior marketing capabilities. The CMO of the future must

fulfill many roles and embrace sometimes competing, even contra-
dictory, forces both within and outside the organization. Among
the most challenging is the need to deliver business results immedi-
ately, while creating the business of tomorrow. Both are essential to
a healthy business (and a successful CMO), but require very different
marketing processes, skills, and capabilities.
Delivering in the short term requires more proven, predictable, and

repeatable tools, skills and processes embodied in ordinary capabilities.
It is more left than right brained. These marketing capabilities require
developing and executing repeatable models, simplification, executional
discipline, rigorous measurement, and decisive action. Convergence,
focus and delivery, with a more short-term mind-set is required. The
CMO who does not master these ordinary capabilities and build them in
the organization probably will not get the chance to spend much time on
the longer-term challenges and opportunities.
Creating the business of tomorrow is an equally critical and longer-term

challenge. The CMOs who do not master these dynamic capabilities will
also find themselves at risk. The dynamic capabilities needed to identify

and prepare the organization to seize the future – finding new opportuni-
ties and addressing the challenge of changing consumer and competitive
environments – are different from the ordinary today capabilities. These
require divergence and adaptive market experimentation (versus codi-
fication and convergence), vigilant market learning guided by curiosity
(versus conformance), and the open-ended creative skills of innovation
and design thinking.
2. Bring an outside-in perspective to the strategy dialogue. The marketing

leader has customarily been the “voice of the customer.” The sources
of their influence are well known (Feng et al. 2015). However, with
a broadening mandate from the leadership team they can and should
evolve to become the authority and advocate for starting the strategy
dialogue from the outside in, and bringing deep insights about the
demand-side ecosystem into strategic decisions. The credibility of
these marketing leaders will depend on their mastery of customer
insights, competitive strategies, and foresight capabilities.
Marketing leaders will also cultivate the organizational properties that

are most conducive to the successful formulation of outside-in strategies:
an empathetic orientation that is catalyzed by collective curiosity, and an
emphasis on looking forward. They will achieve this by leading through
their example – they genuinely live this perspective – and by role mod-
eling to their functional organization. They are persistent champions of
this approach, reminding everyone of success stories (or inside-out fail-
ures), and by using every occasion to educate others in what it means and
how thinking from the outside in benefits the organization.
3. Integrate digital technologies. In a digital world, software is the vehicle

for engaging prospects, current customers, and recapturing defectors.
The choice of software and its configuration and deployment can
dramatically affect how the firm is seen by customers. This means
mastering a new set of capabilities, supporting them with invest-
ment spending, and interfacing with service providers, agencies, and
research firms that have to be managed as partners.
In this changing digital space, the CMO and chief information officer
(CIO) must collaborate closely. One way to manage this interface in
a holistic fashion, to ensure that what is possible with technology inspires
what is needed by marketing (and vice versa), is to engage a new type of
hybrid executive: the chief marketing technologist (CMT) (Brinker and

McLellan 2014). Their job is to serve as the connective tissue between
marketing, information technology (IT) and external partners.
The CMT cannot achieve this digital integration on his or her own. Most
companies are facing a crisis in finding the talented people who under-
stand the fast-changing digital landscape. Everyone wants the same scarce
set of skills to undertake data analytics, utilize knowledge-sharing tech-
nologies, and deploy social media methods. Marketers will have to work
with human resource professionals to identify the skill sets needed in the
future, and develop a continuous talent-spotting and recruitment process.
There is a generational transformation underway currently in marketing

that is both a challenge and an opportunity. For most of the past, the
future generation learned at the “knees of the elders,” as experience and
wisdom were the primary sources of knowledge, expertise, and ultimate
success. With the digital technology-led transformation of strategies, it is
the “future generation” who have the greater knowledge, understanding,
and comfort with the new digital and social-marketing applications.
The fluid organization will recognize the value from obtaining the best
from the digital marketers, and will neither be stuck in the past nor
discard all the institutional knowledge and experience in jumping to
a completely new model of marketing. The fundamentals of marketing
strategy, customer value propositions, and consumer behavior have not
been repealed. A fluid organization will study the changes, understand
how the consumer interacts with the new marketing technologies, chal-
lenge old models and tactics, and experiment with new ones. They will
figure out what works in the new digital environment for their business
and customer, and evolve their models and practices.
4. Tightening the alignment with sales. Too often there is an adversarial

Mars versus Venus coloration to the relationship of sales and market-
ing. It has historically been rooted in mutual incomprehension of the
other’s role, different time horizons, and divergent goals and incen-
tives. Typically, the two functions occupied separate silos, and one
function had more power than the other, depending on the industry.
The traditional lines between marketing and sales are blurring. Key account
managers serving large, powerful customers are engaged in long-run
marketing strategy and brand development activities. Meanwhile, the
number of possible points of contact with customers and consumers

has been increasing exponentially, with social media, interactivity, and
mobility demanding closer coordination. Increasingly, CEOs are looking
for a single point of contact with all market-facing activities, who can
take responsibility for the value proposition, innovation, marketing, and
sales across all platforms. Many companies have responded with a new
combined role of chief commercial officer. This combined function
ensures closer internal and external alignment, by using digital platforms
to coordinate all marketing and sales activities – from customer-service
representatives responding to complaints on blogs to systems for tracking
sales calls and consumer search behavior.
5. Taking accountability for the returns on marketing spending. There is

no foreseeable future where marketing will not have to demonstrate
that it can earn acceptable returns on marketing investments. While
there is, admittedly, a fair amount of craft (even art) in effective
marketing, the discipline at its core exists to create value for the enter-
prise. The CMO who does not understand this, embrace it, and build
a marketing culture and capability around value creation through the
returns on its marketing investments, will not survive.
Summary
For organizations to succeed when there is increasing turbulence

and accelerating change, they will have to reinvent their marketing
organization.
The CMO will succeed by first adopting the mind-set of the CEO, not the
creative CMO. The marketing function exists to deliver increased enter-
prise value in the short, medium and long terms. It does so by owning
both the numerator and denominator of the value equation – optimizing
the ability of marketing to generate top-line growth (the numerator) and
reducing the cost of delivering that growth (the denominator). The CMO
needs to adopt this mind-set and create a marketing culture that fully
embraces it. He or she needs to serve as the role model for the desired
values and behavior, and embrace the core metrics and measurements –
not avoid them.
Appendix: what role for marketing
leaders?
This question addresses the role of marketing, as a functional activity,

in contributing to the formulation of a competitive strategy. Ideally, this
strategy should be a product of the combined efforts of the entire leader-
ship team, but on the outside-in aspects the leader of marketing should be
the first among equals.
Strategy making should not be the sole purview of the chief executive
officer (CEO), the chief operating officer (COO) and the board of direc-
tors. Effective strategies are most likely to emerge from the combined
insights and thought processes of the senior leadership team (the C-suite
or top management team). The most influential members of this team
are strong communicators who collaborate with other functions and
serve as credible advisors to the CEO on all key decisions. Far more than
advocates for the interests of their function or group, they can overcome
the natural tendency toward isolated organizational silos that concentrate
on the immediate tasks.
Within this leadership team the relative influence of the marketing leader
can be diagnosed with the 10-point checklist in Figure A.1. These require
difficult judgments, and ideally there should be separate assessments by
both the CEO or COO and the marketing leader. To some extent the
influence is signaled by the title they are given. The chief marketing/
commercial/customer officer will have more influence and is more likely
to be a part of the leadership team, than someone with the title of Director
of Marketing, Director of Marketing Communications, VP of Marketing
Services, or Director of Sales Support.
109
Figure A.1 Diagnosing the influence of the marketing leader
Assessing the leader of marketing
For our purposes it is sufficient to treat each of the indicators in Figure

A.1 as equally important and simply add up the total number that are
checked. This overall score is a “descriptive” picture that captures the role
and influence of the marketing leader as it is, and not a “normative” judg-
ment of what the role should be. If the CEO and the leadership team do
not accept how limited the role is revealed to be, and want to adopt more
of an outside-in approach to strategy, they should collectively decide to
upgrade the role.
This advice is easier to offer than it is to follow. In many organizations

there is a pervasive credibility gap faced by marketers. The problem as
one observer noted is that “CEOs already see that their most important
challenges are marketing ones – they just don’t believe that marketers
themselves can confront them” (Kumar 2004, p. 30). This underlines the
importance of thinking clearly about both the actual and possible roles.
These can be grouped into four categories:
APPENDIX 111
1. Top-line leader (score of 7 to 10). In this role, marketing has a central

strategic guidance function that directs all customer-facing activities
and the vigilance capability, drives the organic growth agenda, and
positions the organization to prepare for an uncertain future. It has
ownership of the customer proposition. This marketing leader will
be accountable for obtaining an acceptable return on all marketing
investments, and may have direct oversight of the sales activities. This
model of a chief marketing officer (CMO) flourishes in B2C compa-
nies with big global brands, such as Unilever or American Express.
2. Market advocate (score of 4 to 6). These marketing leaders differ from
top-line leaders by having only a limited role in the broader strategy
dialogue, and seldom have direct oversight of sales, strategy develop-
ment, or product development. Their main roles are to be advocates
for outside-in approaches, and serving as a credible source of market
insights (Fahey 2018). While their aspirations may be expansive, they
are primarily coordinators and communicators, although they may
have an increased influence as an integrator of digital strategies to
enhance the customer experience.
3. Service resource (score of 2 or 3). These leaders are closer to line man-
agers, overseeing central marketing research activities while coordi-
nating relationships with partners in social media outlets, advertising
agencies and marketing research suppliers. Service resource marketers
also have sundry administrative responsibilities, such as monitoring
compliance with brand or trademark guidelines. This model of
a strictly supportive marketing function is found at science-based and
high-technology firms with strong R&D cultures, in which product
managers have complete profit-and-loss responsibility.
4. Sales support (score of 1 or 2). This model is most prevalent in smaller
B2B firms that are reliant on intermediaries. In these firms, sales
usually wins the battle over budget allocations (Kotler et al. 2006). The
relative power of sales is strengthened further if the most powerful
customers, such as Walmart, expect to be served by large, multifunc-
tional teams coordinated by sales.
Summary
An organization’s marketing leadership model falls into one of four cat-
egories, ranging from a lofty and influential “top-line leader” to a limited
and supportive “sales support” manager. Regardless of their range of

responsibilities and influence, they each have a central role in modeling
what it means to adopt an outside-in approach to formulating a strategy.
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Index
4Cs 99–100 Christensen, C.M. 77

7As 18 Cisco Systems 101
co-creation 32
abductive reasoning 86 commitment of resources 69, 80
academic marketing 17–18 commoditization 36–40
activities 18–19 competitive advantage 15–16
agility 89–90, 96, 99, 101, 102 competitive strategy 13–17
Almquist, E. 27, 49 competitors, anticipating moves by
Amazon 77–8, 80 68
Apple 56, 69 ConsenSys 102
artificial intelligence (AI) 20–21, 87, ‘consideration set’ 30
96, 103 consumer evaluation processes 30
attention 97–8 consumption, overcoming barriers
attributes 27 to 50
continuity risk 26
core competence 14–15
B2B companies 79, 93–4, 104–5, 111 culture, organizational 73–4
Bang & Olufsen 55 curiosity 81–2, 85–6
barriers to consumption, overcoming Curves Fitness Centers 65–6
50 customer benefits and risks, perceived
benefits 25, 27–8 4–5, 25–8
Bezos, Jeff 77, 80 customer-centric structures 100–101
Bharti Airtel 62 customer experience, improving 52–3
blockchain technologies 20, 37, 97, 102 customer solutions 32–4, 39–40, 53, 79
‘blue ocean strategy’ 57 customer value 4–5, 24–8
business models 42–3, 46, 47, 48, changing priorities/
60–69 commoditization 36–40
creation 28, 42–3
C-suite, changing role of 103–5 defending leadership 38–40
capabilities 14–15, 16, 42, 61, 72, 80, integrating outside-in and
88, 91, 98–9, 100, 105–6 inside-out considerations
chief marketing technologist (CMT) 40–43
107 and market evolution 35–6
chief officers 10, 82, 83–4, 104, 105–8, priorities 28–34
109–12 value-capturing system 43
123
customer value proposition (CVP) 24, external orientation and decision

31–2 approach 1
and innovation/growth pathways
5–6, 46, 47–58 fast-fashion 61
customers features 27
complaints, monitoring 49 Felin, T. 102
primacy of 5, 74–5 financial risk 26
understanding and connecting foresight 81, 82, 87–8, 90
with 95–6 forward-looking posture 87–8
CVP Octagon 33–4 ‘foxes’ 7
full-spectrum approach to innovation
data 21, 95–6 46–7
decision biases 73 functional role of marketing 2
decision tools, advances in 95–6
demand-pull approaches 56, 78
Gaddis, J.L. 3
design innovation 55
general management responsibility,
design thinking 48, 49, 73, 75–6
marketing as 1–2
developing countries 51
geographies, new 51
differentiation 14
Ginger 57–8
digital technologies, integration of
globalization 51
106–7
go-to-market approach 63–4
digital transformation 7, 20–21, 94,
growth pathways approach to
103
innovation 5–6, 47–58, 65–9
digital turbulence 37–8, 95–6
Gulati, R. 89
discipline, exercising
opportunity-seeking 66–9
disruptive innovation and technology Herman Miller 48
37, 55 Homburg, C. 74
Dow Corning 42–3, 62 human capital 100
Drucker, P.F. 1, 60, 66
DuPont 99 IKEA 29
dynamic capabilities 16, 61, 72, 80, 88, imitations, innovative 56
91, 98–9, 100, 105–6 innovation 45
Dyson 56 agile teams 99
business model pathways 46, 47,
economic climate 21–2 48, 60–69
ecosystems, evolving 103 customer value proposition
Edward Jones 29–30 (CVP) pathways 5–6, 46,
‘elements of value’ model 49 47–58
emergent needs 48–9 to defend customer value
Emery, F.E. 72 leadership 38–9
empathy 76, 81–2, 84–5 disruptive 37
enacted versus objective reality 9 full-spectrum approach 46–7
ESG (environmental, social, and inside-out approach 91
governance) 21, 54 outside-in approach 48–58, 90–91
‘evoked set’ 30 inside-out approach
excellence 18 and customer solutions 32
exceptions versus rules 9 and customer value 28
INDEX 125
focus of organizations 89 spending, accountability for

and innovation 91 returns on 108
integrating with outside-in strategy, definition and
approach, customer value perspectives on 3–4
40–43 markets, established versus embryonic
strategy making/formulation 71, 9–10
72, 73, 78, 79–80 Martin, Roger 103
integrated customer solutions 53 money-making, changing source of 65
mutually determined customer value
Jaworski, B.J. 73, 74 proposition (CVP) 31–2
Jobs, Steve 77
‘jobs-to-be-done’ approach 77 Narver, J.C. 73–4
net promoter scores (NPS) 28
Netafirm 65
Kirca, A.H. 91
networked teams 101–2
Kohli, A.K. 73, 74
Nike 63–4
Kum, M.E. 90
Nintendo 50
Novartis 99
Lafley, A.G. 5
latent needs 48–9 objective versus enacted reality 9
lead users 49 offering, innovating 54
leadership team O’Leary, Michael 83–4
changing role of 103–5 ‘omnichannel’ 64
growth leaders 5–6 open innovation 62–3
marketing leaders, role of opportunity-seeking 66–9
109–12 organic growth 18, 47, 60, 104
marketing priorities 105–8 organizational culture 73–4
and strategy making/formulation organizational model 21
17, 81–8 organizational resilience 89–90
organizations, and outside-in strategy
macro climate 22 making/formulation 81–92
market advocates 104 outside-in approach
market boundaries 36 advocating 104, 106, 111
market evolution 35–6 benefits perspective 27
market insights 6–7, 21 and customer solutions 32
market orientation 73–5, 76, 81, 88, innovation 48–58, 90–91
90–91, 99 integrating with inside-out
market share 13–14 approach, customer value
market turbulence 96–9 40–43
marketing and parity 30–31
academic 17–18 and value priorities 24
configuration 99–100 outside-in strategy making/
excellence 18 formulation 6–7, 70–73, 81–2
future of 93–4 cognate concepts 73–8
influence on strategy 17–19 iterative approach 78–80
meaning and roles of 1–2 leadership emphasis and role
priorities 105–8 modeling 82–8
resources 21 performance gains 89–91
summary of performance effects Salesforce.com 55

91–2 scenario approach 19
‘outside the box’ thinking 76 segments, emerging 50–51
outsourcing 62 Sephora 85–6
service-dominant (S-D) logic 17
parity 30–31, 37 service models 65
perceived customer benefits and risks service resource marketers 104–5,
4–5, 25–8 111
performance shareholder value 22
gains, outside-in strategy making/ Slater, S.F. 73–4
formulation 89–91 Sophos 53
outcomes 13–14 sources of advantage 14
risk 25–6 speed 98
value 28–9, 31, 36–7, 38, 39 stakeholders 5, 22–3
peripheral vision sub-capability 88 strategy 13–17
Pflesser, C. 74 ‘blue ocean strategy’ 57
pharmaceutical industry 64 content versus process 8–9
physical and time risk 26 definition of 2–3, 13
platforms and platform innovation 55, strategy making/formulation 70–71
95, 97 guiding premises 4–7
Porter, Michael 14 influences on 17–19
positional advantages 14 inside-out approach 71, 72, 73,
Pret A Manger 50 78, 79–80
price value 29, 31, 38, 39 persistent dilemmas shaping 8–10
process versus strategy content 8–9 responsibility for 10, 109
Proctor & Gamble 5, 63 see also outside-in strategy
product development 54–6 making/formulation
product life-cycle 35 structural granularity 101
products, evolution of 36 supply chains 63, 103
psychological and social risk 26 supply-push approaches 56, 78
sustainability 54
SWOT (strengths/weaknesses/
relational value 29–30, 31, 39–40 opportunities/threats) analysis
resilience, organizational 89–90 70
resource-based view (RBV) 15, 72
risk 25–7, 69 teams, networked 101–2
Rohrbeck, R. 90 technological development 54–6, 78,
role modeling 83 95–6
rules versus exceptions 9 technology
Rumelt, R.P. 80 applying advances in 61–2
Ryanair 83–4 blockchain 20, 37, 97, 102
digital, integration of 106–7
Saeed, S. 90–91 digital transformation 7, 20–21,
sales 94, 103
force, rethinking role of 64 digital turbulence 37–8, 95–6
relationship with marketing financial risk 26
107–8 map 71
support 105, 111 Teece, D.J. 72
INDEX 127
‘The Country’s Best Yoghurt’ (TCBY) value map 41, 57–8

52–3 value proposition, see customer value
theories-in-use 8 proposition (CVP)
trends, emerging 49, 53–4, 102–3 value pyramid 27–8
Trist, E.L. 72 value stick 40–41
Tuli, K.R. 32, 79 Vanguard 54
turbulence 7, 19–22, 37–8, 72 vigilance 90, 97, 98–9
turbulence, preparing for greater 93–4, vigilant learning dynamic
108 sub-capability 88
digital turbulence 95–6 ‘visionaries’ 75
emerging trends 102–3
implications for marketing Warby-Parker 51
organizations 99–102 Watson (IBM) 96
market turbulence 96–9 willingness to pay (WTP) 40–41
marketing priorities 105–8 willingness to sell (WTS) 40–41
work, future of 102
uncertainty 19–22, 35, 72, 87, 93–4, ‘working backwards’ approach 77
98–9 Worm, S. 33, 34, 79
Unilever 87
value-capturing system 43, 65 Young, I. 84

value-creating activities 61–2
value-creating system 42–3 Zara 61
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Elgar Advanced Introductions are stimulating and thoughtful intro-

Elgar Advanced Introductions

Cheltenham, UK • Northampton, MA, USA

All rights reserved. No part of this publication may be reproduced, stored

Edward Elgar Publishing, Inc.

A catalogue record for this book

Library of Congress Control Number: 2022934684

ISBN 978 1 80037 788 2 (cased)

About the authorvii

1 Marketing strategy: the guiding premises 1

2 Marketing strategy: looking back to see ahead 13

3 Achieving customer value leadership 24

4 Sustaining customer value leadership 35

5 Innovating new value for customers: the

Summary: outside-in innovation 58

6 Innovating the business model 60

7 Strategy formulation starts from the outside in 70

8 Enabling outside-in strategy making 81

9 Preparing marketing for greater turbulence 93

Appendix: what role for marketing leaders?109

George S. Day is the Geoffrey T. Boisi Emeritus Professor in The Wharton

He has been a consultant to corporations such as General Electric, IBM,

The purpose of a business is to create and keep customers at a profit.

Welcome to this advanced introduction to marketing strategy. If you are

These staples of marketing are sound starting points for formulating

An advanced approach to marketing strategy starts from the outside

integrating themes of an advanced approach to marketing strategy, and

This advanced introduction is another milestone in my career-long

their recognition and citation throughout this book. A special acknowl-

Marketing functions at the interface of a business and its markets, and

What is marketing? There is no straightforward answer, because mar-

The first meaning of marketing is that it is a distinctive feature of an

Marketing is also a general management responsibility, for choosing,

Figure 1.1 What does marketing mean?

What is strategy? There is no agreed-upon definition of strategy that

strategic human resources …, strategic (fill in the blank). Sometimes strat-

What is marketing strategy? This is a core aspect of a competitive strategy

This perspective on marketing strategy is consistent with the usual dis-

The marketing strategy is the collective responsibility of the leadership

Summary. The benefits of a marketing perspective on strategy depend on

Premise one: achieving and sustaining superior customer value

An effective marketing strategy specifies how a business intends to

• Arena: the markets to serve and the customer segments to target.

These choices are highly interdependent; a change in one means changes

The pandemic of 2020 accelerated a shift toward a multiple stakeholder

Premise two: innovating new value for customer requires

Growth leaders maintain a healthy tension between the creative,

Discipline is also exercised by the leadership team when they accept

Premise three: strategy making starts from the outside in

This approach to strategy formulation will not produce superior perfor-

Premise four: outside-in organizations are better prepared

Market-driven organizations that approach their strategy making from

Persistent dilemmas shaping marketing strategy

be formulated all at once. Instead, a strategy emerges in small steps as an

Rules versus exceptions. An enduring question is how to interpret empir-

Objective versus enacted reality. The normative strategy literature implic-

Established versus embryonic markets. Strategy researchers are most

We are less secure with emerging markets being created or transformed by

About the authorvii

1 Marketing strategy: the guiding premises 1

2 Marketing strategy: looking back to see ahead 13

3 Achieving customer value leadership 24

4 Sustaining customer value leadership 35

Summary: outside-in innovation 58

6 Innovating the business model 60

7 Strategy formulation starts from the outside in 70

8 Enabling outside-in strategy making 81

9 Preparing marketing for greater turbulence 93

Appendix: what role for marketing leaders?109