Putting the priority on consumers is tried, true and often forgotten.
Often called the father of business consulting, management expert Peter Drucker once said, “The purpose of business is to create and keep a customer.”
Too many companies — as well as business scholars — tend to ignore this simple truth, said Richard Priem (pictured below).
“When it comes to business strategy, for too long we have looked at … how we can protect a competitive advantage by erecting barriers around existing resources,” said Priem, Luther Henderson Chair of Strategic Management and Leadership in the Neeley School of Business. “We haven’t spent enough time paying attention to how we get the competitive advantage in the first place.”
Priem surveyed academic literature and used industry examples to illuminate beliefs about why businesses succeed or fail in “Demand-side Strategy and Business Models: Putting Value Creation for Consumers Center Stage,” a 2018 paper in the journal Long Range Planning. His charge to business scholars is to prioritize the consumer, not the resources and capabilities at hand.
The shift in perspective has big implications for the future of business scholarship and for entrepreneurship.
For the uninitiated, demand-side business strategy focuses on consumer needs and behavior. More mainstream business strategy, Priem said, emphasizes the supply side — that is, looking upstream to the individuals, resources and capabilities involved in delivering a product.
“Most services and products are delivered through a chain of companies, each supposedly contributing or adding value to the final product. But this isn’t the reality,” Priem said. “There is no value inherent in any particular product or service. Rather, consumers are the arbiters of value. They decide what is valuable.”
Priem and his co-authors, Matthias Wenzel and Jochen Koch, both faculty members in management at the European University Viadrina in Frankfurt (Oder), Germany, assert that consumers are so important that a product doesn’t have to offer the best technology to be a smash hit. To illustrate, they cited the cases of Apple’s first-generation iPhone and Ford Motor Co.’s Model T, both of which created historic demand shocks.
“This occurs when the demand is so high that the product is selling out almost immediately,” Priem said. “And it’s not necessarily the best product: The first iPhone was slow and didn’t have much storage at all. And there were lots of other cars out there before the Model T was introduced. But these products offered just the combination of things consumers wanted.”
Michael Sherrod, the William M. Dickey Entrepreneur in Residence at Neeley, compared the analysis in Priem’s recent article to a Venn diagram. He said demand-side strategy research occupies one circle, and recent research into business models — or how an organization does business — occupies the other.
“And in that middle, overlapping section, the two things common to both frameworks are consumers and value creation,” Sherrod said. “Now this is where an entrepreneur will say to the academic, ‘Seriously? You’re just figuring out that consumers are important?’ But it’s huge because [Priem] is bringing real rigor to these ideas. And this is where a lot of businesspeople misunderstand the purpose of research. Yes, it’s to push the envelope and discover new things, but it’s also to verify the concepts and practices that have existed simply as prevailing beliefs.”
Priem’s work introduces an untapped area of academic research, Sherrod said, with the potential to answer important questions for business scholars and entrepreneurs. For instance: Are there commonalities in all effective business models? And how can entrepreneurs identify latent consumer needs?
“So much of success in business today comes from having a collaborative mindset,” said Suzanne Carter, executive director of Neeley’s Executive MBA program. For an example of entrepreneurs collaborating with consumers, she pointed to the founders of Airbnb, the online marketplace for lodging. The company, through surveys and visits to hosts’ homes, has relied heavily on its customers to find out what is and isn’t working with the service.
“Working together with their customers, the founders discovered a business model that exceeded anything they could have produced on their own,” Carter said.
Deprioritizing consumers is not only bad for the bottom line, but also can have disastrous consequences when it is widespread across industries. Upside-down mortgages — when the loan debt is greater than the value of the property financed — and the Great Recession provide a perfect example, Priem said.
“Amid the financial crisis, companies treated consumers of mortgages very, very poorly, and as a result of that, lenders lost millions and millions of dollars in [their companies’] value because they were thinking about value capture at the expense of consumers, rather than a long-term interest in serving consumers well.”
BY JULIE ENGEBRETSON