Product Strategy: Key Challenges of Smart Customization

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Framework Primer
Product Strategy: Key Challenges
of Smart Customization
Presentation created by
Cost of
Complexity
Valueless
Variety
Value Creation
and Delivery
Alignment
1
2
3

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Contents
Templates
Overview
Smart Customization
Cost of Complexity
Valueless Variety
Value Creation and Delivery Alignment
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Leading organizations are offering bespoke solutions to customers to
drive growth through Smart Customization
Presentation Overview
To serve customers’ fragmented needs, companies often outstretch the optimum level of
complexity in their systems and portfolios while striving for customization.
Customers, these days, demand ever-higher levels of personalized products and services to suit their
needs. Their demand is grounded on technological disruption and access to up-to-date information.
Thus, they believe that in an economy characterized by disruption and operational innovations that
make customization possible, they have an excellent chance of getting it.
However, leadership at most supplier organizations believe that a strong focus of attention is the key to
keeping rivals at bay and realizing amazing revenues. But the approach has its own shortcomings, as
a focused market, geography, value proposition, or segment becomes replete after a while.
Organizations need to aim for and harmonize multiple points of focus to keep up with the fragmenting
demand of their customers.
This presentation, first, highlights dissimilarities in the approach companies adopt towards customized
client requirements. The slide deck then talks about the concept of “Smart Customization” and
explains in detail the 3 key challenges that companies have to face while implementing Smart
Customization:
The slide deck also includes some slide templates for you to use in your own business presentations.
1 Cost of Complexity 2 Valueless Variety 3 Value Creation and Delivery
Alignment

Customer today have unlimited access to information and thus demand
more personalized offerings
Multiple Points of Focus – Overview
Organizations that tailor their business models and organizational structures in line with
bespoke customer needs can become industry leaders versus those that remain static.
Most executives believe that a strong focus of attention is the key to keeping rivals at bay and realizing amazing
revenues.
However, the approach has its own shortcomings, as a focused
market, geography, value proposition, or segment becomes replete
after a while.
Organizations need to aim for and harmonize multiple points of focus,
since customers, today, demand highly customized products and
services, targeted specifically to their needs.
The customers justify their demand as they feel that the advancement
in technology, increased access to information, and innovation in
operational excellence, nowadays, has enabled them more
opportunities to get customized service or product offerings from the
suppliers.

Contents
Templates
Overview
Smart Customization
Cost of Complexity
Valueless Variety

Firms that don’t revisit their business models & operations in accordance
with customers’ demands for customization lag behind their rivals
Types of Customization – Overview
Typically, there is often a two-to-one performance difference between “smart customizers”
and “simple customizers.”
With rising demands for customized offerings by the customers, organizations need to gauge the value that
customization offers to their customers with the complexity costs they can charge them, in order to achieve
higher growth and profit margins than their competition.
Investigations have revealed remarkable
dissimilarities between enterprises in terms
of their approach towards customized client
requirements:
Simple
customizers
1
Smart
customizers
2
Those organizations
that offer transient
solutions to customer
demands.
The firms that trans-
form and bring their
customer strategies
and implementation
plans in line with the
specific customers’
requirements.
Source: Smart Customization: Profitable Growth Through Tailored Business Streams, Booz & Co, 2004
High Low
High
Low
Deliveryalignedwithcost
driversandaccountvalue
Customer insights and value creation
Smart Customizers (40% of companies)
Twice as likely to have growth rate
above industry average
More likely to have profit margins
above industry average
Average Customizers
(30% of companies)
More likely to have
growth and profit
margins below
industry averages
Simple Customizers
(30% of companies)
Five times as likely to have
growth below industry average
More likely to have profit
margins below industry average

Improved focus on the specific needs of customer segments helps boost
the market share
Types of Customization – Smart Customization
For more info on Smart Customization, take a look at this framework:
https://flevy.com/browse/flevypro/product-strategy-smart-customization-3779.
Research on various large organizations reveals that smart customizers (high performing companies) have a
consistent focus on 3 best practices:
Smart customizers have a clear appreciation of the value that
customization allows to their customers.
They strive to constantly transform towards the point at which
customization adds value to both their clients and their organization.
They modify their business models based on their customers’
demands, to provide value at significantly lower costs.
01
02
03
For low-end
customer
segments, smart
customizers utilize
automation to
their benefit and
reduce the costs
of their sales,
marketing, and
customer service
functions.

Smart Customization seems simple but is quite challenging to execute
Key Challenges of Smart Customization – Overview
Not many companies are able to strike a balance between the value of customization
and the cost of complexity.
Implementing Smart Customization isn’t as easy as it sounds.
A Booz Allen Hamilton study of product and
service companies—conducted in North
America and Europe for over 6 months—
revealed that customization programs at
around two-third of the companies failed to
improve their revenues or profits.
The study suggested that most
customization initiatives added to
organizational complexity. These initiatives
drew the emphasis of sales and marketing
units off of the real value-added
propositions, diverted their focus away from
the most profitable customers, and directed
disproportionate investments that failed to
boost revenue.
The 3 main challenges that come in the way of Smart Customization are:
Cost of
Complexity
Valueless
Variety
Value Creation
and Delivery
Alignment
1
2
3

Contents
Templates
Overview
Smart Customization
Cost of Complexity
Valueless Variety

Organizational structure, operations or value propositions start out
simpler but get complex over time
Cost of Complexity – Overview
Unwarranted customization and complexity diverts resources away from top priority
initiatives and limits investment in promising opportunities.
DESCRIPTION
There are 2 reasons that are attributed to organizations’ decision to add complexity to their product or
service portfolio:
To create value for a customer segment
In response to rivals’ moves.
The challenges of increasing complexity stay obscured from majority of the organizations. These
challenges include:
Balancing customers’ requirements for variety in product and service offerings, with the escalating
costs of complying with their needs.
Organizations often forget to refresh their decisions about the markets they cater and how they
serve them—and end up losing track of the real value of a customer segment and the cost incurred
by the initiatives they create.
Most firms fall short of targeting customer demands accurately, delivering offerings that set them
apart from the others in their pursuit for customers, or providing sustained value to current
customers.
They fail to develop a thorough understanding of the cost drivers and are unable to differentiate
between easy and difficult customization programs, which restricts them from achieving scale and
scope efficiencies.
– Such a customization leads to intensifying the rivalry and further squeezing top-line and bottom-
line figures.
CHALLENGE
Cost of
ComplexityThe content on this page has been partially hidden.

One size fits all
Processes,
Systems,
and
Resources
It is critical for the organizational leadership to ascertain the true value
of their customer segments
Cost of Complexity – Single Business Streams
Single business streams result in tripling the cost base owing to complex systems and the
desire to accommodate the unknown.
Customer segmentation enables the organizations to line up their delivery systems in such a way that the
highest-value customers get the most costly delivery infrastructure, whereas low-value requirements are
fulfilled by inexpensive delivery systems. A one-size-fits-all business model cannot work in these
circumstances.
A large majority of firms, in most settings,
perform their typical operations across their
product or service ranges. In just about 20%
cases, there is a need for some tailoring as
per customer demand. However, in their
quest for streamlining the business, most
firms strive to develop all of their offerings
through a single set of operations, which are
organized to meet the demands of the most
complex offerings they offer.
100% of
product

In most industries, there is an ongoing competition among service
providers for complex, senseless customization that deplete profits
Cost of Complexity – Tailored Business Streams
Tailored business streams segment products and business flows based on stable and
emergent customer needs, and are 3X economical than single business streams.
Complex, irrational customization is putting a substantial dent in industry growth.
If we take a look at the Telecommunications
industry, we find that a majority of the Telco carriers:
Offer infinite number of calling plans to consumers
and persistently add new propositions to stay ahead
of the competition that most customers can’t
differentiate—such as, free minutes, discounted
handsets, usage tracking services, and wireline-
mobile integration.
Typically offer these propositions haphazardly to
high-value and marginal-value customers.
Funnel customers through the same helpline and
sales line—manned by expensive staff that is often
inadequately trained on calling plans, service
packages, and customer issues—who are unable to
efficiently manage customers’ queries.
Have yet to adopt a tiered customer service
approach. Most carriers use expensive sales and
marketing system for high-end as well as low-value
customers.
Organizations need to utilize tailored business streams to match the level
of customers’ needs with the level of operations required to serve them.
Tailored
80%
Basic and
stable
15%
Variable, but
predefined
5%
Emergent

Contents
Templates
Overview
Smart Customization
Cost of Complexity
Valueless Variety

It isn’t a firm’s intention to have valueless variety of products or services-
-yet unchecked business complexity emerges from good intentions
Valueless Variety – Overview
Simplicity serves the customers as long as they don’t have a choice or knowledge
of other offerings.
DESCRIPTION
Complexity often goes unnoticed until it becomes a problem.
A typical startup evolves by a passionate entrepreneur who has faith in the product or
service she/he develops to meet an unfulfilled customer need. These startups are
established on the principles of simplicity — serving known customers with a single
offering.
However, these simple, one-dimensional models—or mom-and-pop operations—can get
transformed into complex ventures and add valueless variety. This happens because of
a number of external forces and reasons, e.g.:
A new grocery store opens in the neighborhood
A rival software firm develops a new program to solve the same problem more
effectively
A customer demands new features or additional services
A competitor offers a compellingly low price.
CHALLENGE
Valueless
VarietyThe content on this page has been partially hidden.

Leading organizations segment the market on the basis of
socioeconomic classes
Valueless Variety – Smart Customization Performance Curve
Smart customizers carry out segmentation and present offerings (services, models, or
products) according to different customer categories.
Market leaders categorize products and offer inexpensive products to lower income groups, moderately priced
products for the middle layer, and expensive, highest value ones for the high-end—to cover all the customer
segments based on their needs.
Smart customizers carry
out the following actions
to control their
marketplaces:
Create multidivisional
management systems to
streamline their functions,
such as, inventory,
manufacturing, and
distribution processes
They distinguish and
share common resources
among departments.
The illustration below shows the extent of customization and its impact
on revenue and costs:
Low
Customization
Optimal product/
service breadth
Greater product/
service breadth enabled
High
Customization
Customized value proposition and delivery
Revenuefromcustomization($)
Revenue
Cost curve with
unmanaged
complexity
Max profit
New max
profit
Cost curve
with complexity
contained
OperatingCost($)
1
2
3

Smart Customization of offerings without undue complexity can be a
great source of enhanced productivity
Valueless Variety – Sources of Improved Performance
Streamlining key processes is important to optimize costs and fulfill customer needs
effectively.
Smart Customization of products and services that becomes a basis of enhanced productivity depends on 2
broad elements.
Deeper understanding of the customer and
value creation opportunities1
Customize business streams and offerings
while ensuring cost optimization2
Tailor business streams to rationalize costs
Get the delivery model in line with customer
needs
Identify value creation opportunities from
customization
Segregate from competitors through
additional, yet streamlined customization
Don’t count on additional customization, go
for right customization
Identify and develop “order winners” in
different segments
Offer tailored offerings to gain market share
and develop strategic relationships

Contents
Templates
Overview
Smart Customization
Cost of Complexity
Valueless Variety

The companies that provide the customers the offering they truly value
are poised to gain better profit margins than their competitors
Value Creation and Delivery Alignment – Overview
Providing customers with the product and service offerings they truly value is essential
for success.
DESCRIPTION
Organizations often get inundated by complexities originating from their blunt strategies
in response to their flawed insights on customer value—for instance, US automakers
interpreted value as increasing the number of models and leaving all quality issues to
the mercy of their extensive dealer networks.
Toyota didn’t have such extensive dealership networks, but it worked hard to:
Limit complexity issues
Bundling products
Implementing continuous improvement
Minimizing the dealer role
Offering more robust products
This straightforward yet holistic business model--where Toyota aligned its insights on
customer needs with its delivery system—helped the company take away a sizable US
market share than the traditional U.S. automotive model.
CHALLENGE
Value Creation
and Delivery
Alignment

The firms that implement Smart Customization can generate value for
their customers and drive profitable growth
Value Creation and Delivery Alignment – Growth through Smart Customization
Analysis reveals that “simple customizers” (with index scores of ≤50) have lower profit
margins and are 5x as likely to grow at below industry average.
Achieving Smart Customization helps in generating value.
Booz Allen Hamilton verified this linkage by
analyzing how holistically a company execute
Smart Customization and then quantifying its
value in driving growth. The analysis included:
Integrating Initial industry benchmarks and
developing best practice criteria in the 2
dimensions of customization--customer value
creation and delivery alignment between cost
drivers and account value.
Fine-tuning the weighting of the criteria based
on their importance in predicting performance.
Developing the Smart Customization Index—to
show how well a company is doing against the
set of best practices identified.
Adding the scores of a company on both value
creation and delivery alignment, on a range of 0
to 100. Firms with a focus on both value
creation and delivery alignment, total scores >
50, and above-average scores in the 2
dimensions were branded “smart customizers”.
Growth and Profitability through smart customization
Booz Allen Smart Customization Index Score
Growth Index

Smart Customization has shown to have a strong correlation
with growth
Value Creation and Delivery Alignment – Profitability through Smart Customization
The profit margin index of smart customizers was calculated based on the comparison of
operating margin vs. peers to normalize across industries.
The analysis on Smart Customization and its value in driving growth found a 99% confidence level between a
company’s place in the Smart Customization Index and its revenue growth and profit margins compared with
industry peers.
The study also revealed smart customizers to
have profit margins of ~10% above their peers,
and a revenue growth ratio of two-to-one
against the rivals.
The company growth index was based on
comparison of 3-year CAGR vs. industry peers
to normalize across industries (15 industry
groups used).
Booz Allen Smart Customization Index Score
Profit margin index

Contents
Templates
Overview
Smart Customization
Cost of Complexity
Valueless Variety

Insert headline
Types of Customization – TEMPLATE
Insert bumper.
High Low
High
Low
Deliveryalignedwithcost
driversandaccountvalue
Customer insights and value creation
Smart Customizers
Average Customizers
Simple Customizers

Insert headline
Key Challenges of Smart Customization – TEMPLATE
Insert bumper.
Cost of
Complexity
Valueless
Variety
Value Creation
and Delivery
Alignment
1
2
3

Insert headline
Key Challenges of Smart Customization – TEMPLATE ALTERNATE
Insert bumper.
Cost of
Complexity
01
Value Creation
and Delivery
Alignment
03
Valueless
Variety
02
• Insert filler text, filler
text, filler text, filler
text.
text.
text.

Insert headline
Key Challenges of Smart Customization – TEMPLATE ALTERNATE
Insert bumper.
Cost of
Complexity
01
02
03
Value Creation
and Delivery
Alignment
Valueless
Variety

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Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
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press@flevy.com
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Product Strategy: Key Challenges of Smart Customization

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