Example: The resin manufacturer deepened its understanding of key customers in several ways. Document Value Delivered Create written accounts of cost savings or added value that existing customers have actually captured by using your offerings.
Example: Quaker Chemical conducts a value-proposition training program annually for chemical program managers. A version of this article appeared in the March issue of Harvard Business Review. James C. Anderson is the William L. James A. Narus is a professor of business marketing at Wake Forest University. This is a subscriber-only article. Subscribe Now I'm already a subscriber. Forgot Password? I'm a subscriber, but I don't have an HBR.
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By using Compass, BT Products was able to demonstrate how an alternative layout in conjunction with its high-performance trucks required only two trucks—one less truck and one less operator. In addition, they believed that they would not have been able to convince Birkenstock management that their solution was correct. Suppliers can use their understanding of value to strengthen performance and create competitive advantage in several ways.
For example, a supplier can use its knowledge to tailor supplementary services, programs, and systems in its current market offerings and to guide the development of new offerings.
Integrating everything it has learned about value into its marketing efforts, it can also gain new customers. Finally, it can better sustain customer relationships by documenting its delivery of superior value over time and by discovering new ways to update and reinvigorate those relationships. Doing so entails constructing what we call naked solutions with options. Naked solutions consist of just those product and service elements that all customers within a market segment value.
We said that suppliers should strive to sell naked solutions at the lowest possible price that will yield a profit. An understanding of how customers value those components—and what they cost the supplier to deliver—enables suppliers to identify and eliminate what we call value drains. These are services that cost the supplier more to provide than they are worth to the customers receiving them and that have no strategic significance.
Consider this: A producer of chemicals used in extracting oil from wells routinely performed a field analytic monitoring service for its customers to determine when, and in what amounts, they should apply its products. Rather than finding value drains by chance, as in the example, suppliers can set out to detect them by using field value assessment in conjunction with activity-based-costing analysis.
Identifying and eliminating value drains results in better allocation of resources and improved profitability. Virtually always, the results more than pay for the cost of doing the field-value-assessment research. Value models provide that information. Knowing that an improvement in some functionality is important does not tell a supplier if a customer is willing to pay for it. At the same time, a model allows the supplier to see how the value of its new technology varies across applications, customer capabilities, and usage situations.
For example, the supplier could ask managers in different functional areas of customer companies to evaluate potential improvements. Specifically, the supplier wanted to know how the customer would value some near-term-achievable changes in technical attributes, such as gloss or dispersibility.
Knowledge of how their market offerings specifically deliver value to customers enables suppliers to craft persuasive value propositions. Consider the case of Greif Brothers Corporation, which produces fiber drums, plastic drums, and intermediate bulk containers for food products and chemicals manufacturers.
Rather than competing on a price-per-container basis, Greif markets complete packaging systems. How does Greif develop its propositions? First, a Greif strategic account manager, together with a representative from the customer, builds a value model to understand total costs. Greif developed its current model based on information from 20 major customers.
Key elements include the costs associated with tracking and retrieving the drums, cleaning and maintaining them, testing and recertifying recycled drums, and all the associated paperwork. Greif has found that customers—both existing and potential—can readily assign monetary values to some elements but that other elements are more difficult to pin down. For those elements that are harder to quantify, Greif takes its analysis to a deeper level. Consider the benefit of environmental stewardship.
During the presentation, they discuss the merits and prices of each solution. At the core of all successful working relationships are two essential characteristics: trust and commitment. To demonstrate their trustworthiness and commitment to customers, progressive suppliers periodically provide evidence to customers of their accomplishments.
Sales managers at Greif, for example, give customers quarterly reviews that document actual cost savings. Applied Industrial Technologies AIT , a major distributor of specialty replacement bearings, power transmission components, and fluid power products in the United States and Canada, provides another good example. AIT primarily serves maintenance, repair, and operating MRO supplies markets within the primary metals, mining, pulp and paper, utilities, chemical processing, textiles, food processing, and agricultural industries.
It operates more than branch locations across the United States. In , the company began to market a value proposition promising to help its customers improve productivity rather than simply selling them parts at a low price. Through value assessment, the company began to work with its customers to help them save money in areas such as maintenance, inventory, and energy consumption—any measurable area other than purchasing.
And to support their efforts, the company has developed a customized software program that calculates cost savings. Sales representatives can run the program on laptops while visiting customers. Then, either on a quarterly or a semiannual basis, AIT presents each customer with a report that documents the savings, allowing customers to assess firsthand the value AIT has delivered. In order to establish credibility for its reports, AIT asks customers to sign and return a copy.
The company keeps track of the performance of each cost-savings initiative and aggregates the totals. Understanding value in business markets and doing business based on value delivered gives suppliers the means to get an equitable return for their efforts.
The essence of customer value management is to deliver superior value and get an equitable return for it, both of which depend on value assessment. Grainger, the MRO supplies distributor, is an excellent example of a company that has realized the benefits of measuring and monitoring value for its customers.
The company has even established a consulting arm, Grainger Consulting Services, specifically to help customers understand the total cost of MRO supplies management. Grainger and Its Customers Benefit. Grainger distributes maintenance, repair, and operating MRO supplies and related information to the commercial, industrial, contractor, and institutional markets in North America. At each company, GCS detailed the steps involved in acquiring an MRO item and outlined the estimated costs associated with each step.
Since the original studies, GCS has gained extensive experience and knowledge in building customer value models, which it calls total cost models. And as its reputation has grown, it has increasingly offered its consulting services on a for-fee basis to clients.
Pharma Labs is a rapidly growing pharmaceuticals manufacturer. At one of its largest plants—a facility with employees—purchasing managers were questioning whether to outsource their MRO procurement and inventory management processes. During the meeting, two GCS managers toured the facility to gain an overview of its MRO-supplies-management processes.
The consultants told the Pharma managers, for instance, that some companies do not account for MRO supplies inventory and associated carrying costs.
Following the meeting, GCS proposed that it perform what it calls a baseline assessment, which documents the total costs of MRO supplies management and then, following that assessment, offer Pharma managers some strategic recommendations about how they could improve their operations. To begin, GCS put together a case team, which consisted of a consulting manager, a consultant, and a business analyst. Pharma Labs formed a steering committee and a project team. The steering committee comprised the relevant department heads, such as maintenance, purchasing, manufacturing, inventory management, management information systems, and finance, and was responsible for project oversight and strategy development.
The project team was a smaller cross-functional group with representatives from each of the departments on the steering committee and was responsible for working with the GCS case team. Generally, GCS looks for the elements of its customer value models in four primary areas: processes from how the need for items is identified to payment of invoices , products product price, usage factors, brand standardization and application , inventory on-hand value and carrying costs , and suppliers performance, consolidation and value-adding services provided.
In each area, GCS defines value and cost-saving elements such as freight and courier charges and the cost of overtime , specifies the measures for the elements such as procurement cost per purchase order, number of suppliers, and inventory accuracy , collects the data and analyzes them, and specifies measures for monitoring performance.
At Pharma Labs, the measures for monitoring performance included supply expenditures, number of suppliers, and transaction volume. In a baseline assessment, GCS uses process mapping and activity-based costing to build customer value models, drawing on proprietary databases that the company has built from its findings in past engagements. At Pharma Labs, GCS applied an activity-based-costing approach to identify procurement costs across all typical functional areas—purchasing, maintenance, receiving, and accounts payable.
These identified costs were generally in line with costs tracked in the GCS databases. The data provided GCS and Pharma with insights about the potential for consolidating the number of products Pharma purchased regularly from various suppliers.
It also suggested how Pharma might consolidate its purchases in return for lower prices and greater value-adding services from its remaining suppliers.
Moreover, the company can direct certain value-added services or products to a specific group of clients whose interest it knows to be strong. Kraft has the information systems, analytical capability, and educated sales force to allow it to develop as many different so-called micro-merchandising programs for a chain that carries its products as the chain has stores.
The program can be different for every neighborhood outlet. But to accomplish this, Kraft had to change itself first. It had to create the organization, build the information systems, and educate and motivate the people required to pursue a strategy of customer intimacy. Like most companies that choose this strategy, Kraft decentralized its marketing operation in order to empower the people actually dealing with the customer.
Instead of pushing one-size-fits-all sales promotion programs, Kraft salespeople now work with individual store managers and regional managers to create customized promotional programs from an extensive computerized menu of program models. Kraft does not just give its salespeople permission to work with customers, it also is giving them the data they need to make intelligent recommendations that will actually work.
To do so, Kraft has assembled a centralized information system that collects and integrates data from three sources. The data it collects from individual stores break out consumer purchases by store, category, and product and indicate how buying behavior is affected by displays, price reductions, and so forth. They also provide profiles of customers who have bought particular products over the past several years and their rates of purchase. A second database contains demographic and buying-habit information on the customers of 30, food stores nationwide.
A third set of data, purchased from an outside vendor, contains geo-demographic data by nine-digit zip code. At Kraft headquarters, its trade marketing team sorts and integrates the information from these three databases and uses the results to supply sales teams with a repertoire of usable programs, products, value-added ideas, and selling tools. For instance, the trade marketing team sorted all shoppers into six distinct groups, with names such as full-margin shoppers, planners and dine-outs, and commodity shoppers.
Kraft then determined for its major accounts which shopper groups frequented each of their stores. A Kraft sales team even persuaded one chain to create a drive-through window in stores where planners and dine-outs—people who plan their shopping trips and dine out often—were a large segment, making it more convenient for them to pick up staples between big shopping trips. Kraft is also able to develop promotion packages for store clusters for special events like the Super Bowl.
It can design a product mix more likely to succeed in one cluster than another. Pinpointing which store gets which product reduces inventory and delivers the right product to the right place at the right time. In reinventing itself, Kraft emulates other companies in different industries that also choose to pursue the strategy of customer intimacy. Its business processes stress flexibility and responsiveness. Its information systems collect, integrate, and analyze data from many sources.
Its organizational structure emphasizes empowerment of people working close to customers, and its hiring and training programs stress the creative decision-making skills required to respond to individual customer needs. Companies that pursue the third discipline, product leadership, strive to produce a continuous stream of state-of-the-art products and services. Reaching that goal requires them to challenge themselves in three ways.
First, they must be creative. More than anything else, being creative means recognizing and embracing ideas that usually originate outside the company. Second, such innovative companies must commercialize their ideas quickly. To do so, all their business and management processes have to be engineered for speed.
Third and most important, product leaders must relentlessly pursue new solutions to the problems that their own latest product or service has just solved. If anyone is going to render their technology obsolete, they prefer to do it themselves. Product leaders do not stop for self-congratulation; they are too busy raising the bar.
By the summer of , Acuvue was ready for test marketing. In less than a year, Vistakon rolled out the product across the United States with a high-visibility ad campaign. Taken off guard, the competition never caught up. Vistakon also took advantage of the benefits of decentralization—among them, autonomous management, speed, and flexibility—without having to give up the resources, financial and otherwise, that only a giant corporation could provide.
Part of the success resulted from directing much of the marketing effort to eye-care professionals to explain how they would profit if they prescribed the new lenses. In other words, Vistakon did not market just to consumers. But Vistakon is not resting on its laurels. It continues to investigate new materials that would extend the wearability of the contact lenses and even some technologies that would make the lenses obsolete.
Product leaders create and maintain an environment that encourages employees to bring ideas into the company and, just as important, they listen to and consider these ideas, however unconventional and regardless of the source. In addition, product leaders continually scan the landscape for new product or service possibilities; where others see glitches in their marketing plans or threats to their product lines, companies that focus on product leadership see opportunity and rush to capitalize on it.
Product leaders avoid bureaucracy at all costs because it slows commercialization of their ideas. Managers make decisions quickly, since in a product leadership company, it is often better to make a wrong decision than to make one late or not all.
That is why these companies are prepared to decide today, then implement tomorrow. Moreover, they continually look for new ways—such as concurrent engineering—to shorten their cycle times. Japanese companies, for example, succeed in automobile innovation because they use concurrent development processes to reduce time to market.
They do not have to aim better than competitors to score more hits on the target because they can take more shots from a closer distance. Companies excelling in product leadership do not plan for events that may never happen, nor do they spend much time on detailed analysis. Their strength lies in reacting to situations as they occur. Fast reaction times are an advantage when dealing with the unknown. They also responded quickly when competitors challenged the safety of Acuvue lenses.
They distributed data combating the charges, via Federal Express, to some 17, eye-care professionals. Vistakon can move fast and take risks because it is organized like a small, entrepreneurial company. At the same time, it can call on the resources and capabilities of a multibillion-dollar corporation. Product leaders have a vested interest in protecting the entrepreneurial environment that they have created.
To that end, they hire, recruit, and train employees in their own mold. Product leaders are their own fiercest competitors. They continually cross a frontier, then break more new ground. They have to be adept at rendering obsolete the products and services that they have created because they realize that if they do not develop a successor, another company will. These companies are never blinded by their own successes. One final point about product leaders: they also possess the infrastructure and management systems needed to manage risk well.
When a company chooses to focus on a value discipline, it is at the same time selecting the category of customer that it will serve. In fact, the choice of business discipline and customer category is actually a single choice. One set of potential customers defines value within a matrix of price, convenience, and quality, with price the dominant factor.
These customers are less particular about what they buy than they are about getting it at the lowest possible price and with the least possible hassle. They are unwilling to sacrifice low price or high convenience to acquire a product with a particular label or to obtain a premium service.
Whether they are consumers or industrial buyers, they want high-quality goods and services, but even more, they want to get them cheaply or easily or both.
These are the customers who shop for retail goods at discount and membership warehouse stores. They buy PC clones directly from manufacturers. They seek basic transportation when they buy a car and discount commissions when they buy or sell stocks and other investments.
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