Beyond Six Sigma: Profitable Growth through Customer Value Creation

Beyond Six Sigma Profitable Growth Through Customer Value Creation

GARY A. PLASTER JERRY D. ALDERMAN

John Wiley & Sons, Inc.

Beyond Six Sigma

Beyond Six Sigma Profitable Growth Through Customer Value Creation

GARY A. PLASTER JERRY D. ALDERMAN

John Wiley & Sons, Inc.

This book is printed on acid-free paper. ∞ Copyright © 2006 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at http://www.wiley.com. Library of Congress Cataloging-in-Publication Data Plaster, Gary. Beyond six sigma : profitable growth through customer value creation / Gary A. Plaster, Jerry D. Alderman. p. cm. Includes index. ISBN-13: 978-0-471-68151-9 (cloth) ISBN-10: 0-471-68151-2 (cloth) 1. Total quality management. 2. Organizational effectiveness. 3. Marketing. 4. Customer relations. I. Alderman, Jerry D. II. Title. HD62.15.P55 2006 658.4'013--dc22 2005023556 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

Dedication

To my wife Beverly and children, Natalie, Madeline and little Gary for their unconditional love and support. Thanks for all of your sacrifices over the years. Gary A. Plaster

To my beautiful wife Tracy and our amazing daughters, Kirbey, Carlie, Kelli, and McKenzie who together continue to create joy and inspiration in my life. I love each of you with all of my being.

Jerry D. Alderman

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Table of Contents

PREFACE

PART I Introduction

1

CHAPTER 1 Customer Value Creation

3

PART II Preparing for Growth

11

CHAPTER 2 Beyond Six Sigma

13

CHAPTER 3 The Outside-In Perspective

23

CHAPTER 4 The Value Perspective

37

PART III Value Analysis

45

CHAPTER 5 Dimensions of Growth

49

CHAPTER 6 Demand Chain Economics

63

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TABLE OF CONTENTS

CHAPTER 7 Solution Concepts

85

CHAPTER 8 Solution Valuation

113

CHAPTER 9 Value-Based Decisions

131

PART IV Execution

151

CHAPTER 10 Value Exchange

153

CHAPTER 11 Executing the Growth Strategy

163

CHAPTER 12 Six Sigma and Beyond

193

APPENDIX CHAPTER 13 Exploration of Growth Dimensions

197

CHAPTER 14 Supporting Tools for CVC

241

INDEX

289

Preface

The ideas and concepts that comprise Beyond Six Sigma: Profitable Growth Through Customer Value Creation represent the culmination of a broad range of work by the authors with numerous companies across multiple industries. With more than a century of combined experience, we hope to share the rigorous process-based approach we have developed building and guiding growth initiatives through a focus on creating and exchanging value with customers. Detailed conceptual explanations and real-world examples present a clear description of how these ideas and practices have helped other companies and why you should consider adding them to your repertoire of tools to drive profitable growth. Several factors drove us to put these ideas to paper. The first is the need for a process-based approach to manage growth that captures the best of industry learning from Six Sigma, but that is appropriately different. The Six Sigma process, developed by Motorola and perfected by GE, has been a powerful tool to drive cost out of an organization utilizing a structured and rigorous approach. Six Sigma success has been based upon its focus on data and fact-based management, a process improvement perspective, and a linkage between operations and financial success. Six Sigma has been used successfully to drive billions of dollars of cost from companies’ supply chains. To date, Six Sigma’s focus has been inside the four walls of a business—an “inside-out” perspective—rather than a focus on how a company can create and exchange value with their customers—an “outside-in” perspective. This inside-out perspective has served companies well through the recent economic malaise. During this period, many companies significantly reduced and, in some cases, eliminated growth-focused initiatives. Now that the economy has turned and presents the opportunity for growth, companies must shift their focus toward pursuing profitable growth with the same rigor they have successfully displayed on the cost side, often utilizing Six Sigma programs. That brings us to the second factor influencing this book: The pressure is intensifying on ix

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PREFACE

companies to achieve growth rates that match or exceed overall economic growth. Six Sigma as currently defined has limited ability to improve a company’s position in its customer-driven demand chain. In these “demand chains,” much of the growth opportunity resides. Our perspective on this point has been strengthened through our experience working with many companies, from small, middle-market businesses to Fortune 500 companies. In every case, the challenge of driving profitable growth initiatives into results has been elusive. This lack of success in identifying and executing on growth opportunities stands in stark contrast to the high level of success companies have demonstrated in identifying and executing cost-cutting initiatives. On a scale of 1 to 10, with 10 being excellent, we estimate that, on average, companies rank near an 8 on cost cutting and closer to 2 on achieving profitable growth. Regardless of the reasons or causal factors, this disparity cannot persist. The point is not to argue the merits of cost cutting versus profitable growth since both concepts are important to sustaining competitive advantage. However, most companies will default to cost cutting before taking on the challenge of finding and delivering profitable growth. This bias toward cost reduction is natural since it can generally be accomplished without customer interaction. On the other hand, achieving profitable growth does require significant customer interaction, which is uncomfortable for many individuals within companies. For this reason, we see an opportunity to create sustainable competitive advantage by adopting a more disciplined approach to profitable growth. The third and final factor driving the need for this book is technology. During the past decade, a tremendous amount of investment has been made in technology infrastructure, including Enterprise Resource Planning (ERP), Internet capability, Activity-Based Costing (ABC), Customer Relationship Management (CRM), Supply Chain Management (SCM), and more. All of these investments were made to improve the timeliness and delivery of data to increase management knowledge and to improve management decision making to increase profits and cash flows. From an evolution of knowledge collection capability, companies now have the necessary technology infrastructure to attack profitable growth with the same data rigor that has proven so successful with cost-reduction initiatives.

Preface

xi

In working with leading companies on the development and management of their growth agendas during the past decade, a consistent picture has begun to emerge: ■

■

■

■

The economy is demanding that companies focus on profitable growth. Large investments in effective cost-reduction methods such as Six Sigma are not being leveraged to gain strategic advantage or to drive profitable growth. Companies are reluctant to step out of the comfort of the four walls of their enterprise and into a broader understanding of what drives their customers’ success or failure. Large investments have been made in technology to make data more readily available, but these investments have not been aligned to support a fact-based approach to profitable growth.

Now that we understand why we should focus on profitable growth, how do we achieve profitable growth? Throughout this book, we hope to offer a straight answer. In order to achieve profitable growth, companies must optimize the value they create for their customers. Though it is a relatively straightforward thought, the shift in perspective and the rigorous analysis required to deliver upon this concept can be a significant undertaking for companies. To achieve value creation, companies must have a deep understanding and quantifiable measure of how their products and services create value and how that value is exchanged between themselves and their customers. We will introduce and define our approach to driving profitable growth: Customer Value Creation (CVC). Though most companies will report they understand how to create and exchange value with their customers, our experience has taught us that most do not. We have consistently observed a set of common barriers preventing companies from achieving profitable growth. Specifically, we see companies repeatedly fall short in the following four areas: 1. Lack of alignment between strategy and internal initiatives 2. Internal (Inside-out) Perspective vs. Customer (Outside-In) Perspective 3. Limited ability to operationalize the strategy 4. Limited ability to socialize lessons learned

xii

PREFACE

To address those common barriers, we have identified four fundamental components of a winning approach: 1. Set the context in terms of Profitability The investments in growth must be consistent with the company’s strategy. As the economy improves, companies must shift their emphasis toward growth by creating value in the demand chain versus cost reduction of the supply chain. 2. Outside-In Perspective vs. Inside-Out Perspective Successful companies understand that their only raison d’être is to create and exchange value with their customers. Unfortunately, many examples show that failed companies with the greatest technology generated internally failed to understand how those concepts create value for their customers. 3. Focus on Operationalizing the Strategy No matter how good a company’s strategy is—unless it is executed flawlessly and the organization is aligned to deliver on it— it will be marginalized. The most successful companies implement rigorous approaches to ensure the execution of their strategy and align their processes and organization to deliver on the strategy. 4. Create a Continuous Learning Environment The approach to growth must be repeatable and socialized throughout the organization. One of the most powerful findings from using improvement tools such as Six Sigma is that it is more effective to manage organizational learning by having a common language and approach to problem solving. The winning approach to profitable growth includes developing a more rigorous data-driven process approach than currently exists at most companies. These four fundamental tenets represent the underlying business philosophy of our approach to profitable growth which we call CVC. We think of CVC as a business philosophy rather than a series of tools or the next management program because it requires a profound and somewhat philosophical leap. The leap is to put the customer at the center and then design, build, and operate a value creation engine that maximizes the value exchange for both parties. Adopting this philosophy is fundamental to achieving profitable growth.

Acknowledgements

We are indebted to all of the professionals at Charter Consulting. David Benjamin, Robert McIlhattan and the rest of the Charter team provided us with an environment that embraced and supported the intellectual and project exploration that was required to produce this book. Without the support of the Charter team on projects, critical thinking, writing, editing, debating, selling and all of the rest there would never have been a completed manuscript. Several or our Charter colleagues deserve particular mention. There is really no way to adequately acknowledge their contribution, since without their help there would be no book. Our sincere hope is that our names will show up soon in the acknowledgement section of books they have published. The following professionals from our firm have made invaluable contributions to this work: Ashish Kothari, Mark Beischel, Joe Lackner, Jamsheed Attari, Scott Brown, Hanno Lorenzl, Peter Santori, Bruce Nagel, Ethan Teas and David Wojdyla. Additionally, we would like to thank the many clients that have allowed us to serve them and have had the faith in us to help us prove out our concepts in their businesses and often times on their nickel. Without access to your working laboratories, the ideas presented in this book would be only concepts not proven approaches. Finally, there is one individual who deserves all of the credit in the world and really should consider himself an author. This individual is Jeffery Navach. Jeff, through his participation in the actual projects, burning of the midnight and weekend oil, and passion for the effort was able to capture rough thoughts and notes and turn them into something that most people might recognize as comprehensible and intelligible thought. This certainly was not the work of the authors. Thanks Jeff, you are amazing!

xiii

About the Authors

Gary A. Plaster is an accomplished author and consultant with over two decades of experience advising “C” level executives. He is a nationally recognized thought leader in the area of growth strategy and managing growth. Mr. Plaster is the co-author of the book, THE ROAD TO SUCCESS: How to Manage Growth (published by John Wiley & Sons, 1998). Mr. Plaster is a Partner with Charter Consulting, a boutique strategy firm focused on helping companies grow profitably. Before joining Charter Consulting, Mr. Plaster was a Partner with Grant Thornton LLP, a public accounting and management consulting firm. He served the firm in a variety of roles including as the National Managing Partner of the Enterprise Strategies practice and as the firm’s Chief Strategy Officer. Mr. Plaster also served as Chief Executive Officer of Winday.com, a Chicago-based technology start-up. Mr. Plaster has worked with companies in the industrial products, automotive, paper and packaging, semi-conductor, computer, defense electronics, pharmaceutical, airline, financial services, architecture and engineering, software, and IT services industries. Mr. Plaster’s clients have included: Lockheed Martin, SAP, Honeywell, Exxon Mobil, Federal Signal, RR Donnelley, Ventas, NCR, Medtronic, IBM, Kellogg’s, Eli Lilly, Michael Foods, Liberty Diversified Industries, Michigan State University, Braun Intertec, and Alliant Techsystems. Mr. Plaster has a BS in Industrial Engineering and an MBA in Finance from the University of Wisconsin. He has been a requested speaker for many organizations including Columbia University Center for Entrepreneurship, University of Minnesota Carlson School of Business, the Business Marketing Association, the Society of Competitive Intelligence Professionals, the American Institute of Architects and Medical Alley.

xv

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ABOUT THE AUTHORS

Jerry D. Alderman is an accomplished business professional and consultant. During Mr. Alderman’s 20+ years he has earned a reputation as a master problem solver who has the ability to develop unique insights into complex business problems. This book, “Beyond Six Sigma” reflects years of Mr. Alderman’s business experiences and represents just a small portion of his passion for developing a more rigorous, profitable growth process. Mr. Alderman is a Principal with Charter Consulting. Before joining Charter, Mr. Alderman was an executive at Boise Cascade where he gained a broad base of experience from manufacturing through sales and marketing and on to strategy. During the last 10 years Mr. Alderman has either served as, or counseled executives who are tasked with driving bottom line results. It has been during this time when Mr. Alderman developed an approach for combining the quantitative rigor of manufacturing with the outside-in perspective of the customer to achieve growth that is unattainable through cost reduction only. In addition to Charter Consulting and Boise, Mr. Alderman has also been involved with several entrepreneurial ventures where he has been challenged with achieving growth from a zero base. Mr. Alderman’s collective experience has led to work in a diverse set of industries and companies which include: automotive, paper and packaging, software, industrial products, chemical, printing, defense, office supplies and consumer products. Before starting his business career, Mr. Alderman served six years on Nuclear Submarines as a Naval Officer through the Admiral Rickover program. During this time, Mr. Alderman participated in special operations on Fast Attack Subs and stealth missions on Ballistic Missile Submarines. Through these experiences Mr. Alderman gained a deep respect for the capability of high performing teams and the power of technology and innovation to drive the outcome of events. These experiences combined with a bachelor’s in Civil Engineering, master’s in Nuclear Engineering and an MBA from the University of Chicago provide a broad base of problem solving skills from which Mr. Alderman grounds his work.

PART

I

Customer Value Creation (CVC) SETTING THE STAGE Profitable growth is an often discussed but seldom realized objective of many companies. The benefits of profitable growth are obvious, but in reality, most companies do not have their processes, people, and technology aligned to achieve profitable growth. What results for most companies is an ebb and flow with the general economy with intense focus on cost reduction during down times and confusion between good management and good markets during good times. To sustain profitable growth over time, companies need to build a more robust and reliable growth platform with a disciplined focus on creating and exchanging value with their customers. Over the past decade, companies have spent millions of dollars on improving their ability to deliver goods and services more cheaply and efficiently. Business process transformation, technology enablement and automation through Enterprise Resource Planning (ERP), and business process outsourcing, among others, have fueled this focus on removing costs. To maximize the return to shareholders, companies must not only reduce cost and improve efficiencies but focus on profitable ways to grow the business. This seems logical, and the data bear this out. In a study of Fortune 1000 companies measuring absolute market value growth, companies that focused on improving profit and increasing revenue (e.g., Profitable Growth), were the real winners in market capitalization (see Exhibit I.1). Over a 10-year period from 1989 to 1998, companies that experienced an above-industry-average growth in profit and revenue saw their market capitalization increase at a higher rate than those companies that focused on cost reduction only. Additionally, those companies

2

CUSTOMER VALUE CREATION (CVC)

Faster

Profit Growth

Industry Average

Cost Cutters

Profitable Growers (Revenue Focus)

12%

19%

Shrinkers

Low-Profit Growers

4%

8%

Slower Slower

Industry Average

Faster

Revenue Growth

EXHIBIT I.1

Absolute Market Value Growth (Fortune 1000 1989–1998)

that focused on revenue growth only and those companies that had shrinking profits and revenue lagged considerably behind in market capitalization growth. Executives who do not recognize this dynamic and do not take steps to capture maximum value will risk leaving money on the table and may fail to deliver exceptional shareholder returns. The case for profitable growth is clear. Yet the method for pursuing profitable growth remains an elusive mystery for many companies. All range of companies struggle to find a reliable, repeatable approach to identifying the best opportunities for growth, prioritizing resources to maximize growth opportunities, and balancing different avenues for defining the growth agenda.

CHAPTER

1

Customer Value Creation (CVC) VC is a disciplined approach to profitable growth that has been used and proven with many industrial companies (see Exhibit 1.1). At the highest level, CVC is a business philosophy that combines Customer Value Analysis (CVA) and Operational Excellence (OE). The fundamental principle behind CVA is that to grow profitably, you must focus on creating and exchanging value with customers. The second idea behind CVC is OE. The fundamental principle behind OE is that you must have an analytical and process-based approach to execute growth. CVC combines these two core ideas to leverage the quantitative rigor and process-based mentality of Six Sigma with an outside perspective on value to drive profitable growth. Since CVA and OE represent the basis for the book, a little more discussion on each is probably warranted, starting with CVA.

C

CVA CVA focuses on creating and exchanging value with customers. This definition of CVA seems simple, but executing the ideas of CVA is challenging and represents much of this book. To understand CVA, we must dissect the definition. CVA starts with the customer and creates a growth platform whose bedrock is an outside-in perspective. The next word to focus on is value. CVA is driven by understanding how customers receive value from the solutions they receive. Exchange then suggests that in return for delivering value to the customer, the company receives something in return: profits. Finally, this 3

4

CUSTOMER VALUE CREATION (CVC)

CVC = Customer Value Analysis + Operational Excellence CVA Focus on creating and exchanging value with customers

EXHIBIT 1.1

OE Analytical and fact-based approach to execute growth

The CVC Formula

book is focused on generating profitable growth and not simply measuring the status quo. The main objective of CVA is to find solutions that will drive profitable growth.

OE OE is an analytical and process-based approach to execute growth. CVC, being process-based, is the genesis for considering CVC to be “Beyond Six Sigma.” CVC leverages the powerful concepts of Six Sigma and adds the necessary changes to allow those concepts to be utilized in the customer-facing world. Like Six Sigma, CVC is analytical and data driven. By using data and analytical tools, many of the qualitative beliefs and market myths are dispelled or reinforced. In either case, the data enables an unbiased approach that leads to better decisions. Finally, OE is focused on execution. In the case of execution, CVC strives to align people, processes, and technology from an outside-in customer perspective to enable profitable growth. The rest of the introduction will provide a brief preview of each chapter. The purpose of these previews is to create a sense of direction so from chapter to chapter, so you can follow the buildup toward achieving CVC.

CHAPTER 2: BEYOND SIX SIGMA The “Preparing for Growth” section is focused on establishing the right mind-set for the balance of the book. Chapter 2 discusses the history of Six Sigma and demonstrates how CVC goes beyond it.

5

Customer Value Creation (CVC)

This chapter establishes that CVC is a process-based approach to growth that utilizes the positive elements of Six Sigma and other process improvement approaches. These elements include: Define, Measure, Analyze, Improve, and Control (DMAIC); continuous improvement; common language; and data.

CHAPTER 3: THE OUTSIDE-IN PERSPECTIVE Chapter 3 describes one of the fundamental tenets of CVC—that value is driven from the outside, beginning with the customers. Within the context of CVC, the outside-in perspective is more than just a slogan or smart promotional language. Outside-in is rooted in science, and the chapter details the connection between the latest research in the field of Behavioral Economics and the relation to CVC (see Exhibit 1.2). The outside-in approach is much more than capturing the “voice of the customer.” The outside-in approach suggests that people, process, and technology need to be aligned from an outside-in customer perspective to see the value, generate solutions, and capture growth. This is in contrast to the inside-out company perspective that is used to maintain existing products and services. Outside-In Growth

Inside-Out Maintenance

People, Process, Technology Executive

Company

• Strategic Planning • Strategic Control

Product Development

Customer Acquisition And Sales

• Research

• Marketing

• Product & Process Design

• Sales

• Interface with • Prototyping Government Organization • Product Phase In/Out

• Order Fulfillment

Supply Chain

AfterSales Support

• Procurement • Customer Service • Inbound Logistics • Spare Parts • Direct Production • Production Support

The Outside-In Perspective

• Finance & Accounting • Human Resources

• Repairs • Warranty

• Information Management

• Returns

• Legal

• Distribution • Collections

EXHIBIT 1.2

Infrastructure Support

Customers

6

CUSTOMER VALUE CREATION (CVC)

CHAPTER 4: THE VALUE PERSPECTIVE Chapter 4 describes the second major tenet of CVC: the concept of value. In the context of CVC, value is measured from the customers’ perspective. Value is created and delivered by a company to customers in return for which the company receives profits. Value to the customers can be thought of in terms of the value attributes of Product, Access, Experience, and Cost (PAIC), as shown in Exhibit 1.3. For each of the four value attributes, more granular levers drive the value. If one continues to drill down on the attributes of value, there will come a point at which the levers of revenue and cost will be found. Drilling down on value attributes until revenue and cost drives are exposed is what allows value to be quantified.

CHAPTER 5: DIMENSIONS OF GROWTH The CVC process begins by evaluating a company’s existing customer base along the dimensions of growth. The dimensions of growth are expressed in a framework called the growth cube shown in Exhibit 1.4. The growth cube is comprised of three axes, which are customer profitability, customer share of wallet, and number of customers. The cube represents how a company receives profits from its customers. The growth cube takes on many different shapes depending on the company’s positioning in the market. For example, maybe the company has high profitability on current customers but has low customer share of wallet; the direction of growth is likely to increase share of wallet. The purpose of the growth cube is to frame growth opportunities in relationship to what needs to be done with the customers instead of expressing growth in terms of increased product sales, increased market share, increased tons sold, and so on. With the cube, growth is expressed in relationship to what needs to happen at the customer level: grow customer profitability, grow share of customer wallet, or grow the number of customers.

7

Customer Value Creation (CVC)

Customer Value = (Product

+

Access

+

Experience

−

Cost)

• Performance

• Availability

• Service

• Price

• Features/ Functions

• Reliability of Supply

• Impact on Customer

• Total Cost of Ownership

• Technical Innovation

• Distribution Channel

• Brand

• Process Cost • Payment Terms

Revenue and Cost Drivers

EXHIBIT 1.3

Customer Value

CHAPTERS 6 THROUGH 10

Profitability

Chapters 6 through 10 walk through the process of defining the complete growth cube, as shown in Exhibit 1.5. In addition to the three dimensions of growth, the completed cube depicts the “As Is,” “Could Be,” and “Should Be” conditions. The As Is cube represents today’s situation. The Could Be cube represents

Share of Wallet

EXHIBIT 1.4

The Growth Cube

f ro s be er um om N ust C

8

CUSTOMER VALUE CREATION (CVC)

Profitability

Could Be

Should Be

As Is

Share of Wallet

EXHIBIT 1.5

f ro s be er um om N ust C

The Growth Cube

the maximum growth conceivable if no company constraints exist, such as capital. The Should Be cube represents the growth in profits the company should achieve given the constraints with which it must adhere. There are times when companies will consider having two Should Be cubes. One Should Be cube may be for the current planning year (short term) where another may reflect a longer planning horizon. The process starts by defining the As Is cube. The As Is cube is defined in Chapter 5 (Dimensions of Growth) and Chapter 6 (Demand Chain Economics). In these chapters, we will be defining how the company receives profits from its customers and how those profits relate to the larger system of economics in which the company and customer participate. Next, the Could Be cube is created in Chapter 7 (Solutions Concepts) and Chapter 8 (Solution Valuation). These chapters walk through the process of identifying and valuing profit-enhancing solutions. Inputs for these solutions are received from customers, the company, and potentially other participants in the demand chain. In some instances, solutions may be to combine existing products and services, they may include eliminating some overdesigned product or service, or they may include developing new products or services.

Customer Value Creation (CVC)

9

Finally, the Should Be cube is constructed in Chapter 9 (ValueBased Decisions) and Chapter 10 (Value Exchange). The Value-Based Decisions (VBD) chapter considers the solutions developed in the Could Be cube and narrows them down to the appropriate portfolio of solutions, given the constraints of the company. Chapter 10 looks closely at pricing to ensure the company’s fair share of value is captured by way profits through pricing.

CHAPTER 11: EXECUTING THE GROWTH STRATEGY The lesson to be learned is that generating new and profitable growth requires an organization to do something different. It must change its processes, go see customers and talk about something new, take a risk on an unproven technology, and so on. All of these issues are about change, and effecting change is one of the most difficult tasks in the world. The bottom line is that most people wake up in the morning and go through a routine similar to whatever it was they did the day before and the day before that. Waking up in the morning and driving toward change every day is not normal. To generate change, good project and program management is the most critical competency to improve the probability of success. Without the focused attention of a dedicated project team, new initiatives will rarely be executed successfully. Many of the principles discussed in this chapter may appear to be universal. However, the specific tools, techniques, measures, and structural changes required for growth strategy attainment are different than those used to drive other types of changes. Let’s explore each of these themes in the detail necessary to get real results.

PART

II

Preparing for Growth “You read a book from beginning to end. You run a business the opposite way. You start with the end, and then you do everything you must to reach it.” —Harold Geneen, Former CEO, ITT

he path to any destination begins by first determining the final destination you are seeking. Without a defined end point, even the savviest manager will not know which direction to set sail. For this reason, Part II of Customer Value Creation (CVC) is focused on setting the proper context for pursuing profitable growth. Without understanding your ultimate growth goal, you cannot ensure your growth initiatives are aligned with your objective. Before embarking on a number of misguided projects or deploying multiple resources, companies need to take a moment to assess their current position and define their future objectives. Establishing the proper context consists of three core activities:

T

1. Adopting a more rigorous approach to solving the profitable growth challenge. During the past 20 years, companies have adopted one version or another of continuous improvement as a way to drive out costs. These investments in the decision process need to be leveraged into driving the profitable growth agenda, that is, to Beyond Six Sigma. 2. To establish the proper context for CVC, companies need to go develop an outside-in perspective. The outside-in perspective is a fundamental shift of thinking toward understanding how value is delivered to the customer.

12

PREPARING FOR GROWTH

3. The last element of growth preparation is to define value. Value is not price or profits. Value is not something the company receives. Value is something delivered to the customer. Companies need to go beyond describing their value proposition and must quantify it for their customers. Smart managers understand that they must establish context before pursuing new initiatives. By adopting a rigorous process, taking an outside-in approach, and defining value, the proper context will be established for pursuing profitable growth and CVC.

CHAPTER

2

Beyond Six Sigma ix Sigma has been a revolution in business management. Six Sigma and other continuous improvement initiatives have helped companies drive out billions of dollars in cost and have driven productivity to historically high levels. For all of its success, Six Sigma is running out of steam at many companies because it has not found its way to the revenue and growth side of the business economics equation. Today’s challenge is to leverage the investment made in Six Sigma in order to generate successes on the leverage and growth side of the business similar to those achieved on the cost side. The answer is yes. The CVC process has been successful at driving a profitable growth agenda at several leading industrial companies. CVC is grounded in what is good about Six Sigma and then adds the changes necessary to achieve a level of performance that is Beyond Six Sigma. In recent years, companies have used Six Sigma with varying degrees of success to improve their customer-facing processes such as customer service. Though the application of Six Sigma to customerfacing processes is good, the cost leverage is not nearly equal to that which was obtained in the manufacturing environment. For Six Sigma to create the next level of business benefit, it will need to have applicability to sales and marketing professionals. Even in the face of this reality, little of today’s literature, management discussions, or Six Sigma implementations explore the changes in perspectives and tools necessary for Six Sigma to continue to add

S

13

14

PREPARING FOR GROWTH

value. Six Sigma has the potential to serve as a continued foundation for success. Its long evolution and widespread implementation has created a business lexicon and a set of approaches that offer executives and managers a consistent and effective framework for identifying and solving business challenges. These can provide lasting value and continued return on a company’s investment through some revolutionary thinking about what Six Sigma is and where and when it should be deployed. People must change the way they think of and use Six Sigma. A revolution is necessary to push Six Sigma from an effective management approach for helping cut costs and improve quality in an existing business to a holistic method of thinking that will systematically position a company to drive growth over the long term. This chapter provides a discussion of how Six Sigma’s core principles offer the foundation necessary to spur the revolution from a “cost and quality” focus that drives process improvement to a CVC focus that consistently drives growth and renewal.

EVOLUTION OF SIX SIGMA Six Sigma was conceived more than 20 years ago by Motorola and others, in an age when business relationships were defined by classic supply-and-demand economic theory: Suppliers build products and find customers to buy them. The traditional economic construct of the scarcity of resources held sway over markets. Demand was readily available. Companies were induced to find ways to improve their own efficiencies and cut their operating costs as a means to drive a greater capture of value for their shareholders. In this environment, a focus on process efficiency and product quality were the key competitive differentiators. Today, these are closer to required performance in most markets and are not differentiators. When Six Sigma was developed, it was simply a system to improve the quality and consistency of products. Its inventors were focused on delivering what their engineers promised their products would deliver. In the economic environment of the time, it may have been all that was needed to drive acceptable returns. This first generation of Six Sigma was focused primarily on manufacturing and supply chain processes. It was in the manufacturing process where many of the companies that initially adopted Six Sigma saw their biggest opportunity to improve. The tools that were initially developed within were developed to reduce

Beyond Six Sigma

15

unexpected results from manufacturing processes; they were built to reduce process variance. This made eminent sense in an environment where each step in a process relied on getting what the prior step was promised to deliver. Six Sigma’s roots in the Total Quality movement explain its strength and its limitations. It has proven an effective tool to drive costs out of operations, and its record of success in removing errors and defective outputs from business operations speaks for itself. A disconnect occurred between what the engineers believed customers needed and what customers actually needed, which all too often adversely affected the economics of customers’ businesses. In recent years, Six Sigma practitioners have begun to look at deploying the approach against a broader set of business processes, including everything from human resources to marketing processes. Even as practitioners push its boundaries, they remain focused on the processes within the four walls of the enterprise and rarely, if ever, extend into the domain of the customer. At first glance, this might look contradictory: Six Sigma is being applied to marketing processes, but it is rarely extended into the domain of the customer. Let’s examine this more fully. As it is applied in marketing today, Six Sigma is primarily a means to affect an organization’s impact on customer satisfaction and, at least, to affect the success rate of promotional activities. Companies have begun to track satisfaction and have applied Six Sigma’s statistical tools to determine cause and effect and to eliminate variation in the process. Six Sigma simply does not go far enough today, largely because its overriding focus has been on improving the supply side of the Supply Demand equation. Its adherents have concentrated on leveraging its tools and techniques to enhance internal operating processes and, in some instances, their supply chains. Less frequently, they have begun to apply Six Sigma concepts to their customer-facing processes. Its Achilles heel has been its inability to help companies focus on identifying new ways to deliver value.

HOW DOES CVC LEVERAGE SIX SIGMA? CVC leverages significant components of Six Sigma and deploys them to create a more rigorous approach to profitable growth. The fundamental objective of CVC is not to change the ideas of Six Sigma but rather to leverage what has worked well in the past.

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DMAIC Process Six Sigma has driven a new acronym into the business lexicon: DMAIC (dee-may-ik). The acronym means Define, Measure, Analyze, Improve, and Control and has become synonymous with Six Sigma, representing one of Six Sigma’s biggest strengths. DMAIC serves as a road map to help companies understand how to identify challenges and problems and how to change their performance. One may see the similarities between DMAIC and the scientific method taught in most middle schools. In short, it is a scientific approach to problem solving that formed the heart of Six Sigma and is at the heart of Beyond Six Sigma for the future. The flexibility of the DMAIC approach accounts for its success in extending Six Sigma from the manufacturing floor into other areas within the four walls of the business. Further expanding how we think of DMAIC and when and where it is deployed will move a company from the “cost and quality” mind-set to the growth-oriented “customer value” mind-set. CVC follows the scientific decision-making process of DMAIC. The only component of the decision-making process CVC does not follow exactly is Control. Since CVC is not a pure manufacturing process, the idea of Control is less applicable and descriptive than Execute. Having a well-defined and repeatable process allows learning and continuous improvement. CVC is not intended to be a onetime growth project. Like Six Sigma, CVC is designed to be repeated so improvement achieves a compounding effect and learning becomes a continuous endeavor. Creating a common language is critical to enabling continuous improvement. By creating a common language, the profitable growth process does not have to restart each time a new manager takes over a department. Further, by having a common language, people in the organization beyond sales and marketing can start to relate and contribute to the growth process. This is particularly important between functions such as R&D and Sales. For too long, a language barrier has existed between these organizations, and CVC serves as a communication bridge. CVC is quantitative in nature and seeks to drive decisions through data and facts rather than biases qualitative conjecture.

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Facts and Data Too many investments in growth are made without proper attention given to facts and data about the customer. Though the retail world has done a great job of taking a data-oriented approach to understanding customer value, the industrial products world has a long way to go before it could be accused of being too quantitative. Industrial companies need to gain a more quantitative understanding of how their customers receive value. Since it is these same industrial companies that have embraced Six Sigma, it makes sense to expand on the facts and data philosophy into the profitable growth agenda. CVC places significant emphasis on quantitatively understanding how customers and other participants in the Demand Chain deliver and receive value. Combining a quantitative understanding of value together with the mostly resident qualitative understanding creates a more datadriven and fact-driven approach to profitable growth.

Tools Armed with a solid decision-making process, common language, and philosophy of facts and data, Six Sigma has created a common problem-solving toolbox. This toolbox further cemented the language of Six Sigma since people talked the same and knew what tools to deploy during their problem-solving sessions. Instead of developing and debating for hours about tools, Six Sigma came with an equipped set. CVC has its own toolbox. As shown in Exhibit 2.1, the toolbox is similar but different. The real difference in tools is that Six Sigma focuses on driving uncertainty and variability out of a process while CVC takes a probabilistic approach to problem solving. CVC is driven by the uncertainty of customers. Customers do not behave as nicely as a manufacturing process and, therefore, require a different toolbox. Therefore, the CVC toolbox is replete with tools used to define the needs of a customer using a certain, fact-based approach. These kinds of tools run counter to how many Six Sigma champions think. Whereas Six Sigma tools are used with an idea of achieving Six Sigma

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Six Sigma

Beyond Six Sigma Sigma…CVC to CVC

• Cost

• Value

• Supply Chain

• Demand Value Chain

• My Economics

• Customer Economics

• Process Variation — no failure

• Scenario Planning — planned failure

• Products

• Solutions

• House of Quality

• House of Value

• Process Variation

• Scenario Planning

• Pareto Analysis

• Multidimensional Scaling

• Portfolio of Projects

• Portfolio of Growth Investments

• Cost of Quality

• Conjoint Analysis

• Product Innovation Process

• Customer Innovation Process

EXHIBIT 2.1

A New Toolbox

accuracy (99.99%), the reality of the customer interaction does not allow for that level of accuracy. If you let the philosophy of no errors into the realm of customers, then no customer-related decision will ever be made. This is part of what drives the big divide between engineers and sales professionals. As this book progresses, most of the tools of CVC will be discussed or used in examples. Many tools are contained in the appendix. For the moment, recognize that in both cases there are tools and they are quantitatively rigorous.

ORGANIZATION: PLATINUM BELTS AND BLACK BELTS Six Sigma has created its own organizational network. Good and bad are associated with this network. The good part has been discussed before. Because there is a large installed base of knowledge and training attached to Six Sigma, an approach that leverages off this base can develop momentum and results quickly. Results can occur much faster than those from the original Six Sigma implementations since the know-how is embedded in the organization. In addition to quicker results, the incremental investment needed to get those results is lower. These are not only good things; they are great things.

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The challenge is that the current organizational Six Sigma network is not well versed in customers, marketing, and growth. The Black Belts are manufacturing engineers. Six Sigma has been great for the engineers since most of the tools in the toolbox were right from their engineering textbooks. For the organization to get Beyond Six Sigma, it needs to create organizational space for something beyond what current Black Belts consider to be their fiefdom. This can be done by creating a new Six Sigma level of expertise such as a Platinum Belt. The Platinum Belt is equivalent to a Black Belt but trained in the sciences of customers, finance, marketing, sales, and business. The goal for the Platinum Belt is to drive a more rigorous process into profitable growth and to maintain the essence of Six Sigma that was discussed earlier, which is a Hat Trick in any language. The Platinum Belt needs to teach the organization to manage projects and balance quantitative rigor so the company can continue to operate on customer time. Typically, customer time is a little faster than that which most corporate teams get anything done. All of this is not to say that a Black Belt cannot become a Platinum Belt. To the contrary, a Black Belt who achieves a Platinum Belt may become the next CEO. The Platinum Belt must be more versed in the company’s strategy. Creating and executing the profitable growth agenda requires a solid understanding of the company’s desired objectives in the market. Without this understanding, one has no way to determine the magnitude and types of projects that should be tackled. This is one of Six Sigma’s problems. Since current Six Sigma is predominately cost oriented, it often lacks strategic understanding and, as such, winds up focused on projects that do not scale to the strategic challenge at hand or are driving in the wrong direction.

BEYOND SIX SIGMA Today’s Six Sigma seeks to align operating processes to deliver on customer requirements, but customers are too frequently defined as the next player in a process chain, and the requirements are too often narrowly defined as today’s requirements, as product requirements, or as some other current quality requirement. For executives and managers to release the power of Six Sigma, they must revolutionize how they deploy it: They must leverage its strengths more effectively

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in process thinking, disciplined problem solving, and quantitative rigor to gain a deeper understanding of current and future customer needs. Six Sigma practitioners must help the enterprise understand how its customers’ markets and competitive environments will evolve so the enterprise can move proactively with and provide leadership to its customers. Companies that harness the thought and energy that has been put into the Six Sigma movement can find a competitive advantage in its deployment. The movement has created a strong reusable foundation of process thinking, fact-based decision making, and the seed of customer-oriented perspectives. Most of the Six Sigma energy has been limited to defining and improving internal processes. Though beneficial, this focus will always provide incremental advantages. Initial improvements may be large, but the number and size will diminish over time. The energy of the Six Sigma movement and the strengths of the approach must be directed toward a more rigorous understanding of customers and markets. This will position an enterprise to understand its Demand Chain and how its operating processes and market offerings are positioned to affect this Demand Chain. This change in the focus of a Six Sigma approach will allow an enterprise to excel in the face of increasingly demanding competitive environments. In short, Six Sigma’s strengths must be recast as a set of guiding principles that will help the enterprise to work more efficiently and to continue to grow and prosper by scientifically identifying how to identify, create, and deliver value for their customers and how to position their investments to capture a share of this value.

BEYOND SIX SIGMA AND INDUSTRIAL MARKETING Getting Beyond Six Sigma to industrial product companies relies heavily on Industrial Marketing. Industrial Marketing differs from Consumer Marketing. Industrial companies are fooled into thinking that, by applying Consumer Marketing ideas directly, they can overcome their Industrial Marketing shortcomings. They cannot and do not because Industrial Marketing and Consumer Marketing are different in the key areas:

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Complex Demand Chain. Industrial companies typically deal with a complex Demand Chain that involves many different parties working together to define an end product. Decision Process. Buying decisions in the Industrial Marketing space are made in days-weeks-months. In consumer markets, the decision process may take seconds. Switching Costs. Relationships in industrial markets often span years. Convincing industrial customers to switch requires hardhitting and sustainable economic benefits. Data. Consumer marketer data is more available. Industrial data is not as forthcoming, but is more transparent via the Internet than at any time in history.

Industrial Marketing is one of the most underdeveloped sciences in all of business. Can anyone name an MBA program that offers any particular focus on industrial markets? Industrial markets, or socalled business-to-business (B2B) markets, represent some two thirds of all business transactions. Consumer-oriented companies long ago understood the need to understand how customers receive and pay for value. The reason industrial companies have not embraced the customer (Industrial Marketing) is because they have not had to. As information becomes more transparent up and down the Demand Chain, as competitors are emerging on a world scale, and as natural growth in North America and Europe is not outpacing supply, industrial companies are taking notice of their customers. They are doing so because they must to maintain their share of the profits in the market and returns to their shareholders. CVC is designed with a deep regard for the need to improve Industrial Marketing. Improving Industrial Marketing skills is a big part of getting Beyond Six Sigma.

CHAPTER

3

The Outside-In Perspective s discussed in Chapter 1, an outside-in perspective is one of the core principles underlying Customer Value Creation (CVC). Though the term “outside-in” can mean many things to many people, our shorthand definition indicates that too often companies do not spend enough time thinking about business decisions from a perspective other than their own. Instead, companies continue to make business decisions using an approach approximately based on their internal knowledge and instincts: an inside-out approach. By continuing to operate with an inside-out approach, companies lose connection with their customers, struggle to offer enhanced value propositions, and frequently underperform against financial expectations. The business world has known the basic concept of outside-in. The idea that companies should align their businesses around their customers and make customers their top priority has been a popular area of emphasis for longer than we can remember. Yet, despite everyone’s acknowledgment of the importance of customer intimacy, few companies embrace what we consider to be a thorough customer focus, especially as it pertains to defining value. In our minds, companies that exhibit an outside-in perspective are those that employ a rigorous, fact-based approach to interacting with customers (yes, this means talking to them) to understand their perspectives, pain points, business drivers, growth objectives, and so on. Several pioneering and market-leading companies have embraced this approach, but the majority of companies continue to struggle with viewing their customers through this lens. Thus, our first ingredient for achieving profitable growth is to establish an outside-in perspective.

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HOW DID OUTSIDE-IN ORIGINATE? As we have mentioned, one of our primary objectives in writing this book was to incorporate today’s prevailing business ideas, as well as leading academic insights and discoveries, and combine them with our own personal experiences to provide practical, quantifiable, and tangible tools and processes that companies can leverage to drive growth. This objective has emerged over many years as we have studied what differentiates successful growth companies from the rest of the pack and developed tools to help others replicate that success. In our experience, we have repeatedly seen one common characteristic emerge with these companies: They understand their customers more deeply and more broadly than anyone else. What explains this phenomenon? Better yet, how can we translate these companies’ successful formulas into a language that others can understand and rapidly adopt to achieve similar success? To help answer this question, we must first understand what prevents most companies from developing this approach. By understanding these underlying hurdles and drawing the curtain back on the problem, we will be in a better position to move forward to develop and implement well-targeted solutions. To that end, we have identified three dominant forces that can restrict companies in their quest to operate from an outside-in perspective: 1. Human Nature. Significant scientific evidence and our own extensive experience suggest that despite most individuals’ best intentions, their decisions largely reflect internal viewpoints and myopic perspectives on customers’ needs. 2. Operational Outlook. The last decade of internal focus on cost improvement and enhanced efficiencies has had one unforeseen impact on the business world in that most organizations are too focused on their own companies to peer outside and understand what customers want. 3. Data Availability. Until recently, companies did not have access to the depth and breadth of reliable information available through tools such as Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), and the Internet to quantify value drivers.

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Human Nature To explain the first element—that human nature can have a significant impact on the quality of decision making within our organizations— recall our previously mentioned objective to turn prevailing ideas and discoveries into useful tools for companies. In this case, we draw upon the lessons from the world of behavioral economics, an emerging academic field that marries the study of psychology, sociology, and economics. During the past several years, there have been significant advances in the field of behavioral economics that need to be incorporated into business. Many of these theories are being implemented in the capital markets but have not made their way into operating business practices. The most fundamental advancements in the behavioral economics field pertain directly to how we make decisions and the flaws inherent in many of those decisions. Decision behavior has received increased recognition with the award of the Nobel Prize in Economics in 2002 to Dr. Daniel Kahneman. Kahneman, a professor at Princeton University, was the first behaviorist in history to win the award. Kahneman was cited “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision making under uncertainty.” Among other things, Kahneman’s efforts have shown that we tend to be overconfident in our own ability and, as such, need to integrate an outside-in perspective to improve our business decisions. Kahneman’s work has laid the foundation for a new field of research by discovering how human judgment may take shortcuts that systematically depart from basic principles of probability.

Outside-In Is Based on Scientific Principles

Why do so many people struggle with making decisions? To begin with, implications and outcomes result directly from being a decision maker. This responsibility can hinder an individual’s ability to make rapid and confident decisions.

Relating the Outside-In Approach to Decision Making

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Consequences. Sometimes decisions result in positive consequences, and sometimes, the results are negative. Since most everyone desires a positive consequence, the possibility of a negative consequence causes many to stall decisions or never make them at all. Accountability. How many times have you heard, “Whoever made this decision should be fired”? No one wants his or her name attached to a decision that may go wrong. Instead, people usually wait for a positive outcome and then work feverishly to take some part of the credit. Choices. We have too many choices. How do we know what choice should be chosen? In today’s world, the number of choices seems to be growing without parallel growth in the number of right answers.

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Once individuals overcome the difficulties preventing them from making decisions in the first place, how can we be certain that they make the proper decisions? Do they consider all factors and strive towards an objective, rationale decision? Kahneman’s findings have shown unequivocally that they rarely do. There is good reason for this: Most of us think we are smarter than everybody else and that the answer we develop in our own conference rooms is right. Unfortunately, research has demonstrated that humans do not decide rationally and make predictable errors. We exhibit decision failures for a number of reasons: biases in perception, fallacies in reasoning, and problems of groupthink. As a result, it is more often the case that our answers and ensuing decisions do not deliver on the financial returns we promised. To highlight the importance of outside-in, consider these welldocumented biases and heuristics (J. Edward Russo and Paul J. H. Shoemaker, Decision Traps: The Ten Barriers to Brilliant Decisionmaking and How to Overcome Them, New York: Fireside, 1990) that can sabotage decision making with an inside-out approach:

Why Do We Tend to Look Inside-Out?

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Overconfidence Bias. Our brains are programmed to make us feel overconfident. Behavioral economists often illustrate this point with simple quizzes: guess the weight of a fully laden jumbo jet or the length of the River Nile. Participants are asked to offer

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not a precise figure but rather a range in which they feel 90 percent confidence, for example, the Nile is between 2,000 and 10,000 miles long. Time and again, participants walk into the same trap: Rather than playing safe with a wide range, they give a narrow one and miss the right answer. Most of us are unwilling and unable to reveal our ignorance by specifying a wide range. Most of us prefer to be precisely wrong rather than vaguely right. So how does this relate to business? Most of us think we are smarter than the next guy. This overconfidence in our own abilities too often leads us into making fundamentally flawed decisions. The Status Quo Bias. In one classic example (William Samuelson and Richard Zeckhauser, “Status quo bias in decision making”, Journal of Risk and Uncertainty, March 1988), students were asked how they would invest a hypothetical inheritance. Some received several million dollars in low-risk, low-return bonds and typically chose to leave most of the money alone. The rest received higher-risk securities and left most of the money alone. What determined the students’ allocation in this experiment was the initial allocation, not their risk preference. People would rather leave things as they are. One explanation for the status quo bias is aversion to loss: People are more concerned about the risk of loss than they are excited by the prospect of gain. The students’ fear of switching into securities that might end up losing value prevented them from making the rational choice, which is rebalancing their portfolios. Anchoring. One of the more peculiar wiring flaws in the brain is called anchoring. Present the brain with a number, ask it to make an estimate of something completely unrelated, and it will anchor its estimate on that first number. The classic example is the Genghis Khan date test. Ask a group of people to write down the last three digits of their phone numbers, and then ask them to estimate the date of Genghis Khan’s death. The results show a correlation between the two numbers; people assume that he lived in the first millennium, when in fact he lived from 1162 to 1227. Anchoring can be a powerful tool in negotiations. In negotiations, naming a high sale price for a business can help secure an attractive outcome for the seller since the buyer’s offer will be anchored around that figure.

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The Herding Instinct. The desire to conform to the behavior and opinions of others is a fundamental human trait and an accepted principle of psychology. Warren Buffet summarized this point when he wrote, “Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.” For most CEOs, the only thing worse than making a huge strategic mistake is being the only person in the industry to make it. We all felt the tug of the herd during the dot-com era. At times of mass enthusiasm for a strategic trend, pressure to follow the herd rather than rely on one’s own information and analysis is irresistible. Yet the best strategies break away from the trend. Some actions may be necessary to match the competition; for example, imagine a bank without an ATM. But these are not unique sources of strategic advantage, and finding such sources is what defines strategy. False Consensus. People tend to overestimate the extent to which others share their views, beliefs, and experiences, which is the false consensus effect. Research shows many causes: ● Confirmation Bias. The tendency to seek out opinions and facts that support our own beliefs and hypotheses. ● Selective Recall. The habit of remembering only facts and experiences that reinforce our assumptions. ● Biased Evaluation. The quick acceptance of evidence that supports our hypotheses, while contradictory evidence is being subjected to rigorous evaluation and almost certain rejection. We often, for example, impute hostile motives to critics or question their competence. ● Groupthink. The pressure to agree with others in team-based cultures. Confirmation Bias. The tendency is to ask questions or seek information that confirms a favored hypothesis and to avoid asking questions or seeking information that might disconfirm a favored hypothesis.

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This selection of human behavior is not intended to be exhaustive, and many organizations may have controls to combat these tendencies. Regardless, we hope readers will recognize this brief list, which highlights the varying ways human tendency can get in the way of

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sensible decision making within an organization. Without the proper processes to mitigate these inherent human traits, organizations will generally gravitate toward maintaining their traditional inside-out approach to business decision making.

Operational Outlook The second factor impeding adoption of an outside-in perspective in companies today is the prevailing internal focus on cost savings, reengineering, and operational effectiveness during the last decade. Since we have discussed this point and most readers have experienced this process firsthand, we will not devote significant time to the history behind this evolution. Instead, consider the long-term impact of repeated emphasis on perfecting internal processes to deliver product or services efficiently. How has this lengthy focus on improving our own companies affected our ability to look objectively at our business, the value chains we participate in, and most importantly, the end customers? We have seen how relying on this approach can lead to a poor understanding of how the outside world values a company’s products and services. Unfortunately, this inside-out approach is not a recipe for developing and sustaining competitive advantage in the marketplace. Cost reduction and operational improvements are an organizational imperative for many organizations, and ample evidence indicates we can derive some value from these programs. But today’s competitive imperative is to identify new growth sources. Continuous cost improvement and enhanced efficiencies are not the formula for long-term profitable growth. Companies must augment their internal initiatives with an outside-in perspective. Now is the time for companies to recognize how this deeply engrained emphasis on operational effectiveness can cloud their outside view and to take measured action to institutionalize an outside-in philosophy.

Data Availability The third major factor affecting the adoption of outside-in is the prevailing perception that it is too difficult to obtain the necessary data

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to understand value. This is an excuse that we hear repeatedly from companies. Since this issue is raised so often, is it true that the information is unavailable, or is it more accurate to say that many companies do have the right data to define and quantify the exchange of value with customers? In the case of retailers, the answer may be yes. The proliferation of data summarizing consumer buying patterns, customer preferences, and demographics has helped retail companies tailor their business offerings to customers’ perceived values. Unfortunately, companies in the industrial world are less likely to grasp the concept of outside-in, partly because they have not had access to the same data to help them understand customers as retailers have learned to do. Industrial companies have also not likely adopted this perspective to the level of their retail counterparts because there has not been a competitive imperative to do so. In retail, you listen, market, and deliver value comparatively better than your competitor, or you cease to exist. This competition is partly enabled by third-party information providers who mine consumer data and make it available to all who are interested in competing for consumer share. In the business-to-business (B2B) industrial world, however, downstream customer information is not as readily available. This lack of common information across the competitive set creates a hurdle to understanding how customers value one offering versus another. This information gap exists for many reasons: ■

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Lack of easily available customer data, buying behaviors, tendencies, and so on. For example, locating existing data that summarize the demographics and buying habits of industrial adhesive customers is probably difficult. Supply-oriented versus customer-oriented. Whereas retailers often have a primary focus on growing market share, industrial companies are often focused on managing supply chain and improving efficiencies. Focus on generating sales as opposed to creating value. Many companies attempt to “brute force” their sales effort by applying more sales resources rather than understanding how they can create value with their customers. Uncertainty regarding ownership of customers. Unfortunately, in many organizations, there exists a conflict over the “ownership” of the customer relationship. This oftentimes leads to limited

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sharing of customer information and hoarding of information in certain pockets around the organization. Outdated attitudes that customers are for retailers. In many technology- or engineering-driven organizations, customers are regarded as an afterthought. These are organizations that believe in the adage, “If we build it, – they will come.”

Though this data gap has existed for a long time and the competitive imperative to adapt and pursue new perspectives has not been compelling, companies cannot continue to differentiate without repositioning themselves and their approach to understanding customer value. Companies need to acknowledge that these developments can enhance their understanding of customer requirements and begin moving beyond the data availability excuse: ■

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CRM (Internal). Companies have made significant investments in technology infrastructure to capture and deliver better information about customers, cost drivers, and overall profitability. In many cases, firms are still refining their internal profitability calculations, but companies must recognize that they do not need to wait for precise data. They need to accept that what they have is a strong, quantifiable starting point to begin assessing customer value. CRM (External). Companies are not alone in the above step. With the widespread build-out of technology infrastructure, companies are not alone in possessing better customer data. Companies can take advantage of this opportunity to share and exchange data with other participants in their value chains. Information Sharing. In the past, companies were cautious and protective of their internal customer data. Most organizations were reluctant to share information for fear of giving away competitive advantage. This perspective has been replaced with a competitive imperative to identify new sources of competitive advantage. In the global economy, information sharing and strategic alliances are a competitive necessity. Many companies have begun to embrace sharing information with delivery partners, and they can identify new opportunities to create incremental value for everyone. Most of the success thus far has been with a Supply Chain emphasis. Now is the time to take this same approach to the Demand side of the equation. You have data.

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Your customers have data. By stepping outside your organization and meeting with your customers, you can gain access to the full range of data to understand value.

WHAT IS OUTSIDE-IN? We consider companies that have embraced an outside-in perspective as those that employ a rigorous, fact-based approach to interacting with and understanding customers’ perspectives, business drivers, and growth objectives. Only by understanding these quantitative fundamentals can companies be in a position to establish an appropriate value perspective. Some examples of company activities that reflect an outside-in perspective include: ■ ■

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Developing a quantitative assessment of customer value. Assessing products or services from the customer perspective and quantifying your offering in terms of customer value as opposed to measuring from a cost perspective. Defining the system economics or the sources and exchange of profit for each participant in a value chain as opposed to considering the producing company’s economics or viewing the flow of goods only in terms of cost. Thinking in terms of understanding and addressing customer problems as opposed to developing and selling new product offerings not aligned with customer requirements. Focusing on establishing stronger relationships/partnerships with your customers so you understand their business in greater detail. Using tools such as Demand Value Chain (DVC) and Customer Economics to map the exchange of goods and services from the customer back through the change as opposed to mapping with a Supply Chain emphasis that originates with suppliers.

WHY NOW? Ask industrial company executives if they understand better than their competitors how these value trade-off decisions are made and they will likely suggest they do. Unfortunately, the competitive dynamics are as

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strong in the industrial world as in retail. But all of the biases and heuristics discussed are playing tricks on their business judgment. Companies must understand these inherent challenges and develop specific strategies to position themselves for growth: ■

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Behavioral economics describes how the lack of formal decisionmaking processes can allow human biases and myopic views to obstruct important business decisions. The competitive imperative is upon us. Though savings opportunities from internal projects exist, profitable growth cannot be achieved from inside. Companies must learn to leverage their Six Sigma IN-focused efforts and turn them outside toward new value creating opportunities. The data do exist. Over the last decade, we have spent billions of dollars on technology infrastructure. Countless companies have implemented CRM, ERP, Activity-Based Costing (ABC), and so on. Now is the time to leverage these massive investments to drive new growth.

By understanding these biases and taking an aggressive outside-in approach, there is an opportunity to create competitive advantage and drive profitable growth.

SUMMARIZING OUTSIDE-IN Taking an outside-in approach is one of the fundamental concepts of achieving profitable growth under the CVC management philosophy. Companies that continue to focus on creating value by having meetings among themselves in their conference rooms have little chance of creating differential value in the eyes of their customers. Kahneman’s research has shown that we do not know as much about our business as we think, and we are often afraid to ask too many questions lest we discover our own ignorance. Likewise, the years of internal focus on improving operations have had the unanticipated effect of helping companies forget about their customers. By systemically taking an outside-in approach, the risk of perpetuating an ill-conceived overconfidence in our ability to create and capture value in our exchanges with customers and suppliers can be reduced.

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In conjunction with adopting an outside-in perspective, companies must learn to think about their products and services within the context of how they deliver and capture value. The next chapter will describe this concept in more detail. Furthermore, once you recognize the importance of the outside-in perspective on value, we will discuss multiple tools to help translate this fresh perspective into enhanced financial returns. By employing tools such as DVC, Customer Economics, and House of Value (discussed in Part III), companies can apply the same rigor and discipline (traditionally reserved for operations) to their market-facing business processes. Leveraging these perspectives and tools to define and quantify how value is exchanged with customers is the critical bridge to translating outside-in into profitable growth.

CASE STUDY: PEPSI VERSUS COKE To highlight the importance of an outside-in approach, consider the classic example of Pepsi’s attempts to challenge the dominant position of Coke during the 1970s. Though these events are over 30 years old, they continue to provide timeless lessons of how to think about your customers. Furthermore, though most retailers have applied the lessons from Pepsi’s experience competing with Coca-Cola, industrial companies have not grasped the power of these case studies and their ability to transform their ability to deliver value to customers. At the time, Pepsi executives were certain that Coca-Cola’s distinctive, hourglass-shaped bottle was Coke’s most important competitive advantage. Trying to compete with Coke’s bottle, Pepsi spent millions of dollars and many years studying new bottle designs, but the company’s efforts never achieved the recognition of the Coke bottle. In dealing with this problem, John Sculley, better known as the former chairman of Apple Computer and Pepsi’s vice president of marketing at the time, decided to take a different approach by asking what the customer wanted. Sculley realized the company did not know enough about the consumers to identify what they wanted and, therefore, could not conduct its marketing decision process properly. So, before he tried to assign the bottle question to a new task force, Sculley launched a test to study how families consumed Pepsi and other soft drinks in their homes.

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As a result of the study, Pepsi discovered what all marketers now recognize as a key fact about snack foods: However much you can persuade people to buy, that is how much they will consume. This helped Sculley determine that Pepsi needed to design packages that made it easier for people to get more soft drinks into the home. Pepsi began a new intelligence-gathering stage, decided to launch a new group of larger packages, and established new systems to learn from store feedback to refine the packaging strategy further. The results of Pepsi’s changes were dramatic: Coca-Cola could not convert its famed hourglass silhouette bottle into a larger container. Pepsi’s market share expanded dramatically and drove the long-unassailable Coke bottle to extinction in the U.S. market.

CHAPTER

4

The Value Perspective s discussed in Chapter 3, in conjunction with adopting an outsidein perspective, companies must quantify their customers’ perceptions of products and services in terms of value. Two perspectives, outside-in and value, form the backbone of how companies need to think about their customer relationships to drive profitable growth. The concept of value is emphasized here because most companies tend to look at the world through a traditional Supply Chain lens. From this perspective, companies first think about their own cost and then the corresponding margin they can earn above that cost. But a focus on value is critical for success because customers do not buy products and services solely because of production cost. Instead, they purchase goods that deliver value to them. Enterprises that adopt this perspective and understand how customers define value across these dimensions can develop a sustainable competitive advantage and achieve superior long-term profitable growth.

A

WHAT IS VALUE? Since value is a commonly used term that can have multiple interpretations, some discussion of this term, as it pertains to CVC, is necessary to establish a common language. First, value is expressed from the perspective of the customers. Value is the level of utility or worth that customers derive from a product or service. Second, the quantity of value is the equivalent of the excess utility that customers derive 37

Total Value

38

PREPARING FOR GROWTH

Value Delivered (Consumer Surplus) Price Value Captured (Producer Surplus)

Value of Competitive Alternative (BATNA)

EXHIBIT 4.1

The Value Perspective

from a new product relative to that customer’s next best alternative (see Exhibit 4.1). For those readers who are familiar with negotiation theory and tactics, this perspective on value is similar to the concept of Best Alternative to a Negotiated Agreement (BATNA). From a negotiation perspective, BATNA is a powerful tool for understanding and extracting value. Customers’ BATNA represents the value level that customers receive from an alternative solution. Unless a company can offer “value” to the customers, (e.g., incremental utility to their current solution) then customers will most likely not purchase the new service offering. To illustrate our perspective on value, let us begin with a simplified discussion of the dynamics of Value Analysis (see Exhibit 4.2). Definitions of Key Terms Industry: Collection of like enterprises (companies offering similar products or services) supplying similar or dissimilar markets Markets: Collection of like consumers (business, governments, or people/individuals) who purchase/need similar products or services Demand: A consumer/customer desire for products or services to fulfill a want or need at a given price Supply: A producer’s willingness and ability to fulfill a want or need at a given price Value: The utility received by the consumer/customer from the combination of product, access, and experience less the price paid (cost) Money: The financial returns to the suppliers as a result of delivering value to customers

39

The Value Perspective

Value Analysis Industry Supply

EXHIBIT 4.2

Market Money Value

Demand

Value Analysis

Although this picture seems rather simple, it is a setup to a rigorous and quantitative approach to growth. Exhibit 4.2 has three significant components. On the right side there are consumers or customers who have wants and needs for which they are willing to pay. On the left side are producers or suppliers who compete with others to fulfill those wants and needs. In the middle, a negotiation occurs in which the customer tries to maximize the value or utility it receives relative to the prices paid. The supplier simultaneously tries to maximize the price it receives relative to its cost to produce. It is this middle zone in which demand-driven monetary payments are exchanged for supplier-created value. While we consider the individual consumer in this description, the focus of this book is not directed toward the exchange of value that occurs for an individual consumer. The quantitative and qualitative body of knowledge that has been developed over the last 20 years about these types of consumer transactions is very sophisticated and very large. Unfortunately, this same level of knowledge and sophistication has not yet reached other industry segments in which negotiated exchanges of value occur (e.g., industrial markets, business-to-business segments, etc.). Part III of this book moves beyond the prevailing wisdom about the exchange of value during a consumer’s shopping experience and focuses on the chain of value exchanges that occur before the product reaches the shelf (the point of sale). Within the Customer Value Creation (CVC) framework, value creation represents the combined actions of two fundamental elements: 1. Value Identification. Defining value drivers and developing a new product or service offering that provides incremental value to customers. 2. Value Exchange. The allocation of the total amount of value (surplus) created through a new offering (Value Delivered + Value Captured).

40

PREPARING FOR GROWTH

Value Delivered

Customer Value Drivers

P+A+E−C

Company

e Valu

A tion tifica Iden

Price

Value B Exchange

Value Captured

EXHIBIT 4.3

Value Creation

Value Identification represents the elements of assessing customer value drivers and developing new solutions to offer incremental value to the marketplace. The four elements of defining customer value are discussed in more detail below. Once companies complete the process of defining and identifying value, they must determine how to allocate this newly created value between the value chain participants. The second element of our value creation framework, Value Exchange, is focused on techniques like value-based pricing and selling and promotion activities that are aimed at optimizing how this value is shared among the Demand Chain participants (see Exhibit 4.3). You must understand the key elements of value in the customers’ eyes. As companies go through this exploration, they realize that customers perceive value in many areas that are not readily visible. Leading companies do not stop at uncovering these new value-delivering attributes of their offerings. The best companies understand the value that customers place on the various attributes of their offering, and they apply quantitative rigor to measure that value. Without this detailed understanding, many enterprises are left to hang their hats on benefit statements that are attached to their product’s specifications. These often fail to articulate the real value they deliver.

41

The Value Perspective

In most cases, a procurement agent does a detailed analysis of technical specifications to ensure that a product meets the customers’ technical requirements. However, without a quantitative metric for the differential value that a supplier adds, the procurement agents must focus on the one quantitative measure they find on the bid sheet, which is the price. This is a key driver for the ongoing downward pressure on prices that most companies feel. In this regard, value becomes the total package of product performance, access, experience, less the corresponding cost (see Exhibit 4.4).

PRODUCT ATTRIBUTES Of the four elements of value delivered to customers, product attributes is the category that enterprises relate to most easily. After all, most enterprises tend to have a large number of people in R&D, engineering, product design, and operations. These people configure and reconfigure their product’s features and functions in the hope of gaining a competitive edge. Unfortunately, we find that they spend more than 90 percent of their time focusing internally. They are not out in the market trying to understand customer requirements or the value that customers place on performance features or the tradeoffs they are willing to make. This inward focus drives products that are

Customer Value = (Product

+

Access

+

Experience

−

Cost)

• Performance

• Availability

• Service

• Price

• Features/ Functions

• Reliability of Supply

• Solutions

• Total Cost of Ownership

• Technical Innovation

• Distribution Channel

• Impact on Customer

• Process Cost

• Brand

• Payment Terms

The enterprise delivers value to customers across each of the dimensions of the relationship

EXHIBIT 4.4

Uncovering Customer Value

42

PREPARING FOR GROWTH

overdesigned and loaded with features and functions that add to manufacturing and other costs while offering little or no added utility to the customers. A good example of this rampant overdesign is the Microsoft Office family of products where 80 percent of the functions remain largely unused by most customers.

ACCESS ATTRIBUTES The second category of value drivers is defined by how accessible an enterprise’s products and services are to the marketplace. Many enterprises fail to recognize this source of value they provide to their customers. Dell Computers (Dell) is a good example of this point. Ask Dell about the value of accessibility of supply. Dell requires its suppliers to deliver orders 15 minutes after it places them. A single unavailable component can bring an assembly line to a grinding halt. When selecting suppliers, proven availability and reliability are key elements in the selection of one supplier over another. By developing a clear understanding of the different access requirements of each unique market and customer, leading enterprises optimize the deployment of their resources to ensure their operations can deliver their customer’s accessibility and availability requirements. For example, enterprises that know the products critical to customers and that maintain low inventories will often keep safety stock. Customers rely on the supply consistency and will often pay a premium for the availability.

EXPERIENCE ATTRIBUTES The third category of value drivers is defined by the overall experience that customers have as they use an enterprise’s products and services. Experiences are initially shaped by impressions of the enterprise’s brand and are more strongly influenced by each direct interaction between customers and the enterprise’s employees. These interactions take place at many stages of the buy-pay-use cycle. Leading enterprises pay close attention to the way they design their customer-facing processes, how they train their service organizations,

43

The Value Perspective

Basic Product

EXHIBIT 4.5

Augmented Product

Technical Service

Customer Service

Affecting the Experience

and how they build their brands. The enterprises that understand customers’ experiences across transactions can reap the benefit of superior pricing, higher margins, and the creation of higher switching costs. The perception of quality that the computer marked “Intel Inside” carries is an example of brand value in the PC industry. Couple this with the easy nature of a transaction with Dell, and it is easy to see why Dell continues to build market share in the face of better-performing alternative products from the suppliers like AMD and others. By developing a deeper understanding of the overall context in which customers use products and services, enterprises can uncover customer needs that are unfulfilled by competitors. In filling these needs through a uniquely designed solution that leverages the enterprise’s products and services, accessibility, and experience, leading enterprises build the value that customers perceive as being above and beyond what the competition has to offer. In many markets, integrating the product sales with after-sales service contracts offers companies an opportunity to decommoditize their core business. A good example is copier products company, IKON. Over the last decade, IKON has transformed itself from a distributor of copier products to a service company focused on helping companies manage document flows and increase efficiency. IKON wraps a superior service offering that ranges from document management services to financing services around a world-class collection of copiers and printers (see Exhibit 4.5).

44

PREPARING FOR GROWTH

COST ATTRIBUTES Cost attributes are often the most difficult ones around which to build consensus. Too often, enterprises and customers take a myopic view of cost by limiting the discussion to the purchase price. The most astute buyers and sellers realize the invoice price is one of the costs associated with using a product or service. Perceptive enterprises and customers focus on the customer’s total cost in buying and consuming an offering. This allows an enterprise to communicate the value of its offering better over its entire useful life and allows customers to make a more economically effective purchase decision. Customers incur a range of costs in consuming an offering: search costs associated with finding the right product and right vendor, vendor management and legal costs associated with contract negotiations, product disposal costs associated with getting rid of the used product or waste, personnel costs related to training for product sale or consumption, and the costs associated with whatever differentiates the product’s performance from a competitive alternative. Enterprises that understand value management will appreciate how each of these costs affects their customers’ ability to make money. Leading enterprises work with customers to reduce the total system costs experienced over the life of an offering and thereby add additional value for their customers. By understanding how each of the attributes of product, access, experience, and cost (PAEC) contribute to the overall value perceived by customers in different markets, enterprises can leverage valuebased segmentation and fine-tune their offerings to each market’s unique situation. This allows enterprises to differentiate their offerings from their competitors’ based on total system value.

PART

III

Value Analysis art III, Value Analysis, moves into the actual mechanics of finding and deciding upon opportunities that will drive profitable growth. These mechanics will be fundamentally grounded in the core CVC philosophies of: driving growth from an outside-in customer perspective, adopting a more rigorous process to facilitate learning and continuous improvement, and quantitatively defining customer value. Value Analysis is comprised of five chapters: Dimensions of Growth, Demand Chain Economics, Solution Concepts, Solution Valuation, and Value-Based Decisions. Taken together, these chapters represent a rigorous decision-making process. The outcome of the process is a decision on which opportunities represent the best and most profitable growth alternatives for the company. Part IV, Execution, then picks up from Part III in a discussion about how to ensure execution success. Value Analysis is organized into three sections. The sections are: As Is, Could Be, and Should Be. Exhibit III.I shows these three sections along with Part IV, Execution. The As Is section defines the current state. During this phase the focus is on determining how and how much profit is generated with the current customer base. The Could Be section establishes the maximum profit potential that would result from delivering all of the customer-desired solutions. The Should Be section is a subset of the profits available in the Could Be case and represents what the company “should do.” The Should Be section takes into consideration the constraints of the company such as capital, time to market, and capabilities as well as its influence within the demand chain, and then establishes the profit maximizing condition given these constraints.

P

• Assess customer segments along Growth Dimensions • Measure current customer economics • Determine Growth Dimension for focus of growth initiatives

• Current Customer • Demand Chain Economics Map • Solution Concept • Value Exchange Filter Insights • Demand Chain • Advantaged Solution Demand Chains Strategies

• Map the Demand Chain originating with the end customer • Model the chain economics (Profits/Assets) • Identify “Advantaged” Demand Chains for further analysis

Demand Chain Economics

Solution Valuation

4 Value-Based Decisions

5

Should Be

• Value Driver Hypotheses • Solution Concepts

• Solution • Solution Concept Value Prioritization Quantification • Value • Value Driver Distribution Model Scenarios

• Identify • Quantify value • Evaluate “advantaged” drivers Solution solution • Create Concepts concepts sensitivity • Select Growth • Determine model to Initiatives potential value evaluate value drivers across • Validate Demand Demand Chain Chain • Validate solutions and value drivers • Identify potential collaboration partners

Solution Concepts

3

Dimensions of Growth

Could Be

1

2

As Is

Customer Value Creation

DELIVERABLES

TASKS

PHASE

EXHIBIT III.1

Operational Enablement

7

Execution

• Value-Based • Organization Pricing Strategy Realignment • Expected Value Capture

• Develop Value • Create dedicated Pricing project Strategy management • Quantify Value team Delivery • Commit (Customer) necessary • Quantify Value resources Capture • Ensure senior (Supplier) management commitment • Develop specific objectives, timelines, milestones

Value Exchange

6

Value Analysis

47

Achieving profitable growth through CVC is not a one-time project. To the contrary, CVC is an iterative process that lends itself to continuous improvement. This is an important point to keep in mind throughout the discussion that occurs in Part III. It is important because there will be a tendency to take the ideas and concepts discussed in the next five chapters too literally. The chapters are not intended to represent the right or complete answer for anyone. Instead they are examples and snippets of work that attempt to weave together a story about what it means to think about value from the customer perspective, to be quantitative and adopt a process-based approach to growth. The particular constructs and approaches discussed that the reader will invariably pick apart are not nearly so important as is the idea of developing your own process that can be continuously improved. The power of CVC comes from continuous learning about the customer, not from any particular framework. The other caution that needs to be discussed before moving on is an acknowledgment that the following chapters do not explore every possible method for achieving profitable growth. Achieving profitable growth through internally driven breakthrough research and development is not discussed. Achieving profitable growth by reducing costs and passing on some of the savings to customers is not the focus. The focus and suggestion in the next five chapters is that those who understand how customers view value, quantify that value, and use a process to continuously learn will develop products and services that will support growth and profits beyond those of their competitors. And it is our experience that the science of achieving these objectives is still in its infancy.

CHAPTER

5

The Dimensions of Growth THE BEGINNING OF A PROCESS This chapter is the first step in the CVC process (see Exhibit 5.1). The objective of this chapter is to relate the profitable growth challenge in terms that directly connect to the customer. The work entails translating typical statements such as: “We intend to increase our market share from 10% to 15%” or “Our objective is to increase EBITDA returns from our current and industry average of 9% to 12%” into tangible actions that involve customers: the source of all growth and profits. The chapter puts the overall profit growth goal into the context of what needs to be done relative to the customer.

WHAT ARE THE DIMENSIONS? There is more than one way to grow profits with customers. Profits can be improved by directly improving the average profit realized per customer: “customer profitability.” Profits can be grown by increasing the number of profitable customers: “number of customers.” Profits can be grown by increasing the number of products and services sold to existing customers: “share of wallet.” These three methods of increasing customer profit represent the “Dimensions of Growth” in the CVC process. In addition to these dimensions, duration of customer relationship is often a powerful axis to consider as well. The point to take home is that the opportunities for improving customer profitability are not one-dimensional. Instead, thinking along at least three dimensions is usually more appropriate.

49

• Assess customer segments along Growth Dimensions • Measure current customer economics • Determine Growth Dimension for focus of growth initiatives

Dimensions of Growth

EXHIBIT 5.1

Solution Valuation

4 Value Based Decisions

5

Should Be

• Value Driver Hypotheses • Solution Concepts

• Solution • Solution Concept Value Prioritization Quantification • Value • Value Driver Distribution Model Scenarios

• Identify • Quantify value • Evaluate “advantaged” drivers Solution Solution • Create Concepts Concepts sensitivity • Select Growth • Determine model to Initiatives potential value evaluate value drivers across • Validate Demand Demand Chain Chain • Validate solutions and value drivers • Identify potential collaboration partners

Solution Concepts

The Customer Value Creation Process

• Current Customer • Demand Chain Economics Map • Solution Concept • Value Exchange Filter Insights • Demand Chain • Advantaged Solution Demand Chains Strategies

• Map the Demand Chain originating with the end customer • Model the chain economics (Profits/Assets) • Identify “Advantaged” Demand Chains for further analysis

Demand Chain Economics

3

DELIVERABLES

TASKS

PHASE

Could Be

1

2

As Is Operational Enablement

7

Execution

• Value-Based • Organization Pricing Strategy Realignment • Expected Value Capture

• Develop Value • Create dedicated Pricing project Strategy management • Quantify Value team Delivery • Commit (Customer) necessary • Quantify Value resources Capture • Ensure senior (Supplier) management commitment • Develop specific objectives, timelines, milestones

Value Exchange

6

51

Customer Profitability

The Dimensions of Growth

Could Be

Should Be

As Is

Share of Wallet

EXHIBIT 5.2

f ro s be er um om N ust C

The Growth Cube

The growth cube shown in Figure 5.2 takes the dimensions of growth and expresses them in the context of a framework or a tool. As can be seen, the three dimensions of growth form the axis of a cube. In addition to capturing the dimensions of growth, the cube also captures the element of time by pictorially expressing changing cube sizes. The time element is captured in the cubes labeled “As Is,” “Should Be,” and “Could Be.” The As Is or “current state” section defines the current situation. During this phase the focus is on determining how and how much profit is generated with the current customer base. The Could Be section establishes the maximum profit potential that would result from delivering all of the customer-desired solutions. The Should Be section is a subset of the profits available in the Could Be case and represents what the company “should do.” The Should Be section takes into consideration the constraints of the company such as capital, time to market, and capabilities then establishes the profit maximizing condition given these constraints. The growth cube is not intended to be a pure mathematical construct. Multiplying or adding together Customer Profitability, Share of Wallet, and Number of Customers does not yield total value or total profitability. The financial value of customers will remain as the current and projected net present value of those customers’ cash flow contributions. What the model does do however is force the

52

VALUE ANALYSIS

company to carefully consider all of the dimensions that will drive growth. The growth cube can be summarized as: ■ ■

■

Providing customer dimensions on which value can be captured Creating a bridge toward solutions thinking and away from a product-centric mentality Providing a style guide in creating and investing in solutions

Defining growth along these three dimensions provides companies with a holistic view on the value they derive from customers. Mapping these measures along three dimensions will give a better understanding of the current total value of its customer relationships; more important, it sets the stage to define the potential future value of those relationships.

USING THE CUBE TO DRIVE GROWTH Defining “As Is” The first level of consideration in developing a profitable growth plan is to define the As Is cube. The work entails defining how and where financial performance is currently being derived relative to the number, share, and profitability of customers. Companies have different levels of understanding and data on the growth dimensions. Some companies do not know how profit contribution is driven on a specific customer level. Some do not understand what their share of customer spend is while others have not even defined what bucket of customer spend they aspire to capture. This lack of data and initial understanding invariably raises questions about how much study or research should be done before getting to the work of actually growing profits. The point that really needs to be stressed is that CVC is an iterative process. Companies that have been practicing CVC for a couple of years will have already built their As Is, Could Be, and Should Be perspectives. Their next growth project will be more focused and have a higher likelihood of success than their first project. A company that is just getting started with CVC will experience necessary learning and may not choose the exact best path the first time. In either case, CVC is about doing and not about studying. So for those companies just starting, the process often times goes something like this (see exhibit 5.3):

53

The Dimensions of Growth

Profitability

As Is

Share of Wallet

EXHIBIT 5.3

f r o rs e b e um stom N u C

The As Is Growth Cube

CUSTOMER PROFITABILITY Understanding customer profitability is often the correct place to start. Having a thorough understanding of customer profitability usually leads companies to actions that are directionally consistent with developing a successful profitable growth agenda. Before going too far in this discussion, it should be noted that Chapter 14 is dedicated to a more in-depth discussion of Customer Profitability, Share of Wallet, and Number of Customers. This chapter will focus more on general understanding and leave the details to Chapter 14. The Customer Profitability dimension measures the economics of current transactions and is normally expressed as average financial return per customer. Customer Profitability is measured at varying levels depending on the availability of customer financial data. By defining the current state performance along the Customer Profitability axis, a series of questions can be answered: 1. What is the financial return from each individual customer? 2. What is the distribution of profitability across the customer set? 3. What is the driving profitability variance: Revenue? Cost? The first question is aimed at framing up the nature of the challenge. Knowing that customer profitability is high or low is not a concluding point but represents an important input to several decision trees. The second question starts to create more interesting questions. Is the customer profitability distribution normal, meaning does it have the common bell shape? If so, then does the shape of the bell itself create valuable information? If the bell is narrowly concentrated

54

VALUE ANALYSIS

around high profitability, then the profitable growth path will not likely be driven by focusing on the profitability axis but instead on finding more customers: “Number of Customers.” If the bell is again narrowly concentrated but around lower profitability, then there may be an opportunity to drive the profitable growth agenda by focusing on the profit axis alone. In this case the answer may be to raise prices or reduce the cost-to-serve. The question to ask is whether there is enough room to raise price or reduce cost to achieve the desired growth in profits set forth in the company’s overall profit growth plan. Each customer has different value requirements that drive different “cost-to-serve” profiles which ultimately impact profitability. Companies can choose to modify their interactions with their customers depending upon the value requirements. Dealing with these extra costs may require a company to charge for selected services, cut back on services provided, make those services more efficient, renegotiate contracts, or even “fire the customer.” Knowing the actual customer costs and profitability is crucial to making the right decisions about your customers. It is far more common to have customer profit distributions that are messy, nonstandard, and not homogeneous. It is in the mess where the more challenging opportunities reside. In some situations the customer distribution of profits is bimodal in nature, meaning two distinct clumps of customers. In this case the classic answer is to “fire” your low-profit customers to improve profits. CVC promotes understanding why there is a clump of high profit customer and a clump of low-profit customers before firing anyone; customers are too hard to come by. When looking at complex profitability distributions, a good problem-solving approach is to segment the customer into causal buckets. As mentioned, some of the causal buckets will relate directly to price, price waterfall, or cost-to-serve. Many examples show companies improving overall profitability by developing a thorough understanding of individual customer profitability. A large well-known overnight package delivery company analyzed the profitability of its top 30 customers that generated about 10 percent of the total sales volume. They found that some customers spent a lot of money but demanded little customer service. Others spent less and demanded more service with little potential of

The Dimensions of Growth

55

spending more in the future. Using these data, the company segmented its customers into groups based upon profit potential. It began to treat customers differently based upon their profitability profiles, raised rates to weed out unprofitable customers, and marketed differently to those companies that showed little potential to spend more in the future. This strategy led to a substantial reduction in costs and improvement in profitability.

SHARE OF WALLET The Share of Wallet dimension measures the revenue derived from customers for company products and services in relation to the total spent on the overall category. The Share of Wallet dimension measures the percentage of customers’ total spending that enterprises can capture. Expressed differently, though the first dimension focuses on the profitability per customer transaction, this dimension focuses on the number of transactions per customer. The Share of Wallet is not necessarily confined to only those products and services provided by the company. Instead it is more insightful to consider the products and services from an outside-in customer perspective; think not about what you sell but rather what the customer buys. What the company should try to understand is its category share relative to how the customer thinks about that category. If a customer must work with 10 suppliers to fulfill a particular need or problem, then it will likely judge those suppliers in terms of their importance to solving the need or problem. It is on this level that the company wants to understand its Share of Wallet. If the company is the majority owner of the solution, then it will likely be better positioned for profitable growth than the supplier who has a relatively meaningless position. Going back to the Customer Profitability discussion, let resume where the customer profitability distribution is messy and the company is looking for causal buckets. Question: Is there any difference in the Share of Wallet between the clump of customers who have low profitability versus those who have high profitability? If yes, then why? Maybe the profitable growth agenda needs to be built around doing a better job of cross-selling to those low-profit customers. If the Share of

56

VALUE ANALYSIS

Wallet is low across the board, then the question becomes whether there is an opportunity to improve overall profitability by delivering a more robust solution to one or both of the customer groups. It could also be that the low-profit group is missing a particular solution component unique to this group of customers that would raise the group up to the level of the higher-profit group. The answer may be to improve the Share of Wallet with the high profit group while focusing on the profit dimension with the low-profit group. Based upon our experience, the Share of Wallet dimension is the least understood and pursued of the growth dimensions. Most companies have some understanding of basic profitability, and just as many have aggressive programs to increase the number of customers. However, what few companies do is develop an understanding of how and if they have clusters of customers whose profitability is directly linked to Share of Wallet or solution delivery. By exploring the correlations between profitability and Share of Wallet, insights are generated that are not possible through considering profitability in isolation. Home Depot has revolutionized the home improvement market through the expansion of the destination home improvement superstore concept. Its success has been defined through efficient supply chain management driving its ability to offer a vast array of products at competitive prices. Its value proposition had been defined as providing a one-stop destination for building products at competitive prices. Consider what is now driving the fastest percentage growth of the $65 billion market leader: a 40 percent growth in the installation services market. Home Depot has redefined its customers’ demand for home improvement products to reflect demand for home improvement solutions. Though Home Depot is the market leader in the $265 billion home improvement products market, it has only begun to grow in the $200 billion home improvement services market. It has redefined the customers’ wallet to include home improvement services. This changed definition has allowed Home Depot to capture a larger share of its customers’ home improvement solutions wallet.

NUMBER OF CUSTOMERS If the first step in defining the growth cube is to consider Customer Profitability, then to consider Share of Wallet, the final dimension to

The Dimensions of Growth

57

consider is Number of Customers. The Number of Customers dimension measures the proportion of the market space that a company controls given its current product and service offerings. It may be intuitively obvious that the more customers a company has, the bigger the profit potential. However, as we learned in the discussion on customer profitability, not all customers are created equal. The key is to find more customers that provide an opportunity to create and exchange value with them. The concept is simple: Leverage the value equation with your current customers to expand the current market, or enter new markets where the core offerings have similar or higher value. When creating the growth cube, it makes sense to process the Number of Customers dimension last. It makes sense because sustaining profitable growth by acquiring new customers is one of the most difficult options for profit improvement available. It is typically much easier to work with existing customers to improve profits through cost reductions, pricing actions, or share of wallet enhancement than to win new customers outright. However, if the right answer is to win new customers, then having thoroughly explored the existing customer base for profit-maximizing conditions will position the company much better to understand and find more customer who have the potential to be profitable. Once again, let us go back to the example developed in the paragraph on profitable customers where a bimodal distribution of customer profitability was discovered. Now assume that the company discovered that customers in the more profitable clump were buying a different mix of products than those in the lower clump. And further, that this group of customers were buying this product mix because they had a particular problem that was being solved by this mix of products and services. By developing a good understanding of this situation, the company can look for other groups of customers in the market who may have similar challenges. Too often companies focus on winning new customers without first understanding how they are creating value with their existing customers. Understanding how value is created with existing customers (Customer Profitability) and exploring opportunities to grow with existing customers (Share of Wallet) creates a more robust platform from which to drive a profitable growth agenda and to add new customers who will be part of profitable growth.

58

VALUE ANALYSIS

The process deliverable for the discussion so far is the As Is cube shown in Exhibit 5.3. The As Is creates a perspective on the company’s current situation relative to Customer Profitability, Share of Wallet and Number of Customers. The As Is cube does not reveal which axis the company should focus its profitable growth efforts. This is because the As Is cube does not show opportunity or performance gaps. There is no information in the As is cube about what profits Could Be or Should Be. Chapters 7 through 9 focus on the work necessary to determine the Could Be and Should Be cubes.

SHORT DISCUSSION OF COULD-BE AND SHOULD-BE Chapters 7 through 9 will focus on building out the Could Be and Should Be cubes. As has been stated before, the Could Be cube represents the maximum opportunity for growing profits without regard to constraints such as capital, capabilities, and so on. An example of the Could Be cube is shown in Exhibit 5.4. The Could Be state captures the cumulative potential value that can be created without internal or external constraints such as availability of capital, internal resources, or antitrust considerations. The Could Be cube represents the theoretical value creation potential in a perfect world. The Could Be state reflects the potential value available to a company if it could execute all of its identified initiatives around each dimension of the cube. Unfortunately, reality dictates

Could Be

Profitability

$12

As Is $40 Share of Wallet

EXHIBIT 5.4

The Could Be Growth Cube

f ro s be er um om N ust C

59

The Dimensions of Growth

that enterprises prioritize their scarce resources and apply them in a manner that optimizes the value exchanged between the company and its customers. Ultimately this will optimize the value created on behalf of the shareholders of the company. The first thing to notice about the Could Be cube is that it is not really a cube at all. In this example, the contents of which are developed in later chapters, the opportunities are skewed toward improving Share of Wallet and Customer Profitability. Although the objective is not to get into numbers at this point, one can see from Exhibit 5.4 that there is an opportunity to improve Share of Wallet by a factor or three and an opportunity to double Customer Profitability. With the Could Be cube, a picture develops around where the growth opportunities reside. The Could Be view helps develop a perspective on the potential profit opportunities but does not indicate the path to growth; that is the job of the Should Be perspective. The Should Be cube shown in Exhibit 5.5 shows the dimension on which the company should focus. The Should Be cube is a subset of the Could Be cube. The Should Be view indicates the direction and magnitude of the profitable growth agenda. In this case the opportunity is to double profits by substantially increasing Share of Wallet. The more practical “Should Be” state (see Exhibit 5.5) shows what value could be attained in a one-to-five year horizon with focused investments. The Should Be state represents the view of the company’s

Profitability

Should Be

As Is

Share of Wallet

EXHIBIT 5.5

The Should Be Growth Cube

f ro s be er um om N ust C

60

VALUE ANALYSIS

value creation potential after strategic initiatives have been identified, resources prioritized, risks identified, and achievable time horizons contemplated. Depending on the current state, and the potential value creation opportunities identified, each axis of the Should Be state will grow at a varying rate. By defining the Should Be state, companies can ensure alignment of operating initiatives to drive high-return projects across the organization.

WHERE TO START The problem is figuring out how to get started. Nine out of ten companies do not have the data necessary to create the growth cube perspectives. Going through the effort of building out all three dimensions of the As Is, Could Be, and Should Be growth cubes is measured in months/years rather than weeks/months. Unless a company falls into the very small category of those that can afford a year of study without executing, then the right answer is to find a way to start executing the profitable growth agenda without the benefit of having fully developed the entire growth cube landscape. The most often used approach to get started is to develop the As Is view with the best available data and then to choose one dimension of the growth cube that represents the organization’s best guess on its Should Be focus. This sort of hypothesis-driven approach will be used often through the course of building out the profitable growth agenda. Over time the growth cube will start to form based on actual experience and data rather than hypothesis. Until that time, choosing a dimension based on the experience and knowledge of the organization allows an opportunity for getting to results while not waiting to build out the entire data set necessary to clearly see the full dimensionality of the cube. It is possible to be working on more than one dimension at a time. There are plenty of examples where companies have efforts under way to reduce the price waterfall (Customer Profitability), deliver a new service to the market (Share of Wallet) and find new customers (Number of Customers). In fact, the majority of companies likely fall exactly into this bucket. What companies fail on is bringing their efforts into the context of what needs to be accomplished. There are too many examples of companies working on $5 million solutions

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61

for a $50 million problem. The philosophy of CVC and the growth cube is not to limit initiatives to one dimension but rather to make sure the initiatives and their respective growth dimensions are relevant to the profitable growth challenge at hand. That said, most companies are not successful at developing all three dimensions at the same time. In the end there is usually a dominant axis that gains the lion’s share of the effort with minor maintenance or growth initiatives occurring on other dimensions.

SUMMARY Companies must evaluate all three dimensions of the growth cube to set the agenda for profitable growth. The customer value creation process begins by defining the dimensions of growth with the growth cube. The growth cube can serve as a road map to help a company understand where to focus the growth strategy and how to prioritize the growth initiatives. Many enterprises create growth strategies without having a good understanding of how they create value with their customers and where they stand along the axes of the growth cube. By defining the current state along each dimension of the growth cube, an enterprise can quickly focus its efforts on the areas where it can optimize value. For example, an enterprise that has many profitable customers but has a low Share of Wallet would want to invest in creating new products or services to capture a higher percentage of the customers’ spend. Company resources would be invested to leverage the existing customer relationships to create and exchange additional value with the current customer set. Conventional business wisdom would usually suggest that that same enterprise continue to invest in the new customer acquisition to continue to build upon the success with the current offering. At some point the cost of new customer acquisition outweighs the incremental benefit of finding those next customers. Leveraging the existing relationships to drive additional products/service sales could generate a higher return. Truly understanding and managing the dimensions of growth allows companies to jump-start growth, align their customers’ real needs with their internal projects, and realize the full potential of the profitable relationship between the company and its customers. It an

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era of mass customization, customer relationship management, and it is probably easy to conclude that growth begins with understanding your customers better. And it does. But only recently have we had the tools to explicitly understand who are our customers, what they buy from us, where the buy from us, why they buy from us, when they buy from us, and how profitable are those relationships. The challenge now becomes: How can we leverage this information to define, create, and exchange value with these customers? Until recently, the information and technology tools required to accurately assess the profitability of customer relationships was not available. Today, those companies that have invested in data and knowledge management systems (ERP, CRM, etc.) can be richly rewarded by using these systems to create insights in the customer profitability dimension. Having a deep understanding on the distribution of customer financial returns creates a robust platform from which to launch activities to improve profitability. Companies that have this capability can prioritize their investments to optimize their financial returns from customers.

CHAPTER

6

Demand Chain Economics emand Chain Economics is the first step in creating a quantitative understanding on how value is created, captured, and delivered along a chain of goods and services. Demand Chain Economics establishes a high-level economic perspective by identifying profit and investment levels for each step along the demand chain. By looking at the overall system economics of the demand chain, a broader perspective is gained about where potential improvement opportunities may reside. Once potential value creation opportunities or solutions are identified from Demand Chain Economics, then a deeper understanding of attractive value drivers are developed during Solution Concepts (Chapter 7). Demand Chain Economics is comprised of two basic elements:

D

1. Define the demand chain ● Identify participants and competitors in the demand chain ● Select “advantaged” demand chains ● Define the appropriate length of the demand chain 2. Determine the economics ● Define the distribution of profits and investments along the demand chain ● Develop hypotheses about opportunities within the demand chain ❍ Power within the demand chain ❍ Alignment of interests ❍ Economic performance of the participants over time

63

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VALUE ANALYSIS

DEMAND VERSUS SUPPLY Before detailing the elements of Demand Chain Economics, we must distinguish between demand chains and supply chains. Exhibit 6.1 shows a traditional supply chain, which starts with Raw Materials and works its way to the End User through five value transformation steps. Supply chains are generally constructed by following the flow of a product from left to right. Once the steps to deliver the product are understood, the picture highlights how costs accumulate and flow through the chain. The demand chain leverages the fundamental ideas behind the supply chain but attacks the supply chain from a different perspective (see Exhibit 6.2). Exhibit 6.2 represents the framework for a demand chain. Rather than tracking the supply from left to right, the demand chain maps the demand from right to left. In addition, the demand chain is structured in terms of profits and capital investment and not just cost. Supply

Raw Materials

Components

Subassembly

Final Product Production

Distribution

End Customer

Supply Chain • Tracks the flow of supply of products or services • Identifies cost of each step

EXHIBIT 6.1

Design

Example Supply Chain

Produce

Assemble

Distribute

Demand Value Chain • Tracks the flow of demand • Identifies the profits and investments at each step

EXHIBIT 6.2

Example Demand Chain

Deliver

End Customer

65

Demand Chain Economics

EXHIBIT 6.3 Demand versus Supply Chain Attribute

Demand Chain

Supply Chain

Chain Orientation

Right to left Customer-driven Profit and investment Profitable growth

Left to right Producer-driven Cost

Economics Solution Orientation

Cost reduction

chains and demand chains differ primarily because they serve different purposes. The demand chain is constructed to identify profitable growth opportunities. The supply chain is generally constructed to focus on cost reduction. In this regard, the concepts of demand chain and supply chain are similar tools that provide different information. (see Exhibit 6.3) To illustrate the value of mapping the flow of the demand chain, consider the following case study that highlights the initial insights that a multibillion-dollar printing company uncovered by establishing a demand chain perspective.

CASE STUDY: DEMAND CHAIN VERSUS SUPPLY CHAIN The leadership of a multibillion-dollar printing company, which had long been a dominant and powerful player in the world of printing newspaper inserts for retailers (inserts are the advertisement flyers that tumble out of your Sunday paper each week), found itself in a different environment. Due to the widespread adoption of rigorous procurement and strategic sourcing within the retail industry, the company was experiencing declining revenue, market share, and profitability. At this point, the company needed help to identify new growth opportunities in its retail insert business. As an initial step in the profitable growth process, the printer had mapped its own view of the value chain based upon prior supply chain initiatives. Its perception of the value chain is represented by the supply chain view in Exhibit 6A. (Note: Supply chain components have been simplified for illustrative purposes.)

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VALUE ANALYSIS

Procure

EXHIBIT 6A

Pre-media

Print

Distribution

Insertion

Printing Company Supply Chain

This supply chain view had been used as the framework to conduct numerous internal cost reduction initiatives. In this supply chain view, the physical flow of product was tracked from left to right, starting with the procurement of raw materials and ending with the product delivery destination. This information was appropriate when the company’s objective was cost reduction. Unfortunately, this producercentric viewpoint was insufficient for identifying profitable growth. To introduce a new perspective, the company developed a more appropriate demand chain that focused on value from an outside-in perspective, rather than product flow from and inside-out perspective. The result created the demand chain shown in Exhibit 6B. Starting at the far right of Exhibit 6B, the chain originates with the end consumer. Beginning on the right, with the customer, and working backward creates a new perspective on the demand chain. In this case, the creation of this demand chain was the first time the printing company had evaluated its role as it related to the overall objective of their end customer: the retailer. In this case, the objective of the retailer is to drive more store traffic and consumer purchases. To this end, retailers use the newspaper inserts together with other marketing tools, such as broadcast advertising, to create a mix of consumer influencing activities. Through demand chain analysis, the printer learned that the entire value chain was initiated and funded by the retailer’s return on newspaper inserts relative to other marketing tools that competed for the retailer’s finite marketing and advertising budget. The far left end of the chain (the beginning of the process) pointed to Media Planning and Budgeting. This was another important discovery. Since budgeting is a periodic activity, understanding this driver altered the timing and frequency of the printing company’s interactions with its retail customers. Moving to the right, the printer identified the physical delivery of the newspaper to the consumer as

67

Demand Chain Economics

Media Planning & Budgeting

EXHIBIT 6B

Creative Services

Print

Deliver Insert to Newspaper

Insert into Newspaper

Deliver Paper to Consumer

Retailer Sales

Consumer Purchase

Printing Company Demand Chain

a relevant step in the demand chain since not all consumers read the same newspaper or any newspaper for that matter. Moving farther to the right, the remaining steps in the chain were essentially the same as had been previously depicted in the supply chain perspective. By taking an outside-in perspective on value, the printer’s firstpass attempt at creating a demand chain was different than what had been used in the context of a supply chain. Furthermore, going through the demand chain creation exercise led to important change and helped raise additional questions: ■

■

■

Retailers establish their budgets for retail inserts on a periodic basis and on a marketing program level, not on a project-toproject basis. For the printer, this meant that it should stop calling on the retailer regularly and instead focus on the retailer during times when the budgets were being created. It was during these times that the retailer thought about how much and how often it should use inserts and would be most receptive to hearing an outsider’s perspective on what it might do differently. The amount of newspaper inserts used by a retailer depended on how the retailer viewed the effectiveness of these inserts relative to other marketing mechanisms at its disposal. How did the retailer decide on how many and how frequently to use newspaper inserts? At present, the printer did not even know what percentage of the overall marketing budget was used for inserts. Was this the way the printer should think about Share of Wallet? If the printer wanted the retailer to purchase more inserts, then these seemed to be a key questions to be answered. The printing company understood that the inserts were delivered to the consumer via the newspaper. The printer understood from its efforts in the supply chain delivering its inserts to the differing locations that different newspapers existed in the country. What

68

VALUE ANALYSIS

the printer was now thinking about, though, was how the retailer allocated its insert spending across multiple papers. Did it use all of the newspapers in a given market? Did the declining newspaper readership matter to the long-term usage of inserts by retailers as a marketing vehicle? Though creating the demand chain did not answer all of these questions, it did help the printer think differently. While creating the demand chain, the printer included additional steps that had not been considered in its previous supply chain efforts. The inclusion of these additional steps caused the printer to adopt an outside value perspective, think differently about its chain, and ask different questions.

As this printing company’s experience highlights, companies can gain a different perspective on their product usage and the demand drivers for their offerings by adopting a demand chain perspective. In addition to emphasizing the importance of the end customer and by mapping the demand chain from the point of sale backward, companies will develop a better appreciation for the overall demand “system” and how they participate within this system.

ADVANTAGED DEMAND CHAINS Most companies will typically find themselves within multiple demand chains. For example, consider a large, multinational chemical company that participates in multiple demand chains, including automotive, consumer goods, packaging, and several others. The chemical company will not likely be able to map every chain in which it participates. The important thing for this chemical company is to understand the major markets and to understand how the business economics vary from one market to the next. For example, within the automotive demand chain, the company may be more successful capturing value directly from the automotive manufacturer if its materials are important to the performance of the final consumed product: the automobile. In consumer products, chemicals may not affect the final product’s value, but may be critical to the product innovation

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69

process. In this case the chemical company might add value by coordinating an innovation center within the chain. The demand chain can operate differently within a market segment. Returning to the automotive value chain example, some manufacturers focus on product innovation and technology, others focus on low cost, and others may differentiate on customer intimacy. The market positioning of leaders in the demand chain will often dictate the economic cadence within the chain. Since most companies participate in a number of demand chains, the goal of Demand Chain Economics is to find and analyze the “advantaged demand chains.” Advantaged demand chains are those where multiple forces combine to create opportunity for profitable growth that is not being exploited. Given the large number of participants in any given demand chain, some companies may find themselves in hundreds of chains that deliver products and services to the end user. The challenge is to reduce the chains into a manageable set of advantaged chains that can be analyzed. A number of attributes can be considered when creating a filter to determine advantaged demand chains: ■

■

Strength of end use segment. Keeping with an outside-in approach, building the advantaged demand chain filter starts with the end user. Some end use segments are more important than others to the company. In most cases, the company’s marketing department will have gone through an extensive exercise to determine which end use segments are the most strategic to the company and why. Market access. Market access highlights whether the demand chain is relevant to the company’s products and services or not. This attribute is usually measured by looking at some combination of revenue and number of customers. If the revenues are high and flowing to a strategic end use, then the demand chain would likely be considered advantaged. Even if the profitability of the end use segment was low, a compelling reason will exist to understand the system economics of this demand chain since the end use segment is considered strategic and the market access is significant. This is a departure from some theories that suggest low-profit customers should be fired and highly profitable customer should be grown. The Demand Chain Economics approach to understanding system economics focuses on quantitatively understanding why the

70

■

■

■

VALUE ANALYSIS

profitability of customers is low before eliminating a potentially valuable point of access to market. Markets of one. In many cases, it helps to think of demand chains as “markets of one.” “One-to-one marketing” is a popular expression, and for industrial companies that encounter large companies within their demand chain, it can be a useful approach. Working through the interrelations in the demand chain from the ground up using the markets of one concept is a much different approach than segment analysis associated with consumer marketing. The markets of one concept builds the chain ecosystem using actual companies and requires the use of proprietary knowledge held by those who live and desire to prosper in their own particular ecosystem. This approach is predicated on the underlying belief that decisions within the industrial demand chain are predominately driven by economics, as opposed to behaviors, and as such are quantitative in nature. For example, the previously described chemical company is involved in chains with many large companies in consumer goods, packaged goods, automotive, and so on, where it is appropriate to understand the economics of the demand chain in terms of how it relates and evolves around a single company. This is important because the company could leverage quantitative demand chain knowledge and make a market by understanding and serving the needs of this company better than its competitors. Ability to influence. Ability to influence is an attribute that is intended to measure a company’s competitive advantage. This competitive advantage can take on many forms, including product differentiation, low-cost production, unique customer experience, and so on. Most companies have analyzed this attribute in their marketing efforts, but we emphasize this point to encourage companies to leverage this input into the advantaged demand chain approach. Customer profitability. Customer profitability is the ultimate bottom-up approach and ensures that demand chains that include current customers who are profitable are analyzed. Most often, developing a quantitative understanding of demand chains that contain a company’s most profitable customers reveals how competitive advantage is perceived from a customer perspective. This information can be used to market to additional customers.

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71

Advantaged demand chains are not necessarily those receiving high scores on all five attributes. In fact, profitable growth usually comes from situations where two or three of the attributes are good and the others are deficient. The two or three dimensions that are good serve to make the demand chain advantaged. The two or three attributes, which are deficient, serve to create opportunity. That said, demand chains that are ranked highly on all attributes can be sources of information to leverage in other demand chains. Now that the demand chains are rated using a combination of attributes the next step is to pick a reasonable number for analysis. The number of demand chains chosen depends on the company’s strategic objectives. If the company focuses on near-term tactical improvement, then analyzing demand chains where “access to market” and “ability to influence” is high will be reasonable. On the other hand, if the outcome focuses more on the longer-term strategic horizon, then more weight should be given to strength of end use.

DEMAND CHAIN CONSIDERATIONS In addition to selecting the most advantaged demand chains, companies should consider some additional nuances as they construct their desired demand chains.

Multiple Participants Though demand chain diagrams can imply a simplified flow along the chain, most demand chains are complex. For many industrial companies, the complete universe of participating companies within a demand chain is more likely to resemble a complex systems diagram or a fully functioning ecosystem. For example, consider a chemical company that produces chemicals for various types of plastics for multiple industries, including the automotive industry (see Exhibit 6.4). This demand chain begins with consumer demand for economical transportation but quickly branches out in divergent directions. Understanding the wants and needs of an automotive consumer is a science unto itself in the area of consumer marketing, and demand chain work does not address consumer behavior. But the

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VALUE ANALYSIS

Consumer marketing

Engineering services & design

Automobile Buyers

Consumer wants & needs

Automobile Dealers

Logistics & transportation

Tier 1 Assemblers

Energy

Tier 2 Parts Manufacturers

Automobile recycling

Additional raw materials

Industrial marketing

Formulators/ Converters Chemical Processing Refining & Cracking

Oil exploration & extraction

EXHIBIT 6.4

Geological services

Automotive Industry Ecosystem

chemical company must begin with this perspective to understand how value is being captured in the system of supplying that demand. Companies that operate in complex, multidimensional demand chains can use Demand Chain Analysis to simplify the complexity that resides within their chains. By using this tool to simplify the complexity, companies can focus more on the proper information to summarize the exchange of value and money throughout the chain. In a perfect world, building out the demand chain would translate into an understanding of how much profit the chemical company captures when a consumer purchases a $40,000 automobile. In reality, the chemical company will probably not be able to isolate its share of profits at the individual automobile level, but the intention is to break down the demand chain into understandable and actionable components to begin quantifying value capture. Types of Demand Chains Demand chains can be characterized into two broad categories: those that are producer-driven and those that are buyer-driven (see Exhibit 6.5).

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Demand Chain Economics

EXHIBIT 6.5

Producer-Driven and Buyer-Driven Demand Chains

Drivers of Chain Core Competencies Barriers to Entry Economic Sectors

Typical Industries Ownership of Manufacturing Firms Network Links Predominant Network Structure

Producer-Driven

Buyer-Driven

Industrial capital R&D, production Economies of scale Consumer durables, intermediate goods, capital goods Automobiles, computers, aircraft Transitional firms

Commercial capital Design, marketing Economies of scope Consumer nondurables

Investment-based Vertical

Apparel, footwear, toys Local firms in developing countries Trade-based Horizontal

You must consider the different demand chains and recognize that every demand chain has unique dynamics that must be understood. Furthermore, along the chain, participants will exhibit different preferences, value propositions, and business models that offer additional insights that can strengthen a company’s overall knowledge and advantage as it works within the chain. Another dynamic to consider is the shift in focus within many demand chains, as the power of tangible assets is replaced by that of intangible activities. As tangible assets become more accessible to global competitors, intangible assets such as knowledge, skills, experience, and marketing have become critical to creating and maintaining effective barriers to entry. Building tangible assets and hoping the demand chain will maintain constant financial returns is becoming more difficult. This shift in power from producers to buyers creates an additional incentive for industrial companies to understand the demand chain. By increasing their understanding of the demand chain drivers, companies can build unique knowledge to differentiate themselves from the competition and increase growth and profits.

Length of the Chain Deciding how far downstream or upstream to conduct a demand chain analysis is another key element of creating a profitable growth

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strategy. The right answer is usually to include all of the demand chain participants from a system economics and then to exclude those of lesser interest during the customer economics stage. Here are some rules to consider when contemplating how wide your initial demand chain: ■

■

■

■

Wider is better. Think of the Customer Value Creation (CVC) process as a funnel in which companies work their way from a large universe of potential value creating opportunities down to the most attractive and likely to succeed. By cycling through the CVC process, gathering additional information, and gaining deeper insights, companies reduce the number of attractive options and determine the most suitable growth opportunities. In this regard, the first attempt at mapping the demand chain should take a wide perspective and include a large number of participants in the chain. This prevents companies from eliminating possible value creating opportunities too early in the process. Furthermore, drawing upon the lessons from behavioral economics in outside-in, by starting with a wider approach to the demand chain, companies can improve their ability to mitigate existing inside-out biases related to the traditional chain that may prevent the identification of new alternatives. Typically, the most appropriate point of origin for the demand chain of most industrial companies (e.g., the participant on the far right-hand side) is the final point of sale. The objective of Demand Chain analysis is to drive toward influencing and capturing value and not to influence consumer behavior. Therefore, we do not want to complicate our perspective with consumer buying behaviors. By mapping from the point of sale, we consider all valuetransforming activities that result in the final product or service. The demand chain should be mapped far enough to the left to capture all value-transforming activities. For most companies, this would mean mapping backward to the point in which commodity inputs are introduced into the chain. Effective Demand Chain Analysis should consider competition along the chain. The primary objective of Demand Chain Economics is to create a high-level snapshot of how the economics are shared across the chain; so, companies must limit the universe of competitors incorporated into the analysis to maintain

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75

the appropriate level of balance between detail and simplicity. In general, companies should consider the top three to five competitors at critical value-transforming steps along the chain. Within each of these steps, an analysis of the competitors’ differing business models, positioning, and attributes of differentiation should round out the demand chain picture. Companies should recognize that demand chain work differs from the traditional supply chain perspective. Demand chains represent complex systems with multiple participants and can reflect fundamentally differing types of demand chains. The next challenge is to understand the flow of money across the chain to establish a quantitative perspective on the dynamics of the chain.

DETERMINE THE ECONOMICS OF THE DEMAND CHAIN Demand Chain Economics focuses on the flow of money back from the customer through the chain. The first objective of Demand Chain Economics is to define the flow of profits and assets that exist through the chain. This perspective on profits and assets along the demand chain typically looks something like that shown in Exhibit 6.6.

Cost versus Profit and Investment As mentioned before, the goal of supply chain initiatives is to focus on cost and cost reduction. A simplified example of the picture developed from this process might look something like Exhibit 6.6. This example shows how the supplier’s price becomes the customer’s cost and the resulting cost buildup as the product moves down the chain. In addition to costs, cycle times and processes are often mapped as well. By better understanding the cost pools and process times, efforts to reduce cost can be prioritized and measured. All of this information is important and essential to a cost reduction initiative. The demand chain builds upon the mechanism used in Supply Chain analysis but moves to include profit and investment. (see Exhibit 6.7). By including profits and investments, the overall

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VALUE ANALYSIS

Example Supply Chain Raw Materials

Components

Subassembly

Final Product Production

Price

Price

Price

EXHIBIT 6.6

Price Cost

Distribution

Price Cost

End Customer

Cost

Cost

Cost

Cost and Profit Pools

economics of the chain start to come into view and help generate a deeper level of questions and insights. An interesting insight from the demand chain perspective is how the economics of the chain do not apply in the same way to the end user. For the end user, there is a cost but there is no outbound selling price. An approach needs to be used to create an understanding of how the end user places value on the product or service received. This aspect of value is considered in more depth during the Customer Economics phase. Demand Chain Economics is dedicated to generating a systems view on how money flows from sources of demand back to sources of supply (see Exhibit 6.7). As stated in the definitions at the beginning of the chapter, money connotes the overall financial returns for the provider. This definition considers income received plus investments required. Demand Chain Economics does not define how value is created and delivered; instead, it considers the distribution of profit and investment within the chain. Though it does not provide the exact reason for why and how value flows forward, it creates a framework from which logical questions about the money flows can be asked. Demand Chain Economics can be thought of as

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Demand Chain Economics

EXHIBIT 6.7

Demand Chain Including Profits and Investments

End Produce Assemble Assemble Distribute Deliver Customer TOTAL Profit Investment ROI

$50 $60 84%

$200 $2000 10%

$10 $20 50%

$(10) $60 (17)%

$340 $1400 24%

Value? Cost? Return?

$590 $3540 17%

a tool for creating a systems view of the economics occurring through a chain of demand and supply. As we have discussed, the ultimate goal is to understand the flow of value within the demand chain. Though Demand Chain Economics is driven by profitability and investment, this step in the process is still critical to understanding the dynamics of the chain because the distribution of profits often has a high correlation with and serves as a proxy for value creation within that chain. Prior to embarking upon Customer Economics and taking the time to engage actual customers in deep dialogue to quantify that value, profitability in the demand chain serves as a directional guidepost. Based on this systems-level view of economics, companies are positioned better to develop informed ideas and hypotheses. Once they have gathered and assembled the necessary data to map the participants in the chain and the system economics, many companies will for the first time have a complete view of the system economics within a given demand chain. Now that this information is captured, how do you use it to gain new insights?

POWER WITHIN THE DEMAND CHAIN Not all players are created equal in the demand chain. Power is typically asymmetrical due to concentrated demand, proprietary technology, control of downstream customer access, and so on. One of the keys in developing Demand Chain Economics is to identify these sources of power and understand their impact on your ability to influence desired outcomes. Exhibit 6.8 shows a demand chain with good overall financial returns. Total demand chain profits of $605 million against an asset

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Company #1

Company #2

Company #3

Company #4

Company #5 TOTAL

Profit

$200

Investment

$2000 10%

ROI

EXHIBIT 6.8

$10

$(10)

$340

$65

$605

$20

$60

$1400

$100

$3580

50%

(17)%

24%

65%

17%

Demand Chain with Profit by Participant

base of $3.58 billion yield an overall return on assets of 17 percent. This is not spectacular performance for an overall demand chain, but it is sustainable and will support ongoing capital investment. However, closer examination indicates that not all participants within the chain are receiving the same return. This indicates that competitive forces are at work on the individual economics within the system. In this case, the first and third companies need to change to improve their returns. Consider how the first company might use Demand Chain Economics information to form its approach to driving a profitable growth agenda. The first company has $2 billion of assets invested in the demand chain representing over 50 percent of the total assets deployed. This company is only receiving a 10 percent return on these assets, which is less than the average for the demand chain and not high enough to generate interest in further capital investment. The first company may have been reducing its costs for several years, but it must focus on driving profitable growth and set a goal to achieve at least a 15 percent return on assets. This means this company needs to increase its profits by $100 million. This company can gain several insights by considering its challenge relative to the demand chain picture.

ALIGNMENT OF INTEREST The first company determines who along the demand chain may have similar interests to its own of increasing the overall profits generated by the demand chain. This company can see that $100 million is a large amount of profits relative to the total profits being generated in the demand chain. Since $100 million is large, there is little likelihood

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79

the first company will be able to extract this amount from the existing demand chain profit pool. So the first company sees that it must increase the overall demand chain profits. As this company looks across the demand chain at the other companies that it coexists with in this economic system, it discovers a few things. The fourth company has a large financial stake in the demand chain. Though the fourth company is receiving a good return, it would likely be a willing collaborator in finding ways to increase the overall value generated by the demand chain. The first and fourth companies have similar interests. The interest alignment between the first and second companies is not so obvious. The second company’s investment in the demand chain is low as are its profits relative to the total profits generated by the chain. Though the second company is the first company’s direct customer, it may well be that the second company is less willing to collaborate than the fourth company because the second company is making excellent money by participating in the demand chain as it operates without having to invest serious capital. The second company is interested in maintaining the status quo. The third company is losing $10 million on an investment base of $60 million. This company would definitely like to find ways to increase the profits from the demand chain. The first company would probably find a willing collaboration partner in the third company. From an interest perspective, the third company would be more interested in improving short-term profits. As long as the first company orients its collaboration efforts toward the short term, the match between the first and third companies could be good. If the first company wanted to take a longer-term play, its interest would be less aligned with the third company.

ECONOMIC PERFORMANCE OVER TIME Considering financial performance over time creates additional insights about Demand Chain Economics. Exhibit 6.8 is a financial snapshot of the demand chain as it works today. For most demand chains, the system economics change over time. In some cases, the changes can occur in two-year to three-year intervals, and other changes occur over 20-year to 30-year cycles. The important thing

80 EXHIBIT 6.9

VALUE ANALYSIS

Change in Demand Chain System Economic Information Over a Four-Year Period Company Company Company Company Company #1 #2 #3 #4 #5 TOTAL

Profit

2005 2001 Investment 2005 2001 ROI 2005 2001

$200 $300 $2000 $1600 10% 19%

$10 $6 $20 $13 50% 46%

$(10) $32 $60 $60 (17)% 53%

$340 $260 $1400 $1900 24% 14%

$65 $62 $100 $100 65% 62%

$605 $660 $3580 $3670 17% 18%

relative to developing a profitable growth agenda is to develop a perspective on the current trends. Exhibit 6.9 shows the change in demand chain system economic information over a four-year period. The overall results of the demand chain have changed little, but financial shifting has occurred within the chain. In this case, return on assets (ROA) has dropped by one percent over four years and on a slightly lower asset base. The decline in ROA is consistent with ongoing downward pressure on profits and an ability to achieve results with a lower asset base. The real story here, however, is how profits and investments have shifted between the first and fourth companies. The first company has seen its profits drop by $100 million, but its investment base has increased by $400 million. On the other hand, the fourth company has had the reverse fortune: Its profits have increased by $80 million while its investment base has shrunk by $500 million. In addition to the profit pool shifting between the first and fourth companies, significant economic change has occurred with the third company. By adding a time element to Demand Chain Economics, additional insights and questions are raised regarding why profit and investment pools are shifting. At this stage of Customer Value Analysis, the objective is not to determine why these shifts in value are occurring. Identifying cost and revenue value drivers is done in Solution Valuation. At this stage, companies have developed a valuable map that is driven from the customer backward and captures the distribution of profits within a given chain. Before proceeding to begin capturing information from a value perspective, companies must first make

Demand Chain Economics

81

some important decisions to begin limiting the scope of their focus. Conducting detailed Demand Chain Economics and Customer Economics analyses requires countless hours of research, data collection, and customer interaction. Ultimately, this work must be completed on all major value chains that a company participates in, but the operational reality is that most companies will not have the available resources, access to customers, breadth, or market research capability to assess multiple demand chains simultaneously. To help focus the efforts of the organization toward the most likely opportunities for success, the next step is to select advantaged value chains that are best suited for further analysis.

SUMMARY Demand Chain Economics is one of the most powerful tools that needs to be used routinely in the next generation of Six Sigma. Through the course of our work, we have seen hundreds of marketing and business plans. Many of these plans utilize popular business school tools such as Porter’s Five Forces; strengths, weaknesses, opportunities, and threats (SWOT); and so on. What is missing in nearly every plan is the straightforward perspective of how goods and information flow, where the money is made, and a linkage to the source of demand. Once this information is complete, then a much better picture of the business ecosystem evolves. This picture can be used to create a better frame from which to apply the business school tools.

CASE STUDY: MULTINATIONAL CHEMICAL COMPANY Chemical Company Cost versus Profit This case details how by taking a profit and investment approach a different outcome is reached than by taking a more traditional costbased approach. In this case, a chemical company was exploring alternatives to develop new solutions in one of its most complex supply chains. Since this particular supply chain was important, the company had mapped out the chain and identified product costs as they flowed through the chain.

82

VALUE ANALYSIS

Using this model, the chemical company came up with a number of solution ideas. Each of these ideas was assessed based on how it reduced cost and how that cost rolled through the chain. For the most part, the ideas generated fell into two categories. The first category focused on how the chemical company could reduce its cost and what that would mean to the other suppliers in the supply chain. For these solutions, the supply chain view was helpful in creating context for how relevant a cost reduction by the chemical company would be to the overall product. The second category of ideas focused on how the chemical company could market higher-value products. In this solution, the cost from the chemical company would go up but the cost from downstream participants would go down since their jobs were made easier by this value-added chemical. Exhibit 6.10 is a simplified version of the chemical company’s value chain. The baseline represents the cost for each step of the process. In this case, the chemical company contributed $6 toward the cost, the component supplier contributed $44, and the molder contributed $86 for a total cost to the OEM of $136 for this particular product (the costs are cumulative). On the cost-reduction front, the chemical company in collaboration with the component supplier devised an approach that would allow each company to save $0.25 per unit. Both companies decided that their respective cost reductions would not be passed down the line but instead be dropped to the bottom line as profit. As such the cost perspective of the supply chain did not change. The cost reduction project went forward without a hitch. The component supplier embraced the change, and both companies realized their targeted $0.25 savings ahead of schedule. EXHIBIT 6.10

Baseline Cost Reduction Growth

Cost Per Unit Analysis Chemical Company

Component Supplier

Molder Integrator

OEM

$6 $6 $10

$44 $44 $40

$86 $86 $80

$136 $136 $130

83

Demand Chain Economics

The chemical company through its Research and Development (R&D) efforts developed a new chemical formulation that would streamline the overall process. This new chemical formulation represented a higher-value product to the chemical company and would reduce the total supply chain cost by $6 per unit. Based on the overall cost reduction in the supply chain and the lure of selling a higher-value product, the chemical company moved forward with its growth project. After several months of failing to gain traction with its new value added product, the Chemical Company was forced to reassess the viability of its growth plan. The project to grow through a higher value product did not go as well. Looking deeper into the economics of the chain provides insights into why these projects were received differently. By looking at profits and investments in the chain, a different picture comes into perspective (see Exhibit 6.11). The chain shows that the chemical company benefits by introducing the new value-added product. The new product generates increased profits of $1.40 per unit without adding any capital to its investment base, which is high. For the OEM, the potential $6 reduction in costs would result directly in a $6 improvement in profit. From an overall chain perspective, the profit change is positive at (1.4 + (.2) + (2.62) + 6) = $4.58. Even with these positive drivers, the Chemical Company is unsuccessful in driving the change. Why? EXHIBIT 6.11

Baseline Cost Margin Unit Profit Growth Cost Margin Unit Profit Profit Change Investment Base

Growth Economics Chemical Company

Component Supplier

Molder Integrator

$6 10% $.60

$44 15% $6.60

$86 17% $14.62

$136

$10 20% $2.00 $1.40 High

$40 16% $6.40 $(.20) Low

$80 15% $12.00 $(2.62) High

$130

OEM

$6

84

VALUE ANALYSIS

The answer resides with the molder integrator. The molder integrator is unwilling to adapt the new chemical product since its profits are reduced. With its high investment base, the molder integrator is going to do everything in its power to protect its turf. The particulars of this example continue and could form the basis for more analysis. A few insights, however, can be made at this simple level: ■

■

■

Growth opportunities need to be assessed relative to their impact on profits and investments for all participants in the demand chain. Even though looking at costs in the supply chain is sufficient for cost reduction initiatives, the cost approach is usually insufficient for growth-oriented initiatives. Participants in the demand chain need to cooperate to maximize the value produced by the demand chain. In the example above, the demand chain is suboptimized because one participant who has power is unwilling to lose so the overall chain can win. If the chemical company and molder integrator had worked together and agreed upon a method to split the potential gains, they may have both been better off. Assets or investments along the demand chain play an important role in shaping interests. In the example above, the two participants that have the most invested in this demand chain are the chemical company and the molder integrator. These two companies should be interested in collaborating with each other and others to find opportunities to improve the overall return of the demand chain and the potential return on the large investment they have made. These companies have a lot to lose. In the end, their natural “aversion to loss” is more powerful than their passion for gain, and the demand chain remains suboptimized.

CHAPTER

7

Solution Concepts t this point in the Customer Value Creation (CVC) process, a company has gained a thorough perspective on the current state or As Is economic picture. Participants have assessed their own customer economics and completed an external analysis to identify advantaged demand chains (e.g., the highest-priority demand chains). Mapping the links along the demand chain and determining the system economics provides valuable insights and observations about the dynamics of the chain and the balance of power. Understanding the As Is situation provides the proper context to begin thinking about the Could Be or potential growth opportunity for the organization. The focus will now shift from current state analysis to innovation development. And the basis for measurement will shift from economic terms to a value perspective. This chapter represents this transition to thinking in terms of value. It is focused on finding potential opportunities for value creation along the Demand Value Chain (DVC). Through this phase, companies develop Solution Concepts that represent the portfolio of ideas and new products concepts that exist within a company that management believes can create value and drive profitable growth. During this phase of CVC, the objective is to leverage the quantitative analysis we have conducted to develop hypotheses about where value creation opportunities reside along the demand chain and to map the company’s existing Solution Concepts and future ideas for value creation to align with these opportunities. This step requires the company to collaborate with customers and other companies that exist along the value chain. The challenge is to explore opportunities to

A

85

86

VALUE ANALYSIS

increase the return of a larger set of assets along the DVC than is owned by any one individual participant. Exhibit 7.1 represents the framework for this analysis. The transition to Solution Concepts requires a different approach to thinking about innovation and how value is defined. To frame the objective of this stage of the CVC process, recall several relevant themes highlighted throughout the book: ■

■

Quantitative rigor. Developing a thorough, quantitative understanding of the demand chain may be difficult, but it can yield valuable returns. Most demand chain examples have enough information from research, interviews, and internal knowledge to piece together a fairly robust quantitative perspective of the chain. Once a quantitative demand chain perspective is developed, companies have a strong foundation for engaging partners in robust discussion on value creation within the ecosystem. Outside-in mind-set. The emphasis on value reinforces the need to meet with customers in person. No other single activity generates more insights than engaging customers in a rigorous process focused on understanding and building value. In addition to end customers, companies should collaborate with other stakeholders along the demand chain. This will provide a more thorough understanding of opportunities and capabilities throughout the

DESIGN

PRODUCE

ASSEMBLE

DISTRIBUTE

DELIVER

END CUSTOMER

Demand Chain Economics

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

Cost

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

Profit

$200

$10

($10)

$340

$10

$65

$615

Solution Concepts

TOTAL Revenue

Opportunity

Investment ROA

$2,000

$20

$60

$1,400

$20

$100

$3,600

10%

50%

(17)%

24%

50%

65%

17%

Value Potential Solutions Cycle Time

EXHIBIT 7.1

$0.0

Framework for Innovation Development

Solution Concepts

■

87

chain. One caveat is that not all members in a demand chain ecosystem will be receptive to engaging in a detailed exploration of value creation and capture. This should be viewed as normal since some participants are more attractive collaboration partners and others are more tactical and transactional in nature. Iterative approach. This aspect draws upon Six Sigma work but with a moderate change for the purpose of CVC. Reality dictates that we cannot achieve 99.9995 percent accuracy or correctness. For this reason, we recommend a gated approach to demand chain work, so the level of rigor is matched with the business need. This important idea needs to be reinforced constantly as a company proceeds in the CVC process. The power of the CVC process to profitable growth does not come from long periods of internal analysis. The power results from taking a quantitative, repeatable approach that leads to learning over time. Sometimes companies can get so wrapped up in defining their internal perspective on solutions and value that they do not focus the appropriate amount of energy on their customers and other participants in the demand chain. Throughout the CVC process, one rule that needs to be kept at the forefront of the mission is: “Capture the best internal hypothesis and move on so the market has an opportunity to comment.”

With these themes in mind, we now begin the process of developing Solution Concepts. The approach to assembling Solution Concepts and establishing the foundation for quantifying value consists of these steps: Step 1. Identify “Target” Solution Concepts ● Gather solution concepts ● Prioritize and classify concepts Step 2. Define Value Drivers Define customer value attributes ● Develop value driver hypotheses ●

Step 3. Conduct Collaboration Interviews Identify potential collaboration partners ● Conduct external interviews ● Validate Solution Concepts and value drivers for Solution Valuation phase ●

88

VALUE ANALYSIS

IDENTIFY TARGET SOLUTION CONCEPTS Gather Solution Concepts Solution Concepts can originate from a wide continuum of different sources. The CVC philosophy does not limit the pool of potential solutions to only those created from external exploration and interviews with participants in the demand chain. CVC considers solutions from all sources to identify the best sources of value creation for customers. Throughout this process, the sources of solutions should be balanced just as the objectives of those solutions should be balanced. Recall the picture of Value Analysis shown in Exhibit 7.2. This picture illustrates the range of different solution sources from the supply side on the far left to the demand side on the far right. Value-creating solutions can originate at any point along this continuum. On the left are those solutions that are driven from an individual company or industry. These solutions may originate from the company’s R&D efforts or an insight on how to maximize the effectiveness of the network. On the far right, demand-oriented solutions are driven by forces and factors in the market associated with the future needs of consumers. In the middle exists a vast space of potential solution combinations and permutations between the companies who participate in the demand chain. During our efforts to execute profitable growth solutions, we have found that efforts to find solutions at either end of the spectrum are well developed. As an example, on the left is a large body of work at most companies around why their next manufacturing plant will be in China and how by doing so value will be created. On the far right is a tremendous amount of science on what type of cars will be driven 10 years from now. The current gap for new solution development occurs in the white space in between. In our experience, this space is where you see value creation such as: ■

A printing company that needs to begin working collaboratively with a retailer to maximize their mutual assets to produce weekly newspaper inserts.

89

Solution Concepts

Industry

Market Money

Supply

Demand

Value

EXHIBIT 7.2

■

■

Value Analysis

A chemical company and an automobile manufacturer where a modest change in chemical formulation may allow three steps in the compounding and two components in assembly to be eliminated. A garbage truck manufacturer and a waste management company where a modest engineering improvement could enable one garbage truck to cover the route previously served by two.

None of these examples requires futuristic study or insight into the next source of low-cost labor or materials. What all of the examples require are collaboration, financial understanding, and a desire to create value.

Internal Sources of Solution Concepts Every company holds vast amounts of knowledge about its customers and markets. The intent of this step in the process is to leverage internal knowledge to develop a point of view or hypothesis on where opportunities to create value and drive profitable growth reside along the demand chain. Existing Ideas Almost without exception, companies are spending money on growth they hope to be more profitable than today. Money can be spent by focusing the energy of a sales force on a particular product or customer segment, enhancing a product’s strengths

90

VALUE ANALYSIS

characteristic, or developing the molecular structure of the next plastic. These projects should be included in the CVC process so they can be evaluated on the express quantitative value they create for customers and for the company. Projects to generate profitable growth can generally be found in these areas: ■

■

■

Business or Marketing Plans. Most companies will have plans developed by business units or marketing that includes growth or profit improvement targets. To the extent these targets are higher than trend line, then some discussion is usually included as to what solutions or value is being generated to support growth. These concepts should be included in the process to determine if the value clamed can be found in the demand chain. Capital Plan or Product Development. The capital plan along with product development can be a good source for current projects or solution concepts. Though these projects should be in step with sales and marketing, there are times when the two are not aligned. Research and Development (R&D). R&D will sometimes have projects underway that are not on the radar screens of sales and marketing or in the capital plan. Depending on the particular situation, these projects may be too far into the future or too sensitive to be included in the process. Either way, R&D projects should be discussed for inclusion in the process.

Additional insights can be gained by interviewing individuals in the organization. Generally, people within the organization get genuinely energized when engaging in a discussion about ways to drive profitable growth. Most people recognize that growth is more aligned with job creation whereas cost reduction is synonymous with job elimination. In this regard, discussing concepts to fuel growth creates a positive attitude. The primary reason for talking to individuals is not to spread goodwill and cheer, however, but to discover solution concepts. Individuals throughout the organization are a good source of information, and many good solution concepts go undiscovered because of a lack of an existing infrastructure to

Internal Interviews

Solution Concepts

91

aggregate these solution concepts. Herein lays one of the reasons Six Sigma has been successful for cost reduction. Six Sigma provided a common language and communication channel for individuals to insert their ideas for cost reduction and process improvement. The same language and communication channel has not existed for growth, but the CVC philosophy is a good step toward creating this language. Conducting formal and informal interviews with individuals to hear their ideas for growth is powerful for its insights and its effect on people’s prospects for the future. In addition to gaining insights for growth, the process of interviewing individuals serves as a process for practicing and perfecting the subject matter and interview skills that will be needed when engaging participants in the demand chain. To this end, the materials used to conduct internal interviews should be as close as possible to those that will be used during the value chain participant interview process. Presenting a well-articulated point of view will demonstrate commitment and raise the level of credibility with those demand chain participants.

Push and Pull Concepts As discussed earlier, projects can come from the supply side, the demand side, or from somewhere in between. It is useful to think of concepts as having a “push” or “pull” basis. Push concepts are those the company thinks will maximize its competitive position in the market and create value in the demand chain. These projects will likely support the company’s competitive strategy. Pull concepts are driven by the market or voice of the customer (VOC). Both sources of solution concepts have merit. The final decision to choose a concept for execution should be based on a quantitative and factual assessment of the value delivered to the customer and of the value captured by the company. Pull and push concepts are often an area for debate. Those who line up on the side of focusing on pull projects fundamentally believe that the VOC is the best source of intelligence for future projects. This group will point to long histories of project failure that could

92

VALUE ANALYSIS

have been avoided through customer collaboration. The group lined up behind push projects will suggest that customers have limited perspective on the types of solutions they will value in the future. Our experience in generating profitable growth is that no one has cornered the market on good solution concepts. Sometimes, the best concepts come from internal interviews with sales professionals, and other times they come from the CEO of a large customer. The CVC approach emphasizes a wide funnel for solution concept input and then rigorously assesses each concept from a value quantification perspective to filter toward the most attractive alternatives.

Prioritizing Internal Solution Concepts As companies assemble their internal solutions from across the organization, they must simultaneously develop an approach to assess and prioritize this solution portfolio. The more detailed this level of information, the more effective the final assessment of each Solution Concept will be. Thinking about each Solution Concept within this more rigorous context will facilitate the final assessment and prioritization process. The practical reality is that most companies will not have the time or resources to analyze and quantify every Solution Concept’s impact on value creation. Therefore, establishing an approach to prioritizing each Solution Concept up front will help drive toward the proper direction. To consider the breadth of impact and challenge associated with each Solution Concept, companies should evaluate their opportunities in light of the market attractiveness of the concept as well as the company’s ability to deliver the offering. ■

Understanding the external attractiveness or interest in the concept is a critical first step. Companies need to begin capturing a quantitative perspective on several qualitative variables to understand how valuable each solution can be within the market. Factors to consider include: ● Strategic Alignment. How well is the product/service aligned with the current product offering, the company’s core competencies, or stated strategy?

Solution Concepts

93

Customer Perceived Value. From an inside-out perspective, how well is the solution aligned with customer needs? (This should be validated externally thereafter). ● Competitive Advantage. Does this solution create a competitive advantage for the company? Does a competing solution exist with similar attributes or positioning? ● Market Attractiveness. An assessment of the market opportunity size addressed by the solution. Does the solution augment an existing product or offering? Does it open new markets or attract new customer segments? ● Time to Breakeven. Payback period, level of required investment. ● Company Value Add. This factor leverages the findings from Demand Chain Economics to assess how the solution contributes to the total amount of value creation within the demand chain. The internal capabilities of the company to deliver the solution. ● Technical Gap ● Solution Complexity ● Availability of Resources ● Permission to Serve ● Competitive Intensity ● Market Need ●

■

For each of these categories, quantitative rankings should be collected from multiple sources from within the company to develop a weighted average scoring summary to rank each category. Exhibits 7.3 and 7.4 are typical representations of financial attractiveness and success probability.

PROBABILITY OF SUCCESS As solution ideas are found and analyzed, they should be considered in the context of value delivered above that available from other demand chain competitors. To create value, the delivered value must be greater than that available from the competitive set. Furthermore, the parties exchanging this value need to agree the value is real.

Technical Gap

100% 30% 10% 50% 80%

Solution Concepts

Solution Concept 1 Solution Concept 2 Solution Concept 3 Solution Concept 4 Solution Concept 5

Probablility of Success

Solution Concept 1 Solution Concept 2 Solution Concept 3 Solution Concept 4 Solution Concept 5

EXHIBIT 7.4

9 8 6 8 9

Solution Concepts

Project Attractiveness

Strategic Alignment

EXHIBIT 7.3

PROJECT ATTRACTIVENESS

9 6 8 3 8

Competitive Advantage

100% 80% 10% 50% 75%

80% 70% 10% 60% 60%

Solution Availability of Complexity Resources

9 9 10 5 8

Customer Perceived Value

100% 100% 80% 80% 80%

Permission to Serve

6 7 10 4 8

Market Attractiveness

80% 60% 100% 30% 70%

Competitive Intensity

10 9 0 8 8

Time to Breakeven

90% 90% 50% 60% 90%

Market Need

7 5 0 3 6

Company Value Add

92% 72% 43% 55% 76%

AVERAGE

8.3 7.3 5.7 5.2 7.8

AVERAGE

95

Solution Concepts

Opportunity and Value Potential In conjunction with the process of gathering internal information about Solution Concepts, the findings from Demand Chain Economics are incorporated to identify attractive segments along the demand chain. First the steps in the chain are considered. Usually, the best approach is to have Solution Concepts that cover each step of the demand chain rather than having all solutions stacked up in a particular step. Within each step, the company should generate insights with respect to factors such as opportunity and value potential (see Exhibit 7.5). ■

■

Opportunity is a qualitative measure of the room for improvement at the particular step in the demand chain. If a large amount of room for improvement exists, then the assessment for opportunity will be high. If the process works well at a particular step in the demand chain, then the assessment for opportunity may be low. Value potential is a qualitative view of the magnitude of value that can be created at a particular step in the demand chain. If, for example, the opportunity is considered high and the revenue flowing at a particular step is high, then the value potential will probably be high. The reason for this is because the step in the demand chain is viewed to be operating poorly, and a great deal of money is involved at that particular step.

Company #1

Company #2

Company #3

Company #4

Company #5 TOTAL

Profit

$200

Investment

$10

$(10)

$340

$65

$605

$2000

$20

$(60)

$1400

$100

$3580

ROI

10%

50%

(17)%

24%

65%

17%

Opportunity

High

Low

High

Medium

Low

Value Potential Solutions Cycle Time

EXHIBIT 7.5

High

Low

Medium

Medium

Low

Concepts 5, 8, and 15

Concept 2

Concepts 1 and 4

Concepts 3, 6, 7, 9, and 10

Concept 12

2 weeks

6 days

5 days

6 weeks

3 days

Demand Chain

10 weeks

96

VALUE ANALYSIS

In addition to having Solution Concepts for each step, it usually makes sense to have more projects for steps in the chain that have high value potential and fewer projects for steps with low value potential. The completed view of the demand chain after going through the collection of internal Solution Concepts should look something like Exhibit 7.5.

CASE STUDY: THE POWER OF TALKING SOLUTIONS Oftentimes, the most effective approach to conveying the power of these ideas is through anecdotal examples. In this case, informing companies that they need to get outside and meet with customers does not sound all that groundbreaking. The unfortunate reality is that in many cases, long-held beliefs and entrenched ways of thinking often cloud executives in their ability to see they are not doing enough with customers, or their expectations of what will come from customer discussions are off target. Let us return to the printing company that was struggling to find new growth opportunities within the newspaper insert segment. The following story sold this particular company on the power of this process for life. The company had gone through the CVC process and was now on the verge of visiting its first customer. The printing company was nervous because it had never done anything like this before with its customers. In the past, it had sent customer satisfaction surveys and organized some VOC sessions. All of these past efforts were mostly qualitative in nature and focused on what the retailer thought of the printer’s business. Now the printer was going to the retailer with a quantitative approach that almost felt intrusive in its aim to understand the drivers of value in the retailer’s business. Maybe some of the facts in the demand chain economics were wrong. Maybe the retailer would not appreciate any of the solution concepts. The printer did not have a co-development partner. So the printer thought about its demand chains and customer base and chose three companies it believed would make could co-development partners. A brief note was sent to the individual who had direct profit and loss (P&L) responsibility for the media budget for each company with a high-level explanation of the process. For one company, the P&L holder was in SVP Advertising, in another the chief marketing officer,

Solution Concepts

97

and in another it was a VP Operations. Two out of the three executives accepted the invitation. The meeting was on! The first meeting was with SVP Advertising of one of the largest retailers in the world. From the printer’s side, two people attended the meeting, the VP and general manager of retail, and a marketing VP. In the meeting, the printer shared its findings to date. Together, the retailer and the printing company reviewed the steps of the demand chain and its economics. The printing company shared the solution concepts it had developed and discussed them with the retailer for 20 minutes or so. About 45 minutes into the meeting, SVP Advertising started into a conversation that changed the course of the meeting and the course of the printer’s business. The SVP Advertising said, “Ok, you’ve obviously done your homework and this work is thorough. You’ve got the chain about right and the economics seem reasonable. Where you have missed the boat however is in the Solution Concepts. Our biggest problem has little to do with the mechanics of the current chain or any of your Solution Concepts. Our number one problem is that only 70 percent of the population receives a newspaper. Thirty percent of the population is not receiving our weekly print advertising. This problem is more acute in the fastest-growing segment of the population, the Hispanic population. The opportunity lost for us in not reaching these potential customers is more than all of the profits you show in the demand chain. So, if you can help us reach these customers, then you will have created value. A light went on for the printer. It had not even come close to identifying this kind of problem during its solution concept development process. Though the problem was a difficult one, and something the printer could not get done by itself, the printer was clearly in a position to influence the efforts of many participants in the chain toward this challenge. As important as the specific finding, though, was the realization it was talking to this large customer for the first time on a true business level. Still euphoric from the session with this customer, the printing company met with the other retailer who had accepted its invitation to participate in the process. This second session had similar results. The printer shared its desire to embark upon a rigorous approach to driving growth and went on to share results that had been generated so far from the process. The retailer was impressed by the detail, and

98

VALUE ANALYSIS

a 20-minute conversation ensued about the mechanics of the demand chain. Then, as in the first session the retailer, as if on cue, started talking about its biggest problems within the demand chain. The retailer began discussing the rapidly expanding number of versions it was creating in its newspaper insert program. The retailer had been attempting to improve consumer response rates by creating timelier ad messages. For example, instead of running a blanket back-to-school piece at one time around the country, the retailer was timing its piece in relation to when a specific part of the country started back to school. The same kind of event based targeting was being used for the entire marketing calendar. Though the response rate improved, the additional costs associated with versioning increased the total cost, making the overall return on investment questionable. As a way to make the system operate more efficiently, the retailer was considering the installation of a new media management system. Could the printing company help? In this case, the printing company had considered a better solution to versioning. What the printer did not understand before was that the drive behind more versions was an effort by the retailer to increase response rate. Of course, for the printer, this increase in the number of versions came with an overall decrease in the number inserts per order. The combination of more versions and shorter runs were hurting the printer’s business. With a better understanding of what was driving the change for the retailer, the printer could create a value adding solution for everyone. Overall, the printer considered its first step toward working collaboratively with its customers toward a quantitative approach to growth to have been wildly successful. And, a few lessons were learned: ■

■

The only reason any of the sessions worked was because the printing company had done its homework and presented a “best guess” framework of the demand chain, its economics, and potential solution cases. The retailer learned as much from this approach as the printing company had learned. Having a well-defined process going into the discussion with the customer helped create a sense of direction and purpose for the session.

Solution Concepts

■

99

The retailer’s problems were not perfectly aligned with the printing company’s capabilities and vice versa. The printing company recognized that as much as it tried, its solution concepts were developed around its capabilities and not necessarily around creating solutions for the customer problem. The printer learned that it needed to understand the customer problem and then figure out how best to leverage its own capabilities within the context of that problem.

DEFINE VALUE DRIVERS As we have already mentioned, it is important to fully understand the key elements of value in the eyes of the customer. As companies go through this exploration, they realize that customers perceive value in many areas that are not readily visible. Leading companies don’t stop at uncovering these new value-delivering attributes of their offerings. The best companies not only understand the value that customers place on the various attributes of their offering, but also apply quantitative rigor to measure that value. Without this detailed understanding many enterprises are left to hang their hats on benefit statements that are attached simply to their product’s specifications. These often fail to articulate the real value they deliver. In Chapter 4, we introduced the concept of customer value (see Exhibit 7.6). From a customer’s perspective, total value is comprised of four elements: product performance, access, experience, less the corresponding cost (PAEC). From a supplier’s perspective, understanding each of these value attributes is critical to deconstructing a customer’s value perceptions and creating a framework for building a quantitative model of total value. Two primary objectives are in the Solution Concepts phase. The first is to identify and prioritize Solution Concepts. The second objective is to identify the value drivers that can be used in the Solution Valuation phase to quantify value. The customer value framework (PAEC) is the tool to develop the initial hypotheses of these drivers. After establishing these initial thoughts, these hypotheses should then be validated through the external client interviews conducted later in this stage of the process.

100

VALUE ANALYSIS

Customer Value = +

(Product

Access

+

Experience

−

Cost)

• Performance

• Availability

• Service

• Price

• Features/ Functions

• Reliability of Supply

• Solutions

• Total Cost of Ownership

• Technical Innovation

• Distribution Channel

• Impact on Customer

• Process Cost

• Brand

• Payment Terms

The enterprise delivers value to customers across each of the dimensions of the relationship

EXHIBIT 7.6

Elements of Customer Value

Value Attributes To leverage the customer value framework (PAEC), consider each of the individual value attributes in more detail. Of the four elements of value delivered to customers, product attributes is the category that enterprises relate to most easily. After all, most enterprises tend to have a large number of people in R&D, engineering, product design, and operations. These people configure and reconfigure their product’s features and functions in the hope of gaining a competitive edge. Unfortunately, they spend more than 90 percent of their time focused internally. They are not out in the market understanding customer requirements or the value that customers place on performance features or the tradeoffs they are willing to make. This inward focus drives products that are overdesigned and loaded with features and functions that add to manufacturing and other costs while offering little or no added utility to the customers. A good example of this rampant phenomenon over design is the Microsoft Office family of products where 80 percent of the functions remain largely unused by the majority of customers.

Product Attributes

The second category of value drivers is defined by how accessible an enterprise’s products and services are to the marketplace. Many enterprises fail to recognize this source of value that

Access Attributes

Solution Concepts

101

they provide to their customers. Dell Computer (Dell) is a good example of this point. Ask Dell about the value of accessibility of supply. Dell requires its suppliers to deliver orders 15 minutes after it places them. A single unavailable component can bring an assembly line to a grinding halt. When selecting a supplier, proven availability and reliability are key elements in the selection of one supplier over another. The third category of value drivers is defined by the overall experience customers have as they use an enterprise’s products and services. Experiences are initially shaped by impressions of the enterprise’s brand and are more strongly influenced by each direct interaction between the customer and each of the enterprise’s employees. These interactions take place at many stages of the buy-pay-use cycle. Leading enterprises pay close attention to the way they design their customer facing processes, how they train their service organizations, and how they build their brands. The enterprises that understand customers’ experiences across transactions can reap the benefit of superior pricing, higher margins, and the creation of higher switching costs. By developing a deeper understanding of the overall context in which customers use products and services, the enterprise can uncover customer needs that are unfulfilled by competitors. In filling these needs through a uniquely designed solution that leverages the enterprise’s products and services, accessibility, and experience, leading enterprises increase the value that customers perceive as being above and beyond what the competition has to offer.

Experience Attributes

Cost Attributes Cost attributes are often the most difficult ones around which to build consensus. Too often, the enterprises and the customers take a myopic view of cost by limiting the discussion to the purchase price. The most astute buyers and sellers realize that the invoice price is merely one of the costs associated with using a product or service. Perceptive enterprises and customers focus on the customer’s total cost in buying and consuming an offering. This allows enterprises to communicate the value of its offering better over its entire useful life and allows the customer to make a more economically effective purchase decision.

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Customers incur a range of costs in consuming an offering: search costs associated with finding the right product and vendor, vendor management and legal costs associated with contract negotiations, product disposal costs associated with getting rid of the used product or waste, personnel costs related to training for product sale or consumption, and the costs associated with whatever differentiates the product’s performance from a competitive alternative. Enterprises that understand value management will appreciate how each of these costs affects their customers’ ability to make money. Leading enterprises work with customers to reduce the total system costs experienced over the life of an offering and, thereby, add additional value for their customers.

Develop Value Driver Hypotheses That was interesting, but so what? Well, we have just taken you through this dialogue on the elements of customer value (PAEC) to clarify each of these attributes in more detail. As the four fundamental components of value from a customer’s perspective, PAEC represents an excellent framework for beginning our discussion of value. Remember that our final objective is to quantify the total financial potential of each Solution Concept in terms of value. Keep this in mind as we think about value drivers and we embark upon our external customer visits. Remembering the end game will help shape our perspective as we approach the meeting and clarify our expected outcomes. So, how do we come up with our initial value drivers? Recalling the outside-in focus and the discoveries from mapping the demand chain, you must think in terms of the customers’ overall objective. Why are end customers in business (as before, we are referring to point of sale, not individual consumers)? What is their primary objective or measure of success? If we think back to our favorite printing company, consider one of its end customers, a large retailer. If we did not think in terms of value or demand chain, the tendency might be to continue thinking in terms of selling more inserts. But that is not necessarily what the retailer values. The retailer is focused on driving more store traffic

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and selling more products. Newspaper inserts reach different consumers who react to the ad and then decide whether to visit the retail location. To develop an initial list of value drivers, a company’s perspective must be aligned with the end customer’s objective. So, in the case of the printing company, the PAEC framework could help identify several different elements of value. Value Attribute

Customer-Defined Value Attributes

Product

What is the quality of the insert? Who controls the content? How is the content produced (art direction, photography, etc.) How productively do printer and retailer collaborate? How can the retailer reach more eyeballs? Does the printing company provide turnkey solution or are multiple vendors required? How do I reach the right customer segments? How do I ensure my ads are timely? How easy/hard is it to work with my vendors? Are there opportunities to increase collaboration along the demand chain to eliminate costs? Can the printing company manage the digital content? What is the cost implication for reaching new sets of customers?

Access

Experience

Cost

Once we have collected a list of value-based considerations that align with PAEC, we must dissect them to think in terms of revenue and cost. We must understand all of the drivers in terms of revenue and cost to quantify them. This requires the next level of detailed analysis to deconstruct the customer value elements into high level value drivers.

VALIDATE Once Solution Concepts have been assembled and ranked and preliminary value drivers have been identified, the stage is set to engage customers and other participants in the demand chain in value creation dialogue. The primary objective from these external meetings is to verify value creation ideas, identify new solution concepts from the customer perspective, and validate the core value drivers. This is

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the last step in the process before developing the quantitative model used to translate each qualitative solution into value terms.

Co-Development Partners Co-development partners are used as a process check on work done so far before assigning quantitative value to specific solutions. The objectives of working with a co-development partner are: Co-Development Partner Checklist ✔ Verify the demand chain is correct from the customer perspective ✔ Gather customer perspective on inefficiencies in the demand ✔ ✔ ✔ ✔ ✔ ✔

chain Gather customer input on Solution Concepts that will create value Rank Solution Concepts developed by the company in the eyes of the customer Discuss “permission to serve” for the Solution Concepts Start the value driver dialog Build confidence in the dialoging with customer about driving profitable growth Establish a precedent for having business conversations with participants in the demand chain that do not include purchasing and sales

Usually, co-development partners are customers and others along the demand chain that have a stronger interest than most in helping to create value. This strong interest to collaborate in value creation can be driven by various reasons. Often, companies along the demand chain who have large assets at work are partners. In some cases, one or two customers look forward enough to understand that continuous improvement along the chain is required for long-term survival and openly invite value creation sessions. In other cases, they may be companies who are

How Do You Find a Co-Development Partner?

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doing poorly, have exhausted their internal opportunities, and are compelled to collaborate with others to find solutions. The purpose of using a co-development partner is to get feedback from a customer or outside perspective so the facts are as good as possible before moving on to other demand chain participants who are less familiar. Once good co-development partners are established the number of additional participants who need to be included in the Solution development process can be reduced significantly.

Why Use a Co-Development Partner?

A Little More Discussion on the “Permission to Serve” Objective The “permission to serve” objective is always an interesting area of discussion. First of all, permission to serve is a question directed at the customer relative to the customer’s confidence in the company’s ability to build and deliver the solution concept in question. The question is not intended to kill or support solution concepts but is meant to measure how customers think about the companies’ ability to deliver on solutions in the demand chain. About 50 percent of the time the results are such that the company is surprised at the latitude or expectation the customer has for the company to be bringing new value creation solutions to the chain. The other 50 percent of the time companies are surprised in that their customers have no confidence in their ability to deliver the goods. Though the question is not meant to kill or support a solution concept, the answer provides the company additional insights about the likelihood of its success on a particular concept.

The Solution Concept Interview The interview with the co-development partner is an in-depth and in-person interview. Depending on the complexities of the situation, the interview process can take up to two days with three or four two-hour sessions per day.

Types of Interviews

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VALUE ANALYSIS

The participants best positioned to discuss Solution Concepts are those who are responsible for improving return on investment (ROI) combined with those who are closest to the value transformations occurring in the demand chain. For most companies, this means general managers, operations managers, marketing, and R&D people. In general, none of these individuals are directly engaged in the day-to-day transactional negotiations that occur between companies and their customers and are, therefore, not biased by the issue the day or week. On the other hand, sales professionals and purchasing representatives are paid to be biased and are always angling for position. To achieve profitable growth, the interviews must be conducted by those who have financial responsibility for both sides of the transaction and are not involved in day-to-day negotiations.

The Interview Participants

Interview Guides Interview guides are prepared prior to engaging the co-development partner. These tools help interviewers ensure their line of questioning and general interview approach is aligned with the interviewees’ background and perspective. Furthermore, preparing a detailed interview guide serves as a formal guidepost for planning and structuring the actual interview. In light of the strategic importance of the forthcoming meeting, the complexity of issues to discuss and the breadth of objectives and expectations for the meeting, you must plan ahead. The interview guide supports this effort. In addition to structuring the objectives and guiding the overall discussion, an interview guide should include all supporting data, handouts, and other additional information required for the interview. Organized companies will have such elements as the demand chain, Demand Chain Economics, solution concepts and evaluation criteria for exchange and review with the customer. Interview Objectives ■

Demand chain discussion ● Key components of business model ● Customer’s stated value proposition ● Specific revenue and cost drivers ❍ Those the company can impact ● Location of value contribution along the chain

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Customer’s participation in activities along the demand chain Customer’s strongest/weakest performing products and services ● Top three impediments within the demand chain affecting effectiveness and growth potential ● Most significant customer pain points that need to be addressed ● New solution ideas ❍ Customer requests ❍ Competitive offerings ❍ Company vision Demand chain validation Contribution to strategy ● Economics ● Opportunity for improvement ● Relative performance ● Cycle time Solution Concept review and ranking Solution Concept gap identification Value Driver review and validation ● ●

■ ■

■ ■ ■

And now? We have assembled Solution Concepts. We thought about value drivers and came up with some initial thoughts. So, what now? These collaboration interviews should validate and affirm the steps we have completed to get to this point.

Validate

Phase 2: Market Verification Attaining market verification is not typically as linear as it is being discussed in this book. The best approach to working with customers and other demand chain participants is to do so continuously and in parallel with the solution development process. By taking this approach to gaining an outside-in perspective, the direction tends to be refined on a continuous basis. This approach always works better than waiting until the end and finding several important assumptions were wrong. The important idea to embrace to achieve a successful approach to profitable growth is to gather outside-in perspectives early and often as the process progresses. Companies fail because they do not rigorously collect the input from their customers and other demand chain participants.

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VALUE ANALYSIS

Creating a detailed and prescriptive approach to gathering outside-in perspective is not worthwhile in the context of this book. The exact approach depends on the company, its industry, and solutions being considered, and so on. That said, in addition to seeking outside-in perspectives early and often, here are a few more helpful tidbits of guidance that others have generated. Don’t Try to Do Everything with One Participant A few companies will want to invest the time and resources necessary to engage in the solution development process from start to finish. The aim is to have the solution development partners primarily fulfill this function. For the rest of the customer group, a compartmentalized plan should be developed that focuses on developing specific pieces of insights from differing participants. Preparation is Key One of the more significant drivers of success in working with customers and others on solution development is to be prepared. In cases where the level of preparation is good, some valuable information will always result from a solution development interaction. On the other hand, when preparation is poor, the information gleaned is often superficial and cursory. In other words, the level of response tends to be consistent with the insightfulness of the question. Good Sessions and Not So Good Sessions There should not be any expectation going in to a process that fosters collaboration that all customers and demand chain participants will collaborate on similar levels. What should be expected is that a wide variance in responsiveness will be experienced. The difficult thing to overcome is not to let those who view the collaborative process in a negative light to take away from the positives driven by those who embrace the opportunity. The impact from those who do react negatively can be minimized by having a plan of action that is acted on when a customer does not respond.

Market research can be conducted using one of multiple techniques depending on the situation and resources available to the company. The most common approaches to conducting market research are:

Use Different Information Gathering Techniques

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Interviews are typically conducted in person using the interview guides developed in the prior step with teams of two interviewers. The interview is structured to probe key pain points in the value chain for the customer. The success of interviews is typically conditional on finding and exploiting the strengths of the interviewee. In some cases, the interviewee will be more oriented toward qualitative or quantitative descriptions. In either case, the interviewer should go with the interviewee’s energy. One-to-One Customer Interviews: In-Depth Interviews

Focus groups are a powerful means to evaluate services or test new ideas. Basically, focus groups are interviews but with 6 to 10 people at the same time in the same group. One can get a great deal of information during a focus group session. The focus groups usually run about –one to one and a half hours and may cover four to six major topics. Similar to one-to-one customer interviews, focus groups should be conducted with teams of two interviewers. The success of focus groups is typically conditional on the facilitation skills of the interviewer. Focus Groups

Marketing surveys can be used to gage how well the company stacks up against competition on the key value drivers. They can be used to get a better sense for what actions need to be taken in the short and long term to drive up customer ratings on a value driver. Unlike one-to-one interviews and focus groups, a much larger sample of customer population can be covered. Richness of information is sacrificed in favor of reach. The success of the surveys is driven to a large extent by good customer databases. It is important to establish standards and guidelines on sampling requirements, layout and length of the survey, response scales and wording, as well as the weights given to each value driver to get consistent results. We recommend using one-to-one interviews to build the customer economic model. However, once the model is in place and the organization has aligned itself along customer value, surveys are a good method to monitor success and make corrective actions where needed.

Surveys (Telephone, Mail, Web-based)

110

VALUE ANALYSIS

Improving Customer Segmentation In the case example, the printer identified three retailers with whom it thought would make good co-development partners. Two of the three retailers responded to the request to collaborate on finding and building profitable growth solutions. The third retailer chose not to participate. Some customers and participants in the demand chain will decline to collaborate. The willingness to collaborate is a good dimension on which to segment customers and demand chain participants. A company’s willingness to collaborate is the best predictor of future profits. This is a little like marriage. Those marriages that seem to work the best over time are those that have good communication and continuous efforts to find and build common interests. In business, the interaction between humans is not different. There still needs to be communications. The common interest ideas are the same as well with more focus on economic gain in the business setting. Including a customer’s willingness to collaborate can improve the overall effectiveness of segmentation. Prioritizing collaborative efforts with those who are willing to collaborate quickens the pace of profitable growth initiatives.

What’s Next Value drivers are first identified in the solutions concept step. In the case above, a couple of value drivers were uncovered and were the “number of households” receiving newspaper inserts and “response rate” to the insert. Whatever the printer could do to help the retailer increase these two drivers of value would positively change the value available in the demand chain. By working with the retailers, the printer had a couple of ideas on things it might influence to do just that. What the printer still does not understand is how all of the value drivers work together to create value or how many value drivers there are. Some of the drivers focus on revenue and others are costoriented. As always, improving a revenue driver inevitably increases the cost driver as well. But, what is the model under which they operate? If the printer could help the retailer increase its response rate by one percent, that would be a big deal. How much would such a

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change be worth in dollars to the retailer? How much would it cost to increase the response rate by one percent and what are the drivers of cost? How do these cost drivers fall along the demand chain? The printer learned that the number of households receiving inserts was a driver of value. If the retailer could increase its household penetration from 70 to 80 percent, what would that mean in financial terms? What if the retailer could not only increase its overall penetration but specifically improve its coverage of the Hispanic demographic? And once again, what would it cost and who should be involved along the demand chain to effect a change. Understanding how value drivers are identified and quantified is the sole purpose of this chapter. This process serves to align thinking in terms of value drivers and to create a starting point for the collaboration partner discussions. These collaborative discussions should serve to validate and further refine the hypotheses we have developed here to determine a complete list of value drivers. During Customer Economics, the value drivers will be identified. Then, mathematical models will be constructed for each so the kinds of questions just pondered can be answered.

SUMMARY The Solution Concept step in the journey to drive profitable growth is an important transition between understanding economics and creating new value. Prior to this step, the efforts in the profitable growth process had focused on understanding where profits were being captured and the level of investments made to create these profits. During the Solution Concept step, a dialog is initiated with customers and others in the demand chain about potential new ideas to create value. During these conversations, the focus necessarily turns toward how these solutions will create value. Quantitatively predicting how and how much value is created is the subject of Chapter 8, Solution Valuation.

CHAPTER

8

Solution Valuation “Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality.” —Peter Drucker

he process of defining Solution Concepts, meeting with customers, validating demand chain hypotheses, and further refining and developing the portfolio of potential growth opportunities can be long and challenging. But the value of taking this rigorous, outsidein approach will invariably outweigh the cost and time associated with this effort. Organizations will have developed a much deeper understanding of their customers’ needs as well as their own internal efforts and how the two are aligned. Furthermore, the impact of collaborating with customers and other demand chain participants to develop new solution ideas can often result in groundbreaking innovation as well as deeper organizational relationships. The challenge most companies will face in the process, however, is translating these qualitative, subjective benefits into real dollars and cents. It is much more elusive to quantify the value of this process and to understand how to focus resources to select and execute the most attractive alternatives. This is the objective of Solution

T

113

114

VALUE ANALYSIS

Valuation: quantifying the individual Solution Concepts that have been assembled to translate the portfolio of concepts into the “Could Be” cube. This allows a company to compare the realm of possible value creation opportunities with the original “As Is” cube to confirm that the chosen growth dimension is most appropriate. The approach is as follows: ■ ■ ■

Define value driver formulas Create value driver model Conduct sensitivity analysis and confirm growth dimensions

QUANTIFYING VALUE

Total Value

Total value is defined as the value created above the competitive alternative. In this sense, the customer’s current situation is considered the baseline from which additional value must be created. The current benefits of existing offerings in the market are not included with new value. Thus, value creation as defined in this book represents value that is incremental to what is available in the market (see Exhibit 8.1). Additionally, value from the customers’ perspective is expressed as a function of product, experience, access, and cost (PAEC) (see Exhibit 8.2). The Solution Valuation phase initiates a transition from considering these value drivers in qualitative terms to defining how each value driver will be measured in quantitative terms. This process begins with the value drivers and their associated value attributes.

Value Delivered (Consumer Surplus) Price Value Captured (Producer Surplus)

Value of Competitive Alternative (BATNA)

EXHIBIT 8.1

Total Value

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Solution Valuation

(Product

+

Access

+

Experience

−

Cost)

• Performance

• Availability

• Service

• Price

• Features/ Functions

• Reliability of Supply

• Solutions

• Total Cost of Ownership

• Technical Innovation

• Distribution Channel

EXHIBIT 8.2

• Impact on Customer

• Process Cost

• Brand

• Payment Terms

Customer Value

Within each value attribute category, a list of potential drivers can be identified. The challenge of solution valuation is to continue drilling down on these value functions until specific cost and revenue drivers are uncovered. The overall model for decomposing the value attributes is pictured in Exhibit 8.3. Value should be considered a function of several underlying variables. At the highest level, Level 1, these variables are PAEC. Level 1 variables are not directly measurable, so an additional level of detail is needed. Level 2 decomposes Level 1 value attributes into the additional level of detail. As an example, consider the high-level value attribute “Product.” Product is broken down into the sublevel

EXHIBIT 8.3

Value Driver Discovery Model

Y = f(x) Level 1: • Value = f(product, access, experience, cost) Level 2: • Product = f(performance, features/functions, technical innovations) • Access = f(availability, reliability, distribution) • Experience = f(service, solutions, customer impact, brand) • Cost = f(price, cost of ownership, process cost, payment terms) Level 3 • Performance = f(revenue, cost) • Features/function = f(revenue, cost) • Etc.

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VALUE ANALYSIS

value attributes of performance, features/functions, and technical innovation. Again, these value drivers are not directly measurable, so another level of detail is required. At Level 3, specific cost and revenue drivers are discovered. It is at this level where dollars can be measured and then rolled up to overall value.

THE RATIONALE FOR OUR APPROACH Progressing through multiple value levels can be cumbersome. Upon reviewing this approach, a more direct approach may seem sensible, where value is defined directly as a function of revenue and cost drivers. In such an approach, once a particular solution is identified, specific revenue and cost drivers would be identified and quantified. This would provide a quick quantification of the overall solution. This approach can be used for evaluating a solution in isolation. The issue, however, is that as we have seen throughout the Customer Value Creation (CVC) process, solutions usually do not occur in isolation. It is more likely that they exist within a large system of solutions that together represent a company’s position or strategy in the market. For this reason, the PAEC-driven approach provides overall insight into how systems of solutions work together to create value and market position. In Exhibit 8.4, a perspective is shown on how systems of solutions can be viewed together. On the horizontal dimension, the value attributes are listed. Behind each of these attributes is the framework (see Exhibit 8.3). The vertical axis shows the solution concepts being analyzed. By using the Value Driver Discovery Model, the connection between each solution and customer value becomes more apparent. As an example, the value of the first Solution Concept is driven by two attributes: 75 percent of the value is driven by Product and 25 percent is driven by Cost. On the other hand, the third Solution Concept delivers value differently from the customer’s perspective. In this case, 80 percent of the value is related to Experience, and 20 percent is related to Access. In the case of these two solutions, a company may find that the total value of each is similar. (We will soon get to this analysis.) This exhibit highlights the importance of preserving the PAEC framework through the quantification process. By understanding each solution at the level of customer value attributes, companies are better informed to select the most attractive solutions to develop and market.

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Solution Valuation

PRODUCT

EXPERIENCE

ACCESS

COST

TOTAL

Solution Concept 1 Solution Concept 2 Solution Concept 3 Solution Concept 4 Solution Concept 5 TOTAL

EXHIBIT 8.4

Solution Evaluation

VALUE QUANTIFICATION Discussing the rigors of value quantification is better suited for a mathematics textbook than a business book. Though the math is somewhat tedious, it is necessary to transition from qualitative beliefs to quantitative rigor and fact. Most of the math in this book has been kept simple to illustrate the value of the CVC tools. Though conjoint analysis and other statistical modeling techniques are used in this process, they will not be discussed in this book. Instead, the focus is on conveying the key concepts, while keeping the math simple.

Mathematics and Value Modeling Value driver discovery is the process of developing formulas to quantify value drivers. In some cases, complete formulas can be developed with the help of Sales and Marketing. However, in many cases, all that is achievable at this stage is identification of key variables that should be part of the formula. The importance level or weighting that multiple components are assigned for each value driver might differ by customer segment. The analysis at this point is kept flexible to accommodate differing customer perspectives. These value driver formulas will be further refined through customer collaboration sessions.

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VALUE ANALYSIS

Companies will have collected a significant amount of information from customers and demand chain participants at this stage of the process. In addition to translating qualitative terms into financial reality, the challenge is to organize and interpret the information to draw meaningful insights about value. The inputs for this effort flow out of the Solution Concepts step of the process.

DEFINE VALUE DRIVER FORMULAS Revenue Drivers To quantify value from revenue, let’s expose the mathematical equation driving revenue. Revenue that retailers derive from advertising through retail inserts is a function of the number of customers visiting the store as a result of the insert and the average amount that their customers spend in the store. Revenue = function (No. of customers visiting store, Average customer spend) Decomposing this further, the number of customers who visit the store is a function of the number of households getting the insert and the response rate (the percentage of those who decide to visit the store as a result of seeing this insert). Revenue = No. of Household Impressions × Response Rate × Average Customer Spend Level 2 decomposition of the number of household impressions reveals that the number of households getting the inserts is a function of the number of campaigns, the target households that the retailer wants to reach, and the household coverage provided by the newspaper. The logic underlying this decomposition is that not all households are worth the same to a retailer. For example, most drugstores target households within a five-mile radius of their store location. On the other hand, a high-end clothing store may define its target set on a much broader geographic area and may focus on a few high-income

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Solution Valuation

neighborhoods. Further, not all households are reachable by newspapers since not all households subscribe to newspapers. No. of Household Impressions = Number of Campaigns × Target Households × Coverage Now that these equations have been written and the variables have been identified research can be conducted and assumptions made about particular variables from which the equations can be exercised and understanding gained.

EXAMPLE: CALCULATING REVENUE DRIVERS How would we quantify the value of reaching one additional household with a newspaper insert? Assumptions ■

■ ■ ■

Average response rate from a prospective customer is 13% Average spend per customer visit = $28 Average number of customer visits per year = 52 Retail variable margin = 30%

So, the value of this household to the retailer over the course of a year assuming one insert per week was sent and the household responded 13% of the time would be Revenue = (52 inserts sent) × (13% response rate) × ($28 spent per response) = $189. Using the assumption that the retailer’s variable margin is 30%, this yields pre-tax profits of $56 and post-tax profits of $42. Since there were 52 inserts (continues)

120

VALUE ANALYSIS

(continued) sent to this household, the breakeven cost per insert is roughly $0.80 per insert. Since the cost of sending an insert to a household is something less than $0.10, the overall economics of this transaction seem to work out well. If the printer can change this value driver for the retailer and help it reach more eyeballs, the effect on the retailer will be huge. Assuming a 30 percent variable profit margin for the retailer, this translates into approximately $42 in post-tax profits per year or about $1 per insert. This profit represents the maximum that the retailer would be willing to pay to achieve this household impression. Compare this to the five-cent rate that the retailers pay per copy to the printer. For the printer, this information is powerful. For the first time, the printer has developed a sense for what the insert is worth to the retailer. Of course, assumptions were made that need to be tested, and the calculation would vary based on the type of retailer in question. Even so, the printer had some basis from which it could derive a perspective on how much value would be created if the printer could find a way to increase the number of household receiving an insert. Recall the case in Chapter 6 where the retailer suggested its number one opportunity was to reach additional households. In that case, the retailer suggested it was only reaching 70% of its target households. Said another way, it was missing over 30 million households. The overall value to the retailer for reaching the additional 30 million household could be as much as ($0.80 x 30 million = $24 million) $24 million in post-tax profits. This, of course, is the incremental value to the retailer not including the margins generated by other demand chain participants. For the printer, this was just one retailer; what about the hundreds of others?

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121

Cost Drivers So far, in value quantification, the focus has been on the revenue side of the equation. There are value drivers that fall on the cost side of the ledger. Working on the cost side of the equation is similar to the revenue side. The starting point is again to complete the mathematical equation driving the cost associated with insert campaigns. Producing an insert is a multistep, multi-actor process involving merchandisers, photographers, layout artists, copywriters, account manager, marketing managers, category managers, advertisement firms, PreMedia services providers, printers and logistics providers. Marketing managers set objectives and supply background materials. Merchandise managers choose the product and price combinations. Account managers maintain schedules and communicate with clients and creative teams. Art directors develop creative strategies, and graphic designers create the look and feel. Copywriters craft text, and editors fine-tune it. Photographers and studios photo shoot the product images for the products advertised in the insert. All these individuals participate in several document review, revision, and approval cycles. These processes are complex and time consuming. The total costs are a function of the amount the retailer spends on vendor management, content creation, print production, paper, distribution, and newspaper inserts. Cost = function (vendor management, media planning, content creation, print, paper, distribution, and insertion) As shown in the revenue example, each of these cost drivers can then be broken down further into its constituent underlying elements. For example, let’s take the case of content creation. Level 1 decomposition of content creation cost reveals that content costs are driven by photography, copy design and layout, prepress, and proofing. Content Creation = function (photography, copy design and layout, prepress, and proofing) Level 2 decomposition is more complex. Each of the value attributes has a number of individual drivers (see Exhibit 8.5).

122

VALUE ANALYSIS

EXHIBIT 8.5

Level 2 Cost Drivers

Photography cost = no. of campaigns × pages/campaign × (no. of photos/page × (cost of repurposing × % photographs repurposed + cost of new photos × % new photos)) Copy design = no. of campaigns × pages/campaign × (product descriptions/page × (cost of repurposing × % creative repurposed + cost new product description × new creative)) Prepress = no. of campaigns × pages/campaign × average prepress cost/page Proofing = (no. of campaigns × proofs/campaign × cost/proof) + amortized cost of proofing machine

From these two examples, one would not want to run through all of these calculations each time a new solution was to be evaluated or scenario analyzed. The best way to manage and manipulate these equations is by putting them into a model. Once the model is built, then these horrendous looking equations can be pushed into the background.

CREATE VALUE DRIVER MODEL The next step of the value quantification phase focuses on building an interactive value model based on the value driver algorithms. At the most basic level, the objective of the model is to translate the value driver formulas into an iterative, flexible model that can quickly generate the value impact of various solutions. The specific modeling tool is unimportant. It depends upon organizational preferences and the model developer’s familiarity. For the purpose of our discussion, we highlight an Excel-based model. Organizations should choose whichever tool they prefer most. Two underlying attributes of a good value model are userfriendly interface and scenario analysis capability.

User Interface The value driver model can be complex and can be a big turnoff for nonfinancial people. A good value driver model only exposes the

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123

basic value driver attributes that a business will affect, but it hides the underlying complexity and algorithms. Therefore, the number of variables and supporting information shown on each screen should be limited to maintain clarity and emphasize the appropriate elements. The graphic user interface (GUI) designer faces a similar challenge: how to organize the different modes and types of analysis that the model could support. The model shown in Exhibit 8.6 is an example used to analyze solutions from the case of the printer. The model has value drivers down the vertical axis and summary value across the horizontal axis. This model is constructed so the value driver buttons provide access to the underlying assumptions and algorithms driving that particular value driver. On the horizontal axis, the value driver summary is shown in As Is and Could Be states. Exhibit 8.7 is the first level of assumptions and algorithms detail underlying Exhibit 8.6, and this example highlights the Household Impressions driver. The top two boxes are the direct algorithm inputs for current and future states. The next box down summarizes the critical assumptions. These assumptions are tracked for the current and future states. The last section of the calculation screen summarizes the value calculation. This information is transferred to the front summary page and can be followed by selecting the “return to value driver quant” button. As mentioned previously, this book is not intended to provide complex mathematical analysis to serve as a handbook for creating intricate, quantitative models. Instead, this discussion and the accompanying picture of a typical value driver model are provided to help readers visualize the tactical approach to quantifying the value of each Solution Concept. As has been stated multiple times, CVC is an iterative, quantitative process. Thus, one of the critical success factors for executing CVC is adopting a reliable and thorough approach to conducting the quantitative analysis. It is the prerogative of individual companies and managers to select their preferred approach for achieving this level of precision.

Sensitivity Analysis A good model should support scenario analysis capability and be dynamically extensible to support new analysis. What that means is

124

VALUE ANALYSIS

Current Value Driver State

Future Value Driver State

Change in Value Driver

Value Created (In M)

Influence No. of Household Impressions

2288

3744

1456

$407,680

Influence Response Rate

1.00%

1.00%

0.00%

$0

Influence Average Customer Spend

28

28

0

$0

Influence Vendor Management Costs

0

0

0

$0

Influence Content Creation Costs

0

0

0

$0

Influence Printing Costs

0

0

0

$0

Influence Papaer Costs

0

0

0

$0

Influence Distribution Costs

0

0

0

$0

Influence Insertion Costs

0

0

0

$0

Clear All Data

EXHIBIT 8.6

Value Driver Analysis

EXHIBIT 8.7

Household Impressions Driver Analysis

Solution Valuation

125

that, the model designer should limit the hard coding of values to any of the underlying attributes. Most of the values should be stored in an easily accessible data table that the users can change as their operating environment changes. Further, the model should be easily extensible and support the capability to include or exclude the different value drivers that can be included in the scenarios analysis. For example, one scenario, with a particular solution the company is developing, may affect more than one value driver. By providing the dynamic capability to build new analyses and include/exclude value driver elements, the usefulness and customizability of the model increases. In Chapter 7, the value quantification model is used extensively to generate scenarios. These scenarios help reveal the solution sensitivities and test the low and high end of potential value creation. Most companies find that by creating a value quantification model, a much more rigorous effort is directed toward alternative consideration because the model enables alternatives to be analyzed quickly.

QUANTIFYING SOLUTIONS At this point, the value quantification machine is built and ready to be started. Value drivers have been decomposed into equations of cost and revenue and those equations have been linked together and loaded into a model. As the model is exercised, the process focus shifts away from equations and drivers and toward assumptions and inputs. Each of the solutions will require sets of assumptions and inputs. In the case discussed earlier in the chapter, a set of assumptions was necessary to quantify the value of increasing the number of households. The assumptions are listed again below. As the process of validating these solutions moves forward, the effort will be more about testing these assumptions than about writing equations. What will come out of the value quantification model is the total value for each solution aligned by value driver. In the value quantification model shown in Exhibit 8.6, each value driver is shown along with summary data for the amount of value created given a particular solution. This output is summarized to create the perspective shown in Exhibit 8.8.

126 EXHIBIT 8.8

VALUE ANALYSIS

Solutions, Concepts, and Their Total Value PRODUCT EXPERIENCE ACCESS

Solution Concept 1 Solution Concept 2 Solution Concept 3 Solution Concept 4 Solution Concept 5 Total

$10 $7

$6 $8

COST

TOTAL

$5 $2

$15 $15 $10 $12 $24 $76

$2 $12

$14 $31

$10 $24

$2

$19

Exhibit 8.8 shows each of the Solution Concepts and their total value created. In addition, it shows how each solution impacts customer value creation in terms of PAEC. As an example, the first Solution Concept has a total value of $15. Ten dollars of the $15 is driven by value of the products and $5 is driven by cost. On the other hand, the third Solution Concept creates value but delivers that value differently from the customer’s perspective. So, which solution is better? One differentiator is the total value. The first Solution Concept has $15 of value compared to the third Solution Concept of $10. The first Solution Concept is $5 better. But, what about the solutions delivering on different value drivers. The key to understanding how this information can be valuable requires a step back to the beginning of the process to create a platform for profitable growth.

COULD BE GROWTH CUBE Several chapters ago, we introduced the concept of the Growth Cube. By continuing this example, we will demonstrate the development of the Could Be growth cube from the As Is Growth Cube (see Exhibit 8.9). Interpreting the Information Exhibit 8.10 indicates a total potential for $76 in value creation. Looking to Exhibit 8.8, this $76 represents the Total Value creation available for the solutions considered.

127

Solution Valuation

Could Be

f ro s be er um tom Share of Wallet N us C

Profitability

Profitability

As Is

As Is

Share of Wallet

EXHIBIT 8.9

f ro s be er um om N ust C

As Is to Could Be Growth Cube

This is the theoretical maximum amount of value that could be captured assuming one participant in the demand chain could build and execute all potential solutions. Capturing this total $76 would require the solution provider to price in and capture the $76 without sharing value with customer or consumer. Both of these topics will be discussed in Chapter 10, Value Exchange. The solution ownership and value allocation will be spread across the demand chain based upon the individual participant’s value contribution. Pricing to capture value will be discussed separately. A fair amount of information is available. Let’s assume again that the goal that was developed in Chapter 5, Dimensions of Growth, was to focus on and increase Share of Wallet. This outcome was concluded due to the initial or “As Is” shape of the growth cube. Now we can start to see what the maximum opportunity for increasing share is by mapping the solution value back to the growth cube. Once the value change is calculated for each dimension, then the “could be” cube can be drawn. By looking at the resultant shape of the cube, the original hypothesis of expanding by focusing on share of wallet is confirmed or denied. When the decision was made to focus on share of wallet, it was because this dimension of the growth cube was weak compared to the other dimension. Based on this hypothesis, a process was set in motion to determine if significant value could be created on this growth dimension. Internal solution ideas were captured. Enough work was done on the demand chain and its economics relative to

128

Total Value

$76

VALUE ANALYSIS

Value Delivered (Consumer Surplus) Price Value Captured (Producer Surplus)

Value of Competitive Alternative (BATNA)

EXHIBIT 8.10

Value Creation Potential

these solutions. Therefore, a credible perspective could be shared with customer and other outside demand chain participants. Those participants, not knowing the companies perspective was to increase share listened to this perspective then provided their input on where growth and profits could be improved. The results of all perspectives was quantified and shown in Exhibit 8.11 as the “Could Be” growth cube. If, through this effort, the share of wallet dimension does not show significant improvement relative to the other dimensions, then the original hypothesis may have been wrong. If, the share of wallet dimension does show improvement, then the hypothesis to increase value by focusing on share of wallet will be confirmed. Confirming the hypothesis to grow the share of wallet dimension does not exclude the other cube dimensions as being candidates for profitable growth. To assess the full potential for the dimensions of profitability and number of customers, the process should be repeated for those dimensions. Only after each dimension is fully analyzed will the nature of the potential for improvement be assessed on that dimension. The challenge, however, is that most companies do not have the time or resources to conduct a full quantitative assessment on each dimension every time they need to develop profitable growth concepts. So, this process is based on choosing a dimension for growth (discussed in Chapter 5) by using a combination of qualitative judgment and the best quantitative data available. The direction chosen becomes better quantified through the process (discussed in Chapters 6, 7, and 8). At the end of this process, it may be there is significant room for profit growth on the chosen dimension and the hypothesis is confirmed. Or little profitable growth may be found and the dimension rejected as having high profit growth potential.

129

Solution Valuation

Profitability

Could Be

As Is

Share of Wallet

EXHIBIT 8.11

f ro s be er um om N ust C

Could Be Growth Cube

Growth Dimensions Are Not Mutually Exclusive The dimensions of growth are not mutually exclusive. In nearly every case, a solution will affect more than one dimension. Finding solutions that do impact more than one dimension is a good idea. The goal in quantifying solutions along the dimensions of PAEC and the Growth Cube is not to achieve 100 percent accuracy on which dimension a particular solution impact. The goal is to express how directionally, with a little quantitative construction, a solution affects PAEC and the dimension of growth. By making this effort, solutions can be evaluated based on their impact on different dimensions.

Why Does This Matter? The power of finding and creating solutions along the growth cube dimensions and in terms of PAEC is to ensure that the solution developed is put into the context of a plan. As mentioned before, this plan could be the company’s strategic direction of becoming a product differentiator. It may be to reinforce a company’s focus on quickly increasing the number of customers at the expense of profitability to capture market share. By taking time to organize solutions in terms of their impact on PAEC and growth dimensions, capital spent on growth can be targeted and managed against the company’s higher-order objectives.

130

VALUE ANALYSIS

The key to understanding this information’s value requires a step back to the beginning of the process to create a platform for profitable growth. In the beginning of the process to drive profitable growth, the original dimension of growth was established on the growth cube as being share of wallet. This focus was driven by the fact that share of wallet was low relative to the growth cube dimensions of Profitability and Number of Customers. This now cast the first and third Solutions Concepts in differing lights and sets the context for thinking about other solution concepts as well. In this case, the first, second, and fifth Solutions Concepts contribute to improving value from product and, hence, affect share of wallet. The third and fourth Solution Concepts have positive value creation but have no impact on the value created by the product. These Solution Concepts may need to be held for implementation at a later date so the focus of value creation can be on the first, second, and fifth concepts. By considering value through the organizing frame of PAEC, the amount of value created by Solution Concepts can be mapped back to their influence on the original dimension of growth. As companies use this approach, they will start to develop an understanding in absolute terms of how much value is created on each of the growth cube and PAEC dimensions.

CHAPTER

9

Value-Based Decisions alue-Based Decisions (VBD), launches the Should Be phase of Customer Value Creation (CVC) (see Exhibit 9.1). During this phase, the universe of possibilities uncovered in the Could Be phase is narrowed down to the practical set of activities that will maximize returns for the company during the timeframe of interest: the Should Be. The Should Be growth cube is an expression of how much value should be created (see Exhibit 9.2). It is the forecast of expected growth in profits during the time horizon used in the Customer Value Creation process. There are times when the Should Be state is described using short-term and long-term time horizons. The shortterm time horizon typically describes what can be done during the current planning year, and the longer-term time horizon is related to the planning cycle.

V

COMPLETING THE GROWTH CUBE A few working steps remain before the Should Be state of the Growth Cube can be completed. Step 1. Complete a fair share analysis. The fair share analysis builds upon the Demand Chain Economics work to help determine what percentage of the solution value should be captured by companies along the chain.

131

• Assess customer segments along Growth Dimensions • Measure current customer economics • Determine Growth Dimension for focus of growth initiatives

• Map the Demand Chain originating with the end customer • Model the chain economics (Profits/Assets) • Identify “Advantaged” Demand Chains for further analysis

• Current Customer • Demand Chain Economics Map • Solution Concept • Value Exchange Filter Insights • Demand Chain • Advantaged Solution Demand Chains Strategies

DELIVERABLES

TASKS

4 Solution Valuation

Value Based Decisions

5

Should Be

• Value Driver Hypotheses • Solution Concepts

• Solution • Solution Concept Value Prioritization Quantification • Value • Value Driver Distribution Model Scenarios

• Identify • Quantify value • Evaluate “advantaged” drivers Solution solution • Create Concepts concepts sensitivity • Select Growth • Determine model to Initiatives potential value evaluate value drivers across • Validate Demand Demand Chain Chain • Validate solutions and value drivers • Identify potential collaboration partners

Solution Concepts

3

2

Demand Chain Economics

1

Dimensions of Growth

Could Be

As Is

The Customer Value Creation Process

PHASE

EXHIBIT 9.1 6

7 Operational Enablement

• Value Based • Organization Pricing Strategy Realignment • Expected Value Capture

• Develop Value • Create dedicated Pricing project Strategy management • Quantify Value team Delivery • Commit (Customer) necessary • Quantify Value resources Capture • Ensure senior (Supplier) management commitment • Develop specific objectives, timelines, milestones

Value Exchange

Execution

133

Value-Based Decisions

Profitability

Should Be

As Is

r

be

um

Share of Wallet

EXHIBIT 9.2

N

The Should Be Cube

Step 2. Conduct a balanced portfolio analysis. The balanced portfolio considers market opportunities, company constraints, and the relative value of each solution that exist in the Could Be universe. Step 3. Filter this information through the House of Value, which feeds the growth cube. The House of Value is the kindred spirit of the House of Quality but is used in the context of growth and value. Step 4. Choose Solution Concepts that need written business cases to request funding for execution and advance in the company’s stage gate solution development process.

FAIR SHARE ANALYSIS Throughout the CVC process, solutions have been identified and quantified with the value assumed to be fully captured by the solution provider. As we mentioned at the end of Chapter 8, the solution valuation summary shown in Exhibit 9.3 summarizes the total value creation opportunity from each Solution Concept. In most cases, however, value is not claimed by one participant in the value chain. More likely, other participants along the demand chain, including customers, will also have some claim to the value created. For

134 EXHIBIT 9.3

VALUE ANALYSIS

Solution Value Analysis PRODUCT

Solution Concept #1 Solution Concept #2 Solution Concept #3 Solution Concept #4 Solution Concept #5 TOTAL

ACCESS EXPERIENCE COST TOTAL

$10 $7 $2

$6 $8

$2

$10 $24

$5 $2 $12

$14 $31

$19

$15 $15 $10 $12 $24 $76

instance, in cases where the solution provider is repackaging existing solutions to increase number of customers, the full value may be kept by the solution provider. In cases involving growth and value creation that require innovation and development, however, others along the demand chain can lay claim to a share of the value created. Fair share analysis provides a method for understanding how this value should be distributed along the chain. The fair share analysis begins by evaluating the demand chain and inspecting the solutions identified along the way. Recall the demand chain in Exhibit 9.4, where each Solution Concept is listed under a specific company in the demand chain, although the amount of value captured will likely be shared along the chain. The value must be shared because each participant plays a role in delivering the solution to the end user. Factors such as size, influence, and capabilities will determine each participant’s fair share of the value. To help illustrate this concept, we will analyze two Solution Concepts that have been identified through the CVC process. We will begin with the fifth Solution Concept shown in Exhibit 9.4. The challenge of fair share analysis is accurately translating the company-level analysis from Demand Chain Economics into product level information that can be used to evaluate each Solution Concept. To begin, consider each company in the Demand Chain in terms of their specific roles in delivering to the end user (manufacturer, assembler, etc.). To establish context for value distribution, we begin with the previously calculated profit distribution of the overall demand chain to represent the current state fair share analysis. Since the primary objective is to identify new “profitable growth” opportunities, companies should not rely upon this current state profit allocation to identify opportunities. But this first step is important because many

135

Value-Based Decisions

EXHIBIT 9.4

Profit Investment ROI

Demand Chain Picture Company #1

Company #2

Company #3

Company #4

$200 $2000 10%

$10 $20 50%

$(10) $60 (17)%

$340 $1400 24%

$65 $100 65%

Low Low

High Medium

Medium Medium

Low Low

Concept 2

Concepts 1 and 4

Concept 12

6 days

5 days

Concepts 6, 7, 9, and 10 6 weeks

Opportunity High Value High Potential Solutions Concepts 3, 5, 8, and 15 Cycle Time 2 weeks

Company #5 TOTAL

3 days

$605 $3580 17%

10 weeks

companies never even develop an accurate perspective on the current state profit distribution. And even in the case of companies that do understand their existing chain economics well, very few conduct the rigorous analysis necessary to determine the “fair share” or optimal profit allocation that should occur in the chain. Mapping the current state percentages serves as a catalyst to consider additional profit improvement opportunities. As Exhibit 9.5 demonstrates, the profit distribution in this demand chain is not equally balanced between each participant. The manufacturer and distributor alone control approximately 90 percent of the profits, while the formulator and assembler are struggling to achieve break-even profitability. Once the current state is understood, the next step is to understand how profit distribution relates to each of the value attributes. This step of the process is difficult for many companies, because it requires managers to think specifically about who is best positioned to deliver upon individual value attributes. To develop this perspective, companies need to collect insights from team members representing multiple functions in the organization to obtain a diversified perspective on the relative capabilities and positioning of the chain participants. As Exhibit 9.6 reflects for the demand chain example we have been discussing, the fair share analysis summarizes the relative positioning of each demand chain participant along each of the four customer value attributes defined by Product, Access, Experience, and Cost (PAEC).

136

VALUE ANALYSIS

EXHIBIT 9.5

Current State Profit Distribution

Fair Share Analysis - As Is Manufacturer Profit/Unit

Formulator Assembly

35%

0%

Distributor

Retailer

55%

10%

0%

Once an overall perspective on value creation in the Should Be state has been developed, each individual Solution Concept must be assessed. We begin with the fifth Solution Concept, which happens to be a new product that is easier to use than its predecessor. As Exhibit 9.7 highlights, the Value Distribution column captures the solution value allocation along each value attribute developed in Chapter 8. In this case, the solution has a total value of $24, with $14 attributable to Product attributes and $10 attributed to improved Experience attributes. The fair share values of each of the demand chain participants are then calculated using the value contribution percentages summarized along the horizontal axis. In this example, the manufacturer’s fair share is $10 out of the $24 in total value creation. The conclusion from this analysis is that the manufacturer should claim $10 since it contributes 50 percent of the product value and 30 percent of the experience value. In this case, the manufacturer has a greater amount of the fair share than other participants in the chain. Since the manufacturer receives twice as much value as the next closest demand chain participant, it makes sense for the manufacturer to lead the solution development process. This conclusion may seem to be an obvious point, but this point trips up many. To highlight this challenge, consider the third Solution Concept. EXHIBIT 9.6

Fair Share Analysis of a Demand Chain

Fair Share Analysis - Should Be Value Attributes Manufacturer Product Access Experience Cost Total Value Contribution

50% 15% 40% 40% 40%

Formulator Assembly 30% 0% 5% 5% 5%

10% 0% 5% 20% 10%

Distributor

Retailer

10% 60% 30% 30% 30%

0% 25% 20% 5% 15%

Product Access Experience Cost Total Value

Value Attributes

$14 $0 $10 $0 $24

$0 $2 $8 $0 $10

Value Distribution

Solution Concept #3

Solution Concept #3

EXHIBIT 9.8

Product Access Experience Cost Total Value

Value Attributes

Value Distribution

Solution Concept #5

Solution Concept #5

EXHIBIT 9.7

0% 0% 30% 0% $2

Manufacturer

50% 0% 30% 0% $10

Manufacturer

0% 0% 0% 0% $0

Formulator

30% 0% 10% 0% $5

Formulator

0% 0% 0% 0% $0

Assembly

10% 0% 10% 0% $2

Assembly

0% 100% 70% 0% $8

Distributor

10% 0% 10% 0% $2

Distributor

0% 0% 0% 0% $0

Retailer

0% 0% 50% 0% $5

Retailer

138

VALUE ANALYSIS

As shown in Exhibit 9.8, the third Solution Concept creates $10 of total value, driven by the value attributes of Experience and Access. Though this solution was identified by the manufacturer through the CVC process, in this case the manufacturer does not actually create the majority of the value. The manufacturer’s fair share of the third Solution Concept is $2, and the distributor’s fair share is $8. In this case, the manufacturer may or may not want to take the lead in developing the third Solution. The manufacturer might be better off having the distributor take the lead, allowing the manufacturer to direct its resources toward opportunities more closely aligned with its own interests. Companies often struggle with opportunities such as the third Solution Concept because they overestimate their contribution to value and, hence, their ability to capture value. By creating a step in the process in which relative value contribution is allocated along the chain, companies are better equipped to make informed decisions about their ability to share in the value pool. Therefore, in the case of the third Solution Concept, the manufacturer is most likely better off by allowing the distributor to take the lead in executing the solution. This process of distributing the fair share of value across the demand chain continues until all of the solution concepts of interest have been assessed (see Exhibit 9.9). When all of the solution concepts have been analyzed, the potential value for each participant can be reviewed. Sometimes companies are surprised at how much impact they may have on their demand chain. At other times, this analysis can be a somber reality check of a company’s weakness relative to its demand chain partners. In either case, it is better to understand fair values and navigate accordingly than to blindly invest in solutions and hope for results. Exhibit 9.10 summarizes the overall value distribution for five Solution Concepts. This perspective normally creates a number of insights, which this example helps highlight. The fair share of value for the manufacturer is not the $76 identified in the Could Be state. After spreading the value across the demand chain, the manufacturer’s value contribution is $35. At this point, the Should Be cube has been reduced to $35. The fair share of value is not spread evenly across the demand chain. For the solutions considered, the value is heavily weighted toward the manufacturer and the distributor. This information will be important to the manufacturer going forward.

Total Solution Concept Value

Product Access Experience Cost Total Value

Value Attributes

$15 $15 $10 $12 $24 $76

Value Distribution

$31 $16 $24 $5 $76

Value Distribution

Total Solution Concept Value

EXHIBIT 9.10

Solution Concept #1 Solution Concept #2 Solution Concept #3 Solution Concept #4 Solution Concept #5 Total Value

Value Attributes

$21 $3 $10 $1 $35

Manufacturer

$13 $8 $2 $2 $10 $35

Manufacturer

Solution Concept Value Summary

Solution Concept Value Summary

EXHIBIT 9.9

$4 $0 $1 $0 $5

Formulator

$0 $0 $0 $0 $5 $5

Formulator

$4 $0 $1 $1 $6

Assembly

$2 $2 $0 $0 $2 $6

Assembly

$2 $10 $7 $3 $22

Distributor

$0 $5 $8 $7 $2 $22

Distributor

$0 $3 $5 $0 $8

Retailer

$0 $0 $0 $3 $5 $8

Retailer

140

VALUE ANALYSIS

Because the distributor has so much to gain and controls such a large portion of the solution value, the manufacturer should find a distributor to become a co-development partner. On a more granular level, deeper insights can be drawn from understanding how PAEC accumulates along the demand chain. Before conducting a fair value analysis along the chain, the $76 of total solution value was simply defined by the Product, Access, Experience, and Cost attributes. Once these values have been allocated along the chain, companies can have a greater appreciation for the fact that Product attributes are weighted more heavily toward the manufacturer. On the other hand, Access attributes are weighted more heavily toward the distributor and the retailer. The Experience and Cost attributes are more evenly spread along the chain. This is not to suggest a hard and fast rule that says manufacturers control Product value and distributors control Access. What we suggest is that in order to maximize PAEC, the entire demand chain needs to work together since no individual participant is capable of understanding and improving all of the value attribute levers on their own.

BALANCED PORTFOLIO The last step before integrating all of this data into the House of Value is to balance the portfolio of solutions. We introduced the concept of a balanced portfolio analysis in Chapter 7, and we will use that data here to support our decision making process. As stated earlier, the goal of using a balanced portfolio approach is to ensure that potential solutions are considered relative to market opportunities and company constraints. By balancing solutions across these opportunities and constraints, a portfolio of solutions can be chosen that will match the risk-reward profile of the company and provide a return that is consistent with expectations. The general approach to balanced portfolio development and usage has been well documented over the years. The aim of this book is not to expand upon that the body of work, but to reinforce the need for a balanced portfolio analysis at this stage of the CVC process. In Chapter 7 we obtained quantitative measures for several qualitative risk factors (see Exhibits 9.11 and 9.12).

9 8 6 8 9

Solution Concept #1 Solution Concept #2 Solution Concept #3 Solution Concept #4 Solution Concept #5

100% 30% 10% 50% 80%

Technical Gap

Probability of Success

Solution Concepts

EXHIBIT 9.12

Solution Concept #1 Solution Concept #2 Solution Concept #3 Solution Concept #4 Solution Concept #5

Strategic Alignment

Project Attractiveness

Solution Concepts

EXHIBIT 9.11

100% 80% 10% 50% 75%

Solution Complexity

9 9 10 5 8

Customer Perceived Value

80% 70% 10% 60% 60%

Availability of Resources

9 6 8 3 8

Competitive Advantage

100% 100% 80% 80% 80%

Permission to Serve

6 7 10 4 8

Market Attractiveness

80% 60% 100% 30% 70%

Competitive Intensity

10 9 0 8 8

Time to Breakeven

90% 90% 50% 60% 90%

Market Need

7 5 0 3 6

Company Value Add

92% 72% 43% 55% 76%

AVERAGE

8.3 7.3 5.7 5.2 7.8

AVERAGE

142

VALUE ANALYSIS

As is typical with a balanced portfolio, there are two axes of consideration. In this case, one axis corresponds to the alignment of the solution with the company’s capabilities (attractiveness), and the other corresponds to the ability to deliver the solution (probability of success). Solutions are ranked on these dimensions and plotted creating a visual understanding of their portfolio position (see Exhibit 9.13). Additionally, with the completion of the fair share value of each Solution Concept, the size of the plot points in the balanced portfolio graph captures the potential value opportunity to the company. By combining these three data perspectives, companies are now in a position to identify a balanced portfolio of growth initiatives. As a final departing thought on balanced portfolio analysis, when using the balancing criteria be aware of the potential for diluting the rigorous effort that has gone into creating and quantifying solutions. This can be easily done by including value as one of several balancing factors that are equally weighted and mapped. What works well is to identify those balancing criteria most important to the company and to add them to the solution view.

100% Solution Concept 1

Probability of Success

Solution Concept 2 75% Solution Concept 5

Solution Concept 4 50% Solution Concept 3 25%

0%

4

6

7

8

Project Attractiveness

EXHIBIT 9.13

Balanced Portfolio of Growth Investments

10

Value-Based Decisions

143

COMPETITION Another important element of value based decision making is competitive analysis, which this book will not discuss. The authors feel that companies spend too much time thinking about their competitors and not enough time focusing on their customers. This tendency to focus on competitors leads to competitive parity, product commoditization, and lower profits. The ultimate source of profitable growth is with customers and not with competitors. So this book’s focus is on understanding the customer and not the competitor. With that in mind, it is still essential to consider competitive offerings, competitive reactions, and barriers to competitive entry before introducing new solutions to the market. Understanding competitors and their reactions should be incorporated into a rigorous scenario analysis.

FROM THE HOUSE OF QUALITY TO THE HOUSE OF VALUE To this point, the explanations of value creation have focused on finding solutions along one Demand Value Chain (DVC). This is helpful for explanation purposes, but the reality is that most companies have multiple value chains in which they participate. The House of Value is the place where the transition is made from one DVC to including multiple chains for consideration. There is value to thinking about DVCs on an individual basis and by looking at them together in groups. Throughout this book, the power of looking at individual DVCs has been discussed. Solutions need to be developed at the specific DVC level. For example, the chain of value that exists to manufacture and distribute diapers is large and has its own needs for solutions. Only by looking specifically at the value chain for diapers would one develop a deep understanding of how value could be created. But once the value creation opportunities are found in the diaper value chain, there is value to looking across other value chains to see if solution in one chain has application in other value chains. For example, in the case of the diapers DVC, one outcome may support the development of an advanced adhesive that contributes incremental value to the diaper segment. Once this diaper-related Solution is matched against other

144

VALUE ANALYSIS

Exp

Competitive Products

erie nce Acc ess Pro duc t

Value to Customers

Cos t

ote ntia l sion to S Com erv pan e yF it mis

Per

fit P Pro

Val u

e to

Us

markets and DVCs, it may become apparent that a similar adhesive product could create value in several other markets where the company competes or would like to compete. It is not unusual to find complimentary uses or new markets from new product offerings. The House of Value can provide an overall perspective to help companies find these opportunities. The House of Value is a tool to consider how solutions from one DVC may pertain to other DVCs. To do this, we align the value chains along one another inside the House of Value as shown in Exhibit 9.14. The value of thinking about DVCs in groups is to find common solutions resulting in leveraged solutions. Leveraged solutions have applicability across more than one DVC. In some situations, solutions can have broad appeal and others will have solutions limited to a few DVCs. The insight that is being sought is why the solutions appeal to particular groups of customers. Once an understanding is developed as to why a solution appeals to a customer group, then specific customers who fall into that group can be targeted. Segmenting customers in terms of solutions applicability is a powerful means to focus the sales and marketing organization. Therefore, the House of Value seeks to understand how solutions might appeal to a broader set of DVCs beyond the particular chain under analysis. By continuing to consider solutions across multiple demand chains, a number of overarching solutions can be built.

P1 P2 P3

H H

L M

H

e Valu

H

e Valu

H

e Valu

Solution L

EXHIBIT 9.14

L

House of Value

1 ver

Dri

ver Dri

2

n ver

Dri

Value-Based Decisions

145

DEVELOP BUSINESS CASE The final step in the process is to write the business case so others can understand it for final approvals and consensus building. In addition to the standard issues that most companies highlight in their internal business cases, CVC related opportunities should communicate several key points about the solution.

Value to the Customer The business case should articulate the amount and nature of the value delivered to customers through the solution offering. This value should be expressed in qualitative and quantitative terms and be represented as the amount in excess of the value which is available from the customer’s best alternative.

Profits to Company The business case should establish how the solutions will deliver profits to the company that meet the targets established during the dimensions of growth stage. When the direction of growth was established, the company decided its targets for growth along the customer dimensions of share, profit, and number of customers. The business case should show the quantity and dimensions along which the profits are generated as a result of the new solution. Though the book has described money flowing back from the customer in terms of profits, different ways exist to measure the flow of cash resulting from delivering customer value. The financial result should be described in the business case in a manner consistent with how the company measures financial performance.

Constraints The business case should discuss how solutions can be developed and deployed given the company’s constraints. These constraints should be those considered in the balanced portfolio criteria and should include

146

VALUE ANALYSIS

things such as time to market, payback period, capability fit, and capital required, etc. The goal in this section is to ensure the chosen solutions meet the company’s objectives. If the company focuses on returns in the one-year to two-year horizon and the considered solutions do not achieve payback for three years, then the solutions will not meet the constraints. Understanding and choosing solutions that meet the constraints is as important as ensuring the company delivers value to the customer and profits itself.

NEW SOLUTIONS VERSUS NEW PRODUCTS People often think solution development and product development are the same thing and they are not. The reason we raise this point now is because many of the tools used during new product development apply to the solution development process. In the context of this book, solutions are those things a company can offer to create value for the customer and yield profits for the company. These solutions may help the company increase its share of wallet, gain new customers, or focus on improving profitability. Developing new products is one dimension to consider when looking for solutions to achieve these objectives. New solutions do not have to involve new product development at all. A new solution to increase share of wallet may include offering existing products combined in a new fashion. A new solution may include offering an existing solution to a new group of customers. A new solution may include changing the service offering to groups of customers so profitability can be improved. The point is that new solutions does not equate to new products. However, the new product development tools are germane to new solution development and should be used. A couple of the more important tools are scenario analysis and the use of a stage gate approach. Scenario analysis is used to ensure the system response to solutions is considered on the negative and positive ends of the outcome spectrum. By forcing consideration on both ends of the spectrum, critical success factors and sensitivities can be identified and managed. The stage gate process is a good tool to deliver new solutions to market. The main emphasis on using the stage gate process is to have preplanned checkpoints along the way to ensure the new solutions being delivered are performing as designed. The risk of not

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using a preplanned stage gate approach is that people get married to their own ideas and will continue implementing a solution even when the solutions are not having their intended effect. By using a stage gate approach, success criteria can be established on the front side along with timing so the decision to continue becomes one of measurement rather than biased judgment.

WHY IS THE SHOULD BE CUBE THE BEST FORECAST FOR GROWTH? The Should Be cube is the best forecast of growth because the process from which it was created was quantitative and rigorous. As we mentioned at the beginning of Part III, the CVC process is designed around a rigorous decision-making framework. This framework is behind every good decision-making process. The process has five steps: Step 1. Setting the Context for Growth. The context for growth was established (in Chapters 3, 4, and 5). In Chapter 3, the outside-in perspective was established. The purpose of establishing an outside perspective is to eliminate internal biases and look at growth opportunities through the customer’s eyes. Chapter 4 established the need to think quantitatively and in terms of value. Chapter 5 focused on creating the growth challenge in terms of customer dimensions in contrast to more traditional product or share-related metrics. The combination of these chapters sets the context for growth in terms of the customer value and quantitative rigor. Step 2. Gathering Intelligence. Chapters 6 and 7 focus on gathering intelligence. In Chapter 6, the economics of the business environment were established including those of the customer. The business environment is defined in terms of demand chains in which the company participates. In Chapter 7, solutions concepts were developed from differing viewpoints along the demand chain. By considering demand-oriented and

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supply-oriented solutions, a complete perspective on opportunities to create value along the demand chain can be gathered. Step 3. Drawing Conclusions. Chapters 8 and 9 focus on drawing conclusions. In Chapter 8, solutions were evaluated and valued based on their ability to deliver value to the customer using the PAEC framework. This rigorous analysis of customer value set up Chapter 9, where conclusions have been drawn based on a solution ability to deliver customer value and the companies’ ability to retain profits in exchange. The conclusion on the set of solutions that will maximize value includes decision-making aids, such as scenario analysis and balanced portfolio. Step 4. Implementation. Chapters 10 and 11 will focus on implementation. These chapters will focus on getting the people, processes, and technology of the organization aligned to deliver value. The pricing process plays a significant role in capturing price, so Chapter 10 is dedicated to ensuring the organization’s prices in the value it has created. Instead of focusing on prescribing the changes in people, process and technology, Chapter 11 will focus on the ideas of change and program management. There is no way to prescribe the changes necessary in an organization to enable profitable growth. However, what is always common to companies is the need to have a program/change management team that owns the growth agenda and is empowered to drive change through the organization. Step 5. Learning from Experience. Chapter 2 focuses on learning from experience. The goal of profitable growth will not be achieved in a threemonth or four-month project. To achieve profitable growth, a company must continuously work on and improve its understanding of customer value and develop solutions to capture that value. As companies

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have experienced with their cost initiatives, having a process helps the organization learn the language. Therefore, the organization does not need to restart every time it has a new manager.

ELIMINATING BIASES In Chapter 3, we suggested that an outside-in perspective was necessary to eliminate biases. Now that we have discussed the value-based decision making process, it is pertinent to review those biases to see if the CVC process has mitigated them. Briefly, recall the biases that were discussed in Chapter 3: ■

■

■

■

■

■

Overconfidence—the notion that most of us think we have the correct answer more often than not The Status Quo—the inherent fear associated with making a change when we are not certain of the new outcome Anchoring—the inability to see beyond the As Is state to envision the Should Be opportunities Herding—the struggle to make unpopular decisions that differ from the rest of the crowd False Consensus—the tendency to gravitate towards similar beliefs and perspectives to avoid challenging the prevailing wisdom Confirmation Bias—the practice of limiting an analysis or discussion to avoid alternative viewpoints

As mentioned in Chapter 3, a common pitfall that companies face is that individuals throughout the organization are susceptible to these biases. Without a rigorous, repeatable process for understanding, quantifying, and evaluating growth opportunities, it is very difficult for companies to escape the cycle that these biases can create. By using the CVC approach to profitable growth, organizations can take several steps to mitigate these biases. The first tenet of CVC, driving the growth agenda by understanding value from the outside-in customer perspective, is specifically targeted at mitigating the impact of these biases. By injecting the customer perspective, companies can reduce the natural tendency of individuals to follow their own

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beliefs. This perspective combined with the second CVC tenet, establishing a rigorous and quantitative fact-based approach, provides a usable tool for helping to eliminate these biases. By developing a quantitative process, companies can position themselves to reduce the possibility of qualitative rhetoric ruling the day over quantifiable facts.

PART

IV

Execution “Most strategies fail because they are poorly executed.” —Jerry Alderman, Author, Submariner, Businessman, Consultant

n Chapter 1, Customer Value Creation was introduced as the combination of CVA and OE (see Exhibit IV.1). So far the book has focused on “creating value with customers” and developing an “analytical and fact-based approach”. Still remaining are the concepts of “exchanging value” and “executing growth.” Part IV deals with both topics. Chapter 10 focuses on Value Exchange while Chapter 11 discusses Executing the Strategy. The main objective of Value Exchange is to give special consideration to pricing. Pricing is the lever that regulates the split between value delivered to the customer and profits retained by the company. All too often companies give away value and sub-optimize profits because they do not price in the value they create.

I

CVC = Customer Value Analysis + Operational Excellence CVA Focus on creating and exchanging value with customers

EXHIBIT IV.1

CVC Formula

OE Analytical and fact-based approach to execute growth

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After pricing, the chapter on Executing the Strategy is meant to help think through what must be done in order to effect changes in people, process and technology to support the growth agenda as shown in Exhibit IV.2. This chapter makes no attempt to cover each area of change but rather focuses on how to set up teams and projects to lead and enable the necessary changes.

Outside-In Growth

Inside-Out Maintenance

People, Process, Technology Executive

Company

• Strategic Planning

Product Development

Customer Acquisition and Sales

• Research

• Marketing

• Product and • Sales Process • Strategic Design • Order Control Fulfillment • Prototyping • Interface with Government Organization • Product Phase In/Out

Supply Chain

After Sales Support

• Procurement • Customer Service • Inbound • Spare Parts Logistics • Direct Production • Production Support

People, Process and Technology

• Finance and Accounting • Human Resources

• Repairs • Warranty

• Information Management

• Returns

• Legal

• Distribution • Collections

EXHIBIT IV.2

Infrastructure Support

Customers

CHAPTER

10

Value Exchange he exchange of value and profits is regulated by pricing strategy (see Exhibit 10.1). On the customer side of the picture, solutions have been developed that have their value quantified in terms of product, access, experience, and cost (PAEC). On the company side of the picture, we have developed and followed a rigorous process, focused our growth objectives on share of wallet, number of customers, or customer profitability, and calculated what our “fair share” of value should be. Now, we must develop a pricing process that creates the value exchange whereby value is delivered to the customer and the company retains the profits. Pricing is one of the most complex and dynamic processes that any company has to manage. The reason for this is simple: Pricing determines how surplus money is divided between the company and its customers. Pricing is similar to employee compensation. Employee compensation is the process that divides the surplus money between its employees and the company’s owners. With pricing and employee compensation, the process becomes difficult because people are greedy and may not settle on what is fair. Instead, they most often settle on the maximum they can extract from the process. Unless you understand the value you create and have a process to capture that value, the other person will take it from you. This does not make the other person a villain. It affirms that this person is acting rationally. The only irrational player, when it comes to splitting surplus and pricing, is the one who creates surplus then does not demand a fair share.

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Customer

Company (Product

Profitability

Could Be

Profit Value

Should Be

As Is Share of Wallet

EXHIBIT 10.1

f r o rs be me m o u t N us C

+

Access

+

Experience

−

Cost)

• Performance

• Availabiltiy

• Service

• Price

• Features/ Functions

• Reliability of Supply

• Impact on Customer

• Total Cost of Ownership

• Technical Innovation

• Distribution Channel

• Brand

• Process Cost • Payment Terms

Price Revenue and Cost Drivers

Exchange of Value and Profit

The objective of this chapter is not to create a pricing process that will ensure a company executes a fair exchange of value. Pricing is too involved a science to accomplish that task in a chapter. This chapter’s objective is to discuss pricing as one of the most critical processes that must be addressed in any initiative to improve profitable growth. All of the Customer Value Creation (CVC) in the world will be worthless unless it has a good value-based pricing process because the value will be unwittingly priced away to someone else.

THE LEVERAGE OF PRICE Proactively understanding and managing price offers companies one of its strongest opportunities to impact profitability. Price’s effect on profitability is easy to demonstrate. Here is a simple example: Assume the variable cost to serve a given customer is $50 and the price that this customer pays per unit is $100; this customer, therefore, contributes $50 per unit to fixed costs and profit. If you could increase the customer’s price by 5 percent to $105, this customer’s contribution to fixed cost and profit will go up 10 percent (to $55). If you lower his price by 5 percent, to $95, his contribution to fixed cost and profit becomes $45, a 10 percent decrease in his contribution to fixed cost and profit. This simple example makes clear that price movement has a valuable and immediate impact on profit. We all know that raising prices is more difficult than in our simple example. But alternatives for managing price can increase an enterprise’s prices. At the core of these alternatives is the realization

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that the price customers pay to companies is the economic tradeoff, or sacrifice, they are willing to make to realize the value companies are offering. To industrial companies, price is the economic profit they can extract from customers in return for the value produced and delivered. When industrial companies consider price as a reflection of economic profit they deliver to customers, companies will begin to consider the value that they create through its entire offering, including the product, distribution, pre-sales and post-sales service and communication. These are the foundation of value-based pricing.

OPTIMUM VALUE Often, marketing departments and top executives speak openly about organizing to deliver the “maximum” possible value to customers. If the goal of this type of rhetoric is to create positive feelings among customers or to differentiate a company’s offering from lowcost competitors, it is fine. However, if this rhetoric becomes an operating philosophy, it can be dangerous. Companies that operate under the “deliver the maximum value” philosophy can quickly drive up their operating costs in unexpected ways. Companies can lose focus on what truly delivers dollar and cents value to customers and invest in processes that deliver features to customers, create additional cost for themselves, and may not deliver value. Companies can incur significant costs by over-serving the customer. They can invest too much in developing product features customers do not want. They can stress the distribution channel through oversupply. They can hold too much inventory. In short, they can invest in noncustomer valuecreating activity. Often, the company’s reaction to a constricting market demand or an increase in competition is to differentiate itself by investing in parts of the business that executives perceive will create a competitive advantage. To drive growth, these investments must be aligned with value delivered to customers. The company following a disciplined approach to growth will focus on leveraging the combined understanding of how it creates value for its customers and where its own growth opportunities lie to align its operating processes to deliver the optimum value to customers and to capture the maximum possible return on its investments in delivering that optimum value.

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TYPES OF PRICING There are different ways to approach pricing. Most of the approaches are built from the bottom-up or are comparative in nature. Typical types of bottom-up pricing would include cost plus or margin based. In these pricing schemes, the price to the customer is tied to the cost to produce the product or service. In these pricing approaches, the actual value delivered to the customer is not considered in the setting of price. Another popular method of pricing is comparative or competitive. In these cases, price is set based on what is considered to be the closest competitive alternative. In these cases, the company is acknowledging its products and services are not differentiated. Past pricing practice serves as a powerful anchor to what the company believes its products and services are worth. If a company is ever to break from its pricing anchors, it must take a value-based approach to pricing. By taking a value-based approach to pricing, this anchor can start to be broken and the company can start to capture some of the value it creates in its ongoing solution development efforts.

Value-Based Pricing

Total Value

This entire book could be summed up by the diagram shown in Exhibit 10.2. As you may recall, Exhibit 10.2 was the central theme from the Chapter 4’s discussion of value. Value-Based Pricing is the final piece that needs to be discussed to complete the ideas represented in this picture. Up to this point, the focus has been on finding

Value Delivered (Consumer Surplus) Price Value Captured (Producer Surplus)

Value of Competitive Alternative (BATNA)

EXHIBIT 10.2

Value Based Pricing

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157

value over and above that which is available in the market. Now we need to capture some portion of that value by way of pricing. Where price is set within the range of value is the subject of a different book. It will depend on many factors such as the relative magnitude of value delivered, market power, and so on. For most companies, getting to the point of understanding Exhibit 10.2 and thinking about pricing in value is a step function improvement. The science of how price is set within the value range is too much to absorb at this point in the process.

VALUE VARIATION BETWEEN CUSTOMERS Customers perceive delivered value differently. This can especially be true for customers who receive a similar solution but use it to solve for different problems. Since customers place differing value on solutions, a potential to elicit different prices can come from different customers. These price differences are based on the difference between the higher economic value that one customer receives (or perceives) in a transaction and the lower economic value that another customer receives (or perceives) through a similar transaction. These differences must be investigated, documented, and analyzed to create effective value-based pricing strategies. There are three areas that typically drive value difference from customer to customer that create an opportunity to improve profits thru value-based pricing strategies: 1. Differences in the cost-to-serve customers 2. Value delivered to the customer through all elements of the offering 3. Overall market structure (i.e. supply and demand) and likely competitive reactions

Cost to Serve Understanding the cost to serve customers is the start of any sound pricing strategy. An understanding of the relationship between costs and individual customer contribution can be constructed through a

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Customer Profitability analysis (which often includes Activity-Based Costing, or ABC, models) that can highlight the differences in costs that are attributable to different customers. These models show that different elements of the industrial enterprise’s entire offering (product, service, distribution, etc.) are consumed differently by customers. Customer Profitability analysis proves that the industrial company is delivering greater economic value to some customers than to others. These differences must be defined and quantified so the industrial company understands the value that it is delivering. Therefore, it will be able to leverage this understanding in a way that communicates about the offering it is delivering. Variations in cost to serve are not the whole answer. We know that some customers are better negotiators and that the competitive market creates a standard of product and service delivery that may be the minimum required value for the price. The point is to define the drivers of cost to serve the customers and to define how these affect the prices that you must achieve from various customers.

Value Delivered Cost is not the only element in effective value pricing. Pricing based solely on cost is an unacceptable approach when an organization has the goal of maximizing profit. Cost does not determine the customer’s willingness to pay. That is determined by the value that customers derive through the transaction. Focusing only on cost, we fail to focus on what customers are willing to pay and, thereby, leave potential profits in the customers’ hand. The value that customers derive from a transaction with companies is the true determinant of their willingness to pay. Documenting and understanding the value delivered to customers is the key to defining an effective value-based pricing strategy that maximizes profitability. Even if the fixed costs dominate the cost to serve, the customer and capacity utilization is a key to keeping costs low (through achieved economies of scale). The potential for large profit gains resides in understanding the elements in the enterprise’s whole offering that customers value, in defining the elements that can be uniquely delivered by the enterprise, and in charging the customer prices that reflect these values.

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Competitive Environment The first step in any of these efforts is to understand the relationship among prices, demand, and competitors. Will demand rise as prices fall, or are some other dynamics at work in the market? How will competitors react to price changes? Will they undercut your pricing moves? Are alternative products or solutions available to customers to substitute for your offering? In industrial markets, where fixed costs in plants and production capacity are high, market exit costs are often prohibitive. Capacity cannot be easily shut down, and economies of scale have a large impact on overall profitability. A detailed analysis of the relationship between cost, market capacity, and likely competitive reactions is required to establish an effective price strategy. The percentage of capacity that the competition controls, its strategic intent (i.e., being a niche player, gaining market share, being the low-price alternative), and its likely reaction to price moves must be effectively analyzed. A pricing strategist will document and analyze the price points available to customers of each of the alternative solutions that competitors make available. To do this, you must analyze your competitors’ goals, document and track their movement on an ongoing basis, and plot how you expect they will react to your pricing moves.

IMPLEMENTING VALUE-BASED PRICING We saw in the example above that customers differ in their cost to serve and in the economic value delivered. They differ in part because they demand and extract different levels of performance from the industrial enterprise. Customers’ value systems must be understood in greater detail. The key elements of value should be defined and the economic impact should be quantified. Customers can be segmented based on the value they derive from various elements of the industrial enterprise’s offering and differential pricing strategies can be constructed for each of these segments. This is an effective way to operationalize opportunities for value pricing. Once customer value systems have been identified, customer segments have been defined and the size and attractiveness of the segments to the company have been evaluated, we must search for ways

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to vary the prices for the various levels of value delivered. Opportunity to customize price based on elements of value delivered can be described in four ways: 1. Product differentiation: Does some element of the product exist for which one segment is willing to pay more? Does some attribute of the product exist that can be enhanced to better fit the needs of a group? With variations in product, you may be able to allow customers to “self-select” the product and price that is most fitting to them. 2. Service differentiation: Does some element of service exist for which a segment is willing to pay more? Does some technical service, delivery time, or inventory management capability exist that is highly valuable? 3. Geography/Availability: Does some geography or other availability constraint exist that the company can overcome that will greatly enhance the value that customer derives from a transaction? 4. Transaction type: Do some transactions exist that deliver greater value to the customer? EDI, Vendor managed inventory, expedited delivery, and so on. So far, we have assumed management’s goal is profit maximization. There are other goals, like volume growth or market share; given the maturity of many industrial markets, the profitability goal is often most appropriate. Whatever the specific goal of the enterprise, it must be communicated throughout the organization. In fact, it must be over-communicated. Typically, different functional areas of the company are involved in the pricing process. Each group has different goals, perspectives, and access to information: Sales wants to maximize volume, marketing wants to maintain competitiveness, and finance wants to preserve its predetermined ROI requirement. Often, the pricing process has no clear leadership. Communicating and leading each area through the development of a new pricing strategy is a challenge that must be met with a cross-functional approach. As in most change management efforts, the first step must be to document the current state approach. If the process by which prices

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are defined, listed, and realized is documented, the opportunity and magnitude of potential profit impact can be more effectively evaluated and communicated. This can provide a compelling argument for improving the process.

TAKING RESPONSIBILITY FOR SELLING VALUE AND SOLUTIONS It is always in vogue to talk about selling value and solutions. If you ask managers if they should be selling customer solutions rather than products they will say yes. If you ask if they should sell on value and not price, they will say yes. At this point in the conversation, managers will then talk at length about how the sales force is untrained to sell solutions. Furthermore, they’ll suggest the sales force does not understand the value of what they sell and, thus, revert to a lowest common denominator price-based selling approach. Though managers are usually right in their assessment, the question is why the sales force does not understand solutions and value. The answer is usually because managers do not understand what solutions customers want and managers have no earthly idea how much such a solution may be worth. Managers need to take responsibility for finding out and telling the sales force what solutions they should sell and how those solutions are valued by customers in terms of dollars and cents. The root cause for not selling value and solutions is not normally sales professionals but rather those who have responsibility for telling sales what to sell. It is these people who need to hold themselves responsible for achieving a profitable growth agenda. Without this guidance, there is no reason to expect sales to do anything tomorrow that is different than what they did today.

CHAPTER

11

Executing the Growth Strategy his chapter does not focus on the theory of growth strategies or the analytics required to drive a successful growth program. This chapter focuses on execution: the frustrating world of turning the growth strategies into bottom-line profits. Execution is the most difficult part of any strategy and is difficult when it comes to growth strategy. However, based on scores of projects and dozens of clients attempting to drive growth; sometimes successfully and sometimes not successfully, we have observed and helped our clients implement nine principles that increase the odds of success. None of these principles are new individually, but if all the principles are followed in combination success is virtually assured. Sometimes even adhering to one principle can make all the difference in ensuring bottom line profits. One large corporation asked one of its best managers to “figure out a growth strategy and start growing.” This manager was tasked with a large piece of the corporate plan but was equipped with no goals, no team, no indicators of success or failure, and not a lot of help from senior management. This from an organization that cared about and measured cost reduction to the detriment of all other ideas and worried more about customers asking for price reductions than collaborating with them to drive growth. On the surface, senior management made all of the classic mistakes. However, it made one great move in that it got the right person. The manager it asked to drive the growth strategy and “start growing” immediately went to work driving out the other eight principles. She set goals, tweaked the organization as much as she could, set in place hard measures, asked senior management for

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specific assistance, and ran the various growth initiatives to such an exacting program that the manufacturing engineers were borrowing concepts to reduce costs. In this case, though senior management could have done a lot more to help this young executive get started, it followed the most important principle of all: get the right leaders in place and be ready to support them as they drive the other required changes to turn growth programs to profits. Another reality that marketing and sales executives must realize immediately and accept as reality is that all growth programs and all market ideas will be judged on their effect on the profit and loss (P&L) and balance sheet. There is no wiggle room here. All of the corporate executives we work with are barraged daily with ideas that will drive out costs, position the company in new markets, create the killer new product, or reduce variation or business risk. The only common language that can help these executives determine the potential efficacy of these various options is the language of finance. A word to the wise is: “Turn top line into bottom line” if you have any chance of convincing the board, the CEO, or the shareholders that your growth program should supersede other company options. This chapter, then, is meant to provide descriptions of the nine principles for success and give practical, field-tested examples for each principle. The nine principles that increase the success rate of growth programs are: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Get the Right People Organize for Success Measure Results Engage Senior Management Articulate Value in Financial Terms Drive From the Outside–In Manage Like a Project Set Clear Goals Balance Short- and Long-Term Goals

These principles may appear to be universal. However, the specific tools, techniques, measures, and structural changes required for growth strategy attainment are different than those used to drive

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other types of changes. Let’s explore each of these themes in the detail necessary to get results.

PRINCIPLE 1: GET THE RIGHT PEOPLE In the book Larry Bossidy co-authored with Ram Charan, “Execution” (Crown Business, 2002), he describes having the right people in the right place as the job no leader should delegate. He goes on to state that he spent 40 percent of his time looking for and grooming his leadership team as part of his turnaround plan at Allied Signal/Honeywell. He describes finding the right leader as his most important role as CEO. We could not agree more. As described in this chapter, finding and retaining the right leaders save many growth programs. The leaders will find other leaders and other role players. The leaders will drive out the other necessary principles for success. The leaders will take on the internal politics, the external risks and the financial rigor to drive out a successful program. However, it does not need to be as difficult as we sometimes make it. The principle is a reminder that the time invested in the right people and the right leadership is well worth it and will pay higher dividends than any other time invested in the growth programs.

PRINCIPLE 2: ORGANIZE FOR SUCCESS Changing the organization can be fraught with risk, emotion, and confusion. However, in almost every case, the organization must be changed to achieve aggressive growth goals. Most growth strategies can be categorized as one of two major themes: 1. Increase current customers. 2. Create new revenue from new markets, customers and products. We will address examples of organizing models for each of these two major themes. We have found that senior executives and managers will drive out elegant solutions to help the company grow profitably

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but stop short of making the fundamental organizational changes required to achieve the intended results. Unfortunately, larger companies need the fundamental changes mostly due to scale and communications, yet changing large organizations structurally can be most difficult.

Increase Current Customers—Organizing Around Customers The most prevalent organizing model in most industrial companies is some kind of structure around products and geographies. These product-oriented organizing models forget one important entity: the customer. Typically, significant growth gains can be achieved by aligning the organization more toward customers. If your strategies involve increasing customers’ share of wallet, penetrating new markets, or understanding your product’s application from the outsidein, then a model more oriented toward customers can accelerate the pace of progress. Often, the customer is an afterthought in the way that industrial companies organize. You hear about the plants, the warehouses, the regions, the product lines, and other dimensions of the business but seldom hear about the large accounts or the most profitable accounts when discussing organizational structure. Many large industrial companies cannot tell you who their best customers are in terms of sales or units much less profits or return on capital. The organization, the information systems, the accounting systems, the internal metrics, and the external metrics are typically designed to measure products or sometimes geographies. Little infrastructure supports customer strategy. Yet we find that the top 20 percent of customers provide 80 percent of the revenue and 95 to 110 percent of the profits. One good way to get the organization serious about increasing profits and revenue from the best customers is to change the organization. It is not for the faint of heart, but can move organizations quickly to growth results. Viewing the business from the customer dimension can make cross-product and cross-geography gains. We have found that 20 to 40 percent profit gains can be achieved within specific accounts and 10 to 20 percent overall profit gains by orienting around your best

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customers and selling them a full portfolio of your products and services.

The Account Is the Market Particularly for large accounts, the account is the market. That is, the best opportunity for your company to sell more products at a good margin is at your existing accounts. However, few industrial companies put the requisite emphasis on these existing accounts. A senior executive at a large technology manufacturing company would constantly remind his people that, “The account is the center of the universe.” This philosophy reminds all of your organization’s people that the selling costs are low and the upside potential is high at accounts where you have a strong footprint. Contrary to internal perceptions, more than 80 percent share of wallet is left to be mined at your best accounts. With all of this said, how does one organize to exploit this axiom and not lose the good aspects of product or geography focused organizing models?

Three Customer-Centered Models There are three account-centered organizing models conceptually. For a visual depiction of each model, please review Exhibit 11.1. The most prevalent organizing model is not shown in Exhibit 11.1. If it were, it would be to the far left of the page and customers would not be connected at all organizationally. Many industrial companies choose to attack the market geographically or by product, and they do not know how the customer rolls up at the corporate level. The three models shown are progressive steps toward a more customer-focused organization. On the left side of Exhibit 11.1, we have the “Account Coordination” or “Weak Matrix” model that drives some crossproduct or cross-geography collaboration without fundamentally changing the organizational structure. In this model, the customer teams are typically led by the predominant product team or by geography. Each customer team is tasked with driving growth by offering a wider array of products and services from the entire company’s

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Customer-Centered Models

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EXHIBIT 11.1

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portfolio. The strength of this model is that it does not fundamentally change the organization and can be implemented quickly with little pushback. The chief weakness of this model is that it may not change behavior and, therefore, will not drive cross-product or cross-geography growth unless heavily augmented by performance metrics and management time. The power resides in the vertical bars which depict product groups or geographies in this model. Other pros for this model are its simplicity and that it drives accountability with its one-dimensional view of responsibility. Cons for this model are that it weakly pushes accounts as an organizing dimension, is inflexible to individual account needs, and requires considerable management time if accounts are to be stressed at all. The second model in the middle is a “True Matrix,” meaning that each dimension of the matrix has the same organizational power. Many people dislike true matrices due to their inherent lack of accountability. (Whenever two or more people are responsible for something, no one is responsible.) However, a true matrix is an excellent model for serving customer needs and responding quickly to changes in the marketplace. This model typically has a shadow P&L for accounts with the official P&L still being product or geography focused. Many companies use this model to manage their top accounts. We have seen this model successfully deployed when a small number of customers comprise a high percentage of revenue or profits. Many industrial companies fall into this category. The secret that makes this model work when it does work is appointing a strong VP of Accounts that outranks his or her peers on the product or geography dimension. Since this executive is going to be outnumbered, this person must outrank the others and report directly to a senior corporate executive. This model does require a credible customer profitability model. Many companies do not have credible customer profit models. The customer profitability must take into account all fixed costs on an activity basis since it will be used as a shadow P&L. It will lack credibility if it only takes into account variable or gross margins. The third model depicted on the right as “Global Customer Business Unit” cedes the most important customers to a separate P&L with separate rules and bonus pools. This is the extreme version of the organizing model that forces the best customers to be served and measured differently than other customers. This model can be

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costly and may be deployed by companies with the margins to afford it. It does provide extreme focus on top accounts. The biggest drawback is not its potential for redundant costs but its potential for derisive behavior within the organization. When separate P&Ls and separate bonus pools are implemented, cross-product collaboration and cross-geography collaboration can degrade back to the levels of “Weak Matrix” model on the left for similar reasons. This model provides excellent focus on accounts and typically drives the highest overall share of wallet. So, which model works the best? We recommend that industrial companies begin moving from where they are now (typically all or almost all vertical orientation around products or geographies) to the right of the models shown above until they arrive at the right customer orientation level for their business. Most industrial companies are too far to the left and need to move to the right. Simply put, make customers a larger part of your organizing model, not for soft reasons like “satisfaction” but for the hard metrics of share of wallet and increased margins. It is amazing what a little more focus on the customers can provide in terms of revenue and profit lift. A recent Harvard Business School Study shows that 30 to 42 percent growth can be achieved in your best accounts by focusing on them. The organizing models above provide some ideas on how to go about “moving to the right” and getting higher share of your current customers.

Grow Current Customers—Functional and Process Responsibility One of the most difficult aspects of organizing around customers is that any customer-centric model results in some sort of a matrix organization. As was pointed out previously, matrices are inherently weak on accountability. Our clients that have succeeded with matrixed customer models make the roles and responsibilities clear. Exhibit 11.2 depicts the functional roles and process/task responsibilities for a typical large account management structure. As shown in Exhibit 11.2, each functional area has specific responsibilities on the process dimension.

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Executing the Growth Strategy

Functions Customer Account Group Management

Portfolio Management

Business Development

Relationship Management

Customer Service

Administration

Processes Establish Customer Account Group Goals

Develop Account Teams

Develop Account Plans

Develop Relationship Plan

Provide Customer Service

Provide Financial Analysis

Recruit and Train Account Executives

Establish Portfolio Goals

Identify Opportunities

Present New Ideas; Entertain Customers

Manage Customer Inquiries

Analyze Financial Performance

Assign Account Executives and Monitor Performance

Analyze Financial and Service Performance

Build and Present Proposals

Establish and Expand Relationships

Measure Customer Satisfaction

Provide Financial Reports

Select and Retire Customer Account Groups

Develop Improvement Plans

Negotiate Contracts

Coordinate Executive Participation

Administer Customer Performance Reporting

Administer Reallocation Program

Measure Customer Account Group Value and Effectiveness

Recommend Product and Service Enhancements

Establish New Customers

EXHIBIT 11.2

Functional and Process Responsibility

Create New Revenue from New Markets and Products Linking Marketing and Products. Another key organizing concept that is missing or lacking in industrial companies is a strong linkage between the market facing organization and the product development organization. Almost all of our clients have redesigned their product development process in the last few years to be more disciplined, follow a stage gate process, remove unneeded cycle time, listen to customers, and provide more financial discipline in the process. The results have been successful with lead times coming down and more projects getting killed before they absorb serious resources. The voice of the customer (VOC) has been baked into the New Product Development (NPD) process with excellent results in product diffusion rates and higher price points. However, we find that the feedback from the marketplace and particularly direct, honest feedback from your best customers is lacking in the product development

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process. We feel that this is not because the NPD process does not call out steps for customer feedback but that the organization is structured to make it difficult to provide customer feedback. Oftentimes the linkage between Marketing and NPD is weak or non-existent. Exhibit 11.3 shows what we think is a good model for ensuring that direct customer feedback changes the product development process.

Create New Revenue from New Markets and ProductsStrategic Marketing Teams

Key Strategic Thrusts

Business Strategy Guidance

Knowledge Environment

• Role of Innovation • Target Segment Needs • ROI Expectations • Core Principles • Capacity/Budget for Innovation Projects

• Ongoing Technology Trends Analysis • Ongoing Market Analysis • Scenario Planning • Economic Forecasting • Past Successes/Failures

Ideation (2-3 Months)

Product Development (18 Months)

Launch (6 Months)

Stewardship (5-10 Years)

Retire (1-2 Years)

Gate 1

Gate 2

Gate 3

Gate 4

Other Gates

Product Innovation

Launch

Product Life Cycle

Strategic Marketing

Another missing link in most industrial companies’ organization is a formal organization for defining and creating new markets. Typically, NPD will have large dedicated teams exploring new technologies and new products and their applications. However, these teams are often underrepresented when it comes to strategic marketing. Worse yet, the marketing teams are not teams at all but standing committees that have no organizational power and meet so intermittently that their recommendation are too slow to effect serious results.

Service Innovation Top Customer Innovation

Portfolio Management Requires of Project Teams: • Effective business case • Follow the defined process & templates • Resource requirements estimates • Market success likelihood • Strategic fig analysis • Growth potential/ROI potential • Understand customer needs and wants

Provides for Project Teams: • Business Plan templates • Process Expertise • In-depth understanding of the process • Communicate required gate deliverables • Empowers project teams to act between gates

Acts for the Organization at Each Gate: • Understands where project fits in entire product portfolio • Scores opportunities based on value to organization • Makes Go/No-Go Decision for each project • Allocates development budget to project team or disbands team

Cross Functional Organization

Technology Capabilities

EXHIBIT 11.3

Linking Marketing and Product Development

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Successful industrial companies set up “Surgical Strike Teams” that attack more far-ranging market issues. These teams are referred to by many names but the successful teams have these six characteristics: 1. 2. 3. 4. 5. 6.

Direct interaction with customers Full-time day-to-day leadership Full-time team members Financial acumen on the core team Cross-functional Steering Team Band and disband quickly

Industrial companies attempt to attack major ideas in the marketplace with hit-or-miss teams that are unconnected to the market (by way of customers) or to senior management (by way of a Steering Team). These teams do not have dedicated resources, so they move slowly and waste 30 percent of their time reorienting themselves. Lastly, they have little financial skill resident on the team and, therefore, cannot sell their ideas in terms people across the organization can relate to. These teams are doomed from the start. Exhibit 11.4 shows a typical “Surgical Strike Team” that might exist for one year to flesh out a new market idea before it disbands and hands over the idea to operations to run day to day. As a marketing executive or general manager, your responsibility is to give these teams the firepower to drive new ideas. The other ancillary benefit of this structure is that because of the full-time nature of the work, it will force out priorities from the rest of the organization and force the ideas to be crisp enough to warrant attention of full-time teams.

PRINCIPLE 3: MEASURE RESULTS What gets measured gets done: Most executives agree with this statement. Growth management, because of its complexity, must be measured tightly to ensure the results expected are the results achieved. Probably the biggest misconception we find in driving growth strategies is that growth cannot and possibly should not be measured with the same rigor of cost reduction or financial performance. We disagree. Growth is measurable. Growth strategies are measurable.

Surgical Strike Team Example

Role Characteristics: • Highly knowledgeable about the value chain • Knows customer issues

EXHIBIT 11.4

Service Specialist (Full-Time)

Role Characteristics: • Highly knowledgeable of the company’s and the competition’s products • Ability to investigate and clearly define new market opportunities

Role Characteristics: • Ability to draw valid conclusions by using real data • Effective at analyzing price elasticity situations, demand planning, and the effectiveness of promotions

Scenario Planner (Full-Time)

• Motivating and leading teams • Negotiating with stakeholders • Project management skills • Excellent customer handling skills • Strong internal relationships

Role Characteristics:

Project Manager (Full-Time)

Product Specialist (Full-Time)

• Account Executives • Business Unit Leaders • Lead Customer Executives

Customer Advocate Team (Part-Time)

• Marketing – SVP* • Manufacturing – VP • New Product Development – VP • Sales – VP • CFO

Steering Team

Role Characteristics: • Ensuring project processes and standards are followed • Mitigating project risks • Managing project costs

Process Driver (Full-Time)

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Profits from growth strategies are measurable. Many of your legacy systems were not designed to measure growth and the supporting strategies, but many industrial companies are making great strides in this area.

Growth Measures Many industrial companies are measuring growth as part of an overall “Balanced Scorecard” approach or as a stand-alone “Marketing Effectiveness Scorecard” or “Growth Scorecard.” Typically, companies measure the growth initiatives’ effectiveness (on-time, on budget, etc.) and the results that come from executing a growth program. This chapter will focus only on the results scorecard as individual initiative scorecards are specific to the individual company and fairly straightforward in concept and implementation. The growth measures listed below are provided as a starting point and are not comprehensive. These measures should help you and your teams begin to formulate your own measures.

Growth Measures and Definitions ■

■

■

■

Target Customer Percent of Total Revenue: Measures the effectiveness of targeting and growing selective customers. Promotes selectivity, segmentation, understanding relative customer profitability. Target Customer Profit Growth: Measures effectiveness of programs with target customers. Should be at least two times growth of nontarget customers. Can be expressed as target growth index by dividing target customer growth percentage by nontarget customer growth percentage. Target Market Growth: Promotes selective investments in target markets, should be at least two times growth percentage in nontarget markets. Forces team to define target markets. Percent of Customers Above Margin Threshold: Measures effectiveness of targeting programs, measures progress of redefining relationships with unprofitable customers, depicts “whale curve” in financial terms, requires credible customer profitability model.

176 ■

■

■

■

■

■

■

■

■

EXECUTION

Pricing Attainment Index: Measures attainment of desired pricing based on benchmarks or internal historical elasticity data. Can measure price upside missed or price downside. Difficult to administer but often comprises more value than all cost measures combined. Growth Idea Funnel: NPV of ideas that have passed a certain gate in the stage gate process. Often the second gate is used as a measuring point. Measures volume of and quality of ideas in the marketing funnel. Can be measured as NPV, 5-year profits, but must be longer term-oriented to be effective. Share of Wallet (small s): Measures your company’s share of an individual customer’s purchases of the products you sell to that customer. Drives opportunity identification. Share of Wallet (big S): Measures your company’s share of all products and services you could provide in revenue or profit terms. Drives bigger thinking. Encourages service additions to products. Share of Value Chain: Measures your company’s profits as a percent of all profits made in the value chain you and your customer participate in. Difficult to measure but drives significantly bigger thinking. For example, your company’s “small s” share of wallet may be 45 percent, “big S” Share of Wallet 21 percent, and Share of Value Chain 4 percent. Bottom Quartile Customer’s Profits/Losses: Focuses on redefining relationships with unprofitable or marginally profitable customers. Somewhat negative measure but does reinforce need to make tough decisions regarding these customers. Account Plan Compliance/Reviews: Measures the discipline taken to work the large accounts. Can be a simple compliance percentage or include qualitative data. Drives account planning, which drives Share of Wallet. Manufacturing Capacity Quality: Measures marketing and sales ability to replace marginally profitable capacity with higher margin capacity. Works well in capacity constrained environments. Can be measured as revenue per unit or gross margin per unit. Helps link manufacturing into customer profitability discussions. Emerging Market Revenue Growth: For smaller, emerging markets, measures effectiveness of execution to plan. Should be three to 10 times normal market growth and twice the market’s

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■

growth. This is reserved for smaller markets or new markets where conventional measures do not work. Training Achievement Index: Measures sales and marketing personnel achievement of development. Can be input measure (percent of people fulfilling requirements) or output measure (average grade on achievement test). Intended to drive a workforce that can sustain the gains driven by various growth programs.

The above are a few of the measures that can be used to drive growth programs. An example growth scorecard is provided in Exhibit 11.5. A few notes regarding growth scorecards: ■

■

■ ■ ■

Measures must be linked upwards (to strategy) and sideways (to each other) Measures should be understood by financial and operational management Measures should be reconciled to formal systems wherever possible No more than 10 measures should be used Measures should link in with overall company scorecard (if it exists)

PRINCIPLE 4: ENGAGE SENIOR MANAGEMENT Senior management always drives the growth agenda but often its role is suboptimized. This principle is clear: Senior management can Current

Major Strategy

Business Owner

Key Measurements

Grow Profitably

Marketing Marketing Marketing Sales

Elasticity Index Target Market Revenue Growth Opportunity Funnel/5 Years Target Customer Profit Growth

Improve Margins

Sales Operations Operations Marketing Operations

Revenue Growth/FTE Clean Orders Sales & Operations Forecast Accuracy % Volume Exceeding Target Margin Days Sales Outstanding

Sustain Growth

Corporate Training Training Index Investment Index Marketing

Measurement Target Actual Status Frequency Performance Performance R Y G 5% Annual 6% 20% Annual 18% $100mm Quarterly $60mm 15% Quarterly 11% Overall Strategy Rating

Annual Monthly Monthly Monthly Monthly

$5mm/FTE 95.0% 90% 25% Exceed 20 Days

Monthly Annual

90% 5%

$3mm/FTE 80% 94% 20% 18 Days

Overall Strategy Rating

75% 2%

Overall Strategy Rating

EXHIBIT 11.5

Example Growth Scorecard

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and should be involved in the growth program and not in a custodial role but in an active role. This principle offers specific guidance on where and how you should engage with your teams if you are a senior executive and how to leverage senior executives’ time if you are the manager or line executive driving the day-to-day growth programs. Our typical client senior executives lament is, “I started the team and I offered my help, yet the team seems confused and almost seems like they are avoiding me. I feel I selected the right people to drive this but am frustrated with their progress.” The managers and team members running the day-to-day programs will typically say, “Our sponsors are disconnected from the market and have unrealistic expectations. They try to help but always too little too late.” In our experience, most of this frustration can be avoided by defining the roles of the senior executives clearly and then executing against these roles. Senior executives are effective in driving the growth agenda if asked to lead these five areas. If you are a senior executive, insist on these five roles. If you manage the day-to-day growth agenda, insist that the senior executive(s) perform these five roles. 1. Get the Right People. We described this in the first principle, but the senior executive must find the growth leader, help that leader find and negotiate for the staff required, and perform the internal horse trading required to get the best people. 2. Set Clear Goals. Often, the team members will do an excellent job of setting goals. The senior executive’s time must be spent on clarifying the goals. For example, one recent team articulated the growth goal of “Increasing our automotive market share by 20 percent.” The Steering Team chair asked the team to come back with that goal expressed in net profit by year for five years. By setting a clear goal, she forced the team to think through all of the implications of this goal and its supporting strategies. 3. Chair the Steering Team. The senior leader must chair the Steering Team, which includes selecting and recruiting fellow Steering Team members, calling the meetings, and setting the tone for the interaction. 4. Integrate with Other Company Initiatives. As a senior leader, you are paying your executives and managers to focus on their

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areas. Your job is to help the team understand where their growth initiatives fit with the rest of the company’s strategies. Only the senior team has the perspective to understand and integrate acquisitions, divestitures, product launches, and cost reduction programs with the growth agenda. This includes clearing the path for the team to be politically successful. 5. Engage with Customers. Contrary to belief, most senior executives are good with customers. Most senior people served customers for a good part of their career, have the perspective to match up all of their company’s capabilities with all of the customers needs, and have the authority to make big changes quickly. We have seen the customer engagement process break down for the senior executive group when their roles are too fuzzy going into the meetings or the entire team, including the senior executives, are ill prepared. We detail more about a suggested customer engagement process in the sixth principle. These five roles are a minimum for senior executive involvement. These roles may not require much time, but they do require open, honest communication at the outset of the growth agenda between the executives running the programs and the top executives.

Senior Executive’s Role with Top Customers One of the fastest and most proven methods of growing is to increase your share of wallet with your current customers. This usually involves a new approach to your best customers, be it organizational, incentives, or pricing. Exhibit 11.6 provides a quick reminder of the roles and responsibilities associated with growing important accounts. This Exhibit includes top executives and the day-to-day executives that manage the growth at these important accounts.

PRINCIPLE 5: ARTICULATE VALUE IN FINANCIAL TERMS Too many growth programs are articulated to the board, shareholders, and top management in non-financial terms. This is a mistake. All ideas worth considering can and should be converted into their

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Customer Account Group Accountability/Responsibility Matrix

Develop Account Plans Identify Opportunities Build and Present Proposals Negotiate Contract Terms Establish New Customers Relationship Management Develop Relationship Plan Present New Ideas; Entertain Customers Establish and Expand Relationships Coordinate Executive Participation Customer Service Provide Customer Service Manage Customer Inquiries Measure Customer Satisfaction Administer Customer Performance Reporting Administration Provide Financial Accounting Analyze Financial Performance Provide Financial Reports Administer Financial Reallocations

A A A A A

R R R R R

A A A A

R R R R A

A A A A

Accounting and Administration

Customer Service

R R R R R

Operations Director

National Director

A A A A A

Account Executives

Customer Account Group Steering Committee Customer Account Group Management Establish Goals Recruit and Train Account Executives Assign Account Executives and Monitor Performance Select and Retire Top Accounts Measure Customer Account Group Value and Effectiveness Portfolio Management Develop Account Teams Establish Portfolio Goals Analyze Financial and Service Performance Develop Improvement Plans Recommend Product and Service Enhancements Business Development

Customer Account Group

R

R R R R A A A A

R R R R

A A A A

R R R R

A = Accountable R = Responsible

EXHIBIT 11.6

Top Account Management Roles and Responsibilities

impact on the financial statements. We have heard the endless arguments about the “creativity” associated with growth ideas and all of the ideas shot down by the “bean counters” over the years. However, to get your organization to a collective level of confidence where you are ready to invest significant funding, you must spell out your idea in financial terms.

The Value Proposition Writing a value proposition is the first step in converting a concept into financial performance. A value proposition is an “If, then” statement

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that begins to spell out the assumptions required to estimate financial impact. We find that simple value propositions are a powerful first step and communication tool. For example, as shown in Exhibit 11.7, “If we dedicate a national account team to customer #1, then we can increase our share of wallet.” Our assumptions are somewhere between today’s 20 percent share of wallet and a 40 percent share of wallet. We estimate profit margins based on manufacturing’s capacity range and the customer’s propensity to ask for lower pricing as volume increases. After several iterations, we agree as a team that 30 percent is an appropriate target and a 7 percent margin is feasible. This simple value proposition allowed our team to agree on what was a fuzzy notion.

The Business Case Another required tool for articulating value in financial terms is the business case. A business case combines several value propositions to estimate benefits and overlays costs and risks, making it a complete “case” to consider versus other competing priorities. A good business case does not need to be long and verbose. Some of the best business cases we have developed with our clients are fewer than five pages in length. However, a business case must at a minimum cover these topics: Concept Increase customer XYZ’s share of wallet by dedicating a national account team to customer XYZ.

Value Proposition Scenarios

Current Share of Total Spend Wallet

Revenue

Margin

Profit

Incremental Value

Current

$200mm

20%

$40mm

6%

$2.4mm

1

$200mm

25%

$50mm

6%

$3.0mm

$0.6mm

2

$200mm

30%

$60mm

7%

$4.2mm

$1.8mm

3

$200mm

35%

$70mm

8%

$5.6mm

$3.2mm

4

$200mm

40%

$80mm

7%

$5.6mm

$3.2mm

Note 1: Beyond $80 million in revenue would require major capital investment to handle capacity Note 2: Incremental value assumed to be at the same margin level as current value (for illustrative purpose)

EXHIBIT 11.7

The Value Proposition

Goal

182 ■

■

■ ■ ■

■

■ ■

■

■

EXECUTION

Succinct description of the idea, for example, “Develop indirect sales channels” Current state description including baseline facts and financial performance Future state description Future state value and calculations to support Assumptions made to estimate future state value including benchmarks used to estimate future Implementation risks, usually characterized as internal (people, process, technology) and competitive Speed with which changes must be made Costs to implement idea including supporting calculations and assumptions Simple ROI, EVA, or your company’s convention for measuring return Market verification, i.e., level of “outside-in” confidence we have in idea

A straightforward business case can be the single best communication tool you have to articulate your growth ideas. Financial improvement is a language that all executives understand.

Accuracy versus Precision Business cases for growth strategies are viewed as more difficult than business cases for cost reduction. In our experience, the growth-oriented business case is not more difficult but is less precise. Notice that we did not state growth business cases are less accurate, just less precise. For example, one industrial company has detailed goals and plans for yearly productivity gains. These measures are precise as to the cost of headcount whether or not attrition or reduction is precise. Conversely, a growth program at the same company to introduce an existing product into the Asian market is imprecise. But which is more accurate? The existing product was tested for one year in the Asian market and well accepted by the pilot group. The cost reduction program assumes that 11 percent of those eligible for retirement will take a certain mix of retirement packages. This program is precise but not necessarily accurate.

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In our experience, a well-researched growth program can be as accurate as any cost reduction program but not as precise. As long as this lack of precision is articulated verbally or through an expected value discount, all constituencies should understand the growth program’s financial return.

PRINCIPLE 6: DRIVE FROM THE OUTSIDE-IN One of the key themes of our entire point of view on growth strategy is that all ideas must be verified in the marketplace, and many ideas should be born in the marketplace. The marketplace is not a conceptual place. It is in the boardrooms, factories, and technical service conference rooms of your customers. If this concept of engaging deeply with your customers is so obvious, then why do industrial companies shy away from customer interactions? This principle has been discussed several times in previous chapters. It bears repeating here as it defines growth strategy, and an outside-in perspective increases the odds of success. The examples are provided as a way to get started into the customer engagement process.

A Real Concern Industrial companies have evolved over the years from suppliers to key suppliers to true business partners with their customers. However, given the last 10 years of price pressures and strategic sourcing on the part of almost all of their large customers, industrial firms hesitate to engage in open discussions with their customers: “If we engage in open discussion, it will be used against us to drive our price points down faster than we can gain productivity; therefore, we open ourselves up to a margin erosion discussion every time we step into a customer’s conference room.” We see industrial companies overcome this real issue in two distinct ways (and you must employ both): 1. Make the discussions true executive to executive (P&L owner to P&L owner) 2. Do your homework

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When your business leaders are discussing how your customers make money with their business leaders, you are in the right frame of mind to make gains. Second, as in homework or sports practice, you must invest many times more hours preparing for the customer meetings as having the customer meetings. There is a real downside in not doing your homework besides the obvious price leverage risk. If customers feel you do not understand their business or are taking the meetings lightly, you could damage your reputation with customers. The better prepared you are, the more respect your team will garner from customers. Exhibit 11.8 shows the level of preparation we recommend before engaging large customers. By preparing and having true executive-to-executive discussions, you can mitigate the “sourcing” discussion risk and accelerate the valuable discussions.

PRINCIPLE 7: RUN LIKE A PROJECT It is unbelievable sometimes to witness the amount of money and energy that go into growth programs that are run loosely with little accountability. Prepare Estimate Profits • Estimate markets • Analyze current profits • Estimate share of wallet • Estimate total potential • Understand competitive position

Map Relationships • Map current relationships • Assign senior execs to team • Define account team • Schedule initial customer meeting

Defense Strategy • Run pricing scenarios • Run product mix scenarios • Run competitive scenarios

Offense Strategy

Finalize

• Develop 4–6 ideas for value creation

• Develop final customer packets

• Develop preliminary financial value of 4–6 ideas.

• Reiterate roles and responsibilities

• Run blended scenarios • Delineate defense strategies

Engage First Meeting • Senior exec describes program • Account exec details goals for meeting • Value hypothesis described in 4–6 areas • Develop criteria to select ideas

Separate Prep

Joint Team Session

• Discuss total value

• Present idea

• Select scenario from original analysis

• Customer participants list pros and cons of idea

• Discuss value sharing arrangements • Change team to reflect best ideas for next customer session • Prepare roles for next session

Attain Approval • Joint executive committee reviews ideas

• Test hypotheses with customers' customer

• Predetermined criteria govern selection of ideas

• Customers build on ideas

• Drive out financial value

• Ideas pass/fail first review

• End with 4–6 new/ improved ideas

• Develop 2–3 scenarios for value sharing; do not decide yet

• Develop joint teams for each idea • Co-develop templates for value capture

EXHIBIT 11.8

Develop Ideas • Joint teams develop ideas to next level

• Finalize ideas • Develop communication packets

Preparation and Customer Engagement Example

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In a large industrial company, an expensive team was tasked with initiating an entire new service to complement their products. The team had a leader, a budget, and about 50 people to launch the complementary service. Even with the budget and all of the people, they failed. The reason they failed was they did not overlay the discipline of a project onto their plans. They met intermittently. Due dates were informal. Roles were unclear. There was an informal timeline with an end date but no interim deliverables. As they approached the finish line, they found out they had not enough gas, bald tires, and no planned pit stops. They failed because of lack of discipline. Conversely, one large industrial company had five large growth programs, each with five to 10 individual projects and aggressive growth goals for a company of this scale. By managing these programs and their subordinate projects closely, these teams could promise senior executive management and the shareholders specific, measurable profit numbers going out five years. This company was roughly 30 times the size of the company previously mentioned. They accomplished this by driving discipline into every project they undertook. The discipline took the form of basic project management.

The Charter The first step in insuring project discipline is writing a project charter. This charter must be written and usually includes the following 10 sections: 1. Objectives: Describes project objectives. 2. Value: Describes and estimates financial value of project. 3. Scope: Describes where project begins and ends, for example, the project will describe the value chain back two levels in the supply chain and forward to the retailer but not the consumer. 4. Approach: Describes what steps will be taken to complete the project; use verbs to describe. 5. Deliverables: Describes what tangible output will the organization see as a result of the work. 6. Team: Describes who will do the work, what are their roles, what are their time commitments. 7. Timeline: Describes when will each task and deliverable be complete.

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8. Assumptions: Describes what do we assume is in place, for example, easy access to customers. 9. Risks: Describes what could cause the team to miss deadlines or fail. 10. Cost: Describes what are internal and external costs of project. Exhibit 11.9 shows a simple one-page project Charter. The project Charter does not need to be long or elaborate, but it does need to be written and discussed. This will force the team to understand details and discuss the potential project pitfalls. It is a healthy and necessary exercise. Project Charters are referred to as “Workplans” or “Statements of Work.” Regardless of the name, a formal, written, communicated plan is a necessary ingredient for successful implementation.

Structuring the Work For lack of a better term, structuring the work into manageable pieces is an important success factor in running growth programs like projects. As described above, in the highly successful industrial company, each project had a parent program, and the sum total of all of the programs created the total growth agenda. All program directors knew their parts and understood how they all fit together. This is another seemingly simple aspect of running programs like projects, but we experience overwhelmed people at our clients every day for the lack of dissecting the work into manageable chunks. See Exhibit 11.10 for an example of portfolio of work dissected into programs and projects.

Use the Steering Team Another ignored project manager secret is to use the Steering Team as the growth team progresses. Many projects languish when an emergency Steering Team meeting could have saved months or sometimes years of wasted effort.

• • • •

• Customers leverage price • Sales reps lose sight of relationships

EXHIBIT 11.9

• • • • • • • •

• •

Sample Project Charter

• 2 consultants for 9 months • Intermittent participation from numerous sales and marketing people • Statistical specialist • Sponsors: Jane Smith and Business Unit marketing leaders • Steering team • John Smith is day to day project leader

Team

Approach

Risks

•

• Significantly improved pricing decisions • Increased margins through better price/volume management • Financial value estimate is $50mm profit marging over 3 years (Year 1: 10, Year 2: 20, Year 3: 20) • Additional value in spreading the knowledge to other segments • Ongoing cost is approximately 20% of benefits

• Understand price/volume tradeoffs for key segments • Make pricing decisions that optimize long term profitability • Pilot discreet choice modeling to demonstrate value to organization

Define business unit and segment focus Define project working team Determine revenue goals and impacts Determine project objectives • Product Performance • Pricing • Other offering elements (service, delivery, etc.) • Offering Optimization Conduct strategy session to document alternative actionable strategies for testing • Create initial responsibility matrix Construct conjoint and customer study design Gather data from the marketplace • Customers and prospects in target segments • Competitive information about alternative offering performance Analyze customer decision “utilities” Construct market response model Conduct specific analyses of alternative strategies Analyze position and profit impact of alternative strategies Create and prioritize marketing strategy shifts Define business case for action Complete responsibilities matrix Develop high-level action plans

Value

Objectives 3 market segments 30 customers 2 product families 2003 and 2004 data

• $1.5mm total: • $0.8mm external • $0.4mm internal • $0.2mm research • $0.1mm travel

Cost

• 9 months

Timing

• Acceptance of highly detailed analysis by sales reps. participants • Availability and willingness of customers in desired segments • 10 segments x 20 mm revenue per segment = 200mm total revenue x 2.5% margin improvement = 5mm annual value

Assumptions

• • • •

Scope

• Value-Based Selling • Value-Based Pricing

Improve Margins

Activity

11. Measure Price Realization 12. Link DVC to Value-Based Selling 13. Link DVC to Value-Based Pricing

6. Organization Design - Design the relationship matrix and decision rights for cross functional opportunity - Design the relationship matrix and decision rights to realize new customer opportunities - Align incentives and rewards 7. Create a Measurement Dashboard - Leverage top customer work - Create monthly progress views - Internal Economics - External Data 8. Institutionalize the Demand Shaping Process -Complete 5-year plan of goals and objectives 9. Link Demand Shaping to NPD - Pilot Customer Innovation process - Link Customer Innovation to NPD and rollout 10. Develop and Deploy Customer Management Tools - Customer Knowledge Management - DVC software - Cross functional account planning

1. Demand Value Chain (DVC) - Pilot - Rollout 2. Assess capabilities with results of DVC analysis 3. Assess investment needs to realize DVC opportunities 4. Implement Demand Shaping opportunities - Pilot - Rollout 5. Develop Growth Plan for emerging mkts

Structuring the Work

• Organization Design • Organization Capabilities • Measurement

Build Capabilities

EXHIBIT 11.10

• Cross Functional Collaboration • New Customers • New Markets

Work Theme

Drive Growth in New Markets

Growth Theme 3Q 04

4Q 04

Calendar 1Q 05

2Q 05

3Q 05

4Q 05

1Q 06

Future

Executing the Growth Strategy

189

The best growth teams approach the Steering Team in four specific ways: 1. The team never asks for advice without at least three options and a recommended option for the Steering Team to consider 2. The team is always honest with the Steering Team 3. The team always has an informal line to the chairperson for quick guidance 4. The team respects the Steering Team time but does not hesitate to call an emergency meeting if needed Many of the corporate people we work with have been brought up in the “completed staff work” environment where it is considered a sign of weakness to ask for help or guidance. The smart growth executives get past this and use their Steering Teams effectively.

PRINCIPLE 8: SET CLEAR GOALS This principle could have been the first principle we discussed. It is imperative, especially in marketing, to set clear goals. Whether we like to admit it or not, our manufacturing, financial, and Information Technology (IT) brethren view marketing professionals as fuzzy dreamers who cannot deliver real dollars to the company. This belief is widely held and sometimes true. It is incumbent on the marketing executive to dispel this notion by setting clear goals. Typically, gaining consensus on clear goals is difficult but worth it. A clear set of goals with programs and projects underpinning the attainment of those goals erases the ambiguity that can unravel attained results. A proven technique to developing clear goals is to force a mapping exercise that starts with goals and stops with specific performance measures. The growth goals must be linked “upward” to company strategies and “downward” to supporting strategies and specific measures. If you cannot link the growth goal to a company strategy, you have not gone up high enough. If you cannot link the growth goal to a specific measure, you have not gone down far enough. The goals are vague until a specific measure can be tied to the goal or the goal’s supporting strategies. See the following example

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in Exhibit 11.11 that depicts the overall goal of “Long-Term Profitable Growth” as it divides into supporting strategies and specific goals. “Long-term profitable growth could be interpreted many different ways, but after a thorough goal mapping exercise, what you intend to do is clear to your employees, middle management, and other stakeholders. This exercise can be accomplished in one or two days and sets a tone for clarity throughout the growth program. No matter how you go about setting your growth goals, do not begin driving the programs without clear goals understood by operations, financial, and marketing professionals.

PRINCIPLE 9: BALANCE SHORT-TERM AND LONG-TERM GOALS A pharmaceutical executive once told us, “If all of your goals are short-term, you will not achieve greatness; but if all of your goals are long-term, your successor will reap the benefits of your greatness.” In other words, a good growth portfolio comprises short-term and long-term goals.

Self-Funding Portfolio The leading practice in growth management is to create a portfolio of ideas that will fund themselves. Balancing the portfolio forces the company to integrate the short-term plans with longer-term plans. For example, if a short-term plan is to train the sales force on “solution Performance Strategy Grow Current Business

Goal Grow Profits from Large Customers Focus on Target Markets

Measure Large Customer Profits Revenue Growth in Target Markets

Opportunity Funnel NPV Conduct Value Chain Projects International Profits Develop International Strategy Drive Long-Term Demand Drive Marketing / Product Development Linkage Product Diffusion Rate (Market Uptake)

Build Capabilities

EXHIBIT 11.11

Current

Target

7% CAGR 4% CAGR

20% CAGR 10% CAGR

$500mm $5mm 48 months

$4 billion $50mm 24 months

Drive Marketing / Acquisition Linkage

Successful acquisitions per year

1 per year

5 per year

Build Case Study From DVCA Work

Revenue per marketing FTE

$1mm/FTE

$2mm/FTE

Goal Mapping Example

191

Executing the Growth Strategy

selling” to increase share of wallet at major customers, the teams should know that a subset of those same customers are being targeted for long-term collaboration. We would not want a simple “portfolio sale” at one of the top collaborators to interfere with our joint product development. Exhibit 11.12 shows a conceptual example of a self-funding growth portfolio. It should be noted that the growth portfolios are often described as self-funding when they are subsidized for the first six months to a year. But they do not linger long in the world of negative cash flow or dilution of earnings. They quickly and programmatically drive out dollars to fund the longer-term projects. As a rule of thumb, we suggest that 75 percent of cash flow be returned to the shareholders in the form of profits and 25 percent be plowed back into long-term growth initiatives.

Demonstrate Value A practical reason to balance short-term and long-term goals is that short-term value must be demonstrated to achieve the requisite

INVESTMENT

L

A

B

C

D

H

RETURN

H

B

L

&

C

A

$50M

$100M $200M

$50M

$200M

$250M BOTTOM LINE RESULTS Q2

Q3

EXHIBIT 11.12

Q4

Q1

Q2

Q3

Q4

Self-Funding Growth Portfolio

Q1

Q2

Q3

Q4

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buy-in and funding to drive longer-term goals. Stated in lay terms, no one in the organization will believe it until they see it. The industrial companies that achieve the greatest long-term success in their growth programs are those that realize they must prove, not through planning but through piloting and demonstrating, that the growth ideas are providing bottom-line results.

Burnout and Going Native Another reason for balancing the short-term and long-term goals is team burnout. In our experience, teams tasked with rapid growth to get the company over the hump will last about a year before they approach burnout. The short-term goals can be met within the year, thereby giving team members a sense of accomplishment before they move to a more traditional line position. The longer-term team members usually must hand off their roles to others who are more specialized and ready to push the growth idea to the next gate. Last, strange as it sounds, is the “going native” phenomenon. By going native, we mean that the team members begin to accept all of the barriers and headwinds that are a part of driving change and go native, joining the people who are so rooted in the past that they cannot see their way to the future. For example, a team member who at first believes there is collaborative potential at a top customer becomes convinced by the sales reps (who only call on purchasing currently) that the customer will only use the collaboration meetings and data to drive down price points and kill the company’s margins.

CHAPTER

12

Summary SIX SIGMA AND BEYOND The underlying premise of this book is that companies need a process-based approach to drive profitable growth that parallels the Six Sigma process used by many companies to drive cost out of organizations and variability out of processes. The book has introduced the concept of Customer Value Creation (CVC) as a new approach to creating and sustaining profitable growth through the application of Six Sigma-like rigor and tools. CVC is a business philosophy that combines two concepts: Customer Value Analysis (CVA) and Operational Excellence (OE). (see Exhibit 12.1) The fundamental principle behind CVA is that to grow profitably, organizations must focus on creating and exchanging value with customers. The fundamental principle behind OE is that organizations must use an analytical and process-based approach to execute growth. CVC combines these two core ideas to leverage the quantitative rigor and process based mentality of Six Sigma with an outside-in perspective on value to drive profitable growth. Approaching profitable growth with an outside-in perspective means much more than understanding customers. The outside-in approach drives us to understand value from the customers’ perspective and then to align our people, processes, and technology to deliver that value. (see Exhibit 12.2) To grow consistently and profitably, organizations must understand how they create value from the perspective of their customers. Until companies understand how they create value for their customers, they will not be able to determine how to exchange and capture that value on behalf of their shareholders. 193

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CVC = Customer Value Analysis + Operational Excellence CVA Focus on creating and exchanging value with customers

EXHIBIT 12.1

OE Analytical and fact-based approach to execute growth

CVC

As we learned earlier, customer value is defined by a series of attributes (product, access, experience, and cost or PAEC) that drive revenue enhancement and cost reduction for our customers. (see Exhibit 12.3) Once organizations understand these value attributes and drivers, they can begin to offer solutions that their customers value. Profitable growth is the outcome when value is created and exchanged with customers. Another key learning is that the source of all profits is from customers. This mindset must be consistently reinforced since too many companies operate as if profits result from their products and services.

Outside-In Growth

Inside-Out Maintenance

People, Process, Technology Executive

Company

• Strategic Planning • Strategic Control

Product Development

Customer Acquisition And Sales

• Research

• Marketing

• Product & Process Design

• Sales • Order Fulfillment

• Interface with • Prototyping Government Organization • Product Phase In/Out

Supply Chain

AfterSales Support

• Procurement • Customer Service • Inbound Logistics • Spare Parts • Direct Production • Production Support

Outside-In Approach

• Finance & Accounting • Human Resources

• Repairs • Warranty

• Information Management

• Returns

• Legal

• Distribution • Collections

EXHIBIT 12.2

Infrastructure Support

Customers

195

Summary

Customer Value = (Product

+

Access

+

Experience

−

Cost)

• Performance

• Availability

• Service

• Price

• Features/ Functions

• Reliability of Supply

• Impact on Customer

• Total Cost of Ownership

• Technical Innovation

• Distribution Channel

• Brand

• Process Cost • Payment Terms

Revenue and Cost Drivers

EXHIBIT 12.3

Customer Value

Optimizing the profit potential from each customer relationship will maximize the value created for an organization. Three ways exist to increase profits: 1. Enhance the profitability of current customer relationships 2. Capture a larger share of the dollars that the current customer is spending 3. Acquire new customers that value the product/service offering Expressing growth in profits using customer dimensions on which profits can be captured is a powerful tool in setting the tone and direction of the organization. (see Exhibit 12.4) The authors believe that CVC is more than a series of tools and techniques but an underlying business philosophy that will help companies execute on their growth agendas. The challenge is to put customers at the center and then design, build, and operate a value creation engine that will optimize overall value and drive profitable growth. Since Jeffrey Immelt has taken over for Jack Welch at GE, he has focused the company on extending Six Sigma beyond its own walls to strengthen the company’s relationship with its key customer groups. In Immelt’s words:

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Customer Profitability

Growth Cube

Could Be

Should Be

As Is

Share of Wallet

EXHIBIT 12.4

f ro s be er um om N ust C

Growth Cube

“We’re leaving a period, particularly in the late ’90s, where global economic growth of the developed world was pretty robust. It’s just choppier now. You need new ways to boost growth. . . . We need to be focused on where customers are going. We should be playing into major demographic trends and the needs of our customers.” (Business Week, 8/1/2005)

We believe CVC is that new way to boost growth and move beyond Six Sigma.

Appendix

CHAPTER

13

Exploration of Growth Dimensions CUSTOMER PROFITABILITY According to management guru, Michael Porter, “A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers, create comparable value at a lower cost, or do both”. Unfortunately, most companies cannot account for the value delivered to customers or the value captured from customers in the form of profits. Companies find themselves losing profits, unaware of hidden costs and with inadequate tools or processes in place to provide the right information to improve profitability. Many factors can influence a decrease in customer profitability: ■ ■ ■ ■

Limited understanding of business costs and what drives them No ability to track the costs to serve customers Increased variability in customer interactions No understanding of how to guide customers toward the optimal behavior

Customer Profitability Analysis, the ability to understand profit contribution by individual customer or customer segment, can be the key to understanding and improving the overall profitability of an enterprise. The Growth Cube, (see Exhibit 13.1) introduced earlier, presented the three dimensions available for measuring a company’s ability to grow profitably and capture value for its shareholders: 197

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Customer Profitability

Could Be

Should Be Tomorrow

Today

Share of Wallet

EXHIBIT 13.1

f ro s be er um om N ust C

The Growth Cube

1. Customer profitability 2. Share of wallet 3. Number of customers The Customer Profitability dimension measures the share of economic value that the enterprise is able to capture for its shareholders from the total value it creates for its customers. Customer profitability can be measured at the customer level, segment level, and at the enterprise level. Until recently, customer profitability has been largely ignored or poorly executed for various reasons: ■

Accounting systems are not equipped to handle customer profitability analysis. Accounting systems that adhere to General Accepted Accounting Principles (GAAP) rules exclude information about customers from the financial statements. They generally collect and report data at the product and service level and not at the customer level. Three main roadblocks prevent traditional accounting systems from reporting customer profitability accurately: 1. Product costs are aggregated into accounts separate from customers for inventory costing purposes. Revenues are collected at the customer level. For accurate customer profitability analysis, both are needed at the customer level.

Exploration of Growth Dimensions

■

■

199

2. Customer facing costs, such as sales, marketing and service, are not accounted for by customer. 3. Accounting systems exist in isolation limiting the ability of companies to create a common, customer view. This is especially true in multiple business unit situations where several business units within the same company may have a relationship with the same customer. Hidden Costs to Serve. Customers often interact with their suppliers in ways that affect the profitability of the first sale and can drive high relationship costs over the lifetime of the relationship. Complexity of the value chain and differing customer behaviors drive different cost to serve profiles that affect profitability. Until these costs are identified and assigned to customers, companies will continue to make decisions without an accurate picture of profitability by customer. No Alignment with Strategy. A growth strategy based upon creating and exchanging value with customers supported by accurate customer profitability analysis is more likely to succeed than one not based upon accurate customer data. A strategy aligned with customer profitability data can enable dialogue around the elimination of inefficient processes and non-value added activities and re-investment toward mutually beneficial activities that will accelerate value exchange.

Customer profitability analysis is generally defined as the matching, assignment, and/or allocation of company revenues and costs to its customers to understand relative profitability. Based on the experience of the authors, fewer than one third of all companies claim to know their customers’ profitability. Many of these firms have used arbitrary methods to calculate customer profitability that may cause them to make bad business decisions. In some cases, those customers thought to be the most profitable turn out to be unprofitable. For example, at one large manufacturer, customer-related costs were allocated using a percentage of revenue dollars. For high-revenue customers, this method could allocate more costs to them than they consume. Conversely, low sales volume customers may appear more profitable than they are. If this manufacturer acted on this misinformation, it might deteriorate rather than improve its overall profitability.

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Understanding the ways customers influence and companies participate in the Demand Value Chain is critical to exploring the ways in which customers should and should not be served. Companies need to understand customer value chains and customer behavior within the value chains to determine and optimize profitability at the customer level. Each customer has different value requirements, which drive different cost to serve profiles ultimately affecting profitability. Companies can choose to modify their interactions with their customers depending upon the value requirements. For many companies, increased customer costs result from services such as: ■ ■ ■ ■ ■

Smaller order quantities Customized and/or more frequent deliveries Producing and/or stocking a greater number of products Requiring a company to hold inventory Increasing requirements for post-sales support

Dealing with these extra costs may require a company to charge for selected services, reduce provided services, make those services more efficient, renegotiate contracts or even “fire the customer”. Knowing the customers’ costs and profitability is crucial to making the right decisions about your customers. Many examples exist of companies improving overall profitability by developing a thorough understanding of individual customer profitability. A large overnight package delivery company analyzed the profitability of its top 30 customers that generated about 10 percent of the total sales volume. It found that some customers spent a lot of money but demanded little customer service. Others spent less and demanded more service with little potential of spending more in the future. Additionally, it found that certain customers, including some that required a lot of costly residential deliveries, were not doing as much volume as agreed to initially when they negotiated discount rates. Armed with these data, they began to treat customers differently based upon their profitability profiles, raised rates to weed out unprofitable customers, and market differently to those companies that showed little potential to spend more in the future. This strategy led to a substantial reduction in costs and an improvement in profitability.

201

Exploration of Growth Dimensions

In another case, a large global life insurance company was surprised to see the results of a customer profitability analysis that showed the company was selling policies primarily to customers that had little upside potential but high costs to sell. A new direct mail marketing campaign had resulted in increased revenues but the wrong kind of revenue. The campaign, aimed at affluent customers, was encouraging older couples and stay-at-home mothers to sign up for home visits by sales agents. The home visits resulted in increased sales but were expensive. The customers usually bought one policy with small margins. The company was successful at attracting more customers, one dimension of the Growth Cube, but did not pay attention initially profitability of those new customers. Customer Profitability Analysis merges an accounting focus together with a marketing focus to analyze, manage, and improve customer profitability.

Customer Profitability Analysis Approach Over the past decade, many companies have embraced activity-based costing (ABC) as an approach to examine the drivers of their costs to improve management decisions and corporate profitability. ABC was initially applied to more accurately define product costs versus traditional accounting systems. The Customer Profitability Analysis approach described below extends the activity based costing philosophy to determine the profitability of customers. (see Exhibit 13.2) The five-step approach will allow a company to: ■ ■ ■

Understand and analyze customer profitability Increase customer profitability Convert unprofitable customers into profitable ones

Define Customer Activity Costs

EXHIBIT 13.2

Define Customer Specific Costs

Define Customer Profitability

Customer Profitability Approach

Segment Customers

Improve and Monitor Profitability

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The objective of this step is to define all costs associated with customer-facing processes or activities. Examples of these activities are sales, marketing, customer service, shipping, invoicing, after sales support, and the warranty returns. Identifying and understanding these activities and their associated costs is critical as are the key drivers of these costs. These costs can be benchmarked internally and externally and best practices can be identified and implemented. As a result, costs cannot only be assigned to customers better, but opportunities to reduce and/or redirect them must be identified so the total cost to serve customers decrease. The following tasks are used to determine customer process/activity costs. Step 1: Define Customer Process/Activity Costs

Depending on the size of the company, the general ledger can contain hundreds or even thousands of accounts. Grouping similar accounts into pools of resources can simplify the process of mapping the resources to the activities. For instance, salary accounts and benefit accounts are often grouped into the same cost pool. Though they are often kept as separate accounts in the GL, they are handled the same way in this approach. There is no rule of thumb identifying the number of pools to define, however, it is critical to make sure that every account listed on the general ledger can be accounted for in one of the resource pools. There is no limit as to how many accounts can be included in a resource pool.

Define Resource Pools

Once the resource pools have been defined, the next step is to map the general ledger accounts to the resource pools. The dollars associated with each account are mapped to the resource pool. For instance, if a salary account with $1,000,000 in it and a benefit account with $300,000 in it were mapped to the same cost pool, the cost pool would now have $1,300,000 in it. This step is complete when all of the accounts (and their associated dollar values) are mapped to the resource cost pools. Note that no dollar value has been gained or lost; it has been reclassified into one of the cost pools. The total dollar value of the cost pools will be equal to the total dollar value on the general ledger. Map Chart of Accounts to Resource Pools

The intermediary between the resource pools and the customer costs are the activities. All of the activities that Identify/Define Activities

Exploration of Growth Dimensions

203

occur within an organization must be identified. Typically, companies identify approximately 100 to 125 activities encompassing everything done in the organization. Customer-related activities are a subset of a company’s activities. An important yet overlooked part of this step is the process of defining each of the activities. Having a documented dictionary defining the activities will eliminate any misunderstandings of the activity’s intent. This is one of the most difficult steps in the process. It involves the identification of how the resources are being consumed by the activities. The same resource driver can be used for multiple resource pools, but each resource pool must have a resource driver. An example of a resource driver used for a resource pool containing salary and benefit costs is the number of hours. For example, the salary and benefit costs associated with an activity such as “Prepare Customer Invoices” can be assigned by using the number of hours out of the total consumed by this activity. Identify Resource Drivers

Mapping the resources to the activities means determining which resources the activities are consuming and how much they are consuming, i.e., assigning values to the resource drivers identified in the previous step. Imagine 2,000 hours of activity are in the period, 1,800 hours were spent performing activity A, and 200 hours were spent performing activity B. Based on the example from the previous step, the resource containing salary and budget would be mapped to activity A with a value of 1,800 hours, and it would be mapped to activity B with a value of 200 hours. Oftentimes, the most difficult hurdle to overcome in this step is that the data required may not be available. If this is the case, short-term solutions include collecting sample data and using the data as representative, or estimating the values and using these numbers until the required data become available. The long-term solution should be to capture the data required.

Map Resources to Activities

Determine Activity Costs Once the resource drivers have been identified and the resources have been mapped to the activities, the next step is to calculate the activity costs. Each resource mapped to an activity will result in an associated cost. The accumulation of those costs is the cost of performing that activity. The cost that each resource

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brings to an activity is based on the value of its resource driver to the particular activity as a percentage of the total drivers. For instance (see Exhibit 13.3), if the number of hours is the resource driver for a resource pool, and activity A consumes 1,800 hours of the resource and activity B consumes 200 hours, then activity A would receive 90 percent (1800/2000) of the costs associated with the resource. Activity B would receive 10 percent (200/2000) of the costs associated with the resource. Once again, no dollars will be gained or lost but are being reclassified. The total cost of the activities will be the same as the total cost of the resources, which is the same as the total that appears on the general ledger. The objective of this step is to map all customer-facing activity costs to individual customers. After the costs associated with each activity have been defined, those costs can then be assigned to individual customers based upon their own specific consumption patterns. The following tasks will develop customer specific costs:

Step 2: Determine Customer-specific Costs

All customers need to be identified to determine the customer costs. Though this may sound like an easy activity, it may require some decision making. For example, are different company divisions that purchase your products or services considered the same customer or two different customers? All entities for which customer costs are to be determined must be identified during this step.

Identify/Define Customers

Resources ($51,000,000 total)

Resource Drivers

Activities ($51,000,000 total)

EXHIBIT 13.3

Salary and Benefits $50,000.00

Travel $1,000,000 200 Hours

100 Hours

1800 Hours

300 Hours

Activity A $45,250,000

Determine Activity Costs

Activity B $5,750,000

Exploration of Growth Dimensions

205

This step is similar to the definition of resource drivers step discussed above. The objective is to determine how customers consume activities, i.e., how to quantify the activities that are being performed to serve customers. Like resource drivers, there is no right or wrong activity driver to select. Examples of activity drivers for the activity “Provide Customer Support over the Telephone” are “number of calls received from the customer” or the “number of minutes spent supporting the customer.” Define Activity Drivers

In the previous step, activity drivers were explained as a means of quantifying the activities conducted to serve your customers. In this step, the activities are mapped to the individual customer. The objective is to define the activities performed for each customer and the level of consumption of those activities.

Map Activities to Customers

Determine Customer Costs Customer costs are calculated the same way activity costs are calculated. (see Exhibit 13.4) Each activity that is mapped to a customer brings along an associated activity cost. The accumulation of those activity costs determines the customer cost. As with resource costs, the activity cost mapped to a customer is based upon the value of that driver as a percentage of the total drivers. For example, consider the mapping of the activity “Provide Customer Support over the Telephone,” which has a total cost of $5,000,000 to allocated to Customers A and B. Customer A receives 1,500 minutes of support, and customer B receives 3,500 minutes of support during the same period. In this example, 30 percent (1500/5000) of the $5,000,000 will go to Customer A, and 70 percent (3500/5000) of the $5,000,000 will go to Customer B. In other words, $1,500,000 was spent in this period to provide customer support over the telephone to Customer A. The cost of each customer is determined by the sum of all of the activity costs that go to that customer. The aggregate cost of all customers will be equal to the same cost of all activities, which is the same as the cost of all of the resource pools and the total amount in the general ledger. So, no costs are gained or lost but are reclassified. Step 3: Define Customer Profitability The objective of this step is to match all customer-specific revenue and costs information so profit at the customer level can be determined. This information is critical to

206

Salary Benefits Travel Insurance Rent Maintenance

EXECUTION

xxxxx xxx xxxx xxxx xxxxx xxxxx

General Ledger

Map each account in the General Ledger to a Resource Resource

Resource

Resource

Resource

Utilize Resource Drivers to Calculate Activity Costs Activity

Activity

Activity

Use Activity Drivers to Determine Customer Costs

Compare Customer Cost to Customer Revenue to Find Customer Profitability

EXHIBIT 13.4

Customer

Customer

Customer

Customer

Customer Specific Costs

support decisions regarding strategic pricing, contract negotiations, rationalizing customers and/or the services provided to them, implementing new services and seeking new customers. (see Exhibit 13.5) During this step, individual customer profitability is calculated by matching customer specific revenue with customer specific costs for a given time period. Customer profit and loss statements (P&Ls) can be calculated once customer-specific costs, customer product costs, and asset opportunity costs are captured by the customer and matched against customer-specific revenue. The following major categories should be included in the determination of customer profitability: Revenue is generally the most straightforward category to determine. Companies usually have information that captures sales/revenue associated with specific customers. Other information needed may include customer discounts, rebates, and other deductions.

Customer Revenue

207

Exploration of Growth Dimensions

Traditional Profitability

Customer Profitability

Revenue

Revenue

Less

Less

Product Costs

SG&A

EXHIBIT 13.5

Product Costs

Customer Costs

Equals

Asset Opportunity Cost

Operating Profit

Equals Customer Profit

Customer Profitability Framework

Customer Product Cost Product cost is typically the largest cost category and is usually calculated or estimated by every company. Sometimes companies calculate product costs for analytical purposes, which differ from those used by accountants to value inventory. Many companies have a product costing system in which management confidence varies. This approach assumes that product costs are accepted by management and are appropriately calculated for use in determining customer profitability. If not, the effort to determine customer profitability must expand to include a potential revision to product costing methods. This review is necessary because some cost types may have been included in product costs that are related more to the customer than to a product. These costs may include, for example, engineering or design costs, special manufacturing equipment and

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practices, or even invoicing and collection. If significant, some or all of these costs may have to be removed from product cost and, instead, be directed or assigned on a customer basis. Customer-specific Costs As discussed, customer-specific costs are those costs that are driven primarily by the needs or demands of a particular customer. Besides the costs identified above which may have been incorrectly classified as product costs, they include many of the costs, which are usually referred to as Selling and General and Administrative costs. However, they are viewed from the customer’s perspective and the way in which they add value to the customer. These would include sales, marketing, distribution, advertising, legal, and executive expenses.

Asset opportunity costs are those costs that can be assigned to customers based on the assets of the company that a particular customer consumes. They could include working capital such as inventory and accounts receivable as well as fixed assets such as machinery and equipment. For example, certain customers may demand inventory be available immediately, requiring the seller to keep stock available. Another customer may be slow in paying its outstanding invoices, resulting in high accounts receivable balances. The opportunity cost is calculated by multiplying a company’s cost of capital (or some appropriate interest rate) times the average asset value utilized. This cost for capital amount reduces overall customer profitability.

Asset Opportunity Costs

Step 4: Segment Customers The objective of this step is to define trends and patterns of behavior within the customer set based upon customer profitability and other segmentation characteristics. Once profitability is determined at the customer level, patterns of profitability begin to appear. Segmentation is the process of analyzing and grouping customers into logical categories to determine commonalities. Once customer profitability is known at the individual customer level, patterns of profitability across the population of customers become evident. The customers can be grouped into families and analyzed to determine trends and commonalities amongst the groupings. This process is referred to as customer segmentation. The results of segmentation allow companies to make tactical and strategic decisions regarding their approach to serving the market and to improving their profitability.

Exploration of Growth Dimensions

209

Customer sets can be segmented around the following dimensions: ■

■

■

Customer Characteristics ● Revenue from customer ● Profit from customer ● Geographic region, industry, channel ● Demographics ● Specific customer needs and wants Buying Behavior ● Products/services consumed ● Size of purchases ● Frequency ● Sales costs Ongoing Relationship Support Requirements ● Support requirements ● Cost of support, resources required ● Revenue form support activities

After customer profitability and segmentation data is developed, plans can be crafted to expand the enterprise profitably. Additionally, customer-facing processes can be refined to improve the efficiency and effectiveness of the customer interaction. The objective of this step is to develop decisions and actions plans to improve customer and overall company profitability. With a better understanding of customer profitability, companies can make decisions about pricing, product/service mix, service levels, target customers, selling approaches, and new offerings. Customer profitability analysis can answer several questions critical to helping an enterprise expand profitably: Step 5: Improve and Monitor Customer Profitability

■ ■ ■ ■

■ ■

Which customers are most/least profitable? What is the cost to serve each customer? What is the cost to acquire a new customer? What percentage of the company’s resources does the customer consume? What customer groups, channels, regions, etc. are most profitable? What is the profit potential from new customers?

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Armed with this valuable data, companies can make better decisions about pricing, mix, target customers, service offerings, service levels, etc. Robust, data-driven customer strategies can be developed that will optimize company profitability. Critical to the success of Customer Profitability Analysis is its acceptance as a required business practice and the implementation of a repeatable process. Customer Profitability Analysis should not be considered an ad hoc process to be conducted on an infrequent basis. Companies must know customer cost and customer profitability. Determining which customers are profitable and why is a powerful driver for changing overall corporate profitability. Customer Profitability Analysis, the ability to understand profit contribution by individual customer or customer segment can be the key to understanding and improving the overall profitability of an enterprise. Customer Profitability Analysis merges an accounting focus together with a marketing focus to analyze, manage, and improve customer profitability. Knowing the total costs for particular processes and activities allows a company to focus on reducing and controlling them. Knowing costs for a specific customer allows a company to reduce, change or charge for activities/services provided to them. If companies can eliminate costs out of processes that do not add value to the customer or the company, they can reinvest in processes that create value for participants in the value chain and enable the value to be exchanged in a mutually beneficial way.

SHARE OF WALLET The least expensive and assured way to grow is with existing customers. Most companies have an overconfidence bias when they are asked to estimate the share of wallet of the customers spend that they are able to capture. Too often, they define the wallet too narrowly in terms of the products and services they are responsible for selling. They fail to see beyond the silo of their product set or business units and fail to leverage capabilities and offerings resident elsewhere as cross-sell opportunities. They do not understand the overall levers that increase customer loyalty.

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The approach suggested in this chapter leverages the overall understanding of the customers value chain developed as part of the Demand Value Chain and Solution Valuation. It augments that understanding with fact-based data on where the gaps reside in the way we go to market in terms of our market offerings and in our customer loyalty score. The net result is an increased share of wallet position for the company in the market place. Companies can increase share of wallet with existing customers in two primary ways: 1. Market more of the products currently provided by focusing on the Customer Loyalty/Value Delivery Levers 2. Market additional products through improved cross-selling

Benefits of Increased Share of Wallet A direct benefit of increased share of wallet is obviously higher revenue from a customer resulting in return on investment (ROI) from a customer relationship. The investments that a company makes into a customer relationship include the time of the salesperson servicing the account, customer service costs, any relationship specific assets like joint process or technology investments amongst others. However, one of the biggest indirect benefits of a higher share of wallet is that it builds in high switching costs for customers. This has been one of the main drivers of bundled offerings marketed by telecom players in the recent years as a way to minimize churn.

Share of Wallet Methodology Companies can increase their share of wallet with existing customers first by focusing on increasing customer loyalty and second by being better at identifying cross-selling opportunities and capitalizing on them. The first step lays a foundation based on solid mutually beneficial principals of value exchange and the second seeks to build upon that foundation to maximize the number of transactions with the customer over which value can be exchanged.

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Share of Wallet methodology uses a three-phased approach (see Exhibit 13.6) to help companies increase their share of wallet with existing customers:

Phase

Increase Share of Wallet by Capturing CrossSelling Opportunities

Increase Share of Wallet by Improving Value Delivered

Understand the key components of wallet and quantify share of wallet

Develop action plan to increase sales by improving value delivered

Develop action plan to increase sales by improved cross-selling

Key Activities

Define Current Share of Wallet

Objective

Phase 1: Define Current Share of Wallet Definition of the “wallet” is one of the most important activities in the share of wallet analysis. The analysis and definition processes begin by focusing on the extended product and services that the customer consumes in fulfilling its role in the value chain to which the customer belongs. The analysis next shifts to conducting a complete inventory of existing products and services offered by the company to the market place. This inventory is not limited to current products and services but includes any new products and services in the technology/product development pipeline. The definition of the potential market “wallet” is the next step that seeks to define the landscape of products and services that the company would compete in. The definition of the wallet is subjective to each company and the senior leadership. While some companies would define it as encompassing all products and services, others take a narrow view of only including those products that the current business unit serving the customer provides. The final step focuses on developing an accurate picture of the company’s share of wallet across the wallet components.

1. Identify products and services consumed by each customer segment 2. Inventory company offerings across business units 3. Define wallet components by customer segment 4. Collect existing share of wallet data for customer across wallet components

EXHIBIT 13.6

1. Segment customer base by end market served 2. Develop average buying profile across current offering 3. Define opportunities to increase capture of existing spend

1. Improve product attributes 2. Improve access attributes 3. Improve experience attributes 4. Improve cost attributes

Increase Share of Wallet Methodology

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213

The first step of the definition phase develops a complete understanding of all the products and services consumed by the customers. This step usually involves putting oneself in the shoes of the customer and looking at the internal process (e.g., marketing, production, sales, product development) to identify all inputs that the company consumes to produce the products sold in the marketplace. For companies that have completed a detailed value chain analysis to choose the value chains they want to compete in and have identified the revenue and cost drivers through the customer economics process, this step takes little time. Not all inputs consumed by the customer are equally important. Having identified all the inputs into the customers processes, the company will identify those that are core and most important to the customer. This analysis can be conducted only by having a solid understanding of the customers’ value chain and the relative value created in each value chain step. Without this understanding, companies can make inaccurate assumptions about the importance of inputs. For example, in tire manufacturing one might jump to the conclusion that natural rubber is the most important component since it comprises one of the largest percentage by weight for the tire. However, an informed value chain expert would identify the compound butyl rubber as the component creating the highest value by creating an impervious seal between air in the tire and outside the tire. Though butyl is used in small quantities, without it we would be back to the ages where we needed tire tubes with seals to hold air in the tires. Though rubber is traded as a commodity, suppliers of butyl rubber reap high profits. Finally, after having identified all the inputs going into the customers’ internal processes and highlighting the critical ones, companies should seek to enhance their understanding of the input that companies’ source from outside. For example, in the retail insert value chain, the transportation of the printed retail inserts from the printer to the newspapers for insertion in the newspaper and last-mile distribution is handled by some companies using their own trucks, using a third-party logistics company, or using logistics capabilities resident within a printer. By scanning and exploring all services and products that are externally sourced, companies can identify opportunities for outsourcing their customer’s processes in areas where they were not playing earlier.

Step 1: Identify Products and Services Consumed by Each Customer Segment

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EXECUTION

The second step of this phase seeks to develop a complete understanding of all the products and services produced by the company. Most companies lack an understanding of the capabilities resident within their organizations. Companies with product-focused business units are the biggest culprits. Their training processes, incentive processes and production processes are geared toward operating each business unit most efficiently. Salespeople are compensated based on the sales dollars generated for the product that their business unit produces rather than doing a portfolio sell of the company’s offerings. For a company organized around 11 business units, we found a complete lack of collaboration among the sales team of business units. In fact, tribal knowledge suggested that there was little overlap among business units servicing customers. Our analysis revealed over 60 percent of the top customers buying from four to seven business units. When conducting this analysis to build an inventory of all products and services offered by the company, the company should identify which of the products are strategic. A product might be deemed strategic because the company has a near monopoly on the product due to patents and no clear substitute product exists. It could be because the overall industry or the sales for the company for this product are rapidly increasing. It could be driven by the profit margins that the company gets from the product compared to the other products. The company should use the mix of attributes that would make a product strategic for the overall company and weigh them appropriately to ensure that the products that make the cut are chosen objectively. For each of the strategic products, the company should take the analysis to the next step: identify the market these products go into, identify the market value, and drive the product’s strategic nature. Finally, the company should focus only on the products and services in a company’s portfolio but should focus on the products in development in the technology pipeline. This ensures that we do not miss the next big product from the R&D staff, from the share of wallet analysis. The company should identify those products in the current portfolio that are in the sunset phase of their product lifecycle. This will enable the analysis to remain focused on the products that matter and result in higher ROI from conducting this exercise.

Step 2: Inventory Company Offerings across Business Units

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215

A secondary benefit of this step results from the building of the common repository of products and services, which increases the overall awareness of the company’s capabilities within the internal staff of the company and to customers. All the business units can think about additional services their customers might be buying and become internal lead generation engines. Step 3: Define Wallet Components by Customer Segment The third step of this phase is one of the most important and seeks to identify the future landscape over which the company will wage war for gaining share of wallet. Without a clear enterprise understanding and definition of what the wallet looks like, the initiatives around share of wallet may lose steam. The wallet definition does not have to be static over time either. As the company gains positive results and starts to lose additional opportunities, the wallet can be expanded into adjacent products and services not part of the wallet. Jack Welch was known for challenging his executives to continue to expand the definition of the market they competed in every time the business became number one or two in their defined competitive market. A pictorial representation of the products and services comprising the share of wallet the company is going after can serve as a good reminder tool for customer service, sales and every other front line employee. (see Exhibit 13.7) For example, for a commercial printer that prints retail inserts, the wallet might be comprised of: ■ ■

■

■

Direct Spend on Retail Insert Products (Print and Paper) Indirect Spend on Retail Insert Products (e.g., PreMedia, logistics, content management, target analytics) Spend on other communications products (e.g., Catalogs, Direct Mail) Spend on other internal processes (e.g., HR bulletins)

When defining the scope of products and services to consider, remember the customer’s willingness to provide “permission to serve”. The customers’ permission to serve boundary is defined as the maximum range of products and services that can be served while maintaining a credible value proposition. The wallet components should be comprised of current offerings that are growth leaders,

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1) Direct Spend on Retail Insert Products

2) Indirect Spend on Retail Insert Products

3) Spend on Other Communications Products

EXHIBIT 13.7

4) Spend on Other Internal Processes

Share of Wallet Pictorial

offerings that are being harvested for cash, and those in the product pipeline close to completion. The final step of the definition phase is one that seeks to gather quantitative data on the company’s current position in all the share of wallet components. These data are gathered and analyzed from three perspectives: What it is today or “As-Is”, what it should be, and what it could be. The should be position along the share of wallet dimension defines the maximum share of wallet that could be achieved through operational alignment and minor tweaks to the product, access, experience and cost levers. The Could be position is defined as the maximum share of wallet that the company can achieve through a long term change in strategy. This step provides the biggest “wow” factor for companies whose executives are tired of looking for avenues for growth. It shows them possibilities right around them that they could not see. Tribal knowledge gets challenged and the stage is set for launching of initiatives that ensure a reshaping of the share of wallet in the coming years. When conducting the As-Is analysis, customer spend data need to be collected and analyzed for the all products comprising the wallet components. These data are comprised of the number of purchases

Step 4: Quantify Value to Customer of Bridging Gap

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217

over a defined period, the frequency of purchases, units of products purchased, and the revenue associated with the purchases. After building a database by consolidating spend data across different business units and different product lines, the company can conduct sophisticated analysis around share of wallet. This step is easier said than done because data in organizations may be stored and maintained by stovepiped applications. Identifying products sold to a particular customer can be a challenge. A case in point is a telecommunication company which needed a dedicated staff of four people to aggregate sales data bought by a customer over a quarter for one customer because each business unit had different customer IDs and names associated with the same buying entity. Analysis can be easier for companies that deploy sophisticated Customer Relationship Management (CRM) system assuming the customer accounts have been set up and maintained properly. However, capturing current spend data is only one part of the puzzle. The next part of the puzzle can be tough to assess and needs to be estimated. This is the estimate of the total spend by the customers on a particular product or category. Information provided by customers to the sales personnel is a good starting point. However, customers often inflate the share of wallet they provide to a company to bargain for lower prices. Information collected from customers needs to be filtered through basic product consumption analysis using one of many techniques. For example, a company can estimate the quantity of different materials/components going into the production of a customer product. This information is often provided by industry reports or can be collected through product breakdown analysis conducted by engineering or R&D. The total units of customer product sold can be estimated from market share data and industry reports. Using these two pieces of information, one can back into the approximate quantities of different inputs consumed by the company. Phase 2 of the share of wallet methodology focuses on near-term operational actions companies can execute to increase cross-selling effectiveness. Cross-selling is marketing all the products carried by companies to customers based upon their current relationship with their customers. Various techniques are available in consumer and business markets to cross sell.

Phase 2: Increase Cross-selling Effectiveness

218

EXECUTION

For example, a perfect vehicle for cross-selling in the financial services is through monthly billing statements. To be successful at crossselling, the business must focus on its customers. Most multi-product and service companies are organized along product lines. For example, take the case of a chemicals manufacturer that produces olefins, aromatics, and adhesives. (see Exhibit 13.8) This chemical manufacturer was organized along three distinct business units, with each focusing on providing its unique product and service. In reality, these divisions were information silos, isolated from one another, with each division having its own customer databases, customer service functions and IT applications. There was a substantial overlap in customers across the business units with no coordinated approach to managing the accounts. Even when using a common customer database, all the business units had their own unique customer IDs, making cross-referencing difficult. This type of organization is impractical for cross-selling since no centralized understanding of the total wallet size or wallet components exists for these customers. Though all the business units may understand their customers from their own perspective, customers are not understood across the business divisions. An organizational model that improves the company’s cross-selling effectiveness places the customer at the business center. All sales efforts are directed toward developing a complete understanding of the customer’s business and the key inputs going into it. While it is reasonable for all the business units to maintain their unique identify, organizational structures need to be put in place to support collaboration and centralization of all customer information to ensure a

C1

C2

C1

OLE

C4

EXHIBIT 13.8

C3

C2

ARO

C4

Product-Centric Organization

C3

ADH

C4

C3

219

Exploration of Growth Dimensions

single organizational view of the customer interactions with the company and not just a business unit. This model requires an information architecture that consolidates customer information and manages it in a centralized fashion. (see Exhibit 13.9) Once customer data have been centralized, a much better understanding of that customer’s value, behavior, and relationship with the company can be achieved. Since these data are visible to all of a company’s divisions, crossselling becomes possible. Centralizing customer information provides information to a company about current spend of the customer. So, how do you calculate the amount of additional customer spend across the products and services comprising the wallet components that is going to competitors? Companies can start by segmenting customers by end market served and developing a buying profile across these segments. This buying profile when matched against actual spend can highlight products and services where the company has no penetration of the customer and others where the penetration is suboptimal related to the customer spend. The first step of the improving cross-selling phase starts with segmenting the total customer base into the end markets they serve. In case of customers serving multiple markets, companies should make an estimate for the revenue dollars and product consumption dollars associated with each of the end market. Segmenting along the market enables aggregation of like demand and lays the foundation for more analysis on what the company’s total spend is along the share of wallet components.

Step 1: Segment Customers by End Market Served

OLE

ARO

C4

OLE

CRM

ADH

EXHIBIT 13.9

Customer-Centric Organization

C3

ADH

ARO

220

EXECUTION

Most CRM systems provide companies with the ability to capture end markets and industries their customers serve. However, these fields are not often used systematically. Even in the cases that this information is captured, it is in the form of the industry that the customer belongs to. Since a particular industry’s product can go into multiple value chain and markets, capturing the industry level details is insufficient. Take the example of polyethylene manufacturers. Polyethylene is a product used by converters and compounders to make plastic bottles, films, plastic molded parts for the car, etc. In order to model and predict polyethylene usage by a converter, the company must know the different applications and end markets for which the converter is using polyethylene. Salespeople are best positioned within the customer organization to collect this information. They should collect any additional competitive intelligence along the proportion of input/product that gets used in multiple applications. The second step of the cross-selling phase focusing on building an average product consumption profile along the wallet components for each customer segment. Segmenting along the market enables aggregation of like demand and lays the foundation for further analysis on what the company’s total spend is along the share of wallet components. Companies should start out by collecting product spend data across all wallet components for the top customers belonging to a particular segment. For example, a company that supplies tea, coffee and non-dairy creamer to the lodging industry sells to four major restaurant chains. Exhibit 13.10 describes the consumption pattern for each customer. Aggregating consumption data across all the spend data points enables us to create an average spend profile across all product categories. (see Exhibit 13.11) Step 2: Build Average Customer Buying Profile by Segment

EXHIBIT 13.10 Customer ID 120 121 122 123

Consumption Pattern Per Customer Customer Label

Tea

Coffee

A B C D

118 100 400 0

240 50 740

Milk

Total

50 100 261.5

358 200 500 1000

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Exploration of Growth Dimensions

EXHIBIT 13.11 Customer ID

Aggregate Consumption Data Customer Label

120 A 121 B 122 C 123 D Average Buying Profile (in $) Average Buying Profile (in %)

Tea

Coffee

118 100 400 0 618 30%

240 50 740 1030 50%

Milk

Total

50 100 261.5 411.5 20%

358 200 500 1000 2058 100%

Though a more accurate method to conduct this analysis would be to estimate the average revenue that a restaurant derives from coffee versus tea based on demographic preferences for the two beverages, these data are tough to come by. Instead, our quick and dirty average buying profile analysis will guide us in identifying white space opportunities and opportunities to increase share of wallet spend. The final step of the improving cross-selling phase focuses on identifying white space opportunities and opportunities to increase share of wallet. This analysis approach assumes the average buying profile represents the approximate ratios in which the customers will allocate their purchasing spend. It does not allow companies to estimate what percentage of total spend they are allocating to a supplier. There are other methods to estimate that. For now, let’s explore how this analysis plays out using average buying profiles. The analysis starts out by raising the lagging product category sales to match the average buying profile relative spend ratio. (see Exhibit 13.12) For example, in the case of Customer A, assuming that an average buyer would buy tea and coffee in the ratio of 3:5, we can estimate the tea spend upper limit to be (3/5) times 240 or 144. As a next step, we can now plug in the potential milk spend that we are losing out on, which would be (2/5) times 240 or 96. All white space opportunities are highlighted in light grey, and opportunities to increase share of wallet through increased penetration are highlighted in darker grey. In total for this company, the analysis revealed a greater than 75 percent increase over the base amount that the customers could potentially spend with this supplier. Step 3: Build Average Customer Buying Profile by Segment

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EXECUTION

EXHIBIT 13.12 Customer ID

Consumption Data Including Potential Milk Spent

Customer Label

120 A 121 B 122 C 123 D Average Buying Profile

Tea

Coffee

Milk

Total

144.00 100.00 400.00 444.00 30%

240.00 166.67 666.67 740.00 50%

96.00 66.67 266.67 296.00 20%

480.00 333.33 1,333.33 1,480.00

Total Opportunity 122.00 133.33 833.33 480.00 1,568.67

Phase 3: Increase Customer Loyalty Completion of Phases 1 and 2 leaves companies with a solid understanding of their current position along the share of wallet dimension and sets the stage for identifying and launching initiatives to improve their share of wallet through improved value delivery. Though Phase 2 focuses on improved crossselling and identifying opportunities for increasing spend across the entire wallet, Phase 3 focuses on increasing the total spend across the entire category that customers are willing to allocate to a company. The best way to accomplish this is through improving customer loyalty through better value delivery. Customers often stay loyal when they perceive a mutual exchange of value between the transacting parties. Multiple studies have shown a strong positive correlation between loyalty and share of wallet. Companies have the obligation to create unique value propositions for each applicable segment and to make sure their company’s customers understand the value that has been delivered to them. Total value perceived by customers of a company’s offering can be translated easily to its product, access, experience and cost (PAEC) attributes. Using Demand Value Chain Economics, Solution Concepts and Solution Valuation tools allows a company to understand where their offerings stand compared to competition in terms of value offered to the customer. This phase takes the gap analysis conducted in the prior chapters as an input into this phase and starts to map out initiatives to improve the offering along each of the attributes. (see Exhibit 13.13)

The first step of the improving customer loyalty phase starts with an analysis of a company’s offering and seeks to move the offering along the major product attributes

Step 1: Improve Product Attributes

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223

closer to the customer ideal points. Companies must analyze improvement opportunities along product form, features, performance quality, durability, reliability, reparability, etc. The elements of durability, reliability, and reparability come into play along the cost attributes. Let’s use the example of form. Products can be differentiated in form, i.e., the product’s size and shape. Often, increasing or decreasing the size or changing the physical form of the product can provide improved value to the customer. Take the case of Claritin, which is available in caplet form to be swallowed and other forms that can be placed under the tongue for quicker absorption into the blood stream. Research indicates that customers value the sub-lingual form more than the caplet and are willing to pay up to four times as much in product price. Similar examples exist along features and performance quality. Company products can be overly complex and significant value can be added by removing unneeded features from the product and making it simpler to use. A good example of this are the new cellular phones that companies are selling to kids and have three to five programmable buttons with precoded phone numbers. Making it easy to use is helping extend the products to a new demographic and parents are paying top dollar for these gadgets. Performance characteristics are the most common characteristics that companies innovate around. High performance quality is strongly correlated to a high share of wallet and ROI. High-quality products benefit from high customer loyalty resulting in increased purchases. However, the answer is not for companies to keep improving performance quality continuously. Beyond a certain point, companies start seeing diminishing returns. Thus, the answer is for companies to design a performance-level appropriate to the target customer segment and higher relative to the performance levels of competitive offerings. However, improving product attributes is a difficult process. So, companies must tackle questions like which product attributes do customers value most and can we quantify the value customers place on the attribute? Will the increased share of wallet that we would earn from updating the product features pay for the additional cost we would need to invest in improving the particular feature? Multiple techniques are available to help companies answer these questions. Hedonistic pricing and conjoint analysis are two techniques that can

224

EXECUTION

provide companies with insight towards the relative value that customers place on the different product attributes. Perceptual maps and multidimensional maps can assess where the products stack up against competition and customer ideal points. Focus groups and survey-based techniques can help companies model the increased share of wallet that would result from improvement along the product attributes. Finally, engineering and manufacturing can provide an estimate of the cost associated with such a move. Together, these provide enough information to help companies decide which product attributes to improve to increase share of wallet. The second step of the improving customer loyalty phase explores the access attributes of the company’s offering including availability of the product, reliability of supply and the performance of the distribution channel. Wal-Mart, Dell Computers, and Caterpillar are three companies that have excelled at the access attributes of their market offerings and have leveraged this competitive advantage to leave their competitors behind. Improving access attributes requires analyzing customer needs, establishing high-level supply chain objectives, and identifying and evaluating the major channel and supply chain alternatives to best meet the customer needs. Product variety, service backup, location, lot sizes, waiting time to replenishment, flexibility, order fill rates and service levels become important dimensions along which customer satisfaction needs to be sought. Companies must make it easy for their customers to find what they need and purchase it as quickly as possible. Let’s take the example of availability. For consumer products, the cost of stock out at a retail store is not limited to a lost sales opportunity for the company. It often results in loss of preferential shelf space to a competitor. Some retailers levy significant penalties on suppliers who cannot ensure that the products the retailer is carrying for them are constantly replenished on the store shelf. Similar if not tougher constraints occur in the business-to-business (B2B) markets. For any company that has adopted just-in-time (JIT) techniques, the stock out of one component can bring entire supply chains to a halt at excessive costs. Thus, availability of products and reliability of supply become important attributes. Supply chain strategies are one of the key levers for improving the access attributes of companies’ offerings. Companies must assess Step 2: Improve Access Attributes

225

Exploration of Growth Dimensions

the ability of their existing channels’ supply chains to meet customers’ needs. Based on the gap, companies might need to conduct network optimization and invest in new distribution facilities closer to key markets, revise inventory policies, invest in new systems that allow customers to share demand data with the company, and revise manufacturing schedules. The third step of the customer loyalty phase explores the experience or service attributes of the company’s offering including brand effects, ordering ease, training-provided and support-provided post delivery, and maintenance and repair. Often, when the physical products are difficult to differentiate, as with commodities, the services that companies design to envelop the product offering become the key to competitive success. Perceptions of company performance along the experience attributes are mostly shaped by the company brand, and the interaction between the customer and the company’s employees at different stages of the product buying and usage cycles. Companies must pay close attention to the way they design their service organization and build their brands. Those companies that pay careful attention to the overall experience will reap high benefits in terms of superior pricing, higher margins, and inherent high switching costs. One does not need to look far beyond the PC industry and the perception of quality that the computers marked “Intel Inside” logo carry. Customers are willing to pay premiums for these PCs while other lesser-known brands like AMD struggle despite having superior performance characteristics.

Step 3: Improve Experience Attributes

Basic Product

EXHIBIT 13.13

Augmented Product

Technical Service

Affecting the Experience

Customer Service

226

EXECUTION

Similar to the other attributes, improving experience attributes requires analyzing customers’ needs, and identifying and evaluating the major service enhancement initiatives that can be launched to meet customers’ needs. The first step that companies can take in improving experience attributes is to develop a deeper understanding of the overall context in which customers use companies’ products and services. Companies can reveal unmet customers’ needs are unfulfilled by any competitor. By fulfilling these needs that through a uniquely designed solution leveraging the company’s products and services, companies can build the value that customers perceive from the products and services. In many markets, integrating the product sales with after sales services contracts offers companies an opportunity to de-commoditize their core business. A good example mentioned earlier is the copier products company IKON. Over the last decade, IKON has transformed itself from a distributor of copier products to a service company focused on helping companies manage document flows and increase efficiency. After sales service and support is one of the most important areas for service differentiation. Many companies outsource this function without the due diligence and monitoring systems needed to ensure that the third-party performance meets the specifications desired by customers. Recently, many companies have jumped on the bandwagon of outsourcing customer service to reduce costs. Though there are many companies that truly excel in this function, many cause potential damage to the customer relationship. Take for example Dell, which was forced to repatriate customer service for some large business customers to the United States after they complained that their service representatives’ heavy accents made communication difficult. The final step of the customer loyalty phase explores the cost attributes of a company’s offering including Price, Total Cost of Ownership, process cost, and payment terms. Basic economics tells us that as prices fall, the quantity demanded by customers increases. Pure demand side analysis would suggest decreasing the product prices to increase share of wallet. Too often, companies fall into this trap and start tweaking the price of the offering. However, they do not realize that other approaches may prevent price erosion.

Step 4: Improve Cost Attributes

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227

Astute buyers and sellers of products and services realize the invoice price is but the tip of the total cost iceberg associated with using a product or service. They focus on the total cost to serve/use metric. Customers incur a whole range of costs in the product usage life cycle. Some of these are search costs associated with finding the right product and right vendor, vendor management and legal costs associated with contract negotiations and vendor management, maintenance and service costs, product disposal costs associated with getting rid of the used product, and training costs related to training associated with the product. Companies that understand value management attack all of these cost elements and work with customers to reduce these costs on a systemic basis, adding additional value to their core product offerings. As a general premise, customers often stay loyal when they perceive a mutual exchange of value between the transacting parties. Marketers have an obligation to create unique value propositions for each applicable segment and to ensure their company’s customers understand the value that has been delivered to them. However, prior to launching customer loyalty improvement drives, companies must segment their customer base along elements of profitability, potential growth, and strategic value to identify the customers whose loyalty they seek. Once a company understands which customers it wants to keep loyal, it should deploy its resources toward analyzing and reporting on value delivery perceptions, value improvement speed, and momentum.

NUMBER OF CUSTOMERS The core ideas behind increasing the number of customers is simple: Understand how you create value for your current customers, and identify other geographic or market arenas where the core offering would have similar if not higher value. As depicted in Exhibit 13.14, companies can increase their number of customers in two primary ways: 1. Gaining market share in the markets that they compete in today 2. Identifying and entering new geographic markets

228

EXECUTION

Enter new geographies

Grow in existing market

Current market share

EXHIBIT 13.14

Path Towards Increasing Number of Customers

By systematically looking at each of these areas, companies can identify new growth opportunities they thought were unavailable or hard to capitalize on.

Number of Customers Methodology Companies can increase the number of customers they serve by uncovering and sharpening the core foundation of their value creation and extending it to new customer segments, geographies, and markets. Number of Customers methodology uses a two-phased approach to help companies increase the number of customers they serve. (see Exhibit 13.15) The first phase searches deep into the market the company serves, to develop a better understanding of the different customer segments that might exist in the market and then fine-tunes the value drivers of PAEC to make the offerings value proposition superior to the competition. The second phase extends the search for value exchange opportunities to new geographies that the company does not serve and strives to identify value driver customizations that would be needed to dominate the new geography. Phase 1: Expand Footprint in Existing Market The first phase focuses on increasing market share in the existing markets. Companies should

229

Phase

Develop action plan to increase market share in existing market

Key Activities

Expand Footprint in Existing Market

Objective

Exploration of Growth Dimensions

EXHIBIT 13.15

1. Conduct value-based segmentation and develop demand profile by segment 2. Choose segments to target based on fit between segment needs and company offering 3. Refine Product, Access, Experience, and Pricing attributes to capture market share in each segment

Expand into New Geographies

Develop action plan to enter new geographies

1. Understand demand in new geography for company offering 2. Analyze external environment and evaluate chances to success 3. Refine Product, Access, Experience, and Pricing attributes to penetrate new geography

Increase Number of Customers Methodology

explore new approaches to promotion strategies to persuade customers to increase the size or frequency of their purchases or to capture new customers in existing segments. Companies should analyze the fit of the products to new customer segments that might be attractive but are being underserved, and identify the changes needed in the offering to gain share in those segments. New sales channels that might be better suited to serve customer segments should be explored as should new delivery mechanisms that improve the value offered to customers. All these start with developing a consistent and company-wide accepted definition of the market segments the company deems strategic. The analysis and definition processes begin by focusing on the customer base we serve and developing a value-based understanding of why they choose to do business with us. Companies that have conducted Demand Value Chain analysis and customer economics analysis can short-circuit this step. The first two steps of the first phase focus on conducting detailed segmentation work in each of the strategic markets to identify the segments that the company would go after and understand the value economics for these

230

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segments. The final step of this phase focuses on identifying changes to the PAEC that need to be made to increase market share in each of the strategic markets that we compete in. Step 1: Conduct Value-based Segmentation and Develop Demand Profile by Segment

The first step of this phase seeks to classify the market into large identifiable groups that have a homogenous appetite for the value provided by a company. Value-based segmentation recognizes that customers buy the same products for different reasons, and place different value on the PAEC attributes. For example, in the purchase of a grinding machine, some customers may be most interested in the machine’s output quality, and others might value the total cost of operating the machine. Segmenting customers on value lays the foundation for creating a more finely tuned product or service offering and pricing it appropriately for the target segment. Value-based segmentation is conducted by collecting data from the market participants through a survey, followed by factor and cluster analysis to identify discernible segments. Survey design leverages the understanding of value drivers and value chain attributes from Demand Chain Economics and Solution Valuation work and develops questions to gather data on value attributes and their importance ratings. For example, some segments might place more importance on product performance attributes than on cost attributes. Others might place more weight on cost attributes. The analysis phase focuses on removing highly correlated variables by conducting factor analysis and then applying cluster analysis to create a specified number of different value segments. Each segment should be profiled in terms of the product demand, usage patterns (frequency), projected growth, potential profitability, and other distinguishing characteristics. Exhibit 13.16 outlines one such segmentation schema for the retail insert buyers. Retail inserts are primarily bought by retailers who use them to drive store traffic. Segmentation has been conducted from the perspective of a commercial printer selling retail insert services to retailers, both store-focused and multi-channel. Value-based segmentation revealed five distinct segments within the store-based retailers, which was the primary market of focus for the commercial printer.

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Exploration of Growth Dimensions

Store-Based Retailers

Brand Buyers

EXHIBIT 13.16 ■

■

■

■

■

Value Chain Coverage Focused

Innovation Focused (Product)

Market

Cost Focused

Geographic Coverage Focused (Access)

Value-Based Segments

Value Based Segments

Brand Buyers. The retailers in this segment were large and national in characteristic and placed a disproportionate amount of weight on the brand of the commercial printer providing this service. Value Chain Coverage Focused. The retailers in this segment were smaller and wanted to work with a printer which was a one-stop shop providing all the services along the insert value chain including PreMedia, print and logistics. Innovation Focused. Innovation focused retailers significantly valued the ability of the printer to come up with new formats and layouts that would differentiate the retailer’s insert from the competition. Cost-Focused Retailers. The retailers in this segment bought exclusively on cost of the inserts. They bundled services from different players in the insert value chain and sought to minimize costs in each of the value chain components by going with the best of the breed. Geographic Coverage Focused. This group of retailers had national operations and hence the ability of the printer to service all their markets was extremely crucial.

Step 2: Choose Segments to Target Based on Fit between Segment Needs and Company Offering The second step of this phase identifies the strategic segments

in which the company will compete. Segment attractiveness is driven by a whole host of factors ranging from profitability, growth, size, prestige, and the fit between company offerings and customer desires. The following five criteria serve as good aids in target segment selection:

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1. Segment size. The estimated size of the market to determine if it is worth going after. 2. Segment growth. The size of the market may be small, but if it is growing significantly, it may be worth going after. 3. Competitive intensity. The less competition the more attractive the market. 4. Cost of market penetration. Is the market accessible to a firm’s marketing actions? If not, it should not be pursued. 5. Fit with the organization’s objectives and resources. The weights that different companies place on different value drivers and underlying offering attributes can be completely different, and this difference makes some segments attractive to some. For example, economies of scale players prefer to dominate segments that might be growing slowly but have large sizes and are typically low cost buyers of fairly homogenous products. Companies focusing on this segment tend to be operationally efficient and focus on producing a quality product at the cheapest cost. Their no-frills approach to manufacturing and servicing their customers combined with economies of scale gives them a value advantage that others cannot compete with. Companies should aim at selecting two to three segments to target. Anything more than that becomes unmanageable and leads to value obfuscation of the offering making it unappealing to any of the segments. Companies should treat each of the selected target segments as their own market and develop detailed profiles on each of the target segment. Companies must monitor their movements within segments and the migration of ideal points for customers belonging to each of the target segment. Once you define your target audiences, you must learn their preferences and habits as they relate to your business and in context of their organizations. For example, to which organizations do they belong and what conferences do they typically attend? Which other customer do they do business with? The only way to develop effective consumer communications is to become knowledgeable about your core target. One of the best ways to get to know your target markets is to incorporate customer feedback into your sales process and collect information on what customers like and sharing it across the company. Sales people should be trained to be good listeners and take notes on key themes that come up frequently. Paying attention to customers is a great way to get insights on what they are thinking.

Exploration of Growth Dimensions

233

Step 3: Refine Product, Access, Experience and Cost Attributes to Capture Market Share in Each Market Segment The final step of the first phase seeks to develop

a companies’ image and value offering so the customers within the target segment understand and appreciate what companies stand for in relation to their competitors. Strong positioning of companies’ offering in the eyes of the customers is a necessary but insufficient condition for the companies’ profitability. Companies should seek to augment/move the offering features toward the ideal points for each of the customer segments. A perceptual map can help companies understand where their products stand compared to the competition’s. Perceptual maps represent consumer perceptions and preferences spatially by means of a visual display. Having identified the gap along each of the PAEC attributes, companies should identify the steps needed to bridge them. ■

■

■

Product. Companies can improve the Product attributes of their offering by exploring extensions and/or modifications to their existing products to fill the gaps between existing products and customer ideal points. Companies should think hard about the customer need that the current products are fulfilling and alternative ways to fulfill those needs. Sometimes, the way to move a product closer to the ideal point is by removing features from the product that customers do not use. Access. Companies can improve the Access attributes of their offering by developing better delivery systems including supply chain improvements. Development of Internet-based technologies has enabled companies to bypass existing sales channels and create new ones, which directly reach the consumers. Supply chain technologies are enabling companies to collaborate across the supply chain with customers and vendors jointly reducing system costs while increasing the flexibility to respond to demand spikes. Do the customers in a particular segment need higher service levels or increased flexibility to meet with demand fluctuations? Do the customers need a national or international presence and the ability in their suppliers to meet their demands globally? By exploring all dimensions of Access, companies can make rapid strides towards achieving the customer ideal point in terms of Access. Experience. Most companies focus their attention on the product and give service just lip service. Further, many take a productcentric approach to their business versus seeing themselves as

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solution providers to a company’s problem. Companies should explore the additional services that customers buy and understand the overall context under which they consume the product. Companies should develop an understanding of what level of customer service customers expect from their suppliers and in what form they want to receive this service. Companies often are happy to gain access to information via portals created specifically for them that provide visibility into operational data. For example, by creating a portal that provides access to customers to check on their order status, companies are improving the experience of customers while lowering their own cost of customer service since no one needs to answer the phone. Cost. The final value attribute of cost has one of the largest impacts on the market share that companies can receive. Companies should conduct price elasticity studies to analyze the impact of price increases and decreases on product sales of their products. They should conduct and make available the total cost of ownership data to the customers. Price-Performance mismatches are the most common mismatches and can be easily corrected using perceptual maps. The chapter on pricing sheds much more light on the pricing lever for companies to increase sales.

The second phase of the number of customers methodology focuses on one of the most powerful options available to companies for growth. With advances in telecommunications and Internet technologies, countries separated by oceans and mountains are interconnected. Global trade is helping companies find new demand sources for their products and find cheaper supply sources for key inputs. Geographic expansion enables companies to source raw materials from lower-cost countries around the globe. For example, China has become a favored destination for a number of U.S. manufacturers seeking lower labor costs and access to a large and growing market. These cheaper supply sources, by reducing cost of production, are enabling companies to reach downstream toward cost-conscious customers that they would not have been able to reach. International growth opportunities offer companies another arena to replicate a successful business formula and leverage the cost advantages bestowed by

Phase 2: Expand into New Geographies

Exploration of Growth Dimensions

235

economies of scale. For example, two of the three handset manufacturers (Nokia, Ericsson) are international companies which would have had access to a fraction of their customer bases had they restricted themselves to their home countries of Finland and Sweden respectively. Various options are available to an organization to enter an international market. These options vary with cost, risk, and the degree of control which can be exercised over them. The simplest form of entry strategy is exporting using an agent or a broker. More complex forms include global operations which may involve joint ventures or export processing zones. Having decided on the form of export strategy, decisions have to be made on the specific channels. Regardless of the mode of market entry, companies need to understand the demand in new geography for company offerings, analyze the risks associated with the market and their chances to succeed, and refine the value offering to win in the new geographic market. The first step of the Expand into International Markets phase starts with identification of regions or countries that offer a potential market opportunity for your product or service. For each of these markets, a detailed industry sector analysis report should be assembled to assess the market outlook for a particular industry. A detailed country assessment focused on the environmental assessment of the nation’s political, economic, sociocultural and technical factors should be conducted. Market research plays an important role in estimating the demand for a company’s product in the new geography. Primary and secondary market research should be conducted. Secondary research should be focused to collect the macroeconomic, political, and demographic data to improve market understanding. Competitive and industry data should be collected through research agencies and other companies selling these. Primary research should be conducted using the traditional market research techniques like surveys and focus groups. When conducting research, the companies should be conducting analysis on how the product relates to local preferences and if it would need to be tailored. In the past few decades, some products have become more homogeneous around the world. However, even in products like Coca-Cola, the concentrate composition and the drink taste different and are customized to local taste.

Step 1: Understand Demand in New Geography for Company Offering

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Companies should conduct a segmentation and targeting exercise similar to the first phase for the new geography to identify customer segments to go after. At the end of this step, companies should have a solid understanding of the market they are targeting, the expected sales and profits they expect from the market, market penetration, and coverage expectations. Many methods are available to develop an estimate of sales uptake for a company’s product. One such method utilizes a variant of the Bass model. By looking at prior demand uptake data for other international product introductions, companies can estimate what the coefficient of innovation and imitation would be. These, when combined with the target market size, can lead to good estimates of what the demand uptake would look like. The second method that companies can use is to study their own success in taking the product into other international markets or different products into the existing international market. Estimates from these methods can be improved by bumping them against market research data. Step 2: Analyze External Environment and Evaluate Chances to Succeed The second step of the geographic expansion phase focuses on analyzing the external environment for risks and evaluating a company’s chances to succeed. Companies should study the countries’ political and regulatory risks. Local ownership requirements can provide barriers to investment and reflect a country’s level of openness. In certain countries, the rule of law is an issue, where decisions are based on political not business reasons. Unstable governments make for a risky landscape and companies should be wary about making significant investments and use hedging strategies like using contract manufacturing as an entry strategy. Expanding across national borders exposes a company to fiscal risk due to currency fluctuations. Currency fluctuations affect the cost of material and labor and can be hedged by using financial techniques like currency hedging or by creating a natural hedge by locating plants internationally and sourcing material locally. In addition, tax regulations in countries should be studied, especially as they relate to repatriation of funds back to the home country. Cultural, social, and religious issues can affect international businesses and companies’ success. A thorough understanding of the

Exploration of Growth Dimensions

237

cultural landscape and local business practices is essential. U.S. companies expanding into South Asian markets often run into questionable practices of providing bribes to speed clearance of products through customs. The Foreign Corrupt Practice Act prohibits U.S. companies from participating in these practices. Companies need to assess the risk they face by not indulging in these local practices and the impact it would have on their competitive position. Intellectual property protection is difficult to enforce in many parts of the world and counterfeiting is rampant. Some local governments support these practices. Companies entering such countries need to assess the risk posed by these issues to their existing businesses and take appropriate risk hedging steps. Weak infrastructure and poor distribution networks can be major risks that companies need to manage. In many parts of the world, companies need to invest in cogeneration units to provide their own energy. However, not much can be done to develop the transportation infrastructure by any one company. For geographic markets of strategic importance, companies might explore collaborating with other companies who are not their direct competitors in jointly investing in local infrastructure projects in exchange for preferential local tax treatment or other incentives. Companies should start by building a complete list of risks that they could face in international markets. The companies should identify risk mitigation strategies they can adopt to minimize risk. A weighting method should be developed to give weights to each risk and a rating should be given to each country along the risk measure. Finally, the aggregate risk score should be compared to an aggregate reward score comprised of the growth rate, market size, and profitability. A risk-reward matrix can help select the specific countries the company will go after among all the countries that show high demand for a company’s product. In the matrix (see Exhibit 13.17), countries D, E, F, and G offer above average rewards and below average risk scores and are good countries for entry. Country B is risky while offering a below average reward score in terms of market opportunity. Country A offers a high reward but has a high-risk profile and should be avoided until the company has run out of growth opportunities with companies D, E, F, and G.

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Countries 25 D

F

20

E A 15 Reward Score

G

10 5

0 10x

B C

5x

3x

2x

1x

0.5x

0.3x 0.2x

Risk Score

EXHIBIT 13.17

Risk-Reward Matrix for Country Selection

Step 3: Refine Product, Access, Experience and Cost Attributes to Capture Market Share in Each Market Segment The final step of the second phase seeks to adapt

a company’s marketing strategy to local conditions. The PAEC attributes of the value offering need to be tweaked to local conditions to succeed. However, at a higher level, companies take one of two approaches when entering international markets. They can go with a standardized marketing mix selling largely the same products and using the same marketing approaches worldwide or they can adapt their marketing mix elements to each target market, bearing more costs but hoping for a larger market share and return. Let’s look at each of the value drivers and see the kind of changes a company would need to make to increase their chances of success in international markets. ■

Product. Companies can have one of three options available for the core product offering. They can market a product in an international market without any change. Secondly, they can adapt a product to meet local needs in foreign markets. Finally, they can create new product extensions for them. When adapting the product to local conditions, companies might create a product

Exploration of Growth Dimensions

■

■

■

239

adoption for a whole region, e.g., the European or the Asian region version for each country, to keep customization costs low. The product changes can be cosmetic and related mostly to packaging, language and instruction manuals or can be significant with one or more components say the power supply being customized for different regions. Access. Access attributes pose the biggest headache to companies looking to expand globally. Global markets add complexity to the existing supply chains. As a result, the end price doubles or triples the cost at the entry node. Any breaks in the information or product flow across any of the points of the supply chain can lead to failed expectations and poor value delivery in the eyes of the customers. Long shipping times due to large distances add an additional complexity and limit the ability of companies to respond to flex demand. Distribution channels within the country vary considerably and involve many new types of intermediaries which each mark up the product. Experience. Developing a solid understanding of the experience attributes that the consumers in the new geographic markets come to expect from their products is important. This attribute category differs from one geographic market to another. Often, companies that have well-established brands in their local markets have to invest in promotion to create brand and product awareness in the new market. In developing promotional messages to create preferential demand for a product, companies can use the same theme globally but change the copy to suit each local market or they can develop country-specific ads using local advertisement firms. Companies need to explore partnering with local service providers to ensure that they will support maintenance of the products in the local markets in case of breakdowns. Cost. The final value attribute of cost poses significant problems associated with international pricing. Possible pricing approaches include charging a uniform price around the world, charging what consumers in each country will pay, or using a standard markup everywhere. When developing pricing strategies, companies must not run afoul of the law for dumping or for customer gouging. The chapter on pricing details the specific strategies that companies can take in achieving market penetration.

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This chapter presented a two-phased approach to improving performance on the Number of Customers dimension. By focusing on each of the two phases, companies can systematically increase market share in local and international markets. Growth is difficult, and though these strategies do not guarantee success, they will tip the scales in your favor to create meaningful growth for your business.

CHAPTER

14

Supporting Tools for CVC INTRODUCTION The purpose of the following chapter is to provide the reader with an overview of a set of tools that can support the Customer Value Creation (CVC) process. These tools represent a mix of standard frameworks and techniques such as Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis, Core Competencies, or Cluster Analysis as well as CVC-specific tool such as House of Value. Some of the tools have been mentioned at varying degrees of detail in the preceding chapter. This chapter will provide a consolidated list of key tools as a reference to the reader and show the relevance to CVC. The chapter does not provide detailed step-by-step instructions of how to apply the tools but sufficient context for the reader to consider what to include in a CVC initiative. The chapter is organized around the construct presented in Exhibit 14.1. Setting the context for growth. Establishing a baseline of company position with regard to market and customer performance and future potential Gathering intelligence. Collecting internal company, external company, customer, and market information to provide factbased and outside-in perspectives that serve as the foundation for growth decisions Drawing conclusions. Interpreting the fact-based to identify ways to generate additional value by serving customer needs more efficiently and effectively

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II. Gathering Intelligence • Outside-in • Demand Value Chain (DVC) • Solution Concepts

I. Setting the Context for Growth • Problem-Solving Matching • Customer Profitability

V. Learning from Experience • Beyond Six Sigma

III. Drawing Conclusions Customer Value Creation: A business philosophy

• Business Cases • Solution Valuation • Portfolio Balancing

IV. Implement Solutions • Pricing • Executing the Strategy

EXHIBIT 14.1

Customer Value Creation: A Disciplines Approach to Profitable Growth

Implementing the strategy. Increasing success by managing the execution of initiatives as a portfolio of projects Learning from experience. Ensuring the longevity of knowledge through structure documentation and transfer of insights and experiences

SET THE CONTEXT Market Map The Market Map (see Exhibit 14.2) places the company’s current product and service into the context of all of the products and services their customers typically buy in a defined marketplace. The column headings correspond to product offerings while the row headings correspond to the service offerings. This inventory of

Description

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Supporting Tools for CVC

Product 1

Product 2

Product 3

Product 4

Prepare Creative Services Innovative Concepts Photography Cutting edge Layouts Integrated Business Product Design Services Premedia/Prepress and Color Imaging and Color Science Digital Imaging Composition Personalization/Customization Image Creation Page Production Online Proofing Produce Materials Management Category Management Paper Management Procurement Services Outsourcing Print Services Gravure Printing Offset Printing Digital Printing Short Run 4C Printing Binding Electronic Media Conversion HTML e-book PDF SEC Edgar Filings Deliver Inventory Management Merchandise Management

EXHIBIT 14.2

Market Map

the company’s current offerings is created through a collaborative process comprising of secondary research, interviews, and joint working sessions with the Sales, Marketing, and Operations personnel. The Market Map defines the current offering and shows gaps between that offering and the related products and services customers purchase. As such, it helps to frame the discussion on how to change or adjust the offering to increase the value delivered to the customer.

Relevance for CVC

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Growth-Share Matrix Description In the 1970s, the Boston Consulting Group developed the Growth-Share Matrix (see Exhibit 14.3) to help larger conglomerates allocate resources to their business units or product lines by mapping their market share against overall market growth in a two-by-two matrix. Using two-by-two matrices to plot two independent variables and the Growth Share Matrix, in particular, remains a popular analytical tool. To generate the matrix, business units or product lines are plotted as a scatter diagram based on their market share along one axis and the respective industry growth rate along the other axis. Individual businesses are categorized depending on which of the four quadrants they are mapped to:

1. Stars, businesses with a high market share in a rapidly growing industry. Sustaining the leadership position may require investment, but this is worthwhile given the expanding market. The goal is to transition Stars to the next Cash Cows as their market matures. 2. Cash Cows, businesses with high market share in a slowly growing industry. These typically leverage their established market position to generate excess cash without heavy investment, but the slow industry growth rate limits future potential. They are to be “milked” by managing investments since the slow industry growth limits the ability to generate returns. 3. Dogs, businesses with low market share in a mature, slow-growth industry that breaks even by generating enough cash to maintain the business’s market share. Though they may provide synergies with other businesses, they do not generate cash for the company and negatively affect the overall return on net assets (RONA) ratio. Typically, the recommendation is to divest Dogs. 4. Question Marks, businesses with low market share in a rapidly growing industry. Such businesses have significant upside potential but require investments to expand their market position and become a star. However, if they do not live up to their potential as the industry matures, they can turn into dogs.

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Supporting Tools for CVC

Example of Growth-Share Matrix Stars

Question Business Units with size indicating

Growth Rate Company Hurdle

Dogs

Cash Cows

4.0

2.0

1.0

0.5

.25

Market Share vs. Largest Competitor

EXHIBIT 14.3

Growth Share Matrix

The objective of the Growth Share matrix is to help managers in a diversified company maintain a balanced portfolio of business that maximize current cash generation and ensure future growth. Relevance for CVC Plotting existing businesses or product lines on the

growth share matrix can be starting point in the assessment of growth opportunities. It provides a snapshot of which businesses products are positioned in growth industries and may profit from the overall lift versus businesses that are in more mature markets with more intense competition. This highlights those areas where additional growth depends on redefining the market and changing the value offering for customers.

Customer Profitability Analysis Description Identifying which customers generate the most profit for an organization is critical to develop a strategy for profitable growth. In many companies, the typical 80/20 rule applies where a

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small percentage of all customers generate a disproportional large amount of the total profits. Those customers deserve special attention, and expanding the relationship with current customers is one of the primary ways to realize future growth. However, determining who those highly profitable customers are with a reasonable degree of accuracy can be difficult. It requires assigning indirect costs incurred by customers such as sales, marketing, service, and warranty to calculate their net impact on the bottom line. Traditional accounting regulations, e.g., Generally Accepted Accounting Principles (GAAP) and systems are product or operations-centric and not set up to calculate revenue and cost (direct and indirect) at the customer level. Too often, companies assume that customers that account for the most revenue must be the most profitable. To clarify customer profitability requires some degree of activitybased costing (ABC) exercise. ABC is a method of identifying all the activities that are part of a process (e.g., manufacturing a product, running a customer service call center, providing warranty support) and assigning a cost to each activity based on the resources consumed by that activity (e.g., cost for each call to the call center asking for product setup assistance). Once the key activities have been assigned costs, individual customers can be “charged” as they require an activity to be performed (e.g., number of calls to the call center by customer). Customer profitability can be calculated by subtracting the total cost from the revenue generated by each customer. Conducting ABC analysis can be time and resource intensive depending on the available data and the level of detail desired. A balance needs to be achieved between the level of detail that provides enough insight to make decisions and the effort to collect, analyze, and assign revenue and cost data. Understanding what individual customers contribute to a company’s bottom line is critical to applying CVC. The goal of CVC is to optimize the value exchange between a company and its customers and to take advantage of unrealized opportunities to create value. Though the focus for this analysis is outside-in, from the customer’s perspective, knowing how much value each customer delivers to a company is a key input for consideration. Highly profitable customers are important to the overall financial performance. Any changes to their product/service offering need to be analyzed to

Relevance to CVC

Supporting Tools for CVC

247

avoid upsetting the relationship. In addition, existing, satisfied customers are a prime target for additional revenue and their specific needs can be incorporated into the CVC process and in the data gathering, conclusion drawing, or implementation phases.

GATHERING DATA Environmental Trend Analysis Environmental trend analysis (see Exhibit 14.4) determines the influence of macro-environmental trends in markets where a company competes. There are four primary macro-environmental trend categories (PEST): 1. Political trends determine the likely outcome from a legislative body, e.g., deregulation, tax legislation, monetary policy. 2. Economic trends include broad measures of economic health, e.g., GDP growth, unemployment levels, inflation. 3. Social trends reflect cultural and demographic influences, e.g., fashion, buying habits, age, income, customer education 4. Technological trends include innovations that impact products and processes, e.g., WiFi, optical networks, broadband. Environmental Trend Analysis is done in three steps: Step 1. Primary and secondary data collection Step 2. Analysis of industry structure and the competitive environment Step 3. Trend qualification through analysis of company and competitor sales and growth It can provide benefits such as: ■

■

Providing a framework for conducting a scan of the macroenvironment in the initial stages of strategic planning and analysis engagements Contributing to the identification of value drivers and critical success factors

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Can be conducted at various levels of detail Supporting scenario based strategic planning efforts

However, the qualitative and subjective nature of results can lead to vague, incomplete or inaccurate plans. Additionally, it requires considerable data collection and trend verification efforts that can be time consuming. Environmental Trend Analysis can establish a baseline of the external dynamics that a company will be affected by and that any product/service offering needs to adapt to. It can serve as an initial check of developments that need to be addressed and set priorities for the organization. As such, the outcome can focus subsequent CVC activities and guide the development of new/changes customer offerings.

Relevance to CVC

Industry Attractiveness Description Industry Attractiveness is usually determined by evaluat-

ing the competitive intensity with an industry through Five Forces Analysis. (see Exhibit 14.5) Five Forces Analysis, first introduced by Michael Porter in the early 1980s, assesses the economic structure of an industry and the relative strength of the players in that industry. Five competitive forces affect company performance: 1. 2. 3. 4. 5.

Bargaining power of suppliers Bargaining power of buyers Threat of substitute products or services Threat of new entrants to the industry Level of competitive rivalry between existing firms

Industry attractiveness is determined by the underlying causes of the structure and relative power distribution in an industry. The firm’s competitive position within the industry is determined by the strengths and weaknesses of the company relative to the industry’s critical success factors. The development of competitive strategy relies on identifying a defensible competitive position in an industry that capitalizes on strengths and minimizes weaknesses of the client.

249

Internet shopping Retailer website taking share from revenue growing catalogue ordering faster than offline

2

Newspaper readership declining

Opportunities

Traditional media face increased competition

Evidence of Trends

Trend Summary Matrix

1

#

Key Market Trends

EXHIBIT 14.4

Demand for catalogue printing declining

Value of newspaper inserts to drive store traffic diminishing

Threats

Leverage catalogue design capabilities for online sites

Direct to home delivery of printed material as a new channel

Strategic Hypothesis and Trend Link

Protect relationships with retailers

Leverage relationships and expertise in printing and logistics

Competitive Advantage Gained?

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Threat of Potential Entrants

Bargaining Power of Suppliers

Direct Rivalry among Competitors

Bargaining Power of Customers

Threat of Substitutes

EXHIBIT 14.5

Five Force Analysis

The technique can be applied at multiple levels. At the highest level, the technique can help form hypotheses regarding the critical success factors in the industry. At the next level of detail, the technique can structure the data collection, environmental, and situation analysis. Finally, at the most detailed level, the technique can structure a detailed analysis of the economic structure and cost drivers in an industry prior to developing a competitive strategy. Five Forces Analysis is usually conducted in five steps: Step 1. Define the industry and the scope of analysis Step 2. Conduct a broad industry analysis Step 3. Identify the strategic groups in the industry Step 4. Identify the clients competitive position within its competitive set Step 5. Develop a competitive strategy that creates a defensible position in the industry Evaluating industry attractiveness is another valuable tool to establish a fact base for subsequent CVC efforts. Assessing the competitive intensity and knowing the structure of the industry focuses and selects the appropriate changes in the product service offering. It allows for estimates of potential competitor reaction to industry structure or value chain changes and estimates of the success potential of new solutions.

Relevance to CVC

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Supporting Tools for CVC

SWOT Analysis Description A SWOT Analysis, a strategic planning tool, evaluates the Strengths, Weaknesses, Opportunities, and Threats facing an organization. (see Exhibit 14.6) Strengths and weaknesses are internal to an organization, and opportunities and threats originate from outside the organization. The objective is to identify required actions that seize opportunities and mitigate threats by leveraging strengths and overcoming weaknesses. Potential strengths and weaknesses can include: ■ ■ ■ ■ ■ ■ ■ ■

■ ■ ■ ■ ■

Experience Resources (People, Financial, Capacity) Product Differentiation Process Efficiency Infrastructure Quality Customer Service Reputation Brand Perception Examples of possible opportunities and threats include: Business and Competitor Alliances New Products and/or Services Market Maturity Government Legislation or Regulation Public Opinion

Environmental Trends Market/Industry Trends

External Opportunities and Threats Critical Success Factors

Direct Competitors Company Skills and Resources

Internal Strengths and Weaknesses

Analysis of Current Strategy

EXHIBIT 14.6

SWOT Analysis Framework

Strategic Hypotheses

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Performing a SWOT Analysis creates the fact base for a shared understanding of the competitive baseline an organization is facing. It can identify issues that need to be addressed to succeed in a given environment and can focus the CVC efforts. Relevance for CVC

Market Segmentation Maps Description Market segmentation is the process of decomposing a

market into smaller segments with similar characteristics. (see Exhibit 14.7)The goal is to identify groups of homogenous market participants based on certain criteria with the assumption that they have similar needs, behave similarly, and respond similarly to specific value proposition and marketing mix activities. Successful segmentation requires the individual segments to be: ■ ■ ■ ■ ■ ■

■ ■ ■ ■ ■

Homogenous around the selected segmentation criteria Heterogeneous among segments Stable Identifiable and measurable Accessible and actionable Sizable enough to be profitable Markets can be segmented based on various criteria: Geographic, e.g., global region, country size, climate Economic, e.g., GDP, market type, growth rate, industrialization Demographic e.g., age, gender, income, occupation Psychographic, e.g. personality, values, attitudes Behavioral, e.g., value sought, usage rates, brand loyalty, adoption

Relevance for CVC Individual segments can be detailed out to create profiles and can be grouped to show a map of the respective market that illuminates different segment values, needs, and potential offerings. Market Segmentation Maps are an input for the CVC analysis that can identify segments not being served or underserved by the company offering or the market as a whole .

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Supporting Tools for CVC

Full Line

Group A Full line, Vertically integrated Low mfg cost Moderate quality

Specialization

Group C Moderate line, Assembler, Medium price, High customer service, Low quality Low price

Group D Narrow line, Highly automated, Low price

Group B Narrow line, Assembler, High price, High

Narrow Line High Vertical Integration

EXHIBIT 14.7

Vertical Integration

Assembler

Example Market Segmentation Map

Demand Value Chain Description Before detailing the elements of Demand Value Chain

Analysis, we must distinguish between Demand Chains and Supply Chains. Traditional industrial supply chain depictions (see Exhibit 14.8) start with raw materials and work their way to the end user through five value transformation steps by following the flow of a product from left to right. The depictions highlight how costs accumulate and flow through the chain. Rather than tracking the supply from left to right, the demand chain maps the demand from right to left. (see Exhibit 14.9) In addition, the demand chain is structured in terms of profits and capital investment, and not only cost. Supply Chains and Demand Chains differ primarily because they serve different purposes. The demand

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Example Supply Chain Raw Materials

Components

Subassembly

Final Product Production

Distribution

End Customer

Supply Chain • Tracks the flow of supply of products or services • Identifies cost of each step

EXHIBIT 14.8

Example Supply Chain

chain is constructed to identify profitable growth opportunities. The supply chain is constructed to focus on cost reduction. In this regard, the concepts of Demand Chain and Supply Chain are similar tools that provide different information as depicted in Exhibit 14.10. Cost versus Profit and Investment As mentioned before, the goal of supply

chain initiatives is to focus on cost and cost reduction. A suppliers’ price becomes the customers’ cost, and the resulting costs increase as the product moves down the chain. In addition to costs, cycle times and processes are often mapped as well. By understanding the cost pools and process times, efforts to reduce cost can be prioritized and measured. All of this information is essential to a cost reduction initiative. The Demand Chain builds upon the mechanism used in Supply Chain analysis but includes Profit and Investment. A simplified picture of this idea is shown in Exhibit 14.11. By including profits and investments, the overall economics of the chain appear and generate

Example Demand Value Chain Design

Produce

Assemble

Distribute

Demand Value Chain • Tracks the flow of demand • Identifies the profits and investments at each step

EXHIBIT 14.9

Example Demand Value Chain

Deliver

End Customer

255

Supporting Tools for CVC

EXHIBIT 14.10

Demand Chain versus Supply Chain

Attribute

Demand Chain

Supply Chain

Chain Orientation

Right to Left (Customer-Driven) Profit and Investment Profitable Growth

Left to Right (Producer-Driven) Cost

Economics Solution Orientation

Cost Reduction

a deeper level of questions and insights. Demand Value Chain is dedicated to generating a systems view on how money flows from sources of demand back to sources of supply. All players are not created equal in the demand chain. Power is typically asymmetrical due to concentrated demand, proprietary technology, control of downstream customer access, etc. One of the keys in developing Demand Value Chain is to identify these sources of power and understand their impact on your ability to influence desired outcomes.

Power within the Demand Chain

Considering financial performance over time creates additional insights about the Demand Value Chain. Exhibit 14.12 is a financial snapshot of the demand chain as it works today. For most demand chains, the system economics change over time. In some cases, the changes can occur in two-year to threeyear intervals. Other changes occur over 20-year to 30-year cycles. The important thing relative to developing a profitable growth agenda is to develop a perspective on the current trends.

Economic Performance over Time

EXHIBIT 14.11

Demand Value Chain Example

End Produce Assemble Assemble Distribute Deliver Customer Total Profit $50 Investment $60 ROI 84%

$200 $2000 10%

$10 $20 50%

$(10) $60 (17)%

$340 $1400 24%

Value? Cost? Return?

$590 $3540 17%

256

ROI

Investment

Profit

$200 $300 $2000 $1600 10% 19%

Company #1 $10 $6 $20 $13 50% 46%

Company #2 $(10) $32 $60 $60 (17)% 53%

Company #3

Financial Snapshot of the Demand Value Chain

2005 2001 2005 2001 2005 2001

EXHIBIT 14.12

$340 $260 $1400 $1900 24% 14%

Company #4

$65 $62 $100 $100 65% 62%

Company #5

$605 $660 $3850 $3670 17% 18%

Total

257

Campaign Planning

Customer Analytics

Value Chain Analysis

Importance to Process Score (1–10) Trend or Improvement Opportunity Score (1–10) Permission to Serve Capabilities to Serve Distribute 100 cost points across Value Chain Is this step done in house versus through suppliers In case of suppliers, how many suppliers does Sears typically use for this step Total Spend

Value Chain Steps

EXHIBIT 14.13

Creative Services PreMedia

Materials Procurement Printing

Qualitative Value Chain Analysis

Post print

Last Mile Campaign Distribution Delivery Effective& Logistics (Intent to Buy) ness Analysis

258

EXECUTION

Though profit and ROI do not necessarily indicate value, they are key indicators and motivate behavior in the value chain. Knowing where and how profits accumulate in the value chain can focus on areas where changes to the value chain can generate additional value. Profit accumulation indicate technological, structural, and regulatory constraints with significant value potential if they can be mitigated by a new product/service offering.

Relevance for CVC

Qualitative Value Chain Analysis Description Qualitative Value Chain Analysis contains a qualitative

assessment of the company’s value chain by product. (see Exhibit 14.13) The analysis is focused on identifying key activities in the value chain and the opportunities that customers see associated with each activity. An assessment is provided on the company’s capabilities/permission to serve customers at each activity of the value chain. The qualitative value chain analysis is done through joint working sessions with co-development partners (lead customers) and sales and marketing personnel. These data feed the solution hypothesis generation work and focus for deeper probing in the later stages of the customer value creation analysis. Relevance to CVC

Customer Economics Description Customer Economics is a methodical, step-by-step approach to uncover and quantify the elements of value from the customer’s perspective using a value driver model. (see Exhibit 14.14) The value drivers are classified depending on the impact of the driver on the company’s performance as revenue drivers or cost drivers. Customer Economics Analysis can be done in three phases:

1. Value Driver Discovery a. Define the value chain (see Demand Chain Economics) b. Develop value driver hypothesis c. Build formulas to quantify value drivers

259

Supporting Tools for CVC

Disciplined Process Product attributes

Access attributes

Value Driver Discovery

Customer Value Drivers Cost attributes

EXHIBIT 14.14

Market Validation

Experience attributes

Value Quantification

Quantifying Customer Value

2. Market Validation a. Develop interview guide b. Conduct market research c. Develop customer interview summaries 3. Value Quantification a. Refine value quantification algorithms b. Build interactive value model c. Test drive value model with co-development partner After completing these three phases, a company will have a solid understanding of its customer’s perspective on how and where it delivers value. Exhibit 14.15 below shows how such value drivers may look

Media Planning and Budgeting

Creative Services

Print Production

Revenue Drivers

Logistics and Insertion

Cost Drivers

➣

Increase number of household impressions

➣

Reduce vendor management costs

➣

Reduce content creation costs

➣

Increase response rate

➣

Reduce printing costs

➣

Increase average spend per customer

➣

Reduce paper and material costs

➣

Improve campaign mix

➣

Reduce distribution costs

➣

Reduce insertion costs

EXHIBIT 14.15

Value Driver Examples for Commercial Printer

260

EXECUTION

Value Driver = Increase Number of Household Impressions “What is the financial impact of not being able to reach a prospective customer?” ➢ Increased number of household impressions (until saturation is reached) results in higher revenue through increased store traffic Revenue = Number of household impressions × Response rate × Average customer spend “What drives the number of household impressions a retailer can achieve?” ➢ Number of campaigns ➢ Target households reachable ➢ Coverage achieved of the target households Number of Household Impressions = Number of campaigns × Target households reachable × Coverage

EXHIBIT 14.16

Sample Revenue Value Driver Algorithm

for a commercial printer. In addition, the company will have a way to quantify the value delivered by each value driver by creating quantitative algorithms for each driver. (see Exhibits 14.16 and 14.17)

Value Driver = Reduce Content Creation Costs “What is the financial impact of reducing content creation costs?” ➢ Reducing content creation costs results in a lower total cost of production for the insert Total insert cost = Vendor management costs + Media planning and budgeting costs + Content creation costs + Print production costs + Paper costs + Distribution costs + Insertion costs “What drives content creation costs?” ➢ Number of campaigns ➢ % of content repurposed ➢ Cost of new content ➢ Cost of repurposed content ➢ Prepress costs ➢ Merchandise Costs Content creation costs = Photography costs + Copy costs + Prepress costs + Proofing costs + Merchandise costs + Cost of time

EXHIBIT 14.17

Sample Cost Value Driver Algorithm

Supporting Tools for CVC

261

Relevance to CVC Understanding customer economics provides the

insights necessary to identify new and improved ways to deliver value that provides true differentiation from competitors. Armed with these insights, companies can design products that are game changing from the perspective of their customers versus being incremental additions. Companies can price their products and services based on the value they provide to their customers and value-differentiate their offering to capture a larger share of the value for their shareholders. Companies that have embraced customer economics will be able to deliver superior value to their shareholders as they become more effective and more efficient at providing value to and extracting value from the marketplace.

Interview Guides Description Interviews comprise an important part of the data gathering during the CVC process. If conducted properly, interviews can render tremendous amounts of useful information. If done incorrectly, interviews are wasted efforts for the interviewer and the interviewee. Successful interviews require as much, if not more, time to prepare and debrief than the actual interview. The most important preparation, especially if multiple interviews are done, is to create a detailed interview guide that outlines the areas to be covered and the questions to be answered. Most interviews are unpredictable by nature and a guide ensures all relevant areas are covered consistently across interviews and interviewers. Interview guides contain a mix of qualitative and quantitative questions designed for the purpose of analyzing the value chain, pain points, value drivers, and potential solution ideas. (see Exhibit 14.18) These guides are customized by different customer profile types to ensure that the questions are of highest relevance to the interviewee. The interview guides are developed by the core project team and validated with Sales and Marketing personnel. Relevance to CVC Leveraging an outside-in perspective is at the center of the CVC approach. Gathering customer input is critical to a complete outside-in picture. The interview guide ensures that the maximum value is generated in terms of information gathered from the opportunity to interview a customer (vendor, employee, etc.).

262

EXECUTION

1. Understanding the approach to driving traffic and mindshare The first set of questions are targeted towards developing a deeper understanding of the marketing mix and the role of print media

Retail Inserts Catalogs Direct Mail TV Ads Others

Promotion Mix for Retail 1. How much do you rely on print media to support your promotion needs? 2. What % of media spend do print products occupy? 3. What is the approach to work: by campaign, by channel, by category, etc? 4. What is the nature of collaboration on the value chain: Retailer, Agencies, Print, Content, Logistics, etc? 5. How does Sears measure the effictiveness of the print and nonprint campaigns?

EXHIBIT 14.18

Excerpt from an Interview Guide for Customer of a Commercial Printer

Critical Success Factor Analysis Description Critical Success Factors (CSFs) are the skills, resources

and activities that a company must excel at to be successful in the marketplace. CSFs differ in each market or industry, but are usually the same for competitors in the same market. CSFs fall into four general categories: 1. Marketing ● Products ● Distribution ● Sales and Marketing 2. Operations ● Production ● Infrastructure ● R&D

263

Supporting Tools for CVC

3. Finance ● Revenue ● Profitability and Cash Flow ● Debt/Equity and Asset Structure 4. Organization and Management ● Leadership Quality ● Alignment with Strategy ● Corporate Portfolio CSF analysis can identify the few key factors that an organization should focus on to be successful. It can also identify competitors’ relative strengths and weaknesses and competitive advantages or core competencies. Understanding what an organization needs to do well can determine the priority and potential success of an entry into a new market. (see Exhibit 14.19)

CSFs

Company

Competitor A

Competitor B

Competitor C

Average

Brand

5

3

3

1

3.0

Product Line Breadth

4

3

2

3

3.0

Channel Coverage

4

1

1

3

2.25

Mfg. Cost

5

2

3

1

3.1

Prod. Tech

3

5

4

4

4.0

R&D

3

5

3

3

3.25

Borrowing Capacity

3

3

2

2

2.5

Mgt. Skills

4

4

3

3

3.5

CEO Leadership

5

5

1

2

3.25

Org. Structure

5

3

2

1

2.8

Average

4.1

3.5

3.0

2.9

3.4

EXHIBIT 14.19

Example of a CSF Comparison

264

EXECUTION

However, CSF analysis can overlook the internal linkages between departments, or SBUs, that lead to market success. It can lead to incorrect conclusions if the future impact of macro-environmental trends is ignored. Too much focus on the current situation may ignore the potential for a “game changing” strategy. CSF analysis is best applied at the business unit or discreet product level because this: ■ ■

■

Avoids the distorting effects of corporate level analysis Identifies of business strength or weaknesses relative to market requirements Prioritizes investment opportunities CSF analysis is typically conducted in five steps: Step 1. Develop a list of potential critical success factors for each market opportunity Step 2. Evaluate relative competitor strength in the CSF Prioritization Matrix Step 3. Identify the business impact of each CSF Step 4. Determine the clients relative competitive position on each CSF Step 5. Plot the CSFs on the Strategic Implication Matrix

CSF analysis identifies the areas that a company needs to excel at based on internal and external factors. It can, therefore, provide a solid starting point to investigate how the CSF can be used or adapted to create additional value for customers.

Relevance for CVC

Competitive Cost Analysis Description Competitive cost analysis compares relative cost structures

of competitors in an industry. Three techniques are typically used for competitive cost analysis with the selection of a specific technique driven by time and level of detail required:

Supporting Tools for CVC

265

1. Financial ratio analysis 2. Value Chain analysis 3. Cost Driver analysis Competitive Cost Analysis is typically done in four steps: Step 1. Select the critical cost drivers Step 2. Identify the components of the critical cost drivers Step 3. Quantify competitive position on critical cost drivers Step 4. Refine estimates of competitive cost structures to ensure realism The relevant unit of analysis should be as focused and specific as possible to: ■ ■

■

■

■ ■

■

Identify improvement opportunities and set competitive strategy Allow the company to better anticipate competitor reactions to strategic decisions Improve pricing and production decisions Competitive cost analysis: Can be time consuming because it requires considerable internal and external data Requires some form of ABC Risks being to narrowly focused without well-developed value chain, Might hide opportunities for redefining the value chain to gain cost advantage by ignoring links among the company and other players in the industry

Relevance for CVC Competitive Cost Analysis identifies how a company’s cost baseline compares against other industry participants. It can identify competitive advantages and weaknesses based on how efficiently various parts of the business are run. As such, it can become an input for how to change the value offering for the customer to leverage cost advantages.

266

EXECUTION

Core Competency Analysis Description Core competencies are a firm’s unique skills and technolo-

gies derived from its proprietary assets, people, and processes. By definition, no two firms can have the same set of core competencies. The unique nature of core competencies enables firms to develop competitive advantages in the marketplace. The concept of core competencies was introduced by Prahalad and Hamel in a 1990 Harvard Business Review article. They wrote that a core competency is “an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity.” A core competency “provides potential access to a wide variety of markets, it increases perceived customer benefits, and it is hard for competitors to imitate.” One core competency can support several end products, and one end product can be the result of several core competencies. The competencies that are core to the firm are those generalized capabilities that span across several end products. For example, Honda’s expertise in small gasoline engine design and production is a typical example of a core competency. Honda was able to extend that core competencies from lawnmowers and motorcycles to cars, trucks, and Formula One racing. Similarly, Black & Decker’s expertise in small electrical engines is often cited as a core competency that is part of their products covering drills, vacuums, and blenders. Conducting a core competency analysis is done in five steps: Step 1. Identify the company’s end products Step 2. Group the end products into businesses Step 3. Identify the company’s core products Step 4. Identify the company’s competencies Step 5. Determine the implication of the identified core competencies Core competency analysis can: ■

■

Be useful to review and justify the firm’s current portfolio of businesses Allow firm-wide consolidation of technologies and production skills into competencies

Supporting Tools for CVC

■ ■ ■

■

■

267

Help determine new revenue creation opportunities Assist in identifying and addressing capability gaps Cause misinterpretation because of subjective nature and generalizations Be time intensive and difficult to conduct for diversified corporations Not yield any transferable core competencies

Relevance for CVC Similar to CSF and Competitive Cost Analysis, Core Competency Analysis identifies a company’s key competitive advantages, in this case, specific skills and capabilities that are hard to imitate and that the current customers value. As such, they present an ideal starting point to discuss how to change or expand a company’s offering to increase the value delivered to the customer. This may involve moves into related markets, segments, or a combination of existing products based on the same competency.

DRAW CONCLUSIONS House of Value Description The House of Value (HOV) provides a comprehensive

approach to identify profitable growth opportunities. HOV takes an outside-in, customer-focused approach to uncover new product/service solution ideas. It tests these new ideas for profitability, permission to serve, company fit and competitive response. Finally, solution ideas are grouped into growth platforms. As such, HOV ensures higher ROI because new ideas are vetted for customer value, acceptance, and competitive offerings, which translate to market success. House of Value analysis is conducted in three phases with four steps each: Step 1. Define the value gap a. Prioritizing value drivers and assessing impact on customer profitability b. Identify relevant competitive set for analysis

268

EXECUTION

c. Conduct competitive product and service performance studies to identify gaps d. Quantify value to customer of bridging gap Step 2. Identify growth platforms a. Assess company fit to bridge value gap b. Assess permission to serve in the market to bridge value gap c. Assess profitability potential from bridging value gap d. Define growth platforms to bridge value gaps Step 3. Develop solution concept cases e. Quantify value of growth platform to the company f. Identify new market offerings for a company to develop g. Develop scenarios based on competitors likely reaction h. Build business cases

Pro

duc

t

ce ess

Exp e

Acc

Cos t

rien

Competitive Products

mis

ote ntia l sion to S Com erv pan e yF it Val ue t oC usto mer s

Value to Customers

Per

fit P Pro

Val u

e to

Us

Exhibit 14.20 shows how HOV is structure to ensure that new solution ideas are thoroughly customer-based, vetted for competitive response and provide value to the company. HOV is a core component of the CVC approach. HOV combines the three pieces of the profitable growth puzzle that companies do not

P1 P2 P3

H H

L M

H

e Valu

H

e Valu

H

e Valu

Solution L

EXHIBIT 14.20

L

House of Value

ver

1

ver

2

ver

n

Dri Dri

Dri

Supporting Tools for CVC

269

often link. The intersection of an outside-in, value-to-the-customer perspective with a fact-based competitive and company assessment. HOV can serve as a communication tool to illustrate the current situation and highlight potential growth areas. It can summarize tremendous amounts of collected information and focus the attention on the critical gaps.

Cluster Analysis Description Cluster Analysis is a common technique to analyze statisti-

cal data. Clustering is the classification of similar objects into different groups, i.e., the partitioning of a data set into subsets (clusters), so the data in each subset share common characteristics. Data clustering algorithms can be hierarchical or partitional. Hierarchical algorithms build successive clusters from previously established clusters, and partitional algorithms determine all clusters in one run. Hierarchical algorithms can be driven bottom-up or topdown. Bottom-up algorithms start with each element as a separate cluster and aggregate them into larger clusters. The top-down algorithms divide the entire data set into smaller clusters. Cluster analysis can determine clusters (or segments) of customers within a larger survey sample that share common characteristics and needs. Once the needs have been identified, CVC can develop offerings that provide value by satisfying the specific need. Relevance for CVC

Factor Analysis Description Factor analysis is a statistical technique that can analyze

large quantities of data. The objective is to explain variability among a number of observable random variables in terms of a smaller number of unobservable random variables called factors. The observable random variables are modeled as linear combinations of the factors, plus unexplainable error terms.

270

EXECUTION

Factor analysis requires three steps: Step 1. Identify the key attributes customers use to evaluate products in a specific category Step 2. Use quantitative research methods such as surveys to collect data from a sample of potential customers that rate all product attributes Step 3. Analyze the results with statistical software package such as SPSS or SAS and execute the factor analysis to identify a set of underlying attributes (or factors) Factor analysis advantages include: ■ ■

■ ■

The ability to incorporate both objective and subjective attributes, Relative ease and accuracy, assuming the data has been collected and relevant software tools are available Direct inputs from customers Flexibility in naming and using dimensions

However, the usefulness depends on a complete and accurate set of product attributes. In addition, factor naming can be challenging as multiple attributes can have a high correlation with no apparent reason. Factor analysis will always produce a pattern among variables, no matter how random. Relevance for CVC Factor analysis is useful to cull insight from a large amount of customer data on preferred product attributes. It allows for identification of those attributes that drive value perception for customers and can help select the new product/service offerings with the highest customer appeal.

Conjoint Analysis Description Conjoint analysis is a statistical method to determine what

combination of a limited number of attributes is most preferred by respondents. Research participants are shown a set of products, prototypes, mockups, or pictures. Each example is similar enough that

Supporting Tools for CVC

271

consumers will see them as close substitutes, but dissimilar enough that participants can determine a preference. Each example is composed of a unique combination of product features. The data may consist of individual ratings, rank orders, or preferences among alternative combinations. The latter is referred to as “choice based conjoint” or “discrete choice analysis.” Conjoint analysis requires five steps: Step 1. Select features or attributes to be tested Step 2. Show product feature combinations to potential customers Step 3. Have participants rate, rank, or choose between the different combinations Step 4. Run the data through statistical software package such as SPSS or SAS and execute the conjoint analysis Step 5. Determine the preferred features combinations for a new product launch or marketing piece Though conjoint analysis measures preferences at the individual level, managing the overall effort to conduct the analysis requires that only a limited set of features can be included since the possible permutations increase rapidly as more features are added. Relevance for CVC Conjoint analysis can provide guidance on what feature combinations would be perceived as providing the highest value to the customer. It can provide a quantitative base for making decisions how to optimize the offering s to customers.

High-Level Pricing Analysis Description The high-level pricing analysis provides an initial estimate of the potential price magnitude at which each solution idea might be marketed. The analysis provides a high price point and low price point and an estimate of most probable price point for solution offerings. (see Exhibit 14.21) The analysis contains an estimate of the prices the interviewed customers might be willing to pay. The analysis is conducted using

272

EXECUTION

HIGH LEVEL PRICING ANALYSIS Price Point Description and Assumptions SOLUTION 1: INCORPORATE DIGITAL ASSET MANAGEMENT INTERNAL ESTIMATE Pricing Band Estimate High Point Low Point Most probable price EXTERNAL ESTIMATES Company Customer 1 Customer 2 Customer 3

EXHIBIT 14.21

Quoted Price

Services Description

High Level Pricing Analysis

joint development teams comprised of Sales and Marketing personnel and builds on the data collected during the interview sessions.

Price Elasticity Analysis Description Price elasticity of demand measures the relationship of the

quantity demanded of a good to its price. Price elasticity is measured as the percentage change in quantity demanded that occurs in response to a percentage change in price. For example, if, in response to a 15 percent price decrease for a good, the demand increases by 30 percent, the price elasticity of demand would be 30/(15) = 2. Various research methods such as test markets, conjoint analysis, or historical data can calculate price elasticity. Elasticity with an absolute value greater than 1.0 is considered elastic, and a decrease in price will be outweighed by the greater quantity of goods sold, thereby increasing revenue. Elasticity with an absolute value of less than 1.0 are inelastic, and the decrease in price will be not be compensated for by the greater quantity of goods sold, causing revenue to decrease. Relevance for CVC Understanding price elasticity helps determine the over-

all revenue impact of a change in the offering, especially any change in price (cost to the customer) and inherent change in value. Knowing the elastic demand in a given segment can guide the overall effort made to influence perceived value through price changes. If price is a relatively less important decision criterion, then more effort can be spent on the other component of the value proposition for the customer.

273

Supporting Tools for CVC

Problem Opportunity Map Description The Problem Opportunity Map summarizes the conclusions on growth opportunities. (see Exhibit 14.22) It delineates the current problems at specific points in the value chain, a priority for implementation and the value potential. It can be used a communication tool to convey where the biggest opportunities are to add value.

The Problem Opportunity Map describes opportunities from a value perspective. It is a good communication tool and can serve as a verification point to ensure that the analysis, insights, and recommendations are comprehensive and complete.

Relevance to CVC

Impact-Effort Matrix Description The Impact-Effort Matrix is another version of mapping

two independent variables. (see Exhibit 14.23) In this case, the investment (Effort) required for a new initiative is mapped against the estimated return (Impact) to assess and prioritize among a number of individual initiatives. The objective is to ensure initiatives have an impact commensurate with their investment. In addition, the matrix enables maintenance of a balanced portfolio of initiatives that collectively have a good mix of required effort and impact so that implementation tackles both complex issues as well as easier to hit targets.

Media Planning and Budgeting

Problem

No clear ROI driven marketing plans

Opportunity Prioritization Value Potential

EXHIBIT 14.22

Creative Services

Print Production and Paper

Logistics

Multiple versions and manual cross functional processes

Insertion

Total subs are rapidly declining leading to limited mindshare capture opportunities

High

High

Low

Low

High

Unknown

Medium

Low

Low

High

Problem Opportunity Map

274

EXECUTION

High

Quick Hits

Game Changers

Be Selective

Do Not Do

Initiative

Impact

Low Low

EXHIBIT 14.23

Effort

High

Impact Effort Matrix

After a number of new offerings have been identified and defined, mapping them onto the matrix can ensure the company has a balanced growth portfolio, i.e., does not face a slew of challenging implementation hurdles setting unrealistic expectations or generating unsatisfactory returns based on the required effort.

Relevance to CVC

Solution Idea Inventory Description The Solution Idea Inventory documents the preliminary

hypotheses around new solution developments ideas to help the clients achieve their Share of Wallet expansion goals. (see Exhibit 14.24) The solution ideas are developed with an understanding of the gap between current offerings and market needs and the ability to influence a value driver and capabilities/permission to take the solution to market. The idea hypotheses are developed through a series of joint working sessions that can include a lead customer, sales personnel, and marketing personnel. Detailed analysis of the value drivers, the market map and strategic group maps provide inputs into the idea generation process.

275

Solution Idea Cost Reduction

Solution Idea Inventory

Legend Direct Spend on Retail Insert Products Indirect Spend on Retail Insert Products Spend on Other Communications Products Spend on Other Internal Processes

Provide Content Management Services

EXHIBIT 14.24

1 2 3 4

3

2

1

Sno

Revenue Enhancing OR Cost Reduction 2,3

Solution Category (1-4) Pre Media

Value Chain Step

SOLUTION IDEA INVENTORY

Customer Benefit Description Content Management services will help drive lower costs for the customer by better utilizing assets of the customers

276

EXECUTION

The Solution Idea Inventory functions as a central repository of new solution concepts. It aids in managing and prioritizing solutions and helps identify/consolidate solution ideas that have significant overlaps or are subsets of other solutions.

Relevance to CVC

Balanced Portfolio Criteria Description The Balanced Portfolio Criteria are a listing of those criteria

by which the client will determine the value of any given new solution. (see Exhibit 14.25)The spreadsheet acts as a key tool in ensuring that the solution ideas being nurtured through the development process meet the current and future business needs. Though significant similarities occur in the balancing criteria themes across companies, the market position and strategies for each company are unique, and therefore, these criteria are unique. These criteria reached through a collaborative process comprising of external research, interviews, and joint working sessions with company executives. Establishing balanced portfolio criteria is critical to developing a solution portfolio that supports the company’s overall objectives. In most cases, more potential new solutions to bring to market will exist than the company has resources available. The prioritization process that determines which solutions receive the goahead needs to be aligned with company-wide objective. Balanced portfolio criteria establish that link between the new solution development and the company objectives. Relevance to CVC

Portfolio Maps Description The Portfolio Map translates each of the portfolio balancing criteria chosen by the executive team into actionable plots that can be used to assess solution ideas for balance. (see Exhibit 14.26) These maps are one of the most popular portfolio management tools in use by management. The portfolio map templates are created by the core project team and updated with specific data emerging from the CVC analysis.

277

Balanced Portfolio Criteria

Prob. Suc

Reward

Prob. Suc

Strat fit

Time to Market

Axis 2

Total Cost

Axis 1

Balanced Portfolio Criteria

8 Cost vs. Benefit

Technical Newness vs. Market 7 Newness

X

Shortlist

Projects Balanced by Strategic 5 Buckets (1, 2, 3, 4) X Strategic Fit (Bus Strategy fit and leverage) vs. Probability of Success 6 (Technical plus commercial)

Market Concept Attractiveness vs. 4 Upfront investment rqmt

3 Risk vs. Reward

Cost to implement vs. time to 2 implement

Market Concept Attractiveness vs. 1 Ease of Implementation

EXHIBIT 14.25

Sno

NPV

Resources

NPV

Revenue

Bubble Size

Risk = F(f1, f2, f3)

Reward - F(f4, f5, f6)

Axis 2 Calculation Details F(Time, Resources, difference from current)

Axis 1 Calculation Details F(Importance, impact score and NPV)

278

EXECUTION

10 9

Idea 1

Ease of Implementation

8 7 6

Idea 5

5

Idea 3

Idea 4

4 3

Idea 2

2 1 0 -1 -1

0

1

2

3 4 5 6 7 Market Concept Attractiveness

8

9

10

= $200 in Revenue

EXHIBIT 14.26

Portfolio Map

Relevance to CVC The Portfolio Map can be a visual aid to assess the dif-

ferences among the new solution ideas as measured along three different criteria. This helps balance the overall portfolio and make prioritization decisions.

Future State Market Map Description The Future State Market Map provides a pictorial depiction

of the magnitude and movement of the company’s business along multiple dimensions as a result of the new solutions in the pipeline. (see Exhibit 14.27) These dimensions represent the clients’ current business position and the unique challenges they face in the marketplace. The Future State Market Maps are created using input from senior management and joint working sessions with sales and marketing personnel.

279

Supporting Tools for CVC

Operating Margin = EBITDA/Sales

2008 ROA = 7%

ROA = 3%

2003 The size of the bubble is a measure of the company’s total revenue

ROA = 1%

Product – Services Stance

EXHIBIT 14.27

Future State Market Maps

The Future State Market Map provides a quick snapshot of the company’s projected future performance. It can compare projections against established goals and targets to assess if the CVCbased changes will support meeting the overall expectations.

Relevance to CVC

Business Case Description A Business Case documents the costs and benefits to the organization associated with undertaking a specific initiative and is used to request and justify allocation of resources. Business cases usually contain financial and nonfinancial information. Calculation of the financial cost and benefits vary. The most common approach is to use a discounted cash flow (DCF) model that estimates the net cash impact by period based on changes in revenue, cost or capital efficiency. Those net cash flows are discounted by the appropriate factor back to the current date to assess the impact in today’s money. Nonfinancial information can include such items as customer satisfaction, employee moral measures, public opinion and perception, and legislative/governmental requirements. Larger companies will often have prescribed business case formats to request allocation of resources.

280

EXECUTION

Most new solutions require resources to develop and bring them to market. The business case provides the analytical rigor and documents the assumptions to ensure that company resources are utilized for initiatives that promise an adequate return. Relevance to CVC

IMPLEMENT THE STRATEGY Project Charter Description A Project Charter defines a project and is required to ensure implementation discipline. The Charter should be in writing and usually includes the following ten sections:

1. Objectives: Describes project objectives 2. Value: Describes and estimates financial value of project 3. Scope: Describes where project begins and ends, for example, the project will describe the value chain back two levels in the supply chain and forward to the retailer but not the consumer. 4. Approach: Describes what steps will be taken to complete the project; use verbs to describe 5. Deliverables: Describes what tangible output will the organization see as a result of the work 6. Team: Describes who will do the work, what are their roles, what are their time commitments 7. Timeline: Describes when will each task and deliverable be complete 8. Assumptions: Define a set of assumptions 9. Risks: Describes what could cause the team to miss deadlines or fail 10. Cost: Describes what are internal and external costs of project Exhibit 14.28 shows a simple one-page project Charter. The project Charter does not need to be long or elaborate, but it does need to be written and discussed. This will force the team to understand details and discuss the potential project pitfalls.

281

• • • •

• Customers leverage price • Sales reps lose sight of relationships

EXHIBIT 14.28

• • • • • • • •

• •

Sample Project Charter

• Two consultants for nine months • Intermittent participation from numerous sales and marketing people • Statistical specialist • Sponsors: Jane Smith and Business Unit marketing leaders • Steering team • John Smith is day-to-day project leader

Team

Approach

Risks

•

• Significantly improved pricing decisions • Increased margins through better price/volume management • Financial value estimate is $50mm profit marging over three years (Year 1: 10, Year 2: 20, Year 3: 20) • Additional value in spreading the knowledge to other segments • Ongoing cost is approximately 20% of benefits

• Understand price/volume tradeoffs for key segments • Make pricing decisions that optimize long-term profitability • Pilot discreet choice modeling to demonstrate value to organization

Define business unit and segment focus Define project working team Determine revenue goals and impacts Determine project objectives • Product Performance • Pricing • Other offering elements (service, delivery, etc.) • Offering Optimization Conduct strategy session to document alternative actionable strategies for testing • Create initial responsibility matrix Construct conjoint and customer study design Gather data from the marketplace • Customers and prospects in target segments • Competitive information about alternative offering performance Analyze customer decision “utilities” Construct market response model Conduct specific analyses of alternative strategies Analyze position and profit impact of alternative strategies Create and prioritize marketing strategy shifts Define business case for action Complete responsibilities matrix Develop high-level action plans

Value

Objectives Three market segments 30 customers Two product families 2003 and 2004 data

• $1.5mm total: • $0.8mm external • $0.4mm internal • $0.2mm research • $0.1mm travel

Cost

• 9 months

Timing

• Acceptance of highly detailed analysis by sales reps. participants • Availability and willingness of customers in desired segments • 10 segments x 20 mm revenue per segment = 200mm total revenue x 2.5% margin improvement = 5mm annual value

Assumptions

• • • •

Scope

282

EXECUTION

Project Charters are critical to ensuring specific objectives are realized. For CVC, that means new solutions are developed and brought to market as envisioned with the same attributes and on schedule. Otherwise, they will not provide the value to the customer that was envisioned and that led to the project initiation in the first place.

Relevance to CVC

Responsibility Assignment Matrix (RAM) Description The ResponsibilityAssignment Matrix (RAM), a correlation matrix, relates solution idea development project work packages to the project and business organizational structures responsible for development of the solution. (see Exhibit 14.29) The matrix ensures each element of the project’s scope of work is assigned to specific individuals. It clarifies the interaction between project team members and the rest of the organization, and it establishes clear accountability. For each solution idea, at least one individual must be assigned as “ACCOUNTABLE” for the management and delivery for the work package. The RAM is created by the project core team and each of the solution development leaders.

A RAM ensures that the activities and tasks required to execute on the identified growth opportunities have been assigned to individuals. Clear assignment of responsibilities removes any ambiguity of who is doing what and allows for tracking of milestones and To Do lists. The RAM ensures all stakeholders and inputs required for a success have been identified and are integrated into the execution plan.

Relevance to CVC

Project Plan and Schedule Description For lack of a better term, structuring the work into manageable pieces is an important success factor in running growth programs like projects.

283

Supporting Tools for CVC

Responsibility Assignment Matix (RAM)

Resource

Joe Baker

Mike Printer

Joan Inky

Jane Musgrave

Shirley Temple

John Stamper

Kristen Jones

Steve Miller

Mark McMoney

Marketing

Marketing

Sales

Sales

Operations

Operations

Finance

Finance

Finance

Deliverable/Work Package

Group

Project Contributors

O

A

A

A

A

WBS ID

Description

1.1

Current Customer Profitability

1.2

Growth Share Analysis

A

O

2.1

SWOT Analysis

A

O

A

2.2

Core Competency Analysis

A

O

A

2.3

Customer Interviews

3.1

House of Value Analysis

3.3

Solution Prioritization

O

A

3.4

Business Cases Development

A

A

A

A

O

A

A

A

A O

A

A A

A

O

Key Accountable

A

Organizational Owner

O

Sign Off Required

S

Review Required

R

Input Required Not Involved

Project Manager: Bob Davies Technical Leader: Ryan Fleming Date Issued: March 2, 2004 Date Received: April 5, 2004

I Blank

EXHIBIT 14.29

Responsibility Assignment Matrix (RAM)

ACCOUNTABLE – the individual accountable for managing and delivering the specific work package. THERE MUST BE AT LEAST ONE “A” FOR EVERY ROW. ORGANIZATIONAL OWNER – the functional manager responsible for providing the resources for the specific work package and acting as champion for its completion. THERE MUST BE AT LEAST ONE “O” FOR EVERY ROW.

284

EXECUTION

This is another seemingly simple aspect of running programs like projects, but we experience overwhelmed clients because they did not dissect the work into manageable chunks. See Exhibit 14.30 for an example of portfolio of work dissected into programs and projects. A Project Plan and Schedule ensures that various activities required to being a new solution to market are executed in a coordinated fashion. It allows for effective management of issues, risks, and interdependencies. It can serve as a communication tool to let other stakeholders know when to expect results and how to monitor progress.

Relevance to CVC

Pilot Testing Description With CVC, companies can gain new insights into their

customers’ needs and purchasing decisions. These insights can lead to changes in the product and service offering. Depending on the degree of change and the number of customers affected, evaluating the market response through a controlled sample as part of a pilot test can mitigate risks and provide critical input for a larger launch. Pilot tests should mimic the market environment expected for the full launch. This includes accounting for such factors as seasonal changes, geographic differences, and full capacity production run rates. Relevance to CVC Pilot testing can vary in scope by targeting different customer segments, distribution channels, or manufacturing operations. The objective is to gain first-hand knowledge of the customer’s response and an opportunity to identify and address any issues in the value chain with regard to delivering on the product/service offering.

Scorecards and KPI Dashboards Description A Key Performance Indicator (KPI) is financial or nonfi-

nancial metric used to track progress toward goals in critical areas of the business. KPIs can serve as a tool to communicate organizational

285

• Value Based Selling • Value Based Pricing

Improve Margins

Activity

11. Measure Price Realization 12. Link DVC to Value-Based Selling 13. Link DVC to Value-Based Pricing

6. Organization Design - Design the relationship matrix and decision rights for cross functional opportunity - Design the relationship matrix and decision rights to realize new customer opportunities - Align incentives and rewards 7. Create a Measurement Dashboard - Leverage top customer work - Create monthly progress views - Internal Economics - External Data 8. Institutionalize the Demand Shaping Process -Complete 5-year plan of goals and objectives 9. Link Demand Shaping to NPD - Pilot Customer Innovation process - Link Customer Innovation to NPD and rollout 10. Develop and Deploy Customer Management Tools - Customer Knowledge Management - DVC software - Cross functional account planning

1. Demand Value Chain (DVC) - Pilot - Rollout 2. Assess capabilities with results of DVC analysis 3. Assess investment needs to realize DVC opportunities 4. Implement Demand Shaping opportunities - Pilot - Rollout 5. Develop Growth Plan for emerging mkts

Structuring the Work

• Organization Design • Organization Capabilities • Measurement

Build Capabilities

EXHIBIT 14.30

• Cross Functional Collaboration • New Customers • New Markets

Work Theme

Drive Growth in New Markets

Growth Theme 3Q 04

4Q 04

Calendar 1Q 05

2Q 05

3Q 05

4Q 05

1Q 06

Future

286

EXECUTION

priorities as well as means to monitor performance. KPIs can be aggregated into scorecards or dashboards to capture and report on performance at various levels of an organization. (see Exhibit 14.31) Since what is measured is usually what gets done, KPIs and scorecards focus the organization’s attention. For KPIs to be effective they need to be based on: ■ ■ ■

■

Established and defined business process Clear and communicated performance expectations Available quantitative/qualitative measurement data to track results and compare with targets An approach to investigating variances and modifying processes to achieve long-term targets

A KPI Scorecard or Dashboard allows any manager to see which areas are not performing as expected and need attention. It focuses scarce resources on problem areas and helps keep the organization performing at high levels.

Relevance to CVC

LEARN FROM EXPERIENCE Knowledge Transfer Fact Packs Description The CVC process increases the knowledge of markets, cus-

tomers, products, and opportunities. During the research and analysis phases, it generates considerable amounts of data on critical aspects of the business. This valuable insight must not dissipate as individuals join or leave the CVC initiative. A Fact Pack is a structured repository of data, findings, and recommendations related to the CVC initiative. It can be transferred from one individual or team to another and preserves the value of the completed work for future phases.

287

Sustain Growth

KPI Dashboard

Corporate Training Training Index Marketing Days Sales Outstanding

Improve Margins

EXHIBIT 14.31

Revenue Growth/FTE Clean Orders Sales & Operations Forecast Accuracy % Volume Exceeding Target Margin Days Sales Outstanding

Sales Operations Operations Marketing Operations

Grow Profitably

Key Measurements Elasticity Index Target Market Revenue Growth Opportunity Funnel/5 Years Target Customer Profit Growth

Business Owner

Marketing Marketing Marketing Sales

Major Strategy

Monthly Annual

Annual Monthly Monthly Monthly Monthly

Annual Annual Quarterly Quarterly

Measurement Frequency

90% 5%

$5mm/FTE 95.0% 90% 25% Exceed 20 Days

5% 20% $100mm 15%

Target Performance

75% 2%

$3mm/FTE 80% 94% 20% 18 Days

6% 18% $60mm 11%

Actual Performance

Current Status R Y G

Index

ABC. See Activity-Based Costing Access dimensions, 233 drivers, 239 requirements, development (understanding), 42 Access attributes, 42, 100–101, 233 improvement, 224–225 refinement, 233–234, 238–240 Account plan compliance/reviews, 176 Accountability. See Human nature Account-centered organizing models, 167 Accounting systems ability, 198–199 existence, 199 Accounts chart, mapping. See Resource pools relationship. See Markets Accuracy/prediction, contrast. See Business case Activities costs definition. See Customers determination, 203–204 drivers, definition, 205 identification/definition, 202–203 mapping. See Customers resources, mapping, 203 Activity-Based Costing (ABC), 33 exercise, requirement, 246 usage, 265 Advantaged demand chains, 68–71 score, 71 selection, 63 Alderman, Jerry, 151 Anchoring, 27, 149 Anti-trust considerations, 58 Apple Computer, 34 As Is analysis, conducting, 216–217 condition, 7 cube, 114 defining, 8 current state, 51 defining, 52

growth cube, 126 shape. See Growth Cube state, 123 Assets. See Demand chain; Fixed assets opportunity costs, 207 structure, 263 Attributes customer usage, identification, 270 testing, 271 Automobile manufacturer, example, 89 Availability, example, 224 Balance sheet, 164 Balanced portfolio, 140–142 Balanced Portfolio Criteria description, 276 relevance. See Customer Value Creation Balanced Scorecard approach, 175 Balancing criteria, importance, 142 Baseline facts, 182 Bass model, 236 BATNA. See Best Alternative to a Negotiated Agreement B2B. See Business-to-business Behavioral economics, 25, 33. See also Outside-in advancements, 25 Behavioral segment, 252 Best Alternative to a Negotiated Agreement (BATNA), 38 Best guess framework. See Demand chain Biased evaluation, 28 Biases. See Confirmation bias elimination, 149–150 Black & Decker, expertise, 266 Black Belts, 19 Bonds, risk, 27 Bottom-up algorithms, 269 Bottom-up pricing, types, 156 Brand buyers, 231 Brand perception, 251 Break-even profitability, achievement, 135 Brute force, 30 Budgets, establishment. See Retailers Burnout. See Team burnout

289

290 Business case accuracy/prediction, contrast, 182–183 constraints, 145–146 construction, 268 description, 279 development, 145–146, 279–280 relevance. See Customer Value Creation usage, 181–182 Businesses alliances, strengths/weaknesses, 251 categories, 244 conversations, precedent (establishment), 104 leaders, customer discussion, 184 model, components, 106 plan, 90 portfolios, review/justification, 266 process establishment/definition, 286 outsourcing, 1 risk, reduction, 164 strengths/weaknesses, identification. See Markets units company offerings, inventory, 214–215 sales team, collaboration (absence), 214 Business-to-business (B2B) industrial world, 30 Business-to-business (B2B) markets, 21 Buyer-driven demand chain, 72–73 Buyers. See Brand buyers bargaining power, 248 Buying behavior, 209 Buying profile, segment construction. See Customers Buy-pay-use cycle, stages, 42, 101 Capability gaps, identifying/addressing, 267 Capacity production run rates, 284 Capital investment, 64 plan, 90 spending. See Growth Cash cows, category, 244 Cash flow, 191, 263. See also Discounted cash flow Caterpillar (company), 224 Channels, profitability, 209 Charter sections, 185–186 Chemical company, example, 89 Choice-based conjoint, 271 Clients, competitive position determination, 264 identification, 250

INDEX Cluster analysis application, 230 description, 269 relevance. See Customer Value Creation Coca-Cola contrast, case study. See Pepsi/Coca-Cola products, 235 Co-development partners, 104–105, 258 checklist, 104 discovery process, 104–105 involvement, 96 usage, reasons, 105 Collaboration interviews, conducting, 87 Collaboration partners, identification, 87 Communications products, spend, 215 tools, 269 Companies assessment, 268 challenge, 113–114 competencies, identification, 266 core products, identification, 266 end products, identification, 266 higher-order objectives, 129 initiatives, integration, 178–179 inventory, holding, 200 offerings, 235–236 inventory. See Business units segment selection, 231–232 participation. See Demand chain profits, 145 resources, percentage, 209 return measurement convention, 182 sales/growth, analysis, 247 vision, 107 Company value add, 93 Comparative pricing, 156 Competition, 143 consideration, 74–75 Competitive advantage, 93 Competitive Cost Analysis, 264–265 description, 264–265 relevance. See Customer Value Creation steps, 265 Competitive cost structures, estimates (refinement), 265 Competitive environment, 159 analysis, 247 Competitive imperative, 33 Competitive intensity, 93 Competitive pricing, 156 Competitive reactions, 157 Competitive rivalry, level, 248 Competitive strategy, development, 250

Index Competitors. See Demand chain alliances, strengths/weaknesses, 251 identification, 63 reactions company anticipation, 265 scenario development, 268 sales/growth, analysis, 247 strength, evaluation, 264 Complex systems diagram, 71 Component Supplier, involvement, 82–83 Concepts. See Solution concepts external attractiveness, understanding, 92 interest, understanding, 92 prioritization/classification, 87 Confirmation bias, 28, 149 Conjoint analysis, 270–271 description, 270–271 relevance. See Customer Value Creation steps, 271 Consensus. See False consensus Constraints. See Business case Consumers buying patterns, 30 marketing, 70 contrast. See Industrial marketing products, usage/impact, 68–69 transactions, types, 39 Consumption data, aggregation, 220 Content creation, 121–122 Continuous cost improvement, 29 Contract negotiations, 227 Core activities, context (establishment), 11–12 Core business, decommoditization, 226 Core competencies conducting, steps, 266 implication, determination, 266 transfer, problems, 267 Core Competency Analysis, 266–267 capability, 266–267 description, 266–267 relevance. See Customer Value Creation Core value drivers, validation, 103–104 Corporate level analysis, distortions (avoidance), 264 Corporate portfolio, 263 Cost accumulation, 203–204 analysis. See Competitive Cost Analysis attributes, 44, 101–102, 234 improvement, 226–227 refinement, 233–234, 238–240 drivers, 31, 121–122, 239. See also Critical cost drivers analysis, 265 equation, 121

291 focus, 14 mindset, 16 pools, 75 profit, contrast (case study). See Multinational chemical company profit/investment, contrast, 75–77, 254–255 reduction, 29, 82 focus, 65 program, 183 switching, 21 Cost to serve (serving cost). See Customers; Hidden costs to serve customers, differences, 157 determination, 209 profiles, 54 Cost-focused retailers, 231 Could be condition, 7 discussion, 58–60 state, 58, 123 Could be cube, 58–60 creation, 8 representation, 7–8 solutions, development, 9 Could be growth cube, 126–130 information, interpretation, 126–128 Country-specific ads, development, 239 Critical cost drivers competitive position, quantification, 265 components, identification, 265 selection, 265 Critical Success Factors (CSFs), 247 analysis, 262–264 description, 262–264 relevance. See Customer Value Creation steps, 264 business impact, identification, 264 categories, 262–263 prioritization matrix, 264 CRM. See Customer Relationship Management Cross-functional steering team, 173 Cross-geography collaboration, 167, 169 Cross-geography gains, 166–167 Cross-product collaboration, 167, 169 Cross-product gains, 166–167 Cross-sell opportunities, 210 Cross-selling effectiveness, increase, 217–222 phase, improvement, 221 CSFs. See Critical Success Factors Currency fluctuations, 236 Current customers growth, 170 increase, 165–167

292 Current share of wallet, definition, 212–217 Current state, understanding, 135 Customer Economics, 258–261 description, 258–260 model, 109 phases, 76–77, 258–259 relevance. See Customer Value Creation usage, 32, 222 advantages, 261 Customer profitability, 53–55, 70, 197–210 bimodal distribution, 57 calculation, 206, 246 combination, 51 company level, 6 conversion, 201 definition, 205–207 determination, 201, 209 distribution, 53–55 impact, assessment, 267 improvement/monitoring, 209–210 increase, 201 knowledge, 208 understanding, 53, 201 Customer Profitability Analysis, 158, 197, 245–247 approach, 201–210 description, 245–246 relevance. See Customer Value Creation success, 210 Customer Relationship Management (CRM), 24, 33, 217. See also External CRM; Internal CRM Customer segment, 89 definition. See Wallet product consumption, identification, 213 service consumption, identification, 213 Customer value, 145 assessment, 31 framework, 99 mindset. See Growth-oriented customer value mindset perception, 93 quantification, 216–217 quantitative assessment, development, 32 systems, identification, 159–160 variation, 147–159 Customer Value Analysis (CVA), 3–4, 193 Customer Value Creation (CVC), 3 approach, usage, 149–150 balanced portfolio criteria, relevance, 276 business case, relevance, 280 cluster analysis, relevance, 269 competitive cost analysis, relevance, 265 conjoint analysis, relevance, 271

INDEX context, establishment, 11 core competency analysis, relevance, 267 critical success factor analysis, relevance, 264 customers economics, relevance, 261 profitability analysis, relevance, 246–247 demand chain economics, relevance, 258 efforts, 250 environmental trend analysis, relevance, 248 exhibit, 46 factor analysis, relevance, 270 facts/data, 17 framework, 39 future state market map, relevance, 279 growth-share matrix, relevance, 245 impact. See Six Sigma impact-effort matrix, relevance, 273 industry, relevance, 250 interview guides, relevance, 261–262 KPI, relevance, 286 management philosophy, 33 market map, relevance, 243 market segmentation maps, relevance, 252 opportunities, 145 philosophy, 91 pilot testing, relevance, 284 portfolio maps, relevance, 278 power, 47 price elasticity analysis, relevance, 272 problem opportunity map, relevance, 273 process, 74, 85 completion, 96 time horizons, usage, 131 project charter, relevance, 282 project plan/schedule, relevance, 284 purpose, 87 qualitative value chain analysis, relevance, 258 RAM, relevance, 282 scorecards, relevance, 286 solution idea inventory, relevance, 276 supporting tools conclusions, 267–280 context, setting, 242–247 experience, instruction, 286–287 introduction, 241–242 strategy, implementation, 280–286 SWOT analysis, relevance, 252 tools, 17–18 worthlessness, 154 Customer-based solution ideas, 268 Customer-centered models, 167–170

Index Customer-facing activities, 202 costs, 204 Customer-facing processes, 202, 209 Customer-oriented perspectives, 20 Customer-related activities, 203 Customer-related costs, 199 Customer-related decisions, 18 Customers acquisition, 195 cost, determination, 209 activities, mapping, 205 attitudes, 31 buying profile, segment construction, 220–221 characteristics, 209 collaboration sessions, 117 costs, determination, 205 cross-selling, 55–56 data. See Internal customer data availability, 30 dimensions, 52 direct input, 270 direct interaction, 173 discussions, concern, 183–184 facing costs, 199 feedback, incorporation, 232 firing, 54 groups, profitability, 209 growth. See Current customers identification/definition, 204 increase. See Current customers information absence. See Downstream customer information centralization, 219 input, collection, 104 interaction, 179 variability, increase, 197 internal processes, inputs, 213 interviews. See One-to-one customer interviews summaries, development, 259 intimacy, importance, 23 loyalty, 211 increase, 222 margin threshold, percent, 175 number. See Number of customers optimal behavior, guide, 197 organization, 166–167 ownership, uncertainty, 30–31 participation. See Demand chain permission to serve boundary, 215 perspective. See Demand chain preferences, 30 problems, understanding/addressing, 32

293 process/activity costs, definition, 202–204 product cost, 207 profit potential, 209 profits/losses, bottom quartile, 176 relationships, 37 profitability, enhancement, 195 requests, 107 revenue, 206 creation, 165 segmentation, 208–209 end market service, 219–220 improvement, 110 senior executives, role, 179 service, 200 functions, 218 serving cost, 157–158 tracking ability, absence, 197 share of wallet, 6, 166 support, 205 switching costs, 211 value proposition, 106 voice. See Voice of the customer Customer-specific costs, 207 determination, 204–205 CVA. See Customer Value Analysis CVC. See Customer Value Creation Cycle times, 75, 254 Data, 21 availability, 24, 29–32. See also Customers capture, 203 existence, 33 gathering, 247–267 proliferation, 30 support, 106 DCF. See Discounted cash flow Debt/equity, 263 Decision making conclusions, 148 outside-in approach, 25–26 process. See Value-based decision-making process steps, 147–149 quality, impact, 25 Decision process, 21 Define Measure Analyze Improve and Control (DMAIC) process, 16 Deliverables, 185 Deliveries, customization/frequency, 200 Dell Computers, 42–43, 224 customer service, repatriation, 226 Demand cube, power, 255 definition, 38 sources, discovery, 234

294 supply, contrast, 64–65 understanding. See Geographies Demand chain. See Advantaged demand chains; Buyer-driven demand chain; Producer-driven demand chain activities, customer participation, 107 analysis, 74–75 assets, 84 best guess framework, 98 company participation, 69 competitors, 93 complexity, 21 considerations, 71–75 correctness, verification, 104 definition, 63 discussion, 106–107 dynamics, 73 financial stake, 79 framework, 64 hypotheses, validation, 113 impediments, 107 inefficiencies, customer perspective, 104 investments, 84 length, 73–75 definition, 63 leverage, 64 operation, 69 opportunities, hypotheses (development), 63 participants, 17, 40, 84, 133–134 point of origin, 74 power, 77–78 quantitative understanding, 70–71 step, coverage, 95 supply chain, contrast, 253 case study, 65–68 types, 72–73 usefulness, 75–76 validation, 107 Demand Chain Economics, 63, 253–258 approach, 69–70 company participation, 200 conducting, 81 description, 253–254 determination, 75–77 development, 255 information, usage, 78 relevance. See Customer Value Creation time element, addition, 80 usage, 222 Demand profile, segment development, 230–231 Demand Value Chain (DVC) solutions, discovery, 143 usage, 32, 34 value creation opportunities, 85

INDEX Demographic data, collection, 235 Demographic segment, 252 Demographics, usage, 209 Dimensions. See Customers; Growth dimensions; Share of Wallet naming/usage, flexibility, 270 Discipline, absence, 185 Discounted cash flow (DCF), 279 Discrete choice analysis, 271 Distribution channels, 284 networks, 237 DMAIC. See Define Measure Analyze Improve and Control Dogs, category, 244 Dollar share, capture, 195 Downstream customer information, absence, 30 Drivers. See Cost; Value drivers Drucker, Peter, 113 DVC. See Demand Value Chain Earnings, dilution, 191 EBITDA returns, increase, 49 Economic performance, 63, 79–81, 255 Economic segment, 252 Economic trends, 247 Economics. See Customer Economics; Demand Chain Economics determination, 63 sharing, 74–75 Economies of scale, achievement, 158 EDI, 160 Efficiencies, enhancement, 29 Emerging market revenue growth, 176–177 End customers, existence, 102 End market services. See Customers End products grouping, 266 identification. See Companies End use segment, strength, 69 Enterprise Resource Planning (ERP), 1, 24, 33 Environmental trend analysis, 247–248 relevance. See Customer Value Creation ERP. See Enterprise Resource Planning EVA, 182 Evaluation. See Biased evaluation Excel-based model, 122 Execution. See Growth Executive to executive discussions, 183 Existing ideas, usage, 89–90 Experience attributes, 42–43, 101, 233–234 improvement, 225–226 drivers, 239

Index instruction, 148–149. See also Customer Value Creation strengths/weaknesses, 251 External CRM, 31 External environment, analysis, 236–238 External interviews, conducting, 87 External metrics, design, 166 External risks, 165 Fact Pack, 286. See also Knowledge transfer fact packs Fact-based approach, 17–18 Fact-based decision making, 20 Factor analysis, 269–270. See also Critical success factors advantages, 270 description, 269–270 relevance. See Customer Value Creation steps, 270 Fair share. See Manufacturer determination, 135 distribution process. See Value Fair share analysis, 133–140 challenge, 134–135 initiation, 134 False consensus, 28, 149 Finance, category, 263 Financial acumen, 173 Financial performance, 182 Financial ratio analysis, 265 Financial return, 53 Financial rigor, impact, 165 Five Forces. See Porter’s Five Forces Five Forces Analysis, 248 steps, 250 Fixed assets, 207 Fixed cost, customer contribution, 154 Focus groups, 109 Foreign Corrupt Practice Act, 237 Full-time day-to-day leadership, 173 Full-time team members, 173 Functional responsibility, 170–171 Future State Market Map, 278–279 description, 278 relevance. See Customer Value Creation GAAP. See Generally accepted accounting principles Gaps bridging, 268. See also Value defining. See Value identification, 268. See also Solution Concepts Garbage truck manufacturer, example, 89

295 GDP, 252 Geneen, Harold, 11 Generally accepted accounting principles (GAAP), 198, 246 Genghis Khan date test, 27 Geographic area, broadness, 118–119 Geographic coverage, focus, 231 Geographic markets, identification/entry, 227 Geographic segment, 252 Geographies availability, 160 demand, understanding, 235–236 domination, 228 expansion, 234–240 Global Customer Business Unit, 169–170 Global markets, complexity, 239 Goals balance. See Short-term goals clarification/setting, 178, 189–190 Going native phenomenon, 192 Government legislation/regulation, strengths/weaknesses, 251 Graphic user interface (GUI), 123 Groupthink, 28 Growth. See Segment achievement, 47 agenda, 57 development, 80 management, 178 capital, spending, 129 challenge, approach (adoption), 11 context, setting, 147, 241 definitions, 175–177 driving, 52–53, 90 execution, 151 forecasting, should be cube (usage reasons), 147–149 ideas creativity, association, 180 funnel, 176 initiatives, balanced portfolio (identification), 142 management, results measurement, 173–177 measures, 175 opportunities, 74. See also Profitable growth opportunities assessment, 84 platforms, value (quantification), 268 preparation, 11 element, 12 process, 16 initiation, 49 step, 65–66

296 programs project orientation, 184–189 work, structuring, 186 solutions, execution, 88 strategy, 183 determination, 163 execution, 163 support, 90 Growth Cube. See As Is; Could be growth cube completion, 131–133 steps, 131 creation, 57 dimension, 201 As Is shape, 127 limitation, 61 usage, 52–53 initiation, 60–61 Growth dimensions, 6–7, 49 confirmation, 114 definitions, 49–52 exploration, 197 mutual exclusivity, 129 Growth Scorecard, 175 Growth Share matrix, 244–245 description, 244–245 objective, 245 Growth-oriented customer value mindset, 16 GUI. See Graphic user interface Herding instinct, 28 Heterogeneous segments, 252 Hidden costs to serve, 199 High-level pricing analysis, description, 271–272 High-quality products, benefit, 223 High-revenue customers, 199 Hit-or-miss teams, 173 Home Depot, market revolution, 56 Homogenous segments, 252 Honda, expertise, 266 House of Value (HOV), 267–269 analysis, phases, 267–268 description, 267–269 tools, 144, 222 usage, 34 Households, number, 110 impressions, 119 Human nature, 24–29 accountability, 26 choices, 26 consequences, 26 Hypothesis driven approach, 60

INDEX Ideas description, 182 implementation, costs, 182 usage. See Existing ideas IKON, 43, 226 Immelt, Jeffrey, 195 Impact-effort matrix, 273–274 description, 273 relevance. See Customer Value Creation Implementation risks, 182 Improvement opportunities, identification, 265 Incremental value, creation, 31 In-depth interviews, 105 Industrial marketing. See Six Sigma buying decisions, 21 consumer marketing, contrast, 20–21 Industry analysis, 250 attractiveness, 248–250 definition, 38 entrants, threat, 248 position, defense, 250 relevance. See Customer Value Creation strategic groups, identification, 250 structure, analysis, 247 Influence, ability, 70, 71 Information gathering techniques, usage, 108 interpretation. See Could be growth cube sharing, 31–32 source, 90 Information Technology (IT), 189 applications, 218 Infrastructure, 262 build-out. See Technology strengths/weaknesses, 251 weakness, 237 Innovation, focus, 231 In-person interview, 105 Input measure, 177 Insert rates, 118 Intelligence, collection, 147–148, 241 Interactive value model, construction, 259 Interests, alignment, 63, 78–79 Internal CRM, 31 Internal customer data, 31 Internal hypotheses, capture, 87 Internal interviews, usage, 90–91 Internal politics, confrontation, 165 Internal processes perfecting, 29 spend, 215

Index Internal solution concepts, prioritization, 92–93 International businesses, impact, 236––237 International markets, entry, 238 International pricing, problems, 239 Internet technologies, advances, 234 usage, 24 Internet-based technologies, development, 233 Interview guides, 106, 261–262 description, 261 development, 259 relevance. See Customer Value Creation Interviewees, background, 106 Interviews. See One-to-one customer interviews; Solution concepts conducting. See Collaboration interviews; External interviews objectives, 106–107 participants, 106 types, 105 usage. See Internal interviews Inventory costing purposes, 198 Investment base, 79 contrast. See Cost distribution, definition, 63 opportunities, prioritization, 264 Inward focus, 100 Iterative approach, 87 Kahneman, Daniel, 25 Key Performance Indicator (KPI), 284–286 description, 284–286 relevance. See Customer Value Creation Knowledge transfer fact packs, 286–287 description, 286 Labor, cost, 89 Leaders (right people), discovery, 165, 178 Leadership. See Full-time day-to-day leadership quality, 263 Logistics capabilities, usage, 213 Long-term goals, balance. See Short-term goals Long-term profitable growth, 190 Long-term survival, 104 Long-term targets, achievement, 286 Long-term time horizons, usage, 131 Loss, aversion, 84 Low-cost production, 70

297 Macroeconomic data, collection, 235 Macro-environment, scan (conducting), 247 Macro-environmental trends, 247 Mail surveys, usage, 109 Management category, 263 non-financial terms, 179–180 Manufacturer fair share, 136 misinformation, 199 Manufacturing capacity quality, 176 Margin erosion, 183 Market exit costs, 159 Market Map, 242–243. See also Future state market map description, 242–243 relevance. See Customer Value Creation Marketing. See One-to-one marketing category, 262 mechanisms, 67 piece, launch, 271 plan, 90 products, linkage, 171–172 teams. See Strategic marketing teams Marketing Effectiveness Scorecard, 175 Markets access, 69–70 accounts, relationship, 167 attractiveness, 93 definition, 38 footprint, expansion, 228–230 growth. See Target market growth maturity, 251 need, 93 offerings, identification, 268 penetration, cost, 232 requirements, business strengths/weaknesses (identification), 264 research, 108 conducting, 259 revenue creation, 165, 171–173 growth. See Emerging market revenue growth segment, share capture, 233–234, 238–240 segmentation criteria, 252 segmentation maps description, 252 relevance. See Customer Value Creation share, collection, 227 structure, 157 validation, 259

298 verification, 107–109, 182 wallet, 212 Markets of One, 70 Materials, cost, 89 Mathematics, value modeling (relationship), 117–118 Matrices, usage, 244 Media Planning, 66–67 Misinterpretation, cause, 267 Money connotation, 76 definition, 38 Multi-actor process, 121 Multinational chemical company, cost/profit contrast (case study), 81–84 Multiple participants, impact, 71–72

INDEX

National borders, expansion, 236 New Product Development (NPD) process, 171–172 Newspaper inserts, 66 amount, 67 Nonfinancial information, 279 NPD. See New Product Development NPV, 176 Number of customers, 56–58, 198, 227–240 combination, 51 discovery, 60–61 growth targets, 145 methodology, 226–240

Order quantities, 200 Organization category, 263 importance, 18–19 know-how, embedding, 18–19 objectives/resources, 232 Organizational model, impact, 218–219 Organizational space, creation, 19 Original Equipment Manufacturer (OEM), 83 total cost, 82 Output measure, 177 Outside-in approach. See Decision making behavioral economics, 74 concept, 30 confidence level, 182 definitions, 32 drive, 183–184 importance, 26–27 meanings, 23 mindset, 86–87 origination, 24–32 scientific principles, 25 summarization, 33–34 Outside-in perspective, 5, 23, 25, 241 adoption, impedance, 29 collection, 107–108 reasons, 26–29 Overconfidence, 149 bias, 26–27

Objective attributes, incorporation ability, 270 OE. See Operational Excellence OEM. See Original Equipment Manufacturer One-to-one customer interviews, 109 One-to-one interviews, 109 One-to-one marketing, 70 Operating process, alignment, 155 Operational data, 234 Operational Excellence (OE), 3, 4, 193 focus, 4 Operational improvements, 29 Operational outlook, 24, 29 Operations category, 262 improvement, internal focus, 33–34 Opportunity costs. See Assets determination. See Revenue identification. See Improvement opportunities map. See Problem Opportunity Map prioritization. See Investment qualitative measure, 95 value potential, 95–96 Optimum value, 155

PAEC. See Product access experience and cost Participants. See Interviews identification, 63 impact. See Multiple participants usage, 108, 271 Partnerships, establishment, 32 Pepsi/Coca-Cola contrast, case study, 34–35 Performance expectations, 286 Permission to serve, 93 assessment, 268 boundary. See Customers discussion, 104 objective, 105 PEST. See Political trends Economic trends Social trends Technological trends Pilot testing description, 284 relevance. See Customer Value Creation P&L. See Profit and Loss Platinum Belts, 19 Political data, collection, 235 Political trends, 247 Political trends Economic trends Social trends Technological trends (PEST), 247

Index Polyethylene manufacturers, example, 220 Porter, Michael, 197 Porter’s Five Forces, 81 Portfolios. See Balanced portfolio; Corporate portfolio; Self-funding portfolio management tools, 276 maps, 276–278 description, 276 relevance. See Customer Value Creation review/justification. See Businesses sale, avoidance, 191 Post-sales support, requirements (increase), 200 Power, shift. See Producers Prediction, contrast. See Business case PreMedia, 231 services providers, 121 Preparation, 108 Price elasticity analysis, 272 description, 272 relevance. See Customer Value Creation leverage, 154–155 waterfall, reduction, 60 Price-based selling approach, 161 Price-performance mismatches, 234 Pricing. See Value-based pricing analysis. See High-level pricing analysis attainment index, 176 benefits, 101 strategists, documentation/analysis, 159 strategy, cross-functional approach, 160 types, 156–157 value-based approach, 156 Primary data collection, 247 Printing company collaboration, 88 insert example, 67–68 Problem Opportunity Map description, 273 relevance. See Customer Value Creation Problem-solving toolbox, creation, 17 Process costs, definition. See Customers dimension, responsibilities, 170 efficiency, 251 responsibility, 170–171 Process-based mentality, 3 Procurement agent, 41 Producer-driven demand chain, 72–73 Producers, power shift, 73 Product access experience and cost (PAEC), 6, 126 accumulation, 140 attributes, 44, 194, 238 gap, identification, 233

299 elements, 99 framework, 103 function, 114 impact, 129 maximization, 140 translation, 222 value drivers, 228 quantification, 153 variables, 115 Production skills, firm-wide consolidation, 266 Products assessment, 32 attributes, 41–42, 100, 233 improvement, 222–224 refinement, 233–234, 238–240 combinations, showing, 271 consumption dollars, estimation, 219 identification. See Customer segment contrast. See Solutions cost, 207. See also Customers aggregation, 198 design, 100 development, 90 tools, 146 differentiation, 160 strengths/weaknesses, 251 drivers, 238–239 features/functions, 41 launch, 271 linkage. See Marketing marketing, 211 number, increase, 200 performance, 41 studies, conducting, 268 revenue creation, 165, 171–172 sales, integration, 43 segment, 89 variety, 224 Product/service offering, value, 195 Profit accumulation, 258 contrast. See Cost distribution, definition, 63 growth targets, 145 increase, 78 potential, optimization, 195 Profit and Loss (P&L), 164, 169 Profitability, 263. See also Customer profitability achievement. See Break-even profitability analysis. See Customer Profitability Analysis distribution, 53 enhancement. See Customers variance, 53

300 Profitable growth opportunities, 134–135 Project charter creation, 185–186 description, 280 relevance. See Customer Value Creation sections, 280 Project orientation. See Growth Project plan/schedule, 282–284 description, 282–284 relevance. See Customer Value Creation Psychographic segment, 252 Public opinion, strengths/weaknesses, 251 Pull concepts, 91–92 Push concepts, 91–92 Qualitative descriptions, 109 Qualitative Value Chain analysis, 258 description, 258 relevance. See Customer Value Creation Quality focus, 14 impact, 143–144 mindset, 16 requirements, 19 strengths/weaknesses, 251 Quantification. See Value quantification Quantitative descriptions, 109 Quantitative research methods, usage, 270 Quantitative rigor, 86 leverage, 3 Quantitative/qualitative measurement data, availability, 286 Question marks, category, 244 Questions, asking (tendency), 28 RAM. See Responsibility Assignment Matrix R&D. See Research and development Recall. See Selective recall Regions, profitability, 209 Relationships establishment, 32 support requirements, 209 Replenishment, waiting time, 224 Research and development (R&D), 16, 41, 90, 262 efforts, 83, 88 people, 106 staff, 214 Resource drivers definition, 205 identification, 203 Resource pools accounts chart, mapping, 202 definition, 202

INDEX Resources availability, 93 mapping. See Activities prioritization, 2 scarcity, 14 strengths/weaknesses, 251 Response rates, 118 Responsibility Assignment Matrix (RAM) description, 282 relevance. See Customer Value Creation Results, measurement. See Growth Retail insert products, direct/indirect spend, 215 Retailers, 66. See also Cost-focused retailers budget establishment, 67 problems, alignment, 99 Return on assets (ROA), decline, 80 Return on investment (ROI), 182, 211, 223, 258 improvement, 106 requirement, 160 Return on net assets (RONA), 244 Returns decrease, 223 measurement, convention. See Companies Revenue. See Customers creation. See Customers; Markets; Products opportunities, determination, 267 decline, 65 dollars, estimation, 219 drivers, 106, 118–120 calculation, example, 119–120 equations, 118 growth. See Emerging market revenue growth Right people. See Leaders Risks, 280 focus, 265 minimization, 237 ROA. See Return on assets ROI. See Return on investment RONA. See Return on net assets Russo, J. Edward, 26 Sales, 262 channels, development, 182 costs, 209 generation, focus, 30 Samuelson, William, 27 SAS, usage, 270, 271 Scenario analysis capability, 122 support, 123, 125 Scenario-based strategic planning efforts, support, 248

Index Scorecards, 284–286 description, 284–286 relevance. See Customer Value Creation Sculley, John, 34–35 Secondary data collection, 247 Securities, risk, 27 Segment attractiveness, 231 construction. See Customers growth, 232 selection. See Companies size, 232 stability, 252 Segmentation conducting. See Value-based segmentation criteria, 252 effectiveness, 110 improvement. See Customers maps. See Markets success, requirements, 252 Selective recall, 28 Self-funding portfolio, 190–191 Senior executives, role. See Customers Senior management, involvement, 177–179 Sensitivity analysis, 114, 123–125 Services assessment, 32 consumption, identification. See Customer segment differentiation, 160 offerings, 242 performance studies, conducting, 268 Serving cost. See Customers Sessions quality, 108 success, 98 Share, growth targets, 145 Share of Wallet, 176, 210–227 combination, 51 consideration, 56–57 definition. See Current share of wallet dimension, 55–56 expansion goals, 274 increase, benefits, 211 methodology, 211–227 percent, 176, 181 Share of wallet, 176, 198. See also Customers dimension, growth, 128 increase, 146 inflation, 217 Shareholders, return (maximization), 1 Shoemaker, Paul J.H., 26 Short-term goals, long-term goals (balance), 190–192

301 Short-term time horizons, usage, 131 Should be condition, 7 discussion, 58–60 state, development, 136 Should be cube representation, 8 usage, reasons. See Growth Six Sigma, 4–5, 13 alignment, 19–20 development, 14–15 evolution, 14–15 generation, 14 implementation, 18–19 industrial marketing, 20–21 leverage process, CVC (impact), 15–18 movement, 20 practitioners, 15 summary, 193 usage, 17 Social trends, 247 Solution Concepts, 85 collection, 87–89 customer input, collection, 104 gap identification, 107 identification. See Target solution concepts internal sources, 89–91 interview, 105–107 prioritization. See Internal solution concepts ranking, 104 review/ranking, 107 support, 105 transition, 86 validation, 87 value delivery, 116 distribution, 138, 140 Solution Idea Inventory, 274–276 description, 274 relevance. See Customer Value Creation Solutions applicability, 144 bridge, creation, 52 complexity, 93 creation/investment, style guide, 52 discovery/creation, importance, 129–130 portfolio, 140 prioritization, 92 power, case study. See Talking solutions products, contrast, 146–147 quantification, 125–126 selling, responsibility, 161 targeting, 24 valuation, 113 challenge, 115

302 SPSS, usage, 270, 271 Stars, category, 244 State description, 182 State market map. See Future state market map State value, 182 Statistical software packages, usage, 270, 271 Status quo, 149 bias, 27 measurement, 4 Steering team. See Cross-functional steering team chairing, 178–179 respect, 189 usage, 186–189 Strategic decisions, 265 Strategic Implication Matrix, 264 Strategic marketing teams, 172–173 Strategic mistakes, 28 Strategic trend, enthusiasm, 28 Strategy alignment, 92, 199, 263 contribution, 107 implementation, 242 Strengths Weaknesses Opportunities and Threats (SWOT) analysis, 81, 241, 251–252 description, 251 relevance. See Customer Value Creation Subjective attributes, incorporation ability, 270 Substitute products/services, threat, 248 Success chances, evaluation, 236–238 factor analysis. See Critical success factors organization, 165–173 probability, 93–94 Suppliers, bargaining power, 248 Supply, definition, 38 Supply chain contrast, case study. See Demand chain efforts, 68 emphasis, 31 perspective, 67 strategies, 224–225 viewpoint, 66 Supply-oriented focus, customer-oriented focus (contrast), 30 Support cost, 209 Support-provided post delivery, 225 Surgical Strike Team, 173 Surveys design, 230 usage, 109. See also Mail surveys; Telephone surveys; Web-based surveys SVP Advertising, 96–99

INDEX Switching costs, 225. See also Customers SWOT. See Strengths Weaknesses Opportunities and Threats Systems diagram. See Complex systems diagram economics, change, 79–80 viewpoint, 76–77 Talking solutions (power), case study, 96–99 Target audiences, defining, 232 Target customer percent. See Total revenue profit growth, 175 Target market growth, 175 Target solution concepts, identification, 87–96 Team advice, request, 189 burnout, 192 description, 280 members. See Full-time team members Technical gap, 93 Technological trends, 247 Technology firm-wide consolidation, 266 infrastructure, build-out, 31 Telephone surveys, usage, 109 Third-party information providers, 30 Time to breakdown, 93 Time to breakeven, 93 Timeline, 185 description, 280 Total Quality movement, 15 Total revenue, target customer percent, 175 Training achievement index, 177 Training-provided post delivery, 225 Transactions number, maximization, 211 type, 160 Trend verification efforts, 248 True Matrix, 169 User interface, 122–123 User-friendly interface, 122 Value. See Customer value; Optimum value analysis, 45, 88 articulation, financial perspective, 179–183 attributes, 100–102 capture, 2, 39 contribution, 106 definition, 37–41 delivery, 39, 155, 157–158 levers, 211 demonstration, 191–192

303

Index distribution. See Solution Concepts elements, understanding, 40 emphasis, 86 exchange, 39, 153 fair share, distribution process, 138 focus, 3 gap bridging, 268 defining, 267–268 identification, 39 impact, 143–144 key terms, definitions, 38 management, understanding, 102 maximum amount, 127 modeling, relationship. See Mathematics models construction. See Interactive value model testing, co-development partner (involvement), 259 perspective, 6, 37 potential, 95. See also Opportunity proposition, 180–181. See also Customers requirements, 54 selling, responsibility, 161 variation. See Customer value Value chain analysis, 265. See also Qualitative Value Chain analysis detail, 213 coverage, focus, 231 definition, 258 development level, 265 Value creation initiatives, execution, 9 opportunities. See Demand Value Chain discovery, 143–144 sources, 88 Value drivers categories, 100–102 definition, 87, 99–103 dialog, 104 discovery, 258 model, usage, 116 formulas, definition, 114, 118–122

hypotheses, development, 87, 102–103, 258 identification, 247 model, creation, 114, 122–125 prioritization, 267 quantification formulas, 258 understanding, 110–111 validation, 103–111. See also Core value drivers Value quantification, 114–118, 259 algorithms, refinement, 259 approach, rationale, 116 model, 125 solutions, 125–126 Value-based considerations, 103 Value-based decision-making process, 149 Value-Based Decisions (VBDs), 9, 131 Value-based pricing, 156–157 implementation, 159–161 strategy, 158 Value-based segmentation, conducting, 230–231 Value-based understanding, development, 229–230 Variances, investigation, 286 Variation risk, reduction, 164 VBDs. See Value-Based Decisions Vendor management, 227 Vendor-managed inventory, 160 Voice of the customer (VOC), 91–92, 171 capture, 5 Wallet. See Share of Wallet components, customer segment definition, 215–216 Wal-Mart, 224 Waste management company, example, 89 Weak Matrix, 170 Web-based surveys, usage, 109 Welch, Jack, 195, 215 Whale curve, depiction, 175 Work, structuring. See Growth Zeckhauser, Richard, 27