186 Guffey and Loewy, Essentials of Business Communication, 12th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 186 Guffey and Loewy, Essentials of Business Communication, 12th Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER

Creating Advantage: Customer Value Leadership

Price is what you pay. Value is what you get.

—Warren Buffett

Strategy 101 is about choices: You can't be all things to all people.

—Michael Porter, HBS professor, founder of The Monitor Group

Ever since Morton's put a little girl in a yellow slicker and declared, “When it rains, it pours,” no advertising person worth his or her salt has had any excuse to think of a product as having parity with anything.

—Malcolm MacDougal, Jordan Case McGrath & Taylor

Our attention now shifts from strategic market analysis to the development of strategy.

• What value will the firm offer and in what product markets will it compete?

• How will it compete, and what assets and competencies will be important to its sustained competitive advantage?

• Will it lead or follow? • How will it develop strong customers and brands, and how

will these assets be leveraged over time to grow the business? What investments and disinvestments should be made to improve company success over time?

ALTERNATIVE VALUE PROPOSITIONS

• Companies choose from a variety of ways to offer value to customers.

• Look at any market and you will observe an array of different types of offerings that are more or less attractive to different types of customers.

• This is a sign of a healthy marketplace.

ALTERNATIVE VALUE PROPOSITIONS

A closer look reveals a fairly common set of different types of customers and value propositions across markets.

Three broad groupings exist:

1. companies that compete on performance value 2. companies that compete on price value 3. companies that compete on relational value

Performance Value

• For performance value, the value proposition is all about having the best product or service offering, usually at a price premium.

• Customers who buy these products value this exceptional quality and are willing to pay for it.

• To compete on performance value, the company must ensure that its products or services exceed customer expectations on valued performance attributes or benefits.

• There are 5 key types of performance value 1. Functional 2. Innovation 3. Design and Fashion 4. Service 5. Social Responsibility

1. Functional Quality

• This is the most basic and straightforward type of quality—the product performs its basic function extremely well.

• The product works better or lasts longer than competitors, and customers are willing to pay for this type of quality.

• By producing a product that performs its basic function extremely well, a company can charge higher prices.

2. Innovation Quality

• This type of quality focuses on offering novel sources of value that are not currently available in the marketplace.

• Companies such as Medtronic, 23andMe, and Tesla qualify.

3. Design and Fashion Quality

• The focus here is on an outstanding aesthetic or style.

• Hermès Birkin handbag • exotic leathers • a goat-skin lining that matches the color of the outside

of the bag • hardware plated in gold or palladium to prevent

tarnishing. • Limited amounts handmade in France by expert artisans • $11,550 – $150,000

• The design and exclusivity communicate a sense of fashion and status.

• The limited number of Birkins are made each year drive up prices.

4. Service Quality

• Performance value can also be achieved through service quality— which is usually a collection of intangible and tangible sources of value.

• Consider the exceptional service of Singapore Airlines. With Ferragamo toiletries, Givenchy blankets, pillows, and pajamas, meals like Lobster Thermidor, suite cabins on some planes, tuck-in service, and exceptionally polite and kind flight attendants, it is no wonder the airline was named the best international airline in the world.

• In general, service quality is based in large part on the perceived competence, responsiveness, and empathy of the people with whom customers interact.

5. Social Responsibility Quality

Here the focus is on developing products and services that contribute to larger societal outcomes.

“We take from nature, so we must respect and preserve it.” Doing better to safeguard the future just isn’t negotiable. We’ve designed our packaging to be recyclable, powered our facilities with renewable electricity, and promised to keep 1.5 million pounds of plastic out of our oceans—and that’s just the tip of the iceberg.

At Subaru, we feel it is our corporate responsibility to show love and respect to all who interact with us. We strive to empower all members of our family – owners, employees,

the communities we serve, and our industry at large – to grow and share their own positive impact.

We do this by living our Love Promise, through our annual Share the Love® event, by partnering with organizations that are building up our communities, by holding

ourselves to the absolute highest quality and safety standards as a car manufacturer, and by reflecting on our practices often to identify ways we can grow and improve the lives and world around us. From our retailers volunteering in their communities across the

country to our nonprofit partnerships here at home in Camden, New Jersey, we’re committed to the Subaru Love Promise.

Price Value

• In nearly every market, from appliances to economy sedans to toothpaste to booksellers to brokerage services, there will be a customer segment that is motivated by price. • Even in high-end markets such as luxury sports sedans,

some brands (e.g., Acura) will stake out a value position. • During recessionary times, the “value segment” can

become especially large. • These companies do not compete on quality or innovation. • They don’t cultivate close relationships with their

customers • they provide reliable products or services positioned in

the middle of the market space at the best price. • The best price is seldom the “cheapest,” but offers the

lowest total life cycle cost to the customer.

Price Value

• Vanguard Group, IKEA, Aldi and Walmart work on all the factors that customers consider when comparing total cost, such as

(1) product reliability that lowers further costs of ownership by avoiding repairs and down-time

(2) reliable service that reduces annoyance and uncertainty about delivery or reliability, and

(3) PRICE PAID IS MORE IMPORTANT THAN convenience and availability.

• How to do it? • highly disciplined cost management • superior pricing acumen

Disciplined Cost Management • These firms sell high volumes of standard products to gain the cost

savings from economies of scale. • They gain efficiencies by converting their large volumes into

experience curve cost-savings benefits. • Scale is not enough; further discipline is needed to limit variety and

avoid product line proliferation. • Minimize every element of overhead and installing a frugal culture

• Simple • Procedures are highly standardized • Tight cost controls are in place.

All firms need cost controls to keep costs in line, but companies competing on price value should be more thorough, rigorous, and less accepting of cost variances.

Superior Pricing Acumen

• To be able to offer the best price, a company competing on price must have a well-defined pricing capability and deep insights into the price sensitivity and behavior of its target segment.

• Progressive became one of the most profitable auto insurance companies in the United States. • Auto insurance is a required but not a desirable purchase • customers are highly price sensitive

• premium is more important than service benefits

Superior Pricing Acumen

• Progressive employs a superior data mining and analysis capability to accurately assess the risk—and thus the expected cost—of each customer.

• It then uses highly targeted pricing schemes to attract profitable customers and discourage unprofitable ones.

• It is able to find customers who competitors are systematically over- charging and then undercut these prices.

• This strategy has required a long-term investment to create massive data archives on customer characteristics and behavior that competitors are so far unable to match.

• Progressive uses sophisticated algorithms to extract insights from its data, such as getting a ticket for “failure to yield” warrants a higher premium increase than does getting a ticket for “speeding.”

Relational Value • Companies focusing on relational value

are unlikely to offer the lowest price or the latest performance features.

• These companies offer their customers a more customized set of solutions in a variety of ways depending on the market. • customer intimacy and

personalization • customer collaboration

Relational Value Companies competing on relational value…

1. their relationships with their best customers are tight, with mutual trust based on shared understanding and commitments.

2. they have broadened their offerings far beyond their core product to include customer information and training, complementary products, support services, and financing as required.

3. their customers think they are getting offerings that have been tailored to their needs. It may be fully customized or simply personalized – This is not the “one size fits all” approach of price value.

Relational Value • These common features conceal huge differences in how

relational value is delivered in different markets. • Customer relationship management (CRM) approaches are

used by firms like Fidelity Investments that serve mass markets with millions of customers.

• Comprehensive solution management approaches are applied by firms like Rolls-Royce when complex systems are sold to a small number of very valuable customers. • Many markets use some of each approach.

Customer Relationship Management • The essence of CRM is customizing products and services for each

particular customer. • It is a cross-functional process involving a continuing dialogue with

customers, managing across all customer touch points, and offering personalized treatment for the most valuable customers.

• These firms harness digital technologies to cost-effectively have dialogues with customers and gain a comprehensive view of each customer, including their profitability. • Example – Fidelity Investments repositioned itself with a strategy

of providing affluent investors with credible advice and investment solutions tailored to the individual investor's situation and delivered with exceptional service to meet specific needs.

• This required careful identification of customer segments to nurture.

Comprehensive Solution Management • Solutions are bundles of products and related services that create

value greater than the sum of their parts. • To offer a real solution, and not just a repackaging of existing

products and services, four criteria must be met:

1. Each solution is co-created with customers. 2. It is therefore tailored to each customer. 3. The relationship between customer and supplier is unusually

intimate. 4. Suppliers accept some of the risk through performance-based or

risk-based contracts.

Comprehensive Solution Management • Like CRM best practices, the aim is to form a one-to-one

learning relationship – but much deeper and broader than those enabled by CRM with social and information connections across many levels and functions of each partner organization.

• This is only feasible with high-value, long-term customers who warrant sizeable investments of time and energy and are also willing to make reciprocal commitments.

• Customers who are partners can gain from such intimate relationships in several ways. • Overall costs may be lower and the quality higher when

interacting with a single supplier for multiple activities. • They may see benefits from superior performance

through preferred access to the latest technology. Their risks may be reduced by sharing them with the supplier.

CUSTOMER VALUE LEADERSHIP

• A value proposition isn’t everything for competing on customer value

• True customer value leaders work to stand out on one source of value. • Toms Shoes stands out on social value—while

performing at least at parity on other important sources of value. The shoes perform the basic functions of footwear, use reasonable quality materials, and are sold at prices similar to other types of casual shoes (despite giving away one pair).

CUSTOMER VALUE LEADERSHIP

• To understand this approach to value, let’s look at the 3 general types of value that customers use when making choices among competing alternatives of bottled water.

• Will their bottled water be a premium offering such as Evian or Gerolsteiner, a standard option in a Dansani or Aquafina offering by The Coca Cola Company and PepsiCo, or a bottled water subscription service brought to customer's homes from Endless Waters or Crystal Springs?

• In the minds of prospective customers, each of these water brands has a position that is above, below, or at parity on each vector.

CUSTOMER VALUE LEADERSHIP

• The Three Value Vectors • Customers judge the relative positions of the offerings in

their consideration set—the set of offerings from among which they will select.

• Customers weight the vectors according to what is most important to them— price value, performance or relational value.

• What brands end up in the consideration set for comparison can, of course, be offerings from same category and might include brands in related categories that fill the same need.

Parity Performance

• Parity is a customer-driven concept. • The question is not whether there is an actual difference between

competitors but whether customers perceive a meaningful difference.

• Parity is the level of performance that must be met if customers are to judge a firm's offering as credible.

• This parity level is more than just the minimum requirements • Moderate and high levels of parity are more meaningful. • The arbiter is always the customer, including customers who buy

from the firm now, those who have never bought from the firm, and those who may have stopped buying from the firm.

Parity Performance

1. Which alternatives are in the customer's consideration set? • Neiman Marcus isn’t competing with Dollar General.

2. How do the firm's offerings compare to competitors • One way to assess parity is to ask a sample of customers to

rate the firms or brands on key features and benefits. 3. When competitive alternatives lack meaningful differentiation, the

conversation between buyers and sellers usually deteriorates to a negotiation about price.

• The resulting downward pressure on margins means that few firms have profits that exceed their cost of capital.

Points of Parity, Points of Difference

• Meeting customers' basic expectations keeps an offering in the does not lead to a high probability of purchase.

• Chances increase when the offering has a point of difference on one vector while measuring up to basic expectations on the other two.

Points of Parity, Points of Difference • Few markets are as undifferentiated as refined

sugar! • Brand names are weak • Purchasing decisions based solely on price and

delivery terms. • A relational value strategy based on partnering

to manage the customer's total requirement.

Evolving Value Propositions

• As growth slows, competitive positioning intensifies

• Strategies of incumbents start to converge and accelerate.

• Herd mentality among incumbents leads to continuous jockeying to reestablish “points of parity”

• The degree of perceived differentiation steadily diminishes due to the relentless process of imitation.

Evolving Value Propositions

• Keeping pace with rivals in a market is needed to stay relevant.

• Falling noticeably behind on any one of the three value vectors erodes the overall customer value position.

• Effect of everyone keeping pace 1. performance improves 2. real prices drop 3. service is better

• Parity becomes an escalating target.

Evolving Value Propositions

• As parity advances on all three vectors, companies have to spend more just to stay in the game.

• Well-informed customers are more willing to play one competitor against another.

• As customers' expectations about acceptable performance on each attribute rise, they are less willing to accept below parity performance on any vector.

Evolving Value Propositions

• These pressures require firms to pay attention to all three value vectors, not just the value vector they seek value leadership on.

• Performance value leaders can't allow prices and costs to be badly out of line or their service to be viewed as unacceptably poor. If they do, such leaders will be forced to offset the deficiencies in the total value of their offering by lowering prices.

MANAGING FOR CUSTOMER VALUE LEADERSHIP • How does a company achieve and maintain a position of

customer value leadership? • Three steps are important…

1. selecting a focus and not trying to be all things to all customers

2. aligning the business model 3. creating strategic synergies when possible.

Selecting a Focus and Making Tradeoffs • Customer value leaders don't try to straddle multiple value

vectors. They accept the familiar adage “you can't be all things to all people.”

• Many don't want to make choices that limit the markets they can serve for 2 reasons… 1. Both customers and employees are likely to be confused about

the positioning of the firm. The brand message is murky, the selling appeals lack consistency and clarity, and the product or service bundle is a series of compromises

2. Such a strategy is not only tepid in its communication with the marketplace, but it is also vulnerable to attacks by more focused competitors.

Aligning the Business Mode

• If the value proposition is what the company offers to the target segment, then the business model is how the business profitably fulfills this promise.

• Effective business models are tightly synchronized to fit the value proposition—not the other way around!

• Good business models answer two enduring questions… 1. what is the value-creating system—what business

activities are necessary to create the value we promised our customers and who will perform them?

2. what is the value-capture system—how does the company make money while creating value for its customers?

The Value-Creating System

• all the activities the firm performs to create and deliver customer value, from basic inputs to create products and services to the channels used to sell, service, and distribute an offering.

• It represents firm choices of 1. which activities to perform 2. who performs them—whether it is the firm or a

partner.

The question of which activities to perform is essential. What activities are essential to create the value the company has promised the customer?

The Value-Creating System – Make, Buy or Ally

• A make strategy is the most expensive and should only be undertaken if the company has the right assets and competencies.

• A buy strategy is also expensive because the knowledge and skills have to be bought. However, the company now fully controls these activities—the challenge is to manage the integration with the new company.

• An ally strategy is the least expensive, but the company also encounters the costs and challenges of managing the partnership to meet its objectives.

Value-Capture Mechanisms • The business model must also account for how

the firm will capture profits. • These value-capture mechanisms are the

“monetizing” part of any business model. • ways the firm gets paid • Fixed and variable costs

• These together determine the pattern of cash flows.

• There is a high degree of complementarity between value creation and value capture, as when Gillette subsidizes the price of razors to sell more profitable replacement blades.

Coordinating the Business Model Elements

• A business model is best designed as a whole, rather than the sum of isolated and separate decisions about pricing or outsourcing.

• To ensure the whole is greater than the sum of the parts, a company needs to:

1. Create a tightly bound relationship between the value proposition elements and the business model elements – This deep integration is often referred to as strategic complementarity because there is a positive synergistic effect between the two elements.

2. Remain immersed in deep customer and competitor insights. Many business models fail because they get out of sync with customer needs or are trumped by a competitor with a better solution.

Coordinating the Business Model Elements

3. Align metrics and incentives – These should be tailored to the business model to measure and reward key value-creating and value-capture activities.

• For example, Edward Jones should reward advisors for increasing their share of clients' investments as well as new client acquisition— both support its business model, which is based on a single advisor acquiring and developing strong and long relationships with clients in a local area.

Creating Strategic Synergies • Aligning business model elements is one critical synergy the

company should create. • There are many others that improve marketplace performance and

the bottom line. • Technologies in one business can become innovations in another.

• For example, Sony exploits synergy across its product line by showcasing them together in stores and even on Celebrity Cruise ships. The ships are outfitted with Sony entertainment products, including television screens, movie theaters, and sound equipment. The result is an integrated package that helps create and reinforce Sony's brand of providing high-quality and technologically advanced entertainment.

Creating Strategic Synergies

• Synergies can be generated by leveraging assets and competencies for multiple uses. • Amazon leverages its warehouses, ordering, and distribution

systems by allowing other firms to use its system. • Services such as Elastic Compute Cloud (EC2) provide developers

with computing capacity in the Amazon Web Services Cloud. • Amazon allows third parties, even competitors, to sell products

and use fulfillment services in the Amazon Marketplace.

• Disney leverages its brand and its connection to kids and family over a wide variety of owned and licensed offerings including Broadway shows and cruise ships.

Creating Strategic Synergies

• Companies should seek synergies such as these when creating its strategy.

• Leveraging existing assets, competencies, and offerings generates more value for the company.

• Synergies are also important because they make it harder for competitors to imitate the company.

• The scale and scope of strategy that synergy is built on cannot be easily copied by rivals.

• Good business models answer two enduring questions. 1. what is the value-creating system—what business activities

are necessary to create the value we promised our customers and who will perform them?

2. What is the value-capture system—how does the company make money while creating value for its customers?

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