Business Marketing: Understand What Customers Value

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Business Marketing: Understand What Customers Value

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HOW DO YOU DEFINE VALUE? CAN YOU MEASURE IT? What are your products and services actually worth to customers? Remarkably few suppliers in business markets are able to answer those questions. And yet the abihty to pinpoint the value of a product or service for one's customer has never been more important.

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  1. IDEAS AT WORK Gauging-and communicating- what your products and services are worth to customers has never been more important. "Everything is worth what its purchaser will pay for it.' Publilius Syrus, first century B.C. H OW DO YOU DEFINE VALUE? CAN YOU MEASURE IT? What are your products and services actually worth to Business customers? Remarkably few suppliers in business markets are able to answer those questions. And yet the abihty to pinpoint the value of a product or service for one's customer has never been more important. Customers - especially Marketing: those whose costs are driven by what they purchase-in- creasingly look to purchasing as a way to increase profits and therefore pressure suppliers to reduce prices. To persuade customers to focus on total costs rather than simply on ac- Understand quisition price, a supplier must have an accurate under- standing of what its customers value, and would value. Put yourself, for a moment, in the role of a commercial What grower. Two suppliers are trying to sell you mulch film: thin plastic sheets that are placed on the ground to hold in mois- ture, prevent weed growth, and allow melons and vegetables Customers to be planted closer together. The first supplier comes to you with this proposition: "Trust us-our mulch Him will lower your costs. We'll provide superior value for your money." The second supplier says, "We can lower the cost of your mulch Value film by $ 16.8 3 per acre," and offers to show you exactly how. Which proposition would you find more convincing? fames C, Anderson is the William L. Ford Distinguished Professor of Marketing and Wholesale Distribution and by James C. Anderson ami a professor of behavioral science in management at North- western University's J.L. Kellogg Graduate School of Mdn- James A. Narus agement in Evanston. Illinois. He is also the AT&)T ISBM Research Fellow at the Institute for the Study of Business Markets. located at Pennsylvania State University, fames A. Narus is an associate professor of management at the Babcock Graduate School of Management at Wake Forest University in Charlotte, North Carolina. Their book, Busi- ness Market Management: Understanding, Creating, and Delivering Value, has iust been published by Prentice Hall. HARVARD BUSINESS REVIEW November-December 1998
  2. IDEAS AT WORK UNDERSTAND WHAT CUSTOMERS VALUE Many customers, like the com- mists may care about "utils," but we some context. Even when no compa- mereial grower, understand their have never met a manager who did! rable market offerings exist, there is own requirements but do not neees- Second, by benefits, we mean net always a competitive alternative. In sarily know what fulfilling those benefits, in which any eosts a cus- business markets, one competitive requirements is worth to them. To tomer incurs in obtaining the de- alternative may be that the eustomer suppliers, this lack of understanding sired benefits, except for purchase decides to make the product itself is an opportunity to demonstrate price, are ineluded. Third, value is rather than purchase it. persuasively the value of what they what a eustomer gets in exchange for We can capture the essence of this provide and to help customers make the price it pays. We see a market of- definition of value in the following smarter purchasing decisions. fering as having two elemental char- equation: A small but growing number of acteristics: its value and its price. Thus raising or lowering the price of j Pricej) > (Valueg - Priceg) suppliers in business markets draw on their knowledge of what cus- a market offering does not change the g and PricCg are the value and tomers value, and would value, to value that sueh an offering provides price of the supplier's market offer- gain marketplace advantages over to a customer. Rather, it changes the ing, and ValuCjj and Price^ are the their less knowledgeable competi- customer's incentive to purchase value and price of the next best alter- tors. These suppliers have developed that market offering, finally, consid- native. The difference between value what we call customer value models, erations of value take place within and price equals the customer's in- which are data-driven representations of the worth, in monetary terms, of what the supplier is doing or could do for its customers. Using Customer Focus Groups Customer value models are based on assessments of the costs and ben- to Assess Value efits of a given market offering in a partieular eustomer application. De- Although field value assess- company conducted four focus pending on circumstances, such as ment-gathering data firsthand groups with itinerant Genera- availability of data and a customer's whenever possible-is the most tion X professionals, some of cooperation, a supplier might build common way to huild customer whom had six telephone num- a value model for an individual cus- value models, not all situations bers on their business cards. tomer or for a market segment, draw- lend themselves to it. Indeed, At the beginning of each focus ing on data gathered from several in some cases, the only way to group, the moderator demon- customers in that segment. obtain information for a value strated the service using a spe- Customer value models are not model is to rely on customer per- cially arranged prototype and easy to develop. But the experiences ceptions. The results of such as- then asked focus-group partici- of suppliers that have built and used sessments may not be as precise pants to write dtiwn their first them successfully suggest several as those calculated from field impressions of the service and guidelines that we believe will be value assessments; nonetheless, how much they would be will- useful to any company attempting they can be quite effective. Con- ing to pay for it per month. The to define and measure value for its sider a telecommunications participants then engaged in a eustomers. company that used focus groups discussion of the service, how to gain a better understanding they would most likely use it, A Common Definition of Value of the worth of an advanced in- and so on. At the conclusion of To measure value in practice, it is telligent network service called the approximately hour-long crucial to have a shared understand- single-number reach. discussion, the moderator asked ing of exactly what value is in busi- Single-number reach is de- the participants to write down ness markets. Before we go into any signed for people who want their interest m the service us- detail about building value models, callers to reach them easily, ing a ten-point scale and again, we need to provide a brief explana- even if they are not at a single how much they would be will- tion of what we mean by value. Value location or phone number dur- uig to pay for it per month. in business markets is the worth in ing the course of a day, Provided Although the company was monetary terms of the technical, eco- from a central office switeh, the interested in the actual mone- nomic, service, and social benefits a service allows a caller to seek tary amounts given at the begin- customer company receives in ex- the buyer of the service via a se- ning and at the end, xt was more change for the priee it pays for a mar- quence of programmed tele- interested in any pattern of dif- ket offering. We will elaborate on phone numbers. To determine ferences between the amounts. some aspects of this definition. the target market segment, the An ominous pattern would be First, we express value in monetary terms, such as dollars per unit, guilders per liter, or kroner per hour. Econo- 54 HARVARD BUSINESS REVIEW Novtrmber-December 1998
  3. UNDERSTAND WHAT CUSTOMERS VALUE IDEAS AT WORK centive to purchase. Simply put, the cases where field value assessments provide the resources to gather the equation conveys that the customer's are not feasible, it is possible to gain data at no charge to the customer incentive to purchase a supplier's a worthwhile understanding of and guarantee to share all findings. offering; must exceed its incentive to value through such methods as di- For most companies, the promise of pursue the next best alternative. rect and indirect survey questions, shared research findings among par- conjoint analysis, and focus groups, ticipating customers in an aggregated Building Customer Value Models all of which rely primarily on cus- or disguised manner is an irresistible Field value assessments (also known tomers' perceptions of the function- incentive because it allows them to by other names, such as value-in-use ality, performance, and worth of a benchmark. W.W. Crainger, a major or eost-in-use studies) are the most supplier's offering. (See the insert distributor of maintenance, repair, commonly used - and, we believe, the "Using Customer Focus Croups to and operating supplies in North most accurate-method for building Assess Value.") Below, we describe a America, offered both incentives for customer value models. Field value process for building a value model the 15 companies that participated assessments call for suppliers to using field value assessments. in its initial model-building effort. gather data about their customers Get started. Witht)ut a doubt, the Generate a comprehensive list of firsthand whenever possible. Clearly, most difficult customer value model value elements. Value elements are however, conducting such direct that a supplier will build is its first anything that affect the costs and research isn't always an option. In one. Indeed, gaining a comprehen- benefits of the offering in the cus- sive understanding of the value of tomer's business. These elements a market offering in a particular cus- may be technical, economic, service, tomer setting may appear monu- or social in nature and will vary in mentally difficult. But it can be done. their tangibility. How well a pigment The first step is putting together the disperses in a coating, for example, right kind of value research team. would be a technical element; provid- The team should include people ing a consolidated monthly invoice steep declines from the initial with product, field engineering, and rather than a separate invoice for amounts to the ending amounts, marketing experience, and two or each purchase would be an econom- indicating that the participants three forward-think ing salespeople. ic element; design assistance would were initially intrigued with the Having salespeople involved at the fall under the service heading; and service but, upon further con- start is particularly important. They ease of doing business with the sup- sideration, concluded that it know the customer and how the plier would be social. As it is generat- would not offer them much offering is used; they also know ing the list, the team should consider value. No significant change be- which customers might be willing the entire life cycle of the offering tween the initial amounts and to etx)peratf in value research. Sales- in question, from how the customer ending amounts would be a people who are part of a value assess- acquires and uses it to how the cus- preferable pattern, provided the ment initiative from the outset are tomer disposes of it when it is no specified amounts were suffi- also more likely to understand and longer needed. The list should cap- ciently large. The final pattern, appreciate it. They will, therefore, ture all the potential effects that do- considerable increases from the support the approach and can then ing business with a supplier might initial amounts to the ending persuasively relate their experiences have on the customer's business. amounts, would indicate that to others in the sales force. It's important to be as inclusive as when the participants thought Selecting the right market segment possible. Leaving out elements, par- about the service, they recog- to target is the next step. Because ticularly those tbat might make tbe nized a greater potential value. the supplier will need to conduct supplier's market offering k)ok unfa- That pattern would suggest the value assessments with at least two vorable next to the incumbent or crucial role of husuicss market- and perhaps up to a dozen customers next-best-altcrnative offering, will ing communications in convey- to build an initial value model, it's undermine the project's credibility. ing the value of using the ser- a good idea to start with a segment By identifying as many elements vice to prospective customers. in which the supplier has particu- as possible, the team will be able The company used the results larly close, collaborative relation- to gauge more accurately the differ- of the research to provide esti- ships with customers, extraordinary ences in functionality and perfor- mates of the service's worth to knowledge of how customers use mance its offering provides relative local telephone-service providers the offering in question, or relatively to the next best alternative. Broadly and It) show those providers an simple offerings. stated categories, such as the cost of approach for segmenting the Before approaching a customer, an hour of downtime in a customer's market, targeting customers, the team should think through what plant, may be easier to identify. But and positionuig the offering. it will need from the customer and they tend to leave out cost elements, what the customer will gain, aiid be producing less valid estimates of prepared to otfer an incentive. For worth. A bottle breaking in a filling example, the supplier might offer to continued on page s 8 HARVARD BUSINESS REVIEW Ntwcmber-December 1998 55
  4. IDEAS AT WORK UNDERSTAND WHAT CUSTOMERS VALUE line causes downtime, certainly, but the next step is obtaining initial esti- The value research team also it also generates costs in scrap, dis- mates for each element and finding needs to he creative in finding other cards, disposal, maintenance labor, out what each one is worth in mone- sources of information. Indepen- cleaning and sanitizing chemicals, tary terms. Sometimes, suppliers dent industry consultants or knowl- and so on, many of which tend to find it useful to gather data by plac- edgeable personnel within the sup- be buried in various plant-overhead ing a team member in a key func- plier company can be good sources accounts. tional area of the customer's organi- of initial estimates. San Diego-based Often, the value research team zation for a week or two in order to Qualcomm, a supplier of satellite- will have to make trade-offs between gain a better understanding of what based mobile communications sys- relying on a customer's perception of is actually being done and where tems for truck fleets, for example, things can go wrong dur- drew on the American Trucking ing the day. For example, Association's research studies to Frequentlyy the customer a supplier might have a team member work in provide ranges for some of the ele- ments in the value model it devel- doesnt know that it has the the customer's receiving oped for its OmniTRACS mobile communications system.When a department. To allay any data or information the concerns on the part of supplier provides a service that miti- the employee, customer gates the customer's risk, it can be supplier is lookingfor. management should tell useful to tap actuarial consultants to them that the person is estimate what the cost of the poten- there to help out and to learn. tial difficulty would be. what all the relevant elements are and actually observing firsthand the Frequently, the customer doesn't The ease with which the team can ways in which the supplier's offering know that it has the data or informa- establish monetary estimates for its affects the customer. The customer's tion the supplier is looking for. The value elements will vary. The value management may not have an accu- customer may think the information of social elements such as greater rate understanding of all the value does not exist. In fact, the kind of peace of mind, for example, is gener- elements associated with a particu- data that needs to be pulled together ally very difficult to express in mon- lar offering. Believing that this was in the analysis may reside on six or etary terms. In fact, most suppliers frequently the case, Alcoa Aerospace seven databases or systems in differ- do not even attempt to assign mone- developed a program in which the ent functional areas. tary amounts to social elements. In- company trained its salespeople in Sometimes, the only way to find stead, they put those elements aside field-value-assessment methods and the data is for team members to ask and discuss them with the customer then gave them an assignment in around until they come across the in a qualitative way after presenting which they had to comprehensively individual who knows where the in- quantitative results. Qualcomm docs chart all the steps a customer took in formation is. not assign monetary amounts to acquiring, converting, and disposing Focus groups made up of represen- many less-tangible elements but of an Alcoa offering. Interestingly, tatives from each functional area still includes them in its analysis as the program gave salespeople a rea- in a company can also be an effective "value placeholders." in this way, son to approach customers: to ask mechanism for uncovering data. The Qualcomm conveys to its customers them to cooperate in letting them Proaction Group, a Chicago-based that those elements are worth some- do their assignments. The promise consulting and strategy implemen- thing and leaves open the possibility of enhanced knowledge of their own tation company, recently conducted that a specific monetary amount businesses provided an incentive for four internal focus groups at a cus- might be ascertained in the future. those customers. tomer company for exactly that pur- In anyfieldvalue assessment, sup- Alcoa's initiative paid off. At the pose. To prepare themselves and the pliers will find that some assump- end of a two-month period, the sales- prospective focus-group participants, tions must be made in order to com- people got together and presented Proaetion consultants met individu- plete an analysis. These assumptions their findings to one another. The ally with each prospective partici- might be about the functionality presentations allowed participants to pant before the session, learning or performance a market offering learn from others' experiences and what the issues might be and gather- actually provides in the customer's to exchange ideas about various cus- ing some initial data. During the ses- specific setting, particularly for ele- tomers' situations and the potential sion, participants were asked what ments that are extraordinarily diffi- for future sales. The customers bene- kinds of information they thought cult or costly to measure. Or they fited because they learned about cost should be used in a value model and might be about the monetary worth and benefit elements they had previ- then where in the organization to of perceived or measured differences ously been unaware of-elements look for that information. The con- in functionality or performance that they could now factor into their own sultants discovered sources of data an offering provides in the customer's assessments of suppliers' proposals. in places that neither they nor the setting. It is critical for the supplier customer's management had previ- to be explicit about any assumptions Gather data. With a comprehen- ously identifi.ed. sive list of value elements in hand. it makes. If the customer doesn't 58 HARVARD BUSINESS REVIEW November-December 1998
  5. UNDERSTAND WHAT CUSTOMERS VALUE IDEAS AT WORK know how or why the team assigned member that people are generally Create value-based sales tools. a certain value to an element-or is better at making comparative judg- Suppliers can not only use value not encouraged to offer its own ratio- ments [more or less than) than ab- models to inform and guide their nale if it disagrees with the suppli- solute judgments [it's worth X\. In own decision making but also to er's estimates and then to join the other words, the supplier should pro- create persuasive sales tools. One supplier in researching a mutually vide the initial estimate and ask the common sales tool is a value case acceptable solution-the supplier's informants whether that element is history. Value ease histories are writ- credibility will be compromised. more or less valuable to them than ten accoxmts that document the cost Validate the model and under- the estimate.) savings or added value that a cus- stand variance in the estimates. Af- In conducting additional assess- tomer receives from its use of a ter building the initial value model, ments, the supplier will also learn supplier's market offering. Sonoco the supplier should validate it by how the value its offerings provide Products Company's protective conducting additional assessments varies across kinds of customers. The packaging division, for example, with other customers or potential supplier ean then build a database tracks the savings its customers gain customers in the market segment. that contains value estimates-and from implementing an offering it Conducting further assessments en- the individual customer characteris- calls total packaging solutions. ables the supplier to refine its value tics, whieh we call descriptors, that Rather than selling customers the estimates and to understand better might affect those estimates - from all more commonly marketed corrugat- how the value of its market offering participating companies. Looking at ed-cardboard packaging materials, varies across customers' applica- all of the data together, the supplier Sonoco offers packaging systems tions, eapabilities, and usage. that, it maintains, are stronger, can then determine which descrip- What's more, as the supplier con- tors have more impact than others lighter, and smaller. The major ele- ducts additional value assessments, on the value customers receive from ments in Sonoco's value model thus it will develop a greater understand- the offering in question. As a result, include savings from reduced prod- ing of where it needs to use firsthand the supplier can choose to pursue uct damage, packaging costs, ship- data and where it can rely on cus- those customers and prospective ping costs, and storage costs. When a tomers' perceptions. [In soliciting customers for which its offering will customer has used these "solutions" perceptions, the supplier should re- provide superior value. for a year, Sonoeo constructs a case The world's best in Barcelona "As I was reviewing some of the materials, I found mi^self fnillin'i ideas, models and learnings from various sessions and creating a new business idea or a new change model... I am confident that the knowledf^e I gained from lESE will continue to assist me." Silvia Dolena Prvjcct Manager. Hewlett Pnckuni. USA MIT Sloan McKinsey and University of Strategic New School of Company Michigan Management Programs Management ' 15uildinj;Strdtt'gic ' Global Program kn of Technology- in 1999 • Mjiiaf;L'iiK'nt in ihf Human Kesourct Management Capabilities and based Development Entrepreneurial Alij;tiing Infornwtiun Intellectual Capital ' Cldbal Pnigram for Companies Family Businesses Ifchnulogy and Management With (acuity frum ' Gaining Competitive De\'elt)pmcnt-Chin.i Stanford University Advantage Through (with CEIBS) Global!) Distributed Teams Fur information on lESE's internalional executive education, please contact: Mr, y p Director of International Executive Education lESE, InternatJonal Graduate School of Management Av. Pearson, 21 Barcelona 08034 Spain IIIIHIESE Tel: +34 93 253 4200/+34 93 253 4379 (direct) UNIVERSITY OF NAVARRA Fax:+34 93 253 4343/+34 93 253 4359 (direct) e mail: simpson®ieie,edu
  6. IDEAS AT WORK UNDERSTAND WHAT CUSTOMERS VALUE How BT Products Uses Value Models as Sales Tools BT Products, a suhsidiary of BT ity. The system helps the cus- very well; others do not. BT Prod- Industries Group, whieh is based tomer figure out, for example, the ucts' most senior salespeople work in Sweden, is a worldwide producer optimal aisle width that will ac- with the customers in doing the of warehouse trucks for inventory commodate the dimensions of a analysis. They even provide hands- handling. In 1993, the company counterbalance lift truck, and it on data collection as needed at the created BT Compass, a logistics- calculates the layout and equip- customer's facility. planning software system, to help ment requirements to meet peak- One of the advantages of using its eustomers improve their prof- hour needs. Compass is that it eombines ware- itability by lowering the total cost BT Products measures the actual house planning with an analysis of of the inventory-handling process. performance of its competitors' the kind and number of trucks The BT Compass system provides equipment, often buying the equip- needed to optimize warehouse per- the following: ment to test it. Thus it knows the formance. Recently, Birkenstock, • a full analysis of the customer's critical performance measures that the German shoe manufacturer, operational requirements, customers use to judge lift trucks. decided to build a new warehouse • a fast comparison of different BT Products also gathers informa- in Asbach, Germany. An in-house pallet handling and order- tion about the customers' individ- consultant responsible for the pro- pieking solutions, ual systems. Customers sometimes curement process for this new • optimum warehouse layout, provide functional specifications warehouse had proposed a layout • accurate calculations of and ask the lift truck supplier to that required three lift trueks to handling capacities, tell them the number and types of handle the pallet movements. By • complete analysis of projected trucks required. If the performance using Compass, BT Products was life-eyele costs. is not met, the selected supplier able to demonstrate how an alter- The BT Compass system has been has to provide additional trucks at native layout in conjunction with developed to work in seven lan- no cost to the customer. its high-performance trucks re- guages, and all inputs and outputs The data the customer must quired only two trueks-one less can be translated into any language enter into Compass requires some truck and one less operator. Accord- with a single keystroke. It displays eompetence on their part. To help ing to BT Products' managers, with- different layout options by using the customer gather tbe required out Compass, they would not have high-quality color graphics, and ail data, BT Produets has developed a been able to find this new solution plans can be printed quickly using one-page worksheet that pulls to- and provide the detailed perfor- a printer or plotter. gether the necessary input data. manee results for their trueks. In BT Produets uses the Compass (See the worksheet "The Informa- addition, they believed that they system when a customer is con- tion BT Products Gathers to Build would not have been able to con- templating a ehange in materials Customer Value Models.") Some vince Birkenstock management handling or is adding a new facil- customers know the required data tbat their solution was correct. study about the cost savings and re- the potential value of the offering to a development of new offerings. Inte- ports the findings to the customer. particular customer. (For an illustra- grating everything it has learned Sonoco maintains afileof these ease tion of how such a tool can be used, about value into its marketing ef- studies, which its salespeople draw see the insert "How BT Products forts, it can also gain new customers. on when making proposals to other Uses Value Models as Sales Tools,") Finally, it can better sustain eus- prospects. The studies persuasively tomer relationships by documenting convey the cost savings that the Putting an Understanding of its delivery of superior value over prospects themselves would likely Value to Use time and by discovering new ways realize. Suppliers ean use their understand- to update and reinvigorate those Value assessment can also become ing of value to strengthen perfor- relationships. a service that suppliers offer as part mance and create competitive advan- Managing Market Offerings. In the of a consultative selling approach. tage in several ways. For example, a article "Capturing the Value of Sup- For example, a supplier can develop supplier can use its knowledge to plementary Services" (HBR January- a spreadsheet software applieation tailor supplementary services, pro- February 1995), we argued that suppli- that salespeople ean use on-site grams, and systems in its current ers ean capitalize on the inevitable with a laptop computer to evaluate market offerings and to guide the variation in eustomers' requirements 60 HARVARD BUSINESS REVIEW November-December 1998
  7. UNDERSTAND WHAT CUSTOMERS VALUE IDEAS AT WORK The Information BT Products Gathers to Build Customer Value Models This chart represents the BT Compass value-assessment worksheet. It shows the parameters that affect the costs and benefits of the supplier's offering. Clearly, many of the I w l nnfr: •••ai !>••: elements listed won't be relevant in other industries, but they AtMM are central to assessing value for this company. *!n-. .... . ** '.' midon — t^imi: 1 MM mnim ifail- ' ^'a"et movement/da/ Number of shifts/day Working time/shift Double cycles in o/o 1 H«w mmhr IWIt lor uBItr w m 1 If1» of biRIi Irvtl [KdHBj wiTli 1 Tvp* c4 t m l«*il w b n i tnioJi 1 Max. utilization in 0^ ( .lk( 1 .i..1lll. . UBMrmuc Nth of cycles/transfer Fill irff • ' ' m Nn, at rjJwiWkUn naM channe, c WcqViflf hmc/ihili in huun time/cycle in se — - Pit^ linic^L-k l^lln"^',«m"«"" Kpuiul in m - ^-dO,,,,^,^^^^^^^ .[Li-hiunL iinc^/iiiikriinF l i t h « « l N^. .'.;"."-i'.'- !l! i'j'iT'i'i,.^,,,, 11, [k.n. • „ • 1.- . • D^t.n meters to that position • 'IimnHn'Ut •nrftrig (•".• i|j liriLJi. Ill IIIP.I ^0. of 90 degree curves iiiiBiMiiianiiH •1 p.-kint ..-III Battery capacity in Ah •BAnl lod imr R^'ocations in o^ (cranes)^ tnncltodmMVyar i * n within market segments and in- A company's ability to manage from wells routinely performed a crease their profitability by provid- flexible market offerings suceessfully field analytic monitoring service for inj; flexible market offerings. Doing rests on its understanding of the its customers to determine when, so entails construeting what we value each component of an offering and in what amounts, they should call naked solutions with options. creates as well as its associated cost. apply its products. A salesperson vis- Naked solutions consist of just An understanding of how eustomers iting one of the eompany's small, tbose product and service elements value those components-and what less sophisticated customers noticed that all customers within a market they cost the supplier to deliver-en- the reports staeked in a corner of the segment value. We said that suppli- ables suppliers to identify and elimi- production shed. When asked about ers should strive to sell naked solu- nate what we call value drains. These their usefulness, the customer tions at the lowest possible price are services that cost the supplier replied that he was not using the in- that will yield a profit. Then suppli- more to provide than they are worth formation at all and instead just had ers should "wrap" those solutions to the customers receiving them and the producer's truck driver pump a with options-specific product and that have no strategic significance. few gallons of the chemicals into service elements that some, hut not Consider this: A producer of each well whenever the truek came all, customers value. chemicals used in extracting oil hy. Learning this, the supplier offered HARVARD BUSINESS REVIEW November-December 1998 61
  8. IDEAS AT WORK UNDERSTAND WHAT CUSTOMERS VALUE Understanding Value: How W.W. Grainger and Its Customers Benefit W.W. Grainger distributes maintenance, repair, and told the Pharma managers, for instance, that some operating (MRO) supplies and related information to companies do not account for MRO supplies inventory the c
  9. UNDERSTAND WHAT CUSTOMERS VALUE IDEAS AT WORK mcnts. At Pharma Labs, GCS applied an activity- Pharma managers to at least one significant finding in based-costing approach to identify procurement costs the procurement area. It turned out that Pharma lah across all typical functional areas-purchasing, main- technicians played an unusually large role in the tenance, receiving, and accounts payable. These iden- procurement process, handling some routine purchas- tified costs were generally in line with costs tracked ing, maintaining detailed, handwritten logs of all in the GCS databases. transactions, receiving the items into inventory, and In any analysis, GCS attempts to use the customer's managing that inventory. The GCS value model electronic: data whenever possible. The team usually showed that Pharma Labs was spending 10% of its attempts to get one year's worth of data. Early on, the procurement costs-or the equivalent of nearly three case team makes a site visit to examine the customer's full-time positions-on lab technicians who could he data and to assess how accurate and complete they redeployed from this purchasing function to more are. In the case of Pharma Lahs, GCS analyzed two value-adding activities in their intended function. years' worth of purchasing and accounts payahle data, Pharma Labs eventually signed a supply agreement as well as six months of procurement card data. The with another company, which, in return, put one of its data provided GCS and Pharma with insights ahout people on site to manage this procurement process. the potential for consolidating the numher of products After GCS completes a haseline assessment, it then Pharma purchased regularly from various suppliers. tries to specify improvements that the customer can It also suggested htjw Pharma might consolidate its make in 6 to 12 months. It also works with the cus- purchases in return for lower prices and greater value- tomer to formulate changes in the MRO-supplies- adding services from its remaining suppliers. management strategy. At Pharma Lahs, as in most GCS engagements, the At Pharma, GCS identified at least $327,000 in total case team also had to do an invoice analysis ^actually cost savings on the $6.1 million Pharma was spend- inspecting past invoices to gather usahle data-to vali- ing yearly on MRO supplies, including the costs of date the electronic data and to provide additional line- acquirmg and managing them. These projected cost item product detail when available. The level of detail savings came ahout through consolidation of suppli- that the customer has is usually not adequate. The ers and product-spending reductions ($165,000), in- customer's system may contain only aggregated pur- ventory reduction ($72,000), and process improve- ehase-order information, showmg only how much was ments ($90,000). For example, GCS recommended paid in total. Complicating the task further, invoices that Pharma Labs dramatically consolidate its MRO themselves often have incomplete item descriptions supplies purchases. Pharma Labs agreed and initiated that make it difficult to determine exactly what was a national account agreement with Grainger in June purchased. 1997. In return, Grainger provided Pharma Lahs with The GCS team also found from its inventory analy- an on-site Grainger representative to manage the sis that Pharma Lahs had no records of the amount purchase and inventory processes at the company. of inventory on hand or its usage, Inventory levels This allowed a Pharma Labs maintenance technician were extremely high-the team later found that Phar- wbo had been spending 100% of his time purchasing ma had more than $i million worth of slow-moving MRO supplies to return to performing value-adding inventory-hut no actual record of this inventory maintenance activities. was maintained in a system to track and manage What were the ultimate results of Grainger's work the items. with Pharma Labs? In December 1997, GCS and Phar- The GGS case team supplemented its analyses hy ma Labs jointly conducted an audit of achieved cost interviewing the Pharma project team members. In savings, which were found to he $387,000 during the these interviews, GCS shared its preliminary findings, first six months. What's more, for the whole of 1997, tried to uncover anything that they might have over- W.W. Grainger sales to Pharma Labs increased seven- looked, and learned what the Pharma managers them- fold, from $50,000 to $350,000. Clearly, a better un- selves perceived to be potential areas of improvement. derstanding of value created substantial benefits for The interviews were, in fact, fruitful, alerting GGS and each company. HARVARD BUSINESS REVIEW November-December 1998
  10. IDEAS AT WORK UNDERSTAND WHAT CUSTOMERS VALUE to discontinue the service and, in use value assessments to determine of it or reconditioning it. Greif s value exchange, give the customer a 7% what improvements are worthwhile proposition - total-cost-based pack- per-gallon price reduction. The cus- and which ones have the highest aging-promises that its systems can tomer readily agreed, and the profit- priority. For example, the supplier significantly reduce a customer's ability of that account jumped from could ask managers in different func- total packaging costs. minus 6% to 32%! tional areas of customer companies How does Greif develop its propo- Rather thanfindingvalue drains by to evaluate potential improvements. sitions? First, a Greif strategic ac- chance, as in the example, suppliers One cbemieal pigment supplier count manager, together witb a can set out to detect them by using asked managers in its customer's representative from the customer, field value assessment in conjunction production and R&JD areas to perform builds a value model to understand with activity-based-costing analysis. a conjoint analysis for potential total costs. (Greif developed its cur- changes in its rent model based on information offering. Specif- from 20 major customers.) Key ele- Knowing that an improvement ically, the sup- ments include the eosts associated r • V. • • ^ ^ i plier wanted to with tracking and retrieving tbe know bow the drums, cleaning and maintaining in somefunctionality is important customer would them, testing and recertifying recy- value some near- cled drums, and all the associated does not tell a supplier if a term-aehievable paperwork. changes in tech- Greif has found that customers- customer is willing to payfor it. nical attributes, both existing and potential-can Identifying and eliminating value sueh as gloss or dispersibility. At readily assign monetary values to drains results in better allocation of the same time, the supplier asked the some elements but that other ele- resources and improved profitability. customer's general managers and ments are more difficult to pin down. Virtually always, the results more purchasing managers to consider For those elements that are harder than pay for the cost of doing the tbe potential value of ehanges in the to quantify, Greif takes its analysis to field-value-assessment research. products' commercial attrihutes, a deeper level. Consider the benefit Guiding the Development of New such as the supplier's delivery ser- of environmental stewardship. To or Improved Products and Services. vice and payment terms. Although get a handle on tbe value of that Most market research that is con- thefindingslargely conformed to the element, Greif determines wbat per- ducted to provide an understanding supplier's management expectations, centage of its customers' customers' of a customer's requirements and there was at least one important dis- locations (that is, the end users' loca- preferences does not address the covery: tbe relatively high value the tions) are in landfill-restricted areas, question: "If we do X, what is it customers placed on improved dis- where tbe cost of disposing of the worth to that eustomer?" Knowing persibility. Subsequent field investi- containers is higher tban at other that an improvement in some func- gation confirmed tbat tbe supplier's locations. Greif's service-which, as tionality is important does not tell eustomers were indeed having many we said, includes retrieving the con- a supplier if the customer is willing troubles witb "floeking," tbe clump- tainers - not only eliminates this cost to pay for it. Value models provide ing that can sometimes oceur as a but also indemnifies its customers that information. dry pigment is dispersed into a liq- against improper disposal by tbe end In cases where the supplier's new uid solution. users, protecting them from fines offering will introduce technology Gaining Customers. Knowledge levied by the Environmental Protec- into the market, for example, a of how their market offerings specif- tion Agency. While these analyses do value model can demonstrate to ically deliver value to customers not account for all tbe reasons that prospective customers how tbe tech- enahles suppliers to eraft persuasive environmental stewardship would nology can provide greater value for value propositions. Consider the be worth something to a customer, them. That's an especially critical case of Greif Brothers Corporation, such as the value added to tbe cus- point when the new technology which produces fiber drums, plastie tomer's reputation, they nonetheless makes the market offering itself drums, and intermediate bulk con- make environmental stewardship higher priced than the alternative tainers for food products and ehemi- worth something to the customer in choices, which may use more estab- cals manufacturers. Ratber tban monetary terms. lished and familiar technologies. competing on a price-per-container Using tbe value model to construct At the same time, a model allows basis, Greif markets complete pack- several viable total-cost-based pack- the supplier to see how the value of aging systems. Tbat is, Greif stays aging solutions, Greif's strategic ac- its new technology varies across involved witb its eustomers through- count manager and a team of Greif applications, eustomer capabilities, out the life cycle of tbe containers- experts from logistics, handling sys- and usage situations. monitoring how tbe customer uses tems, and computer services then When a supplier is developing a the container, following tbe contain- give a comprehensive presentation new offering in response to cus- er's path to the end user and retriev- to tbe prospective customer's senior tomers' requests or demands, it can ing it when it is empty, and disposing managers. During the presentation, 64 HARVARD BUSINESS REVIEW November-December 1998
  11. they discuss the merits and prices of that AIT and the customer have pre- each solution. viously agreed on. Then, either on a Sustaining Customer Relation- quarterly or a semiannual basis, AIT ships. At tbe core of all successful presents each customer with a re- working relationships are two es- port that documents the savings, al- sential characteristics: trust and lowing customers to assess firsthand commitment. To demonstrate their the value AIT has delivered. trustworthiness and commitment In order to establish credibility for to customers, progressive suppliers its reports, AIT asks customers to periodically provide evidence to cus- sign and retum a copy. Tbe company tomers of their accomplishments. keeps track of the performance of Sales managers at Greif, for exam- eaeh cost-savings initiative and ag- ple, give customers quarterly re- views tbat document actual eost gregates the totals. AIT calculates The Leader's Change Handbook that last year it provided more than savings. Applied Industrial Tech- $100 million in cost savings to its An Essential Guide to Selling nologies (AIT), a major distributor customers. Direction and Taking Action of specialty replacement bearings, Jay A. Conger, Orelcheti M. Spreitzer, power transmission components, Delivering Superior Value Edwanj I Lawler III, Editors and fluid power products in tbe and Getting an Equitable United States and Canada, provides Return "Tbis imponani book provides another good example. state-of-the-art help to managers on Understanding value in business AIT primarily serves maintenance, markets and doing business based the pragmatics of leading cbange" repair, and operating (MRO) supplies on value delivered gives suppliers —Michael Tushman, professor, markets within the primary metals, the means to get an equitable return Harvard Business School mining, pulp and paper, utilities, for their efforts. Tbe essence of chemical processing, textiles, food Hardcover 432 pages customer value management is to processing, and agricultural indus- deliver superior value and get an eq- ISBN 0-7879-4351-7 $28.00 tries. It operates more than 337 uitable return for it, both of whicb branch locations across tbe United depend on value assessment. W.W. States. In 1990, tbe company began Grainger, the MRO supplies distrib- to market a value proposition promis- utor, is an excellent example of a ing to help its customers improve company tbat has realized the bene- productivity ratber than simply fits of measuring and monitoring selling them parts at a low priee. value for its customers. Tbe company Through value assessment, the com- has even establisbed a consulting pany began to work with its cus- arm, Grainger Consulting Services, tomers to belp tbem save money in specifically to help customers un- areas such as maintenance, inven- derstand the total cost of MRO tory, and energy consumption - any supplies management. (See tbe in- measurable area other than purehas- sert "Understanding Value: How ing. The results were collected in W.W. Grainger and Its Customers what AIT ealls documented value- Benefit.") Smart Alliances added savings, whicb is now the A Practical Guide to cornerstone of tbe company's part- Perhaps equally compelling, though, is an observation made by a Repeatable Success nering efforts. senior manager at one company tbat John R. Harbison, Peter Pekar Jr. AIT trains all of its employees- does business based on value: "Sell- from branch managers to field asso- ing only on price - where's tbe fun in "An extraordinarily praciical guide ciates to delivery drivers - to look for that ?" This manager recognized that to making alliances work. Highly ways to improve customers' opera- when there is market pressure on recommended to anyone at the sharp tions, and the company rewards price, bis business unit needs to re- end of a strategic alliance." tbem for their successes. And to sup- spond by demonstrating tbat it has —Gary Hamel, associate professor, port their efforts, the company has something different to offer-some- London Business School, and developed a customized software thing that will provide superior coauthor. Competing jor ihe Future program tbat calculates cost savings. value, Assessing and truly under- Sales representatives can run the Hardcover 208 pages standing value in business markets program on laptops while visiting is the beginning of the path to prof- ISBN 0-7879-4326-6 S35.00 customers. Working with customers' itable fun. ^ managers, representatives input Available in Bookstores data for potential value-adding and Reprint 98601 IJOSSEY-BASS PUBLISHERS eost-reduction variables - variables To order reprints, see the last page of this issue. ^ San Francisco • www.josseybass.com HARVARD BUSINESS REVIEW November-December 1998
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