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Customer Value ManagementConcepts and Case Study

by

Sunil Thawani

Adnoc Distribution

thawanis@hotmail.com

Dubai Quality Group Evening Seminar

30th May’2000

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Customer Value ManagementConcepts and Case Study

Purpose of the Presentation:

• Share Concepts of CVM• Application of CVM • Using CVM as a Strategic

tool to drive business

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CVM - The Concept

“What do we buy ?

Value (Benefits)

Value/ Benefit = Use + Esteem function

of a product (service)

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Price, Cost, Profit vs. Value

0

100

1stQtr

3rdQtr

EastWestNorth

Required Desired

(Value) Increasing Benefits- Functions- Performance

Price, Cost,

Profit

Price

Cost

Zero Value Costs

Marginal PriceRealization

Profit

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CVM – Definitions

• Value : is the customer’s perception of benefits received in relation to the competition

• Price : total price perceived to be paid by the customer in comparison to the competition.

• Cost : total cost to company in comparison to the competition.

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The Market Leadership

Supplier offering highest Value to Price ratio

should attain Market Leadership.

(V/P >= 1)

Supplier having superior Value to Cost ratio

should attain Financial Leadership

(V/C <= 1)

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Making Quality a Strategic Weapon

Effectiveness

TimeStage 1

Conformance Quality (Before 80’s): Deming, Juran, Crosby eraFocus - Process Control, Reduce Scrap, SQC,

Conformance to Requirements

Product with Zero Defects may not necessarily make customers happy ?

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Making Quality a Strategic Weapon

Effectiveness

TimeStage2

Customer satisfaction (late 1980s):Focus : Get close to customer, Understand their needs, Be customer driven e.g. Xerox Part of MBNQA

Did not answer why we win/ loose customers ?Often non customers not includedFailed to measure performance relative to competition.

Conformance Quality

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Making Quality a Strategic Weapon

Effectiveness

Conformance Qlty.

Customersatisfaction

T Q M

Time

Stage2

Stage 3

Stage 1

Mkt. perceived Qlty & value relative to competition (1990s)Entire market includedHow our products compare with competitionRequirement of MBNQA

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Unanswered Questions ?

• What are the key buying factors that customers value when they choose among our business and our toughest competition ?

• How do customers rate our performance vs. competition on each of the buying factors ?

• What is the percentage importance of each of these components of customer value ?

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Making Quality a Strategic Weapon

Effectiveness

Conformance Qlty.

Customersatisfaction Mkt-perceived Qlty & value

relative to competitors

C V M

T Q M

TimeStage 4

Quality key to CVM Use changes in market place as a strategy to drive business and create most value for customers Build on TQM principles

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Making Quality a Strategic Weapon

Effectiveness

Conformance Qlty.

Customersatisfaction

Mkt-perceived Qlty & valuerelative to competitors

Quality key toCVM

Customer Value Management

Total Quality Management

Time

Stage2

Stage 3

Stage 4

Stage 1

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Perceived Quality

Quality means little in business unless

Customers perceive your quality as superior to your competition’s.

Knowing how to achieve “ this “ kind of quality is all that matters.

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“Birth” & Development of CVM

• 30 world Quality experts assembled in US in 1987 for Baldrige Quality Award criterion meeting

• Main focus – Manufacturing Quality/ Process Control

• Many “ thought “ customers opinions cannot be measured & is subjective

• Curt Reimann wanted Quality to be defined & measured from customer perspective

• Contribution of Sidney Schoeffler & Bradley Gale

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What is CVM ?

• How to identify attributes that are important to customers ?

• How to understand the importance customers give to those attributes ?

• How to analyse performance relative to competitors on each attribute ?

• How to use CVM as a Strategy to drive the business ?

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AT & T Story

• Successful monopoly business spilt in early 1980s • Pioneer in Customer Satisfaction measurement • Excellent plus Good scores 90 % in Equipment,

Installation, Repair, Billing, Training, Marketing etc. • Mgt. target to maximize excellent plus good scores.• Data used for recognition & rewards programShortcomings :• Did not explain declining market share even with hi

scores • No correlation between satisfaction scores & Mkt share• Focussed on internal competition rather than external • “ Useless” info to understand competitive position

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AT & T Story Ray Kordupleski & West Vogel Study Findings

1987 • Customers “ willing to shop around” increased

dramatically from 10 % to 40 % for Excellent to Good category.

• Company did nothing to convert “ good “ into

“ excellent”• Low scores in What Worth Paid For (WWPF)

question even though overall scores of 95+.

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AT & T Story - Startling Discoveries

• Realised “ Quality was a relative thing “

( What ultimately matters is not the % of satisfied customers but the extent to which customers are more satisfied with our product than by the competition - Market Perceived Quality)

• Relationship between WWPF (Customer Value) scores and Market Share.

• Changes in WWPF scores predicted changes in market share.

CVM DQG

Customer Value is a Leading Indicator of Market Share

AT & T market share

WWPF-

1987 1988 1989Adapted from speech given by Raymond E. Kordupleski at the American Marketing Association’s Customer Satisfaction Congress, 1991.

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AT & T - Shift to CV Management

1990-91 Bob Allen uses CV as strategy : • Top leadership made to commit to customer value• CV data used in reviews & planning processes• Incorporated in AT & T Chairman Quality Award• Executive compensation revised to include CV indices• Identified processes which drive relative performance

on each attribute.• Benchmarking studies to improve processes• Cascaded to employees by teaching & their role in

improving CV.

1992 - AT & T gains significant market share

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Conventional Surveys

• “ Backward looking “ process• Non customers, Opinion/ Decision makers

often left out. Incomplete market opinion • Customer Service Deptt. is the “ owner “• Tactical action (not strategic) • Does not explain why we win or lose

customers ?• Satisfaction scores lack co relation to Market

Share

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The Value Edge Process

1. Select Product & Market segment

2. Collect Price, costs, market share data

3. Select competitors

4. Develop in-house Value Profile,

Value/ Price & Value/ Cost ratios.

5. Validate Value Profile in market &

& Align with Customer Requirements

6. Identify improvement opportunities

7. Prioritise, develop & Implement action plans

8. Attain market & financial leadership

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Step # 3 Selecting Competitors

• Must include all important customers – 2 to 3 largest competitors

• Fastest growing competitor

• Any competitor with latest/ unusual technology

• Imports

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Step # 4 Developing In-house Value Profile

• List key characteristics - Quality attributes that affect the customers buying decision

(other than Price)• Assign relative weights for each attribute• Estimate customers’ opinion of performance

of each of the criterion on a scale of 1-10• Develop Value Profile

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Step # 4 Value Profile - Car Co.

Category/ Weightage Performance (1-10) Value Score (WxP)

Factor A B C A B C

Style 20 5 7.5 6 100 150 120

- Shape

-Colour

-Glass Area

Engineering 30 8 8 6 240 240 180

-Power - Maintenance

- Safety

Comfort 30 6 8 7 180 240 210

-Legroom

-Driving

- Options

Spares & 20 8 8.5 5 160 170 100

Services

Total 100 680 800 610

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Step # 4 – Inhouse Value Profile

Co. A Co. B Co. C

Value Score 680 800 610

Price $ 10,000 11,000 9,500

Value-Price 0.068 0.073 0.064

Value-PriceProfile

1.063 1.141 1

Cost 8000 8100 7500

Value Cost 0.085 0.099 0.065

Value-Cost Profile 1.308 1.523 1

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Step # 5 – Validate Value Profile In Market

• Identify & contact all the users of “Product” in customers/ non customers’ organisation

• Drive it from top• Validate value profile.

(Information may not be as structured as inhouse profile)

• Realign value profile

Findings bound to be different from in-house

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The Competitive Advantage Strategy

• Attain uniqueness in a factor/ category that customers value greatly

• Select one/ more factors that many buyers perceive as important. Position yourself to meet those needs

• Customers will be willing to pay for uniqueness with premium

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Step # 7 Prioritise to ImproveCar C’s Competitive Strategy

Category MaxPossScore

C'sScore

A'sScore

B'sScore

C vs. A C Vs B

Style 200 120 100 150 +20 -30

Engg. 300 180 240 240 -60 -60

Comfort 300 210 180 240 +30 -30

Spares &Service

200 80 160 170 -60 -70

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Customer Value Map

Worse Value

SuperiorInferior

HigherPrice

LowerPrice

DD

CC

BB

AA

Better Value

Value Index

1.0

Price Index

1.0

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Step # 7 - Value Factor – Process Matrix

Process

Value Factor

Design Manufacturing QA Purchase After Sales

Service

Low Power

** **

Leg Room

** **

Shape ** **

Costly Spares

** **

Poor Servicing

**

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Value Edge - Internal Customer Application in Hospital

• Set up about 20 years back in small town in India.

• Vision to provide best possible health care to residents.

• Developed into a 150 bed hospital with all facilities like OPD, Diagnostic centre, Surgery

• Concern - Declining Quality of Service & Loss of Market Share to competition from within town & from nearby big city.

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Sample Customer Value Structure

Supplier : Pharmacy Customer : Patient/ Relative

Quality Attributes Weight Perf Wx P Max. Poss. Gap 1-10 Score

• Minimum Waiting 15 6 90 150 60Time

• Availability of prescribed 30 7 210 300 90Medicines

• Explain doses details 15 6 90 150 60• Timings - open after 10 2 20 100 80

OPD closes• Properly packed medicine 15 8 120 150 30 • Courtesy 10 7 70 100 30• Provide empty bottles 05 0 00 50 50 Total 100

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Sample Customer Value Structure

Supplier : Radiology Customer : Ward Patients

Quality Attributes Weight Perf Wx P Max. Poss. Gap

( 1- 10) Score

• No/ Min. Waiting 25 4 100 250 150

Time

• Reports delivered 30 7 210 300 90

promptly to ward

• Accuracy 30 9 270 300 30

• Courtesy to patient 15 7 105 150 45

Total 100

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CVM – Today’s Business Need

• “ Be better than your best competitors in providing customer value “ – Bob Allen, AT & T

• “ Yesterday does not count. All that counts is providing the most value to customers tomorrow “ – Jack Welch, GE

• We have to become single minded in our quest to deliver better value “ – Ed Artzt, P & G.

• “ Premier companies are serious about delivering value to customers. “ – Larry Bossidy, Allied Signal

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CVM - A Versatile Tool

• Honda - applied to luxury car segment • Milliken & Company - applied to carpet tile

business • NBC Bearings - applied to ball bearings• Michelin Tyre company - applied to radial tyres

And Parke Davis,, AT & T, Allied Signal, J & J,

Gillette, Hewlett Packard, Westinghouse, FedEX

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Benefits

• Delighted Customers• Benchmarking against the competitors.• Identifying the right things.• Teamwork by committed employees.• Enhanced Market Share • Gaining Competitive Edge

• Enables Competitive Strategic planning.

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Thank you

Questions & Answers Session