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Copyright © 2002 byEdward J. Fern
1-1
MARKETS OF ONE HIGH MARGIN BUSINESS
IN THE COMING ERA OF MASS CUSTOMIZATION
By
Edward J. Fern, MS, PMP
Copyright © 2002 byEdward J. Fern
1-2
Edward J. Fern, MS, PMP. . . is president of Time-to-Profit, Inc., a consultancy focused on business process improvement, project management, and product development. His career in Information Technology began in 1973. He has held director level positions with Sprint, Control Data Corporation, TRW, and Infonet Services Corporation. He earned an MS in Technology Management from Pepperdine University in 1992 and his Project Management Professional designation in 1998. He teaches project management and product development at the University of California at Irvine. He serves as Vice President of Professional Development of the Orange County chapter of the Project Management Institute. Ed is the author of Time-to-Profit Project Management: A Primer for Project Managers in Commercial Product Development. His E-mail address is [email protected]
Copyright © 2002 byEdward J. Fern
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REVENUE
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
1996 1997 1998 1999 2000 2001
DELL
COMPAQ
HP
Copyright © 2002 byEdward J. Fern
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EARNINGS
-3000
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-1000
0
1000
2000
3000
4000
1996 1997 1998 1999 2000 2001
DELL
COMPAQ
HP
Copyright © 2002 byEdward J. Fern
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AND NOW• Compaq and Hewlett-Packard will merge
into a single company that will have revenues 2.5 times that of Dell but earnings only 40% of Dell’s.
• Dell’s way of doing business makes the Compaq/HP way obsolete.
• Dell will kill Compaq/HP because
Copyright © 2002 byEdward J. Fern
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Michael Dell is to MASS CUSTOMIZATION
as Henry Ford was toMASS PRODUCTION
Copyright © 2002 byEdward J. Fern
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JUST RIGHT QUESTIONS
• What is the difference between mass production and mass customization?
• What must we change to get into the mass customization business?
• What new skills must we acquire and/or develop to be successful in mass customization?
• How can we get extra funds to grow our mass customization business?
Copyright © 2002 byEdward J. Fern
1-8
MASS CUSTOMIZATION IS• drawing on a large collection of modules
to build unique products and services that exactly match the needs and desires of individual customers who have already ordered what does not yet exist.
• accepting payment for finished products and services before paying for the components of which they are made.
Copyright © 2002 byEdward J. Fern
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CONTRASTSMASS PRODUCTION• Inventory is free• Time is free• Either standardization
at low cost or flexibility at high cost
• One size fits all• Market share focus• Selling goods and
services
MASS CUSTOMIZATION• Inventory is NOT• Time is everything• Low cost and high
flexibility• Customers are particular• Market fragment and
variety focus• Selling service and
experiences
Copyright © 2002 byEdward J. Fern
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WHAT MUST WE CHANGE TO GET INTO THE MASS CUSTOMIZATION BUSINESS?
• Change employee– Recruiting– Incentives– Training– Working conditions
• Change processes– Modularization– Flexible systems
• Change relationships– Suppliers– Customers
• Change marketing– Direct to customer
– Active listening
• Change organization– Empowerment
– Integrated teams
• Change focus– Intellectual capital
– Customer driven
Copyright © 2002 byEdward J. Fern
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CHANGE EMPLOYEE RECRUITING, INCENTIVES, TRAINING, and
WORKING CONDITIONS
• Recruit generalists, not specialists
• Make employees owners and reward valuable behavior
• Educate employees about the whole business and train them in needed skills
• Empower employee teams to make quick decisions
Copyright © 2002 byEdward J. Fern
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CHANGE PROCESSES
• Modularization– Decompose products and services into
discreet modules– Invest is standard interfaces between modules
• Flexible systems– Employee judgment replaces rigid rules– Employee teams make (and re-make) their
own rules
Copyright © 2002 byEdward J. Fern
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CHANGE RELATIONSHIPS
• Suppliers– Replace competition with partnership– Reward loyalty and demand to be rewarded
for your loyalty
• Customers– Replace selling with serving– Reward loyalty and earn it every day
Copyright © 2002 byEdward J. Fern
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CHANGE MARKETING• Direct to customer
– Bypass distributors and retailers– Build two-way communication with the end-
user
• Active listening– ASK about your customer’s problems– Listen for signs of SACRIFICE
The differences between mass produced products and services and what the customer really wants are the sources of customer sacrifice.
Copyright © 2002 byEdward J. Fern
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CHANGE ORGANIZATIONOUT
hierarchy
functional organization
INEmpowerment
Integrated teams
Copyright © 2002 byEdward J. Fern
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WHAT SKILLS MUST WE ACQUIRE AND/OR DEVELOP TO BE SUCCESSFUL
IN MASS CUSTOMIZATION?
• Service – design linkage
• Multiple project management
PHASE and GATE
Copyright © 2002 byEdward J. Fern
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PLEASINGIDENTIFY AND SUPPORT CUSTOMER SERVICE REQUIREMENTS OF THE INDIVIDUAL AND DELIGHT YOUR CUSTOMER
– Total Cost of Ownership
– New Product Ideas
– Relationship Marketing
Copyright © 2002 byEdward J. Fern
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TOTAL COST OF OWNERSHIP
Customers will see that the cost of doing business with you includes more than the money they pay to you.
The MD-11 airliner is essentially a DC-10 that uses less fuel and requires only two pilots instead of three.
Copyright © 2002 byEdward J. Fern
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NEW PRODUCT IDEASfrom
CUSTOMER SACRIFICEYOUR CUSTOMER SERVICE DEPARTMENT CAN,
AND SHOULD BE
THE SOURCE OF INFORMATION ABOUT
UNMET CUSTOMER REQUIREMENTS.
Copyright © 2002 byEdward J. Fern
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RELATIONSHIP MARKETING
• Become involved in the health of your customers’ business.
• Test and listen.• Measure results.• Earn trust.
THEN
Copyright © 2002 byEdward J. Fern
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DESIGN TO ELIMINATE CUSTOMER SACRIFICE
• GEOGRAPHY• CULTURE• AFFLUENCE• GENDER• ETHNICITY• EDUCATION• OCCUPATION
• HEALTH• STATUS• POLITICS• INTERESTS• RELIGION• LANGUAGE• AGE
Customer sacrifice is the difference between what is currently available and what the customer really wants. Sacrifices arise because of differences in:
Copyright © 2002 byEdward J. Fern
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PHASE AND GATEDARWINIAN PRODUCT DEVELOPMENT
• THERE ARE A LOT MORE MARGINAL OR POOR PROJECTS THAN GOOD ONES
• CARRYING MARGINAL AND WEAK PROJECTS HURTS THE FEW GOOD ONES
• IDENTIFYING THE LOSERS ISN’T EASY
• IDENTIFYING WINNERS IS EVEN TOUGHER
PROJECT SELECTION
• BENEFIT MEASUREMENT TECHNIQUES– BUSINESS STRATEGY
– PORTFOLIO MAPPING
– SCORING MODELS
– CHECKLISTS
• FINANCIAL OR ECONOMIC MODELS
• PORTFOLIO METHODS
Copyright © 2002 byEdward J. Fern
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SIX KEYS
• MAKE TIMELY, FIRM, & CONSISTANT GO/KILL DECISIONS
• PRIORITIZE PROJECTS OBJECTIVELY• ESTABLISH VISIBLE DELIVERABLES• COMMIT NECESSARY RESOURCES• MENTOR & ENABLE PROJECT TEAMS• SET HIGH QUALITY AND EXECUTION
STANDARDS
Copyright © 2002 byEdward J. Fern
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TWO STEP DECISION PROCESS
CRITERIA
PASS
KILL
PRIORITY GO
HOLD
Copyright © 2002 byEdward J. Fern
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DELIVERABLES CRITERIA
ACTION• DELIVERABLES DEFINED IN
ADVANCE
• CRITERIA AND TOLERANCE DEFINED IN ADVANCE
• GO/KILL/HOLD/RECYCLE
Copyright © 2002 byEdward J. Fern
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HOW CAN WE GET EXTRA FUNDS TO GROW OUR MASS
CUSTOMIZATION BUSINESS?
On average, Dell collects from its customers six business days before it pays its suppliers:
$ 31.2 billion / 260 business days per
year * 6 business days = $ 720 million
When you eliminate supply inventories, work in progress, and finished goods inventories, you can use your suppliers’ capital to grow your business.
Copyright © 2002 byEdward J. Fern
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PRODUCTION SPEED• Integrate order processing, supply chain
management, production control, shipping, and customer billing into a single, seamless process.
• Negotiate exclusive, just-in-time contracts with your suppliers.
• Build real time communication links with customers and suppliers.
• Reduce or eliminate paperwork.
Copyright © 2002 byEdward J. Fern
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CONCLUSION
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HP
All of this is difficult so me must end where we began, with a reminder that this great effort is also very necessary.