Driving Superior Customer Value

Every day we hear or read about another company that has cut its workforce, or even been forced to shut down.  Challenged with dramatic technological advances, rising energy costs, diminished consumer confidence, and industry-shaking customer value shifts, companies often find themselves overwhelmed.

How can your business hope to achieve market dominance in these troubled times?  The answer lies in creating superior customer value by delighting your customers against their most important dimension of value.

Adequate on all dimensions

An executive of a large organization recently spoke vehemently to me against the airline with which she had just flown.  She had experienced uncomfortable delays, poor service, and the carrier had lost her luggage, leaving her frustrated and displeased.  We can see that the airline had failed to meet her minimum – or “threshold” – requirements.   When she next has the opportunity to choose between that airline and a competitor on the same route, will she travel with them again?  Probably not, because the airline failed to meet her thresholds of basic customer service delivery.

For any player in your marketplace, there is a set of minimum requirements that must be satisfied. A customer’s sense of these minimums is established by the average performance in your market (most competitors provide it) and by the customer’s minimum expectations established from other markets (“I can access my bank account balance 24 hours-a-day by phone, ATM, or on-line.  Why must I wait one week to find out how much money I owe your company?”).

Meeting these minimums is necessary in order to enter your chosen customer’s “consideration set,” meaning the set of vendors that the customer will consider as acceptable options.  For example, if your company were to consider upgrading its information technology, you would not give consideration to vendors unless they had an offering consistent with your needs (i.e. can the new system support invoice software? and my legacy programs?).

But is it enough for a company to shoot just to reach threshold levels of performance thus gaining access to the consideration set? No, it is not. Every company, in order that it might win once considered, must choose a dimension of value in which to excel.

Beyond Threshold to Leadership

Having defined threshold, i.e., those things that must be accomplished to enter your customers’ consideration set, it is then critical to determine the dimension along which your company will establish its edge.

Drawing from the best-selling book The Discipline of Market Leaders, a company must select one of the following three “Value Disciplines” as its basis for leadership:
Operational Excellence: Companies that succeed by providing the lowest total cost – either through low price or great convenience – are Operationally Excellent. Examples include FedEx and Wal-Mart.
Product Leadership: Those businesses that provide the best and newest product features, such as Sony and Nike, are Product Leaders.
Customer Intimacy: Organizations dedicated to solving their client’s broader issues, such as Four Seasons and Nordstrom’s do, are Customer Intimate.

Don’t forget, every company must deliver against threshold on all three dimensions: they must be Operationally Competent, offer Product Differentiation, and be Customer Responsive.  Then every company must select only one dimension against which to excel.  Organizations that try to be everything to everyone inevitably end up being little to anyone.  But organizations do very well indeed when they carefully choose one kind of value with which to lead in the market on which they focus.

How to Lead?

The selection of your Value Discipline should be a function of three things:

What do your customers value most?
Where can your competition be beaten?
What is your organization best equipped to deliver?

The selection of your company’s Value Discipline is no small or easy matter.  You will not simply be able to say, “We are Operationally Excellent” and have it become so.  You must orient the entire way you run your business – from management strategy to billing to culture – around the principles of your chosen Discipline.  You will be required to consider where you want your company to go, how it’s going to get there, and how it will drive profit along the way.  These considerations are captured in:

Value Proposition: The specific combination of cost, product, and service benefits you offer to your customers
Operating Model: The broad organizational and process methods your company uses to deliver the benefits of your Value Proposition
Financial Levers: The differential levers for driving profit given your company’s chosen strategy

Let’s take a quick look at each of the three Value Disciplines in practice, to see examples of the linkages between Value Proposition, Operating Model, and Financial Levers.

Keeping it Simple: Norske Skog Canada

Vancouver, British Columbia-based Norske Skog Canada Limited, producer of newsprint and groundwood specialty papers, successfully models Operational Excellence.  They offer a better combination of quality and low price than their competitors.

To successfully deliver that value to their customers, Norske Skog dedicates its development efforts to performance-improvement initiatives and business simplification.  Examples of this strategy include producing fewer grades of newsprint and hi-brite paper, and recently dedicating 1/4 of paper machine resources to directory paper production.  As a result of these simplifications, they have enjoyed great productivity and efficiency improvements, and the company has been able to pass savings on to its customers.

In turn, to translate this focus into superior shareholder value requires attention to the key Financial Levers.  These levers are the differential ways of making money that are specific to each Value Discipline. Norske Skog Canada is effectively using the following Financial Levers specific to an Operationally Excellent company:
Scale – The company drives profit growth through increased scale, primarily through acquisition. For example, Norske Skog is in talks to buy Pacifica Papers
Capacity Utilization – Norske Skog continually reworks its processes, as with the simplifications noted above, to increase use of its current capacity.
Factor input costs – Proprietary pulp mills and the electrostatic precipitator at their Elk Falls plant help keep their input and energy costs low
Complexity management – Norske Skog Canada has integrated all pulp and container-board production with its paper operations at two of the three production mills

Driving the 22nd Century: Ballard Power Systems

Ballard Power Systems, the Burnaby, British Columbia-based producer of proton exchange fuel cells, through its focus on providing best product, is a successful Product Leadership company.  Declaring that it will be the “first, best, [and] highest quality…manufacturer of PEM fuel cells,” Ballard has consistently raised the bar on alternative energy source manufacturing for almost two decades.

By partnering with “strong, world-leading companies” and applying rigorous R&D practices to its line of pre-commercial prototype fuel cells, the company works to ensure its position as trailblazer for zero-emission fuel cell technology.  Representatives from the company cite Ballard’s results-oriented management teams that reward innovation, creativity, and risk-taking for the company’s success. Indeed, Ballard’s research and Energy Industry-shaking exploration seems to be paying off. In the first few months of 2001, Ballard landed contracts to supply fuel cells to auto manufacturers such as Honda, Ford, Nissan, Volkswagen, and DaimlerChrysler for combined revenue of over $30 million.

Ballard Power Systems provides a good example of how different the Financial Levers crucial for a Product Leader are from those for an Operationally Excellent company.
R&D – The company fosters invention by organizing dynamic, creative development teams that are dedicated to exploring the virtually uncharted field of fuel cell technology.
Time-to-Market – Because it has gotten high-quality, effective PEM fuel cells to market before its competition, Ballard has been able to broker major supply deals with many large corporations
Life cycle management – BPS is continually upgrading its products and improving upon its current technology
Effective brand management – Ballard is poised to launch a new brand strategy later in 2001.  The company is hoping to develop the same recognition of “Ballard Inside” for the auto industry as “Intel Inside” has for computers.

Service with a Personal Touch: CE Franklin

CE Franklin, the Calgary-based supplier to the Canadian Energy Industry, is an organization that typifies Customer Intimacy. In every interaction with the company – whether on-line, in annual reports, or in talking with firm representatives – CE Franklin’s dedication to solving its customer’s broader problems is evident.  On their web-site, they talk about “[enabling] companies…by managing the supply of thousands of complex products…[managing] over 53 customer warehouses…[repairing] specialized industry equipment” and providing “service with the personal touch.”

This personal touch is enabled by the way CE Franklin does business.  The newest addition to CE Franklin’s line of services is the eCommerce Marketplace, an initiative that couples the company’s extensive distribution system with online ordering.  Its “Verity” search engine allows customers to search the richly documented database of more than 40,000 products. Another example of the customized service available is that, for both on-line and phone orders, CE Franklin allows customers to choose individualized plans regarding billing, ranging from very general invoice information to specific, signed-off attachments to each invoice.

CE Franklin successfully applies the following Financial Levers particular to Customer Intimate companies:
Retention  – CE Franklin has a record of great customer retention, accomplished through regular, multi-level contact with the customer, and collaboration in review of internal processes comparisons
Share of Wallet – Having solved its customer’s broader problems through superior service, CE Franklin then graduates the customer to new levels of commitment.  This develops the business relationship and encourages more purchases from the customer
Expertise leverage – CE Franklin has on-staff specialists that provide in-depth technical information regarding all of their products
Mass customization –  CE Franklin makes use of automation to cost-effectively offer custom service, such as their customizable on-line procurement system

Today’s Decision, Tomorrow’s Success

Just as John Milton describes the passage to Hell as “smooth, easy, [and] inoffensive”, so too is a company’s path to average or poor performance.  It is an easy thing to try to be all things to all people, but you risk ending up undifferentiated. Instead, you must develop a compelling answer to the most fundamental question for any business: “Why should our chosen customers do business with us?”

Depending along which dimension of value you choose to lead, you will then need to orient the entire way you do business so that you can deliver the benefits of that Value Proposition.  The final step to realizing superior returns is the application of the relevant Financial Levers.  The path towards creating superior customer value is challenging, but fundamental, and overlooked only at a company’s peril.