LECTURE FIVE: THE RESPONSE THE VALUE PROPOSITION; ITS EXTERNAL AND INTERNAL ROLES Subject 1.

. The Value Proposition 2. Components of the Value Proposition 3. The Gap between Customer Expectations and Perceptions . Closin! the "Value #eli$er% Gap& (. The Value Chain ). *ummar% 7. #iscussion +uestions '. ,eferences - ,eadin! .ist Page 2 3 7 ' ) 11 11 11

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1. T e Va!ue P"#$#%&t&#' /o$et and 0artha 122223 show that4 5the $alue proposition is the utilit%6creatin! product and-or ser$ice that a compan% offers to customers7. /est 118873 offers this definition4 5the $alue proposition includes all the 9e% elements of the situation and the benefits the tar!et customer is loo9in! for in this purchase7. *heeh%: /race% and ;ra<ier 1188)3 assert that4 5the bundle of $alue that an or!anisation deli$ers to its customers is called "the $alue proposition&. 0ore than =ust the product itself: it includes price: ser$ice: selection: and intan!ibles such as ima!e and brand e>uit%. The $alue proposition: in short: is not =ust what the customer is bu%in! but what he or she thin9s the% are bu%in!. ?ebster 1188 3 su!!ests that the $alue proposition identifies both the offer to the compan% and the roles and tas9s of sta9eholders. @t becomes the sellin! proposition to potential customers: the reason the% should do business with compan%: rather than its competitors. @t communicates to the whole or!anisation a sense of specific purpose and direction: coordinatin! their efforts toward the o$erarchin! common purpose of creatin! a satisfied customer.

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(. C#)$#'e't% #* t e Va!ue P"#$#%&t&#' Customer expectations Product F ser$ice characteristics *er$ice F support characteristics A$ailabilit% @nformation ,elati$e competiti$e positionin! #istincti$e competencies Competiti$e necessit% Competiti$e ad$anta!e

Cu%t#)e"

Customer Value 0odel

Value Proposition

Partner roles4 Co6de$elopment Co6production ,eseller ser$ices Customer ser$icin! *ource4 Adapted from ?alters 122223

O"ga'&%at&#'

As we can see: the $alue proposition is made up of a number of different components. Partners are third part% $alue producers that can both directl% and indirectl% impact the $alue proposition. Additionall%: partners can be $iewed as $er% closel% related customers. C#+,e-e!#$)e't is when customers participate in the ,esearch B#e$elopment 1, B #3 efforts of the compan% in order to help the compan% produce products and ser$ices which more closel% resemble that customer&s needs. Thom9e and Cippel 122223 explain that 5Tappin! into customer inno$ation can certainl% !enerate tremendous $alue: but capturin! that $alue is hardl% a simple or strai!htforward process. Dot onl% must companies de$elop the ri!ht tool 9it: the% must also re$amp their business models as well as their mana!ement mindsets7. @n other words: it is about ali!nin! customer needs with the compan%&s business model. C#+$"#,uct&#' is when the customer assembles part of the product themsel$es in exchan!e for a lower price or some other incenti$e. @EEA: the *wedish furniture manufacturin! compan% ha$e used Co6producti$it% to its full effect. @EEA sells its products to end6users in a 9it form which the consumer assembles themsel$es: all for
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much lower pricin!. The reason that this method is successful is that consumers do not place a $alue on their own time and ener!% in assemblin! the product. @n some cases: the amount of additional effort exerted b% the customers themsel$es: can be a hi!her cost than it would be if the assembl% of the furniture were done professionall%. Re%e!!e" %e"-&ce% are those additional: intan!ible: $alue6addin! acti$ities that resellers underta9e. These additional ser$ices include promotin! %our product: transportin! it from one place to another: financin! the purchase of the product etc. Cu%t#)e" %e"-&c&'g include all of those additional thin!s that other $alue chain members pro$ide for the end6user. A t%pical reseller ser$ice is to pro$ide repair and spare parts facilities to replace an% end6use products. *er$icin! the offer tends to occur at sta!es of the $alue chain that are closer to the end6customer. ?e will explore the $alue chain concept in more detail at a later sta!e. Re!at&-e c#)$et&t&-e $#%&t&#'&'g is how competin! $alue propositions are $iewed in the minds of customers. /arne% 118873 su!!ests a compan%& s competiti$e strate!% consists of its business methods to attract customers and fulfil their expectations while withstandin! competiti$e pressures: and stren!thenin! its mar9et position. L#. c#%t !ea,e"% &$ %t"ateg/ a low cost leader&s basis for competiti$e ad$anta!e is lower o$erall costs than competitors. *uccessful low6cost leaders focus on findin! wa%s to dri$e costs out of their business. A firm&s cost position is the result of cost profiles in each area of the total $alue chain. Porter 118'23 su!!ests there are some wa%s to control these costs. Economies of scale4 when costs are reduced b% producin! lar!er $olumes. .earnin! and experience cur$e effects4 the cost of performin! an acti$it% can decline o$er time due to economies of experience and or!anisational learnin!. .in9a!es with other acti$ities in the compan% and industr% $alue chain. ;or example: when a compan%&s >ualit% control costs or materials in$entor% costs are lin9ed to the acti$ities of suppliers: costs can be reduced b% wor9in! with 9e% suppliers on the desi!n of parts and components: =ust6 in6 time deli$er%: and inte!rated material suppl%. The benefits of $ertical inte!ration $ersus outsourcin!4 $ertical inte!ration forward or bac9ward also pro$ides opportunit% for the firm to obtain cost sa$in!s. Gn the other hand: outsourcin! certain functions and acti$ities to

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outside specialists who b% $irtue of their expertise and $olume can perform the acti$ities more cheapl%. D&**e"e't&at&#' $#%&t&#'&'g %t"ateg/. The essence of a differentiation strate!% is to be uni>ue in wa%s that are $aluable to customers in a sustainable wa%. Thomson and *tric9land 1188'3 su!!est differentiation re>uires an in6depth understandin! what customers $alue most: where alon! the $alue chain to create the differentiatin! attributes: and what resources and capabilities are needed to produce this uni>ueness. @t is that the compan% ser$ices a few mar9et se!ments b% pro$idin! a $alue proposition that satisfies each se!ment on a few 9e% dimensions which ma9es this positionin! strate!% profitable. The 9e% is to ma9e %our product stand out from competiti$e offerin!s b% ha$in! a product that offers a few hi!hl% $alued attributes. F#cu% $#%&t&#'&'g %t"ateg/ is where the compan% chooses to focus on a mar9et niche. This in$ol$es creatin! the necessar% $alue structure to ser$ice a small !roup of customer exceedin!l% well. A premium price is usuall% char!ed for this strate!% to be $iable. ?ith each strate!%: a different set of distincti$e capabilities: competiti$e necessities and competiti$e ad$anta!es are necessar%. D&%t&'ct&-e ca$ab&!&t&e% are those capabilities that %our compan% can perform better than competitors and are not easil% clonable. ;or example: @EEA can be said to ha$e a distincti$e capabilit% in understandin! the customer. ?hen this distincti$e capabilit% lies in a 9e% success area: or an acti$it% which is essential if the compan% hopes to sur$i$e in the lon!6term: it becomes a competiti$e ad$anta!e. C#)$et&t&-e 'ece%%&t&e% are those thin!s that a compan% must do ade>uatel% in order to sur$i$e in the mar9et. ;or example: most companies must mana!e information ade>uatel% in order to compete in an% modern mar9et. C#)$et&t&-e a,-a'tage exists when a compan% can do somethin! better than competitors in 9e% success area. ;or example: 0c#onald&s has a competiti$e ad$anta!e in brand mana!ement. Customer expectations and the customer $alue model also impact the $alue proposition. These two areas of the $alue proposition are the customer side of it: and are constantl% e$ol$in!. The other side of the $alue proposition is the compan%&s input. Gne wa% of brid!in! this !ap is throu!h the use of Co6de$elopment and

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effecti$e customer ser$ice mechanisms. The shifts in customer expectations and the customer $alue model is 9nown b% *heeh%: C%ler and /race% 1188)3 as a 0Va!ue S &*t7. Gnl% $i!orous competiti$e monitorin! can prepare the compan% for a $alue shift: the conse>uences of which can be catastrophic. @f a compan% fails to reco!nise the shift in customer expectations and the customer $alue model: it can become ban9rupt. Gnl% in identif%in! new 5Profit Pools7 can the compan% remain rele$ant. Gadiesh and Gilbert 1188'3 cited in ?alters 122223 describe a profit pool as 5the total profits earned in an industr% at all points alon! the industr%&s $alue chain7. The pool ma% be "deeper& in some se!ments of the $alue chain than in others and the $ariations ma% be due to customer: product and distribution channel differences: or perhaps there ma% be !eo!raphical reasons. *l%wot<9% and 0orrison 118873 outline a similar concept: 9nown as 5Profit Hones7.

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1. T e 2a$ bet.ee' Cu%t#)e" E3$ectat&#'% a', Pe"ce$t&#'% Customer Value Criteria Customer *atisfaction @ndex Customer Value Attributes

Customer Purchasin! @nfluences

Customer Value Expectations

Customer Perceptions of #eli$ered Value

Customer Value 0ana!ement

Customer Ac>uisition Costs Customer Value 0odel *ource4 ?alters 122223 Customer Value #eli$er% Gptions

Value #eli$er% Costs Corporate Value 0odel

Ta9in! a customer centric $iewpoint: we can sa% that a purchase is made based on customer expectations and customer perceptions. The left of the abo$e dia!ram illustrates the customer inputs to the $alue proposition and the ri!ht of the dia!ram illustrates the inputs of the compan% and its $alue chain. The result of customer inputs is customer expectations: while the result of corporate actions is customer perceptions: otherwise 9nown as positionin!. ?alters 122223 ar!ues that a !ap exists between these two sides of the $alue proposition. *heeh% et al 1188)3 also illustrates this !ap. Cowe$er: customer expectations are called the "propensit% to bu%&.

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/ased on these models: ?alters 122223 draws some conclusions based on the !ap between customer expectations and customer perceptions. Pe"ce$t&#'% g"eate" t a' #" e4ua! t# E3$ectat&#'% 5 C#)$et&t&-e A,-a'tage Pe"ce$t&#'% 6 E3$ectat&#'% 5 C#)$et&t&-e D&%a,-a'tage Pe"ce$t&#'% 7 E3$ectat&#'% 5 Su%ta&'ab!e C#)$et&t&-e A,-a'tage As we can see: when customer perceptions are !reater than or e>ual than customer expectations: then a competiti$e ad$anta!e arises. That is: if a customer percei$es a product to be capable of exceedin! their expectations: it will hold !reater $alue. ?hen this is realised b% competitors: which can happen relati$el% >uic9l% in the modern world: the% will race to cop% that product offerin!. ;or example: a fashion conscious customer ma% realise that a non brand name label will exceed their expectations in terms of price and >ualit%. ?hen customer perceptions are less than customer expectations: a competiti$e disad$anta!e exists. This is a result of poor mar9etin! or could arise when a product has onl% recentl% been launched and it has not been well distilled in the mar9et. Competitors are li9el% not to offer $alue propositions in this area and newl% launched products will potentiall% be !i$en more mar9etin! support: ?hen perceptions exceed expectations 1but don&t e>ual then3 this represents a sustainable competiti$e ad$anta!e since expectations will ta9e time to ad=ust to this new benchmar9 and competitors will find that $alue proposition difficult to imitate. 8. C!#%&'g t e 9Va!ue De!&-e"/ 2a$: ?alters 122223 su!!ests the followin! process to close the $alue deli$er% !ap. Va!ue De!&-e"/ St/!e 1. Exploration Inderstand the customers& business "needs& F the main processes @dentif% $alue characteristics that the customer is currentl% producin! that could be supplied @dentif% $alue production trends in the mar9et - mar9et
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I,e't&*/&'g a', c!#%&'g t e -a!ue ga$

se!ment 0easure the !ap between customer perceptions of 2. Translation $alue deli$ered and $alue expected currentl% Establish the features of $alue deli$er% Inder achie$in! G$er achie$in! 3. @nterpretation Gptimisin! customer and supplier expectations Establish reasons for performance achie$ements ,e$iew $alue deli$er% or!anisation and cost structures @dentif% alternati$e $alue deli$er% structures: their costs and coordination issues Consider the implications of chan!e on customer satisfaction and corporate expectations . @mplementation A!ree chan!es with partners A!ree new - re$ised $alue deli$er% ob=ecti$es Communicate ob=ecti$es to both customers and $alue chain partnership 0onitor customer perceptions of $alue 0onitor deli$er% costs 0onitor $alue chain partner "returns& performances realised - expected *ource4 ?alters 122223

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*ourcin! *pecifications A$ailabilities Costs Capacitates L#g&%t&c% 0ana!e 5stoc9s and flows7 A$ailabilit% Time fre>uenc% P"#cu"e)e't De%&g' a', De-e!#$)e't P"#,uct&#' =a"<et&'g Se"-&ce

;. T e Va!ue C a&'

Cu%t#)e" a',

Sta<e #!,e"

E3$ectat&#'%

Va!ue

De!&-e"/

*ource4 ?alters 122223 P!a''&'g> c##",&'at&#' a', c#'t"#! #etermine re>uired capabilities and Product and ser$ice capacities specification @nsource@nfrastructure outsourceJ support ser$ices and Establish cost s%stems profiles 0ana!e $ariet%: >ualit% and costs Value positionin! 5/rand7 de$elopment and mana!ement mar9et de$elopment channels mana!ement Customer liaison #istributor liaison Product and ser$ice liabilit%

Va!ue P"#$#%&t&#'

@terati$e feedbac9 loop

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?. Su))a"/ The $alue proposition is the culmination of the $alue chain. there are two sides to the $alue proposition4 the customer and the or!anisation. The or!anisation encompasses all of the internal and external processes that are underta9en throu!hout the $alue chain. The success or failure of the $alue proposition will reflect how the members of the $alue chain percei$e the external influences on the $alue chain. @f these perceptions are incorrect: then the $alue proposition will be obsolescent. @. D&%cu%%&#' Aue%t&#'% 1. #escribe the $alue proposition in terms of the internal and external processes that are underta9en in the $alue chain for a product %ou are familiar with. Cow has this $alue proposition chan!ed o$er the past 12 %earsJ 2. Cow is the $alue proposition affected b% the $alue deli$er% !apJ Cow do internal and external $alue chain roles influence the $alue deli$er !apJ 3. ;or both the or!anisational and the customer sides of the $alue proposition identif% the inputs to the $alue proposition for a product %ou are familiar with. B. Re*e"e'ce%C Rea,&'g L&%t /o$et: #.: and 0artha: K.: 2222: 5Value Dets F /rea9in! the *uppl% Chain to Inloc9 Cidden Profits7: Kohn ?ile% and *ons. *heeh%: /.: /race%: C. and ;ra<ier: ,.: 188): 5?innin! the ,ace for Value F *trate!ies to Create Competiti$e Ad$anta!e in the Emer!in! A!e of Abundance7: American 0ar9etin! Association. ?alters: #.: 2222: 5Gperations *trate!%7: Pal!ra$e 0acmillan. Porter: 0.: 18'(: 5Competiti$e Ad$anta!e7: ;ree Press. /arne%: K. /.: 1887: 5Gainin! and *ustainin! Competiti$e Ad$anta!e7: the ;ree Press.

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