Change Implementation Techniques for Creating a Sense of Urgency

Technique 2.60 Customer Value Analyses

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(including 8 techniques)

Introduction

. Customer value is defined as

"...total benefits of ownership of the product or service less the total cost of ownership..."

Craig S. Fleisher et al, 2003

. Customer value analysis (CVA) includes several techniques for better understanding customers, competitors and markets. Generally, it is used in 2 main ways:

i) as an integral component of market segmentation as the central criteria for s5448. electing profitable market segments

ii) on a continuous basis post-segmentation to monitor an organisation's foundation of competitive advantage

. The philosophy of CVA has been described as

"...full retention by the customer of the usefulness and aesthetic functions of the product. Identifying and removing unnecessary cost, thus improving value, must be done without reducing in the slightest degree, quality, safety, life, reliability, dependability, and features of attractiveness that the customer wants..."

Lawrence Miles as quoted by Craig S. Fleisher et al, 2003

. The development of the market orientation framework stressed

- organisation-wide generation of market intelligence pertaining to current and future customer needs

- dissemination of the intelligence across departments

- organisation-wide responsiveness

. CVA stresses the importance of understanding customers and their needs. This involves 3 additional concepts

- concept of service quality integrated with well-established product quality principles

- cost to the total customer value equation

- quality as defined by the customer, not the organisation

. Customer value is the most important source of competitive advantage. This means

- customer is willing to pay premium prices for superior customer value

- leveraging the organisation's existing strengths offers a cost-effective route to providing customer value

- word-of-mouth advertising is the cheapest yet most valuable method to enhance profitable market share

- by definition, superior customer value will protect the organisation from losing its most valuable assets through custom defection

. Many studies support the connection between profitability and organisations with a market orientation around providing customer value, ie superior profitability is closely attuned to the concept of customer value. Furthermore, customer retention is much more profitable than continually targeting new customers. To attract new customers, techniques such as discount pricing and other promotional efforts are used. Generally, it is expensive to attract these new customers who are generally "more loyal" to price rather than service. Furthermore, resources allocated to attracting new customers means that the regular customers are more likely to be neglected. All-too-often the chasing of new customers results in profitless growth

There are 5 useful strategic implications that should guide implementation of CVA:

"...i) customer value (product quality, service quality and price) is defined by the customer

ii) customer value is defined relative to rival offerings

iii) customer value will change over time

iv) customer value is created throughout the entire value chain

v) customer value is a cooperative effort involving everyone in the firm..."

Naumann as quoted by Craig S. Fleisher et al, 2003

All 5 must be pursued simultaneously to effectively deliver customer value

. The strengths and advantages of CVA

- helps achieve competitive advantage

- owing to the close link to the customer and competitors, it

i) offers a robust, quantifiable approach to customer and competitive analysis

ii) is able to be leveraged with other techniques such as TQM, supply chain management, competitor analysis and resource analysis

iii) improves the quality-oriented approaches by including the concepts of cost and customer-determined value

iv) stresses a forward-looking orientation that focuses the customer (a leading indicator of change)

. Its weaknesses and limitations

- it is very resource and time intense as it requires gathering much complex data from a wide array of individual sources. Furthermore, the analysis and interpretation of the data requires significant skill levels and expertise plus continuous monitoring of customer value

- is rigorous analysis a necessary and sufficient condition for successful implementation, such as does formulating a superior value proposition requires superior product quality, service quality and price? Answer: not necessarily so!!!!!!

- organisation needs to have a market orientation

- all steps in CVA are linked and interdependent, ie if one step is deficient, it will affect the others

. CVA needs to occur on a regular basis as there are at least 3 sources of internal or external dynamic change

i) customer's goals and motivation change

ii) customers defect to rivals for a superior value offering

iii) the degree of importance of internal resources, core competencies, capabilities and processes change places, based on the above 2 factors

1 Attribute/cost of customer value

. This involves viewing customer value as a combination of expected benefits and expected costs

. The expected benefits are broken into 3 categories of attributes

i) pre-sale attributes (includes all tangible product attributes that the consumer can evaluate before purchase) eg, buying a personal computer, etc

ii) post-sale attributes (includes intangible product/service attributes that can only be evaluated post-sale, ie after purchase). Most services are more reliant on experienced-based attributes than products eg, visit to a barber, etc

iii) extended post-sale attributes (including those products and services for which an evaluation of value can only be determined after extended usage, eg brokerage services, visit to a doctor, etc

. Markets based on pre-sale attributes generally experience a high degree of price competition and have many tangible attributes that are easily imitated, eroding any source of competitive advantage through attribute differentiation. Conversely, markets based on extended post-sale service offer competitive advantage to those organisations which successfully deliver superior services/experiences

. Extended costs - this comprises 3 different types

i) transactional costs - upfront cash costs for product and/or services

ii) lifestyle costs - additional costs over the total span of ownership of the product and/or services, such as delivery, installation, learning curve associated with initial usage, maintenance, repair, disposal, etc

iii) risk - actual costs exceed expected costs. Risk is usually higher when the total span of ownership is long

1. Transactional costs have the most influence on the purchase decision in commodity markets in which products have short life spans. For products and/or services with longer life spans, life-cycle costs and risk are more important

2. In looking at service quality rather than product quality, customer purchase behaviour is most heavily influenced by experience-based attributes on both a post-sale and extended post-sale basis.

Attribute-Cost Model of Customer Value

organisational development change management

3. There at 10 determinants of service quality

i) reliability (consistency of performance and dependability)

ii) responsiveness (employees' availability to provide services)

iii) competence (employees' possession of the required skills and knowledge to capably perform the service)

iv) access (approachability and ease of customer contact with employees)

v) courtesy (attitudes such as politeness, respect, consideration and friendliness of contact personnel)

vi) communication (two-way, symmetric dialogue that keeps customers informed in a language that they can understand and employees listening to customers)

vii) credibility (traits and attitudes, such as trustworthiness, believability and honesty)

viii) security (customers' freedom from danger, risk or doubt)

ix) understanding/knowing the customer (the range and nature by which employees make the effort to understand customers' needs)

x) intangibles (evidence of the service, such as empathy, understanding customers' needs, etc)

Service Quality Model

organisational development change management

2 Goal/motivation of customer value

. This technique begins where the attribute/cost technique ends. This technique concentrates more on the motivations of customer purchases as opposed to the attribute technique which analyses only the manifestation of these motivations. Furthermore, this technique incorporates recognition that as the customer's use situation changes, the technique changes as well. Thus customer value is constantly changing.

. It helps explain why achieving customer satisfaction around product attributes is not enough. Customers who are satisfied by product attributes could defect if their goals and motivations are more closely met by rival offerings.

. Customer intimacy is an essential part of the customer value analysis

. The most important implications in this technique are the inter-relationships involving price, product quality, service quality and customer value, ie

"...customer value can be achieved only when the firm meets or exceeds the customer's expectations regarding product quality, service quality and price......if any one of these conditions is absent, the firm will fail to deliver customer value. This implies that, depending on the situation, the firm will realize limits to the pursuit of product and service quality if its customers do not value additional quality. Alternatively, the concept of CVA will present significant stretch goals in order to win over and retain targeted customers..."

Craig S. Fleisher et al, 2003

Customer Value Hierarchy Model

organisational development change management

3. Applying Customer Value Analyses (CVA)

Introduction

. It involves 3 stages (customer intimacy through conversation, formal customer value analysis and strategic management of customer value)

Stage 1 - Customer Intimacy Through Conversation

. Customer intimacy involves positive and negative feedback that goes beyond product and/or service attributes; it needs to involve customers discussing their goals and motivations, and includes the following techniques:

- customer surveys (face-to-face, phone or mail interviews to determine the effectiveness of an organisation in delivering its key products and/or services)

- focus panel groups (using a targeted audience to elicit verbal feedback; includes an independent evaluation of non-verbal responses. Need to be careful of the "group think", ie when group is dominated by a particular member of the group)

- conjoint analysis (using focus groups in several different options, each incorporating a different set of quality attributes. By analysing their choices, the attributes that create the most customer value are determined)

- price sensitivity analysis (it is an expanded version of conjoint analysis, in which everything is compared with price. Price elasticity of the sample customers is determined by their relative trade-off thresholds between price and various quality attributes. Essentially, this technique quantifies the limits of profitability by pursuing higher quality)

- motivational analysis (ideally conducted with one-on-one interviews, it seeks to uncover the underlying psychological reasons driving customer purchase criteria. This leads into product and service attribute analysis)

- unmet needs analysis (best conducted through in-depth personal interviews. It aims to define motivations, needs, or attributes not currently satisfied by existing offerings. Sometimes customers are not aware of their unmet needs. Providing the unmet needs when thay are identified can generate customer loyalty)

- lead user interviews (interview customers who are "ahead of the curve" in terms of product and/or service application. They are usually excellent partners in product development and more receptive to a mutual search for solutions)

- defecting analysis (interview defecting customers to find out the reasons they left)

A useful framework for deciding what information to collect from whom is Attribute information from first-time customers and lost customers is especially relevant for strategies designed to attract new customers

"...Consequent information from short-term customers and lost customers is especially relevant for strategies designed to strengthen an existing base of customers

Motivational information from long-term customers and lost customers is especially relevant for strategies designed to strengthen customer intimacy

Changing perceptions of customer value from cohorts (ie, customers moving into an increasingly deeper level of customer intimacy with the firm such as first-time users moving to short-term customers to long-term customers) is especially relevant for developing future competitive strategies..."

Reichheld as quoted by Craig Fleisher et al, 2003

Stage 2 ‐ Formal Customer Value Analysis

. The 8 most commonly used techniques in this stage are

i. market perceived quality profile - which examines the key purchase criteria of customers for product and/or service under analysis. Customers are asked to rank their purchase criteria, ie out of a possible 100 points. Then they are asked to rank the performance of the organisation and its rivals in delivering each purchase criteria. Then each organisation's score on each purchase criterion is multiplied by the weight assigned to that particular criterion. Adding up each organisation's total score will yield a market perceived quality profile. Sometimes, conjoint or regression analysis or ratio scales are used. For example,

organisational development change management

ii. market perceived price profile ‐ relative price profiles are very similar to market perceived quality profiles except that cost of ownership is used instead of perceived quality parameters. For example,

organisational development change management

iii. customer value map - this combines the previous 2 profiles into a 4 cell matrix; the market perceived quality profit is on the horizontal axis and the market perceived price plotted on the vertical axis. A 45-degree diagonal value line indicates where quality is balanced against price in a 1:1 ratio. Organisations with positions below and to the right of this fair value line are in the best position to increase market share and their current price levels. On the other hand, organisations with positions above and to the left of the fair value line will probably be losing market share. Furthermore, these organisations need to lower price in order to grow market share. For a premium quality product to earn a premium, the customer must perceive the quality premium to be worth more than the price premium. Customer value maps can be used to analyse strategic a business unit, division, or product/service delivery relative to what rivals are offering. Furthermore, the technique provides a static snapshot of the organisation's competitive position in relation to customer value, and the fair value line can determine the improvements in price and quality that the firm needs to pursue in order to capture more customer value. For example, market specific customer value map ‐ luxury cars

organisational development change management

iv. win/loss analysis - it analyses the core reasons for recent gains or losses in market share. It focuses on the quality and price attributes that were responsible for recent market share movements. It studies important aspects of its operation with respect to customer experiences and perceptions with special emphasis on areas at risk and/or requiring improvements. There is a need for a good understanding of the primary drivers and the justification for customers' decisions.

Customer Value Map for Firm-wide Analysis

organisational development change management

v. head-to-head area chart of customer value - this is most relevant in a market in which there are only 2 main competitors. The relative competitive parameters evolve around the organisation's primary competitor and are then a composite of every organisation in the market. On the horizontal axis, several key quality attributes are listed and the thickness of the line reflects that attribute's relative importance in defining total quality. The important conclusion is the clear delineation of where and how well the organisation is competing with its main rival around the quality and price attributes, ie competitive advantage and weaknesses are clearly shown. For example,

Head-to-Head Area Chart of Customer Value Performance Ratio, Lexus versus Mercedes

organisational development change management

vi. key events time line - this outlines the events in a product and/or service market. The criteria for a key event are how

- the strategy of the organisation and its rivals impacts perceptions of customer value

- dynamic perceptions of customer value impact both the type and weighting of attributes over time

vii. what/who matrix - it is a tactical implementation technique designed to track progress towards meeting the organisation's customer value improvement objectives. It assigns who (processes and functional areas) in the organisation will be responsible for delivering on what key product/service attributes are embedded in the organisation's value offering. Need to distinguish between perceived and actual customer value; if it is perceived, then perceptions can be changed. On the other hand, if it is actual, then the root causes need to be identified and rectified. For example,

organisational development change management

iii. Root cause analysis - price and value trees - this is a sequential to the customer value map and is used to determine which actions lead to improvements in the price and quality performance so that customer value improves. By disaggregating the organisation's processes into the most primary components, actionable opportunities can be identified

organisational development change management

Stage 3 - Strategic Management of Customer Value

This is based on the knowledge acquired in Stages 1 and 2, as now the organisation will know which product and/or service attributes provide superior customer value. Consequently, these activities, processes and resources that provide this value need to be protected and strengthened in the future. On the other hand, attributes that need improving will be identified and can be rectified. Finally, activities that are not linked to customer value in any way may be streamlined. So that

"...for optimal profitability, the firm should be operating at the point of maximum difference between the value price and cost of product and service quality..."

Craig Fleisher et al, 2003

Strategic Management of Customer Value

organisational development change management

4. Summary of CVA

. Future orientation (high degree of importance - with emphasis on continuous improvement. Furthermore, changing customer value is a good leading indicator of changing market dynamics)

. Accuracy (medium degree of importance - obtaining and correctly interpreting the necessary information on customer value components is a difficult task. Failure to do so will impact adversely on accuracy)

. Resource efficiency (low - CVA is very resource-intense especially as it involves all staff and most business processes. Furthermore, the information requirements are varied and complex, making it costly to maintain. On the other hand, CVA can be leveraged into management techniques and techniques such as TQM, supply chain management, pricing strategy, competitive analysis and resource analysis)

. Objectivity (high - as the customers determine value, the analysis is inherently objective. Bias might be introduced in analysis through weaknesses in the quantitative methodology)

. Usefulness (high - as this has very close links to competitive advantage)

. Timeliness (low - depending on the complexity of the organisation, developing an appropriate monitoring system could take several years)

(source: Craig Fleisher et al, 2003)

 

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