The business world known to a CEO is made up by business and management models based on the value of their top products and the overall chain that make them possible; we will call this Product-Driven Value Chain (PVC). The executive knows that the environment is not the same it was when Sony introduced the first Walkman to the market, it is not even the same it was when Apple made the disruptive innovation of the iPod almost 13 years ago, which makes this product a teenager according to our perception of time, but an adult in the eyes of the market, an adult that will never find itself in a ceteris paribus status. Given the constant changes, the top product, along with its value chain, must evolve to new generation models. We will call this strategy to respond to changes Market-Driven Value Chain, and it is a glance of the future of value creation.
This article explores the foundations of the PVC model and why it is no longer enough, it explains the MVC model and how it provides greater advantages in the generation of value and it describes the transformation that companies need to make in order to transform their model.
The Past of Value Generation: Product-Driven Value Chain
When we talk about value, we mean strategic and economic value. Strategic value is the position of the company in the market, the differentiator that allows it to capture and defend demand much better than its competitors. Economic value represents profitability, measured in terms of return on invested capital, and the value of market capitalization.
Traditionally, companies have based their generation of value on two basic premises: adding value to the market through products, and adding value to the products by physical means and activities.
These premises lead to executive and operational management models that follow these 7 principles:
1-. Value to the market through products. If you add value to the market through products, then you seek competitiveness with attributes that will satisfy the needs of the consumers and that are different and superior to the next product on the shelf.
2-. Value to the company through profitability. Under this logic, you add value to the company through the profitability of the products. You measure product costs, manage the margins and segment them in families based on their similarities.
3-.Activity is the generator of value in the products and the company. In order to take competitive and profitable products to the market, companies focus their attention in managing and improving the purchase, sale, manufacturing, transport, storage and design activities, both at the company and the chain level; in fact, even the cost of the products is related to the activities they generate through Activity Based Costing (ABC).
4-. Economies of scale and economies of experience are important to improve costs. Size and market seniority are important elements to obtain competitive advantages in positioning and costs.
5-. The generation of value among business partners takes place during negotiations. How much profitability will the company obtain in this relationship depends on how much it can minimize supplier costs and/or increase the price for the clients: it is a matter of business negotiation.
6-. Only managers have the skills to transform information into competitive actions. This requires central financial information systems that provide data on costs, margins, expenses and profits.
7-. The product attacks the market. The product is “pushed” throughout the chain from the materials warehouse, through the production process, then to the finished product, to distributors with attractive savings until it reaches the consumer under the shape of constant offers and promotions. The frantic close to reach those “numbers” that make us lose sleep, dependant upon aggressive promotions, are a heroic phenomenon happens in companies on a monthly basis.
The business management models are based on this metamodel that, historically, has proven to be effective as a basis for the generation of value. However, this tired model that operates under an environment of uncertainty, is the Walkman of value chains, it will continue to grow irrelevant as time goes by. Let’s see why.
Product-Driven Model: More products, less differentiation
In time, consumers have gained power in actual terms in the market. That power comes from the large variety of options at their disposal and the sea of information they have access to. According to Intel, 639, 800 GB worth of data are transferred in a mere 60 seconds over the Internet, and within those hundreds of gigabytes, we might find valuable information on the company’s top product.
In virtually any category, we can see a proliferation of products within the reach of the consumer; from cars and houses, to beverages and pet food. On top of that, the user has constant access to education and information on the products, even more so than the salesperson. Just having several quotes gives the buyer an advantage over his counterpart.
With greater product options, reductions in the cost related with replacing suppliers and with a constant access to unlimited information, the consumer has a negotiation advantage over the salesperson, which turns, quite simply, in ceasing consumption of a product and changing it for another one with zero difficulty. In short: the client has more power.
One doesn’t need to be an expert to state that, the more power a consumer has, the lower the price will be. This situation involves two things for companies:
A) Brands not necessarily represent an actual value for the consumer.
Let’s see the case of David, a small manufacturer with an aggressive approach toward very specific market segments and with more customized value offers than those of the Goliaths of the industry, causing them headaches of biblical proportions and capturing, little by little, their market share.
On the other hand, general price reductions in market prices involve a pressure on the profitability margins of the companies affected, which rely more in the perceived value of the brands they represent.
B) Product Proliferation.
In order to adapt to the growing power of the consumer, who demands increasingly differentiated and specific offers, companies, in every industry without exception, have chosen to develop almost infinite arrays of products to attack broad market niches without discrimination; in other words, there are more options than actually demanded by the market.
This strategy has resulted in increased complexity and costs, due to a greater variety in products and materials moving in smaller lots throughout the chain and facing a growing variability in demand.
However, these product differentiation efforts have little effectiveness. The success companies have had with their Total Quality programs to improve the manufacture of their products has lead to a greater variety of items, from a consumer standpoint, with smaller differences between them.
This is the problem many companies face. The model in which products are developed based on customer needs, and then differentiate the companies in the market and lead to higher prices is not turning out the results that were expected in terms of competitiveness and profitability. It is here where the PVC model is becoming obsolete to generate value.
The product-based value generation model must evolve; with more of the same we are not going to be successful in a market-ruled environment. We must incorporate other additional dimensions that allow us to leave the race between products without real differentiation, to then compete successfully.
Market-Value Chain: Profitability through Experiences
When managing a product, the fundamental task we need to accomplish in the market is to attract and earn client preference and loyalty. As consumers, we see products and judge their value through the experience they involve for us, and through the way in which they satisfy our needs. Therefore, the key for the transformation of our current product-based value generation models comes from the market itself.
The great opportunity for companies is that they can generate value not only by satisfying the needs of their clients with products, but
also in the way the consumers satisfy their needs through their experience with those products. It is precisely in that element where additional value can be added, creating an authentic differentiation and exceeding the profitability expectations.
The MVC model is based on the premise that clients think in terms of activities, and product purchasing, use and consumption experiences; therefore, there is a chance to generate value by enhancing the purchase and consumption path for the client, not only the products. This leads us to business and management models based on the following 8 principles:
1. Adding value to the market through services that allow for the improvement of the purchase and consumption experience of the consumers (who use the product), purchasers (who buys it) and retailers (who sells it). We acknowledge the existence of consumers, buyers and retailers, and segment them to provide services and products that meet their needs.
2. The company defines priorities in each segment. We acknowledge that a company can hardly excel in every category and product, therefore we establish strategic intentions per client segment.
3. Products are not the only source of profitability; clients are also a source of costs and profitability. For that purpose we
research the costs of client segments considering the costs of attracting, capturing and serving, and we seek to achieve a profitable client base.
4. Generating value in the experience requires integrated chains, where coordination and collaboration play a fundamental role. It is very hard that a single participant of the chain can generate by himself this kind of value for the client, it requires skills in different activities, and even companies.
5. The basis for competitiveness is the ability of the company and its chain to attain achievements that are relevant to the market or its profitability, better than its competitors. This ability is based on a combination of technology elements, practices and organizational elements around the processes and functions.
6. If collaboration plays a fundamental role, the generation of value between business partners lies in how they jointly generate more value in the market.
7. The players of the process have the ability to transform information into competitive actions. The primary information comes from the market and the processes in a proactive way.
8. There is a constant search for opportunitiesfor the generation
of value in the market; persistent experiments are being launched to test the value; and the chain is adjusted to capitalize the benefits. The real opportunities are those that are pushed from the market through to the chain.
This model helps companies to improve their ability to generate value by:
- Differentiating their offer before the market in a segmented way that is hard to replicate.
- Reducing costs through coordination, and increasing swiftness.
- Developing competencies: a quality that is very hard to imitate in the medium term by other competitors.
- To have the action level in the chain–rather than in the company, which provides for a greater power to conjugate market oriented efforts.
- To have a horizontal strategy, achieving the alienation of the efforts of Commercial, Product and Supply Chain.
From Product to Experience: transforming the Chain
The main limitation for a company to make the transition from one model to the other is that they see consumers through the products, and they do not identify the total experience of the user around them. To think in terms of products, instead of activities, is the great restriction on the focus of the manufacturer.
The evolution toward the client experience, based on information and collaboration, also requires different organizational management models. The traditional schemes represent a precondition and an excellent starting point.
But, something true, is that an organization cannot be lead toward new, unknown models.
An organization cannot be lead without first knowing the true meaning of “value” for the consumer; nor can it be lead without understanding how new technologies can create capacities; neither can the decision and interaction hierarchical models be perpetuated. Executives not only require skills to integrate their organization, but also talent to integrate a chain. We must learn to establish different arenas of competence, to fight in a more shrewd way, and to use innovative tools while on the battlefield.
Specifically, executives must be experts in the following aspects:
Experience management. Just like a company has product
- design and development processes, executives must promote actions to design client experiences with the company. Very little companies know what the actual experience of the client is, left alone what is should be.
Indeed, what an executive must promote is that the company is much more focused on the client, and not only on the products offered to them.
- Company capacities management. An executive is, generally speaking, a person who is highly committed with the goals of the business. But in many occasions, what stands between him and the results, is perceived as a headache – a complex entity of human beings embedded in an organizational structure with data and systems, making decisions and actions that generate business results. In his role as the strategist and decision maker, the executive sees this entity as something that, if non-existent, would make his life so much better; this is impossible.
What he needs to understand and accept is that a fundamental part of the duties of the executive is to develop the most important capacities in the company, combining human, and technology aspects, and business processes.
- Integrated strategies management. The third aspect involved for management is that horizontal strategies need to be established. What normally happens is that in the search and targeting of new segments, there is proliferation of products that are not necessarily supported by the entire chain. This leads to logic conflicts between the areas.
The goal is to align the market, product and supply strategies.
- Chain management. The final intervention of the executives is in the creation of skills to build chains, not just companies. Competition isn’t between companies: it is between chains! The performance of the company will be increasingly linked to the capacities of the chain or chain it is involved in.
With this, executives must set out to understand the overall environment that their company participates in and to promote the different actions required to strengthen the entire chain, not just their company.
CONCLUSIONS
If we examine virtually any industry, it will be very evident that companies face an increasingly dynamic environment, in terms of the intensity and the speed of the changes. This dynamism can cause the sudden “death” of a company that is not able to contribute a real
value to the market. Successful companies will be those that are able to transform their value generation models toward their client’s consumption experience, based on information and on integrated networks at the chain level.
The management of the intangible to generate tangible value is a major aspect that company executives must learn to manage.
Oscar Lozano, Sintec