Valuespace

First Chapter

YOU ARE THE CEO of a mining company, and you are digging through a difficult minefield with uneven topography. An operator sits atop a tractor mounted with cutting blades, maneuvering through the minefield diligently, cutting here at one angle, chiseling there at another. The task is difficult, the extreme skill of the operator notwithstanding, and the trial-and-error digging is nowhere near the pace it should be. As the CEO of the mining company trying to deliver this multimillion-dollar project on time, you wish there were some way for the tractor to find the best cutting path. If only it could sense the topography and automatically adjust its cutting angles! It could eliminate all the guesswork, reduce demands on the operator's skill, and cut the cutting time by half.

Take heart! There actually is. If your tractor is a CAT D11R, you can actually program it for autopiloted optimum cutting path. CAT's Computer Aided Earthmoving System (CAES) technology actually relays the topography of the ground under the machine to a remote CAT site on a real-time basis; there, CAT engineers calculate the optimum path and beam it right back to the computer on the machine. Now, the operator can simply sit back and watch the machine do its job.

You are a small business, selling widgets to another company. You ship your product by UPS-by Air or Ground, depending on the customer requirement. The customer wants this one particular shipment in three days. An air shipment will reach the customer a day early but will cost more; the ground shipment is cheaper but will miss the deadline. So, reluctantly, you ship by air, paying more. UPS says, "Don't!" Unless you like spending more. "Just tell us where you want it and by when," says UPS, "and we will figure out the best mode, combining ground and air for different sectors of the journey if necessary, and save you money."
This means UPS will make less money on each shipment. So, why would UPS do it?

Andrew Sterner is a district sales manager in the Jacksonville, Florida, operating division of SYSCO, the nation's premier foodservice company. He also happens to be a former chef. So one recent month, he was helping a customer-a restaurant-organize a benefit dinner for the Alzheimer's Association on the anniversary of the sinking of the Titanic. He had already secured 90 percent of the required food as donations, and he borrowed waitstaff from yet another customer (restaurant). As for finding some cooking help, he donned the apron himself and cooked a 13-course meal for 160 persons. And no ordinary meal it was-it was identical to the one served on the Titanic itself!

Caterpillar, UPS, SYSCO. Isn't it nice to be a customer of these companies?
It is. And it is because these companies are masters at creating new ValueSpace, the space that delivers us, their customers, great value.

We recently asked this question of one of our MBA classes. Their answers: to make money (67 percent), to sell what they make at a profit (15 percent), to satisfy their customers (10 percent), miscellaneous-for example, to create new products, to expand their market share, to beat the competitors, to give employment to people (8 percent). Indeed, most businesses measure their success by how well they serve their shareholders. This is not wrong. Money, after all, is the lifeblood of business. Without investors willing to provide money, there will not be any business to run. Investors invest money to make a profit. The more profit a business makes, the more value it delivers to its shareholders. Delivering value to shareholders can thus be a principal measure of a business's success. It is, however, a measure, not a means. A business cannot succeed, and value to shareholders cannot accrue, without value to two other constituencies-employees and customers.

The three value-constituencies reinforce each other. Although a business that ignores value to customers and employees can still deliver value to shareholders in such limited circumstances as a monopoly, a product shortage, or a speculative financial market, to do so in the long run and on a sustained basis is impossible. Without also delivering value to customers and employees, the business will slowly but certainly languish. When a business delivers the desired level of value to its employees, by compensation and job satisfaction, its happy employees help create value for the other two constituencies.

Happy employees are resources to be deployed; but managers must know how best to deploy them. They, as well as nonhuman resources, must be deployed to produce outcomes that customers value. Only when employees succeed in creating customer value, do they (the employees) become the source of shareholder value. In the same vein, nonhuman resources-equipment, technology, and business processes-must also be deployed to create value for customers. Their deployment merely to reduce costs, raise productivity, or produce new concoctions of products or services of no new value to customers will not raise the top line; nor the bottom line. As Figure 1.1 shows, creating customer value is the key to creating shareholder value. This book is therefore about customer value. It is about the ValueSpace where customers are owned for life or lost forever, where the battle for market leadership is won, where global market leaders thrive.

Value, not money, is the basic currency of all human interaction. When we meet someone, we try to quickly assess how long would it be worth our while to be talking to that person. If an incoming phone call shows up on our caller ID, we promptly decide if we would gain anything by taking the call at that time. If we get 10 letters in the mail, we look through them and choose to open only those that we expect to contain some information of value to us. This is even more true for marketplace exchanges. The only reason the customers are even in the marketplace is that they are looking for something of value. The business that can deliver that value, and deliver more of it than its competitors, will gain the customer's patronage.

More than 20 years ago, management guru Peter F. Drucker proclaimed that "The purpose of business is to create a satisfied customer." Later, Tom Peters and Robert Waterman, in their 1982 business classic, In Search of Excellence, extolled management to get "close to the customer." Since that time, businesses in droves have pursued customer satisfaction-albeit, some only in words, but many in deeds as well. This pursuit has led companies to acquire and practice a new marketplace discipline, focusing on customer satisfaction rather than just making a sale. But even customer satisfaction as a business goal seems to have run out of steam. Companies today are realizing that seeking customer satisfaction is a step in the right direction, but that it is by no means a surefire solution to an aggressively competitive marketplace. For one thing, today's satisfied customers will tomorrow switch to your competitors, in the blink of an eye, if someone can offer them better value. For another, customer satisfaction is an outcome, not a business action. You can do nothing with it unless you know what moves it. That prime mover of customer satisfaction is customer value. Keep your eyes on the value you offer your customers and keep ahead of your competitors on delivering those specific values, and you will have some assurance that today's customers will be with you tomorrow, and the day after. The new miracle medicine for continued customer patronage is customer value, rather than customer satisfaction.

Haven't we already heard all the management wisdom there is? We have tried, after all, one-to-one marketing, frequency marketing, loyalty programs, relationship marketing, customer partnering, among others. And we have tried other prescriptions. We have adopted TQM and we have reengineered our business processes; we have identified and honed our core competencies; we have learned to stick to our knitting; we have become a learning organization; we have deployed technology; and we have become lean, agile, and even virtual. What else remains to be learned? What is still missing?

What is missing is a clear guide to the values that customers seek in the marketplace. What do they want in products and services? How do they want businesses to act? How do they want to be treated? And how much sacrifice are they willing to make in return? What, in other words, is their ValueSpace? Make no mistake about it: There is no lack of desire anymore among most companies for satisfying the customer. And there is no lack of action, either. Whatever the customer satisfaction surveys reveal as gaps, companies rush to fix them. But these actions are often piecemeal, and there frequently is no comprehensive, compelling framework for understanding the customer ValueSpace. And certainly no guidance on how to build and deliver in that ValueSpace.

But a framework is badly needed. Profiting from such classics as In Search of Excellence, Reengineering the Corporation, Built to Last, Direct from Dell, The Loyalty Effect, and Competing for the Future, among others, progressive companies have pursued excellence with dogged diligence. These books have served their readers well, making their reengineered and renewed organizations fit and ready to launch a journey. What should be the destination of that journey? What should that organizational energy be channeled to produce? To what ends should the organization deploy its core competence? What should it offer its customers? Again, we come full circle to the need for a blueprint for understanding and creating the customer ValueSpace.

We present a comprehensive framework for building ValueSpace for the customer. And we link it to the organizational processes needed to drive it. To preview this framework briefly, there are three components in the customer ValueSpace: performance, price, and personalization, or what we call "the 3P's of ValueSpace." Like the three basic human needs for survival-food, shelter, and clothing-performance, price, and personalization are basic and universal market values all customers seek.

Performance, price, personalization-these concepts are familiar enough to most managers. Indeed, we have chosen the familiar names on purpose. After all, there is no need to reinvent the wheel. What we do need to invent, however, is meaning-the meaning that makes sense to customers; the meaning that captures the essence of the ValueSpace they are in fact seeking.

We do this in the next chapter, spelling out the core meaning of the 3P's, and then also identifying their fundamental building blocks. These building blocks, eight in total, and their driver processes are described in the chapters that follow, and they are illustrated with case studies from 11 of the world's Most Admired companies. We argue that to craft the complete ValueSpace, all 3P's must be pursued, and all of the building blocks must be deployed. A trade-off is not allowed. The three vignettes at the beginning of this chapter are exemplary instances of each customer value creation. Caterpillar, UPS, SYSCO, the subjects of these stories, are leaders in delivering not just one, but each of the 3P's of the ValueSpace. They, and eight other global market leaders, are also the subjects of our research reported in this book.

To understand how market-leading companies create customer ValueSpace, we researched 11 companies with reputations for delivering exemplary customer value. The research project was sponsored and supported by Marketing Science Institute, a nonprofit organization based in Cambridge, Massachusetts.

We call these companies "the world's Most Admired companies." Seven of them-American Express, AutoNation, Caterpillar, 3M, Xerox, UPS, and PPG-are called just that (actually, they are called Global Most Admired) by Fortune magazine. We chose two more-Hilton and SYSCO-from a similar list of America's most admired companies, because, for its global list, Fortune does not cover the industries to which these companies belong.

Every year, Fortune publishes a list called "Global Most Admired Companies," and likewise, a list called "America's Most Admired Companies" (AMACs). To prepare the list, the magazine surveys a large sample of senior business executives and financial analysts, asking them to rank all the Fortune 1000 companies on nine criteria: overall management quality, product or service quality, innovation, long-term investment value, financial soundness, getting and keeping talent, social and environmental responsibility, wise use of corporate assets, and global business acumen. The AMAC list excludes the last attribute. A company's overall ranking is derived by averaging these eight or nine (as applicable) attribute rankings. The list is organized by industry groups, and company rankings reported within each industry. We chose only one company from a given industry. Since the exact rank within the industry changes somewhat from year to year, our goal was not necessarily to choose the #1 company but rather sample companies from among the top five (out of as many as 15). In the resulting, necessarily a convenient sample, three companies were ranked #1 (UPS, Caterpillar, and American Express), while others ranged from #2 to #5 at least on one of the two lists (Global and North American).

To these nine from the Fortune list, we added two more, not covered by either of the two Fortune lists (due to their limited scope) but, in our view, world-class and possessing some unique attributes. One of these is Rosenbluth International, the world's third largest privately held business travel services company. And the other is a niche company, Fossil, the innovative maker of fashion watches and related accessories. Each of these eleven companies has created admirable ValueSpace for its customers.

Our study was not a typical, quantitative survey research. We wanted to understand in qualitative and process terms how customer ValueSpace is created. We researched published information about the operations of each company, visited its headquarters, and interviewed its senior executives in order to understand their efforts at value creation. What we learned, from the interviews and from our reflections, we report in the subsequent chapters in this book.