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Newsletters 2004: Dec. | Nov. | Oct. | Sept. | Aug. | July
"Last Gasp" Distribution Strategy Unlikely to Save Toys 'R' Us | After Discounting - Now What? | Consulting - It's All About the Results | Good Reading!
“Last Gasp” Distribution Strategy Unlikely to Save Toys ‘R’ Us
Commentary By Dr. Reed Holden
From "Toys 'R' Us Suppliers Pitch In" by Joseph Pereira and Ann Zimmerman
As Toys 'R' Us continues it's downward spiral (Nov. '03 newsletter), they have moved to desperate pleas for support from their suppliers. The suppliers have decided to chip in with extra advertising funds and exclusive access to some of their new toys. The downward spiral was matched by K-Bee toys and F A O Schwartz, both of which went into bankruptcy due to the decision by Wal-Mart to become a significant toy retailer.
The question is whether the support for Toys 'R' Us is a good decision by the toy suppliers. We think not. Exclusivity as a method of building demand in market upswings and with new channels is a good idea. It forces the dealers that the supplier selects to provide a higher level of support and display. In this case, it's being done as a last gasp effort to save a retailer. Unfortunately, it is unlikely they will survive in their current form due to the relentless pressure from Wal-Mart. Toys 'R' Us got lazy and let their stores and merchandising get old. This provided a perfect opening for Wal-Mart to use their low-price strategy to become the dominant retailer in that area.
Should the suppliers be worried about Wal-Mart? Yes. But not because they provided exclusivity to a competitor. They should be worried that Wal-Mart is a relentless value brand that will put massive price pressure on its suppliers, regardless of how they favor other competitors.
"Airlines Retreat as Price Wars Take Their Toll," The Wall Street Journal, December 7, 2004
Commentary by Nelson Hyde
It might be bad news for those of us who travel, but the airlines may be finally inching the needle toward better price management. After a long post-9/11 period of using low fares to stimulate ridership – and collectively taking a $23.2 billion loss from 2001-2003 in the process – the airlines are starting to say enough is enough.
Rather than drop prices like before, airlines are starting to shed unprofitable capacity instead. The industry’s overall capacity utilization is healthy, but some routes have an excess of seats and some hubs are unprofitable. In one example, an American Airlines route was losing money even when flying nearly full. Airlines are starting to pull back strategically and selectively. By taking some seats out of the air on over-crowded routes, they are able to charge as much as 70-130% more than last summer on those same routes.
The old strategy of outright discounting had definitely boosted utilization. In 2003 the industry load factor had recovered from 9/11 and was the highest ever: 73.4% of available seats were filled. Revenue per mile was up slightly -- but was still 12% lower than in 2000 (see chart). Profits were bleeding deep red for the third year running. U. S. Airlines – Passenger Utilization and Revenue
* RASM = Revenue per Available Seat Mile
When sales drop, the knee-jerk reaction is to use discounting to fill capacity. Discounting can be highly addictive: if I can just lower my rates, then I can keep my customers. It’s someone else who will lose theirs. Unfortunately competitors have an annoying tendency to try the same thing.
There are conditions where aggressive discounting can work for some companies: if you really do have the defining cost advantage, for example – like Southwest Airlines. Or if lower prices really do stimulate significant new demand – not typical of mature markets. But for the rest of us who are trying to compete, we need something else. Not every customer is a pure price buyer, after all. Most aren’t. Companies need a convincing, differentiated basis for value other than price. And they need a way to tell when that differentiated value is going to be profitable and when it’s not.
Airlines still need to clarify better the unique value they each provide. But they seem to be starting to do a better job of making explicit, reasoned trade-offs between discount, profit, and capacity. As a result, airlines can refocus on markets where their strengths are, defend the core, and begin to protect margins. Gerard Arpey, chairman and chief executive of American Airlines’ parent AMR, put it this way: we will “basically draw a line in the sand around our strengths, and then from there, not retreat.”
Trend or just desperation? It’s too early to tell. But the airlines may have some hard-earned lessons that would benefit other industries, both consumer and BTB:
Consulting: It’s All About Results
Commentary By Dr. Reed Holden
From "Accenture's New High-Wire Act," Business Week, November 15, 2004, pp. 92
Kudos to Accenture and its CEO, William Green, for focusing on how consultants can and should focus on adding to the bottom line results of their clients. The results are impressive—the firm increased the number of employees by 25% in the past year--a time when many professional services firms are still struggling to use the people they have.
Over 30% of Accenture's contracts include some type of performance measures and more are expected to include these types of provisions in the future. Financial measures include internal cost cutting and improved customer satisfaction. By focusing on client results, Accenture has been able to provide clients with measures of productivity which help justify fees and follow-on work—the lifeblood of professional services firms.
Off to War: One of Our Own | Chief Marketing Officer: Big Wheel in The Value DisciplineSM
By Dr. Reed Holden
The continuing war in Iraq has suddenly come much closer to us. Mike Lawson, Director and an owner at Holden Advisors, is also an officer in the 98th Division of the Army Reserve. Based in Rochester, New York, all 800 members of this unit have been deployed to Iraq to serve in the Foreign Army Training and Assistance Command. While the purpose of the unit is to train and support the development of the Iraq Army, they will be serving in an active war zone and subject to the same random attacks as the rest of the soldiers serving there.
Mike will be serving a 12-month tour, not easy duty for either him or his wife Nicole, who will be at home with their two-month old baby son, Kyle. All of them are handling the deployment well, but our thoughts and prayers will be with them for the duration of Mike’s work in Iraq.
The war in Iraq is no longer a political issue for us, it's personal. Whatever our thoughts on the politics of the war, we will support Mike and the other brave soldiers serving over there without hesitation or question. Mike is able to get e-mail, so feel free to send your thoughts and best wishes to him at mlawson@holdenadvisors.com. Chief Marketing Officer: Big Wheel in The Value DisciplineSM
From "Chief Customer Officers Integrate Operations," Marketing News, November 1, 2004
Commentary by Dr. Reed Holden
Finally, it's out of the closet: sales and marketing don't get along as well as they should. The “street guys" vs. the “corporate guys" has been one of the classic power struggles of modern business. Yet everybody knows that they all work for the same company, trying to accomplish the same thing: growth in sales and profitability. This article represents the leading edge view that Sales and Marketing need to come under the same supervisory structure to better represent the needs of the customer in the firm. It poses the position of the Chief Customer Officer to make sure that high levels of cross functional collaboration occurs to accomplish that task.
It is important that each side should have a series of metrics that define how to work with the other side. Marketing’s job is to provide target customers, positioning messages, and tools for the sales force. In turn, the sales force, armed with extensive information about customer needs and competitive performance, should be assisting marketing in developing better products and customer targets. This should include diagnostics around pricing and product development efforts, as well to make sure that they are focused on providing and charging customers for value. Unfortunately, this ideal is rarely achieved. The end benefit would be higher productivity on both sides, with better-focused investments yielding higher returns and empowering more successful salespeople.
We would argue that this proposal doesn’t go far enough. Integrating sales and marketing is, in fact, one step in the long journey toward The Value DisciplineSM. Next steps should involve integrating new product development and pricing as well, since they should involve an integrated approach to developing value-based offerings and charging prices based on the competitive value. We are heartened that this article certainly does point to the right direction for that journey. Chief Marketing Officer: Big Wheel in The Value DisciplineSM
From "Chief Customer Officers Integrate Operations," Marketing News, November 1, 2004
Commentary by Dr. Reed Holden
Finally, it's out of the closet: sales and marketing don't get along as well as they should. The “street guys" vs. the “corporate guys" has been one of the classic power struggles of modern business. Yet everybody knows that they all work for the same company, trying to accomplish the same thing: growth in sales and profitability. This article represents the leading edge view that Sales and Marketing need to come under the same supervisory structure to better represent the needs of the customer in the firm. It poses the position of the Chief Customer Officer to make sure that high levels of cross functional collaboration occurs to accomplish that task.
It is important that each side should have a series of metrics that define how to work with the other side. Marketing’s job is to provide target customers, positioning messages, and tools for the sales force. In turn, the sales force, armed with extensive information about customer needs and competitive performance, should be assisting marketing in developing better products and customer targets. This should include diagnostics around pricing and product development efforts, as well to make sure that they are focused on providing and charging customers for value. Unfortunately, this ideal is rarely achieved. The end benefit would be higher productivity on both sides, with better-focused investments yielding higher returns and empowering more successful salespeople.
We would argue that this proposal doesn’t go far enough. Integrating sales and marketing is, in fact, one step in the long journey toward The Value DisciplineSM. Next steps should involve integrating new product development and pricing as well, since they should involve an integrated approach to developing value-based offerings and charging prices based on the competitive value. We are heartened that this article certainly does point to the right direction for that journey. Sun’s Solaris Eclipses Antiquated Software Pricing Models
From CNET – News.com, November 14, 2004
Commentary By Mark Burton
We’ve all seen this ploy before – in a vain attempt to gain market share, some marketing “genius” decides to give the product away for free. This may have worked for an already dominant Microsoft with Internet Explorer but was a miserable failure for many dot com’s whose mantra seemed to be “sell it at a loss and make it up in volume.” So why do we think that Sun Microsystems recent announcement to give away the new release of its Solaris operating system is actually a good idea? Simple. What customers buy from software vendors has changed and the traditional idea of selling licenses doesn’t make sense any more.
Here’s what we mean. Most software purchasers realize that the price of the license can be as little as 30% of the total acquisition cost with consulting, training, service, and support making up the remaining 70%. Knowing this, many customers have driven discounts on licenses to astronomical levels and are now gutting the prices they pay for non-license expenses. Why can they get away with treating the purchase of essential technologies like copier paper and staples? Part of the reason is that there is a value mismatch between what software companies are selling–licenses–and what customers want to buy–capable processes that help them increase profits.
This is why Sun’s move makes sense. If you look at the details of the commodity–the software is free. However, the services necessary to turn that software into capabilities along with updates, maintenance, and technical support are not. They are paid for on a subscription basis. Granted, Sun has taken this position to directly confront a competitor, Red Hat, that also has a free product and service subscription model, but this single competitive battle points to where the software industry has to go—software as a vehicle for selling services.
By the way, any industry that creates more value with its services than its products needs to give some serious thought to what is happening. Manufacturing capabilities are becoming commoditized and the basis of competition is moving to services in industry after industry. Are you vulnerable? Ask yourself the following questions.
If so, it may be time to face facts and start planning for the future—prepare for the services clients need to make your products work better for them. The High-Tech Pricing Game Has Changed
From "Drag on High-Tech Recovery: Companies Do More With Less," The Wall Street Journal, Tuesday, November 9, 2004
Commentary By Dr. Joel Cooke & Ellen Quackenbush
High-technology suppliers are confronting a new competitor in the aftermath of the Internet bubble—their own customers.
Do-it-yourself Information Technology managers are leveraging mature technology and standardized components to do more with less and extend the life of their existing IT investments. Gone are the “trust me” days of the 90’s when many customers made purchasing decisions based on the promised benefits of the latest technology features. Today’s technology-savvy buyers are saying “prove it;” that is, if they even engage in a purchase dialogue with vendors. Most are too busy evaluating how to re-purpose their existing technology, waiting for suppliers to drop prices until “the numbers finally work.”
The temptation for high-technology vendors is to believe that all they are selling is a commodity and engage in deep discounting to beat out the competition. Growth by stealing share is tempting, but short-sighted. Few vendors have recognized the need to change pricing tactics and communicate with their customers in terms customers now value – revenue enhancements and cost savings.
Rather than looking over their shoulder to beat out the other guy on price, smart IT vendors should partner with their customers to develop an intimate knowledge of how their technology offerings deliver value to their customer. They should evaluate their value against “the next best alternative,” which can be in-house, home-grown solutions. And they should translate these features into economic value based on efficiency improvements and financial growth.
Don’t be a desperate competitor! The Value DisciplineSM provides a roadmap for creating customer loyalty, improved pricing power and enabling you to converse with your customers in terms they understand and value:
China: Red Hot or Red Herring?
From "AMD Plans Simple $185 Device to Widen World's Access to Web," The Wall Street Journal, October 19, 2004
Commentary By Dr. Reed Holden
With a population that is four times the size of the United States and an economic growth rate of 8% per annum, China represents one of the hottest markets in the world. The problem for many suppliers is that China's per capital GDP is only $785, or only 2%, of the U.S. GDP. As such, along with India, China is one of the lowest current value, yet highest-potential value markets in the world. AMD has recently announced the introduction of a low-priced device to permit consumers to gain access to both the internet and introductory-level computing capabilities. They have partnered with a number of component suppliers to achieve a low-price entry point which will permit a broader based diffusion of computing technologies than with current products.
The question is whether China represents a viable market opportunity for many BTB suppliers. The answer, of course, is that it all depends. For broad-based global B2B suppliers, China represents a "must play" in the list of global opportunities. Failure to establish a major presence in this emerging market means ceding first mover advantage in one of the globe's largest potential markets, allowing competitors to establish business beachheads, build competitive skills, and as the market develops, leverage their established positions. More importantly, this global advantage does not end at the Chinese border. The sheer size of the Chinese market promises scale that established players can leverage to achieve lower costs and lower prices in other global markets – even if the Chinese market is initially a loss leader. Large, global players know this drill – support losses in some, more competitive, markets with profits from other, more secure, markets.
For niche players that can't provide these cross-functional points of leverage, China may be a red herring market – lots of volume but no profit opportunity for the foreseeable future. Unless these new-entry players have a unique low-cost technology or product that addresses a specific market need, they may be better off sticking to established, high-value markets.
For many players, however, the problem is the inability to insulate high-value products in more developed markets from cross-market arbitrage of look-alike products in lower-value arenas. Pharmaceutical firms are well-aware of such grey-markets and may be better served by licensing generic versions of their products rather than selling branded products for deep discounts.
Savvy players, such as AMD and Microsoft, understand the dynamics of the new global chessboard and have taken critical steps to meet the low-value needs of large regional markets while insulating their core, high-value offerings. AMD's Personal Internet Communicator is designed to sell for significantly less than even the lowest-priced desktop. Developed in conjunction with a number of parts suppliers, and supported by Microsoft's recently announced "Windows Light," it will provide consumers with a unique opportunity to gain access to the internet. Their plan to license the new device to local manufacturers will net them the benefits without undermining their higher-value devices. Kudos to AMD as they continue their series of technology home runs.
It's About the customer | Disk Drive Makers ... Competitive Stone Ages
From Marketing Management, Sept. Oct. 2004, pp. 4 - "The ROI Challenge"
Commentary by Dr. Reed Holden
Research from the Marketing Management report "The ROI Challenge" showed that only 4% of senior executives expressed "complete satisfaction with their firm's customer centricity." How well do you know your customers? How do they think and feel about you as a supplier? How well do you stack up relative to your close competitors? Where do you perform well? Where do you perform poorly? What are the implications in the answers to how you develop strategy and run the business? Simple questions? Yes. But I continue to be amazed at the number of senior executives who a) don't ask these questions, and b) don't manage with the answers if they get them.
To make matters worse, most companies don't have metrics in place to integrate the appropriate customer information into their strategic and execution processes. Recent research has shown that firms that do have those metrics in place are 60% more likely to perform in the top third of their industry. Let's do the math. Assume that the difference in performance equates to an increase of 3% RONA (Return on Net Assets) for a $1B company--that's $30 Million to the bottom line. The marketing function should be in a position to continuously assess the value of different activities under its control in terms of improving sales, profits, and returns for the firm. The purpose of marketing is also to connect the customer to the various departments of the firm. That philosophy should drive product development, customer service, production, QC, and web site development not to mention strategy. Customer centricity is at the heart of the Value DisciplineSM. It is the process for connecting the needs of customers to the firm. It pays and it pays well. Disk Drive Makers Still in the Competitive Stone Ages
From "Costly Memories: Behind TiVo iPod and Xbox: An Industry Struggles for Profit" by Scott Thurm, The Wall Street Journal, October 14, 2004, pp. 1
Commentary by Dr. Reed Holden
It should come as no surprise that yet another high-tech segment, in this case disk drive manufacturers, continues to make the mistake of resorting to “stone ages" pricing. No one wins a price war in a mature industry. Consolidation driven by industry maturity should lead to a better informed competitive strategy. What's at the heart of the problem? A number of things.
First, lack of good information on product demand leads suppliers to order too many components and build too many products. Any time customers are worried about supply and are the prime source of demand data, they over-order to cover their needs. Suppliers will overproduce and end up with a glut of inventory they then need to unload at fire-sale prices. Intel figured out years ago that if they tracked demand in their end-user markets rather than the channel, they could better estimate real order levels and produce to this forecasts.
Second, suppliers shouldn't innovate until they know customers willingness to pay for the results. In most cases they are willing but purchasing agents have found they can get both the innovation and lower prices. The key is for suppliers to charge for the results of the innovation. This means entering the introductory and growth phases of the life cycle with higher prices and driving the prices down to commodity levels when the new densities get adopted by all suppliers. Will customers be satisfied? No—but they don’t have to be. If the large customers aren't willing to pay for the innovative drives, sell them to the second tier manufacturers willing to pay for a competitive advantage.
Third, the idea that a supplier can dump any type of electronic component in Asia without incurring problems in other global regions stopped being a successful option years ago. Ask the drug manufacturers. Disk drives, like drugs, can be shipped across the globe for less than 1% of the product's cost. And often they are commodity products; therefore, it's delivery that may be the value-add. Suppliers should avoid dumping products in other channels or regions because those products will leak back into the high-value channel or part of the globe.
Finally, no manufacturer in a mature, commodity industry that wants to gain large chunks of market share should use price. This creates price wars and unless that supplier has a huge cost advantage, it will certainly hurt their profitability in the long run as competitors respond in kind. Instead, adopt competitive strategies that include more productive public announcements, local territory response techniques, and value-based competition (yes, you can do that even for commodity products) based on supply, service, and support to move the industry to profitability. Measuring Value – Make it Contractual
Commentary by Andrew Namiot
The lesser of two evils While neither situation seems ideal, the second scenario (oblivious to the value produced) results in greater exposure to contract termination, price concessions, competitive switching, and over-allocating sales time towards heroic renewal efforts.
Your own worst enemy
The case for contractual measuring
What about the apparent risk of under-performing against the promised value?
First, having contractual measures will guarantee you are able to investigate the potential causes and offer remedies well before renewal takes place. Often, under-performance can be linked to the internal operations of the buyer. Perhaps a large number of new employees did not attend initial training program or the initial configuration of your solution needs to be enhanced to reflect changes in the client’s business operations. Using the processes in the Value DisciplineSM provide a basis for analyzing, understanding and creating value for clients. It is adhering to the discipline of listening to customers that takes the guess work out of living up to the metrics in a contract.
Second, contractual measures increase the number of potential case studies to choose from. Far too often, sellers are forced to use case studies that are not aligned to the industry or the pain or a particular prospect and require a greater leap of faith by the buyer.
Lastly, contractual measures are a means to ensure equilibrium of power between the client and you. In the absence of measures a client has enormous leverage in demanding and winning unjustified price concessions. As the old axiom states, “If you want to know the future, create it.”
True Differentiation in a Competitive Market
Presented by: Dr. Reed Holden and Dr. Tom Sant
Session Description Professional Pricing Society Webinar
Presented by Mark Burton http://www.pricingsociety.com/expertwebinars.asp
The Guerilla Guide to Pricing Success in a Jungle of Corporate Agendas
Marketing Conference http://www.conference-board.org/conferences/conference.cfm?id=726
“Value to the Customer” as a Driver for Strategy and Execution
Commentary on “Just in Time Meets Just Right,” Forbes, July 5, 2004
By Mike Lawson
When most companies embark on their LEAN journey, this usually means squeezing every penny out of complicated costing systems, leaving little value for customers. As the Forbes article stated, “The goal is to reduce from 70 days to 14 the average time between dealer order and delivery from Toyota’s North American factories.” Achieving this goal will give Toyota the epiphany – meeting customers’ special, demanding needs and eliminating waste from the system. This comes at a crucial time for Toyota as “many other automakers have caught up with Toyota’s quality edge.”
Six Sigma and LEAN are great practices for companies that truly understand the power behind process improvement. Improve quality and eliminate waste in process systems to reduce costs, and in very rare cases, enable companies to deliver more value to customers. While Toyota’s goal is to “make customers happier, cut dealer inventory costs and the need for Toyota to spend on rebates for slow selling vehicles,” it is also a way to create different, more profitable offerings for the heavily-segmented auto market. For example, customers that do not mind waiting a few months for their new car would pay a lower price than customers wanting a car in just three to four weeks.
Too often, companies pass along the entire cost savings to customers without realizing the value potential to customers. This may work for companies like Wal-Mart and Southwest that have clear cost advantages in the marketplace and need volume to sustain those advantages. However for companies like Toyota, the task is to become more efficient and even more profitable by capturing the value delivered to customers. This can be done through premium pricing for quicker delivery times, special paint colors or purely customized trim lines. Ultimately, companies that can leverage operational processes with sales and marketing will achieve higher levels of profitability through both lower costs and premium pricing. Six Sigma Black Belts and LEAN Champions should be challenged to consider both operational savings and marketing opportunities when embarking on their process improvement journey. Software Vendors Not Aging Gracefully
"Software Vendors: Soon They’ll Be Fewer," BusinessWeek, July 9, 2004
By Mark Burton
The recent spate of disappointing earnings announcements by some of the leading names in software shows that industry executives have not prepared for the ravages of time on their once young and vital companies. The fact is that large sectors of the industry have moved into maturity. The signs are all there: slow to no growth in new license sales; a shift decision making from the CIO to the CEO; customer demands for complete solutions that quickly generate hard dollar benefits; and steep price discounting.
Success in mature markets requires a starkly different set of strategies than in growing markets. In growth, companies can drive revenues through a stream of innovations and playing on customer fears of being left behind. In maturity, customers are far more sophisticated in evaluating alternatives and making choices that minimize risk and maximize returns. In software that means that customers are no longer buying “applications”; they are buying process capabilities that can quickly produce bottom-line results.
What will smart companies do to survive and grow? They will differentiate themselves by delivering complete solutions of software, consulting, and services packaged to align with customer business priorities. They’ll communicate this differentiation through credible and balanced ROI analyses that compiles the customer’s data, hard numbers showing how the software will make improvements, and a test of that value relative to comparisons against the competition. Finally, they will restore integrity to pricing by establishing price levels that reflect value delivered, supported by policies that focus negotiations on value trade-offs.
Adapting to a mature market, especially one that seems to have shifted so quickly is a Herculean task. In the end, the battles may be won by the firms that are humble enough to put their past glory in perspective and embrace the new rules of competition.
By Joel Cooke
Comments on “Recovery for Applied Materials,” The Wall Street Journal – Tuesday, July 13, 2004
Sometimes the best way to beat the competition is to keep their machines running. Sound bizarre? Not to Applied Materials, the world's largest manufacturer of semiconductor production equipment. Applied Materials has decided to break the competitive mold--not only by leading their rivals in technological and market advances, but also by extending their offerings to include services, specifically the ability to service their competitors’ equipment. This subtle move provides Applied with a steady stream of services revenue in a highly-cyclical market and, more importantly, opens the door to developing a deeper understanding of customer value.
Cyclicality is deeply-rooted in the semiconductor business. Product life cycles are typically less than one year, overcapacity plagues pricing and incessant technology advances doubles the capacity of semiconductor wafers every two years. The typical industry reaction--driving demand via dramatic decreases in price/performance only worsens cyclical swings and intensifies price competition.
Applied is developing a strategy that elevates them from the price wars and allows them to develop differentiated offerings that match what each customer is willing to pay for. Step one is leveraging its current position:
Step two is providing differentiated offerings:
Applied Materials strategy is straightforward – focus on core markets, develop new technology for evolving markets and cultivate partnerships to service the customer value chain. By leveraging their technical expertise and global production footprint, Applied first supplements their cyclical production revenue with a steady cash flow from services and ultimately shifts their relationship with a core set of customers from price-based purchases of equipment to consultative analysis of their operations. Their approach to moving up-market to value-based solutions and matching offerings to customers buying behavior provides a lesson many in the chip fab market may want to watch. Guaranteed Key to Success in Business Management
By Dr. Reed Holden
Ok, so the title is a little cheesy. But the fact is that I believe what follows is true. The best advice I got as a Marketing Manager with a newly minted MBA was the following: READ. It came from an outside consultant hired to help us craft a strategy for our product line. I believe that advice is truer today than it was 24 years ago. What strikes me is two pieces of data. The first comes from Newsweek: there has been a 14% decline in the number of fiction readers in the past ten years. The second is much less formal, but it is insightful. For the past several months, I’ve been asking people how many business books they’ve read. This includes those managers with books piled high on their book cases. The response is generally “one or two a year.”
The sad fact is that despite a wide range of great books in the business press, managers have forgotten the critical skill of reading to gain perspective while defining and managing their business problems. Sure, managers read, but what they read are generally internal documents (always too long) and reports (always too detailed). While those reports may give them insights on what is going on inside the company, it fails to help them understand what is going on outside the company. The view from outside gives us an understanding of what is needed to make improvements inside the firm.
Unfortunately, not all business books are good, nor is everything in the best books correct. By reading multiple books, we gain a good understanding of what is right for us and our firms and what is wrong. I can’t tell you the number of times I’ve been meeting with a client when a salient point from a recently read book helps with the insight to a particular problem.
We have tried to encourage the process of reading with our monthly newsletter which comments on articles from the business press, but that isn’t enough. Going forward, we will begin to assemble a list of good business books to read with brief comments on why they are relevant. If you have a favorite book, drop us a line, and we’ll add it to our list. The following are part of my top 25 list.
Can't Buy Love | A Nimble Giant | Boeing's New 7E7 | Wireless Carriers | Webinar Sept. 30 | Good Reading!
From "Companies Find They Can't Buy Love with Bargains" by William C. Taylor, The New York Times, August 8, 2004, pp. BU 5
Commentary by Dr. Reed Holden
This article reports an interesting study that shows when companies reduce prices, even with improved quality, they don't often improve customer satisfaction. In fact, many of the companies that have dropped prices, like Hewlett Packard, have seen a significant drop in customer satisfaction. As we have long known, low price with high quality is great but, in the end, some level of service or customer support is going to be sacrificed to achieve a low price. By our research, 65% of customers in a B-T-B environment want value rather than very low prices. Price oriented customers do want low price and they're willing to sacrifice features, services, and support to achieve lower prices. But value-oriented customers are willing to pay more if they perceive they will get more value.
Why does it appear most of customers are price buyers? Because when customers demand a lower price, we give it to them. We even give them access to higher-value products at lower prices. Value-oriented customers have learned that if they ask for lower prices, they get them more often than not.
Catering to price buyers is equally devastating unless you produce at the lowest cost in your industry. And, you must keep those costs driving lower by investing in the most efficient production and process technologies. Price buyers are a fickle lot. When another producer offers lower prices because they have lower costs or they are more desperate than the next competitor, the price buyer will switch their allegiance faster than they can sign the purchase order.
Dropping price and eliminating services to value customers is never a good thing. Trying to be price competitive when you don't have the lowest cost won't work either. The bottom line is that it is best to service both price and value buyers with differing offerings of high to low-value bundles of products and services. The price buyers force you to keep your costs down-- a good thing. The value buyers force you to understand what they value and make it part of your offering. Also a good thing. The real trick is to continue to service the needs of high-value customers and to fence the price buyers from gaining access to the high-value services they don't pay for. That is the Value DisciplineSM!
From “Microsoft to Offer Budget Windows” by Robert Guth The Wall Street Journal, August 11, 2004
Commentary by Dr. Joel Cooke
Microsoft recently launched a 12-month program to offer a lite version of its Windows XP operating system. The draw of this “Windows XP Starter Edition,” is its local-language customization which should drive adoption in these markets since it minimizes end-user training and reduces total cost of ownership.
Local language specificity also reduces the chances of product migration to higher-value countries. In order to further limit the likelihood that the low-price product will find its way into those markets, Microsoft has turned off some key features within its localized software offering and also limited availability of this new package to new PCs, thus thwarting migration of the Starter Edition to existing users.
Microsoft has discovered that government specifiers are core to the overall purchase decision in many of these developing markets. By offering lower-priced customized products to the market and targeting key specifiers that set the standards for computer software, Microsoft hopes to stem the infiltration of the Linux systems that are now beginning to appear since they have little to no cost of adoption.
Microsoft is breaking from tradition by developing segment-specific tactics and strategies optimizing their offerings to early adopters in specific segments. Microsoft is also launching a new program designated as “Partners in Learning.” The goal of the program is to attract and retain early-adopters of computers in this huge but embryonic market segment.
Who says that Giants can’t be nimble? Faster Assembly Means Happy Customers for Boeing's New 7E7
From "A Plane That Could Change the Game" Stanley Holmes & Michael Arndt, BusinessWeek, August 9, 2004, pp. 33
Commentary by Dr. Reed Holden
Operational excellence can lead to sustainable competitive advantage as it improves quality, frees up working capital, and reduces costs. After recovering from devastating slowdowns in assembly times in the mid-1990's, Boeing plans to perform the assembly of its new 7E7 in four months rather than the usual 12. The benefits to Boeing are significant, but now there is a benefit for airlines. Boeing is able put the aircraft into service immediately upon completion of assembly rather than having a reconfiguration process, because the aircraft are not compliant with current seating needs. For example, they may have to remove tourist class and add first class seats. The reconfiguring not only can cost millions, but it forces those airplanes to sit idle while work is done to make the adjustments. Just one month of service can equate to millions of dollars of revenue for the cash starved airlines.
Boeing has clearly designed the 7E7 to meet the needs of its customers. With a 10% reduction in operating costs, 20% reduction in fuel consumption, and the elimination of expensive inspections at overhaul times, this airplane is a clear winner. Add reduced set-up costs and faster in-line delivery makes us wonder if Boeing realizes that it finally has an airplane that has an outstanding value story. Only time will tell but if the prices do reflect that value, but our guess is that we should see a healthy rise in Boeing's stock in the coming years.
"Wireless Carriers Leave Many Callers in Dead Zone" by Marlon, Walker & Jesse Drucker, The Wall Street Journal, August 9, 2004
Commentary by Dr. Reed Holden
Just when it seemed like a few of the wireless phone companies were getting it right and moving to some level of profitability, this article reports that many of the firms alienate their best customers by letting new technologies become an excuse for providing poor service. Here, the move to digital wireless networks has led to wireless phones that no longer use the old analog signals. The problem is there are still many places where only analog networks are available. Unless you still have a phone that can handle the old and the new technology, you won't get service on analog-only networks. The phones with all of the fancy features are often the real culprits. Unfortunately, these are also the phones bought by the business people who are often traveling and need coverage in more areas. They also contribute some of the highest average revenue per user (ARPU). It is fantastic that companies let technological change alienate their best and most profitable customers.
The wireless companies still don't get it--technology should improve customer service not cause it to get worse. Yes, I do realize the increased capacity means fewer dropped calls at peak drive times. I am concerned for those of us who still choose to leave the urban environment at times and drive through long stretches of country where cell phones still don't work because only analog signals are available.
It is no wonder that despite high costs of customer acquisition, the churn rate at some of the wireless companies is still in the 25-35% per year range. The problem is not losing customers to low prices, it losing customers because of terrible service--that's why I changed my service provider last year. I would do it again in a heartbeat if I found one that was better. The Value DisciplineSM focuses on developing and leveraging customer value, but it seems that the wireless companies are compromising it. Webinar Hosted by Better Management
Rescuing ROI
The failure of many ROI-based marketing and sales initiatives is rooted in: In this session, we will describe the building blocks of successful business value-centered, go-to-market strategies including: As a result of helping their customers implement a value base, firms will be able to increase differentiation/win rate, improve retention, and generate additional follow-on sales.
LEAN Means Green | Software Vendors Not Aging Gracefully | Balancing the Cycles | Guaranteed Key to Success in Business Management | Good Reading!
Commentary on “Just in Time Meets Just Right,” Forbes, July 5, 200
By Mike Lawson
When most companies embark on their LEAN journey, this usually means squeezing every penny out of complicated costing systems, leaving little value for customers. As the Forbes article stated, “The goal is to reduce from 70 days to 14 the average time between dealer order and delivery from Toyota’s North American factories.” Achieving this goal will give Toyota the epiphany – meeting customers’ special, demanding needs and eliminating waste from the system. This comes at a crucial time for Toyota as “many other automakers have caught up with Toyota’s quality edge.”
Six Sigma and LEAN are great practices for companies that truly understand the power behind process improvement. Improve quality and eliminate waste in process systems to reduce costs, and in very rare cases, enable companies to deliver more value to customers. While Toyota’s goal is to “make customers happier, cut dealer inventory costs and the need for Toyota to spend on rebates for slow selling vehicles,” it is also a way to create different, more profitable offerings for the heavily-segmented auto market. For example, customers that do not mind waiting a few months for their new car would pay a lower price than customers wanting a car in just three to four weeks.
Too often, companies pass along the entire cost savings to customers without realizing the value potential to customers. This may work for companies like Wal-Mart and Southwest that have clear cost advantages in the marketplace and need volume to sustain those advantages. However for companies like Toyota, the task is to become more efficient and even more profitable by capturing the value delivered to customers. This can be done through premium pricing for quicker delivery times, special paint colors or purely customized trim lines. Ultimately, companies that can leverage operational processes with sales and marketing will achieve higher levels of profitability through both lower costs and premium pricing. Six Sigma Black Belts and LEAN Champions should be challenged to consider both operational savings and marketing opportunities when embarking on their process improvement journey. Software Vendors Not Aging Gracefully
From: "Software Vendors: Soon They’ll Be Fewer," BusinessWeek, July 9, 2004
By Mark Burton
The recent spate of disappointing earnings announcements by some of the leading names in software shows that industry executives have not prepared for the ravages of time on their once young and vital companies. The fact is that large sectors of the industry have moved into maturity. The signs are all there: slow to no growth in new license sales; a shift decision making from the CIO to the CEO; customer demands for complete solutions that quickly generate hard dollar benefits; and steep price discounting.
Success in mature markets requires a starkly different set of strategies than in growing markets. In growth, companies can drive revenues through a stream of innovations and playing on customer fears of being left behind. In maturity, customers are far more sophisticated in evaluating alternatives and making choices that minimize risk and maximize returns. In software that means that customers are no longer buying “applications”; they are buying process capabilities that can quickly produce bottom-line results.
What will smart companies do to survive and grow? They will differentiate themselves by delivering complete solutions of software, consulting, and services packaged to align with customer business priorities. They’ll communicate this differentiation through credible and balanced ROI analyses that compiles the customer’s data, hard numbers showing how the software will make improvements, and a test of that value relative to comparisons against the competition. Finally, they will restore integrity to pricing by establishing price levels that reflect value delivered, supported by policies that focus negotiations on value trade-offs.
Adapting to a mature market, especially one that seems to have shifted so quickly is a Herculean task. In the end, the battles may be won by the firms that are humble enough to put their past glory in perspective and embrace the new rules of competition.
By Joel Cooke
Comments on “Recovery for Applied Materials,” The Wall Street Journal – Tuesday, July 13, 2004
Sometimes the best way to beat the competition is to keep their machines running. Sound bizarre? Not to Applied Materials, the world's largest manufacturer of semiconductor production equipment. Applied Materials has decided to break the competitive mold--not only by leading their rivals in technological and market advances, but also by extending their offerings to include services, specifically the ability to service their competitors’ equipment. This subtle move provides Applied with a steady stream of services revenue in a highly-cyclical market and, more importantly, opens the door to developing a deeper understanding of customer value.
Cyclicality is deeply-rooted in the semiconductor business. Product life cycles are typically less than one year, overcapacity plagues pricing and incessant technology advances doubles the capacity of semiconductor wafers every two years. The typical industry reaction--driving demand via dramatic decreases in price/performance only worsens cyclical swings and intensifies price competition.
Applied is developing a strategy that elevates them from the price wars and allows them to develop differentiated offerings that match what each customer is willing to pay for. Step one is leveraging its current position: Step two is providing differentiated offerings: Applied Materials strategy is straightforward – focus on core markets, develop new technology for evolving markets and cultivate partnerships to service the customer value chain. By leveraging their technical expertise and global production footprint, Applied first supplements their cyclical production revenue with a steady cash flow from services and ultimately shifts their relationship with a core set of customers from price-based purchases of equipment to consultative analysis of their operations. Their approach to moving up-market to value-based solutions and matching offerings to customers buying behavior provides a lesson many in the chip fab market may want to watch. Guaranteed Key to Success in Business Management
By Dr. Reed Holden
Ok, so the title is a little cheesy. But the fact is that I believe what follows is true. The best advice I got as a Marketing Manager with a newly minted MBA was the following: READ. It came from an outside consultant hired to help us craft a strategy for our product line. I believe that advice is truer today than it was 24 years ago. What strikes me is two pieces of data. The first comes from Newsweek: there has been a 14% decline in the number of fiction readers in the past ten years. The second is much less formal, but it is insightful. For the past several months, I’ve been asking people how many business books they’ve read. This includes those managers with books piled high on their book cases. The response is generally “one or two a year.”
The sad fact is that despite a wide range of great books in the business press, managers have forgotten the critical skill of reading to gain perspective while defining and managing their business problems. Sure, managers read, but what they read are generally internal documents (always too long) and reports (always too detailed). While those reports may give them insights on what is going on inside the company, it fails to help them understand what is going on outside the company. The view from outside gives us an understanding of what is needed to make improvements inside the firm.
Unfortunately, not all business books are good, nor is everything in the best books correct. By reading multiple books, we gain a good understanding of what is right for us and our firms and what is wrong. I can’t tell you the number of times I’ve been meeting with a client when a salient point from a recently read book helps with the insight to a particular problem.
We have tried to encourage the process of reading with our monthly newsletter which comments on articles from the business press, but that isn’t enough. Going forward, we will begin to assemble a list of good business books to read with brief comments on why they are relevant. If you have a favorite book, drop us a line, and we’ll add it to our list. The following are part of my top 25 list.
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