POINT OF VIEW

Customer Value Creation:

A Platform for Profitable
Growth
by Gary Plaster and Jerry Alderman

P
rofitable growth is an often talked about but seldom realized objective of industrial
companies. The benefits of profitable growth are obvious but in reality most indus-
trial companies do not have their processes, people and technology aligned to achieve
profitable growth. What results for most companies is an ebb and flow with the general
economy with intense focus on cost reduction during down times and confusion between
good management and good markets during good times. Companies need to build a more
robust and reliable growth platform.

Profitable growth is governed by a simple equation: Having worked with many companies across multi-
ple industries, Charter Consulting has developed an
Profit Growth = approach that focuses on these two areas and has
Change in Revenue – Change in Cost proven successful in driving profitable growth.

Customer Value Creation

During the recent difficult economy, companies
have honed their skills in cost reduction focused
supply chain tools such as Six Sigma, Lean Manufac-
turing, and strategic sourcing. Now as the economy
starts to improve and opportunity for growth pre-
sents itself, companies need to attack profitable
growth with the same precision and focus. In order
to do this companies need to:
• Take an Outside-In approach to set the context for
growth
• Achieve Operational Excellence in customer facing
processes to drive execution
Customer Value Creation SM (CVC) is a customer-
centric framework for helping companies choose the
best opportunities for growth by optimizing the
value creation between the enterprise and its custom-
ers. CVC leverages the Outside-In approach through
Customer Value Analysis along with Operational
Excellence in customer facing processes to deliver
profitable growth.
CVC =
Customer Value Analysis + Operational Excellence

© 2006 Charter Consulting 1.

POINT OF VIEW
Customer Value Creation: A Platform for Profitable Growth

• Number of Customers: Measures the pro-

portion of the market space that a company
controls as it relates to its footprint on the
unique buyers of its offerings.
In addition to the three value axis shown in Fig-
ure 2, duration of customer relationship is also
sometimes used. The duration component sums
up value over time to provide a longer term
view of the value potential.

Defining Growth States

Figure 1: Outside In Approach Given these dimensions of value, growth is then
defined in terms of “today’s” situation, the
Customer Value Analysis
“could be” or theoretical state and finally the
Customer Value Analysis is driven by an Out- “should be” or practical condition. Understand-
side-In approach. The principle behind the Out- ing the size and shape of the value cube in Fig-
side-In approach is that companies must under- ure 2 is often one of the most revealing aspects of
stand how value is created and captured with the Customer Value Analysis approach.
their customers in order to position themselves
for profitable growth. As shown in Figure 1, the Direction of Growth
Outside-In approach defines value from the cus- Understanding the shape of the value cube and
tomer’s perspective, rather than the biased per- the firm’s relative position is key to focusing the
spective of the supplying company. Dr. Daniel organization on maximizing value.
Kahneman recently won the Nobel Prize in Eco-
Once the shape and size of the value cube is un-
nomics for his work in showing that people are
derstood, then the company can choose the axis
overconfident and anchored in their own think-
that provides the most opportunity for profitable
ing. The Outside-In approach acknowledges that
growth. A simple example of how to process the
the answers developed within the company are
company’s position in the value cube is shown
likely anchored around the current product and
in Figure 3. Choosing this axis needs to be inte-
service offerings and may or may not translate
grated with the companies overall strategy.
into value from the customer’s perspective.
There are times when the value space available
Dimensions of Growth does not support the company’s stated strategy,
The value that exists between a company and its at which time the strategy needs to be evaluated.
clients is not linear but rather exists on a number
of differing, but related, value planes. Customer
Value Analysis typically considers value along
three dimensions, which form a value cube as
shown in Figure 2:

• Customer Profitability: Measures the over-

all profit an organization drives from its cus-
tomers. Customer Profitability is measured
at the customer level, segment level, and at
the enterprise level.

• Share of Wallet: Measures the revenue de- Figure 2: Customer Value Analysis; Value Cube
rived from a customer for a company’s prod-
ucts and services in relation to the total
spend on the overall category. Share of Wal-
let is also measured at the customer, seg-
ment and enterprise levels.

© 2006 Charter Consulting 2.

POINT OF VIEW
Customer Value Creation: A Platform for Profitable Growth

Customer Facing Operational Excellence

Once the context for profitable growth is set, the
company needs to position its business processes
to deliver optimal value to the customers. Align-
ing business processes is the key change agent in
support of executing against the growth horizon.
Organizations that focus their resources on un-
derstanding the economics of customer behavior
and align their business processes for execution
will grow profitably.
Industrial companies that have developed com-
petency around Six-Sigma, TQM, Lean Manufac-
Figure 3: Defining the Direction of Growth turing and so on have a head start toward
achieving Operational Excellence in customer
Customer Economics facing processes. Each of these organizational
The key to quantifying the value cube is under- practices has at its core a common framework
standing the economics of the demand value from which to drive activity and change through
chain or “customer economics.” The focus of the organization. The challenge for most compa-
customer economics is in defining how each cus- nies is that the efforts have been focused on
tomer along the demand value chain accrues quality and cost. In order to raise these concepts
economic benefits that manifest themselves on a up to the level of business philosophy, the con-
financial statement. These economic benefits can cepts of revenue, growth, and customer must be
be impacted through either cost or revenue driv- incorporated.
ers along the demand value chain. In order to
The opportunity is to repurpose the basic scien-
describe these value drivers, a map of the
tific problem solving methodologies that are cur-
demand value chain and its associated value
rently being used for quality and cost reduction,
transformation processes must be created in col-
populate them with new, relevant tools and de-
laboration with the customer. Most often compa-
ploy them against the customer oriented profit-
nies talk about features and functions but fall
able growth challenges. A few examples of the
well short of being able to describe their product
change in tools are listed in Figure 4:
or service’s real economic benefit. Only after the
company develops an understanding of the cus-
tomer’s economics will it be able to influence
how that value is created and exchanged along
the demand value chain.
Inside-Out Outside-In
Summarizing Customer Value Analysis Mindset Mindset
Customer Value Analysis uses an Outside-In ƒ Supply Chain ƒ Demand Value
approach to establish the context for making in- ƒ My Economics Chain
vestments which will enable profitable growth. ƒ Process Variation ƒ Customer
Although many companies believe they under- ƒ Product Innovation Economics
stand how their customers view value, recent Process ƒ Scenario Planning
Nobel Prize winning work suggests that we are ƒ Customer
ƒ Price
too over-confident and anchored around our Innovation Process
ƒ House of Quality ƒ Value
current situation. By taking an Outside-In ap-
ƒ Pareto Analysis ƒ House of Value
proach, as shown in Figure 1, these biases are
ƒ Portfolio of Projects ƒ Multi-Dimensional
broken yielding a more effective approach to
ƒ Cost of Quality Scaling
making investments in profit-driving growth ƒ Portfolio of
opportunities. Investments
Figure 4: Outside-In Mindset

© 2006 Charter Consulting 3.

POINT OF VIEW
Customer Value Creation: A Platform for Profitable Growth
Many if not all of these customer facing tools
have been enabled by technology and most have
some established process. What’s missing are the
people who can assemble these tools together
using a rigorous approach to profitable growth
similar to the approach companies have em-
ployed toward cost and quality improvement …
Six-Sigma for profitable growth if you will.
This point has brought to light the need for com-
panies to create a competency around industrial
marketing. Industrial marketers are those indi-
viduals who can bring the process skills of a Six-
Sigma expert together with the business acumen
of an investment banker to design and build cus-
tomer facing processes that will create solution
value.
Although many industrial companies recognize
the need for improved marketing, the area re-
mains a bit of an enigma for the majority. Char-
ter has found that in order to drive continuous
profitable growth in industrial markets firms
must come to grips with the need to raise the
competence level of their marketing skills to that
of their consumer counterparts. Here are a few
reasons why:
1. Complex Demand Chain: Industrial compa-
nies typically deal with a complex demand chain
that involves many different parties working
together to ultimately define an end use product.
Understanding the economic dynamics of this
demand value chain is very different than pre-
dicting the behavior or trade-offs that a group of
consumers will make during their shopping ex-
perience.
2. Decision Process: In the Industrial market
space decisions about which solution offers the
maximum value are made in days-weeks-
months. In the consumer world, the decision
process is often made in seconds.
3. Switching Costs: Due to process entangle-
ment, relationships in industrial markets often
span years. Convincing industrial customers to
switch requires hard hitting and sustainable eco-
nomic benefits.
4. Data: For the consumer marketer data is more
readily available. Companies such as Neilson
and IRI collect “Point of Sale” information which
in turn allows deep statistical insights to be
gained about consumer behavior. Other compa-
© 2006 Charter Consulting
nies collect credit histories and demographic
information. This ultimately creates the data
playground on which consumer marketers
thrive. On the industrial side, data is not as
forthcoming but is more transparent via the
internet than at any time in history. Through use
of data mining via the internet combined with
primary research, industrial companies can ac-
cess information that enables them to take a
much more quantitative approach to market.
That said, all too many companies continue to
rely on traditional qualitative insights gained
through Customer Satisfaction Surveys.
For these reasons and more, the skills required of
the industrial marketer are not going to be filled
by consumer marketers, sales professionals, or
engineers. Industrial marketing skills need to be
built, which constitutes both the challenge and
the opportunity for competitive advantage.
Summary of Customer Facing Operational
Excellence:
To achieve a more reliable and sustainable
growth platform companies need to be more
rigorous in understanding then managing those
customer facing processes which will drive prof-
itable growth.
Customer Value Creation—Case Study:
Fortune 200 Manufacturer of Communication
Materials
Situation
Like most companies in today’s economy our
client had spent the last few years aggressively
reducing costs. Recently the company started to
reconsider investments that would drive future
growth. The company chose Charter’s proprie-
tary Customer Value Creation approach due to
its focus on the economics of the customer inter-
action and its emphasis on achieving Opera-
tional Excellence on customer facing processes.
Discussion of Approach
1. Assess the Current State [Inside-Out Perspec-
tive]: This element of the process focused on de-
veloping an understanding of how the firm de-
livered and captured value in “today’s” state.
This was an Inside-Out perspective that cap-
tured the firm’s beliefs regarding the value
4.
POINT OF VIEW
Customer Value Creation: A Platform for Profitable Growth
dimensions of customer profitability, number of
customers and share of wallet. As previously
mentioned, duration was also considered to
provide a perspective on change in value over
time. During this phase the firms strategy and
marketing plans were reviewed to determine
what areas the firm intended to drive growth in
the future. They include: increase customers,
increase share and increase profitability. The
outcome of this phase was an internal perspec-
tive of “today’s” value cube and how the firm
planned to change the cube’s shape.
As shown in Figure 5, the client felt their share of
wallet and number of customers were high, with
the overall profit contribution representing the
value enhancing dimension of focus. As a result
the company was focused on cost reduction and
elimination of lower profit contributing
customers.
Figure 5: Value Cube Defined from an Inside-Out
Perspective
2. Determine “Could be” Potential [Outside-In
Perspective]: In this phase, the objective was to
understand value from the customer perspective
and determine how the firm was positioned in
the overall demand value chain. The first step
was to define the value chain itself.
Initially, the client had a narrow perspective of
the demand value chain. Their view was
anchored around participation in a print value
chain rather than a chain of value that existed to
drive retail store traffic. By simply defining the
purpose and steps of the demand value chain
the client started to ask and consider questions
from a completely different perspective…
Outside-In. A sanitized version of the demand
value chain is shown in Figure 6. Having con-
structed the demand value chain the client was
then prepared to develop a more detailed under-
standing of their customer’s economics.
© 2006 Charter Consulting
Customer economics included defining the par-
ticipants, value drivers, and improvement
opportunities for each step along the demand
value chain. This activity focused heavily on in-
terviews and collaboration with customer and
non-customer executives. These interviews
significantly relied on the perspective of profit &
loss leaders since they were in a position to see
above the transactional fray and provide guid-
ance on mutual gain sharing agendas. In the end,
this research yielded a view of the value chain
that quantified value for each step and allowed
economic valuation of the demand value chain.
Just as importantly, the process identified oppor-
Figure 6: Demand Value Chain
tunities along the value chain for investment
defined through collaboration with customers.
Figure 7 represents the outcome of the process to
establish theoretical value from an Outside-In
perspective. This view of value is a much differ-
ent view than the Inside-Out view in Figure 5.
f
er o rs
b e
um om
N ust
C “Could Be”
Customer Profitability
Today
Share of Wallet
Figure 7: Value Chain Defined from an Outside-In
Perspective
5.
POINT OF VIEW
Customer Value Creation: A Platform for Profitable Growth
In this case, the Outside-In perspective revealed
the dominant opportunity for profitable growth
existed on the “Share of Wallet”dimension of the
value cube. Armed with this information the
firm decided that it was better off creating ser-
vices around its base product that ultimately
delivered solutions rather than focusing on a
significant effort to change the profitability of
the product itself.
3. Determine “Should Be” State: Having estab-
lished the context for profitable growth on the
“Share of Wallet” axis the client then decided
upon projects to pursue. This task was accom-
plished by developing cost-benefit cases for each
of the opportunities that were identified
throughout the value chain. As shown in Figure
8, these cost-benefit cases were evaluated on a
number of criteria using a balanced customer
innovation portfolio approach.
Figure 8: Balanced Customer Improvement Portfolio
Concepts were ultimately selected based on the
companies risk/reward profile and its desire to
penetrate particular portions of the overall de-
mand value chain and layered into a “should
be” model that is shown in Figure 9.
Define Road Map to CVC
Having set the context for profitable growth and
identified specific customer driven improvement
initiatives the company established an organiza-
tional framework to transition the effort from
interesting learnings to bottom line profits. This
was done through the creation of the “Office of
© 2006 Charter Consulting
f
ro s
be er
um om
N ust
C “Could Be”
Customer Profitability
Today “Should Be”
Share of Wallet
Figure 9: Value Cube Defined From a “Should Be”
Perspective
the Customer.” The Office of the Customer was
given two significant charters:
• To program manage the profitable growth
initiatives.
• To achieve Operational Excellence in customer
facing processes by taking a continuous
improvement approach to industrial
marketing.
Using the learnings from successful Six-Sigma
and TQM deployments, the Office of the Cus-
tomer was sponsored by the CEO. By having top
executive sponsorship, clear expectations were
established on the priority of profitable growth
initiatives.
Results
The project set the context for profitable growth
by identifying value added revenue opportuni-
ties of well over $500 million, focused on increas-
ing share of wallet with current customers. This
outcome represented a much different path than
the originally held plan of improving profitabil-
ity through cost reduction and elimination of
lower profit contributing customers. By defining
the direction and magnitude of the growth op-
portunity the client was now much better posi-
tioned to choose projects that were relevant to
the business opportunity. Additionally, capital
and human resources were focused on improve-
ment opportunities that were aligned with the
Outside-In interests of the customer.
6.
POINT OF VIEW
Customer Value Creation: A Platform for Profitable Growth

Summary of Customer Value Creation

In order to achieve profitable growth, companies
must take an Outside-In approach and strive for
Operational Excellence in customer facing proc-
esses. The Outside-In approach focuses on set-
ting the context for growth and investment
through understanding the business through the
eyes of the customer. Operational Excellence
focuses on deploying rigorous methodologies
and analytics to ensure profitable growth is
achieved.

A Call to Action
Capturing profitable growth ahead of competi-
tors is more challenging for most companies
than staying in the cost cutting race. Although
capturing profitable growth should always be a
priority, it is a necessity during times of
economic expansion. By most measures the
expansion has begun.

About the Authors

Gary A. Plaster is a Senior Vice President with

Charter Consulting. Mr. Plaster has over 20 years of
industry and consulting experience. Mr. Plaster can
be contacted at gplaster@charterconsult.com.

Jerry D. Alderman is a Vice President with Charter

Consulting. He has more than 19 years of industry
and consulting experience. Mr. Alderman can be
contacted at jalderman@charterconsult.com

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© 2006 Charter Consulting 7.