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Customer Value Creation

Customer Value Creation

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03/18/2014

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V
P
OINT
O
F
\u00a9 2006 Charter Consulting
1.
IEW

Customer Value Creation:
A Platform for Profitable
Growth

by Gary Plaster and Jerry Alderman
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.

P
Profitable growth is governed by a simple equation:

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:

\u2022 Take an Outside-In approach to set the context for
growth
\u2022 Achieve Operational Excellence in customer facing
processes to drive execution

Having worked with many companies across multi- ple industries, Charter Consulting has developed an approach that focuses on these two areas and has proven successful in driving profitable growth.

Customer Value Creation

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
Profit Growth=
Change in Revenue \u2013 Change in Cost
\u00a9 2006 Charter Consulting
2.
POINTOFVIEW
Customer Value Creation: A Platform for Profitable Growth
Customer Value Analysis

Customer Value Analysis is driven by an Out- side-In approach. The principle behind the Out- side-In approach is that companies must under- stand how value is created and captured with their customers in order to position themselves for profitable growth. As shown in Figure 1, the Outside-In approach defines value from the cus- tomer\u2019s perspective, rather than the biased per- spective of the supplying company. Dr. Daniel Kahneman recently won the Nobel Prize in Eco- nomics for his work in showing that people are overconfident and anchored in their own think- ing. The Outside-In approach acknowledges that the answers developed within the company are likely anchored around the current product and service offerings and may or may not translate into value from the customer\u2019s perspective.

Dimensions of Growth

The value that exists between a company and its 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:

\u2022
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.

\u2022
Share of Wallet: Measures the revenue de-

rived from a customer for a company\u2019s 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.

\u2022
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

Given these dimensions of value, growth is then defined in terms of \u201ctoday\u2019s\u201d situation, the \u201ccould be\u201d or theoretical state and finally the \u201cshould be\u201d or practical condition. Understand- ing the size and shape of the value cube in Fig- ure 2 is often one of the most revealing aspects of the Customer Value Analysis approach.

Direction of Growth

Understanding the shape of the value cube and the firm\u2019s relative position is key to focusing the organization on maximizing value.

Once the shape and size of the value cube is un- derstood, then the company can choose the axis that provides the most opportunity for profitable growth. A simple example of how to process the company\u2019s position in the value cube is shown in Figure 3. Choosing this axis needs to be inte- grated with the companies overall strategy. There are times when the value space available does not support the company\u2019s stated strategy, at which time the strategy needs to be evaluated.

Figure 1: Outside In Approach
Figure 2: Customer Value Analysis; Value Cube
\u00a9 2006 Charter Consulting
3.
POINTOFVIEW
Customer Value Creation: A Platform for Profitable Growth
Customer Economics

The key to quantifying the value cube is under- standing the economics of the demand value chain or \u201ccustomer economics.\u201d The focus of customer economics is in defining how each cus- tomer along the demand value chain accrues economic benefits that manifest themselves on a financial statement. These economic benefits can be impacted through either cost or revenue driv- ers along the demand value chain. In order to describe these value drivers, a map of the demand value chain and its associated value transformation processes must be created in col- laboration with the customer. Most often compa- nies talk about features and functions but fall well short of being able to describe their product or service\u2019s real economic benefit. Only after the company develops an understanding of the cus- tomer\u2019s economics will it be able to influence how that value is created and exchanged along the demand value chain.

Summarizing Customer Value Analysis

Customer Value Analysis uses an Outside-In approach to establish the context for making in- vestments which will enable profitable growth. Although many companies believe they under- stand how their customers view value, recent Nobel Prize winning work suggests that we are too over-confident and anchored around our

current situation. By taking an Outside-In ap- proach, as shown in Figure 1, these biases are broken yielding a more effective approach to making investments in profit-driving growth opportunities.

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- turing and so on have a head start toward achieving Operational Excellence in customer facing processes. Each of these organizational practices has at its core a common framework from which to drive activity and change through the organization. The challenge for most compa- nies is that the efforts have been focused on quality and cost. In order to raise these concepts up to the level of business philosophy, the con- cepts of revenue, growth, and customer must be incorporated.

The opportunity is to repurpose the basic scien- tific problem solving methodologies that are cur- rently being used for quality and cost reduction, populate them with new, relevant tools and de- ploy them against the customer oriented profit- able growth challenges. A few examples of the change in tools are listed in Figure 4:

Figure 3: Defining the Direction of Growth
Outside-In
Mindset
\ue000 Demand Value
Chain
\ue000 Cus tomer
Economics
\ue000 Scenario Planning
\ue000 Cus tomer
Innovation Process
\ue000 Value
\ue000 House of Value
\ue000 M ult i- Dim ens ional
Scaling
\ue000 Portfolio of
Investments
Inside-Out
Mindset

\ue000 Supply Chain
\ue000 My Economics
\ue000 Process Variation
\ue000 Product Innovation

Process

\ue000Price
\ue000 House of Quality
\ue000 Pareto Analysis
\ue000 Portfolio of Projects
\ue000 Cost of Quality

Figure 4: Outside-In Mindset

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