Meeting Customers’ Real

Needs: The Nature of

Service System Design
MEETING CUSTOMERS’ REAL NEEDS
“There is only one valid definition of business purpose: to create a
customer. What the customer buys and considers value is never just
a product. It is always a utility, that is, what a product or service does
for him.”
—Peter Drucker
Without customers, your company cannot earn a profit, create jobs,
or be a responsible corporate citizen.
Creating customer value must be at the core of your business model
design as well as your day-to-day decision making.
MEETING CUSTOMERS’ REAL NEEDS
This fact brings two vital questions to the forefront:
1. Who are your customers?
2. How well do you know your customers and their needs?
Today’s Dual Customer Challenge –
Understanding Customer needs
Seeing Downstream

Figure 1-1 Understanding customer needs 4

Today’s Dual Customer Challenge
Case Study
Walmart’s efforts to help suppliers understand customer needs do not end with Retail Link.
Walmart uses its channel position and day-to-day interaction with customers to become a
sensor for its entire supply chain. As Walmart entered the China retail market, store managers
noticed that laundry detergent was not selling—at least not in the expected quantities. Upon
investigation, Walmart discovered that few Chinese households owned washing machines.
Walmart turned to Procter & Gamble (P&G), asking it to develop a new detergent specially
designed for hand washing. Tide White’s launch was a huge hit, selling 35,000 units in 15 stores
in two weeks. Acting as P&G’s eyes and ears, Walmart spotted an unmet need. Working together
kept Walmart’s shelves stocked with the products its customers want while improving P&G’s
research and development effectiveness.3 The two are partners in profit. Moreover, the entire
supply chain wins when these collaborative efforts bring more customers to Walmart’s stores.

Understanding customer needs 4

Today’s Dual Customer Challenge
You should take the following three learning points away from this discussion:
1. If your company does not meet the needs of your immediate customers, they will buy from
someone else—a supplier that helps them succeed. If P&G had been unwilling or unable to
develop a new laundry detergent, Walmart would have certainly turned to one of P&G’s
rivals—perhaps Unilever. This process is called disintermediation.
2. The end customer takes center stage in well-designed and well-managed supply chains. The
end customer is the only customer who really puts money into the chain. Everyone else
simply recycles it. Every organization in a supply chain should seek to improve its ability to
contribute to satisfying the end customer’s needs and wants.
3. Companies win when they participate as members of a winning supply chain team. If you
don’t understand downstream competitive dynamics, including customer requirements, you
will find it difficult to allocate the resources needed to be a supplier of choice in these
winning supply chains.

Understanding customer needs 4

Today’s Dual Customer Challenge -
Understanding Technology Empowerment
Consider the following four Business to Consumer (B2C) examples to see how the Internet is a
game changer
1. Information acquisition
2. The buying experience
3. Comparison shopping (on steroids)
4. Post purchase evaluation

best customers, who behave as “high-service sponges,” will no longer settle for average service.
You need to understand how your customers define value and determine satisfaction.

Understanding Technology Empowerment

CREATING CUSTOMER VALUE
How your customers define value?
First, customers make purchase decisions based on the value they expect to
obtain
Does the value justify the cost?
Second, customers employ similar criteria to evaluate supplier performance as
they used to select suppliers in the first place.

If your quest is to drive revenue growth—that is, obtain and retain customers—
you need to deeply understand what customers value.
CREATING CUSTOMER VALUE
Economists often discuss value in terms of utilities. As Peter Drucker noted, utility is what a
“product or service does” for the customer. Four core utilities are often discussed:
1. Form utility is the primary responsibility of purchasing and operations managers who
acquire inputs and transform them into products or services of greater customer value.
2. Possession utility falls within marketing’s domain and consists of efforts to communicate
(i.e., promote) a product’s value and then facilitate the exchange process.
3. Time utility emerges from effective management of all value-added processes that
influence when a product is available for purchase. Logistics managers make the inventory
and transportation decisions that ultimately determine availability’s time dimension.
4. Place utility is primarily the charge of supply chain managers who ensure that products and
services are where customers expect to find them—when they are needed.7

Understanding Technology Empowerment

CREATING CUSTOMER VALUE
To win tomorrow’s
competitive battles,
you must grasp the
nature of these value
dimensions and build
the systems to create
and deliver them.

Figure 1-2 Dimensions of value creation

Cost Reducing Strategies
To reduce costs, companies pursue a combination of four strategies:
 Productivity enhancement—The key to improving productivity is to promote learning. The goal is to
empower workers to find and implement better ways to do things.
 Automation—Technology is making process redesign a perpetual initiative. Many tasks that have
been performed manually can now be automated.
Global network design—Improved logistics have reduced the total landed costs of products made in
distant lands. Companies are taking advantage of this by locating facilities in far-flung countries with
low-cost inputs.
 Outsourcing—Sometimes companies discover that they can no longer perform certain value-added
activities as well as other members of the supply chain. Outsourcing enables companies to do what
they do best, relying on supply partners for complementary value creation.
Effective cost reduction can initiate a powerful cycle of competitiveness. As they expand market
share, companies can improve scale economies and raise profitability. The added funds can then be
reinvested in future capabilities.
Quality - Dimensions
Quality is often defined as conformance to specs. A customer focus, however, means that quality is
nothing more or less than meeting customer expectations.
David Garvin, a Harvard professor, identified eight factors that customers use to assess quality:
 Performance—A product’s operating characteristics
 Features—The unique characteristics that distinguish a product from rivals’ products
 Reliability—The user’s ability to count on the product not to fail
 Conformance—How well a product conforms to design specifications
 Durability—A product’s life expectancy (also, mean time between failure)
 Serviceability—The speed and ease of repair when problems occur
 Aesthetics—The perceptions of fit and finish (also, artistic value)
 Perceived quality—A product or brand’s quality reputation
Delivery
Customers value speed.
Fast, reliable cycles improve forecast reliability and reduce the need to carry inventories.
 Responsiveness
Change is the only constant in today’s business world. The ability to act quickly—that is, to adapt or respond—as
customers make special requests, competitive requirements change, or the unexpected happens conveys a vital
advantage.
Responsive companies recover from the unexpected more quickly and resume operations faster than the competition.
“Every minute ahead of the enemy is an advantage.”
The following steps are critical to creating a responsive culture:
 Make responsiveness a priority throughout the firm and across supply chain relationships.
 Map processes to make them visible and to identify responsiveness enabling activities or decisions. Use mapping to
initiate risk-mitigation discussions and identify operating alternatives.
 Use information systems to monitor operations, link to customers, promote proactive environmental scanning, and
share information on a real-time basis across the network.
 Cross-train workers and organize work in multifunctional teams.
 Design performance measures to value responsiveness.
 Build learning loops into every process throughout the organization.
Innovation
To avoid “one-hit-wonder” status, companies need to be able to innovate consistently.
Total Order Performance—A Synergistic
Approach
To help you prioritize decisions regarding value creation, you will want to remember three rules:
 Get into the game—Across most purchase decisions, cost and quality are the critical value
dimensions. If you want to be taken seriously as a potential supplier, you have to perform well in
these areas. Cost and quality thus tend to be order qualifiers.
 Differentiate yourself—If your cost and quality positions are good enough to get you
consideration as a supplier, you need to differentiate yourself along the lines of one of the other
dimensions. That is, customers must view your delivery, responsiveness, and/or innovation as an
order winner.
 Avoid disqualification—You must meet minimum requirements across all five value
dimensions. Even if you rate well on cost, quality, and a differentiating characteristic, you could
still disqualify yourself via unacceptable performance elsewhere. Your customers are keeping
score.
Total Order Performance—A Synergistic
Approach
 CONTRIBUTING TO CUSTOMER
SATISFACTION
Customer satisfaction is the essence of exchange
but it must create the value customers desire and are
willing to pay for.
Three outcomes are common:
Experiences that fail to meet expectations lead to
dissatisfaction. If the experience is bad enough, the
customer may complain (remember “United Breaks
Guitars”).
 Experiences that meet expectations deliver
satisfaction.
 Experiences that exceed expectations achieve strong
satisfaction—a result that may lead to loyalty and
repeat business.
Customer Service Strategies

Table 1-2 Limitations of Different Customer Fulfillment Strategies

Comparison of cost and confidence for
different data-gathering techniques
Well-executed data-gathering initiatives answer the following
questions:
 What value/experience do customers really expect? How
do they define quality, delivery, responsiveness, and other
key value areas?
 How do customers measure our performance? Are our
measures consistent with theirs?
 How well does our performance meet our customers’
expectations and requirements?
 In what ways could we improve performance to
differentiate ourselves in customers’ minds?
Figure 1-6 A framework for customer delight
Figure 1-7 A Customer Success Framework
 SERVICE SYSTEM DESIGN
Managers use this insight, along with a knowledge of their
company’s value-added capabilities, to develop attractive value
propositions. Value propositions are the promises a company
makes to customers about how it will meet their needs.

Value propositions serve two roles:

 They shape customer expectations, influencing customer
purchase decisions as well as how the customer will assess
the actual service experience.
 They define what the company must do to earn a
customer’s business, setting the parameters for the design
of the company’s customer-experience system.

Figure 1-8 Service system design 46

Touch Points
Acquisition touch points, which are consistent with the economic concept of value-in-exchange,
occur as customers learn about and make purchase decisions.

Utilization touch points, the equivalent of value-in-use, occur as the service is experienced.
Orchestration
Orchestration consists of three core steps:
1. Select team members—Knowing what value you need to create, you need to
identify the right players—those with key resources—to participate as members
of your value-added team.
2. Assign team roles—Based on a correct understanding of each player’s skills,
you must assign the right roles and responsibilities to each team member to
create optimal value.
3. Build team cohesion—You need to remember that having the right players
does not mean they will play well together. You therefore need to invest in team
chemistry by establishing the right relationships among team members.
 Value Gaps
1) knowledge gap

2) translation or specification gap

3) performance or service delivery gap

4) Communication gaps

5) perception gap

6) satisfaction or service quality gap

Figure 1-9 Understanding service value gaps

Figure 1-10 Customer experience, loyalty, and competitive advantage