Principle 3: Customer Perception of Value (Item 5)

Providing what your customers value – now and in the future – must be a key influence in your organization's direction, strategy and action.

Why this question is important

You must design all phpects of your company to provide what your customers value.

Although all stakeholder groups are important to the company, the customers provide the constant stream of money — through sales. Because it is the Goal of the business to make money now and in the future, it must be focused most strongly on providing value to its customers. Everything about the business must be attuned to that end — including all the support parts of the business. That is, design your business around providing what your customers want.

The more you do this, the more you sell, the more money you make and the more you can provide to the other stakeholders.

It must be this way around. Customers' perception of value must drive all phpects of the business. If you design the business primarily to provide value to owners/shareholders (the old paradigm), or to the managers (unfortunately also an old paradigm) or to the employees (really!?), the business will not make the money it could make. And, in the end, that is not in the best interest of those owners/shareholders, managers and employees.

The viability of the business in the short and long term depends on you providing what your customers value – now and in the future. To do this, providing what your customers value must be a significant focus in everything about your business' design – the way it does things, its direction, strategy and action.

At first glance, Principle 3 is concerned with the way that the business identifies and sets about meeting the needs of its current and future external customers in its products and services. And that is the way companies who thought about this at all have interpreted it. However, it goes much further and says that the company must be designed to provide what customers value. The company's direction, strategy and action must be designed around providing what its customers value. That is a huge shift.

Most companies are designed to meet the needs of owners/shareholders (with good dividends) or the needs of managers (with good salary packages). Some are also designed to meet the needs of employees (with good working conditions). Very few are utterly and completely designed and structured to provide what customers value. Principle 3 calls all those common practices into question.

Principle 3 also calls into question many takeovers and mergers. Many of these appear to be more aligned to providing excitement and entertainment to senior executives than designing the company to provide value to its customers.

Organizational design

Principle 3 says that `customer perception of value drives all phpects of the organization' - including structure, culture, design, delivery of products and services and direction. Everything about the company should be addressing its customers perception of value — everything its people do, how they act, how the different parts of the company work together, how and which processes it improves, how its people are rewarded, which alliances it forms, its relationships with all stakeholders (shareholders, customers, employees, suppliers, community), the knowledge it accumulates, which data and information it chooses to collect and which decisions it makes and how it makes them — everything. This is taken up in each of the Principles as we go along. The emphasis here is on design of the company.

The old way of thinking is that company is designed for the convenience and benefit of the owners, managers or employees. There are examples everywhere, in almost every organization. A few years ago, we saw organizations displaying their organization charts upside down to try to show they were breaking with that old way of thinking. In most cases, this was just lip service. You cannot break the old habits by issuing a new org chart.

Owners have mistakenly believed the company should be organized for their benefit. That confuses Goal and method. The Goal of the company is to make money now and in the future — for its owners. In order to do this, the company must deliver products and services that its customers see as having value to them.

Managers have always seen the company as there for their benefit – it provides them with income and identity. It has been the behavior and approach of managers that has established the poor behavior we will discuss as `old thinking in all these Principles.

You can go into almost any retail store and see examples of businesses designed for employees. Music played too loud, poorly displayed stock, no information on stock or options, poor lighting. Try a bank at lunchtime, with the queue out the door and all the staff at lunch.

Core Competencies

Principle 3 also implies that not only must the organization be aware of its market and what its customers value, it must identify its own basic skills — its core competencies — so that it can match its capabilities to the needs of its target markets.

Core competencies are what the organization is very good at doing — its underlying skills, knowledge and experience — what makes it special – and different from other organizations. The core competency is what defines the difference say between a bank and a law firm. They each have developed skills, knowledge and experience in different competencies. Organizations should seek to make the most of their core competencies — grow them, build them so that, in line with Principle 3, they add value to its customers.

Organizations must protect their core competencies by keeping up with changes in technology and paradigms about the core competencies.

Better informed customers

In the modern business world, the power in the supplier-customer relationship has swung to the customers and the customer's role in that relationship has swung from passive to active. As competitive alternatives, and information about them, become available, customers have become increasingly demanding and influential. Any business that fails to respond appropriately is punished.

Minimum acceptable levels

Most businesses still produce a product or service and then present it to the marketplace in the hope it will attract customers. Big mistake! It is usually difficult to see that there has been any direct customer input to product or service. Customers in the 21^st Century have much higher expectations and demand much more customer orientation.

From the customer's perspective, there are three value-related issues in any product offering:

1. Features: a feature either "is" or "isn't" present (eg, the supermarket carries frozen pizza)
2. Fitness-for-use: it is fit to use (eg, it complies with use-by dates and refrigeration)
3. Performance: it does the job required (eg, the range of frozen pizza is adequate, the frozen pizza tastes good)

You need to meet all these, just to get to the starting line - the minimum acceptable level.

To be competitive, most businesses must go beyond the minimum level offering. You can do this by identifying and acting on the gaps of specific customer segments.

Segments

Not every one of your customers sees value in the same things. For simplicity, many businesses put `customers with similar needs' into `segments'. This simple definition may not be sufficient.

Because of your limited resources, it is essential that you focus your products and services to provide what each of your customer segments sees to be of value. An astute business will `do its homework' and try to design its offering to fit both the immediate needs of its market segments and customers as well as offer features which continue to attract customers in the future.

Most businesses do not do any more about their segments than grouping them. It is possible to get much moire out of it. In Its Not Luck, Goldratt presents a compelling argument that the concept of market segmentation is almost untapped by industry. The argument goes like this.

As we have seen, most managers believe that the price of a product should be equal to its cost plus a reasonable margin. This implies that most managers believe that there is essentially a single, fair price for a product. At the same time, different market segments have different needs. That is why we grouped them as segments. However, if different market segments have different needs then different market segments might have different perceptions of value. This means that most managers ignore the market's differing perception of value when they set the price for their product.

This points to an overlooked opportunity. Different parts of the market might pay different prices for the same product or service.

However, two segments with different perceptions of value will both demand to pay the lower price if they find out about it – there are no secrets in the long run. If different market segments have different perceptions of value, then we need to find and implement actions that cause them to think they are receiving different value for different prices.

This leads to Goldratt`s definition of a segment. `Two sections of the market are called segmented from each other if and only if changes in prices in one section do not cause changes in the other section'.

Let us look at the implications of this. If you impose a single price, this enables customers who have a high perception of value to pay a low price. Imposing a single price also trims away customers for whom the price is too high relative to their perception of value.

Because most businesses believe in a cost plus margin approach to pricing, this implies that they do not take advantage of the vast potential inherent in market segmentation. In other words, marketing is not oriented to take advantage of the most promising and almost virgin direction of market segmentation.

Usually businesses do their segmentation in too simplistic a manner – the simple definition that we began with. Consequently, most new outlets and most new improved products eat into the sales of existing outlets or products.

You need to be able to segment the market to take advantage of the possibilities of different prices that different segments are willing to pay because of their different perceptions of value.

Read the diagram below from the bottom up. "IF the bottom is true, THEN the one above is true".

When you operate in many market segments you will probably have to take a different approach in each. For example, instead of being `all things to all people', you may become a niche marketer or an expert in developing and sustaining strategic alliances. Your business will need to attune its listening and learning to the needs of each customer group and market segment, customers of competitors and other potential customers.

The airline industry

The airline industry is an example of segmentation being done well. On the same flight, you will have many different fares — not only Business and Tourist. It depends on when they bought the ticket, who they bought the ticket from, how long ago, whether they bought as a group or as individuals, how long they will stay at their destination, whether they are using loyalty program points. All those passengers occupy the same seat space, in the same aircraft, served by the same crew. The price they pay does not have much relationship to the cost of flying a passenger across the Pacific.

Which products and services

You can develop a quick little matrix of which products are working well for you to help you decide whether to devote more resources to a product or to discontinue it. (This approach is a much more useful than the unit cost approach – which has no validity.)

Compare whether your product is important or not important to your customers, with how well it meets your customers' needs. This gives you four broad quadrants to assist prioritization.

Customers, not you, define value to them. You can quantify what the customers think through gap or dissatisfier analysis. If a customer rates an issue as important and your performance as poor, then from the customer's perspective, your service/product is unfit-for-use. You must work to close the dissatisfier gaps in the product/service — or it should be dumped.

1. Winners: This product is a winner for you. It is important to your customers and your customers rate its performance as good. Maintain focus and your efforts to build your position. This is worth attention.
2. Killers: This product is doing you harm. It is important to your customers but your customers rate its performance as unsatisfactory. Remedial action is essential. Address the dissatisfiers. This is a real opportunity for you.
3. Not valued: Although it might be important to you, your product is not important to your customer segment. At least your customers rate its performance as good – whatever that means. Reconsider whether you are wasting resources and adding cost to your organization by persisting with this product. You should raise your customer perception of importance to them, or dump the product.
4. Waste: This product is not important to customers and your performance is poor. Dump it or set it aside for the time being – you never know, customer' priorities may change.

Three steps

In order to design your business around providing what your customers value, you must first thoroughly understand what they value. After you have provided what you think they value, you must measure how you went.

• Understand what your customers value
• Design your organization to deliver what customers value
• Measure how well you are providing what your customers value