Value Drivers Create Greater Customer Value Marketing Essay
This tutorial report aims to give a clear definition of what we understand for value, how it relates with customer expectations and satisfaction and how value chains are defined accordingly to deliver value to consumer and stakeholders. This report also intends to illustrate the concepts mentioned above with the introduction of a brief case-study of the British Company Ocado and its unique value proposition.
The long-term sustainable creation of value for the customers should be the goal of every enterprise aware of the current business environment. Although we all have an idea of the meaning of value, value creation and all the concepts related to it can be confusing. Furthermore, aligning our business strategy with these concepts can be a complex task. Through this report, we seek to make some of these concepts clear and show how they can be applied to an innovative and successful business strategy.
Value is determined by the benefits of a product or service received by the customers less the cost of acquisition of delivered benefits (Walters and Lancaster, 2000). Value is not a new concept. In 1776, Adam Smith gave two perspectives for value. From the producer perspective, value is determined by production costs, while from customers’ perspective, “it is only when it is used that the full costs and benefits of a product-service may be identified” (Walters and Rainbird, 2007). Since 1980s, the customer has become the centre of business process, which means the value creation is strongly customer satisfaction based (Walters and Rainbird, 2007). According to Slywotzky and Morrison (1997), “customer-centric” approach emphasizes meeting customer’s priorities on value of a product or service, and “customer priorities” are simply the things that are deemed important to customers who are willing to pay a premium for them or, when they cannot accept them, they will turn to other suppliers (Walters and Lancaster, 2000). They also suggest that in a value migration world, the focus should not be limited on the immediate customer but more customers through the value chain even including the manufacturers, the distributers and the end-consumers (Waters and Lancaster, 2000).
Utility is one of the characteristics of customer satisfaction. Bowman and Ambrosini (2000) argue that “to judge the utility of the products or service, customers’ perceptions of the value of a good are based on their beliefs about the goods, their needs, unique experiences, wants, wishes and expectations.” This value is perceived by the consumers; it is defined as use value. On the other hand the exchange value is defined as the monetary amount measured when the exchange of products or service take place (Lepak and Smith, 2007). However, value should not only focus on customer satisfaction, it should include all the stakeholder satisfaction, which ensures both customers’ satisfaction and expectation satisfaction of suppliers, shareholders, employees, and etc. (Walters and Lancaster, 2000). Particularly Knight and Pretty (2000) offer a concept of enterprise value. They stated that the core value of an enterprise includes “tangible value”, “premium value” and “latent value”. Tangible value reflects the tangible assets of a company; premium value represents the excess part of book value when company trades in open market; latent value is the potential value of a company (Waters and Rainbird, 2007).
Walters and Rainbird (2007) suggested that value creation and delivery is a complex process, which involves identifying market opportunities, exploring customer expectations and developing a suitable value chain model to meet them and meanwhile building competitive advantages. Magnet (1994) proposed that value delivery network is also called supply chain in which companies partner with suppliers and distributors. Brown (1997), Singh and Srivastava (2008) has given the definition of value delivery network as “a tool to disaggregate a business into strategically relevant activities which enables identification of the source of competitive advantage by performing these activities more cheaply or better than its competitors. This value delivery network is composed of activities performed by suppliers, distributors and end consumers. But differently, Christopher, Payne and Ballantyne (2002) argued that value delivery is to create value in the hands of the ultimate consumers by exchange of products and services through the linkage of different activities carried out in the process of networking.
In order to meet customers’ expectations and create differentiation, relative value drivers for the value expectations need to be identified. The main customer value drivers include: asset – capital intensity, utilisation and productivity of significance to industrial customers; time – production cycle time, order cycle time, cost – fixed costs and variable costs, performance – product quality and reliability, warranties and service support, timely and accurate information, and risks – including financial risk, marketing risk and social risk (Walters and Rainbird, 2007).
Regarding value creation for stakeholders (firm, suppliers and distributors), to serve the expectations, the company must plan for and negotiate explicit contracts with stakeholders and evaluate whether the plan meets the expectations of all of them. The company needs to focus decision making on what drives success, and provides with an efficient resources management plan, from both inside and outside of the company, in order to contribute to the primary financial objectives. Besides, the company needs to identify what drives current and future benefits and establish a platform for performance management. The system should be consistent with both financial and nonfinancial measures of performance to help the organization’s members, from management level to staff, to understand and evaluate the factors for successful value delivery (Anthony et al., 1997).
EXAMPLE: OCADO CASE STUDY
If a company wants to achieve a better position than its competitors, as stated in the previous sections, it has to clearly identify the key value drivers, and most importantly, effectively deliver them to its customers and stakeholders. In this section, the example of the British company Ocado will be used to depict the company’s customers and their expectations.
Company and Industry’s General Information
Ocado is a British online supermarket focused on delivering groceries to homes; the supermarket chain Waitrose holds 40 percent of the company’s shares (Boyer et al., 2002). The grocery industry in the UK is highly concentrated, with 59 percent of the market under the control of the top three supermarkets (Tesco, Sainsbury’s and Asda) (Scott and Scott, 2006) while Waitrose is relegated to the sixth position. This intense competition has influenced Ocado to adopt a launch and learn approach, which means that there is a constant replanning stage and the company improves its flexibility by having only one distribution centre in Hatfield, England from where to base its operations, with a capacity similar to 20 stores (Scott and Scott, 2008).
According to Boyer et al (2002), Ocado’s main customers are those who are close to the distribution centre (Hatfield), mainly female, with busy spouses and small children living in the house. Additionally, the company’s strategy tailors to busy consumers who try to avoid shopping and visiting traditional retailing stores as they do not have plenty of free time to plan their shopping and have a fairly high income. This high income allows them to pay a premium to have their groceries packed and delivered to their homes. The total market for these online shoppers is estimated to be between three billion and nine billion (â‚¤), which represents between 5 and 15 percent of the total British market (Boyer et al, 2002). Consumers that buy in Ocado are willing to pay increased fees only for the satisfaction of not having to shop in crowded places where the time factor is an important feature as not going to the store does not only mean avoiding the waste of time in shopping but also in driving, parking, etc. In order to target this time sensitive customers, Ocado has eliminated the physical stores of the supply chain, using internet as the primary channel. On top of that, the definition of a single distribution centre and a constant upgraded planning stage and inventory management processes allow the company to improve the delivery times and stock cycles and provide a close relationship with customers that saves them time and increases their satisfaction.
In order to achieve better levels of customer satisfaction it is necessary to meet customer expectations. Fulfilling customer expectations will create value and attract more consumers. In terms of the grocery industry, consumers expect to receive better quality products at lower costs, fewer substitutions, timely and reliable service, fresher food, sorted items by calories or nutritional information, food processed under the strict temperature control (Scott and Scott, 2008), personalised coupons and discounts and minimize the wasted time. These expectations are met by Ocado through its unique distribution centre, which allows it to deal with the substitution issues by providing full range of products along with very accurate inventory management, providing better quality products by automation and professionalising the product handling, temperature sensitive products are stored according to their physical requirements and the “trolley rage” is avoided due to the shopping is only carried out online. Additionally, online shopping allows customers to check and sort items, personalize and share shopping lists, which saves them time by reutilizing them, and also, it guarantees the freshness of food; according to Scott and Scott (2008) a tomato in a regular supermarket is touched more than eleven times, situation that is eliminated with the business model of Ocado. Ultimately, eliminating the stores from the supply chain, as Ocado is doing, will help in meeting customer expectations and in creating loyal and happy customers.
Value delivery performance measurement
Once identified the customer expectations and defined a value proposition to fulfil them, it’s necessary to establish a performance measurement system that can assist us in the process of delivering value to our customers. The value delivery performance measurement system must therefore take into consideration Ocado’s performance in meeting the characteristics that make the company’s service appealing to its customers. To do so, it’s important to define a criterion regarding which are the value drivers that contribute the most to our value proposition and focus the attention on improving them.
Taking into account the customer expectations mentioned above, Ocado differentiates itself from other online grocery retailers mainly by offering fresher products and less out of stock situations. Therefore, the value delivery performance measurement system should measure data regarding aspects such as the number of out of stock of products in an order and the number of customer complaints due to sub-standard quality products. Ocado should also take into consideration the performance of its deliveries in terms of consistency and reliability, number of damaged products and deliveries on time as poor performance in these aspects will most certainly mean a bad experience for a customer even if he is satisfied with the products received.
Understanding what customers expect in terms of value in a product or service and delivering it to them must be a priority for every company. In doing so, we must also take into consideration the perception of value by the different stakeholders. Ocado managed to become a successful company in a business sector as competitive as groceries and fast moving goods retailing by targeting customers with very specific needs, coming up with a different value proposition than its competitors and establishing the adequate value chain to deliver the value that these customers expect.