Turbocharge Your Value Proposition

A few months ago, I met with the management team of a medium-sized company having sales problems. The company was in a commodity business, and the sales reps were stuck trying to sell to low-level, price-oriented purchasing personnel in the customers. What could they do?

The answer that I heard: hire rainmakers with C-level contacts. This seemed like a replay of many meetings that I’ve attended over the years.

The real issue is that this common reaction is aimed at a symptom, not the underlying problem. The real problem is not the level of customer contact – it is that the company’s value proposition is not sufficiently innovative and compelling.

The reality is that a rainmaker sales rep with a me-too value proposition will wear out his or her C-level welcome very quickly, while a rep with a compelling value proposition will quickly attract C-level attention.

Extended Product

The key to turbocharging your company’s value proposition is to build your extended product. Your extended product is the full range of attributes that a customer experiences when obtaining and using your product. If you are selling office supplies, for example, the extended product includes product information, convenient shopping or delivery, payment terms, instructions, easy return process, strong warrantee terms, and a host of other attributes. In fact the nature of an extended product is so broad, that there is always room for great creativity and improvement.

Think about the smart phone you have in your pocket. The core telecommunications product, phone service, has long been available through your home phone, your office phone, and a dense web of pay phones. But once you have experienced the convenience of having a phone with you all the time, the extended nature of the portability changes your perception of telephone service. Throw in email and other applications, and a new product is born out of an old commodity service.

I remember advising several major telecom companies soon after deregulation, when wireless service was in its youth. I can conjure up a mental picture of a young product manager going before the investment committee of a major telephone company with the proposal to build an extensive new wireless network so adults wouldn’t have to stop at a gas station to make a call, and teenagers could call each other across the middle school courtyard.

The manager would have been laughed out of the room. And then the investment committee would return to its “serious work” of figuring out how to lower costs because traditional telephone service was a commodity under continuous price pressure.

It took a visionary entrepreneur like Steve Jobs to see the possibility and value of an extended telecommunications product. The result: enormous success and hundreds of billions of dollars in company value.

Vendor-managed inventory

I have written several times about my experience working with Baxter to develop one of the first, widely-followed vendor-managed inventory systems. This system, now named ValueLink, is at the heart of much of Cardinal Health’s medical supply business. It represents an innovative extended product that led to enormous value and transformed an industry.

Initially, Baxter was a provider of commodity products like IV solutions. It sold to low-level price-oriented buyers in hospitals, and was subject to constant price wars. Once Baxter dropped its supplies on the hospital receiving dock, its business was completed.

A small work team was commissioned to explore how to break out of this impossible situation. The team decided to simply go exploring and discover what happened after the supplies were received by the hospital. Within a few days, they were stunned by what they found: if the value of a liter of IV solution was a dollar at the receiving dock, the total cost by the time it was administered to a patient was a multiple of that number. And with duplication of activities between Baxter and the hospital, the company had an opportunity to take a multiple of the product cost out of the hospital’s system.

All of a sudden the world changed for Baxter. The company developed the now-familiar system in which it placed in the hospital Baxter operations personnel who counted the hospital’s inventory and transmitted the information to Baxter’s distribution center, where automated systems picked the product into totes destined for patient care areas. These totes were put away by the Baxter personnel on site in the hospital. The upshot was that the hospital’s costs plummeted and service improved to near-perfect levels.

Once the hospital CEOs saw this new system, and experienced the magnitude of the savings, they swung into action. They simply asked Baxter two questions: (1) Can you really do this? and (2) Can we trust you? The answer to both questions was positive, and the result was over 35% sales increases in the highest penetrated accounts in the country.

In comparable situations, I have almost always seen gains of this magnitude. This is the power of creating an innovative extended product – a compelling new value proposition. No rainmaker with CEO contacts needed here.

In fact, when I start working with a new client, one of the first things I do is read the customer service surveys. Buried in most surveys is an innocent-looking question that goes something like this: Which supplier do you trust to help you manage change in your company? If the client is the supplier trusted for change management, the rest is relatively straightforward. If not, we know how to climb that mountain.

Supply Chain Transformation

About a year ago, I participated on a panel on supply chain transformation along with top officers from P&G, Pepsi, and Chiquita. All three companies were making lots of money and gaining significant market share, even in the depth of the recession, by doing essentially the same thing.

They had identified the customers in their sweet spot – their islands of profit and those that should be in this category – and they were focusing and investing their resources to develop innovative ways to make these customers more profitable on handling and selling the supplier’s products. When the customers made more money on the supplier’s products, they increased the supplier’s market share, and greatly reduced the price pressure.

At the same time, the coordination led to important operational efficiencies for the supplier: better forecasting, smoother order pattern, etc. So the supplier became much more profitable, even as the customer increased its profits and rewarded the supplier with a massive gain in share of wallet. These smart suppliers reinvested a big portion of their new profits in renewing the cycle by finding ever-new ways to expand their value proposition.

This was a real win-win both for the supplier and for the customer. The only losers were the suppliers’ competitors, who were frozen like deer in the headlights trying to cut costs across the board.

Extended products everywhere

Innovative companies in every industry have an opportunity to turbocharge their value proposition by creatively pushing the envelope on developing their extended products.

Take financial services. It would seem that lending money is the ultimate commodity business. After all, money is fungible – which means essentially that you can’t tell one dollar from another. Yet even financial services companies have terrific opportunities to build their value proposition.

For example, one company segmented its customers, and developed highly streamlined processes and customized information for its sweet spot customers. At the same time, it drew on its vast local experience and contacts to help these target customers grow and succeed, and it committed to support them in good times and bad. This was a very compelling value proposition, which converted its commodity business into a highly differentiated one.

Developing your value proposition

What does it take to develop your value proposition? An open mind, clear vision, and a little legwork.

The Baxter innovation began as a “showcase” project. Baxter simply contacted a friendly hospital and asked if it could send in a small team to look around. The objective was to try to find new ways to improve customer service and lower costs. The team – and the hospital – didn’t know what it would find, but both thought it was a good idea to take a look.

Once in a customer, it is very important to look with an open mind at what the customer actually does and experiences through the entire cycle from discovering a need to consuming the product (and even needs that arise after consumption). The objective is to “walk in the customer’s moccasins,” and the best technique is simply to spend a lot of time observing individuals as they go about the process. Questions can come later.

Here’s another powerful technique: go on a journey of exploration. For example, several years ago, GE’s Canadian appliance division asked its VP of Manufacturing to explore what innovations other companies had developed that were not necessarily well-known. After significant research and field work, he discovered an incredibly effective process for make-to-order manufacturing that a small company in New Zealand had developed. (I describe this system in Chapter 24 of my book, Islands of Profit in a Sea of Red Ink.)

When he visited the company, he was amazed by the creativity and innovativeness of the process. He took the knowledge back to Canada, reorganized the company’s manufacturing process, and produced stunning results. The process was soon implemented in GE’s appliance manufacturing facilities around the world, and now – like vendor-managed inventory and make-to-order manufacturing – is a standard way for leading companies to do business.

Pushing the envelope

Every company has an opportunity to turbocharge its value proposition. The rewards are tremendous: strong competitive differentiation, surging profits, and expanding market share – even in a commodity business. No, especially in a commodity business.

What’s preventing top managers from pushing the envelope on value creation? In most cases, it is the strong human tendency to simply assume the status quo and focus on tuning it up.

Turbocharging your company’s value proposition costs nothing and takes little time. All you need is an open mind, clear vision, and a commitment to do things better.

Today’s market leaders all are constantly, almost frantically, trying to push the envelope on their value proposition. That is how they became market leaders, and that is why they stay that way.

Why not decide to do the same? After all, that’s all it really takes.

 

The Accidental Company

Have you ever wondered why we hiccup?

I recently reread a fascinating book, Your Inner Fish, written by Neil Shubin, a professor of anatomy at the University of Chicago. In this very readable book, he describes how we humans carry the very real vestiges of our evolutionary past – hidden right in front of our eyes –  in the way our bodies work every day.

For example, hiccups. Shubin writes, “If the odd course of our nerves is a product of our fishy past, the hiccup itself is likely the product of our history as amphibians… It turns out that the pattern generator [nerve controller] responsible for hiccups is virtually identical to one in amphibians. And not in just any amphibians – in tadpoles, which use both lungs and gills to breathe.”

Shubin continues, “Tadpoles use this pattern generator when they breathe with gills. In this circumstance, they want to pump water into their mouth and throat and across the gills, but they do not want it to enter their lungs. To prevent it from doing so, they close the glottis, the flap that closes off the breathing tube…. They can breathe with their gills thanks to an extended form of hiccup.”

In short, our hiccups are a vestige of our evolutionary past – when we shared an ancestor with tadpoles.

In another terrific book, The Accidental Mind, David Linden describes the evolution of the human brain, and shows how “the brain is not an optimized, general purpose problem-solving machine, but rather a weird agglomeration of ad-hoc solutions that have been piled on through millions of years of evolutionary history.”

What does this have to do with business?

Your company’s evolutionary past

It has everything to do with business.

If you really want to understand why a company does what it does, just look at its business challenges and situation five to ten, or more, years ago. Chances are that most of what the company does simply grew out of the way it met past needs, and that these business practices were passed along as part of the company’s culture – “the way we do business” – over the years, without being reviewed and reconstructed.

I teach a very powerful case about this in my graduate course at MIT. This case presents a very complex optimization problem. Typically the students work hard on the optimization and come to class prepared to discuss their quantitative approaches. I surprise them by starting the class discussion by asking “What is the problem we need to solve?”

After a lengthy discussion, it turns out that the company no longer needed the process that was being optimized. The more complex the optimization, the less likely the students would be to think about whether the underlying process was actually needed.

The prime lesson of the class: the most important things a company does are determined tacitly, and are never seen, never questioned, and never examined. Within this tacit, historically-determined framework, a lot of tuning up takes place, but the framework itself – “the way we do business” – is almost never examined.

What’s most important is that the really big money lies in changing the tacit framework, not in tuning it up. But almost no one operates at this more fundamental level.

In fact, a prime objective of my course is to sensitize students to this enormous opportunity in every company, and to teach them to identify the really big benefits that come from operating at a deep level of understanding. My companion objective is to teach them how to manage the paradigmatic change that is needed to transform a company’s fundamental way of doing business.

What Margaret Mead said

To emphasize the point about the pervasive unseen influence of the past, I tell the class a Margaret Mead story. When I was a student at Columbia, I took an anthropology course offered by the famous anthropologist, Margaret Mead, in the last year she taught. The course was about how culture was transmitted through the generations. We studied a variety of interesting situations, from Pacific Islanders to Morris Dancers.

Toward the end of the course, a student raised his hand and asked whether Americans had any traditions that were passed unseen through the generations. When Professor Mead asked what we thought, she heard responses like “hot dogs” and “baseball.”

She then gazed out at the lecture hall with about 500 students in attendance. She asked everyone who was born and brought up in New England to raise his or her hand. I was brought up in Western Massachusetts and Connecticut, so I raised my hand. I looked around and we New Englanders were ringed around the sides and back of the room like a horseshoe.

Why did this happen? She explained that in the early days of town meeting government in small New England towns, the selectmen asked for volunteers to do the town’s work. If there weren’t enough volunteers, the people who sat in the front and middle were called upon to help.

So over the years, New Englanders started to sit on the sides and back of the room – and this tacit behavior was passed down through the generations without anyone realizing why, even long after people stopped going to town meetings.

The problem with zero-based budgeting

Several years ago, zero-based budgeting was very popular with managers. Its logic, on its face, is very sensible: all expenditures should be evaluated as if there were no pre-existing practices. I think of this as the “if I could only wave a magic wand” approach to business.

The problem with this seemingly obvious approach is that it is almost impossible for managers to penetrate below the surface business procedures to examine and question the more fundamental “way we do business.” Managers almost always get so stuck in their traditional way of doing things that they become unable to carry out the objectives of zero-based budgeting. Hence, they fall back on tuning up existing practices for small incremental gains.

Breaking the mold

How then can a manager see more clearly his or her company’s tacit set of business practices, in order to take a real zero-based look at the company?

The answer is a technique that I call profit mapping, which gives a crystal clear picture of the company at a very granular level. A profit map shows the profitability of every product in every customer, and identifies where re-thinking and resetting a company’s “way of doing business” is most needed.

Every company is an “accidental company” in the sense that it is built to a surprising extent from old business practices. In my consulting and research, I’ve found in industry after industry that even in leading companies, 30-40% of the business is unprofitable by any measure, while 20-30% provides all the reported profits and subsidizes the losses.

Why does this occur in so many companies?

Because in our prior Age of Mass Markets, profitability was a function primarily of sales volume, which created economies of scale in everything from production to distribution to advertising. Prices were set by manufacturers, and distribution costs were very homogeneous because products were simply delivered to the customers’ receiving docks.

In the past 30 years, we have moved into what I call the Age of Precision Markets, in which everything changed. Prices are negotiated, and often vary by account and product. Costs also vary widely, as suppliers form very different relationships – ranging from arm’s length to highly integrated –  with their customers.

At the same time, the traditional broad accounting categories of revenues and costs, which worked so well in the prior era and which work well for financial reporting, are completely inadequate for understanding granular profitability today. Yet we continue to manage as if we still live in the prior era.

What you get is the familiar pattern of “islands of profit in a sea of red ink,” that is the vestige of doing business in a way that worked years ago, but no longer fits. Just like hiccups and sitting on the sides of an auditorium.

Profit mapping

The power of profit mapping is that it yields an extremely powerful view of the company as it really is today – where it is working, where it is not, and why.

I describe profit mapping in detail in my recent book, Islands of Profit in a Sea of Red Ink. In essence you create a set of cost tables, and develop an “income statement” for every invoice line. Because you can identify the invoice line’s account, product, sales rep, and other factors, you can develop a very powerful database that shows the profitability of every product in every account.

When you see this very granular picture of your company’s profit landscape, you will immediately realize where your company’s activities – its “way of doing business” – fit today’s business needs, and where they are deficient because they are essentially continuing to apply old ways of doing business that are vestiges of the past and no longer appropriate.

With this detailed profit picture, you almost can’t help but take a real zero-based look at your company. Of course, you can’t just flash-cut to a new way of doing business. But you will be able to develop a sound step-by-step plan to bring your “way of doing business” into alignment with today’s business needs.

And this is where the really big money is. How big? The upside is often a profit improvement of 30% or more year after year. All self-funded by the cash flow you will generate. The best of all worlds.

New profitability

What’s the timeframe for profit mapping? In a few months a small team can analyze a company and develop quantum profit improvements.

And because these actions are rooted in an intuitively clear, granular profit picture, you can be confident that they will work.

Without a hiccup.