Write these issues in their respective rows before moving on to the next section of this chapter:
FIGURE 2.4: CATEGORIZE YOUR CUSTOMERS’ NEEDS
The main issue of this exercise is to discover how well you know your customers’ needs, particularly for the ‘mission critical’ and ‘cull test’
aspects. Do you really know them? How do you know you know? Is this based on sound information or have you only guessed at them?
Perhaps this will prompt you to do some real investigation into your customers’ motives for buying.
Competitive advantage can be created in one or a combination of two ways:
1. Cost leadership. This is obtained from production efficiencies, economies of scale, use of resources, value engineering and/or constant attention to driving down costs (i.e. Kaizen as in Chapter 1). This will enable the supplier to lead market pricing and, if necessary, beat those who erode the key customer base by price cutting. Because we are all part of a much longer value chain, which is only as strong as its weakest link, for the chain to compete effectively in highly competitive industries, members of the chain must realize that they have to help each other. Ideally the supplier’s cost leadership, if reflected in their prices, enables their customer to be the cost leader in the customer’s market place.
2. Distinctive competence. These are skills such as being good at innovation/responsiveness to customer needs, demonstrated by frequent small, but customer-driven improvements. And, as a consequence the package offered is distinctively more advan- tageous than that from your competitor. Being a ‘preferred supplier’ places a company in a unique position to monitor and respond promptly to the customer’s changing needs and to set the benchmark of performance by which any competitive marauder will be judged.
It is necessary for suppliers to position themselves according to their customers’ needs as above. In turn, these are determined by issues that are of technical and financial significance to them.
So, the question is: does the supplier go for cost leadership or distinc- tive competence to gain the edge?
A cost leadership strategy
If cost leadership is to be the chosen strategic thrust, it is essential for marketers to understand the cost infrastructure of both their customers and their own company. The aim is to provide acceptable quality at the lowest possible delivered cost and to use that cost efficiency to deter competitors from engaging in price-cutting and/or penetration strate- gies. To these ends, it is vital for the marketer to understand the main
leverage points for cost advantage for the customer’s industry, in general and for the customer in particular.
In professional services, attracting and keeping the best quality human resources assumes a significant proportion of the costs, but is critical to the quality of the performance. Full utilization of these human resources and making sure that all their time is appropriately invoiced, is a key success factor. In addition, with high sales and marketing costs, a company should be targeting high frequency automatic repeat business, rather than the one-off short project that will probably require just as much time to sell and negotiate. The customer’s cost structure will determine the degree of importance attached to the company’s offering (goods or service).
To be the cost leader supplier, the marketer must know what that competi- tors’ costs are. For many manufacturing companies, the most obvious route to this information is to buy their competitors’ product, strip it down and evaluate the cost (which is common practice). Indeed, studying the competition is now a mainstream activity to the extent that many companies regularly run recruitment campaigns for the express purpose of securing business intelligence from those applicants who work for rival concerns.
A value-driven strategy
This means achieving a superior value by serving customers’ needs better than your competitors. Five issues have to be addressed:
1. Who is the customer? (We have to understand the customer’s decision-making unit and identify exactly who we have to convince of the value of our products or services.)
2. What values are the decision makers seeking?
3. Will these customers perceive these values and be prepared to pay a premium for them?
4. Can our company deliver these values more effectively than the competition?
5. How can our company enhance its position and achieve superior value?
In business to business, customer-perceived value consists of benefits that increase gross profit by:
• improving performance
• reducing operating costs
• reducing working capital needs
• reducing risk
or reduce the investment cost of a product over its life cycle by:
• lowering purchase prices
• lowering installation and set-up costs
• lowering maintenance costs
• lowering financing costs
• lowering disposal costs.
It is essential that the marketer fully understands some of the pitfalls of going for the value-driven option. These include:
• creating differences that buyers do not value
• pricing in excess of values delivered
• failure to understand the real cost of differentiation (and not building it into the price)
• looking only to the ‘core product’ as the basis of differentiation and ignoring intangible aspects of service and support. (See Chapter 4, Part 1.)
This latter point is especially important. With familiarity, the customer becomes accustomed to the special levels of service that are provided and they can often lose appreciation of the privileges that the relation- ship, as a preferred customer, imparts.
So the marketer must continue to remind their customers of the costs and benefits of the less visible aspects of their relationship and to continually re-sell their competitive advantage.