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Page 129
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Figure 61 Price Squeeze
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Value chain management recognizes the flaws in an efficiency-only mentality When our highest goal is maximizing internal efficiencies, we have a natural temptation to subordinate all of our operations to this single goal As we noted, subordinating operations to efficiency may work in the short run; it will improve margins, reduce costs, and keep discipline among our vendor chain However, it opens a Pandora s box of long-term problems When our chief goal becomes the enhancement of value to our customer, it signals an enormous shift in operational thinking, a move away from efficiency-at-any-cost to a view based on satisfaction at any opportunity
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WHERE DOES VALUE COME FROM
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A key question in value chain management is: What is the nature of value How is it created How is it communicated and passed along
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Page 130 The answer to the first question is emphatic value is determined by the customer Companies that seek to improve their operations through value chain management are doing so because they recognize that their long-term viability does not rest within their own control, it is the result of creating a product or service that customers recognize as one that adds value to their operations Therefore, if my customers perceive value in terms of low-cost vendor/supplier materials only, as a potential vendor, I enhance my chances of gaining their business through creating internal cost efficiencies that allow me to compete for their business on the basis of price On the other hand, if a potential customer signals that they perceive value in terms of additional factors, such as low risk, flexibility, or ability to come up with innovative solutions to address their needs, I create value in their eyes through demonstrating a willingness to lock in a long-term relationship I show willingness to work with their quality assurance people, develop and maintain continuous lines of communication, and so forth The key lies in recognizing that my actions are in response to their perception of value I affect their value chain by understanding their fundamental needs and restructuring my operations accordingly Imagine the implications of this model First, because value is identified by the customer, it requires my company to be customer-oriented, rather than internally driven Success lies in our ability to identify and respond to customers While this point seems obvious, it still forces serious reorientation on the part of those organizations that have been known for maintaining an attitude of Don t tell us what you want, let us tell you what you need Second, the model suggests that effective organizations are those that are agile enough to constantly remake themselves to fit the mold a customer seeks A recent article noted the success American Standard Co has had in reinventing themselves to appeal to different customers3 Through better customer needs assessments, American Standard has been able to reorient their traditional, functional structure to one that was able
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Page 131 to respond directly to customer needs They rebuilt relationships with their chief suppliers, retooled their manufacturing processes to better service customer needs, and communicated these goals through massive retraining of their workforce Through it all, the watchword has been customer satisfaction Recognizing and quickly responding to alternate demands of various customers is essential; if one customer seeks price breaks, we must emphasize our efficiency If another customer wants the freedom to make significant design changes through development, we must demonstrate a strong and helpful engineering staff Doing the same old thing the same old way is a fine recipe for maintaining strong internal efficiencies but it is a poor approach for positively impacting customers with their various and different needs It is the equivalent of Henry Ford s famous statement about buying a Model-T, You can get one in any color you want, as long as it s black! Dell Computer Corporation represents a good example of the flexibility needed to contribute to the customer s perception of value In the computer industry during the decade of the 1990s, speedy service and flexibility became hallmarks of value for both private and corporate customers Rather than simply buying a standard model off the shelf, everyone wanted the opportunity to create their own computer configuration based on personal needs Dell capitalized on this market opportunity by developing the first full-scale sales and service network designed to give customers maximum say in configuring their own systems Coupled with speedy delivery, Dell s idea led to its overtaking Compac as the world s largest seller of personal computers Figure 62 shows a simplified schematic identifying some of the keys links in the value chain configuration Note that the chain is not simply a linear series of connections from site to site, but a complex set of interactions among suppliers, partner firms, sales, service support, and customers In a project firm producing highly
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