How to Gain an Enduring Competitive Advantage

How to Gain an Enduring Competitive Advantage ASAP Midyear Industry & Technology Issues Conference June 2006 Rockney Walters Professor of Marketing and Ford Motor Company Faculty Fellow Kelley School of Business Indiana University, Bloomington waltersr@indiana.edu Rockney Walters (PhD, Purdue University) is a Professor of Marketing and Ford Motor Company Faculty Fellow at the Kelley School of Business, Indiana University, Bloomington. • He has received over 20 teaching awards while at Indiana, including awards from the Board of Trustees, Alpha Kappa Psi, an honorary society, and many student groups. • Rockney is active in executive education and consulting, working with IBM, Ashland Chemical, Ingersoll Rand, Microsoft, 3M, and The Dow Chemical Company, among others, on issues around pricing, value chain analysis, marketing planning, and marketing research. Brief Bio • He is an active researcher, publishing articles in the top marketing journals, including the Journal of Marketing Research, Journal of Marketing, Journal of Product Innovation Management, and the Journal of Retailing. He recently published a pricing/branding case in the Harvard Business Review. • Before obtaining his PhD, Rockney occupied marketing positions in PepsiCo and Schneider Corporation. • He can be reached at waltersr@indiana.edu How to Gain an Enduring Competitive Advantage ► The Case of Southwest Airlines: Gaining Success in a Commodity Market ► How Does Southwest Airlines (SWA) Do It? Insight #1: Knows and listens to its customers  A Southwest VP complained that customers, gate agents, pilots and baggage handlers had more access to CEO Kelleher than he did. Kelleher's response: “… they're more important than you are."  Attracts price sensitive customers – typical fares = $39 to $89 and no fares > $299.  SWA says its major competitor is the automobile! How to Gain an Enduring Competitive Advantage ► How Does Southwest Airlines (SWA) Do It? Insight #2: Operational Excellence: keep it simple  SWA uses only 737s, operates in underserved airports (Love Field, Norfolk, Midway, etc), has quick turnarounds, and emphasizes its core competencies (planes not rental cars).  All have yielded the lowest cost per mile in industry. Insight #3: Monitor the Environment  SWA examines trends and determines where they want to play in the trend (hedged on fuel costs; avoids links to other airlines’ reservations systems) How to Lose a Competitive Advantage Listening to the customer and attaining operational excellence is a necessary though not sufficient condition for success. Consider Siebel Systems: ► Pioneer in CRM Enterprise solutions software with stellar achievements:  IPO 1996 @ $1.06  From 1996 to 1999 revenue grew 9,786%!!  A total of four 2 for 1 stock splits occurred during the period  Stock price in 2000 = $120.00  In 2001 Forbes ranks Siebel #1 in Partner Programs  In 2002 CEO Tom Siebel is Industry Week’s “CEO of the Year How to Lose a Competitive Advantage However, in November 2005, Siebel was sold to Oracle for a paltry $10.66. What happened?  Enterprise customers experienced significant problems with the implementation and use of Seibel’s software.  Less than 80% of purchased software was installed!  While customer dissatisfaction grew competition from other CRM vendors such as SAP, Oracle and Linuxbased Telemation also grew. Ouch! How to Lose a Competitive Advantage ► Customer demand for an on-line “software as service” solution began to pick up steam including products offered by Salesforce.com. In response, Siebel launched CRM OnDemand for a price of $70/month per user  Interestingly, Siebel had previously entered and exited an on-line CRM service. ► Still, revenues and earnings targets were repeatedly missed. How to Lose a Competitive Advantage ► The  experts weighed in: “I think they have a brand credibility crisis.” “SAP has considerably more resources. And there’s a more flexible nimble company in Salesforce.com.” “They have sold more product that’s not being used than any other vendor in the history of … software.”   What happened? Do you think Siebel was not listening to the customer like Southwest Airlines on the way to the top and on the way down? What are the implications of the Siebel debacle for your business? How to Gain a Competitive Advantage: Step 1 Step 1: Perform a self-assessment. Identify where you might possess a competitive advantage now. Do you have a Differentiation Advantage • Product • Service • Brand Marketing Advantage • Distribution • Sales Force • Communications Competitive Advantage Cost Advantage • Raw Materials • Operating Expenses • Marketing Financial Advantage • Cost of Capital • Mergers & Acquisitions • Cash Flow Management How to Gain a Competitive Advantage: Step 1 Some observations about Step 1 • A competitive advantage is not just about having superior products or super service. It can be enhanced by • leveraging your brand equity • achieving strong channel relationships • offering outstanding marketing communications • It is difficult to have a sustainable competitive advantage based on offering low or the lowest prices. • Try to achieve best of breed status on multiple dimensions – diversify your portfolio of excellence! How to Gain a Competitive Advantage: Step 2 • Gather Voice of Customer Data – talk to customers! Identify their • Needs & Wants • Pain Points How to Gain a Competitive Advantage: Step 2 Customers purchase based on value and not based on features. What is meant by value? Value to the customer means how your products, services, and brand can help them Enhance Their Revenues Lower Their Costs Implication #1: Buyers are not purchasing because of interesting design/engineering features. Instead they are buying because your solutions help them build their business. How to Gain a Competitive Advantage: Step 2 Customers also purchase to relieve their pain. Seek data on pain points, the factors that keep them from achieving their objectives. Pain Points are typically related to business processes. For example, a customer’s Pain Points might be an inability to • • • • • take orders effectively process existing orders rapidly fulfill orders correctly and rapidly anticipate demand produce accurate after-sales service and billing Implication #2: Seek insights on customer pain points. Do not constrain your insights to product factors as service-related issues often produce more pain. How to Gain a Competitive Advantage: Step 2 Think about your top potential customers, ► Can you document how their use of your products will build their revenues, reduce their costs, address pain points? your sales reps know the answers to these questions? ► Do ► Do your channel partners know the answers to these questions? How to Gain a Competitive Advantage: Step 2  How can we become experts on how our products drive customer revenues and/or reduce customer costs. Talk to your customers! ► Use in-depth interviews – best approach for really understanding customer needs, wants, and pain. ► Surveys (web, paper, phone) and focus groups are good approaches but they won’t help you become an expert as quickly as in-depth interviews. ► To help guide your customer data collection effort, consider the Purchase Driver Scorecard shown on the next slide. The Purchase Driver Scorecard: Step 2 Market Potential . Awareness Familiarity Present and potential customers travel through some or all of these steps each time they consider purchasing. Consideration Purchase Satisfaction Loyal/Repeat Purchase The Purchase Driver Scorecard in Action: Step 2 An example of data collected for a software product using the Purchase Driver Scorecard as a template. 100 80 60 Respondents 40 20 0 % 100 85 53 49 28 24 Potential Familiarity Purchase Awareness Consideration Satisfaction What is interesting about these results? The Purchase Driver Scorecard in Action: Step 2 60 50 Average 30 Spend $ Million 20 10 0 SATISF INDEX = 12 SATISF INDEX = 15 40 Moving from “medium satisfaction” to “high satisfaction” produces a bump in average spend How to Gain a Competitive Advantage Step 3: Conduct a Value Chain Analysis • The Value Chain is the set of business functions or activities that involve designing, producing, delivering, marketing, and supporting your products and services. A Value Chain Analysis is a tool that can help you identify • what elements of the product, the service and the company customers value • how and where you can make money • To make sense of Value Chains it is important to map them. • Value Chain Mapping: Step 3 Inbound Logistics ►Receiving ►Warehousing ►Inventory Operations Outbound Logistics ► Inventory ► Order Marketing & Sales ► Service ► Design control & Production of Products ► Creation of Services ► Creation of Packaging Fulfillment ► Distribution Channel Design ► Promotion ► Pricing ► Warranty & Guarantee Fulfillment ► Information Procurement Technology & Systems Human resources Firm Infrastructure Source: Porter 1985 Value Chain Mapping: The Case of a US Gas and Oil Pipeline Manufacturer: Step 3 Pipeline Mills Polyethylene Adhesive Anticorrosive ► Carbon Magn. ► Steel . . . Metal Production of Pipeline Trucks Equipment for Pipeline Construction Iron Glassfiber Polymers ► Polyethylene ► Fiberglass . . . Transportation Installed by Pipeline Construction Companies After Sales Service Recovery Of Oil & Gas Steel Strip Laminate Repair Diagnostics Bending Testing Key Question: Where do we can add to the customer? Why Should We Examine Value Chains? Step 3 1. Ability to Attack Unserved Needs – Solve Higher Order Needs 1st Order Needs: Product Functionality 2nd Order Needs: Improving Customer Activity Economics 3rd Order Needs: Solving Profound Business Problems Low Opportunity For Value-Added Differentiation Ability to Set vs. Respond to Customer Agenda High Low High Source: Adapted from Mercer consulting materials Why Should We Examine Value Chains? Step 3 2. Exploit Your Soft Skills - Examine the “soft skills” developed from applications of your “core” business Skills Reach: the ability to positively touch many customers frequently Examples McDonalds efficiently serves 48 million customers a day Interaction: frequent and extended contact beyond you and the customer Wal-Mart customers visit stores 3x as often as they visit the competition Insight: Deep understanding of a customer problem Johnson Controls understands pain Location: the importance of your location in the customer‟s value chain points and opportunities in automobile interiors better than automotive companies UPS occupies a critical position in the customer‟s Value Chain, becoming almost indispensable for many firms Why Should We Examine Value Chains? Step 3 3. Leverage Your Hidden Assets - examine latent skills you have acquired in support of your core business Company Core Business UPS Moving Packages ► Hidden Asset expertise in managing customer logistics and order fulfillment ► skills in working capital management ► expertise supply chain management & consulting skills in home maintenance services ► honors warranties on Sears and nonSears brands ► Sears Soft and Hard Lines Retailer Aircraft Manufacturer Boeing provides financing ► supplies parts ► conducts pilot training ► performs maintenance ► Offering Compelling Value Propositions: Step 4 The Value Proposition (VP) is the marketing offer, the promise you make to the customer around your product/service. A compelling VP must ► Identify the target customer/segment ► ► Indicate key needs/pain points the customer/segment wishes to satisfy Offer insights on how our product/service delivers on the needs/pain points ► Show how our product/service addresses the needs and pain points better than the competition    The VP must be informative, persuasive, feasible, and concise. You have just minutes to make your case. View VP as the moment of truth when you are facing the customer and they ask, “Why should I buy from you ?” Components of a Value Proposition: Step 4 Value Proposition Formula Statement: For __1____ (state target customer/segment) who __2___ (state benefits desired), __3__ (our product/service) __4___ (state key values delivered). Unlike __5___ (primary competitor), __6__ (our product/service) __7__ (state our competitive advantage or differentiation for values of importance to customers). Offering Compelling Value Propositions: Step 4 “For (1) line-of-business executives in the automotive supply industry who seek (2) „insights on demand‟, (3) Vertigo provides (4) quick and meaningful solutions which enable operational and strategic decision making. Unlike (5) Phoenix, (6) Vertigo has the (7) breadth of services and experience to design, implement, and maintain systems that provide customers with a competitive advantage.” Summary Voice of the Customer & Value Chain Analysis • Marketing Research • In-depth Interviews • Focus Groups • Web Surveys Competitive Advantages • Product/Service Differentiation • Marketing Advantages • Cost Advantages • Financial Advantages Implementation of Value Propositions Construction of Value Propositions Customer Response to Value Propositions