Mining Your Unexploited Value - Part II

By Thomas E. Ambler

In "Mining Your Unexploited Value-Part I" 1 we dealt with the thorniest question in the minds of many leaders of mid-sized U. S. businesses today - "Is China a threat or an opportunity for our company and how should we respond?" One of the strong conclusions we drew was the need to understand customers more deeply by engaging in Strategic Marketing, particularly the Market Research piece of it, with a greatly heightened intensity. In Part II we want to drill down into this market research piece and consider a process designed to aid you in (a) identifying value attributes you can exploit and (b) assessing differences between you and your customer in the value you attach to them.

So, let's pick up where we left off in Part I and assume that you are selling to another business.

Evaluating Your Value Proposition

You probably have some very strong opinions about the value you think your customers should place on your Value Proposition. Unfortunately, your evaluation is largely irrelevant. Only the customer's assessment of value counts. It is imperative to know where there are sharp differences between you and your customer as to the value of your attributes. The same is true for an attribute your competitor offers but you don't. If the customer places high value on it, you should be ready to counter by (a) offering compensating competitive differences on other attributes, (b) modifying the customer's perception of the difference or (c) adding that attribute to your offering.

Success at understanding your customers requires that you not only talk to the right people in their organization, but that you think about yourself the same way they think about you. They likely assess the value of attributes they view as Needs (their "must haves") differently than those they view as just Preferences (their "would like to haves"). They are also more likely to focus on the product/service piece of your value proposition than the piece that deals with the broader characteristics of your company that span multiple products and markets, simply because of ease of measurement and tangibility. Your market research approach should attempt to account for these differences in perspective.

Even if your customer buys on a value (Specialty) basis rather than just price (Commodity), price will play a major role in his buying decision. Typically he has a target price point based on the value your product or service contributes to the total price of his product or service or based on a competitive price of an acceptable product-one that at least satisfies all Needs.

With these thoughts in mind, we can structure a powerful, yet basic Value Model for a product or service in the form of a three-step process. Worksheets 1, 2 and 3 each present one step of this model. Although a tabular presentation of concepts is generally not inviting to a reader, it is compact. Therefore, this author invites, no strongly encourages, you to work through these 3 worksheets because they might just contain conceptual nuggets that will prove valuable in your search for unexploited competitive advantages.

Worksheet 1- Determine Customer Value of Product/Service-Related Needs and Preferences

Worksheet 1 is structured like a product-related P&L for each competitor's product with "profit" labeled as Net Value" for (a) customer Needs on Line 15, (b) customer Preferences on Line 22 and combined on line 24. If "China is an issue, be sure one of the competitors (could be you) reflects it.

		$ Value (either + or - numbers) per Unit
	VALUE ATTRIBUTE-PRODUCT-RELATED	Competitor A	...	Competitor N
1	For Customer's Product-Related NEEDS:
2	Total Value of Needs = Customer's Max. Price Point for this product	Same for all		Same for all
3	Customer's Product-Related Needs:
4	Quality Measure 1	Δ Cost-A (Extra Cost by Cust. To Make Product from Competitor A Acceptable)		Δ Cost-N
5	Quality Measure 2	Δ Cost-A		Δ Cost-N
6	...	Δ Cost-A		Δ Cost-N
7	Delivery	...		...
8	Product Feature 1	Δ Cost-A		Δ Cost-N
9	Product Feature 2	Δ Cost-A		Δ Cost-N
10	...	...		...
11	Switching Cost	Δ Cost-A		Δ Cost-N
12	Less: Total of Extra Cost incurred by Customer to make the product from given Competitor acceptable	Tot. Δ Cost-A		Tot. Δ Cost-N
13	Less: Competitor's Quoted Delivered Price for the Product that at least satisfies the Needs	Price A		Price N
14	Plus: Extra Value Rec'd. from Competitor from Need Attributes (Additional Price Pt. justified by above acceptable levels of Need Attributes)	Δ Price Pt.-A		Δ Price Pt.-N
15	Net Value of Product Needs-(must be + for customer to buy at all)	Net Value of Needs -A	...	Net Value of Needs -N
16	For Customer's Product-Related PREFERENCES (Offered by at Least 1 Supplier):
17	Product Feature A	Δ Cost-A (Extra Cost to Cust. to use feature (supplier charge or internal cost) (+ or - )		Δ Cost-N
18	...	...		...
19	Product Feature N	Δ Cost-A		Δ Cost-N
20	Less: Total of Extra Cost incurred by Customer to utilize Preference Product Features	Tot. Δ Cost-A		Tot. Δ Cost-N
21	Plus: Extra Price Customer can charge for extra features provided by the Preferences	Δ Price Pt.-A		Δ Price Pt.-N
22	Net Value (NV) of Product Preferences	NV of Preferences-A	...	NV of Preferences-N
23	Note: Unsatisfied attributes-no one offers yet
24	Grand Total Net Value--Product-Related Needs and Preferences	Grand Total NV-A	...	Grand Total NV-N

Areas of opportunity for gaining competitive advantages or offsetting disadvantages:

• Attributes we have and competitors do not and vice versa (Lines 4-15 for Needs and 17-22 for Preferences)
• Differences in ? Cost incurred by the customer to make products acceptable, Lines 4-11 and 17-19. This would include the extra costs that result from the variability in quality or delivery; e.g., inspection, physical modification and safety stock.
• Differences in value (+ or -) shown on Line 14 and 21 that change the price that the customer can charge his customer (these values are higher with early design phase involvement)
• Line 23

Below is a list, by no means exhaustive, of some specific product/service-related attribute categories that you should consider for Worksheet 1.

• Price
• Freight
• Features and product benefits, including physical packaging and degree of assembly completeness
• Proprietary product/service features
• Product quality in all of its forms
• Life expectancy
• Distribution
• Product switching cost

Worksheet 2- Determine Relative Rating of Competitors on Non-Product/Service-Related Needs and Preferences

Since attributes of the supplier not directly associated with the product are not as readily related to dollar values, Worksheet 2 uses a rating and weighting system that results in a value comparable to a gymnastics score for each competitor on Line 11.

			Score of 1-10 (10 = Best of)
	VALUE ATTRIBUTE- NON-PRODUCT-RELATED	Importance Weight	Competitor A	...	Competitor N
1	Attributes Required to Qualify as a Supplier (Subset of Needs):
2	Supplier characteristic A	%
3	...	...	...		...
4	Supplier characteristic N	%
5	Other Non-Product-Related Needs and Preferences:
6	Brand/Reputation	%
7	Ease of doing business	%
8	Switching cost	%
9	...	...	...		...
10	Attribute Z	%
11	Total Importance-Weighted Score-Non-Product-Related Attributes (Max. Score=10 Pts.)	100%	Total Score-A	...	Total Score-N

Categories of non-product/service-related attributes of suppliers to consider for Worksheet 2:

• Strategic significance due to cost contribution or functionality in customer's product
• Location(s)
• Marketing approach (TC)
• Logistical competency (TC)
• Distribution system
• Brand (including the perceived buyer's internal political risk of not choosing this company; capitalize on the brand loyalty of the customer's customers) (TC)
• Perceived quality and service (commitment to customer service during and after the order cycle) (TC)
• Ease of doing business (TC)
• Operating philosophy (e.g., continuous improvement, short-run vs. long-run, flexibility, mass customization) (TC)
• Ability to enter into stable terms and pricing arrangements that remove risk
• Global or not
• Global Account Management 2 (TC)
• Ability to bridge with dissimilar cultures (TC)
• Culture/Values (TC)
• Fit (TC) 3
• Agility (TC)
• Size/capacity/longevity/industry position (critical mass) (TC)
• Breadth and depth of product line
• Innovativeness
• Technological competency/problem-solving capability (TC)
• Integration (TC)
• Existing relationships (TC)
• Dependency upon customer (TC)
• Ability to form relationships and keep them healthy (TC)
• IT and E-commerce capability (TC)
• "Experience" factor (e.g., they do most of their selling at their ski resort)
• Supplier switching cost (TC)

The (TC) denotes that this attribute can have a significant impact on Transaction Costs, which include the search, information, bargaining, decision, policing and enforcement costs incurred when transactions are contemplated and consummated. Transaction Costs are receiving increasing attention in supply chain management decisions.

The final step in the process is to combine the "apples and oranges" results from Worksheets 1 and 2 to establish a decision-making measure.

Worksheet 3-Determine Overall Values and Best Supplier-Combine Product and Non-Product Evaluations

Max. Price Point per Unit from Worksheet 1, Line 2
% of Total Value from Non-Product-Related Attributes (Based on Gut Judgment)	&
Value per Point for a Perfect Score ( a 10) on Non-Product-Related Attributes	NPRV

Example: If the Max. Price Point is $100/unit and the customer indicates that their decision places 60% weight on product-related value and 40% on non-product-related value, then NPRV = $100/unit x 40% / 10 pts.) = $4 per point

		Competitor A	...	Competitor N
1	Net Value--Product-Related Needs and Preferences (Worksheet 1, Line 24)
2	Score for Competitor (Worksheet 2, Line 11)
3	Net Value-Non-Product-Related Needs and Preferences (Score x Value per Point, NPRV)
4	Overall Net Value of Supplier (Line 1 + Line 3)	ONV-A	...	ONV-N

Worksheet 1 is designed for a single product or tight product line to avoid generalities in your analysis with customers. Obviously, you will have to choose the key product(s) for your future with major customers familiar with multiple competitors. One Worksheet 2 likely applies across all products for a given customer. Since company-related attributes are typically the hardest to sell but likely offer the greatest source of unexploited value, you may want to utilize Worksheet 2 for more customers than Worksheet 1.

No model is general enough to be "one-size fits all." You will have to at least tweak it. It is intentionally structured from the customer's perspective. The customer is not likely to give you dollar values for Worksheet 1 directly, but he will deal with them at least qualitatively and on a ranked basis, hopefully by major competitor. You can then translate them into rough dollar values. Also, listen carefully to the customer when he expresses the desire for an attribute that no one offers and try to establish what that would be worth if you could provide it.

The whole exercise described above is intended to provide a basis for in-depth dialogue with your customer as to where he sees value in the future and initiate thinking about attributes either he or you have never considered before. You will find some high potential attributes for countering your competition, whether it comes from "China" or not.

Once you've completed your initial round of market research, move through the rest of the Strategic Marketing Process described briefly in "Part I." Proactively market your newly positioned offering like you never have before. Avoid the high penalty of procrastinating and proactively turn what you may consider the "China" threat into a winning opportunity. May your mining produce a gold mine!

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¹ Thomas Ambler, "Mining Your Unexploited Value-Part I," Compass Points, April, 2005 issue. (See also--Robert Bradford, "Outsourcing: Menace or Gold Mine?" and "Competing with China: Finding the Right Customers" have appeared in Compass Points/Course and Direction); all are available free of charge in the Article Archives at www.strategyletter.com/article_archive.php?cssp
² John A. Caslione and Andrew R. Thomas, Global Manifest Destiny: Growing Your Business in a Borderless Economy, (Chicago: Dearborn Trade Publishing, 2002), Chapter 4
³ Mark Shonka and Dan Kosch, Beyond Selling Value: A Proven Process to Avoid the Vendor Trap, (Chicago: Dearborn Trade Publishing, 2002)

Tom Ambler is a Senior Consultant with Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at

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