Published on January 9, 2009
How to Gain an Enduring Competitive Advantage : How to Gain an Enduring Competitive Advantage Rockney Walters Professor of Marketing and Ford Motor Company Faculty Fellow Kelley School of Business Indiana University, Bloomington firstname.lastname@example.org ASAP Midyear Industry & Technology Issues Conference June 2006 : Brief Bio 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. 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 email@example.com How to Gain an Enduring Competitive Advantage : 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 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) Slide 5: 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 Slide 6: 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 Linux-based Telemation also grew. Ouch! How to Lose a Competitive Advantage Slide 7: 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 Slide 8: 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 Lose a Competitive Advantage Slide 9: How to Gain a Competitive Advantage: Step 1 Cost Advantage Raw Materials Operating Expenses Marketing Competitive Advantage Marketing Advantage Distribution Sales Force Communications Differentiation Advantage Product Service Brand Financial Advantage Cost of Capital Mergers & Acquisitions Cash Flow Management Step 1: Perform a self-assessment. Identify where you might possess a competitive advantage now. Do you have a Slide 10: 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 1 Slide 11: Gather Voice of Customer Data – talk to customers! Identify their Needs & Wants Pain Points How to Gain a Competitive Advantage: Step 2 How to Gain a Competitive Advantage: Step 2 : 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 Implication #1: Buyers are not purchasing because of interesting design/engineering features. Instead they are buying because your solutions help them build their business. Enhance Their Revenues Lower Their Costs How to Gain a Competitive Advantage: Step 2 : 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 : 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? Do your sales reps know the answers to these questions? Do your channel partners know the answers to these questions? How to Gain a Competitive Advantage: Step 2 : 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 : The Purchase Driver Scorecard: Step 2 . Market Potential Awareness Familiarity Consideration Purchase Satisfaction Loyal/Repeat Purchase Present and potential customers travel through some or all of these steps each time they consider purchasing. The Purchase Driver Scorecard in Action: Step 2 : The Purchase Driver Scorecard in Action: Step 2 100 85 53 49 28 24 0 20 40 60 80 100 Potential Awareness Familiarity Consideration Purchase Satisfaction % Respondents What is interesting about these results? An example of data collected for a software product using the Purchase Driver Scorecard as a template. The Purchase Driver Scorecard in Action: Step 2 : The Purchase Driver Scorecard in Action: Step 2 Moving from “medium satisfaction” to “high satisfaction” produces a bump in average spend Average Spend $ Million Step 3: Conduct a Value Chain Analysis : 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. How to Gain a Competitive Advantage Value Chain Mapping: Step 3 : Value Chain Mapping: Step 3 Firm Infrastructure Source: Porter 1985 Slide 21: Production of Pipeline Trucks Installed by Pipeline Construction Companies Transportation Equipment for Pipeline Construction After Sales Service Recovery Of Oil & Gas Diagnostics Repair Anticorrosive Polyethylene Adhesive Steel Strip Laminate Iron Glassfiber Testing Bending Value Chain Mapping: The Case of a US Gas and Oil Pipeline Manufacturer: Step 3 . . . . . . 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 Opportunity For Value-Added Differentiation Ability to Set vs. Respond to Customer Agenda Source: Adapted from Mercer consulting materials Low Low High High Why Should We Examine Value Chains? Step 3 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 Interaction: frequent and extended contact beyond you and the customer Insight: Deep understanding of a customer problem Location: the importance of your location in the customer’s value chain Examples McDonalds efficiently serves 48 million customers a day Wal-Mart customers visit stores 3x as often as they visit the competition Johnson Controls understands pain 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 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 Why Should We Examine Value Chains? Step 3 Offering Compelling Value Propositions: Step 4 : 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 : 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 : 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 : 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 Construction of Value Propositions Implementation of Value Propositions Customer Response to Value Propositions
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