Introduction
The concept of marketing has evolved from production, product and selling concepts of 1970’s to the marketing concept of 1980’s. The accelerating pace of change has led to viewing the entire business as a process to deliver value to the market at a profit. So significant is the impact of this concept of value delivery that the 90’s has been termed as value decade fostered by the present business environment, advances in information technology, globalisation of trade, networking of economies and intensified competition. The customer of today has many alternatives to choose from and is more informed than the past. The marketeers need to cater to the stated and implied needs of the customer through the product offering as a whole at the lowest possible price to the customer in order to leave a significant portion of the customer surplus which forms the basis for customer value.
Value: the multi dimensional concept
Economists, engineers, finance professionals and marketing managers in specific frames postulated by them, have interpreted the concept of value. The economists consider the value as equivalent to utility per unit of price i.e. utility per rupee/dollar. The marketeers define it as the perceived worth of benefits received by a customer in exchange for the price paid for a product offering (Anderson, 1993). Anderson and Narus (1998) view value in business markets as worth in monetary terms of the technical, economic, service and social benefits a customer company receives in exchange for the price it pays for a market offering. Zeithami (1988) finds value-even in single product category as highly personal and idiosyncratic. While most respondents agreed on cues that signaled quality, patterns of responses from exploratory study can be grouped into four customer definitions of value:
(i) Value is low price
(ii) Value is whatever I want in a product.
(iii) Value is quality 1 get for the price I pay.
(iv) Value is what I get for what I give.
Zeithami (1988) captures four consumer expressions of value to an overall definition of perceived value as “consumer’s overall statement of utility of a product based on perceptions of what is received and what is given.” Value is thus a complete bundle of benefits of an offering weighed against the total price to acquire and use the offering.
Value delivery process
Lanning (1988) states the existence of at least two views of the value delivery process [Exhibit 1 (a) and (b)]. The traditional view is that the firm makes something and then sells it to the customers. The process of value delivery comprises of two steps i.e. making the product and selling the same. The marketing activity consists of pricing, selling, product promotion, distribution and after sales services. The customer figures at the receiving end of the process of value delivery. However the present situation provides the customers with abundant choices. The mass markets are actually fragmenting into numerous micro markets and the customers demand the products customised to their needs at the lowest possible price. A firm going by this somewhat parochial view of value delivery is likey to be outsmarted by a competitor who is more customer oriented.
The modem view of value delivery process starts from the customer wherein the companies have to create value first before they undertake operations to deliver the same. The process of value delivery is divided into three components namely choosing the value, providing the value and then communicating the value. Choosing the value is a set of activities undertaken before the product (offering) is developed. It starts from customer segmentation for a focussed selection of the markets and then developing value positioning. The component of providing the value undertakes product development on the basis of chosen value. This includes operations of manufacturing, sourcing and distribution of the value offering (product). Pricing preceedes operations to act as benchmark or the control limit of product cost for the operations. The price must fall within the range that provides maximum perceived customer value. The operations cost and profits lie within this benchmark. The activities of sales promotion and advertisement communicate the value to the customers. In the present situation where the customers look for information before purchase and the spatial convenience of the information is as important as the spatial convenience of the product.
Analysing value enhancement strategies
The value delivered to customer consists of two components namely total customer value and total customer cost. Total customer value is the bundle of benefits customers expect from a given product or a service and total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining, using and disposing the product or service.
The expected customer value depends upon the industry and the level of competition in that industry. An organization would have to study the components of customer value required by the industry and design its customer service accordingly. Various elements of customer service generally expected are given in
Exhibit 2.
* Salesman visits
* Order cycle time
* Claim procedure
* Inventory availability
* Small orders
* Minimum order size
* After sales service
* Order information
* Policy on returns
* Availability & cost of spare parts
* Consistency of service
* Ordering convenience
Exhibit 2: Elements of customer service Source: Martin Christopher, International Journal of Physical Distribution and Logistics, Vol 13
A study on customer service of LCVs’ indicated that Telco was able to withstand competition from Japanese LCVs because of “easy availability of spare parts at reasonable price” [Kapoor 1986]. Further in case of Telco, after sales service was available in every nook and comer of India. The Japanese LCVs had not been able to build the dealer network. Another such study indicated that Punjab Tractors Limited had an edge over its competitors because of a superior customer service [Unpublished MBA Project Report]. The characteristics of customer service prioritised by farmers are :
(i) Customer dealing
(ii) After sales service
(iii) Warranty period
(iv) Spare parts availability
Plotting with perceived use value on theY-axis and perceived price on the X-axis, a customer matrix [Exhibit 3] can be constructed to analyse the competitive strategy (Faulkner and Bowman, 1997).
A firm plotting the perceived use value and perceived price may position itself at point A in Exhibit 3(a). In products with little differentiation, competitors would line up around point A. In this situation; most of the firms will have similar market share and similar levels of profit. A firm aspiring for a greater market share has the options of either improving perceived use value or decreasing price at same levels of perceived use value. Various competitive strategy options are shown in Exhibit 3(b) and hypothetically explained in the following matrix. A firm can pursue any of routes 1 to 8 and possible effects of each strategy on market share and profitability have been explained. This analysis is based on the assumption that market is competitive and the well-informed customers are responsive to the changes in price and value. The impact might vary according to the actual market conditions when other factors come into effect, but for analysis their effect is assumed to be zero.
Table 1: Impact on market share and profitability with changes in perceived use value and price
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The table shows that firms aspiring to gain leadership in market share and improve profitability have to devise strategies that increase the perceived use value delivered to customer at the most competitive price. The customer is interested in getting higher total bundle of benefits at lowest total cost. So, in case firms plan to enhance customer value by better management of logistics and other operations, they must view the entire process in totality. The systems approach to maximise value and reduce costs must be followed, even if it implies a trade off in some cost components. In this context a study on the feasibility of opening a new warehouse in Chandigarh for a distillery located in Western U.P. calculated the trade-off between the increased cost of operating a warehouse and the savings involved by transporting full truckloads to the warehouse from the factory [Kapoor, 1988]. The study concluded that it would be profitable for the distillery to open a warehouse in Chandigarh. There are a number of studies which concentrate on individual activity centres of logistics such as transportation, inventory, warehousing, etc. But, the logistics problem is a systems problem and it must be looked at as such. A study on total systems approach to logistics indicated that for small volumes of fertilizers, road would be preferred mode of transportation and for large volumes, rail should be preferred [Indu Nohria 1990]. Similarly, an increase in the warehousing and material handling costs as a result of an increase in the number of warehouses, have been traded-off against a reduction in total transportation cost to an extent that the cost effectiveness of the total logistics system is improved.
Value chain analysis
Value chain analysis is a tool for identifying potential comparative advantages. The value chain provides the firm with a comprehensive framework for systematically searching for ways to provide superior value to the customers. Every firm is a collection of activities that are performed to design, produce, market, and deliver and support its products. The value chain can be desegregated into nine primary and support activities. Such a division can help a firm to understand existing and potential sources of advantage as also low value or redundant activities or processes. The nine activities consist of five primary activities and four support activities.
Exhibit 4 : The generic value chain
Source : Michael E. Porter (1990). The Competitive Advantage of Nations. The Macmillan Press Ltd. London,
(i) The primary activities: They represent the sequence of bringing materials into business, operating on them, sending them out, marketing them and servicing them. The primary activities comprise of the following:
* Inbound logistics (sourcing and purchase)
* Operations (Manufacturing and allied activities)
* Outbound logistics (Distribution and transportation for product delivery)
* Marketing and sales (Communicating and persuading customers)
* Services (After sales services)
(ii) The support activities: The secondary activities comprise of the following:
* Firm’s infrastructure (covering the overhead of general management, planning, finance, accounting, legal and government affairs borne by all primary and support activities)
* Human resource management (provides and manages human resources across the organisation)
* Technology development (development means to make the existing operations more efficient and also contributes to newer means to deliver customer value)
* Procurement (involves procuring resources other than raw material and utilities to carry out primary and secondary activities)
These activities occur throughout all these primary activities. The firm’s task is to examine its costs and performance in each value activity and to look for improvements. It should consider its competitors’ costs and performances as benchmarks.
The industry value chain
The firm also need to look for competitive advantage beyond its own value chain, into the value chain of its suppliers, distributors and customers. Gaining competitive advantage requires that a firm’s value chain is managed as a system rather than a collection of separate parts. Such value system includes suppliers who provide inputs (such as raw materials, components, machinery and purchased services) to the firm’s value chain. On its way to the ultimate buyer, a firm’s product often passes through the value chains of distribution channels. Ultimately, products become purchased inputs to the value chian of the buyers who use the products in performing activities of thier own.
Competitive advantage is increasingly a function of how well a company can manage this system. Linkages not only connect activities inside a company but also create interdependencies among a firm and its suppliers and channels. A firm can create competitive advantage by better optimising or co-ordinating these linkages to outside. The value chain analysis is increasingly being used as a tool to develop competitive strategies.
Adding value through logistics
The value chain can be viewed as comprising of the flow of material from one end to the other end and hence the process of value delivery is essentially encompasses the logistics operations. Logistics being in the closest contact with customers, is the most efficient means to deliver maximum value to customers. Intensified competition and well informed customers have contributed to viewing the product offering in terms of a bundle of utilities weighed more by performance and less by brand names. Lower brand name loyalty decreases manufacturer’s power and increases retailer’s (channel) power because sales are determined by what is in stock and what particular brands are offered. Firms aspiring for leadership can gain immense value delivery through efficient management of supply chain.
Successful firms analyse the value added to the offering as it moves down the channel from suppliers to customers. Gottorna (1995) depicts the activities as a product moves from procurement of raw material through purchase by customers. The logistics operations have to identify the responsibility centres that provide service for each party and identify those activities that can add value and thereby differentiate their organization’s products from those of their competitors.
Several opportunities exist for logistics for value enhancement of attributes valued by customers and hence gain a competitive advantage. Advances in information technology and growth of Internet can immensely instrument value enhancement by reducing the cost components of product acquisition. Similarly, operational efficiency of logistics can greatly improve all aspects of customer service output namely spatial convenience, lot size, waiting time and product variety. This can also achieve cost effectiveness of operations and thus allow firms to follow route 7 (more PUV at lesser price) and thus consolidate market share and profitability.
Exhibit 6 : Adding value in the logistic chain
Source : Gattoma John (1995), Handbook of logistics and distribution management, 4th Edition, Jaico Publishing House, New Delhi, pg7 Re-engineering logistics needs to be viewed as a complete system because piecemeal solutions may create bottlenecks at some stages. For example, if a firm enables the customers to place orders through Internet, but does not have the supply chain back up, it is likely to result in reduced customer value. Decisions concerning logistics operations such as warehousing, order processing, transportation, material handling, etc. need to be considered and analysed in light of the value added even if it encompasses some trade off in some cost components. The channel power needs to be channeled to synergize the value delivery process. With a holistic view of the value system and investing logistics resources at those activities that are valued by the customers, firms can achieve value maximisation and a sustained competitive advantage.
References
1. Anderson James C., Narus James A., (1998) Business Marketing : Understand what customer’s value. Harvard Business Review, Nov-Dec, pg 53-65
2. Faulkner David, Bowman Cliff (1997) The Essence of Competitive Strategy, Eastern Economy Edition, Prentice Hall of India, New Delhi, pg 7-11.
3. Gattoma John (1995), Handbook of logistics and distribution management, 4* Edition, Jaico Publishing House, New Delhi, pg 5-10
4. Indu Nauhria (1990) Physical distribution of fertilizers. Unpublished Ph.D. Thesis, Panjab University, Chandigarh.
5. Kapoor Satish (1986), Customer service- Effective policies for light commercial vehicles. Decision, April-June.
6. Kapoor Satish (1988) Warehousing -An effective marketing tool, P.U. Management Review, Vol X and XI.
7. Kotler Philip (2000) Marketing Management, The Millennium Edition, Prentice Hall of India, New Delhi.
8. banning Michael J., (1988) A Business is a value delivery system, McKinsey Staff paper, no. 41, June (McKinsey & Co., Inc.)
9. Michael E. Porter (1990), The Competitive Advantage of Nations, The Macmillan Press Ltd., London.
10. Zeithami Valarie A (1988) Customer perceptions ofprice, quality, and value: A means end model and synthesis of evidence. Journal of Marketing Vol 52, July, pg 2-22