Thursday, February 22, 2007

Strategic Planning - Understanding Value

This is the sixth in a series of articles about how to get more out of your strategic planning.

6. Understand Value

Now, when some people say value, what they really mean is "cheap", and that's not what I'm talking about here. I'm talking about (Q+S+E)/P. Here, Q=Quality, S=Service, E=Effectiveness and P=Price.

The hardest part of understanding this is to know that each customer has his or her own approach to value...and that the definition of value may change depending on the circumstances. For example, let's say my wife asks me to get a loaf of bread on the way home. Am I going to drive 10 miles to Sam's Club and buy a 12-loaf bundle? Of course not - I value my time more than that. So I have my choice of three stores within 2 miles of my home - one is cheaper, almost as cheap as Sam's, one is dreadfully expensive, but very high quality, and the third is pretty expensive but there is never a line there because the store is very well staffed.
Where will I go to get that loaf of bread? If you said "it depends", you are right. If we are having a fancy dinner, I might stop at the really expensive, high quality store. If I'm pressed for time, I might stop at the really quick store. And if I have to buy a lot of other, very commodity oriented stuff (like Kleenex and bleach), I may go to the cheap store. But in each case, my value equation has changed.

To take advantage of understanding this, you have to accept that you won't always get every customer - and, in fact, sometimes you won't get 100% of the business from ANY customer. This is long as you do get some customers some of the time, and their reasons for choosing you are well integrated into your operations, marketing and pricing. What do I mean by this? Take the expensive, high quality store in the example above. Their operation includes more highly paid people than either of the other stores, because they spend a good deal of time and money on learning about the best products and why those products are better. This helps the store to sell a pound of salami for $18, because every staffer involved can explain to you why you would choose this product over a $3.69 package of Oscar Mayer salami from another store. In addition, choosing just the right - often unique - products to sell takes a lot more know-how than goes into merchandising in a more run-of-the-mill store. And, of course, there must be additional margin to compensate for the increased difficulty of running a specialty store.

So - do you understand the value your customers see in you? Most successful companies have a firm, clear answer to this. Often, profitability problems are the result of mixing two reasons (cheap and high quality, for example), because the underlying operational requirements of optimizing different reasons usually clash, creating inefficiency. A proper strategic focus will greatly increase your ability to create strategic alignment around one, good reason to be preferred by your customers.

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