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UNDERSTAND CONSUMER VALUE

Customer requirements of per- formance, functionality, and price have grown ever more exacting and fragmented, as technology has driven new, better, and cheaper products. Consumers now want products and services tailored to their unique needs and preferences (e.g., small business banking services). They want heightened functionality (e.g., ergonomic running shoes and office

furniture). And they want lower life-cycle costs (e.g., improved gas mileage, battery life, and time between oil changes). Most likely, they want all of the above.

Both retail and commercial channels have witnessed a dra- matic proliferation in the prod- ucts and options required by cus- tomers. To accommodate these ever-increasing demands, tradi- tional competitors in every industry have had to repeatedly reconfigure their operations, adding burdensome cost and complexity.

Yet in our experience, com- panies usually miss the consumer value proposition. They tend to overvalue scale economies and undervalue the price premium end-consumers will pay if you hit their “sweet spot.” Building the best possible understanding of what drives consumer value in your value chain is crucial to creating long-term competitive advantage. It helps you build a reservoir of “consumer surplus” (value created minus total costs) from which you and your value chain partners can draw ongoing profits.

Exhibit 5. Principles of Success in Value Chain Restructuring

PRINCIPLE

1) Understand Consumer Value

  • 2)

    Maximize the Surplusin Your Chain

  • 3)

    Pick Your Spotsand Capture the Value

  • 4)

    Look Both Waysin the Value Chain

  • 5)

    Embrace New e-Enabled Opportunities

DESCRIPTION

  • Creating and capturing value requires an understanding of what customers value and what drives cost so that the right economic trade-offs can be made

  • Many companies fixate on cost at the expense of value

    • Clear understanding of cost drivers

    • Vague understanding of consumer value

  • Design and deliver products and services that maximize the consumer surplus(excess of value over cost) in your value chain

  • Pay attention to where value will be created and controlled

  • Companies often create value but end up giving it away to consumers or competitors

  • Through careful pricing and other techniques, a company can capture its fair share,or even more

  • Decide what spots you need to occupy to exercise control over one of three critical

leverage points for profits: capabilities, relationships, or assets

  • Look broadly across the chain for opportunities to create value and consumer surplus they may lie upstream or downstream from your current position, or both

  • Leverage enlightened cooperation to access capable suppliers and channel base, where available

  • The Internet is creating significant new opportunities in many industries to create more

value for consumers, reduce costs, or both

  • A comprehensive approach to value chain restructuring includes a careful look at

these opportunities not just a re-examination of the existing industry value chain

Source: Booz Allen & Hamilton

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