The Hindu Business Line : Creating value for the customer

Creating value is the guiding principle of modern management. This is a significant shift in management philosophy; moving from managing resources (input) to managing performance (output). At the same time, it is an intriguing phrase, the meaning of which is far from clear. When people think about the work carried out in companies, they are more likely to think about the actual goods and services coming out of them, rather than an abstract concept called value.

Nevertheless, the mission of any corporate management is to create value. Value comes from different aspects and sources — from the utility of a product, its quality, its image, its availability and the after-sales service by the company. Value is defined not by what a company does, but by what its customers want. Some people like fast food, while some people dislike it. Some people swear by their cell phones, some others swear at people who use them in public. What is food for one may be poison for another.

Customer orientation

A company exists and succeeds only at the instance of its customers. It must address their needs always. This customer orientation, however, is a recent phenomenon. Earlier, a company was interested more in its product or service and how it could increase its margin through that product or service. For instance, if a company was in the car business or in the coffee business the way to success revolved round making more cars or more coffee, using the same quantity of resources. The challenge was confined to productivity. The way to do that was to make the production process more efficient. This accent on efficiency made good sense in the industrial economy in which demand exceeded supply. Management emphasis was on making more things at less cost.

The prophet of efficiency was F. W. Taylor. He approached the task of efficiency with the discipline of a scientist. Taylor's message was clear. However simple a task might appear, it required a systematic study to arrive at the "one best way" to do it. Taylor was right in the context of his generation, when the number of goods was relatively small. But after an interregnum of about 50 years, scarcity was no longer a threat. The economy was flooded with goods. Consumer sovereignty came into its own. The issue, "what is value to the customer," required a new definition.

`Sense and respond' model

Peter Drucker arrived with a fresh outlook through his landmark book, The Practice of Management. He said that efficiency was necessary, but not sufficient. According to Drucker, customers did not buy products; they bought the sense of satisfaction through products. The businessman has to provide what the customer perceives as value.

Defining value as efficiency (as Taylor did) led to an inward focus — on what the company made and how it made it. It is a `make and sell' model of business. It starts with producing an item, pricing it based on the cost incurred plus profit and selling it to the customer. Drucker advanced a different theory of value. He said that value must be perceived from outside-in. It must be seen through the eyes of the customer. It is a `sense and respond' model that starts with what the customer wants and how much he is willing to pay for it.

This determines what to make and how much cost to incur. This led to a further distinction between selling and marketing. Selling is convincing a customer to buy whatever has been made. Marketing is understanding what a customer wants — what is his value — so that work can be organised to satisfy that value. Peter Drucker formulated three simple questions, in order to help managers cultivate the outside-in perspective: What is our business? Who is the customer? What does the customer value?

Answering them, however, has not turned out to be that simple. In respect of the first question, almost every organisation has more than one way to define its business. Different people have different perspectives. But top management must identify the key elements that govern and guide the business, and project it in clear and unambiguous terms.

"Who is the customer" again does not elicit a sure and straightforward response. There have been many instances when companies came out with excellent products, but there were no customers. When the Vespa scooter was first introduced in the Indian market, there were very few takers. The position of the engine on one side of the rear chassis posed a problem of instability. The competing product, the Lambretta scooter, sold like hot cakes. But in the span of about five years, the situation turned topsy-turvy. The advantage of negligible maintenance cost of the Vespa created a queue and there was a waiting period to obtain one, while sales of the Lambretta started sliding .

The third question embraces the central theme of this article that is, that customer perception of value must prevail and preside over the corporate philosophy. Again, an automobile example will illustrate this point better. During the 1980s, the emergence of lean and aggressive Asian competitors witnessed the decline and fall of the American automobile industry. The Americans had no clue of what the customer wanted. They continued to produce gas-guzzlers, whereas the customer preferred only fuel-efficient cars. Toyota, Datsun, and Honda — names virtually unknown less than six years earlier — made a formidable foray into the market. Apart from their fuel-efficiency, these cars proved to be more reliable and long lasting. Improved quality at lower cost offered irresistible value, which customers endorsed with their wallets.

(The writer, a former HR director of a well-known auto components group, is a management consultant)

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