Establishing a Value Proposition

This is the second article in a series of three on the industrial services and rebuild business focusing on the marketing of engineered customer products; establishing the value proposition of an industrial service and rebuild product; and establishing the optimum product supply chain.

Situation

Jake drove his dark blue pickup truck back home following a successful boating day with his key customer. The mess of fresh water lake perch on ice in the truck bed cooler attested to the successful fishing. Jake seethed and fretted inside over the message left by the customer. “Why are your products so much more expensive than your domestic competition? I hear those Chinese custom products are holding up and they are half the price.”

It was not fair! His product group provided the best long lasting solution in the industry. He backed the product with the strongest and most talented engineers in the business. Now the customers who saved a bundle of money with his productive and long lasting custom solutions were questioning his price. He had always charged a fair price!

The market had grown stronger as the industry consolidated to compete globally. A handful of survivors were emerging. These organizations were global in reach and demanded cost reductions for their business. The specifications were harder to influence despite the expertise of his applications engineering group. The problem was aggravated by the large amount of inventory that was needed to manage the long lead times for new parts. Jake needed to establish the value of the company’s higher cost, but longer lasting product.

Perceived Solution

The sales force and his inside customer service personnel demanded lower prices or lose customers. Clearly the only way to compete with the new global competitors was to lower the price near their levels.

The problem was that the quality of design and materials Jake’s group used to provide better life were more expensive. Jake believed the higher quality product was the reason custom product customers returned time after time. Besides, if price reductions were made at a few customers soon all customers would demand the lower price to stay competitive? Still cutting prices appeared to be the only solution.

Process Tools Deployed
Jake knew he needed a better way to maintain and add new customers. The methodologies deployed were value stream mapping and profiling to determine the value proposition. Value stream mapping determined all the value added and waste activities in the process from initial quote through the shipment of the product. Profiling painted a picture of characteristics / benefits of the product and services through the eyes of the customer. These product characteristics and benefits were thrown against the competitors' and Jake's products and services.
This matrix tool created a value proposition gap.

Findings

The gap findings were shocking to Jake and his team.
• Customers no longer needed the sophisticated adjustment characteristics of Jake's products because the customers had shifted to better aligned equipment.
• Maintenance management at these larger customers were rewarded for today's results and saving money tomorrow had been reduced as an incentive.
• Buying decisions were being taken out of the operations / maintenance personnel and given to sophisticated buyers who were bonuses by unit cost savings.
• Large global customers were more tolerant of overseas products and sister companies overseas used the competitor products successfully.
• Customer's engineering staffs and decision makers were reduced in size so they were not available to meet with several times to get the custom design optimal.
• Jake's products were understood to be longer lived and higher quality.
• Jake's engineering services were being used to design the custom equipment for the resource strapped customers.
• Jake's team had established good relationships with the decision makers over the years of their solving problems.

Solution

Create a value proposition for each major customer. Some of the characteristics of that proposition were:
• Individual custom solutions were replaced by customer models with common characteristics that solved the customer problems while reducing selling confusion, reduced design resources needed, allowed increased minimum order quantities for components to increase allowing buying opportunities, and allowed applications of lean manufacturing such as standard work and manufacturing cells.
• Maintained custom feature tweaks that allowed non-commodity pricing where Jake's company product was perceived by the customer to be better.
• Deployed new product configuration software for the models on secured web connections to minimize the time between the customer decision makers and the applications resources. The eliminated waste and reduced cost while allowing greater pricing as an additional service.
• Jake's company developed a cost reduced model from a low cost country source and used the product to defend against penetration at existing accounts, up selling the custom product and introducing lower cost materials that worked into the custom product for cost reduction.

Results

The customers were maintained with few price decreases. The education on the value added proposition further entrenched Jake’s group at the customers. The web based material provided was easily used by the maintenance personnel to support more spending with their management groups.

The development of the value added proposition for the customers was only one part of the industrial service success story. On Friday, an article on establishing the optimum product supply chain for those services will be posted. Join me every Monday, Wednesday and Friday for a new look at leveraging your human capital to attain a sustainable competitive advantage.