Saturday, June 19, 2010

Five Disciplines for Creating What Customers Want

“Risk comes from not knowing what you’re doing.” – Warren Buffett

Carlson & Wilmot say that businesses must address at least the following types of value:
  • Customer Value
  • Company Value
  • Shareholder Value
  • Employee Value
  • Public Value
Many folks use the words "customer value" to mean "value to the customer". I like to use the words "product value" because for me it represents a property of the product just like "product cost" (a product can be a good, service, or combination of the two). Whatever you call "value to the customer", everyone can agree that it is the center around which all other types of value are based. Everyone can also agree that product value fluctuates over time as the tastes of customers change.

Using product value as a metric to manage the business is about creating what customers want. Carlson & Wilmot list five disciplines for doing this:
  1. Focus on important needs
  2. Have a system for creating value
  3. Make sure your organization has innovation champions
  4. Use innovation teams
  5. Align the organization around creating value
It should be clear that being able to measure product value is key to all five disciplines, but let's role up our sleeves and take a look.

Prioritizing Important Needs

Products satisfy the needs of people who purchase them. My car not only takes me from point A to point B, but it carries me safely, it moves my groceries, my friends, it provides excitement by accelerating swiftly, and so on. The car possesses several critical-to-value (CTV) attributes for which I'll pay. Quantifying how my willingness-to-pay changes as the level of CTV attribute changes is one of the best way to prioritize important needs.

Value Creating Systems

To be successful in the long term, businesses must have a system for making improvements. The best systems are based on the principles of value driven innovation, which focuses on building the net-value of a product over time. Net-value is the difference between product value and product cost and its growth has been linked directly to growth in market share in several studies.

Innovation Champions 

Innovation champions are individuals in the business that encourage and support product and process improvements in the organization. In The Tipping Point, Gladwell listed three important roles of innovation champions:
  1. They share knowledge
  2. They influence others to take action
  3. They connect the right people to enable action
Of the five disciplines, this is the one where quantifying product value may be nice, but not that important. The innovation champion may just need to have an intuitive sense that an opportunity exists and have the innovation team quantify the innovative power of an idea when it comes to obtain funding from upper-management.

Innovation Teams

Kaizen teams are a well known approach for gathering a cross-functional team to attack innovation opportunities. These teams are often formed to focus on process improvements, which can result in cost savings and improved service. Although improving service is one way to increase product value, it is often a secondary objective of Kaizen teams and there exist opportunities to improve the "economic good" part of product value. This is a view held by some of the Six Sigma thought leaders. Indeed, it is my view that Kaizen event charters should quantify the expected change in both product value and cost as a way to understand the projects true innovative power.

Product Value and the Organization

A consistent theme throughout my blogs is that improving the net-value of products and services is everyone's job. Nevertheless, unless businesses learn how to quantify product value, net-value will remain a fuzzy metric and the it will be difficult to set targets and monitor progress. One of the key benefits of measuring product value for the organization is that it is an outward looking metric, which tells you how you are doing with respect to your direct and indirect competition. Ultimately, quantifying the fundamental metrics is what helps the entire organization play the same sheet of music, to set targets, and innovate.

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