Riding the Value Cycle

We all know that sustained superior performance is no accident. How do the best companies keep their value high? Peter Cohan believes ...

We all know that sustained superior performance is no accident. How do the best companies keep their value high? Peter Cohan believes it's all tied to managing a cycle.
Riding the Value CycleFederal Express, Airborne Express (now part of DHL), and Genentech are three powerhouse corporations, each successful in its own way. However, it can be shown that, whether consciously or not, they employ a Value Cycle to spur their success. As with many management models that elucidate complex processes, some initial defining of terms will help you to use the concept in your own business. The Value Cycle articulates a broadly applicable management process for achieving and sustaining superior performance; specifically, it ties together:

Value, which refers to an organization’s ability to exceed the specific needs of its customers. The concept of a customer can be more complex than it appears. For a consumer products company, for example, a firm may have two sets of customers – the retailers who purchase its products directly – and the consumers who buy the firm’s products from the retailers’ shelves. To create value for these two sets of customers, the firm must understand each set’s distinct needs. For example, while the retailer might list its top three requirements as high profit margins, rapid shelf stocking and generous cooperative advertising budgets, the consumer’s top needs might be the product’s excellent taste, low price, and recommendation from family members. To create superior customer value, a firm would need to exceed its competitors’ performance on each of these attributes.

Cycle, which refers to an important notion that in most industries, firms are continually investing to upgrade the value they create for customers. Moreover, new entrants backed with innovative technology may seek to upend the firm’s basis for creating customer value. Furthermore, over time, the needs of customers and/or the relative importance of their needs may evolve. Thus, while a firm may provide superior customer value at a given point in time, the goal of the Value Cycle concept is to help firms sustain that leadership. Moreover, a firm’s initial success may lock it into ways of thinking about value creation that impede its ability to adapt to change. And the concept of the cycle helps managers focus on the need to clear away maladaptive mental habits.

Performance, which is deliberately vague at this point in order to enable managers of both for-profit and non-profit organizations to use the Value Cycle. Superior performance for shareholders of public companies is measured by long-term return on equity and shareholder value creation. By contrast, while they must take in more cash than they spend in order to survive, non-profit organizations measure performance in non-financial terms based on how well they achieve their stated missions. As illustrated here, the Value Cycle consists of three nodes: customer needs, firm activities and relative profitability – and three connecting processes: value creation, value capture and value renewal. The nodes anchor the model by focusing on:

Customer needs, defined as the managerial imperative to understand the customer’s specific needs and how well the firm and its competitors meet those needs. As detailed above, a company might have two or more distinct groups of customers whose needs it must understand. In order to create customer value, managers must interview their customers – asking them to list and rank the specific criteria they use to choose among competing suppliers. Managers must also ask customers to rank the firm and its competitors with respect to how well they satisfy these criteria. Finally, managers must ask customers to discuss their unmet needs the satisfaction of which could provide the firm with a chance to enhance its competitive position.

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