Value Delivery System

In its search for competitive advantage, the firm needs to look beyond its own value chain, into the value chains of its suppliers, distributors and, ultimately, customers. More companies today are 'partnering' with the other members of the supply chain to improve the performance of the customer value deHvery system. For example:

Campbell Soup operates a qualified supplier programme, in which it sets high standards for suppliers and chooses only the few suppliers that are willing to meet its demanding requirements for quality, on-time delivery and continuous improvement. Campbell then assigns its own experts to work with suppliers to improve constantly their joint performance.

Marks & Spencer places its staff at its suppliers' sites to maintain quality standards and improve the speed and reduce the costs of supplying to Marks & Spencer stores.

customer value delivery system

The system made up of the value chains of the company and its suppliers, distributors mid ultimately customers, who work together co deliver vahic to customers.

An excellent value delivery system connects jeans maker Levi-Strauss with its suppliers and distributors. One of Levi's biggest retailers is Sears. Every night, Levi's learns the sixes and styles of its blue jeans that sold through Bears and other large outlets. Levi's then electronically orders more fabric from the Milliken Company, its fabric supplier. In turn, Milliken relays an order for more fibre to DuPont. the fibre supplier. In this way, the partners in the supply chain use the most current sales information to manufacture what is selling, rather than to manufacture based on potentially inaccurate sales forecasts. This is known as a quick response system, in which goods are pulled by demand, rather than pushed by supply.

As companies struggle to become more competitive, they are turning, ironically, to greater co-operation. Companies used to view their suppliers and distributors as cost centres and, in some cases, as adversaries. Today, however, they are selecting partners carefully and working out mutually profitable strategies. Increasingly in today's marketplace, competition no longer takes place between individual competitors. Rather, it takes plaee between the entire value delivery systems created by these competitors. Thus, if Levi-Strauss has built a more potent value delivery system than Wrangler or another competitor, it will win more market share and profit.

Therefore, marketing can no longer be thought of as only a selling department. That view of marketing would give it responsibility only for formulating! promotion-oriented marketing mix, without much to say about product features, costs and other important elements. Under the new view, marketing is responsible for designing and managing a superior -value delivery system to reach target customer segments. Today's marketing managers must think not only about selling today's products, but also about how to stimulate the development of improved products, how to work actively with other departments in managing core business processes and how to build better external partnerships.11

Retaining Customers

Beyond building stronger relations with their partners in the supply chain, companies today must work to develop stronger bonds and loyalty with their ultimate eustomers. In the past, many companies took their eustomers for granted, Customers often did not have many alternative suppliers, or the other suppliers were just as poor in quality and service, or the market was growing so fast that the company did not worry about fully satisfying its customers. A company could lose 100 customers a week, but gain another 100 customers and consider its sales to he satisfactory. Such a company, operating on a 'leaky bucket' theory of business, believes that there will always be enough customers to replace the defecting ones. However, this high customer churn involves higher costs than if a company retained all 100 customers and acquired no new ones.

The Cost of Lost. Customers

Companies must pay close attention to their customer defection rate and undertake steps to reduce it. First, the company must define and measure its retention rate. For a magazine, it would be the renewal rate; for a consumer packaged-goods firm, it would be the repurchase rate.

Next, the company must identify the causes of customer defection and determine which of these can he reduced or eliminated. Not much can he done about customers who leave the region or about business customers who go out of business. But much can be done about customers who leave because of shoddy products, poor service or prices that are too high. The company needs to prepare a frequency distribution showing the percentage of customers who defect for different reasons.

Companies can estimate how much profit they lose when customers defect unnecessarily. For an individual customer, this is the same as the customer's lifetime value. Rob Walker, quality director of Rank Xerox, quantifies the problem:

Last year, customers discontinued using 5,500 machines out of 140,000 installed. It' Rank Xerox had retained them all, the impact on its bottom line would have been over £5 million in the first year and over £19 million in three years. 'If yon then add on the opportunity cost, the effect on the bottom line is large,' he says. 'Not all of this is, however, controllable and recoverable. But we reckon that 30 per cent of it is. So the financial impact of dissatisfied customers is large.'12

The company needs to work out how much it would cost to reduce the defection rate. If the cost is less than the lost profits, the company should spend that amount to reduce customer defections. In this example, if the company could spend up to £1.5 million (0.3 x £5 million) to retain the lost accounts, it would be wisu to do so.

Continue reading here: Relationship Marketing

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