Your customer’s success matters. It determines the value they place on your own products and services. Changes in economic conditions can have a big impact on how your customer sees the value of your offering.
As described in an earlier post, Economic Value Estimation (EVE) is a measure of the impact of your offer on your customer’s business model relative to a competitive alternative. Therefore, anything that impacts your customer’s business model can change their perception of the value you provide. In other words, your value depends on how your customer creates value and on how well your customer is doing.
In turbulent times value can change rapidly. New value drivers can emerge, and some important value drivers can vanish over night. The EVEs you are creating for your offers need to be kept current and your sales people must know the value messages that will resonate with your customers today, not the ones that mattered last month or last year.
Let’s start with an example of how change at your customer can eliminate an important value driver. Imagine you are a manufacturer of a chemical additive that makes a steel mill 3% more efficient. If the plant is operating at full capacity this can be a huge value driver, it can even save your customer the cost of a new plant, which could require hundreds of millions of dollars of new investment. Of course your additive may have a negative value driver as well. Perhaps it requires a process change, for which there is a one-time charge, or even a small ongoing process cost.
In good times, with the plant at capacity, the positive value driver overwhelms the negative and you have a great story to tell. But when the economy goes down, and the plant is operating below capacity, then your value driver for increasing plant capacity has no value. It does not have less value, it has no value. This is shown in the image above, which is a screen capture from LeveragePoint for Value Management. Here, the impact of the additive on capital expenditures is estimated at a savings of US$2.00 per ton, and makes a significant contribution to the differentiation value of approximately US$3.00 per ton (represented in the graph by the light green shaded section). In the image below, the value driver based on capital expenditures has been removed, reducing the differentiation value to just over US$1.00 and the total economic value to approximately US$2.50.
According to the US Census Bureau, capacity utilization has fallen from 73% in Q3 2008, to 64% in Q4 and to only 59% in the first quarter of this year. But these are the general trends, some industries, such as agricultural chemicals and computer peripherals, have seen capacity usage tighten! EVE is calculated for specific customers and it is their situation–not general industry trends–that really matters.
Fortunately, economic change can create new value for your existing offers. Any value drivers associated with lower costs (as long as they are not dependent on capacity utilization) are likely to attract customer interest. Likewise, with workforces being downsized, offers that allow your customers to do more with fewer people can be compelling. Examples of this include current trends like cloud computing (manage with less hardware and fewer IT staff), office automation (make your staff more efficient), and knowledge management (conserve knowledge that would otherwise be lost as staffing changes). Plant capacity utilization may not support value drivers in 2009 and 2010, but anything that makes smaller workforces more effective has become even more compelling.
Political and regulatory changes can also change the value landscape. With the US House of Representatives passing the Waxman-Markey climate-change bill, a whole new category of value drivers is emerging around carbon use. These are likely to ripple through many sectors, from energy and transportation to manufacturing and even consumer products. But this is a topic for another day.
Steven Forth
CEO
