In a recent article “Opportunity At The Bottom Of The Cycle,” we put the onus of new value creation on management. New technologies are traditionally the catalyst of growth in the telecommunications sector. But when the competition has caught up and a number of alternative offerings become available, can companies remain competitive without sacrificing their margins?

From the perspective of customers in highly competitive markets, product or service differentiation becomes increasingly harder. Not in as much that they can’t tell apart technological and performance differences, but rather because effective productivity gains from one vendor’s system over another’s have become increasingly smaller (law of diminishing returns in the utility curve). From the vendor’s perspective, the temptation is high to drop prices and make it up in volume. But when competitors match that move, they soon realize that price elasticity can only do so much to stimulate demand and soon company life altering decisions need to follow in order to remain in business. Is there an alternative to price competition when product differentiation has become too difficult?

The answer is YES. In our approach to value chain management, we suggest that companies found their competitive strategies on clear management objectives in the areas of:

• Customer value
• Functional and operational performance
• Core competency and focus
• Strategic relationship management
• Network and collaborative management systems

A FOCUS ON CUSTOMER VALUE
In this article, the first in a series of five, we will focus on the role of customer value within the concept of “competitive offering” and identify opportunities for value creation extrinsic to the products or services the telecommunication companies sell. This is a key element for companies to build and sustain their competitive advantage. As you read on about the other keystones of competitive strategy in the subsequent articles of this series, you will understand how companies can rapidly and cost-effectively achieve higher performance standards using the value chain management approach.

THE CHALLENGE
Traditionally, telecommunication companies have had the tendency to focus on product and service features to differentiate their offerings and have based their “value proposition” on specific performance metrics of what it is they sell. While tangible economic benefits can be computed from those, this strategy fails to address their potential contribution to their customers’ business models and value chains.

Here are a few (illustrative examples) of the problems with those business models based on “product” strategies the way we perceive it:

From the telecommunication company’s perspective:

1. There is an inclination for strong integration in order to control proprietary platforms. This comes at a great cost in investments, acquisitions, R&D, and infrastructure management.
2. In a weak economy, in order to meet their financial objectives, these companies pursue alternative market opportunities, usually entailing further acquisitions and investments in retooling, integration, and management of even larger corporate infrastructures.
3. In doing so, companies are spreading themselves thin by moving into “new” territory. Furthermore, as we saw at the turn of the millennium, many bundled service offerings failed to take off with customers and BU (business unit or merged entity) integration and synergy initiatives proved to be too expensive and too complex to be successfully implemented.
4. Hence, these companies carry a heavy load that, from the customers’ perspective (or the shareholders’ perspective for that matter), isn’t exactly paying off.

From the customer’s perspective:

1. While greater performance is always welcomed, upgrades, changes, procurement and change management costs can easily outstrip the products’ and services’ productivity gains. When reviewing your customers’ internal service charges you may find that operations as simple as an internal phone change and transfer could be as costly as $100 to $150 for an internal end-user organization. A $50 wireless access card may cost the client organization up to $300 between the purchase requisition processing, the procurement and the installation charges. Those transfer prices usually come right off the customers’ bottom line.
2. Customers sometimes find themselves trapped between vendors and are unable to cost effectively integrate systems and implement their business solutions. Outsourcing is an option, but this compromises flexibility and the integrity of the proprietary knowledge of their business solutions.
3. Though internal pundits promote the status quo, every so often a leader comes along, assesses the supplier and vendor relationships, cleans house and consolidates, and the approved vendor/supplier list is significantly abbreviated. Why? Cost control; and we are not talking about eliminating investments in necessary revenue producing products and services. The question is: Can you preempt this situation for your company?
   

THE OPPORTUNITY
As I pointed out in “Opportunity at the bottom of the cycle,” the costs of goods sold (COGS) can vary as widely as 15 to 50 percent of revenues. Granted, Cisco -- at a record 13 percent last quarter and Microsoft -- at 25-30 percent, are quite profitable. But many companies in the 30-50 percent COGS bracket are struggling. Greater focus on product improvements will up their COGS and, lest the customers approve of the changes en mass, chances are that the cost increase will come right out of their gross margins.

By managing the value chain effectively, we turn the problem around and we focus on ALL the customers’ needs and solutions. With the careful introspection of the customer’s value chain, one realizes that a great deal of contributions can be made outside the transactional aspects of the customer-vendor relationship that can carry a much greater impact on the customer’s bottom line. In essence, we propose that companies attempt to improve their performance and competitive positioning by managing the other 50-85 percent of their cost structures in order to unleash incremental customer value.

Let’s briefly summarize the sources where customers derive value in their relationships with suppliers and vendors:

• Intrinsic product and service attributes (including performance and service) and platform characteristics;
• Learning, knowledge and information transfer and solution development;
• Acquisition/purchasing and decision making processes;
• Supplier capability, consistency and dependability; and
• Nature of the relationship/business model with the supplier or vendor.

Most of the areas listed above deal with something other than the products or services that are being acquired by the customers. These are also the sources of costs that customers have the least amount of control over and that can become cost-prohibitive in the scheme of the overall customer solution management.

We recommend that companies perform a customer value analysis in order to pinpoint the exact nature of their customers’ value experience. In doing so, they’ll identify numerous critical customer concerns, each one of them leading to several opportunities to improve their customer value creating abilities.

Here are just a few examples of questions drawn from our templates that you can ask yourselves in order to assess your company’s level of concern for customer value:

• Does my choice of product/service platform architecture facilitate my customers’ problem resolution in the most effective and efficient manner possible?
• How do I accomplish the required knowledge transfer to my customers’ organizations and ensure that the right information reaches the right individual, in an efficient and effective way to that individual?
• Are my order placement systems conducive to facilitating my customers’ purchasing processes and adapted to their varying needs, styles and behaviors?
• What assurances do my business model (not my contracts) provide my customers that I can appropriately, efficiently and profitably meet their needs?
• To which extent do I take ownership of my customers’ problems?
  

Granted, some vendors do not need to concern themselves with these questions in the short run and can even afford to charge customers for each and every additional service level they provide. Perhaps they have been sheltered from intense competition for the time being. We believe, however, that the handful of such companies still around in the telecommunications industry may be up for a rude awakening as rogue competitors with highly disruptive business models will soon challenge them on their own turf.

In the interim, we recommend that companies do some soul-searching and commence the process of focusing on customer value to work their way to developing a sustainable competitive advantage. In next month’s article, we will define what characterizes functional performance achievement in the context of value chain management.

Xavier Van de Lanotte is the president and founder of VXTConsulting, Inc. He advises telecommunication services and equipment firms on Competitive Strategy, Customer Value, Alliance Management, and Distribution and has worked in this industry in various parts of the world for 15 years. For more information on value chain management, please visit us at www.vxtconsulting.com, or contact us at info@vxtconsulting.com. We welcome your questions and thoughts about this article.