How do companies create, deliver and capture value? What is the nature and function of effective customer relationship management? What are the critical phases of the Value Chain? What are some of the policy implications of the Du Pont model for formulating effective pricing strategies? These policy questions relate to the optimal value chain model of a business enterprise: the right mix of profitability and productivity that maximizes return on investment and shareholder wealth while minimizing cost of operations: create and capture of value simultaneously.
Clearly, effective value creation, value delivery, and value capture are critical to a sound business strategy designed to maximize the company’s wealth-producing capacity. In this series on effective value creation and value capture, we will focus on the relevant strategic margin and volume issues and provide operational guidance. The primary purpose of this review is to highlight some basic pricing theory, strategic margin ratios, and industry best practices in effective value creation, value delivery, and value capture. For specific financial management strategies, consult a competent professional.
A preliminary analysis of the relevant academic literature suggests that the optimal value chain process and value creation, value delivery and value capture appropriate for each company differ markedly based on overall industry dynamics, market structure, degree of competition, height of entry/exit barriers. , market contestability, industry life cycle stage and its competitive position in the market. In fact, as with most market performance indicators, the company-specific value chain strategic stance is insightful only by reference to industry (average) expected value and benchmarks and best practices. generally accepted industry standards.
In practice, companies capture value through competition and persuasion. Most companies have at least two strategic value propositions and pricing options based on the Du Pont ROI model: premium (profit-focused) pricing that seeks to maximize the profit margin on each sale ; and High turnover rate (focusing on productivity) that seeks to maximize the number of sales and effective use of available assets rather than profit margin. There is significant empirical evidence to suggest that when marginal revenue is negative, the firm cannot maximize profit. This is because the revenue loss due to the price effect tends to offset the revenue gain due to the production effect. In addition, there is growing empirical evidence to suggest that firms that choose scale and volume tend to outperform those that choose segment and premium, ceteris paribus.
When designing effective pricing strategies, at least two critical variables must be considered: pricing objectives and price elasticity of demand. These important variables converge to inform optimal value propositions and prices of specific products, overall. Customer relationship management (CRM) consists of customer data analysis, practices, strategies, and technologies that companies use to analyze and manage customer interactions and data throughout the customer lifecycle, with with the goal of improving business relationships with customers, assisting in customer retention, and driving sales. grow efficiently and effectively.
In addition, companies must create and maintain an effective relationship with customers. The effective relationship with the client is a function of at least three critical variables: empathy, trust and commitment. When designing an effective value capture strategy, companies must maintain an effective relationship with the customer. The careful management of this relationship prevents and/or mediates the loss of sales derived from price increases by companies with limited market power. There is increasing empirical evidence to suggest that explaining price increases to customers before implementing them tends to reduce the adverse impact on sales and the resulting loss of revenue.
According to the relevant academic literature, companies create value through the Value Chain process: a set of activities that are carried out to design, produce, market, deliver and support the company’s products. At least two critical activities are required: primary activities consisting of inbound logistics, operations, outbound logistics, marketing and sales, and service in the core value chain that directly creates value; and Support activities consisting of procurement, technology development, human resource management, business infrastructure that supports value creation in the core value chain. Therefore, based on this formulation and concept, a Value Chain disaggregates a company into its strategically relevant activities to understand general cost patterns, specific cost behavior, existing and potential sources of differentiation.
According to current industry best practices, there are at least three critical phases of the value chain: phase one product design, research and development; Phase Two – Production; and Phase Three: Marketing, Sales and Service. The value chain is the process by which companies add economic value to the product concept. As the product idea is conceptualized and moves through the value chain process, value is created for customers. However, the product concept can fail and the creation and capture of value can end at any stage of the process. Optimum value is efficiently captured for the end user through the careful execution of effective service strategies and programs.
Some operational guidelines:
In summary, effective value creation and value capture depend on several factors, such as the value proposition, pricing objectives, price elasticity of demand, a company’s competitive position in the global marketplace, and the stage of the product life cycle. Some key pricing strategies may include penetration, parity, and premium.
Penetration pricing is most effective when demand is elastic and involves charging below competitors’ prices to create economies of scale as a key method of building a mass market or deterring potential market entry due to low price and profit margin. The parity pricing strategy is more effective when the demand is unitary and the product is a commodity; and involves charging prices identical to those of competitors. The premium pricing strategy is most effective when demand is inelastic and involves charging higher prices than competitors in order to quickly recover research and development costs or position the product as superior in the minds of customers.
The effective value proposition is derived from promising customers (expected or standard value) what a company can deliver and delivering more than what the company promised (premium or higher value). As I explained, two strategic value propositions and pricing options based on the Du Pont ROI model are available to most companies: Premium pricing (which emphasizes high margins, high profit margins, and cost effectiveness); and High turnover rate (emphasizing high productivity and effective use of available assets). There is significant empirical evidence to suggest that companies that opt for scale and volume tend to outperform those that opt for segment and premium, ceteris paribus.
In the end, knowledge is a strategic weapon and a source of effective value creation, value delivery and value capture. When companies apply knowledge to tasks they already know how to do, they call it productivity. When they apply knowledge to tasks that are new and different, they call it innovation. Only knowledge allows companies to achieve these two strategic objectives.