Value Merchants. Nirmalya Kumar
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ACKNOWLEDGMENTS
MANY INDIVIDUALS and organizations have provided support to enable us to write this book. While we are grateful to them all, we single out some of them here to explicitly acknowledge their contributions.
We first want to thank the many managers who so graciously took time out of their busy schedules to talk with us. The best practices that these managers shared with us made an enormous contribution. In particular, we would like to especially acknowledge:
Nada El-Zein, Akzo Nobel
Elisa Scarletta and Mark Stoneburner, Applied Industrial Technologies
Eric Berggren and Stefanie Zucker, Axios Partners
Steve Dehmlow, Composites One
Michael Lanham, Dow Corning
Alice Griffin and Robert Smith, Eastman Chemical
Robb Kristopher and Debra Oler, Grainger
Frank Joop, Intergraph
Joy Chandler and John Stang, Kennametal
Marcel de Nooijer and Eelco van Asch, KLM Cargo
Gene Lowe, Milliken
Bas Beckers and Bert Willemsen, Orange Orca
William Blankemeier, PeopleFlo Manufacturing
Art Helmstetter, Quaker Chemical
Joe Razum, Rockwell Automation (now Baldor)
Siva Mahasandana and Chantana Sukumanont, Siam City Cement
Todd Snelgrove, SKF
Eddie L. Smith, Sonoco
Michael Butkovic and Jackie Eckey, Swagelok
Peeyush Gupta and Anand Sen, Tata Steel
We want to thank the Institute for the Study of Business Markets (ISBM), located at Penn State University, for its financial support of our management practice research. We especially want to acknowledge Ralph Oliva, the executive director of ISBM, and Gary Lilien, the research director of ISBM, for their support of our work.
We also want to express our gratitude to Kirsten Sandberg of Harvard Business School Press for her support and editorial guidance of the project.
James C. Anderson would like to thank his research associates at the Kellogg School of Management—Chaitali Bhagdev, Abhinav Gattani, and Akshaya Gulhati—for their capable assistance in this project. He would also like to thank his assistant, James Ward, for James’s helpful suggestions and skillful assistance in constructing the figures and tables.
Nirmalya Kumar gratefully acknowledges the following companies and individuals who over the years were kind enough to allow him to test his ideas regarding value in business markets: ACC, Aditya Birla Group (Kumaramanglam Birla, Santrupt Misra), Akzo Nobel, Alcan, Alfred McAlpine, AT&T, Bekaert, Bertelsmann Direct Group (Gerd Bührig, Ewald Walgenbach), BT (Tim Evans, Gavin Patterson), Caterpillar, Chilton, Continental, Dow Chemical (Carlos Silva Lopes), DuPont, Essel Propack (Ashok Goel), Goodyear, Ambuja Cements, Hewlett-Packard, Holcim (Markus Akermann, Paul Hugentobler), Hydro Aluminum, IBM, ICI, ISS, Jardine Matheson, Jotun, Motorola, Nokia, Norwegian Post, Orkla Group (Karin Aslaksen, Ole Enger), RPG Enterprises (Pradipto Mohaptra), Sabic, Shell, Schindler, Tetra Pak, Volvo, WPP Group (Mark Read), and Zensar Technologies (Ganesh Natarajan). He also thanks his colleagues at London Business School and the associate director of the Aditya Birla India Center, Suseela Yesudian-Storfjell.
James A. Narus thanks the following companies and managers for their assistance with this project: W.R. Grace (Larry Golen), Okuma America (Seth Machlus), Sonoco (Vicki Arthur, Greg Powell), Timken Corporation (Brian Berg), and Volvo Trucks (Clay Flynt).
Developed with the support of the Institute for
the Study of Business Markets at Penn State.
ONE
Value Merchants
Doing Business on Demonstrably Superior Value
A SUPPLIER OF integrated circuits (ICs) for correcting power input was competing for the business of an electronic device manufacturer, which was projecting a demand of 5 million units for incorporation into its next-generation device. In the course of the negotiation, the supplier’s salesperson learned that he was competing against another firm whose price for the integrated circuits was 10¢ lower per IC—45¢ versus 35¢. The customer asked the salespeople from both firms to explain the source of the superior value for their offering relative to the competing offering. This particular salesperson replied that it was his personal and dedicated servicing of the account.
Unbeknownst to him, the customer had built a customer value model in which it had found that his offering, though 10¢ higher in price, was actually worth 15.9¢ more than the alternative supplier. Further, the electronics engineer who was leading the development project had recommended to the purchasing manager supporting the project that he purchase those ICs, even at the higher price. The salesperson’s personal and dedicated servicing as a favorable point of difference was worth something in the model—0.2¢! Unfortunately, the salesperson overlooked the two elements providing the greatest differential value, apparently unaware of the magnitude of the differences and what those differences were worth to that customer. As expected, when push came to shove in the negotiations with purchasing, the salesperson gave a 10¢ price concession to match the competitor’s price and “win” the business (perhaps he suspected that his superior service was not worth the 10¢ difference after all). The result? The firm lost $500,000 (5 million units at 10¢) of potential profit on a single transaction!
Talk to seasoned general managers or business unit executives in business markets, and they will recount a similar story in which:
Their salespeople have a poor understanding of what really creates value for customers.
Their business makes vague promises of superior value without any supporting data.
Salespeople frequently play the role of value spendthrifts, giving value away through price concessions to make the sale, rather than value merchants., who sell profitable growth by stressing the superior value of the firm’s offerings.
Despite providing greater value than competitors, their business is forced to compete as a commodity and therefore does not get a fair return from its superior value.
The result, as in the case just examined, is that even though the supplier believed that its products and services had greater value than those of the next-best alternative, it ended up matching competitor prices. “Leaving money on the table,” as this supplier did, has a direct and substantial negative impact on the supplier’s profitability. Why does this happen as often as it does in business markets?
Purchasing managers in business markets are becoming increasingly sophisticated in their strategies and tactics. Increasingly held accountable for reducing costs, purchasing and other customer managers don’t have the luxury of simply believing suppliers’ claims of cost savings. A relatively easy and quick way to obtain savings is for purchasing managers to focus on price and obtain price concessions from suppliers. To enhance their negotiating power, purchasing managers attempt to convince suppliers that their offerings are the same as their competitors—that they could be easily replaced. In the face of such pressure, as the IC example illustrates, suppliers cave in and match competitor prices. It is a rare commodity in business markets to find firms that do business based on demonstrably superior value.
Senior managers of companies serving business markets—that is, firms, institutions, or governments—are frustrated that they often are cast as “commodity” suppliers. Their customers have been effective in demanding more but have