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March 1997 Volume 1.6
What determines
the Value of a business?
When Warren Buffett, America's number one investor
looks at buying a business he looks beyond the economic value to
establish the market value. In newsletter 1.4 we looked at how Buffett
had drawn on the work of Benjamin Graham. But Buffett has gone past
Graham, who looked strictly at the economic value of a company.
Consider Buffet's purchase of the Nebraska Furniture Market from
Rose Blumkin (Mrs B.) for $60 million, far more than its economic
value. Mrs B provided amazing service coupled with low prices for
the furniture sold by the store. Customers were treated as life
time clients with prices dropped to the bone when people were just
getting established. Superior management ensured that high customer
value could be always delivered from an underlying low cost structure.
('The Making of an American Capitalist', Roger Lowenstein,
Random House, 1995.)
Competitive Value
Early researchers had struggled to make the link from
changes in customer satisfaction through to changes in market share.
Buzzell and Gale finally made the links in the 1980s with their
work at the PIMs Institute when they looked at Total Product &
Service Quality relative to your competition. Meanwhile at AT&T,
Ray Kordupleski had established the critical importance of absolute
customer value as an indicator for purchasing behaviour when it
is tracked with a specially designed customer value survey. Ray
called on West Vogel, another AT&T researcher to see if relative
competitive value had an even stronger link to marketing behaviour.
In April 1989 they published an internal AT&T study with their
findings. For the first time a really strong link had been proven
from customer surveys through to purchasing behaviour. The early
1990s saw the development and testing of a variety of ways of determining
customer value. At Telecom New Zealand, Rodger Gallagher tested
the use of differences in percentage excellent. Finally it was found
that the best way of determining relative value was to divide the
absolute results. This gave a new metric that has become known as
Customer Value Added or CVA. At last we had a single metric with
strong linkages through to market share changes.
Customer Value and the Internet
Last month we looked at how our mythical Internet
Service Provider companies W, X, Y, and Z were placed in terms of
absolute Customer Value.
The positions for absolute Customer Value performance,
with the results out of 10 came out as: Company Customer Value.
W 7.5
X 7.0
Y 7.3
Z 6.7
If we determine Customer Value Added (CVA) for the
companies we get some much more meaningful data:
Company CVA
W 107
X 98
Y 103
Z 92
With parity defined as 100 we can simply see that
both X and Y are hovering close to parity. Z is coming in at 92,
clearly offering worse value while W is providing better value in
the market place.
The Science and the Art
I first saw a Termometrolento in November 1989 while
undertaking a benchmarking visit to Lucent Technologies (nee AT&T)
in Lisle, Illinois. They had one set up in an office set up to demonstrate
the capabilities of ISDN (Integrated Services Digital Network).
While I can't recall if their vision of how ISDN would be used has
worked out in practice, I can remember the Termometrolento. It was
quite beautiful. A number of blown glass globes filled with a purple
liquid, floated in a clear fluid within a tall glass tube. Hanging
beneath each globe, a small brass weight had a number stamped on
it. I had to have one.
The underlying theory explaining how a Termometrolento
works was created by Archimedes in 250 B.C. (The "Eureka"
story.) Mankind had to wait another eighteen hundred years before
Galileo Galilei invented the first slow thermometer. It seems counter
intuitive. As the temperature goes up, the specific gravity of the
liquid falls, with the heaviest globes sinking first. The globes
representing the highest temperature sink rather than go up like
the mercury in a normal thermometer.
Here is a measuring instrument that combines both
the Science and the Art. It is a good reminder that these two factors
need to be considered in any measurement project, and that they
must be integrated. When we plan Customer Value Management projects
for clients we take care to ensure that both types of factors are
built into the action plans.
Anyway my New Year's resolution was to buy a Termometrolento.
I now have one, and it was worth the wait.
Regards,
Rodger Gallagher
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