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September 1996 Volume 1.2
Which knob to turn, and which way?
Managers are always looking for tools to assist them
to decide which knob they should turn, and which way they should
turn it for the best results. This need was the driver for the development
of the standard accounting practices that most companies use today.
Unfortunately there is only a weak link between business success
and traditional accounting metrics like profit. The 1930s saw the
development of quality control techniques which for the first time
formalised ways of ensuring products shipped out the factory door
were of a consistent standard. From their roots in the Telephone
industry, customer satisfaction surveys spread to many other industries
during the 1980s. Combined together to give a balanced scorecard,
these measurement tools provided useful information for managing
businesses for the first time.
Researchers struggled to link customer satisfaction
with metrics such as market share, but only found a weak linkage.
The first big breakthrough came at the PIMS Institute when Buzzell
& Gale worked out that the trick was to track total quality
relative to competitor performance (RTQ), and also look at rating
of relative competitive price (RCP). For the first time business
metrics with a strong link to market performance had been proven.
There must be Value in the Internet
Internet Service Providers operate in one of the most
competitive markets. Success or failure to generate revenue and
traffic volume determines where a provider plugs into the Internet
and the wholesale price paid for service. It is simple to bypass
your current wholesaler and move to another one who gives a better
deal. This creates an amazing range of offers at the retail level.
Let's look at how RTQ and RCP might apply in this market. In practice
these metrics would come from a customer value research programme
coupled with econometric analysis. This article uses a graphical
analysis tool known as the Value Map to look at positions and the
likely market dynamics in the Auckland, New Zealand market. The
"companies", "services', and the metrics described
in this article are for illustrative use only.
Consider four Internet Service providers, operating
in the home market. Lets call them companies W, X, Y, and Z. We'll
assume our customers want to access the Internet for about ² of
an hour a day.
Company W is mainly aiming for the business market,
offering its services to the home market from 5pm overnight to 8am
at night and all day at the weekends. It has set charges at a total
cost of $30 per month. Service is quite poor and it is hard to get
access from 7.30pm to 10.30pm every weeknight. A Help Desk operates
during business hours and on Saturday mornings. The people are helpful
and fairly friendly.
Company X is the subsidiary of a larger company with
deep pockets. It has installed an "industrial strength"
computer, and promoted itself with large colour newspaper advertisements.
This probably drives up perception of price. A Help Desk operates
7 days a week. An efficient but impersonal service is provided.
Users are charged a minimum charge of $30 per month for 5 hours
usage, and then $6 per hour. It is usually easy to get access at
any time.
Company Y provides a flat rate service for $44 a month.
This is a budget service with its costs limited by a low capacity
international link. This bottleneck slows down the service in peak
periods. A Help Desk operates during business hours.
Company Z charges its service by a mix of data and
a $16 monthly service charge. The Help Desk is quite unfriendly
and the attitude seems to be that it is a privilege to get service
from this company. They seem to have more phone lines than customers.
The amounts on the traffic based bills are a surprise for customers,
as the company's traffic meter regularly breaks down. The total
monthly charges vary from $30 to $70 on what seems to be a random
basis.
Based on these scenarios, the fall of Relative Total
Quality (RTQ), and Relative Competitive Price (RCP), where 100 is
the market average, might be :
RTQ RCP
Company W 98
108
Company X 103
92
Company Y 100 103
Company Z 92
95
When this data is plotted on a value map we have :
What does this mean in terms of revenue and market
share? The Internet market is growing rapidly, so suppliers will
win customers. Company Z in the low value corner is badly placed.
They will probably hold their current customers or grow slightly.
But a decision is needed. They either need to exit this business
or improve both price and quality. Companies W and Y should gain
a good number of new customers. Company X has a problem. Their high
price and quality offering limits market size. If they dropped the
price to $2.50 an hour, represented by X' on the graph, this would
move them to a position in the fair value zone allowing them to
attract customers. The Value Map lets managers know which knob to
turn, and which way to turn it.
It's cherry blossom
time
As I drive between Auckland and Hamilton the countryside
is delightful. Thousands of blossoms of every shade of pink have
emerged from the dormant branches.
Regards,
Rodger Gallagher
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