Sunday, August 02, 2009

The Power of Value


Michael Treacy and Fred Wiersema's excellent book "The Discipline of Market Leaders" argues that businesses must focus on one of the following areas to be successful: operational excellence, product leadership or customer service excellence. They used as an example of each Wal-Mart, Intel and Nordstrom's respectively. The authors' thesis is that a company must choose one of these three foci to the virtual exclusion of the others in order to be effective and make an impact in their market.

In presenting various different products to customers over the years and having been a discerning customer myself, I've traditionally used criteria that somewhat resemble the above. Instead of operational excellence, product leadership and customer service, I've used cheaper, faster, better. (by cheaper I mean less expensive, not lower quality).

We often are presented with a product that is cheaper, but not faster or better. Oft times, this is acceptable. How many times have you been out of town and forgotten an essential toiletry item or a belt or a tie? Or when you're throwing a birthday party for toddlers. Cheap will trump performance or quality manufacture.

Conversely we will at times throw care to the wind and pay a premium for a name product that is not the performance leader in its category. For years, Cadillac's name outshone the product. It is arguable whether the food at the Russian Tea Room in Central Park is worth the tariff; but saying you dine there regularly is, as the Visa commercial so aptly puts it, "priceless."

Finally, those at the bleeding edge of technology - the "early adopters" - are renowned for paying the moon and sacrificing reliability to get faster and faster devices.

What a find, then, when we can find a new product that gives us improvement in not one but two of these areas and we only have to sacrifice in one!

Cheaper and faster; or faster and better; or cheaper and better!

In today's economy, customers - in both the consumer and b2b market - are as stingy as ever. Each dollar spent is generally the result of some long and hard consideration. This habit, once inculcated in the generation raised on easy money will be a long time in leaving.

The winner in the long run will be the company or product that can deliver consistently on the promise of cheaper, faster AND better.

How then does one resist the death spiral of discounting and selling only on price? The answer is to be found in the concept of value.

Ben Graham taught in the '20s that not all cheap stocks were cheap and not all expensive stocks were expensive. The trick, he said, was to find stocks that were priced well relative to their underlying value.

This concept understood from the product side is that even though your product may have a higher price tag, it can still be "cheaper" if the value it presents to the customer's enterprise is high relative to the value of a competing product with a lower price tag. Operating costs, labor inputs, repair and replacement costs are all variables to be considered when one makes the value argument.

Of late, I have changed my tune from price to value -- not searching for products that are only cheaper, faster and better, but rather products that are faster and better and as a result -- cheaper.

This is the power of vaule.

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