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AN INDEPTH REVIEW OF TOOLS AND TECHNIQUES FOR CUSTOMER VALUE MANAGEMENT

Business Administration & Management Project Topics

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Successful strategic positioning for the achievement of competitive advantage, as a means of achieving superior profitability and enhanced shareholder value, are critical issues of paramount importance in today’s business environment. They should be at the very top of the agenda for Chief Executive Officers, especially for those at the head of publicly held corporations. Present day stock markets have a very low tolerance threshold for diminutions in shareholder value, and therefore these issues determine the career success of many Chief Executive Officers in the long run. Unsurprisingly, the market capitalization of the firm has been described as the ‘gold standard’ of success for publicly held companies (Gupta and Lehman 2005). On the other hand, an unprecedented turbulence in world markets, especially in major markets such as North America, Western Europe and Japan, has not helped matters at all. Over the last two decades, a number of powerful forces have collectively and progressively redefined the rules by which organizations achieve competitive advantage and superior profitability.

The process of globalization, with the consequent weakening or outright elimination of geographical trade barriers,is creating a global marketplace which is becoming progressively more competitive, and where the control of lucrative regional markets by dominant regional players can no longer be taken for granted. Likewise, rapid technological advances have led to inventions such as the Internet and other technology-driven solutions such as mobile wireless communication and broadband. These have greatly enhanced the abilities of customers and competitors to acquire insight into product and service offerings, as well as company processes, for both existing and alternative suppliers.

These new technologies have led to the emergence, from time to time, of maverick type players in different markets. These companies gradually encroach on lucrative markets, and become peripheral players with inconsequential market shares. However, they usually offer benefits not provided by the dominant players to meet both expressed and latent customer needs, and at a significantly lower overall cost, therefore become influential players over time. In a study of innovative organizations (Carrillat et al. 2004) it is argued that this type of innovation tends to shape overall market structures and the behaviour of market players. New types of behaviour are adopted by consumers, typically to the detriment of incumbent service providers. The ultimate beneficiary of these developments is the consumer, a new kind of consumer who has increased significantly in sophistication and in bargaining power.

This consumer is described as active, knowledgeable and post-modern. It is also widely acknowledged that this new consumer is distinctly different and identifiable from its predecessors (Baker 2003). These phenomena have caused major changes in the magnitude and effect of the classic competitive forces described by Michael Porter, such as threat of new entrants, threat of substitute products (and services), rivalry between existing competitors and bargaining power of buyers (Porter 1985). These classic forces had previously been understood to shape industry structures and determine the inherent profitability of individual industries, while the strategy of a company determined the positioning of its products and services within the industry, and consequently it’s earning power.

Over time, it has become obvious that satisfying customers’ needs must be a key element in strategy formulation, for differentiation and competitive advantage to be achieved, and sustained. An early indication of the potential to differentiate all types of goods and services, whether they are industrial goods and services or consumer goods, was given by Levitt (1980). He argued that even though generic products may have identical features, offered products can be differentiated. He stated further that the former would create an advantage in acquiring customers, while the latter would serve to retain them. This was one of the pieces of work which heralded renewed interest in marketing as a means of achieving sustainable competitive advantage.

The concept of differentiation was later considered in the context of contemporary markets (Hulbert and Pitt 1996). They argued that creating competitive advantage had become more critical, but also more difficult, and that maintaining it may have become impossible in a situation of hyper-competition. They went further to suggest that as competition intensified further, the need to identify, and deliver, new sources of value would be critical to creating competitive advantage. In concluding, they took the position that in today’s climate of intense global competition, power lies with the buyer and not the supplier. The implication of this is that firms must begin to focus great attention on customers to develop real insight into their problems. By doing this, they would be able to identify both latent and expressed needs, through which unique and superior value can be created and delivered.

A more analytical view of a customer orientation was taken by Dobbins and Pettman (1998) who suggested that with time, the emphasis of strategy should be on delivering benefits which would result in improvements to the lives of customers. They argued that marketing involves differentiating products vis-à-vis competition, and that firms which focus on the benefit to the customer would at least have a chance of making a profit. According to them, the ability to differentiate itself is a company’s competitive advantage, and the reason why customers would buy a product or service from one company and not its competitors. They argued further that customers perceive this differentiation in terms of superior value delivered by suppliers. Therefore, understanding, creating and delivering value to customers is arguably the single most important issue in major business circles today, especially since the customer’s concept of value has proven to be elusive and continues to change from time to time.

“Most sales people manage for short-term revenues (regardless of profits). With an increasingly sophisticated customer base that wants lower prices, greater service and more control, this strategy most often results in declining profit margins and commoditization. “Increasingly buying power and market influence is being concentrated in an ever-smaller number of strategic customers. Hence, going forward, we believe that companies will have to think beyond short-term revenue and profitability of today. They will have to take the long view and manage their strategic customer relationships as assets. They will attempt to maximize the net present value (NPV) of future profit streams from these customers, thus shifting to the enhancement of long-term Customer Relationship Capital.” It is important to understand that customers sometimes become unprofitable as a direct result of the way the business operates in its relationship with them. For example, a profitable customer may inadvertently be cross-sold a product or service that cannibalizes an existing source of revenue for the business. Similarly, the way the sales process is conducted and remunerated for sales staff may well encourage the acquisition of unprofitable customers.

Hence, companies must improve in several areas to develop successful strategies that focus on customer value. Any customer-related initiative or interaction must differentiate customers to give insight into the value-creating potential of those customers. Nevertheless, at the strategy level, many companies remain focused on pushing out products rather than drawing in customers. If a company’s strategic focus is to sell as many products as possible, customers will be overwhelmed by irrelevant marketing and sales offers, and their satisfaction will be lowered. It is very difficult to acquire, grow or retain profitable customers in that kind of environment. Ultimately, insight into the value created by each customer relationship provides the most useful information for decision makers. Traditional CRM profit measures typically calculate historical revenues and costs and, therefore, do not provide insights to future value creation.

 

1.2 STATEMENT OF THE PROBLEM

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