How do companies create, deliver and capture values? What is the nature and function of effective customer relationship management? What are the critical phases of the value chain? What are some of the political implications of the Du Pont model in formulating effective pricing strategies? These policy questions relate to the optimal value chain model of a commercial enterprise – the right combination of profitability and productivity that maximizes return on investment and shareholder wealth while minimizing the cost of operations: creation and value capture, simultaneously.
Clearly, effective value creation, value delivery, and value capture is critical to a sound business strategy designed to maximize the wealth-producing capacity of the company. In this series on effective value creation and value capture, we will focus on the relevant volume and strategic margin questions and provide some operational guidance. The primary purpose of this review is to highlight some basic pricing theories, strategic margin relationships, and industry best practices in effective value creation, value delivery, and value capture. For specific financial management strategies, consult a competent professional.
A preliminary analysis of the relevant academic literature suggests that the optimal value chain process and appropriate value creation, value delivery, and value capture for each company differ markedly based on the overall dynamics of the industry, the market structure, degree of competition, height of entry / exit barriers. , competition in the market, stage of the life cycle of the industry and its competitive position in the market. In fact, as with most market performance indicators, the company’s specific value chain strategic posture is revealing only in reference to the industry expected value (average) and benchmarks and top performers. generally accepted industry practices.
In practice, companies capture value through competition and persuasion. At least two strategic value propositions and pricing options based on the Du Pont ROI model are available to most companies: Premium pricing (focused on profitability) that seeks to maximize the profit margin of each sale; and High turnover rate (focused on productivity) that seeks to maximize the number of sales and the effective use of available assets instead of the profit margin. There is significant empirical evidence to suggest that when marginal revenue is negative, the firm cannot maximize profits. This is because the income loss due to the price effect tends to exceed the income gain due to the production effect. Furthermore, there is growing empirical evidence to suggest that companies that opt for scale and volume tend to outperform those that opt for segment and premium, ceteris paribus.
When designing effective pricing strategies, at least two critical variables must be considered: price targets and price elasticity of demand. These important variables converge to inform the optimal price of a specific product and the value propositions, in general. Customer relationship management (CRM) consists of customer data analysis, practices, strategies, and technologies that companies use to analyze and manage customer data and interactions throughout the customer lifecycle, with the goal of improving business relationships with customers, assisting in customer retention and driving sales. efficient and effective growth.
In addition, companies must create and maintain effective relationships with customers. The effective relationship with the client is a function of at least three critical variables: Empathy, trust and commitment. When designing an effective value capture strategy, companies must maintain an effective relationship with customers. Careful management of such a relationship prevents or mediates the loss of a sales assistant due to price increases by companies with limited market power. There is growing empirical evidence suggesting that explaining price increases to customers before implementing them tends to reduce the adverse impact on sales and the loss of derived revenue.
According to the relevant academic literature, companies create value through the value chain process – a set of activities that are performed to design, produce, market, deliver, and support the company’s products. At least two critical activities are required: Primary activities consisting of inbound logistics, operations, outbound logistics, marketing and sales, and service in the core value chain creating value directly; and Support activities consisting of acquisitions, technology development, human resource management, company infrastructure that supports value creation in the core value chain. Therefore, based on this formulation and concept, a Value Chain disaggregates a company into its strategically relevant activities to understand general cost patterns, specific cost behavior, existing and potential sources of differentiation.
According to current best practices in the industry, there are at least three critical phases of the value chain: design, research and development of a product; Phase two: production; and phase three: marketing, sales and service. The Value Chain is the process by which companies add economic value to the product concept. As the product idea is conceptualized and progressed through the value chain process, value is created for customers. However, the product concept can fail and the creation and capture of value can end at any stage of the process. Optimal value is efficiently captured for the end user through careful execution of effective service strategies and programs.
Some operational guidance:
In summary, effective value creation and value capture depend on several factors, such as the value proposition, price targets, price elasticity of demand, a company’s competitive position in the global market, and the stage of the market. Product life cycle. Some key pricing strategies may include penetration, parity, and premium.
The penetration pricing strategy is most effective when demand is elastic and involves charging below competitors’ prices to create economies of scale as a key method of building a mass market or to deter potential market entry due to low price. and to the profit margin. The parity price strategy is most effective when the demand is unitary and the product is a commodity; And it involves charging prices identical to those of the competition. The premium pricing strategy is most effective when demand is inelastic and involves charging above competitive prices to quickly recoup R&D costs or position the product as superior in the minds of customers.
The effective value proposition stems from promising customers (standard or expected value) what a business can deliver and delivering more than the business promised (premium or higher value). As I have already explained, most companies have at their disposal two strategic value propositions and pricing options based on the Du Pont ROI model: Premium pricing (emphasizing high profit margins, high profit margins and profitability); and High turnover rate (emphasizing high productivity and effective use of available assets). There is significant empirical evidence to suggest that companies that opt for scale and volume tend to outperform those that opt for segment and premium, ceteris paribus.
Ultimately, knowledge is a strategic weapon and a source of effective value creation, value delivery, and value capture. When companies apply knowledge to tasks they already know how to do, they call it productivity. When they apply knowledge to new and different tasks, they call it innovation. Only knowledge allows companies to achieve these two strategic objectives.
