Way-ForwardThe retail industry is hurting in Australia. The internet has been blamed for a significant shift in buyer behaviour to online purchases, exploiting the $1000 threshold exemption for the Goods and Services Tax (GST). While this might be true, my experience as an online and in-store buyer suggests a number of other factors that might be at play. In looking to purchase a copy of the book, Game of Thrones, for my daughter, I went into a local retailer considered to be ‘high-end’ on a Saturday afternoon. Having found the book I went to three separate counters to conclude the purchase only to find each one unattended. I returned the book to the shelf and went to the bookstore to see what they had in stock. I ended up buying the boxed set of the series, partly to avoid repeating the process in the future, and partly because it was available, with staff to conclude the transaction. My observation is that the ‘high-end’ store thinks that value is created by simply providing their well appointed store and the staff don’t think they create value by making it simple and easy to buy something.

Ronald Coase died recently, having become famous as the 1991 Nobel Prize winner for Economics. His seminal works included the “Theory of the Firm” and “The Problem of Social Cost”. In the former, he explained that firms create value when search and transaction costs for the customer are lowered. In the latter, however, he also shows that there are many situations when unintended consequences occur. It is a double edged sword if you don’t understand the systemic nature of value creation and the various interdependencies and interrelationships that exist. In the case of the ‘high-end’ store, cutting front line staff, or having poorly skilled front line service staff, will simply have the effect of accelerating the demise of purchases of low involvement goods and services. It is what your customers see and the value that they perceive, that governs the elusive and subjective concept of value creation in a transaction. The risk you run is that high involvement purchases will also suffer from the perception of poor customer service.

This is not a post about the retail industry but rather an emphasis on understanding what value your business creates for its customers. In my experience with retail, it is not just about the store, but access to the goods or services needed, and the ease with which my search and transaction can be concluded. Some things don’t need a shop front and others do. The internet has disrupted the business models in retail and they have been slow to respond with little or no innovation.

Peter Drucker offered five questions that he considered the most important questions to ask about your business:

  1. What Is Our Mission?
  2. Who Is Our Customer?
  3. What Does the Customer Value?
  4. What Are Our Results?
  5. What Is Our Plan?

These questions are intended to enable leaders in the for-profit and not-for-profit sectors to think through what they are doing, why they are doing it and what they must achieve. There can be little doubt that this process underpins the value that a firm creates for its customers. It is also applicable to operating units within the firm to ask similar questions:

  1. What is our mandate?
  2. Who uses what we produce?
  3. Do we produce what they need?
  4. How do we know?
  5. How can we improve?

In our experience, change is often mandated before there is any clear understanding as to why it is necessary. Specifically, there is the clear sense that something doesn’t work but little clarity on specifically why that is the case. Often the mandate comes from above to just fix the problem, with the consequence that this can lead to a whole lot of band aids being placed over problem areas. Worse still is the appearance of action by poorly targeted restructures and downsizing that have the unintended effect of creating structural weaknesses for the future.

The services that you provide, as an organisation or as an operating unit, perform a job for your customers. In their 2007 Sloan Management Review article, the authors talk about finding the right job for your product:

Most companies segment their markets by customer demographics or product characteristics and differentiate their offerings by adding features and functions. But the consumer has a different view of the marketplace. He simply has a job to be done and is seeking to “hire” the best product or service to do it.

Some additional questions we ask to frame value creation and plan any improvement initiatives are:

  1. What isn’t working?
  2. Why isn’t it working?
  3. What needs to be produced?
  4. Who needs to produce what?
  5. How will it be produced?

We evaluate the answers through the eyes of a customer, ensuring they are not superficial and go to root causes, to be meaningful.

Theodore Levitt, in his 1960 Harvard Business Review article, Marketing Myopia, is the most prominent author to show that thinking about value creation begins by understanding the business that you are really in. Consequently, before you change anything you must understand what value you create and you must know what job is performed by your product or service. You must understand why the existing offerings are ineffective and then make changes that enhance value creation, not denude it.  Even a morning milkshake purchase has a job to do and creates value. If you don’t know how your business operations create value today, there is little chance that you will be able to change it to improve value creation. This is why we put effectiveness first. If you simply go after the cost of a service without understanding if it is effective or why it is ineffective, you simply embed dysfunction. Finding answers to these questions will allow you to target improvements, understand what matters to your customers and what they need from you to create value for both parties.