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When to add value? - When to be efficient?

Many times I see people in businesses that are asked by their ‘boss’ to be both efficient AND add value. It goes something like this:

"Add value" on a Monday

"Be more efficient" on a Tuesday

"Add value" on a Wednesday

"Be more efficient" on a Thursday

And the result is that by Friday they are neither adding value nor being very efficient. Mediocrity rules!

This happens mainly because the business owner is not sufficiently focused on where adding value OR adding value is important.

Most businesses can be broken down into either 2 or 3 core elements - as shown in the illustration below.

Those 3 core elements are:

1. The customer types

Customers can usually be broken into two types:

1a. Those customers who have a problem but know exactly what they need to solve that problem. They have a ‘sore throat’ – and they go direct to the Pharmacy to get a ‘throat remedy’. Simple business model.

1b. Those customers who know they have a problem – but are not exactly sure about the best solution. They go and see the ‘doctor’ (see 2 below). More complex business model.

2. The ‘intangible’ solutions

This is generally applicable to more complex businesses where there is some sort of ‘consultative’ element – and the customer is not exactly sure of the best solution (see 1b above).

It will probably be applicable to any business that use intangible words like - ‘knowledge’ – ‘design’ – ‘creativity’ – ‘solutions’ – ‘experience’ etc. in their value proposition. They will probably have this intangible element inside their business model (whether it is obvious or not).

Where this happens there is usually a three-step process:

  • Diagnose the ‘problem’ (identify what the customer wants/needs)
  • ‘Solve their problem’ in concept
  • Point the customer towards the required tangible delivery (of service or product).

An interesting point to note is that once the customer problem has been ‘solved in concept’ – the value to the customer has probably reached its maximum.

Imagine that the customer was a business owner with a tax problem (they were paying ‘too much tax’). The customer knows they need to do something (‘pay less tax’), but they are not sure how (they are a 1b customer type).

They go into see their tax advisor (element 2 above). The tax advisor asks questions and analyses the situation (diagnosis stage) and probably goes through some options. They eventually settle on a proposed plan. ‘If we set up A-B-C tax structure – then you will pay $1m less tax next year’. The customer is very happy – and agrees to go ahead. In their mind the problem is solved (but we have actually not delivered anything tangible yet).

3. The tangible delivery (of product or service)

Tangible delivery can usually be separated into two types:

3a. The tangible delivery of product or service is very standardized and high volume. It is made easy for the 1a customer type to access (like the ‘throat remedy in the Pharmacy’)

3b. The tangible delivery of product or service is more complex. It is necessary for the 1b. customer type to access this via stage 2. Essentially you ‘go to the doctor who does a check up – perhaps refers to another more specialist consultant – who advises that hospital surgery is required to solve the problem. 

This is the tangible delivery of the ‘A-B-C tax structure’ which will save the customer $1m in tax next year.

The interesting point to note here is that we have already maximized the value in the customer’s mind (at stage 2). Now we are just delivering the solution the focus switches to efficiency of delivery. 

The tax advisor will make more profit if the tangible delivery of the ‘A-B-C tax structure’ is delivered (efficiently) right first time. They will make less money if they have to take several goes - and keep re-working it to eventually deliver it and ‘get it right’. Either way the customer will end up saving the $1m tax. 

In conclusion

In deciding where to focus on adding value and where to focus on efficiency:

In any business customers are valuable assets

However usually 1a type customers mostly just need an effective process to find the right solution on the shelves. This process must be efficient because the product or solution that they are buying is probably a ‘commodity’ (price sensitive).

1b type customers are often more valuable (because they require a more tailored solution which is less price sensitive). The focus for these customer types must be to add value

In any business where ‘intangible solutions’ are applicable, the key focus should be to add value

It is often at this intangible stage where the value is maximized. The biggest problem for such businesses is not to ‘give the value away for free’ (or allow the type 2b customer to go somewhere else for cheaper tangible product/service delivery having established what they need). 

In any business – irrespective of whether it delivers type 3a or 3b solutions – the focus should be to a greater or lesser extent on efficiency (deliver the solution efficiently).

The value added element is usually maxed at stage 2 – and once we turn to ‘bashing out the tangible solution’, the principles of the efficient factory should take over.

Once you have broken your business model down into where the focus should be – you can ensure that the relevant people at each stage are EITHER focused on adding value or being efficient (but rarely BOTH adding value and being efficient).

 

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