Product Strategy Study Based on Customer Value Advantage: a Case in Mobile Phone Market

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1 Product Strategy Study Based on Customer Value Advantage: a Case in Mobile Phone Market SHI Fang, XU Zai-shi Zhejiang University of Technology, Hangzhou, P.R.China Abstract Based on the significance and the overview of researches on customer value advantage, this paper is established in the Woodruff s theory to distill the competitive advantage factor of student mobile phone market. And we also have deep researches on these competitive factors though conjoint analysis which enable us know the customer utility at each level of the key competitive characteristics to obtain track of product improvement. As the result of this paper, we put forward that the product have highest customer value may not the most profit one, because some improvement of utility is related to the product cost. Thus, the product strategy must harmonize the customer value and its cost. Key words Conjoint analysis, Customer value advantage, Importance/competition difference matrix, Product strategy 1. Introduction Marketing academics have identified customer value as one of the top research agendas. Understanding what buyers value within a given offering, creating value for them, and then managing it over time have long been recognized as essential elements of every market-oriented firm s core business strategy (Drucker, 1985; Porter,1985, 1998; Slater and Narver, 1998). Determining what the customer wants in a product or service also helps a firm formulate a clear statement of its value proposition, i.e., the communication of the unique benefits and utility obtainable only from the focal product in contrast to those from its competitors. Delivering superior value to customers is an ongoing concern of management in many business markets today, and the value concept is considered one of the most popular constructs among enterprises and academic [1]. Knowing where value resides from the standpoint of the customer has become critical for enterprises, because greater levels of customer satisfaction lead to greater levels of customer loyalty and retention, positive word-of mouth, a stronger competitive position, and, ultimately, higher market share. Porter (1985) notes that a firm s competitive advantage stems from its ability to create value for its buyers that exceeds the firm s cost of creating it. In recent years, there has been a resurgence of interest in the value construct. In 1997, the Marketing Science Institute identified value-related issues as a research priority. In 1998, conferences such as the Annual Conference of the Academy of Marketing Science in Norfolk, Virginia, and the Annual Conference of the Industrial Marketing and Purchasing group (IMP) in Turku, Finland have given broader attention to the issue. Many researchers have investigated the construct, focusing in the past mainly on consumer products and services [2]. Research in the context of business-to-business markets, however, has been limited [3]. In industrial marketing, the value construct often has been neglected, leaving it to other disciplines, such as engineering, production management, or strategic management. Textbooks on business-to-business marketing still frequently limit the concept to the pricing chapter when comparing value pricing with other, more traditional pricing methods, such as cost-plus pricing or probability pricing. However, the value concept is of utmost importance when analyzing industrial buyer seller relationships. Academic research currently is undergoing a paradigm shift from transaction marketing to relationship marketing [4]. In fact, delivering superior value to customers is the key to creating and sustaining long-term industrial relationships. In the late 1970s and early 1980s, researchers of the Industrial Marketing and Purchasing group (IMP) developed an interactive approach investigating the nature of customer buyer relationships within a network perspective [5]. In this framework, customers play an active role; they establish solid and long-term relationships with their suppliers who often develop tailor-made products 1139

2 and services for them. But research on relationship value in industrial markets is still in its infancy. Wilson and Jantrania have studied how value can be measured in relationship development [6] and Holmlund and Strandvik [7] offer a model of mapping perceptions in industrial buyer seller relationships. Value can be created in three domains: value creation through relationships with suppliers, value creation through alliance partnering, and value creation through relationships with customers [8].We adopt the point of view of the supplier and their need to better understand the customer s perception of value. Because perceived customer value is not easy to measure in industrial markets, the main scope of the present article is to provide a managerial tool for measuring industrial customer s perceptions of value in form of a customer value audit (CVA). We argue that customer value analysis is more than just a pricing technique or a market research method. It is a strategic marketing tool for auditing customers needs, positioning the company vis-à-vis its competitors. And in this article we plan to develop product strategy based on customer value advantage In this article, the construct of customer-perceived value is first assessed through a literature review and the introduction of Woodruff s contribution to customer value theory. Then, a multiple-item measure of customer value is developed and illustrated in the context through the research of a case on student mobile phone market. In the conclusion, we can get an industry matrix of mobile phone market and give out the product design of the mobile phone based on customer value advantage. 2. Woodruff s contributions to customer value advantage Professor Robert B. Woodruff at the University of Tennessee at Knoxville who considered customer value was the new source of competitive advantage made many contributions to the area of customer value theory. 2.1 Decision of important strategic value dimensions Besides the Customer Value Determination (CVD), Woodruff proposed three methods to confirm the strategic factors to the customer value. (1)What customers consider of the value dimension. It based on the hypothesis that the factor what is important to customer is the factor that trigger customer purchases. (2)The exhibition of importance and enterprise performance. (3)Importance and the differences between the enterprise performance that customer perceived. This method considered the competitive situation compared the second method. He gave out the introduction of the third method: use double measure scale to test the data of importance and competitive differences(fig.1). But he didn t explain how to confirm the dividing line of the horizontal and vertical coordinates. He defined the strategic significance of customer value factors located in different quadrant: Competition differences Low High Customer s appraisal to the importance of every factor High Low Competitive standard factors No strategic importance factors Fig1.Importance/competition matrix Competitive advantage factors Competitive characteristic factors difference 1140

3 ⅢⅡⅠ Ⅳ The factors in quadrant are the competitive advantage factors which customer considered are of most importance and in which competitors have high differences of performance. That means who have good performances on theses factors can have competitive advantage. The factors in quadrant are the competitive standard factors which customer considered are of most importance while in which competitors have low differences of performance. Woodruff thinks these factors are competition standards enterprises needn t have high performance compared with competitors but need to have the equal level at least. The factors in quadrant have low importance to customer and low differences of performance to industrial competitors which can t get competitive advantage. We can call them factors with no strategic importance. The factors in quadrant have these characteristics: though they re not important to customer, enterprises have great performance differences. If enterprise have distinct performance on these factors they can attract more customer. Therefore, these factors can bring enterprise opportunities of creating difference and be named competitive characteristic factors. This basic thought of this analysis method is that how customers choose suppliers is based on the comparison of suppliers performance differences. If customers consider all the competitive enterprises have equal performance of certain value dimension, this dimension can t have effect to customer even if it is very important. Therefore, the value dimensions which have high importance and high competitive differences have great strategic significance. 2.2 Forecast the change of customer value As we all know, customer preference and views are changing. So forecasting the change can help enterprise make response as soon as possible in order to adjust the strategy of giving customer value and acquire the advantaged opportunity. Woodruff unites the main factors which affect the change of customer value macroscopically environment factor, customer using condition, reform of competition, emergence of new market to make sure the change of customer value. 2.3 Measure the customer satisfaction after offering the customer value What the main task of this process is to get the validity of the measure scale and measure the customer s appraisement of enterprise performance on satisfaction of their needs of customer value. What the technique applied is customer satisfaction measure (CSM). In this step, Woodruff adopted the method measuring customer satisfaction existed to get the customer s perceived appraisal of enterprise s performance on every value dimension and didn t put forward new methods. 2.4 Discussion of the cause of value offering Woodruff consider high marks of satisfaction mean advantage while low marks mean there are some problems existed in value offering or the value communication. Therefore enterprises need to find the problem through analysis of customer complain, investigation in small scale, etc. to make corresponding betterment. 3. Conjoint analysis for deep research on product strategy According to woodruff s theory, competitive advantage elements are the most of importance and should pay attention to. But how to obtain these competitive advantages and how to combine this advantage with cost and profit is not concerned. In this paper we use conjoint analysis for deep research on competitive advantage elements. To customer, product is the aggregate of several characteristics which can benefit him and satisfy his needs. For instance, the mobile phones have characteristics such as price, quality, etc. Every characteristic can be separated into different levels. Different characteristic in different level can be defined as different product concepts which have different utility to the customer. If we want to optimize the customer value of products, we must obtain the utility information of every characteristic on each level. We have direct and indirect methods to obtain utility information. The conjoint analysis is an indirect method which arises from the consumer theory developed by Lancaster (1966, 1991). This method assumes that utility is derived from the properties or characteristics of goods (Ratchford, 1975). A major implication is that the overall utility for a good can be decomposed into separate utilities for its 1141

4 constituent characteristics or benefits (Louviere, 1994). In terms of the utility function, this translates into using the characteristics of goods as the arguments of the function. [9] The traditional way to use conjoint analysis is a cycle process which needs repeatedly evaluate, calculate and compare. Despite some software such as MONANOVA can help us to acquire the answer, these software is still not so easy to obtain. Under this background we transfer the conjoint analysis to the following programming problem, in order to acquire answer by using common software such Matlab, Excel, etc. 2 ( xy) 2 maxr = 2 2 ( x )( y ) x= X X, y= Y Y, Y = aij Max( aij ) = 1 st. aij 0 Where r 2 means the related coefficient; a ij means the utility of i characteristic in j level; X means the favor rank of different product concept; Y means customer utility of a certain product; X and Y means the average of X and Y. 4. Case study in student mobile phone market 4.1 Data collection In order to analyze the status in quo of the student mobile phone market and the customer value of each cost related elements. We acquire data from two surveys on 1200 students in Zhejiang University of Technology about the most popular 6 brands of mobile phone. The first questionnaires are answered by all the 1200 students about the importance of each characteristic of mobile phone and called back 1047 where 983 are available; the availability ratio is 93.89%. The second survey is done according the mobile phone he uses about his assessment of each element on 7 points scale table. Each brand handed out 200 questionnaires, and totally called back 1102, where 1053 questionnaires are available. The detail information is in Tab.1. Tab.1. Data distribution Brand A B C Questionnaires handed out Questionnaires called back Available questionnaires Ratio of availability 98.95% 95.63% 93.14% total D E F % 91.94% 95.90% 97.67% 4.2 Importance /Competitive difference matrix of student mobile phone market We use different methods from Woodruff to acquire the matrix. In the aspect of importance, we calculate average of students answer to scale important degree of each characteristic shown in Tab.2 Tab.2 Importance weighs of value dimensions characteristic importance 1142

5 Health protection 6.93 Fundamental function of communication 6.75 Price 6.62 Stability of quality 6.58 Time of batteries with power 6.49 Price of fitting 6.14 Convenience of free-repair 6.03 Brand famousness 5.93 Time of guarantee of free-repair 5.75 Multimedia functions 5.18 Design style of exterior 5.15 Un-abrasion of the surface 4.85 Games and entertainment 4.83 Quality of material 4.53 Publicity of advertisement 3.69 Out connection 3.52 In the aspect of competitive difference, we use ANOVA to scale the variety of the 6 brands in each characteristic (shown in Tab.3) where the bigger F statistics is the more different of value dimensions. Tab.3 Competitive difference of value dimensions Characteristic Difference Multimedia functions Health protection Games and entertainment Publicity of advertisement Un-abrasion of the surface Time of batteries with power Price Design style of exterior Price of fitting Convenience of free-repair Times of guarantee of free-repair Stability of quality Quality of material Brand famousness Fundamental function of communication Out connection We can see that it is a sudden decline between Times of guarantee of free-repair and Multimedia functions in Tab.2, and the same is between Design style of exterior and Price of fitting. So we use them as the boundary of Law and High level of Importance weigh and Competitive difference. Thus comes to the importance/competitive difference matrix of student mobile phone market shown in Fig

6 Fig.2 Importance/competitive difference matrix in student mobile phone market 4.3 Product strategy based on the Competitive advantage factors We have known that health protection, price and Time of batteries with power are three competitive advantage factors in the student mobile phone market. And we know they are important for mobile phone brands to obtain competitive advantage. Obviously, the best product is the highest health protection, the lowest price and the longest Time of batteries with power. But every improvement of the functions is related to product cost and then influence the profit. So the research of product strategy is to optimize the product in dialectic way between the customer value and the product cost or profit. The first thing has to do is to know the customer utility of each level of every competitive advantage factor. In this phase, we surveyed 300 students and required them rank the conceptual product according to utilities it can bring to them in order to conjoint analyze the customer value. In this survey we callback 296, where 287 is available. We rearranged in descend way the rank of each conceptual product according to average score of them (shown in Tab.4). Tab.4 Favor rank to different conceptual mobile phone health protection Price(RMB) Time of batteries with power 1day days days days health protection low normal Price(RMB) Time of batteries with power 2day days days days health protection high Price(RMB) Time of batteries with power 1144

7 3day days days days We can define this favor rank as X, and define the utility of i characteristic in j level as a ij such like Tab.5. Tab.5 Utility of each level of competitive advantage factors health protection price Time of batteries with power level utility level utility level utility low a a 21 1day a 31 normal a a 22 3days a 32 high a a 23 5days a 33 7days a 34 Then Y=a 1i +a 2j +a 3k. Maximum the related coefficient of X and Y, we can calculate the utility of each level of every characteristic: ( 13 ( = ( a 31, a32, a33, a34 ) = a 11, a12, a ) = (0.03,0.64,1.00) a, a, a ) (0.40,0.29,0.00) (0.71,0.65,0.38,0.00) We can see that the highest utility product ( =2.11) is the one which has high health protection and 7days Time of batteries with power at the price 600RMB. But if consider the cost, this product may not the profit one. So in this situation, we can give up some utility according to sensitivity of customer value. Thus, we can put forward a track of product strategy (shown in Fig.3). Fig.3 Track of product strategy based on customer value 5. Conclusion Researches on product strategy based on the customer value advantage are still in its infancy, despite the existence of researches on the customer value or product design. Through this paper, we can distill the up most important factor which related to competitive advantage by the importance/competitive difference matrix, such as the health protection, price and Time of batteries with power is three competitive advantage factors in student mobile phone market. And we also can have deep research on these competitive factors though conjoint analysis which enable us know the customer utility at each level of the key competitive characteristics to obtain track of product improvement. As the result of this paper, we also know that the product have highest customer value may not the most profit one, because some improvement of utility is related to the product cost. Thus, the product strategy must 1145

8 harmonize the customer value and its cost. Reference [1] Ravald, Annika, and Grönroos, Christian: The Value Concept and Relationship Marketing. European Journal of Marketing 30, (1996). [2] Oliver, R.: Satisfaction: A Behavioral Perspective on the Customer. McGraw Hill, New York, [3] Homburg, C., and Rudolph, B.: Customer Satisfaction in Industrial Markets: Dimensional and Multiple Role Issues. Scientific Working Paper Series of the Center for Market-Oriented Management Otto Beisheim Graduate School of Business, No. 4 (1997). [4] Sharma, Arun, and Sheth, Jagdish N.: Relationship Marketing: An Agenda for Inquiry. Industrial Marketing Management 26, (1997). [5] Ford, David: The Development of Buyer-Seller Relationships in Industrial Markets. European Journal of Marketing 14, (1980). [6] Wilson, David T., and Jantrania, Swanti: Understanding the Value of a Relationship, David Ford, ed., reprinted in Understanding Business Markets,The Dryden Press, (1997). [7] Holmlund, Maria, and Strandvik, Tore: Mapping Perceptions in Business Relationships. Conference Proceedings of the 14th Annual IMP Conference September 3 5, Turku, Finland, [8] Sharma, Arun, and Sheth, Jagdish N.: Relationship Marketing: An Agenda for Inquiry. Industrial Marketing Management 26, (1997). [9] Howard Moskowitz, Jacqueline Beckley and Dorothy Minkus-McKenna: Use of conjoint analysis to assess web-based communications on functional foods. H. Moskowitz et al. / Appetite 43 (2004) [10] Woodruff(1997). Customer Value:the Next Source for Competitive Advantage [J]. Journal of the Academy of Marketing Science. 25(2),P [11] Wolfgang Ulaga. Customer Value in Business Market[J]. Industrial Marketing Management ,p [12] Valarie A. Zeithaml. Consumer Perceptions of Price,Quality and Value:A Means-End Model and Synthesis of Evidence[J]. Journal of Marketing, (July),p2-22. [13] Woodruff, Robert B(1997). Customer Value: The Next Source for CompetitiveAdvantage[J]. Journal of the Academy of Marketing Science. 25(2). [14] Gronroos. C. Service Marketing and Management[M].2nd ED.John Wiley& Sons, Inc, [15] Monroe, Kent B. and R. Krishnan. The Effect of Price on Subjective Produce Evaluations[M]. Lexington Book. 1985,p [16] Achim Walter,Thomas Ritter and Hans Georg Gemunden. Value Creation in Buyer-Seller Relationships[J]. Industrial Marketing Management , p