Small Business Management in st the 21 Century
Small Business Management in st the 21 Century By David T. Cadden and Sandra L. Lueder © 2012, published by Flat World Knowledge 1
COPYRIGHT PAGE Published by: Flat World Knowledge, Inc. One Bridge Street Irvington, NY 10533 © 2012 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the License Agreement available here http: //www. flatworldknowledge. com/legal. No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement. © 2012, published by Flat World Knowledge 2
Chapter 2 Your Business Idea: The Quest for Value © 2012, published by Flat World Knowledge 3
Learning Objectives 1. Define customer value. 2. Understand the five sources of perceived customer benefits. 3. Understand the three sources of perceived costs. 4. Understand that in order to provide customer value, firms must be able to listen to the voice of the customer. © 2012, published by Flat World Knowledge 4
Learning Objectives 5. Comprehend that businesses must attempt to identify those customers’ needs that are not being met by competitors. 6. Understand that business should segment their customers to better meet their needs. 7. Understand that businesses should consider the lifetime value of their various customer segments. © 2012, published by Flat World Knowledge 5
Learning Objectives 8. Understand that although some businesses can create products and services based on their intuitive insights, others need to conduct careful analyses. 9. Comprehend that new product or service development requires that organizations be able to support creativity and innovation. 10. Understand that creativity and innovation are critical for small businesses. © 2012, published by Flat World Knowledge 6
Learning Objectives 11. Realize that innovation need not be limited to the creation of new products and services. It may involve seeing new uses for product, new ways of packaging a product, or new ways of marketing a product. 12. Understand that creativity and innovation must be nurtured in any organization and that there are several areas small businesses must learn to avoid in order to promote creativity. 13. Realize that small businesses should be aware of social and consumer trends, which has been made easier because of the existence of online data sources. © 2012, published by Flat World Knowledge 7
Learning Objectives 14. Understand that providing customer value can have a tremendous positive impact on a firm’s cash flow. 15. Understand that determining customer value is critical to the survival of any business. Customer relationship marketing software, which previously was available only to the largest firms, is now priced so that even small firms can extract their benefit. © 2012, published by Flat World Knowledge 8
Perceived Value • Firms that are successful are those that consistently create superior customer value. • Customer Value is the difference between Perceived Benefits and Perceived Cost. © 2012, published by Flat World Knowledge 9
What is Value? • Value isn’t price – it is a much richer concept. • For a business implementing this concept can prove to be tremendously challenging. • It is a challenge because customer value is highly dynamic and can change for a variety of reasons. – Customer value calculation may change over time. – Customers’ preferences and perceptions may change over time – Competitors may change what they offer to customers. © 2012, published by Flat World Knowledge 10
Types of Value • In looking at the benefits portion of the value equation, most researchers find that customer needs define the benefits component of value. • Sheth, Newman and Gross’ identified five types of value that provide a solid basis for considering perceived benefits • It is critical to emphasize that a business shouldn’t intend to compete on only one type of value. It must consider the mix of values that it will offer its customers. © 2012, published by Flat World Knowledge 11
Types of Value © 2012, published by Flat World Knowledge 12
Types of Value • Functional Value relates to the product’s or service’s ability to perform its utilitarian purpose. • Functional value that can have several dimensions. – Performance related having some degree of measurability – speed of service, miles/gallon, quality or reliability. – Correct features or characteristics – weight, aesthetics or an innovation component. – Final outcomes produced by the business – number of successful operations, number of legal cases won, or percentage of clients whose investments increased. © 2012, published by Flat World Knowledge 13
Types of Value • Social Value involves a sense of relationship with other groups through the use of images or symbols. – Examples of social value: Ben & Jerry’s commitment to the environment or boutique clothing stores that convey a chic or trendy environment. • Emotional Value is derived from the ability to evoke an emotional or affective response. – Examples of emotional value: Insurance companies that are able to tap into fear or restaurants that create a romantic environment for diners. © 2012, published by Flat World Knowledge 14
Types of Value • Epistemic Value is generated by a sense of novelty or simple fun. – Examples of epistemic value: amusement parks and Stew Leonard’s grocery store. • Conditional Value is derived from a particular context or socio -cultural setting. – Examples of conditional value: holiday sales, Apple users, and Harley. Davidson customers. © 2012, published by Flat World Knowledge 15
Perceived Cost • The other component of the customer value equation is perceived cost. • When one examines the cost component they need to recognize that it is more than just the cost of purchasing the product or service. • Perceived cost should also be seen having multiple components. • We identify three components of perceived cost – Monetary – Time – Psychic costs © 2012, published by Flat World Knowledge 16
Three Components of Perceived Cost © 2012, published by Flat World Knowledge 17
Perceived Cost • Monetary cost component should be broken down into its constituent elements: purchase cost, operating cost, service cost, and switching and opportunity costs. • Time cost component consists of the time required to evaluate, acquire and purchase a product or service. • Psychic cost component is the element that can be associated with those factors that might induce stress in the customer. © 2012, published by Flat World Knowledge 18
Market Segmentation • Market Segmentation involves dividing the market into several portions that are different from each other. • Involves the recognition that the market at large is not homogeneous. • Recognizes that not all people of the same segmentation facilitates a better understanding of the needs and wants of a particular customer groups. • There can be several dimensions along which a market may be segmented: geography, demographics, psychographics or purchasing behavior. © 2012, published by Flat World Knowledge 19
Geographic Segmentation • Geographic segmentation can be done by global or national region, population size or density, or even by climate. © 2012, published by Flat World Knowledge 20
Educat ion Demographic Segmentation A ge me o Inc © 2012, published by Flat World Knowledge • Demographic segmentation divides a market on factors such as gender, age, income, education, ethnicity or occupation. 21
Psychographic Segmentation • Psychographic segmentation is carried out on dimensions that reflect differences in personality, opinions, values, or lifestyle. © 2012, published by Flat World Knowledge 22
Listening to the Voice of the Customer • Every business must be open to every opportunity to listen to the Voice of the Customer (VOC). • Better identifying customer value means that one is always open to the question of how a business can better solve the problems of particular customers. • Business owners should always be asking themselves questions concerning as how they can better serve their customers. © 2012, published by Flat World Knowledge 23
Questions That Should Be Asked • What needs of our customers are we currently meeting? • What needs of our customers are we currently failing to meet? • Are there needs that our customers have that they might not even be aware of? • How are we going to identify those unmet customer needs? © 2012, published by Flat World Knowledge 24
Questions That Should Be Asked • How are we going to listen to the voice of our customer? • How are we going to let the customer talk to us? • What is the current value proposition that is desired by customers? • How is the value proposition different for different customers? © 2012, published by Flat World Knowledge 25
Questions That Should Be Asked • How, exactly, is our value proposition different than the competitors? • Do I know why customers have left our business for competitors? © 2012, published by Flat World Knowledge 26
Customer Lifetime Value • The creation of this value must be done in a way that assures that the business will make money. • One way of doing this is by identifying and selecting those customers who will be profitable. • Customer lifetime value is a measure of the revenue generated by the customer, the cost generated for that particular customer, and the projected retention rate of that customer over their lifetime. © 2012, published by Flat World Knowledge 27
Customer Lifetime Value • The net present value discounts the value of future cash flows. It recognizes the time value of money. • Calculator for computing Customer Lifetime Value: http: //hbsp. harvard. edu/multimedia/flashtools/cltv/index. ht ml. © 2012, published by Flat World Knowledge 28
Quality Function Deployment • Quality Function Deployment (QFD) is an approach that takes the concept Voice of the Customer (VOC) seriously, and uses it to help design new products and services or to improve existing ones. • QFD takes the desires of consumers and explores how well the individual activities of the business are meeting those desires. • It also considers how company activities interact with each other and how well the company is meeting those customer desires with respect to the competition. © 2012, published by Flat World Knowledge 29
Quality Function Deployment • Using QFD means building a house that is composed of several components: A. ) Customers’ Requirements (the Whats) – where one identifies the elements desired by the customers – this section also contains the relative importance of these needs as identified by the customers B. ) Engineering Characteristics (the Hows) – the means by which the organization seeks to meet customer needs C. ) Relationship Matrix – this illustrates the correlations amongst the customers’ requirements and the engineering characteristics; the degree of the correlation may be represented by different symbols © 2012, published by Flat World Knowledge 30
Quality Function Deployment D. ) “Roof” of the House – illustrates to correlations amongst the engineering characteristics; this would reveal synergies that might exists amongst the engineering characteristics E. ) Competitive Assessment matrix – used to evaluate the business’ position with respect to its competition F. ) “Basement” – used for assessing the engineering characteristics or setting target values. The “Basement” enables one to see the relative benefits of the activities undertaken by the company in meeting consumer desires. © 2012, published by Flat World Knowledge 31
Quality Function Deployment’s “House of Quality” © 2012, published by Flat World Knowledge 32
Simplified House of Quality for a Restaurant © 2012, published by Flat World Knowledge 33
Creativity and Innovation • Small business has always been a driver of new products and services. – Air Conditioner, Bakelite, FM Radio, Gyrocompass, High Resolution CAT Scanner, Outboard Engine, Pacemaker, Personal Computer, Frozen Food, Safety Razor, Soft Contact Lenses, and the Zipper • One way smaller firms may compete with their larger rivals is through the ability to be better at the process of innovation © 2012, published by Flat World Knowledge 34
Creativity and Innovation • Innovation involves new ways in which the product or service might be used – It can involve new ways of packaging a product or service – It can be associated with identifying new customers or new ways to reach customers. • Creativity is generally required to produce innovative means of constructing customer value. • Alexander Hiam (1998) identified nine factors that can impede the creative mindset in organizations. © 2012, published by Flat World Knowledge 35
Ways to Kill Creativity • Failure to ask questions – Small business owners and their employees often fail to ask the required why-type questions. • Failure to record ideas – Ideas need to be evaluated by other members of the organization. Therefore, it's important for you to record ideas and to share them. • Failure to revisit ideas – One of the benefits of recording ideas is that if they are not immediately implemented, they may become viable at some point in the future. © 2012, published by Flat World Knowledge 36
Ways to Kill Creativity • Failure to express ideas – Sometimes individuals are unwilling to express new ideas for fear of criticism. Some organizations are too willing to critique an idea before it is allowed to fully develop. • Failure to think in new ways – This involves new ways of approaching and looking at problem of providing customer value. • Failure to wish for more – Satisfaction with the current state of affairs translates into an inability to look at new ways of providing value to customers. © 2012, published by Flat World Knowledge 37
Ways to Kill Creativity • Failure to try to be creative – People mistakenly think that they are not at all creative. This means they'll never try to produce new types of solutions. • Failure to keep trying – When attempting to create customer value, sometimes individuals are confronted with creative blocks and then simply give up. • Failure to tolerate creative behavior – Organizations often fail to nurture the creative process. They fail to tolerate the "odd" suggestions from employees and limit creativity to a narrow domain. © 2012, published by Flat World Knowledge 38
Social and Consumer Trends • Not all businesses have to concern themselves with social and consumer trends. • There are other businesses, particularly smaller businesses, that could greatly benefit by recognizing and emerging social or consumer trend. • The great challenge for small businesses is to be able to correctly identify these trends in a timely fashion. • Today many of those capabilities can be provided online – At no cost or a nominal cost © 2012, published by Flat World Knowledge 39
Customer Value’s Impact On Cash Flow • Firms that are successful in correctly identifying the sources of value should be able to provide superior customer value. This may produce the following set of results: – Superior customer value may produce a direct relationship with their customers. – Increase in the probability of customer loyalty. – Generates more revenue and the cost of serving customers drops. – Increased sales means a significant boost in cash flow. © 2012, published by Flat World Knowledge 40
Customer Value’s Linkage to Cash Flow © 2012, published by Flat World Knowledge 41
Digital Technology and E-Environment Implications • Customer Relationship Management (CRM) refers to a service approach which hopes to build a long-term and sustainable relationship with customers that has value both for the customer and the company. • CRM is a generic term covering different software and browser applications. It collects information about customers and organizes it in a way that may be used effectively by management. © 2012, published by Flat World Knowledge 42
Digital Technology and E-Environment Implications • Cloud computing, also known as Saa. S (software as a service), refers to the situation in which vendor software does not reside on the computer system of a small business. • All aspects of the system, from maintenance to backups, are the responsibility of the vendor. This minimizes the need for computing capability by the small business. • Cloud computing can significantly reduce the course of acquiring and maintaining such computer programs. © 2012, published by Flat World Knowledge 43
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