Value capturing as a balancing act

June 26, 2017 | Autor: Paul Matthyssens | Categoria: Marketing, Business and Management
Share Embed


Descrição do Produto

Case study

Value capturing as a balancing act Paul Matthyssens, Koen Vandenbempt and Caroline Goubau Faculty of Applied Economics, Department of Management, University of Antwerp, Antwerp, Belgium Abstract Purpose – The purpose of this case study is to illustrate the difficulty of capturing value by an upstream supplier in a mature business market. The case shows how successful market introduction and value capturing, especially in the case of mature markets, are dependent on the dominant logic of the participants in the supply chain. Scholars can use the case for a class discussion on value pricing. Design/methodology/approach – The approach takes the form of a multilevel case design as part of a larger project on value-based pricing sponsored by the Dutch foundation of Technique and Marketing (STEM). Findings – In this mature and technical industry, the dominant mindset of suppliers and customers turns out to be heavily biased towards cost containment. Also, a volume orientation and a short-term perspective are typical. This leads to adversarial relations in the supply chain, which makes it difficult to jointly introduce new value concepts. Notwithstanding the innovativeness of a new packaging concept with clear potential advantages to all downstream players, it turns out to be difficult to align these players during market introduction. In sum, existing relations, pricing structures and competitive behavior hinder new concept introduction and a value-sharing perspective. Research limitations/implications – With its focus on one industry and one product introduction, this case cannot be generalized to all business settings. However, the in-depth analysis stimulates further research on value-based pricing to incorporate industry characteristics and the pricing reality embedded in the dominant logic of the industry. Practical implications – The experience of this company might inspire other managers operating in similar environments. Managers should not underestimate the challenge of changing their pricing approaches. Turning to a value-based pricing might require a sustained effort in order to change industry rules. Originality/value – The literature hails value-based pricing without often considering the implementation difficulties. Especially upstream players have difficulties in capturing value inherent in their offerings. Keywords Value analysis, Product launch, Commodity markets Paper type Case study

orientation (plant load is key). Standard products are generally preferred over specials, large batches over small ones and large orders over small orders. A consequence of these characteristics is that production and logistics capabilities are considered to be much more important than marketing and selling skills. Margins are continuously under pressure in their mainstream commodity business. So these suppliers seek higher margins with special products targeted at high-end applications. This case explores how a materials supplier strives at capturing a larger share of the value offered to downstream partners with a new superior packaging concept. It faces a lot of challenges . . . In part 1 of this case, we draw a picture of the company and its market. Then, we focus on the current pricing approaches in this market. In part 3, the square can opportunity is introduced and analyzed. In the fourth part, we discuss the implications and lessons learned.

An executive summary for managers and executive readers can be found at the end of this article.

Introduction This article explores the case of a materials supplier that clearly faces the challenges of mature markets[1]. Materials suppliers offer a wide array of products to diverse industrial applications. In general though, these products can be classified as entering goods whose costs are directly assigned to the manufacturing process or as facilitating goods that become part of the end product (Hutt and Speh, 2004). As such, the customer will extremely focus on fitness-for-use and value-for-money. Moreover, the products are considered to be commodities with limited competitive differentiation and high buyer power. The huge capital investments in plant and equipment as well as logistics further leads to a volume The current issue and full text archive of this journal is available at www.emeraldinsight.com/0885-8624.htm

Caroline Goubau worked as research assistant at the University of Antwerp when the article was written. Journal of Business & Industrial Marketing 24/1 (2009) 56– 60 q Emerald Group Publishing Limited [ISSN 0885-8624] [DOI 10.1108/08858620910923702]

Received: August 2006 Revised: March 2007 Accepted: August 2007

56

Value capturing as a balancing act

Journal of Business & Industrial Marketing

Paul Matthyssens, Koen Vandenbempt and Caroline Goubau

Volume 24 · Number 1 · 2009 · 56 –60

The company and its market

raised. Doing so, suppliers seek to compensate for those cost rises they incurred over time, but were not able to transfer to their customers in the preceding period (high customer bargaining power, especially in case of overcapacity). This is a rather tactical and opportunistic approach, which leads to a price evolution resembling a “yoyo”. As a result, the type of applications determines the pricing level (for instance beer and beverages applications versus food applications) due to different competitive environments in these industries. The simple pricing rule is, “the lower the competition, the higher the price”. Tactical and opportunistic pricing also kicks in when there is a potential new customer in the mainstream market (for example in the case of the start-up of a new plant). Materials suppliers may initially agree on supplying the material at a rather low price. They enter with a penetration price since additional volume is important in the materials industry: due to economies of scale, a bigger volume lowers the average production cost. When the customer plant is running for a couple of years the relationship between the material supplier and the customer is determined by framework/annual contracts. In these broad contracts both the price and the volume the company is expected to sell are fixed for at least a year. Within these contracts the price is mainly determined by the volume the customer buys (volume/discount-pricing) and by the competitive landscape (see above) in the particular market. There is little room for value pricing approaches, which could base the price on the value the product brings to the customer. For new products or applications (“the 5 per cent business”) competitors’ prices are important in the pricing process. Depending on the properties of the new product (better or equal to competitors’ product properties) prices are set just above or below the competition price. Hence, pricing of a new application/product is not really based on an understanding of the customer value the product generates, but rather on a comparison with competitors’ products and prices. This industry-wide pricing structure (the price list) was built years ago when labor was relatively cheap compared to material. Today the costs of labor and material have changed in their relative positions; the price list structure however, did not change accordingly. For example, lightweight packaging, which involves more rolling and consequently more labor, is often preferred by the customer. It is valuable to the customer for two reasons: he/she buys less material and it weighs less. However, for the material supplier to capture a part of the value created and to get rewarded for the extra rolling is very difficult. Due to the old pricing system, the extra labor the company puts into the rolling is not fully rewarded.

The case study presented in this article is concerned with a medium sized Europe-based firm operating in the materials industry. This supplier is active in all major applications and supplies materials to industries such as automobiles, service centers, packaging, construction, etc. These applications can more or less be divided into two types of business. The mainstream business accounts for 95 per cent of the company’s business and is concerned with the mass manufacturing and supply of standard materials (“the 95 per cent-business”). This range of mass products can be characterized as commodities. In the other 5 per cent of its business the company develops specific applications for its customers (“the 5 per cent-business”). These applications are based on an insight into what might deliver extra customer value. As we will see, this division into two types of businesses affects the pricing process and determines possible pricing methods[2]. The European materials industry is characterized by a trend towards concentration, which has led to a reduction in the number of players both upstream and downstream. In February 2002 the merger of Aceralia, Arbed and Usinor formed the present Arcelor, which in 2006 merged with Mittal Steel into the world largest player. Another upstream example of concentration is given by the merger of Hoogovens, a Dutch company and British Steel into the Corus Group in 1999. The latter merged in 2006 with the TATA group of India. Similar movements have been and are taking place in the upstream mining and energy sectors. Downstream, this concentration trend is present in major customer industries such as truck and trailer, automotive, packaging and so forth. As in many other industries that are challenged by commoditization and increasing worldwide capacity (new capacity in China and Eastern Europe), the materials industry evolves more towards a fighting scene, characterized by antagonistic supplier-customer relationships. As a consequence, price pressure and competitive rivalry are ruling.

The pricing process Pricing decisions for existing products are mainly the domain of the sales department in this company. For new products and applications there is a higher-level involvement of the product/market development, the marketing and the manufacturing department. The sales director, however, holds the final accountability. Given the relative commoditized nature of the materials offered, the pricing process in the industry can be mainly characterized as: . relatively tactical and opportunistic; . rather supply- and competitor-based; and . rather short-term-oriented.

Room for value-based pricing? In theory it should also be possible in the mainstream business to apply value-based pricing and to differentiate prices across customers within one market (for example the food market) based on: . the product being created afterwards with the material; and . the value the material adds to the total value of the end product.

The prevailing pricing practice The market structure makes that the rule of supply and demand determines the price levels in the majority of the applications (“the 95 per cent-business”). Since the capital cost in the industry is high, capacity utilization is important. Moreover, capacity expansion is difficult which causes rigidity in the production facilities. As a consequence, if suppliers are sold out or expect to be sold out in the near future, prices are

The food market, for example, is huge and materials are used in diverse applications. By asking the question: “What part of 57

Value capturing as a balancing act

Journal of Business & Industrial Marketing

Paul Matthyssens, Koen Vandenbempt and Caroline Goubau

Volume 24 · Number 1 · 2009 · 56 –60

the total value created, is created by our product (the package)?”, it should be possible to differentiate prices within one market. There are some hindrances though. First of all, answering this question depends on: . the customer specific application and purchasing strategy; and . the profitability of the market in which the customer is active.

convenience of the can to the consumer. A big advantage to the retailer lays in the superior logistics: thanks to the square form the needed shelf space is reduced by 20 per cent, which improves the sales per square meter. The consumer too benefits from the superior logistics, as the cans are easier to stack. Another advantage comes from the fact that the can is a light weight can, which lowers the material costs for the can maker as he needs 15 per cent less material compared to a round can. The advantages are clear. However, the company faced the following problems: 1 How to persuade the downstream customers/players? 2 How big is the possible value increase and how can this extra value be quantified?

Second, there is no straightforward method to quantify which part of the total value is created by the material. Owing to these hindrances, at present, value-based pricing is not applied in the industry, which means prices are not differentiated based on the value they deliver to the customer[3,4]. In sum, direct value capturing in materials supply remains a long-term strategic intent. To capture value, materials suppliers seek ways to grasp value within the boundaries of business practice in the industry, e.g. annual contracts, volume-based pricing, etc. Another possibility would be to take new high value products out of the existing framework or try to capture value with new customers. In their new applications business (“the 5 per centbusiness”) nearly each our materials supplier tries to find new pricing approaches to capture a bigger part of the value created. We will now focus on such a case.

In order to have enough information to answer these questions, the company conducted customer research, which is rather exceptional for an upstream player in this industry. Customer reactions: positive feedback and some “buts” With collaboration of a retailer, the company conducted a consumer research in the UK. During about two weeks they replaced in one supermarket well known round soup cans by square cans, selling at the same price. The customers were asked to fill out a questionnaire. Some of the findings from the customer research are: . one-third of the respondents claim that the packaging would make them more likely to buy the soup; . 20 per cent of the buyers, say they do not usually buy the soup, so the new pack encouraged them to buy it; . 42 per cent of the respondents say the packaging makes it look like it would cost more; . 82 per cent of the respondents find it suitable for premium products such as “special recipe” soups; and . On average, the respondents said they would be willing to pay up to 30 per cent more for the square can.

Pricing the magic cube: a fairy tale or a nightmare? The square can For years, the industry is dreaming of a square can which can be directly printed on and which can be easily opened due to a handy peel off system. This way, the supplier of the material hopes to add value and to be considered a packaging developer rather than just a material supplier. The principal aim of the company is to improve the image of food cans and to create a packaging vehicle for higher value products. At this moment, the round food can is most widely used. The round can however has a negative image with the consumers: they associate the can with low value food, with food that cannot be fresh. Moreover, the consumer is shifting towards fresher and more convenient products. As the concept of the square can was initiated and developed by the materials supplier, it was an upstream initiative. However, already in early development stages the company made an inventory of the (many) advantages for the downstream players in the value chain. As we see in Figure 1, the square can is a concept with potential added value for the whole value chain. The symbols indicate how each of the downstream players benefits from the initiative. As we see on the figure, the change in shape from round to square not only raises an opportunity to be different in the market, it also improves the appeal of the can and the perception of the quality of the food it contains (the company validated this with a customer research). As differentiation in the market is highly sought by food suppliers, a new form (square instead of round) can be very interesting for brand owners. Moreover, the square can and its improved perception creates an opportunity for the brand owner to offer higher value products in the cans. Depending on how the consumer reacts, the retailer might benefit from the differentiation advantage as well. Next, the handy peel off system improves the

Until now the company thought in terms of “potential value”. The customer research, however, gave some concrete and positive indications on the perceived benefits. The question remained how to convince the downstream players of the value of the concept. Armed with the positive reactions of the customer research, the company started “guestimating” the real value additions for each level in the value chain. To quantify these possible value increases, the company looked for similar cases in the market to determine which value increase they realized in the past. As such, they looked for a brand that changed its packaging drastically and found that they realized a value increase of 25 per cent after the shape change. It is important to mention that “value increase” is defined as the percentage increase in price after the (shape) change. They did the same for a brand that improved its peel off system and for a brand that changed its original product into a healthier product. Respectively they found a value increase of 29 per cent and of 10 per cent (up to 77 per cent). Of course, adding these percentages is not methodologically sound and concluding that there is a possible overall value addition of 64 per cent (25 per cent þ 29 per cent þ 10 per cent ¼ 64 per cent) might be too optimistic as these percentage value increases were the result of separate single changes. Combining these percentages with the result of the customer research (see research findings above), the 58

Value capturing as a balancing act

Journal of Business & Industrial Marketing

Paul Matthyssens, Koen Vandenbempt and Caroline Goubau

Volume 24 · Number 1 · 2009 · 56 –60

Figure 1 Beneftis of the square can from different levels in the value chain

company came to a realistic hypothesis of a “20 per cent value increase for the whole value chain” (increase in retail price of 20 per cent). As the market for a typical brand of round cans is about 50 million cans, and one round can sells on average at 1e, changing the shape from round to square could imply a yearly value increase of 10 million e in the overall supply chain: (50 million cans £ 1.20e) 2 (50 million cans £ 1e) ¼ 10 million e. As the company estimated the total of the investments in the supply chain on two to three million e, they really felt the market should be excited. As a next step, the company tried to sit down with the parties from all value chain levels in a focus group discussion. However, when they managed to sit around the table with all of them, the discussion became rather technical. When the company tried to discuss how to make the concept work commercially, the different parties were unwilling to have a coordination meeting. Moreover, when faced with the positive results of the customer research, the different midstream parties seriously had misgivings about the sustainability of the concept. Can makers and brand owners believed in the influence of the initial novelty effect of the can, but they doubted whether the consumer interest would last in the long run. As such, they doubted the return on investment and the payback time, given the “huge” investments needed.

with premium products/brands. This is totally different for the retailer. As we mentioned above, the retailer’s benefits are about cost savings: the square shape improves the sales per square meter (reduction in shelf space needed for the product). Their biggest interest focused on the mass market and standard products. As such, there was a tension between what drives the retailer and what drives the brand owner, respectively mass market products vs. premium brands. Furthermore, there were some value perception and value sharing problems. Both the brand owners and the retailers had difficulties in seeing the square can as a packaging concept that could be priced higher than a traditional round can. According to the brand owners there is a price ceiling for canned food, regardless of the shape and the product it contains. The retailers on the other hand find themselves in price wars and as such are reluctant to raise the price of a standard product as canned food. They have no intention whatsoever to “split” the generated logistics savings with any other party in the chain. Another difficulty is the fact that those parties in the value chain that need to make the biggest investments do not have the strongest position in the chain to capture value. We could call this a value distribution problem. Figure 2 clarifies what we mean by this. For example, the can maker needs to make the biggest investments, though has the weakest position to capture value. The brand owner, as usual, has the strongest position to capture value but the investments he needs to make are much smaller than the can makers’. And the retailer who has a rather good position to capture value hardly needs to make any investments. Such a situation obviously causes problems when one tries to get all the parties around the table for a discussion on new value creation and capturing. During the focus group discussion, it became evident that introducing the square can would require a long-term effort. This did not fit into the traditional mindset of the downstream players, which increasingly focus on short-term goals with very strict payback rules (shorter time horizons). A final problem the company encountered was the industry structure. As mentioned above, selective partnerships are difficult to realize. As the past required little collaboration, partnerships are not common in the industry and so the company had only few relationships with brand owners or

Obstacles on the road In the months following the research the company started intensive sales discussions with its customers. Gradually it became evident that there were some more difficulties to overcome. First of all, the materials supplier’s marketing effort was perceived as a technology push, rather than a market pull initiative. In this industry, upstream players generally do not excel on marketing capabilities. Hence, their marketing initiatives aimed at enhancing customer value are often not fully trusted by their customers. Second, the interests of the different players were not aligned. The brand owners saw some value in a changing differentiation, even without changing the food product itself. However, they realized that the biggest value steps were to be realized if they combined the new packaging with higher value products. So the biggest interests for the brand owners lay 59

Value capturing as a balancing act

Journal of Business & Industrial Marketing

Paul Matthyssens, Koen Vandenbempt and Caroline Goubau

Volume 24 · Number 1 · 2009 · 56 –60

Figure 2 2Investment size versus value capturing position

differentiation is competition-based rather than valuebased: the lower the competition, the higher the price. We can conclude that value-based pricing is not applied in the industry, not across different markets, and not across different customers within one market. 4 As our materials supplier explains, both suppliers and competitors, mostly improve their margin by lowering their production costs. As we mentioned above, 95 per cent of their business is treated as a commodity. Commodities are characterized by a constant price pressure, which makes it difficult to raise price. So the company pursues value increases by lowering its production and logistics costs. However, this should not be mistaken for value-based pricing: this is margin thinking rather than value thinking. Profitability or “value” is increased by lowering costs and increasing margin as such. However, lowering costs is a value generator for a company itself, not for the customer.

retailers. In such a chain, characterized by indirect contact, it was difficult for the company to have open discussions with all the value chain players on how to make the square can work commercially to the benefit of all value chain “partners” involved.

Questions and discussion points Think about this case. What really went wrong? Why can this company not capture the value inherently present in this appealing concept? Can you think of other but similar industries where upstream suppliers have realized this challenge? What can our materials supplier learn from their successful practices?

Notes 1 A teaching note for this case is available from the authors. Please contact Paul Matthyssens at the following e-mail address: [email protected] 2 The division 95/5 per cent might seen rather arbitrary; this could also be argued to be 80/20 per cent or 60/40 per cent. Recent internal discussions within the company use a more flexible definition, leading to a higher percentage of “specialties”. For the purpose of this article the 95/5 division is more appropriate. 3 As we mentioned above, there is some differentiation in prices across markets and applications. However, this

Reference Hutt, M.D. and Speh, T.W. (2004), Business Marketing Management, Thomson, Melbourne.

Corresponding author Koen Vandenbempt can [email protected]

To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints

60

be

contacted

at:

Lihat lebih banyak...

Comentários

Copyright © 2017 DADOSPDF Inc.