Developing Multiple Sources of Added Value for Customers

Because fierce competition erodes a firm’s competitive advantage, firms should continuously move fast and build new advantages to counteract the advantages of competitors. To survive and prosper in today’s fiercely competitive market environment, firms need effective functional strategies to continuously add value to their offerings and build multiple layers of added value in different areas to gain and sustain their competitive advantages. Value added is a key element of a firm’s functional strategy that provides its customers with some additional benefits with a slight increase in cost that is perceived by the customer to be less than those benefits. A firm develops and uses functional strategies such as operations, marketing, and purchasing strategies to support a firm’s business strategy and provide the firm with the ability to achieve a competitive advantage in the marketplace. However, to implement functional strategies and achieve competitive advantage, the firm must have core capabilities (also called core competencies). Core competencies allow the firm to create market value and achieve competitive advantage. Core capabilities are activities a firm can perform extremely well. If a firm’s core competencies are better than its competitors, they are called distinctive competencies that allow the firm to differentiate itself from its competitors. Therefore, to gain and defend its market position, a firm must develop core competencies at least in one or all functional areas including key areas such as business innovation, operations management, and marketing management including product development, brand management, and service management to allow it to create added customer value and achieve and sustain a competitive advantage. Through core capabilities, a firm can develop its competitive priorities for the marketplace.

There are two primary sources through which a firm can add value to its products: external (natural, societal, and task) environmental change and internal (strategy, structure, culture, and resources and capabilities) environmental change. For example, any external change in the political-legal part (i.e., change in factors such as tax laws, antitrust regulation, global warming legislation, etc.), economic part (i.e., change in factors such as interest rates, demand, price, etc.), sociocultural part (i.e., change in factors such as health care, unionization, social values, etc.), technological part (i.e., change in factors such as new products, digital transformation, patent protection, etc.), or/and natural environmental part (i.e., change in factors such as climate, weather, pollution, etc.) can create opportunities, however, the value or added value creation to generate competitive advantage will depend on the firm’s ability to take advantage of the opportunities and respond to them through its resources and capabilities.

 Competitive Priorities or Priorities

Functional strategies required to create added value are developed from the competitive priorities or priorities which may include low cost, differentiation, high quality, delivery, flexibility, service, and the environment. Today, competitive priorities are not restricted to operations strategy. The selection of the functional strategies will also depend on the prevailing key success factors (requirements for success) and trends in the industry. The firm’s competitive priorities are achieved through core capabilities.

One of the best ways to choose and develop an effective functional strategy is to understand customers’ additional needs and how to satisfy those needs better than the competition by creating additional value for customers. Value can be added through competitive priorities that we can choose to support on an already decided functional strategy. All functional strategies have the potential to generate added value, however, we only implement a few depending on the competitive priorities we select and focus on, which are industry and customer specific. Below, I will describe competitive priorities and functional strategies that contemporary firms use to create added value.

Marketing Strategies

Updating Business Model

The changing external environment and the firm’s target market, defined by five crucial factors: company, customers, collaborators, competitors, and the context, can render the firm’s business model obsolete. Therefore, to succeed, the firm must constantly update its business model as needed to adapt to the changing environment. For example, to satisfy customer needs in response to the external change, several fast-food restaurants, including McDonald’s, redefined their products and added healthier options to their menu. Healthier options can add psychological value in the domain of customer value. And, in response to competition from internet-based firms, many brick-and-mortar retailers, such as Best Buy, Barnes & Noble, and Macy’s, redefined their business models and became established as multichannel retailers.

Protecting Market Position

When a product becomes successful in the market, it attracts competition, in which the firm loses its market share to the competitive firms. Therefore, to protect its market position, the firm should develop marketing strategies to continuously add value to its current products to make them more appealing to customers. There are two ways by which the firm can add more value to its existing products: repositioning (reducing costs or by increasing benefits), and by adding new products.

Repositioning the Current Product

The firm can reposition its product in two ways: by modifying the product’s value proposition (VP) to make it more attractive to the current customers or by increasing the attractiveness of the offering to a different customer segment.

Repositioning to add more Value to the Product for the Current Customers

This can be achieved in two ways: by adding more value (increasing benefits) and by reducing the product’s cost.

Reposition to Attract New Customers

Besides serving current customers, the firm can reposition its current products to serve the needs of different target customers. Repositioning means modifying the VP through vertical or horizontal repositioning or both ways. In vertical repositioning, the firm can respond to customer needs by changing the VP of the offering by varying the prices (high or low) and proportionately increasing or decreasing the benefits. In horizontal repositioning, the firm can change the VP of an offering by modifying its benefits without changing its price.

Strategies to Enhance Customer Value

To become successful, a firm’s product should keep on adding value to maximize its advantage on certain attributes that are most important to customers. Based on the customer value equation (V = f (w_i, a_i)) a firm can use the following three strategies to add more value to its products and therefore enhance the product’s customer value to sustain its competitive advantage in the marketplace:

1. Enhance Product’s Performance on a Particular Characteristic

With respect to the customer value equation, this strategy implies enhancing the product’s performance (ai) on a particular characteristic (i). For example, to make computer software more appealing to performance-savvy customers, the firm can consider increasing the software speed.

2. Add a new Feature on which the Product has an Advantage

With respect to the customer value equation, we add more attributes (i ranges from 1…n) to the product on which customers assess the product. For example, a software firm can differentiate its product from rivals by introducing a new attribute that is seen as more valuable by customers.

3. Enhance a Product’s Attractiveness on a Characteristic on which the Firm Already has an Advantage

Another way to make a product more appealing is to change the perceived importance of some characteristic of a product in such a way that enhances that feature on which it is already much better than the rival’s product This strategy focuses on improving the w_i function where i is the compatibility. For example, if a software product is slow in speed but is compatible with other software products, it communicates the importance of compatibility to prospects and customers.

Differentiation

When a firm cannot compete based on price, it can provide more value-added products and services through differentiation to compete effectively. Differentiation provides something unique that is more valuable to the customers than offering a lower-price product. When the products of competing firms are similar, the product becomes undistinguishable and becomes a commodity. Therefore, the product’s price becomes the primary basis of competition. Intense price competition erodes industry profitability, and the customers capture the larger share of the value created.

Differentiation opportunities depend on a product’s features and functions. Some products and services such as an automobile or a restaurant can offer an ample amount of differentiation than simple products such as sugar, salt, and wheat. Products that lack physical differentiation are called commodities. However, by adding more value to these products or services, they can be transformed into value-added products or services. For example, Bookselling through the Worldwide Internet is a commodity business. However, Amazon generates additional information to provide several value-adding services, such as reviews, best-seller lists, and customized recommendations to achieve a differentiation advantage.

Differentiation can be created on the supply side and/or on the demand side. On the supply side, the firm should know about its distinctive competencies through which it desires to create uniqueness. Creating additional value on the supply side is typically more complex, and costly, but more sustainable. On the demand side, understanding the customers and their needs and preferences is imperative. Creating value on the demand side is less costly and less time-consuming.

Differentiation encompasses all aspects of the product or service if that aspect can influence the customer value and the firm’s relationships with customers that generate the overall customer experience.

Undertaking Social and Environmental Responsibility

In the 21^st century, businesses have social responsibilities towards their customers, employees, and local communities, and have an obligation to keep their environmental footprint as minimal as possible. During the end of the 20^th century, firms perceived that undertaking social and environmental responsibility would add costs to their products and result in lower profits or even losses. However, during the first decade of the 21^st century, the practical experience of firms shows that by creating value by undertaking social and environmental responsibility, a firm can achieve a sustainable competitive advantage. Many large companies, such as Unilever, 3M, Procter and Gamble, and Marks and Spenser, have become extremely successful in generating long-term profitability. These companies have successfully addressed the sustainability issues of corporate social responsibility and the environment.

Usually, undertaking social and environmental programs does not add monetary value to customers, but they add non-monetary strategic (functional and psychological) value, which can be converted into monetary benefits. For example, Dofasco, a Hamilton, Canada-based steel company before 1990, successfully competed based on a lower-cost strategy. But in the early 1990s, its status was reduced to a commodity provider, as it was struggling to compete profitably. After 1992, it followed a turnaround strategy to refocus on providing high-quality steel solutions and focused its efforts on technology and innovation, operational excellence, and intimate customer relationships. By 1999, it became the most profitable steel company in North America.

One reason behind Dofasco’s success was that it also incorporated social and environmental program initiatives in its 1992 turnaround strategy. This included a variety of training and development programs for company employees. Additionally, it invested in health, safety, and wellness programs in the workplace. These programs considerably improved productivity, reduced costs, and added value to the company’s products. As a result, the company reduced its workforce from 13,000 to 7,000.

Dofasco also addressed environmental quality issues by achieving ISO 14001 certification (International Environmental Standard) in 2002. Today, Dofasco is a subsidiary of ArcelorMittal, which is the world’s largest steel producer and has earned a leadership position in environmental sustainability.

References and Further Reading

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 4, and 15.
2. Ashok N., Successful Innovative Companies Exploit Complex Sources of Competitive Advantages, A&N Strategy Consulting (April 21, 2020).
3. Mark M. Davis, Fundamentals of Operations Management (Ryerson: McGraw-Hill Ltd, 2005), Chapter 2.
4. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2018), Chapter 4.
5. A. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapters 2, 5, and
6. Ashok N., Role of Strategic Management in Achieving Sustainability, A&N Strategy Consulting (August 21, 2023).
7. Nicole Voigt et al., Solving Steel’s Value-Added Riddle, Boston Consulting Group, May 8, 2018.
8. Sustainability Report 2021, “Smarter steels for people and planet-ArcelorMittal North America.”