A Big Company from the Perspective of a Quality Complaint

Hurd’s firing is the coincidental backdrop to my wife’s experience with her HP Photosmart printer. How a company handles such quality issues is a telling sign of its culture and competitive strength.

Since purchasing the printer nearly two years ago, it has never worked reliably. My wife called HP customer service on numerous occasions, each requiring a lengthy phone call in uncertain English that temporarily fixed the problem, after which another issue would arise. During a final “customer support experience” last month after the printer refused to turn on, she offered to take the device to a local HP service center but was told there were none in our area. We live 30 minutes from Manhattan.

Having reached the end of her rope with an unreliable printer and with no way to fix it, she UPSed the offending device and its accoutrements to Hurd personally. My wife taped a letter to the printer that catalogued the history of problems and stated her desire to bring this quality issue to this personal attention of the CEO. Hurd was fired one week after she mailed the package. (My wife doubts the two events were related.)

Several weeks later, guess what FedEx delivered to our doorstep? Carefully swaddled in bubble wrap with cables carefully coiled was my wife’s printer (without the software CD and instruction manual.) HP’s “Executive Customer Relations” department enclosed a letter regretting the technical difficulties but noting that HP’s Corporate Executive Office does not provide technical support or repair services. My wife was advised to contact HP customer service. The letter ended with a cheery apology for any inconvenience.

The Consumer as Guerrilla

A wronged consumer is like a guerilla fighter; she will repeat her quality complaint to as many people as will listen. She will be much more vociferous than a contented customer. And in fact, my wife has repeated her story to the amusement of friends and in doing so has found that she is not alone in experiencing quality problems with HP printers. There seems to be considerable anti-HP sentiment brewing in the New Jersey suburbs!

It is interesting to read that Hurd was celebrated for cost cutting at HP, which boosted profits but may have undermined morale. I can’t help but wonder if a by-product of such a management approach is the obtuse way in which the company handles consumer complaints. 

The HP Way?

The little story of a defective printer is an interesting counterpoint to the big story of Hurd’s dismissal, but it may be a microcosm of broader issues that reflect how far HP has fallen short of its founders’ vision. Quality and ethical standards were at the heart of The HP Way. It cannot be coincidental that inept customer service is linked with expense cuts, employee dissatisfaction, and a foolish executive enriched with a huge severance package who has turned on his former colleagues.

In addition to shorting HP’s stock, I wonder if we should consider shorting Oracle’s. The sins visited on one company will surely be visited upon another.

Not a job for HR or PR

I wonder if many corporate communication pieces are read on the way to the waste bin or the Delete button. Too often they are written by mid-level people in Human Resources or Public Relations and, sadly, they do not sound real. They have too much spin, sugarcoated bad news, or even half-truths. No wonder that in today’s environment many employees do not trust what they read or hear.

Any communication about the future must inspire employees who are concerned about the present. These messages must come directly from the top, and they must convey a blend of honesty, realism, and optimism. In short, your communication pieces must come from the heart and reflect leadership and courage.

I have found that there are three communication vehicles which work well if they come directly from senior management. (1) Face-to-face meetings. There is to substitute for hearing things directly from the boss, and you need to put yourself about so people can interact with you spontaneously. This is the way to uncover those issues which employees are hesitant to ask about publicly. (2) Town Hall meetings are effective if they are built around a brief state-of-the-business presentation followed by Q&A. (3) Informal email messages to all employees. These are surprisingly effective if they come directly from you and have not been edited to death. I like to send these out every few weeks. I also assure my readers that they are not edited by anyone else; they may contain some factual inaccuracies, but they come directly from me.

Getting Unfiltered Information

Good communication goes two ways. Beyond giving your vision of the future, you need to receive unfiltered information about the business today. So spend time on the floor (office, factory, or lab). Make customer calls with your sales force. Cultivate a network of contacts around the company and perhaps include a few trusted supplier partners.

You will want your communications to spread this unfiltered information throughout the organization. Coming straight from the top, such information can help break down departmental silos and generate a common appreciation of the challenges facing the business.

The key point is that communicating about the turnaround is too important to delegate. It must come from you and your leadership team. It must come from the heart.

I have found it useful to think of four steps in a turnaround, each of which entails considerable work. They begin sequentially, but the scope of each step soon causes the work to proceed in parallel.

Step 1: Re-do your strategy

The first symptom of a turnaround is a chronic failure to achieve sales plan, which usually is the result of deteriorating competitiveness and the need for a new strategy. Perhaps product deficiencies have created vulnerabilities, your served market may have changed, or competition may have a new source of competitive advantage — something significant has changed which requires a new strategic response.

While it is unlikely that you can generate the definitive strategy immediately, a two-day reassessment such as that described in an earlier post will identify a number of strategic initiatives which can get the business moving in the right direction. Like all strategies, this initial reassessment is conditional and is subject to refinement over time.

Step 2: Uncover operational deficiencies with the “Seven S Analysis”

Your management team needs to analyze the operational and cultural deficiencies that are holding the business back. A great way to flush out the problems which have not been identified in Step 1 is to analyze the “Seven S’s” of your business. They are described in The Art of Japanese Management by Athos and Pascale.

Begin with the new strategy: what are its key success factors and underlying assumptions? What organizational structure is appropriate for its implementation? What systems are needed to make decisions and implement change? These include systems for financial control, inventory management, performance management, or perhaps enterprise resource planning.

What skills are required, and what staffing policies are needed to put those skills in place? How should the company’s style change, and what are desired management behaviors? What are the company’s shared values, and how should they be inculcated throughout the organization?

Step 3: Realistic Financial Plans & Restructuring

In the context of a clear strategy and an understanding of the deficiencies that have held the company back, you need to develop an achievable financial plan. The goal is to get back into the habit of delivering budget, which is key to restoring the organization’s self-confidence. The new financial plan rests on assumptions made in your new strategy, which is why the strategy re-do must come first. 

Focus on only the most critical objectives, from which spending priorities are established. Evaluate downside and upside contingencies, identifying in advance further expense reductions in case sales come in as much as 20% below plan as well as additional investments if sales growth exceeds plan. Given the need to plan accurately during a turnaround, it is helpful to run the business on a 6-month budget cycle.

Expenses should be zero-based so that everything not critical to the new strategy is a candidate for elimination. This zero-basing becomes the logic for a restructuring, if required. Whatever does not contribute directly should be cut, and this often leaves a considerable body of overhead that can be eliminated.

In my experience, restructurings fail for two primary reasons. First, a meat cleaver is taken to the expense line without a new strategy that redefines the work that needs to be done. Second, insufficient outside perspective is brought to the cost cutting exercise. Restructuring is like doing root canal work on yourself, and it really pays to bring in an outside financial consultant to help you through the process.

Step 4: Re-assess your management team

Every turnaround requires new talent. However, it takes time to find the right balance between the number of new executives who can bring vigor and retained executives who know the business. So replace members of your team one at a time, starting with the weakest.

As with restructuring, this process requires the pragmatism of an outside consultant who is experienced in conducting assessments of executives on your team as well as those you may hire. It is usually very difficult for a business leader to be objective on his staff in these circumstances.

Time

Each of these steps creates a significant body of work for different groups of your management team. For example, Finance becomes the custodian for Step 3 and HR for Step 4. A Six Sigma team can be given responsibility for making the operational improvements identified in Step 2. You and the business leaders will certainly want to take on-going responsibility for Step 1.

It will require several years to put into place the changes needed to produce a real turnaround. However, you will establish a new direction and momentum as soon as you begin working through these four steps. More importantly, you will signal to everyone in the company that change is coming and that the business is no longer content with being just “good enough.”

Symptoms

1. Chronically missing sales plan. There can be many reasons for chronically missing profit plan: poor controls, trying to do too much, inexperienced management. Consistent sales failure, however, is usually the result of more profound competitive and strategic problems.

2. Complacency. A culture that is not self-critical is easily blindsided. This is particularly true for companies that are caught-up in a proud history or past market dominance.

3. Poor cross-company communication. People are locked away in departmental silos and have little sense of common mission.

4. Limited delegation of authority. Excessively tight controls and insufficient empowerment indicate that management is hunkered down and struggling to hold on.

5. Excessive reporting, measurement, and bureaucracy. These indicate a confusion of process with progress.

6. Difficulty recruiting talent with low turnover among your own staff. Good people won’t join-up, and the home team isn’t attractive enough to get hired away.

7. Lack of initiative. Managers are motivated more by job security and fear of doing something wrong than proposing bold ideas.

8. Indecisiveness. Caution rules, there is analysis paralysis, and decisions get bogged down in committee meetings.

9. CEO monologues. Leaders under stress default to familiar expertise, re-tell potted histories of past successes, and rationalize that things must get better (which has a queasy similarity to Hitler’s monologues in the bunker.)

10. Crying wolf. Management issues dire warnings, calls for draconian expense cuts, or insists on 200% effort, but it presents no concrete correction plans. You cannot save your way to prosperity.

Turnarounds don’t happen overnight

Over the past 25 years, the financial press has featured some pretty asinine coverage of miracle-working turnaround artists, who purportedly transform companies in a few quarters. Whether Sunbeam, TWA, or the resurrected financial institutions of past decade, these were not real turnarounds. Restructuring may be part of the turnaround process, but without more it is just a quick-fix to goose earnings.

Real turnarounds require a change in company culture: a new strategy, new management, new methods, new products. Note how most of the symptoms listed above are cultural, and they take years to correct. In fact, after you declare that you’re in a turnaround, financial results often get worse before they get better. It can take several years for performance to bottom-out and several more years to establish a solid upward trajectory.

“We have met the enemy, and he is us.”

Half the battle is won when management agrees with Pogo that it is under-performing and that it must change fundamentally. Once the resolve is made to change, there are four fundamental steps to putting a turnaround in place. See Part II.

Leaders of multi-divisional companies often talk about creating “one company.” To me, this means creating a company that is more than the sum of its parts — where each division enjoys an unfair competitive advantage because it is part of one company. One-company synergies can be achieved in at least two ways: (1) by building powerful competencies that add value throughout the corporation, and (2) by identifying how divisional performance can be improved through coordinated activity.

Is Corporate adding value?

Corporate needs to identify competencies that can add tangible value to all its businesses and then develop those competencies to a very high level. Examples include transnational management, Six Sigma, managing complex projects, sophisticated enterprise resource planning like SAP, acquisition and integration competencies, or management development. These competencies not only add value to your divisions today; they can be the source of value-added which the company brings to acquisitions tomorrow. Most companies can’t develop more than a few such competencies well enough to add real value, so you have to emphasize the few that can contribute most profoundly to your businesses.

It may take years of focused work to build these competencies to the level where they create an unfair competitive advantage for each division. Too often, however, well-intentioned corporate departments introduce too many programs on a “flavor-of-the-month” basis, assuming that they add value, whereas in fact they may only add complexity and fat.

Are all your businesses adding value?

The second way to achieve one-company synergies is to get divisions to work together in ways that potentiate their performance. Many corporate strategies assume that the company is stronger because it has multiple businesses that supply one another or that serve the same customer. However, this doesn’t always work out in practice. (Think of the products supplied by sister divisions which are more expensive or less innovative than what is available on the open market. Or try getting a credit card from the local branch of your US bank when you move to a foreign country!)

You can apply the same criterion to cross-divisional activities that you apply to one-company competencies–undertake them only when they truly benefit the businesses involved. Yes, stamp out misbehaviors by businesses that want to be independent for narrow-minded reasons (last post’s example of Barillo Martinez.) But ensure that the products or services supplied by one division to another truly are competitive, and make sure that customers really benefit from being served by your multiple businesses.

Restructuring reveals the cost of non-synergistic activity

Some years ago, I had to restructure our company and was astounded by how much corporate activity contributed so little. Step One was to replace a silo-ed, functional organization with a divisional one. Step Two was to ask the newly appointed division leaders to identify what they needed to run their businesses. What they didn’t want was cut, resulting in huge savings and a leaner, more responsive company.

During the restructuring, we also realized that our consumer business was not contributing to the fortunes of the medical divisions. It would be better off sold to a company whose businesses were better aligned and where it could generate synergies.

You must be able to define the competencies and coordinated divisional activities that create unfair competitive advantage for all your businesses, or your company is a candidate for restructuring–either by you or by a new owner.

He drove the company’s US leadership crazy. In an effort to gain some measure of control, Corporate changed the reporting lines of HR, Legal, Compliance, and Finance. No longer would these functions report directly (or “straight line”) to Martinez and his country managers; instead, they would report directly to function heads in the US and on a dotted line basis to Europe. However, the European managers for each global business continued to report directly to Martinez.

What’s wrong with this picture?

Of course, Martinez’s territoriality is inappropriate. So are his unilateral decisions on products, which add cost and complexity. He must stop unilaterally deciding whom to hire, given the need for European executives to work with counterparts in the US. His European managers are caught in the middle of the conflict between Martinez’s refusal to accept direction from business and function heads in the US.

On the other hand, it was dead wrong for Corporate to remove local control of functions like HR and Legal–the very things that differ country-by-country and which European country managers are best positioned to manage. The new reporting lines also placed European functions in the Corporate bonus pool, while the local business managers remained in the European pool–a significant barrier to teamwork.

This is an example of what happens when the roles and responsibilities of geographic organizations are not properly defined. You can take a big step to resolving these issues by establishing global business teams, which leverage the global scale of your company while also making decisions that are responsive to local needs.

Transnational Management

Some years ago, companies chose between a global structure in which all decisions were made at HQ, and a multinational structure with free-standing companies in each region of the world. In recent years, competitive pressures have spawned a third alternative, which leverages global scale in a way that is also responsive to local requirements. In Managing Across Borders, Chris Bartlett argues for a transnational structure that integrates decision-making by business and geographic managers at the appropriate level.

Business teams allow you to get around the complexity of managing the typical matrix organization of global businesses on one axis and country organizations on the other. The challenge of a matrix organization is keeping employees from “getting caught in the middle” when businesses and geographies disagree.

Transnational Business Teams

Organize transnational teams for each of your businesses. The teams should include representatives from the worldwide business, key functions like Finance, and your geographic organizations. Challenge them to think globally but implement locally. One of their first tasks is to sort out which decisions should be the primary responsibility of the business and which are most appropriate for the geographic organizations.

Generally speaking, geographic organizations are in the best position to manage Legal, HR, and Sales, which require expertise with the requirements of each country. Worldwide businesses are in the best position to manage product development and strategic marketing. If Manufacturing takes place in one or two global-scale plants, it is best managed by the worldwide business, whereas if it is conducted in a number of regional facilities, it is best managed by the geographic organizations.

Clarifying these roles and responsibilities frees managers from getting caught in the middle and, over time, creates a more collaborative culture. However, there are a number of behaviors which need to be enforced for business teams to operate effectively.

1. There can be no unilateral decision-making. Country organizations must brief global businesses on those decisions that are their primary responsibility and vice versa.

2. Global business teams can only meet periodically, but its members need to communicate constantly.

3. Respect the role of the country general manager, who is the Company’s legal representative in his country. Therefore, the country manager must have the final nod on issues pertaining to HR and Legal.

4. Hiring business managers in country organizations in a joint responsibility. Job specifications and final interviews can be done by the business leaders, but the final decision must be made by the country manager.

5. Budgeting also is a joint responsibility, with the country organization doing its best to conform to the global objectives of the business.

6. It is a serious offense for leaders of the business and the geographic organization to bounce an issue up to a higher level. Such lack of resolution means that people are getting caught in the middle, and such disagreement reveals insufficient flexibility and management skill.

7. Business team leaders should be evaluated on their management style, particularly their inclusiveness and ability to gain consensus.

Over time, these behaviors will become second-nature as a transnational culture is established at your company. There will be less friction, faster decision-making, more rational product development, and more responsiveness.

Oh, and one more thing. Berillo should be replaced. His kind of territorial behavior has no place in a world where there is a new generation of pan-European managers who have the right transnational instincts. The misbehavior of fellows like Berillo drives them crazy, too. 

Why so many top-down initiatives fizzle

The first line supervisor has the hardest management job in the company. So many top-down initiatives fail to take root because they are not relevant to those who manage fundamental processes that manufacture products, run quality control systems, or handle invoices. Most “flavor of the month” initiatives do not solve the problems that are relevant to first line supervisors and their employees–problems such as unreliable equipment, poor process flow, or inconsistent cross-functional support. These are the problems Six Sigma attacks.

What is Six Sigma, anyway?

Six Sigma uses statistical and quality models to eliminate variations, whether in manufacturing, laboratory, or office-based processes. Its name comes from the six sigma defect rate of 3.4 in every million, which produces yields of 99.9997%. Six Sigma was pioneered by Motorola and other electronics companies, but GE and Allied Signal have perhaps most publicly promoted its benefits.

Six Sigma is a continuous improvement methodology. It is led by a small number of full-time black belts and part-time green belts, who work on process improvement teams with the employees who actually run those processes on a daily basis.

It became one of our company’s three distinctive competencies in the expectation that, like project management and a culture of empowerment, it would become a source of value-added not only to our organization but also to acquisitions we planned to make. We had hit the wall on incremental quality improvements and cost reductions and, perversely, kept hearing that everybody was too busy to undertake further improvement initiatives.

The beauty of Six Sigma was that it became part of daily work–in fact, it made daily work go smoother. Six Sigma became for us the “solution of first resort,” and in so doing, it also became the source of bottoms-up initiative and renewal.

Unexpected Benefits

We experienced a number of unexpected benefits from implementing Six Sigma. It empowered people to make decisions on the basis of hard data. That made it difficult for the organization to second-guess the recommendations of a Six Sigma team. Secondly, the new-found empowerment engendered a welcome sense of energy and self-initiative.

Six Sigma aroused expectations within the broad organization, and management had to be prepared to implement change aggressively or it would be viewed as part of the problem. Six Sigma also built new skills and self-confidence in employees who typically were below our radar screen. We had to be prepared to advance their careers or they would leave.

Finally, Six Sigma drove home the seriousness of our intent to regenerate the business. It is painful to commit valuable employees to Six Sigma projects and to back-fill their positions, just as it was hard to mandate the commitment of the entire organization to something that threatened the tried-and-true (or tired-and-true) methods of the past. But what an impact–not only on cost and quality, but on morale as well!

What a mission statement should be

A mission statement must capture what the company is today as well as what it aspires to become tomorrow. It should capture an exciting vision for what the company’s future. Jim Collins says this well in Built to Last, arguing that an effective mission statement preserves the company’s core while also stimulating progress. It is often accompanied by a half-dozen corporate values, which define the company’s beliefs, and several key goals, which describe the way stations on the road to the company’s future.

Brevity is the soul of a mission statement. It must be memorable, and that means it must be simple. Yet is cannot be trivial, like a Victorian stitch-work slogan framed on the wall. As you visit companies, look for the framed mission statements in lobbies and conference rooms. See how often they are too complex or sound inauthentic.

They do not need to be difficult to write

Too much process often accompanies the creation of a mission statement. Here are five observations that can simplify the process. First, remember the saying, “A camel is a horse designed by a committee.” Typically, a committee of the Great and the Good is formed under the leadership of Human Resources. Unfortunately, this can kick-off a group grope exercise which produces drafts that try to embrace the ideas of every committee member.  

Second, the process can be made worse when the company’s public relations firm pitches up to participate. Public relations professionals bring little authenticity to the process–and in this kind of work, authenticity is key. More deadening yet, Legal sometimes edits the final language, adding the requisite “wherefores” and “begats” to make the mission statement read like a contract.

Collins believes that mission statements must be subjected to the scenario of the Corporate Serial Killer. If a corporate serial killer rubbed out your company tomorrow, would anyone care? Repeatedly asking, “So what?” is a great way to refine draft mission statements until you have pinpointed your unique corporate purpose.

Fourth, strive for memorableness. If an employee were awakened at 3 a.m. and asked to state the mission, would it come to mind?

Finally, it helps to have only one person do the drafting. I must admit that when I was a CEO, I found it was easiest to draft the mission and values myself on the theory that the leader’s fingerprints should be all over these statements of corporate purpose. At another point in my career, I participated in the big committee exercise but volunteered to translate what I heard in the meetings into a draft for the committee’s review and final approval by the CEO.  

“They can because they think they can.”

The end result is very important. The mission is at the foundation of on-going communications with employees. It clarifies the company’s purpose to shareholders. It defines the company’s beliefs.

It is important that all stakeholders in the enterprise feel proud of where the company is headed. A statement of mission and values, if well articulated and accepted, can become a tangible, self-actualizing vision. As Virgil said, “They can because they think they can.”

Agenda Day One

A. Industry & Served Market Analysis (Morning)

A1.  Define your broad industry and the specific markets you serve. Have you struck the right balance between focus and getting attacked by competitors who define the served market differently? (45 minutes)

A2.  Assess industry attractiveness using Porter’s Five Competitive Forces model. How will you address the forces that threaten your profitability? (45 minutes)

A3.  What is the stage of industry maturity in terms of realized industry potential, product line proliferation, number of competitors, share distribution, and ease of entry? (45 minutes)

A4. What are the key environmental forces that impact the business? What must you do about them? (60 minutes)

B. Competitive Position Analysis (Afternoon)

B1. Sales, Market, and Share growth for you and your competitors. What are your share dynamics? (30 minutes)

B2. Market Segmentation: What are the product/service needs of different customer groups? What are the differences in their behavioral characteristics, decision making processes, and demographics? (45 minutes)

B3. Relative Value Analysis (see previous post) (90 minutes)

B4. Competitive Position: Based on your market share, growth rate, technical position, distribution reach, and manufacturing capabilities, is your position Very Strong, Strong, Favorable, Tenable, Weak, or Nonviable? (45 minutes)

B5. Map your competitive position and stage of industry maturity. What generic strategy is appropriate: Build Aggressively, Maintain Aggressively, Build Gradually, Build Selectively, Maintain Selectively, Prove Viability, or Divest? (30 minutes)

Day Two

C. Strategy Development

C1. Strengths, Weaknesses, Opportunities, Threats.  Everyone loves to talk about this, so let it rip. But then go back and ask the group to identify the top three in every category. (60 minutes)

C2. Business Strategy: What are the implications of the previous analyses? How will you meet customer needs better than competition? Will you adopt a focused or broad market approach? Are your competitors entering new served markets you should enter, too? What will you do that’s different?  (90 minutes)

D. Functional Strategies

D1. Marketing. What is your selling proposition–the 30 second elevator conversation between your sales rep and the customer?Outline your programs in terms of the 4 P’s: Products, Pricing policy, Place, and Promotion. (90 minutes)

D2. Technology: What is needed to enhance the current offering–what new products and process technologies? What staff enhancements or sources of outside expertise? What technologies can be licensed or acquired? (60 minutes)

D3. Manufacturing & Procurement. Do you want your manufacturing capabilities to focus on Cost, Quality, Dependability, Flexility, or Rapid New Product Innovation? Hayes and Wheelwright (Restoring Our Competitive Edge) are right: you can’t have all five, and what does your choice suggest about Manufacturing’s mission? (60 minutes)

D4. Human Resources: What skills are needed to implement the strategy? Are we organized properly? (45 minutes)

D5. Finance: What are the financial constraints we face? This discussion sets up homework to be done by the time of the follow-up meeting. (45 minutes)

D6. Implementation Risks & Unresolved Issues. This also sets up issues for report-out in the follow-up meeting. (30 minutes)

Follow-Up Meeting (4-6 weeks later)

1. Revisit strategy (1 hour)

2. 3-year Financial Projections. What can we afford? What does the expense scenario look like if we significantly under-perform our sales projections? (3 hours)

3. Revisit functional strategies in light of the financial scenarios. (2 hours)

4. Revisit risks. (45 minutes)

The Key Ingredient–A good discussion leader

It is essential to have an effective leader keep the discussion on point and on schedule. The leader must be familiar with strategy development processes and have the skills to keep the group focused while also allowing time to kick around new ideas. This may mean letting some topics run over, making up time on others. It is helpful if the discussion leader can take notes on a computer, projecting them on a display screen so participants can see the conceptual discussion evolving in black-and-white. Notes can be emailed to participants by the beginning of Day Two. 

It is critical to observe scheduled bio breaks, lunch, and hard stop at the end of the day. Hold the meetings in a large conference room with windows. These discussions are tiring, and nothing is more enervating than group discussion in the dark which gets bogged down. Remember, you can always “connect the dots” after the meeting and capture the spirit of the discussion on any incomplete topic.

The core concept is that market share is gained or lost on the basis of customers’ perception of the value they receive from your products and services. Value is defined as Quality divided by Price.  As Quality improves at a constant price, value increases and market share will grow over time. If Price increases and Quality is constant, value deteriorates and market share will suffer.

How does the analysis work?

Begin by identifying the product and service features your customers expect. Typically, there are 3-5 product features and a similar number of service features. You can weight each feature with percentages totaling 100%. It takes only about an hour for your management team to discuss your performance and that of your competitors by rating each factor using a ten point scale.  (5 signifies “Meets customer expectations nominally;” 10 signifies “Delights the customer.”)

The second step is to summarize the average price of your offering and that of each competitor.  

Step Three is to calculate the average quality for all competitors and divide it by each competitor’s quality rating. This produces relative quality ratings in percentage terms. Do the same for price, producing relative prices in percentage terms. The quality ratings can be divided by the relative prices to produce relative value ratings for each competitor. A score above 100% implies a competitor is delivering superior value, while a score below 100% implies inferior value.   

Finally, the scores can be plotted on Cartesian coordinates, with relative quality plotted on one axis and relative price on the other. This graphic representation of your value relative to those of your competitors is often an eye-opener. It allows you to go back to the factors that drive your relative value rating and assess how improving them can improve your value proposition. You can also see clearly where your competitors’ low ratings make them vulnerable.

Don’t forget to include Sales!

This is an exercise in relative perceived quality. In a perfect world, you would use extensive customer survey data. However, a good approximation can be achieved by including several experienced sales personnel when you do this exercise. This is important because sales personnel must confront perceived quality issues all the time out in the field.

So what?

Had the Big Three automobile manufacturers thought in these terms twenty years ago, they would have seen how Japanese competitors like Honda and Toyota improved their perceived quality faster than they increased their prices. They were delivering greater perceived value than the US auto companies. Likewise, in 1988 Mercedes would have seen how Lexus entered the US market with quality approximating their own but at a considerable price discount, producing a huge difference in value that allowed Lexus to capture leadership of the US luxury car market.

Relative Value Analysis is a simple exercise which gets every member of your management team on the same wavelength regarding how quality must be improved and pricing be set appropriately. It will supercharge your strategy.