Returning to Basics: Giving Value

Production management may not be financially attractive for business school graduates, but it is the source of economic strength of large nations and may determine the survival of individual companies and whole industries.

In the 1960s, the best and the brightest in U.S. business management moved into corporation management. In the 1970s, it was strategy management and in the 1980s money management.

Now corporate offices are focusing on determining what customers really value. This is a good step, but not enough. Customers do not pay corporations for discovering what they value, but for delivering that value better than the competition.

Detachment from the real world, where real things are made and sold, reached its apogee in American industry in the 1980s. Shareholder value and stock price became the vital numbers.

Companies were bought, dismembered and sold by a new wave of corporate managers who made millions from businesses they did not even need to understand but whose vital numbers they could manipulate.

Corporate chiefs, awed by the Wall Street market and its brokers, bond traders, bankers and numbers, had turned away from the real market. And while they watched their stock values, their foreign competitors tracked customers’ values. The same competitors who had earlier undersold them by efficiently managing costs were now outselling them at higher prices by more effectively delivering value.

For example, U.S. car makers were selling cars at discounts of $1,800, while their Japanese competitors were selling cars of equivalent size and performance at premiums of $2,300. Customers were paying $4,100 more because they perceived that they were getting better value.

Tracking customers’ perceptions and determining what they value is now the “in” thing in business. We will hear a lot about it. There is an exciting world of techniques to be explored: Mazda’s system for measuring customer reactions, Nissan’s practice of matching the psychological profiles of product planners and target customer groups, systems for collating shape and color preferences with emerging lifestyles and more.

The ability to determine customers’ values is important, but more important is the ability to deliver value. Japanese car makers have developed a new approach to production. “Lean production” is the term used at the Massachusetts Institute of Technology.

The Japanese can produce variety at low cost by managing large organizations as a web of interconnected small groups, each focused on its customers. Their ability has changed the rules of the game.

Large volumes and long production runs are not prerequisites for low costs.

Although the current re-emphasis on marketing products and services is a return toward the reality of business, it is not enough. The best and brightest will have to return to the plant cafeteria, to the shop floor and to the basics of business.

Determining customer value is intellectually exciting. Delivering it is what rings the cash registers.