markets of one high margin business in the coming era of mass customization

Copyright © 2002 byEdward J. Fern

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MARKETS OF ONE HIGH MARGIN BUSINESS

IN THE COMING ERA OF MASS CUSTOMIZATION

By

Edward J. Fern, MS, PMP


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Edward J. Fern, MS, PMP. . . is president of Time-to-Profit, Inc., a consultancy focused on business process improvement, project management, and product development. His career in Information Technology began in 1973. He has held director level positions with Sprint, Control Data Corporation, TRW, and Infonet Services Corporation. He earned an MS in Technology Management from Pepperdine University in 1992 and his Project Management Professional designation in 1998. He teaches project management and product development at the University of California at Irvine. He serves as Vice President of Professional Development of the Orange County chapter of the Project Management Institute. Ed is the author of Time-to-Profit Project Management: A Primer for Project Managers in Commercial Product Development. His E-mail address is [email protected]


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REVENUE

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1996 1997 1998 1999 2000 2001

DELL

COMPAQ

HP


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EARNINGS

-3000

-2000

-1000

0

1000

2000

3000

4000

1996 1997 1998 1999 2000 2001

DELL

COMPAQ

HP


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AND NOW• Compaq and Hewlett-Packard will merge

into a single company that will have revenues 2.5 times that of Dell but earnings only 40% of Dell’s.

• Dell’s way of doing business makes the Compaq/HP way obsolete.

• Dell will kill Compaq/HP because


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Michael Dell is to MASS CUSTOMIZATION

as Henry Ford was toMASS PRODUCTION


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JUST RIGHT QUESTIONS

• What is the difference between mass production and mass customization?

• What must we change to get into the mass customization business?

• What new skills must we acquire and/or develop to be successful in mass customization?

• How can we get extra funds to grow our mass customization business?


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MASS CUSTOMIZATION IS• drawing on a large collection of modules

to build unique products and services that exactly match the needs and desires of individual customers who have already ordered what does not yet exist.

• accepting payment for finished products and services before paying for the components of which they are made.


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CONTRASTSMASS PRODUCTION• Inventory is free• Time is free• Either standardization

at low cost or flexibility at high cost

• One size fits all• Market share focus• Selling goods and

services

MASS CUSTOMIZATION• Inventory is NOT• Time is everything• Low cost and high

flexibility• Customers are particular• Market fragment and

variety focus• Selling service and

experiences


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WHAT MUST WE CHANGE TO GET INTO THE MASS CUSTOMIZATION BUSINESS?

• Change employee– Recruiting– Incentives– Training– Working conditions

• Change processes– Modularization– Flexible systems

• Change relationships– Suppliers– Customers

• Change marketing– Direct to customer

– Active listening

• Change organization– Empowerment

– Integrated teams

• Change focus– Intellectual capital

– Customer driven


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CHANGE EMPLOYEE RECRUITING, INCENTIVES, TRAINING, and

WORKING CONDITIONS

• Recruit generalists, not specialists

• Make employees owners and reward valuable behavior

• Educate employees about the whole business and train them in needed skills

• Empower employee teams to make quick decisions


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CHANGE PROCESSES

• Modularization– Decompose products and services into

discreet modules– Invest is standard interfaces between modules

• Flexible systems– Employee judgment replaces rigid rules– Employee teams make (and re-make) their

own rules


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CHANGE RELATIONSHIPS

• Suppliers– Replace competition with partnership– Reward loyalty and demand to be rewarded

for your loyalty

• Customers– Replace selling with serving– Reward loyalty and earn it every day


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CHANGE MARKETING• Direct to customer

– Bypass distributors and retailers– Build two-way communication with the end-

user

• Active listening– ASK about your customer’s problems– Listen for signs of SACRIFICE

The differences between mass produced products and services and what the customer really wants are the sources of customer sacrifice.


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CHANGE ORGANIZATIONOUT

hierarchy

functional organization

INEmpowerment

Integrated teams


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CHANGE FOCUS

Intellectual capital

Customer driven


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WHAT SKILLS MUST WE ACQUIRE AND/OR DEVELOP TO BE SUCCESSFUL

IN MASS CUSTOMIZATION?

• Service – design linkage

• Multiple project management

PHASE and GATE


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PLEASINGIDENTIFY AND SUPPORT CUSTOMER SERVICE REQUIREMENTS OF THE INDIVIDUAL AND DELIGHT YOUR CUSTOMER

– Total Cost of Ownership

– New Product Ideas

– Relationship Marketing


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TOTAL COST OF OWNERSHIP

Customers will see that the cost of doing business with you includes more than the money they pay to you.

The MD-11 airliner is essentially a DC-10 that uses less fuel and requires only two pilots instead of three.


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NEW PRODUCT IDEASfrom

CUSTOMER SACRIFICEYOUR CUSTOMER SERVICE DEPARTMENT CAN,

AND SHOULD BE

THE SOURCE OF INFORMATION ABOUT

UNMET CUSTOMER REQUIREMENTS.


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RELATIONSHIP MARKETING

• Become involved in the health of your customers’ business.

• Test and listen.• Measure results.• Earn trust.

THEN


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DESIGN TO ELIMINATE CUSTOMER SACRIFICE

• GEOGRAPHY• CULTURE• AFFLUENCE• GENDER• ETHNICITY• EDUCATION• OCCUPATION

• HEALTH• STATUS• POLITICS• INTERESTS• RELIGION• LANGUAGE• AGE

Customer sacrifice is the difference between what is currently available and what the customer really wants. Sacrifices arise because of differences in:


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PHASE AND GATEDARWINIAN PRODUCT DEVELOPMENT

• THERE ARE A LOT MORE MARGINAL OR POOR PROJECTS THAN GOOD ONES

• CARRYING MARGINAL AND WEAK PROJECTS HURTS THE FEW GOOD ONES

• IDENTIFYING THE LOSERS ISN’T EASY

• IDENTIFYING WINNERS IS EVEN TOUGHER

PROJECT SELECTION

• BENEFIT MEASUREMENT TECHNIQUES– BUSINESS STRATEGY

– PORTFOLIO MAPPING

– SCORING MODELS

– CHECKLISTS

• FINANCIAL OR ECONOMIC MODELS

• PORTFOLIO METHODS


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SIX KEYS

• MAKE TIMELY, FIRM, & CONSISTANT GO/KILL DECISIONS

• PRIORITIZE PROJECTS OBJECTIVELY• ESTABLISH VISIBLE DELIVERABLES• COMMIT NECESSARY RESOURCES• MENTOR & ENABLE PROJECT TEAMS• SET HIGH QUALITY AND EXECUTION

STANDARDS


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TWO STEP DECISION PROCESS

CRITERIA

PASS

KILL

PRIORITY GO

HOLD


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DELIVERABLES CRITERIA

ACTION• DELIVERABLES DEFINED IN

ADVANCE

• CRITERIA AND TOLERANCE DEFINED IN ADVANCE

• GO/KILL/HOLD/RECYCLE


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HOW CAN WE GET EXTRA FUNDS TO GROW OUR MASS

CUSTOMIZATION BUSINESS?

On average, Dell collects from its customers six business days before it pays its suppliers:

$ 31.2 billion / 260 business days per

year * 6 business days = $ 720 million

When you eliminate supply inventories, work in progress, and finished goods inventories, you can use your suppliers’ capital to grow your business.


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PRODUCTION SPEED• Integrate order processing, supply chain

management, production control, shipping, and customer billing into a single, seamless process.

• Negotiate exclusive, just-in-time contracts with your suppliers.

• Build real time communication links with customers and suppliers.

• Reduce or eliminate paperwork.


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CONCLUSION

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1996 1997 1998 1999 2000 2001

DELL

COMPAQ

HP

All of this is difficult so me must end where we began, with a reminder that this great effort is also very necessary.


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THANK YOU!

markets of one high margin business in the coming era of mass customization

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