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Xavier Van de Lanotte

[August 12, 2003]

Core Competency And Focus: Strategic And Competitive Importance

BY XAVIER VAN DE LANOTTE


Since the breakup of Ma Bell two decades ago, the telecommunication industry has undergone significant changes. Regulators around the world may be responsible for opening the doors to the changing environment, but the catalyst for change has undoubtedly been the emergence of new telecommunication services and solutions. That trend is likely to be sustained in the foreseeable future.

But while change often leads to significant long-term growth opportunities, for many companies in the telecommunication sector, this also means uncertainty and risk in the short run. Assuming large infrastructure and R&D commitments and bearing hefty marketing and sales expenses, telecom companies are also subject to severe pricing pressure due to intensified competition -- the combination of which has brought their margins and cash flow to historical lows. As a result of this, their capital requirements have become more difficult and expensive to fulfill as the financial markets still recover from whiplash.

The uncertainty surrounding the sector�s future and the current market conditions have left telecom firms little leverage to wager their growth and profitability prospects. Given this, what is the alternative for telecom companies to effectively compete and regain the upper hand? The answer lies in the value chain for those companies determined to meet their objectives with reference to:

  • Customer value

  • Functional and operational performance

  • Core competency and focus

  • Strategic relationship management

  • Network and collaborative management systems

MAKING THE CASE FOR FOCUS AND COMPETENCY
In the two previous articles of this series on value chain management, we looked at customer value and performance to establish the fundamental drivers of competitive behavior. When performing the appropriate customer and functional value analyses, competitive firms get a grip on the comprehensive needs of their respective customer segments and understand the fundamental capability requirements needed to meet those needs. They investigate the value chain in search of opportunities to optimize their business model, addressing both: Capability gaps and market growth opportunities.

The value chain, and it alone, encompasses all the elements of the customer solution. Competitive firms understand that and develop relationships upwards, downwards and laterally to maximize the value for their customers. To manage that process most effectively, it is necessary that: 

1.      They understand their role and manage their position within the value chain;

2.      They dispose of effective relationship management models; and

3.      They move towards a collaborative management system.

In this column, we broach the subject of the firm�s strategic intent, which couples its capabilities with the needs of its markets. How a firm defines its core competencies determines its focus and impacts its relation vis-�-vis others in the value chain. We will touch upon some of the strategic and competitive implications this has on a firm�s organization. The next two articles in this series will deal with relationship models and collaborative management objectives respectively.

THE CHALLENGE
Telecommunication companies are capital intensive and, to recoup their outlays, are required to reach a large customer base. Their products, operations and processes are standardized in order to achieve efficiency and productivity. Their sales channels are given incentives to push the product and achieve market share growth. Their marketing, services and business development folks continuously seek new opportunities to push outward the fringes of their firms� markets. These activities bring about the establishment of new outlets and value propositions in order to grow revenues and expedite the payback on the firm�s investments.

It sounds fairly simple and innocuous; yet it�s not good enough judging from the sector�s performance lately. The fact that this approach has pretty much become the prototype for business models in the industry should not provide any solace either. So what�s the problem with it? The problem is that there is no real lasting value in the model. Here are a few of the challenges that companies encounter when relying on this approach:

  •  Rapid technology changes and infrastructure cost reductions render the asset (and the value proposition) rapidly obsolete and worthless;

  • Lowered entry barriers allow for an increase in number of competitors;

  • Capacity and supply increase faster than demand and deflate pricing;

  • Despite differentiation efforts, the markets view products or services increasingly as commodities;

  • Intensified sales, marketing and business development efforts (adding distribution costs but little customer value) further squeeze margins;

  • More and more, customers are demanding customized solutions; and

  • Beyond the fringes of the markets loom other �players� moving on a convergent course, which has the potential to upset the balance of things.

On the upside, there is still significant growth potential in the market, and the demand for value-rich offerings has not been exhausted -- far from it. However, as we mentioned before, the industry has changed and with it, so have the customers� needs and expectations. The fragmentation of the telecommunication industry, motivated by the new technologies and the emergence of new competitors, has caused a shift in the roles of its players. Total customer solutions are no longer in the hands of a single company, as once was the case with the old vertically integrated operators. Instead, they depend on multiple vendors of specialized network, software and hardware components. As breakthroughs in the various sectors lead to new products and services, the complexities of the customers� solutions mount.

It�s at this juncture, where the need to address the ever-increasing complexities of customer solutions emerges, that firms make deliberate strategic choices regarding their core competencies and their focus.

THE OPPORTUNITY
CUSTOMER FOCUS� has been the operative phrase for quite some time. Yet it keeps resurfacing as the leitmotif for each restructuring announcement. Would it mean �they� got it wrong the previous times? In how many ways can you define this concept? Is it:

  • Having friendly call attendants?

  • Keeping your commitments?

  • Standing behind your product?

  • Effective service and support?

  • Money-back guarantees?

  • More frequent �consultative� sales calls?

  • Finding new ways in which your products can help your customer?

If you are doing all of the above, you are doing a lot of things right. But there is more than that to being customer-focused. In fact, it may take an entirely new competency to succeed at being customer-focused: A different mindset, a new philosophy.

With the exception of a few consumer offerings, telecommunication products and services are part of a value chain and integrate into total customer solutions. Competitive firms seek no longer to push their products onto unwitting (misinformed) customers; they look for opportunities to fill gaps and alleviate the hassles and headaches that customers experience when they are trying to fix their problems. Customers buy from these firms because they have a reputation for delivering value and producing results that matter.

Don�t get me wrong, supplying quality products at fair prices in a courteous manner and providing good service remains very important. Yet, the focus shifts from seeking to satisfy customers with a good product and friendly service to aiming at consistently delighting customers with solutions that fix their problems. The strategic value objective has evolved from �best product� to �best problem solver.�

The competitive firm espouses this approach because it understands that customers perceive the value of products or services only in terms of their contribution to the solution. Furthermore, this value objective is consistent with the trend in demand, which puts the customer in the driver seat as illustrated below, and strategies in support of it provide that firm with greater competitive advantages in the long run.

 The challenge of managing customer solutions, when in fact the object of the firm is to sell products or services, requires that the firm�s core competency now assumes the responsibility to deliver upon that objective, yet without compromising its capabilities to produce and deliver competitive products and services.

The opportunity to accomplish that exists with value chain management, which allows companies to draw on various sources of expert knowledge and specialized resources within the value chain that are needed to support its customers� solutions. The customer value and optimization objectives inherent to this approach allows firms to free up the resources necessary to manage that process successfully while also improving their ability to effectively adapt their products and services to the needs of their customers.

In essence, to achieve the goal of meeting the higher level of customer needs, the strategy of the firm is to develop and manage strategic relationships with suppliers, outsourcing vendors, providers of peripheral systems and services, channel partners, etc., that dispose of resources and/or provide other components necessary to the implementation of the customer solution. It establishes a collaborative approach that affords it greater effectiveness and flexibility in the customization of its customer solutions. The strategy is also key in accomplishing greater efficiency, which finds its source in economies of scale, synergy and leveraging opportunities that materialize as the participants within the value chain pursue improvements through greater specialization.

Some of the competitive implications of adopting a customer-focused strategy using the value chain management approach are:

  • Customers respond better to offers that address their needs for customized solutions, integration complexities and service requirements;

  • The broader environment of the value chain offers more maneuvering room for firms to uncover growth and cost containment opportunities;

  • The value proposition of the firms is less vulnerable to changes in technology, or emergence of alternative/substitute products in the market;

  • Offers are more resilient to pricing pressures and the tendency to mass produce the products or services; and

  • Barriers to entry are higher as the value proposition and strategic relationships are much harder to emulate.

In conclusion, customer focus, beyond providing quality products and friendly services, can thus be accomplished by firms willing to shift the paradigm to encompass the dynamics of the value chain. Clear benefits emerge both from a strategic management and a competitive positioning perspective.

Other benefits of value chain management will be discussed in a subsequent article on collaborative management. For the next column in this series, we will discuss strategic relationship models, why they are important in the emerging environment, and what it takes to make them work.

Xavier Van de Lanotte is the president of VXTConsulting, Inc. Xavier advises telecommunication services and equipment firms on Competitive Strategy, Customer Value, Alliance Management, and Distribution and has worked in this industry in various parts of the world for 15 years. For more information on value chain management, please visit us at www.vxtconsulting.com, or contact us at info@vxtconsulting.com. We welcome your questions and thoughts about this article.







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