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5.2 Moving from a “Product-Centric” to a“Customer Value” Model

The idea of “make good products and they will sell” stems from manufacturers on the supply side of a product, and is effective in case of a relatively high level of customer demand in relation to the product's current state. However, as seen in “The Innovator's Dilemma” by Christensen, particularly in products with high rates of technological progress, the products exceed the level of customer technology demands, causing the products to lose its effectiveness. For example, every time Microsoft releases a new version of Windows, it adds new functions. However, because of Microsoft's focus on the design for Windows Vista, the consumers rated it poorly as a slow-responding system; subsequently, for the design of Windows 7, Microsoft focused on the lightness of the operating environment. Within the hightech industry of electronics and software, companies are often product-centric, with an obsession for product performance and functionality. In developing countries, such as China and India, with growing markets, the average demand for product technology is often lower than that of developing countries. In these markets, companies must switch from a product-centric strategy to a “customer value model” that aims to maximize value to the customer.

Thus, it is helpful that these companies refer to “Service-Centered Logic for Marketing” (Vargo and Lusch 2004). This publication is an antithesis to traditional marketing theory built on product transactions and centers on the services that customers gain from products. As can be seen in Table 5.1, according to the traditional marketing theory (under the product-centric model), products are the prime movers of business transactions, whose values are set by the companies that provide them. For example, the 4P marketing theory is a tool that examines a product, including its price, place, and promotion from the manufacturers' perspective (see Chap. 9 for more information).

Table 5.1 Comparison of product-centric and service-centric models

Product-centric model

Service-centric model

Unit of market exchange

Products

Specialized knowledge and skills embodied in the services and products that customers gain

Product role

Key component of market exchange

Intermediary that creates customer value

Customer role

Receiver of product

Collaborator in services gained from products

Determiner of value

Corporations (value is attached to the product itself)

Customer (value determined by benefit gained by customer; corporations are nothing more than proposers of value)

Source of value added services

Surplus created from exchanges of tangible products and management resources

Surplus created by exchanges of specialized knowledge and skills from products and services

Source: Compiled from Vargo and Lusch (2004), Table 2

In contrast, the new marketing theory proposed by Vargo et al. (i.e., the servicecentric model) focuses on the service gained by the consumer using a product, with products as a means to which services are provided. Thus, the key component of an exchange in the market place is not the product itself, but the specialized knowledge and skills to implement the services that products provide as intermediaries. The specialized knowledge and skills are provided not only by the companies but also by the consumers, with consumers as collaborators in the creation of the product. In addition, it is ultimately the consumers that determine the value of these services, in contrast to the product-centric model, whose theory is from the viewpoint of the companies as providers Table 5.1.

Using Microsoft Windows as an example, companies should not provide products in which the focus lies on the design and functionality; rather, they should provide services that focus on the benefits that customers derive through the use of Windows. Windows is a computer operating system, which by itself has no utility. However, it is the base software that users need to browse the Internet, create documents, and perform other tasks. From the user's perspective, the services required from an operating system that would result in improved customer value are clearly not software loaded with rarely-used functions, but software that allow the applications to run nimbly. As such, companies should not rely on the sale of traditional products that they have used to date, but rather consider selling, for instance, limited-term licenses currently provided to corporations and using cloud services to customize services for individual user needs. In doing so, businesses are no longer solely transacting on the functionalities of products themselves, but developing a service-centric business model that takes into account customers' uses and benefits derived from the products.

Using this logic for businesses in developing countries opens new possibilities for Japanese corporations struggling against competition in terms of product costs. For example, in China, construction equipment manufacturer Komatsu commands a high market share in hydraulic excavators and large dump trucks used in mining. However, domestic manufacturer Sany Heavy Equipment recently increased its market share in low-cost equipment, intensifying market competition in that arena. Komatsu not only improved product durability and fuel efficiency but also used GPS functionality installed on construction equipment to gather data and provided services such as maintenance inspections and driving advice. From the user's perspective, owners can grasp real-time data on their equipment usage, while receiving precise information on parts replacement and maintenance inspection from Komatsu, reducing the probability of sudden equipment breakdown. This signifies Komatsu's service-centric model, focusing on the usability of its construction equipment. Thus, apart from the construction equipment being transacted, more importantly, specialized knowledge on maintenance timing and know-how on fuel efficient driving, acquired through data culled from equipment and stored in Komatsu's databases is being transacted. Unlike a typical one-way arrangement of a sale of goods from a manufacturer to a customer, data is communicated between the two parties as they use the equipment, thereby making the system user friendly. When customers acknowledge the additional value to products through these services, companies can break away from cost performance competition. In other words, they can maintain competitive advantage in developing countries with a more holistic business model rather than a standalone product model.

 
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