process of production, corresponding to the amount of output minus that of raw ..... Characteristics of Non-functional V
Hitotsubashi University Institute of Innovation Research
Value Creation and Value Capture at Manufacturing Firms: Importance of Non-functional Value
Kentaro Nobeoka IIR Working Paper WP#10-01
April 2010
Institute of Innovation Research Hitotsubashi University Tokyo, Japan http://www.iir.hit-u.ac.jp
Value Creation and Value Capture at Manufacturing Firms: Importance of Non-functional Value Kentaro Nobeoka, Hitotsubashi University
Abstract Most large Japanese manufacturers are good at creating value u t i l i z i n g t h e i r e n g in e e r i n g c a p a b i l i t i e s b u t p o o r a t c a p t u r i n g v a l u e i n terms
of
creating
profit
and
added
value.
This
paper
discusses
conditions to capture value, after explaining a distinction between value
c re a t i o n
manufacturers uniqueness customer
and h av e
and value,
value to
capture.
(1)
link
differentiation enticing
In
order
to
manufacturing
from
c u s t o me r s
c o m p e t it o r s , to
pay
c ap t u r e
value,
e xc e l l e n c e and
(2)
premiums
with create
for
the
differentiation, and to do these two things simultaneously. In the s e c o n d h a l f o f t h i s p a p e r , w e p a r ti c u l a r l y f o c u s o n c u s t o me r v a l u e a n d d i s c u s s t h e i m p o r t a n c e o f t h e n o n - f u n c t i o n a l v a l u e . N on - f u n c t i o n a l v a l u e h a s b e c o me a c r i t i c a l f a c t o r f o r m a n u f a c t u r e r s t o ca p t u r e v a l u e by creating customer value.
1. Introduction I n r e c e n t y e a r s , su p e r b m a n u f a c t u r i n g c a p a b i l i t i e s a n d e x c e l l e n t
- 1 -
products do not necessarily lead to success in business in terms of c r e a t i o n o f a d d e d v a l u e a n d p r o f i t s a n y m o r e . Mo s t f i r s t - r a t e J a p a n e s e m a n u f a c t u r e r s w i t h s t r o n g e n g i n e e r in g c a p a b i l i t i e s o f t e n p r o v e to b e s e c o n d - r a t e v a l u e cr e a t o r s . A m e r i c a n , S o u t h Ko r e a n a nd T a i w a n e s e f i r m s , w h i l e i n f e r i o r t o t h e i r Ja p a n e s e c o u n t e r p a r t s i n e n g i n e e r i n g an d m a n u f a c t u r i n g , a r e o f t e n b e tt e r a t m a k i n g p r o f i t s . The relationship between engineering/manufacturing capabilities and
creation
ambiguous.
of
added
Simply
value
put,
the
or
pr o f i t
c o r r e la t i o n
has
become
between
complex
these
two
and has
diminished. For example, although some Japanese companies have b e c o m e k n o w n a s s u p e r b m a n u f a c t u r e r s o f s e m i c o n d u c t o rs , f l a t - s c r e e n T V s , a n d s o l a r b a t t e r i e s i n re c e n t y e ar s , t h e s e m a n u f a c t u r e r s d o n o t make
mu c h
profit.
Particularly,
e l e c t r o n i cs
and
IT
product
m a n u f a c t u r e r s s uch a s H i t a c h i a n d N E C , w h i c h h a v e l e d t h e w o r ld i n s t a t e - o f - t h e - a r t t e c h n o l o g i e s , h a v e b e e n p e r f o r mi n g p o o r l y i n m a k i n g profits over a long period of time. For the last twenty years, for example, the operating profit divided by sales at major Japanese c o n s u m e r e l e c t ro n i c a p p l i a n c e m an u fa c t u r e r s o n a v e r a g e h a s b e e n a b o u t o n l y 3 % . On t h e o t h e r h a n d , A m e r i c an , S o u t h K o r e a n a n d Taiwanese
companies,
inferior
to
their
Japanese
c o un t e r p a r t s
in
manufacturing, have been making far more profits. For example, Dell's
- 2 -
personal computers and Apple's portable products contain less-thanp e r f e c t e le m e n t s o f c o m p o ne n t d e s i g n a n d m a n u f a c t u r i n g o r f in a l a s s e m b l y , b u t t h e s e c o m p a n i e s a r e m u c h m o r e s u c ce s s f u l t h a n t h e J a p a n e s e f i r m s . I n t h e s e m i co n d u c t o r s e c t o r , wh i c h e n c o m p a s s e s n o t only memories but also system LSIs, newly-emerging firms without o r i g i n a l m a n u f a c t u r i n g t e c h n o l o g y su c h a s T a i w a n - b a s e d M e d i a T e k enjoy a higher profit rate than full-fledged manufacturers. Indeed, divergence has grown between manufacturing excellence and high-level added value. In short, the Japanese manufacturers are good at “value creation” in terms of developing and manufacturing products with excellent engineering and manufacturing, but are poor at “value capture” in terms of creating profit and added value. Even though the relationship between value creation featuring e n g i n e e r in g a n d m a n u f a c t u r i n g a n d v a l u e c a p t u r e h a s be e n b e c o m i n g w e a k , t h e i m p o r t a n c e o f e n g in e e r i n g an d m a n u f a c t u r i n g h a s n o t b e e n d i m i n i s h e d . O n t h e c o n t r a r y , f o r J a pa n e s e f i r ms i n p a r t i c u l a r , v a l u e capture without engineering and manufacturing is out of the question. W h a t t h e y n e e d t o d o i s t o ca p t u r e v a l u e b y t a k i n g a d v a n t a g e o f th e i r capabilities
in
value
creation
with
manufacturing.
- 3 -
e x c e l le n t
e n g in e e r i n g
and
I n t h i s a r t i c l e , p re s e n t e d a g a i n s t t h e b a c k g r ou n d o u t l i n e d a b o v e , after proposing definitions of "value creation" and “value capture,” I shall firstly discuss the importance of capturing value and conditions required
for
successful
value
c a p tu r e ,
and
secondly
describe
the
concept of "non-functional value," which is an indispensable condition of capturing value.
2. Value Creation and Value Capture L e t u s b r i e f l y e x a m i n e t h e t w o c o n ce pt s c e n t r a l t o t h i s a r t i c l e , v a l u e c r e a t i o n a n d v a l u e c a p t u r e . V a l u e c re a t i o n a i m s a t d e v e l o p i n g a n d producing goods of excellent functionality or quality at the lowest possible
cost.
Excellent
products
require
innovative
technological
d e v e l o p m e n t a s w e l l a s e f f i c i e n t a n d s u p e r i o r o r ga n i z a t i o n a l p r o c e s s e s . V a l u e c a p t u r e , o n th e o t h e r h a n d , a i m s a t c r e a t i n g e c o n o m i c v a l u e . S p e c i f i c a l l y , e co n o m i c v a l u e c r e a t e d b y a f i r m c o r r e sp o n d s t o t h e customer value (benefit) as measured by the amount of price paid to a p r o d u c t m i n u s t h e i n v e s t m e n t a n d p r o d u c t i o n c o st r e q u i r e d t o d e v e l o p and manufacture the product. Basically, it is “added value,” which is defined in an economics dictionary as "value newly added in the p r o c e s s o f p r o d u c t i o n , c o r re sp o n d i n g t o t h e a mo u n t o f o u t p u t m i n u s that of raw materials and other intermediate inputs.”
- 4 -
In Japan, the notion that creating financial value (added-value and profit)
is
the
m os t
critical
e l e m e nt
of
social
contribution
for
m a n u f a c t u r i n g c o mp a n i e s t e n d s t o b e o v e r l o o ke d . I t s h o u l d b e n o t e d that the
financial resources supporting social welfare and public
education, employment, and basic research and development are all results of added value created by businesses. In addition, because added value is produced because a product has high customer value, t h e g r e a t e r a d d e d v a l u e a p r o d u c t h as , t h e m o r e i t c o n t r i b u t e s t o customers as well. Figure 1 illustrates the relationship between value creation and v a l u e c a p t u r e . I n t hi s f r a m e w o r k , v a l u e c r e a t i o n is p o s i t i o n e d a s o n e o f t h e c o m p o n e n t s o f va l u e c a p t u r e . F i r ms c r e a t e va l u e i n t e r n a l l y t h r o u g h new
products
by
utilizing
their
engineering
and
manufacturing
capabilities. Value creation does not directly result in value capture, because
value
capture
is
affected
competitors and customers.
- 5 -
also
by
two
external
factors:
Figure 1 Definition of Value Creation and Value Capture Value Capture Value Creation
Value
Customer
Company
Suppliers
Differentiation
Competitor
T h e f i r s t f a c t o r , c om p e t i t i o n , i n f l u e n c e s t h e s c a le o f v a l u e c a p t u r e by a company. Two companies that develop and manufacture products o f e q u i v a l e n t e x c e ll e n c e i n t e r m s o f f u n c t i o n , q u a l i t y a n d c o s t c a n c a p t u r e v a l u e o n t o t a l l y d i f f e r e n t s ca l e s i f t h e y a r e i n d i f f e r e n t situations vis-à-vis their respective competitors. For example, the m a r k e t va l u e o f a p r o d u c t p r o d u c ed b y a c o m p a n y i s l o w i f t h e company's competitor also offers a similar product. T h e se c o nd f a c t o r , c u s t o m e r s, i n f l u e n ce s v a l u e c a p t u r e w i t h t h e i r value standards. The scale of value capture of two products of similar functions and quality can differ greatly if customers are willing to pay different prices in consideration of these two products. Customers` “willingness to pay” varies a widely depending on many different factors
in
addition
to
the
product’s
- 6 -
functions
and
specifications.
C u s t o m e rs ’ p u r c h a s e b e h a v i o r i s d e t e rm i n e d i n a n i n t r i c a t e c u s t o me r product interrelation. T h e r e f o re , i n o r d e r t o c a p t u r e v a l u e , a m a n u f a c t u r e r m u s t d e v e l o p a p r o d u c t t h a t m e e t s t w o c o n d i t i o n s : a p r o d u c t t h a t i s o f f e r e d b y on l y t h a t c o m p a n y , a n d t h a t i s a t t r a c t i v e e n o u g h f o r c u s t o me rs t o b u y a t high price. This kind of product is truly valuable for society after all. While value capture is described above as creating economic value, it s h o u l d b e n o t e d t h a t i t d i f f e r s f u n da m e n t a l l y f r o m m e r e p r o f i t - o r i e n t e d management. Value capture is more important than value creation as a way for manufacturers to contribute to society. A g r e a t d i v e r g e n c e h a s o c c ur r e d b e t w e e n v a l u e c r e a t i o n a n d v a l u e c a p t u r e b e c a u s e t he i m p o r t a n c e o f t he t w o e x t e rn a l f a c t o r s , c o m p e t i t i o n a n d c u s t o m e r s , h a s i n c r e a s e d a s d e t e rm i n a n t s o f v a l u e c a p t u r e . L e t u s briefly examine why these factors have grown in importance. F i r s t , c o m p e t i t i o n a m o n g c o m p a n i e s h a s c o m e t o i n f l u e n c e v a l ue capture to a far greater degree due to recent globalization and the resultant
intensification
of
c o m pe t i t i o n .
A
company
introducing
innovative new technology or product such as optical disk devices (e.g., D V D r e c o r d e r ) o r L C D T V s e t s i s s o o n f o r ce d t o r e d u ce t h e p r o d u c t p r i c e d u e t o n u m er o u s c omp e t i t o r s o f f e r i n g s i m i l a r p r o d u c t s i n t h e w a k e o f t h e p i o n e er p r o d u c t . T h a t i s t o s a y , a n e x c e l l e n t p r o d u c t a l o n e
- 7 -
i s n o l o ng e r s u f f i c i e n t t o c o n t a i n i n t e r - f i r m c o m p e t i t i o n , w h i c h h a s become a faster and more powerful factor in affecting value creation. S e c o n d , c u s t o m e r va l u e h a s b e c o me i n c r e a s i n g l y c o m p l e x , w e a k e n i n g t h e c o r r e la t i o n b e t w e e n e n g i n e e r i n g e x c e l l e n c e a n d c u s t o m e r v a l u e . A s a r e s u l t o f w o r l d w i d e t e c h n o l o g i c a l a d v a n c e s , i t h a s b e c om e e a s i e r f o r m a n y f i r m s t o s a t i s f y c u s t o m e r n e e ds i n t e r m s o f p r o d u c t f u n c t i o n a n d quality. For example, in the United States, the world's largest flat screen TV set market, VIZIO obtained the largest market share from 2007 through 2009, despite its short history in TV development and manufacturing. This is proof that even a young manufacturer can relatively easily satisfy customer needs today simply by assembling p u r c h a s e d c o m p o n e nt s . U n d e r s u ch c i r c u m st a n c e s , ma n u f a c t u r e r s , i n o rd e r t o c a p t u r e v a l u e , need to persuade customers to purchase products with value that surpasses mere functionality or quality, even when it means that c u s t o m e r s p a y a p r e m i u m i n m a n y c as e s . R e p re s e n t a t i v e e x a m p l e s o f such products are Apple's iPhone and iPod, and Nintendo's Wii. From a purely technological viewpoint, these products are not superior to their respective Japanese rival products (such as cell phones packed with upto-the-minute high-tech features and Sony Computer Entertainment's PS3).
- 8 -
T h e s a m e c a n b e s a i d a b o u t t h e e x t re m e l y p o p u l a r D y s o n v a c u u m cleaner.
Functionality
and
quality
are
largely
determined
by
e n g i n e e r in g a n d m a n u f a c t u r i n g , b u t c u s t o m e r va l u e , w h i c h l i e s b e y o n d these attributes, cannot be assured merely through engineering and manufacturing. t e c h n o l o g ic a l
In
o th e r
excellence
and
w o r ds ,
the
customer
relationship value
is
no
between longer
straightforward. G i v e n t h e g r e a t e r in f l u e n c e o f c o m p e t i t i o n a n d c u s t o m e r va l u e , t he relative importance of “value creation” realized by engineering and manufacturing as a component of “value capture” has diminished (See F i g u r e 1 ) . A s a r e s u l t , t h e c o r r e l a t i o n b e t w e e n v al u e c r e a t i o n a n d v a l u e c a p t u r e h a s b e e n lo w e r e d . Fi g u r e 2 i ll u s t r a t e s t h i s p h e n o m e n o n. I t s h o w s h o w J a p a n e s e c o m p a n i e s ' m a n u f a c t u r i n g e x c e l l en c e , a l t ho u g h unchanged, has ceased to capture value (they are situated in the lower r i g h t - h a n d q u a d r a n t o f F i gu r e 2 : h ig h - l e v e l m a n u f a c t u r i n g a n d l o w level value capture). At the same time, the world has seen an increase in the number of manufacturers who excel at capturing value despite their relatively low l e v e l o f t e c h n o l o g ic a l c o m p e t e n c e ( s i t u a t e d i n t h e u p p e r l e f t - h a n d quadrant of Figure 2). Today, manufacturers can realize substantial v a l u e c a p t u r e w i t h o u t i n t e r n a l m a n u f a c t u r i n g s t r e n g t hs b y t a k i n g
- 9 -
advantage
of
industry-wide
horizontal
specialization
and
open
innovations.
Figure 2 Correlations between Value Creation and Value Capture Apple
High
Low Correlation
Mediatec
High Correlation
Samsung Acer
Value Capture (Financial Valueadded/Profit) Panasonic NEC Hitachi
Low Poor
Excellent Value Creation (Technology/Manufacturing)
In this situation, however, first-rate Japanese companies should not be
tempted
emphasizing
to
shift
value
toward
capture
to
the
upper
left-hand
the
detriment
of
quadrant
e ng i n e e r i n g
by and
m a n u f a c t u r i n g . T he i r c u r r e nt m a n a g e m e n t c h a ll e n g e l i e s i n r e - a l i g n i n g t h e i r s t r o n g t e c h n o lo g i c a l c a p a b i l i t i e s ( v a l u e c r e at i o n c a p a b i l i t i e s ) w i t h v a l u e c a p t u r e , d e s p i t e t h e g e n e r al l y l o w c o r r e l a t i o n b e t w e e n v a l u e creation and value capture. In reality, value capture would be easier if c o m p a n i e s o n l y f o c u s e d o n v a l u e c ap t u r e w i t h o ut p a y i n g a t t e n t i o n t o internal engineering and manufacturing. In many cases, it would be
- 10 -
m o r e e f f i c i e n t t o o ut s o u r c e ne c e s s a r y t e c h n o l o g i e s, e s p e c i a l l y g i v e n t he o n g o i n g di f f u s i o n o f m o d u l a r i z a t i o n a n d o p e n i nn o v a t i o n s . H o w e ve r , i t is specifically for this reason that Japanese companies should also remain focused on manufacturing as they strive for value capture as well as value creation. This is a significant challenge for Japanese manufacturing firms.
3 . C o n d i t i o n s t o C a p t u r e V a l u e : D i f f e re n t i a t i o n a n d C u s t o m e r V a l u e As stated above, value creation does not directly result in value c a p t u r e d u e t o t h e i n t e r f e r e n c e o f t he t w o f a c t o r s , c o mp e t i t i o n a n d customer value. This means that, conversely, to capture value it is necessary to (1) link manufacturing excellence with uniqueness and differentiation
from
c om p e t i t o r s ,
and
(2)
create
c u st o m e r
v al u e ,
enticing customers to pay large premiums for the differentiation, and to do these two things simultaneously. In many cases, Japanese c o m p a n i e s u n f o r t u na t e l y h a v e m a n a g ed t o p e r fo r m o n l y o n e o f t he s e t w o c o n d i t i o n s i n r e c e n t y e a r s, a s i l l u s t r a t e d i n F i g u r e 3 . Companies in the left-hand quadrant have products that please customers by satisfying their needs but a low level of uniqueness that d i f f e r e n t i a t e s t h e m f r o m co m p e t i t o r s . I n t h i s s i t u a t i o n , c o m p e t it i o n eventually
flares
up,
driving
customer
- 11 -
purchasing
prices
down
r e l a t i v e l y q u i c k l y . I n h e a t e d c o m pe t i t i o n , e v e n p r o d u c t s t h a t a r e t e c h n o l o g ic a l l y
advanced
and
fully
satisfy
customer
ne e d s
c a nn o t
capture value, as in the case of many flat screen TV sets.
Figure 3 Two Pitfalls: Excessive Competition and Over-Quality
High
Excessive Competition
①
Value Capture
Customer Value
②
Over-Quality
Low
Low
Differentiation
High
To avoid excessive competition, companies pursue originality and differentiation. However, this process presents another trap: companies e n d u p m o v i n g f r o m t h e u p p e r l e f t - h a n d q u a d r a n t t o t he l o w e r r ig h t h a n d q u a d r a n t . T h a t i s t o sa y , c o m p a n i e s w o r k o n n e w t e c h n o l o g i c a l d e v e l o p m e n t a n d f u n c t i o n a l i m p r o v e m e n t t o a t t a i n o r i g i n a l i t y , b u t t he "originality" thus realized is interpreted as excessive elaboration of product
specifications
or
over-quality
by
customers
who,
in
an
i n c r e a s i n g n u m b e r o f c a s e s , r e f u s e t o p a y t h e p r e m i u m co r r e s p o n d i n g
- 12 -
to the increased cost. This happens because an ordinary level of t e c h n o l o gy
offered
by
many
c o m pa n i e s
can
easily
satisfy
most
c u s t o m e r s. T he V I ZI O T V s e t, t e c h no l o g i c a l l y i n f e r i o r t o J a p a n e s e f l a t T V s e t s , n e v e r t h e l e ss w o n t h e l a r g e s t s h a r e o f t h e U S m a r k e t , a s s t a t e d a b o v e , b e ca u s e t h e cu s t o m e r s d e c i d e d t h a t w h a t V I Z I O h a d t o o f f e r w a s g o o d e n o ug h f o r t h e m . I n o r d e r t o c a p t u r e v a l u e , f i r m s n e e d t o s i mu l t a n e o u s l y r e a l i z e originality/differentiation and customer value (situation represented in the upper right-hand quadrant in Figure 3). For this, companies can p r o c e e d in e i t h e r o f t h e t w o d i r e c t i o n s i n d i c a t e d b y t h e a rr o w s ( 1 ) a n d (2) in Figure 3: (1) give priority to customer value (customer needs), a n d a t t e m p t d i f f e r e n t i a t i o n w i t h t e c h n o l o g y th a t a s s u r e s c u s t o m e r value;
or,
c o nv e r s e l y ,
(2)
give
priority
to
sustainable
d i f f e r e n t i a t i o n / o r i g i n a l i t y , a n d c r e a t e c u s t o m e r v a l u e t h a t c o r re s p o n d s to the originality. For Japanese companies, the latter approach is particularly important; that is, embracing manufacturing strength and a c q u i r i n g n e w c u s to m e r v a l u e o n t o p o f i t . I s h a l l e x p l a i n b e l o w w h y approach (2) is more important than approach (1). First, approach (1) contains some fundamental contradictions. To be inimitable and sustainable, a company's originality and differentiation must be attained not in individual products or technologies but in
- 13 -
organizational
capabilities
or
c o re
co m p e t e n c e s .
A
theoretical
f r a m e w o rk t h a t e x p l a i n s t h i s p o i n t i s t h e R e s ou r c e B a s e d V i e w o f t h e F i r m ( R B V ) , w h i c h h a s b e c om e t h e ma i n s t r e a m o f r e ce n t t h e o r i e s o f management strategy (Newbert, 2007). The RBV focuses a company's own tangible and intangible resources and abilities and processes to utilize them, that is, a company's originally constructed organizational c a p a b i l i t i e s t h a t a r e n o n - t r ad a b l e i n t h e m a r k e t . I n d i v i d u a l p r o d u c t s , though differentiated, can be quickly imitated, whereas organizational c a p a b i l i t i e s o r c o re c o m p e t e nc e s a r e i n i m i t a b l e ( I t a m i , 1 9 8 7 ; M c E v i l y and Chakravarthy, 2002). Organizational capabilities cannot be imitated because they have been accumulated over a long period of time (Dierickx and Cool, 1989). They include empirical knowledge acquired through repeated trial and e r r o r i n th e p r o ce s s o f t e c hn o l o g i c a l a n d p r o d u c t d e v e l o p m e n t ( L a d o and Wilson, 1994; Hatch and Dyer, 2004), organizational processes that have been fine-tuned over a long time, and manufacturing facilities i n t o w h i c h r e p e a t e d i m p r o v e m e n t s h a v e b e e n in t e g r a t e d ( H a t c h a n d Mowery, 1998). Meanwhile, customer value and needs change quickly within just a few years. It is extremely difficult to adequately adapt organizational capabilities, which require many years to construct, to s u c h r a p i d c h a n g e s . I t m a k e s m o r e s e ns e f o r a c o m p a n y t o g i v e p r i o r i t y
- 14 -
to developing its organizational capabilities and then to create new customer
value
by
advantageously
drawing
on
its
organizational
capabilities, as in approach (2). Many
Japanese
companies
are
found
in
the
lower
right-hand
quadrant in Figure 3 today. Japanese manufacturers enjoy intrinsic international
superiority
in
the
construction
of
organizational
capabilities for two societal reasons. First, compared particularly to A m e r i c a n f i r m s , J a p a n e s e f i r m s h a v e t h e t e m p o ra l l e e w a y t o a d o p t a l o n g - t e r m p e r s p e c t i v e b e c a u s e t h e y a re e x p o s e d t o l e s s pr e s s u r e f ro m s h a r e h o l d e r s f o r s ho r t - t e r m p r o f i t s . Second, major Japanese companies have many talented technical employees and engineers who stay with them for long periods of time t h a n k s t o t h e l i f e - t i m e em p l o y m e n t s y s t e m . A s a r e s u l t , a l a r g e p o r t i o n of
their
organizational
capabilities
can
be
re t a i n e d
in-house
as
k n o w l e d g e i s a c q u i r e d b y i n d i v i d u a l e m p l o y e e s un d e r s p e c i f i c c o r p o ra t e business systems and task requirements over an extended period. In o t h e r w o r d s , J a p a n e s e c o m pa n i e s a r e i n a n a d v a n t a g e o u s p o s i t i o n t o build up organizational capabilities, although they are not particularly good
at
creating
c u s t o me r
value.
Consequently,
ma n y
Japanese
companies find themselves in the lower right-hand quadrant. This is why customer value creation (approach 2) is essential for value capture
- 15 -
by Japanese companies.
4 . L e v e l i n g - o f f o f C u s t o m e r N e e d s : t h e I m p o r t a n c e o f N o n - f u n c t i o na l Value Japanese
companies
are
now
confronted
with
difficulty
in
persuading customers to pay a large premium for the functional i m p r o v e me n t o f t h e i r p r o d u c t s , n o w t ha t b a s i c c u s t o m e r ne e d s c a n b e e a s i l y m e t i n t h e c as e o f m a ny p r o d u c t s . F o r e x a m p l e , m an y c u s t o me r s c o n s i d e r p e r s o n a l c o m p u t e r s t o b e go o d e n o u gh i f t h e y p r o v i d e w o r d p r o c e s s i n g f u n c t i o n s a n d a n I n t e r n e t c o n n e c t i o n , a n d m a n y d e s i r e no more than reliable calling and texting functions from cell phones. The l e v e l i n g - o f f o f c u s t o m e r ne e d s i s t h e c u rr e n t t r e n d. Offering
far
more
product
functions
than
what
is
sought
by
c u s t o m e r s e v e n t u a l l y r e s u l t s i n p r i c e c o m p e t i ti o n . P r o d u c t q u a l i t y enhancement through technological innovation is not
necessary if
customer requirements do not exceed a certain level. Low functional standards that meet customer needs accelerate product modularization and standardization, facilitating market entry by new competitors, which
in
turn
results
in
excessive
c o m p e ti t i o n .
The
high-level
t e c h n o l o g ic a l e x p e rt i s e o f J a p a n e s e c o m p a n i e s b e g i n s t o l o s e r a i s o n d ' ê t r e o n ce c u s t o me r n e e d s ha v e l e v e l e d o f f .
- 16 -
F i g u r e 4 L i m i t a t i o n o f F u n c ti o n - b a s e d C u s t o m e r N e e d s Competition on Technology
Competition on Cost Integral Design (JPNs are good)
/ y g lo o n h c e T
n io t c n u F
Customer Demand/Need
Modularization Time
Technological development can be generally expressed with a dull " S , " a s i n F i g u r e 4 . T e c h no l o g i c al d e v e l o p m e n t s t a g n a t e s t o w a r d t h e e n d o f a pr o d u c t c y cl e b e c a u s e t e c h n o lo g i c a l l i m i t s h a v e b e e n v i r t u a l l y a t t a i n e d . I n a d d i t i o n t o t h i s , i n m o r e re c e n t y e a rs , l e v e l e d - o f f c u s t o m e r needs have also begun to interfere with this process. In the case of d i g i t a l c a m e r a C C D s , f o r e xa m p l e , a p i x e l c o u n t e x c e e d in g 1 0 m i l l i o n m a y n o t be n e c e s s a r y . N o t e , h o w e v e r , t h a t w h a t h a s l e v e le d o f f i n th i s e x a m p l e a r e c u s t o me r n e e d s re g a r d i n g f u n c t i o n s a n d s p e c i f i c a t i o n s t h a t can be mostly quantitatively determined. Considering that the peaking o f c u s t o me r n e e d s t r i g g e r s p r i c e co m p e t i t i o n , t o c a p t u r e v a l u e , i t i s n e c e s s a r y t o e x p l o r e c u s t o mer v a l u e i n a r e a s o u ts i d e p r o d u c t f u n c t i o n s
- 17 -
and specifications. Products that have succeeded in high-level value capture do not d e p e n d s o l e l y o n h i g h l e v e l s o f f u n c t i o n a l i t y o r t e c h n o l o gy . O n e r e c e n t symbolic example of such products is Nintendo's Wii, as already mentioned. Compared to Sony Computer Entertainment's PS3, which is t e c h n o l o g ic a l l y
and
functionally
much
superior,
Wii
has
created
o v e r w h e lm i n g l y g r e a t e r a d d e d v a l u e . P S 3 i s s u p e r i o r i n t e r ms o f t e c h n o l o g ic a l f e a t u r e s a n d s p e c i f i c a t i o n s t h a n k s t o i t s m o s t a d v a n c e d semiconductor, called “Cell,” developed at enormous investment costs, b u t i t i s n e v e r t h e l e s s i n f e r i o r i n v a l u e c a p t u r e . L i k e wi s e , A p p l e ' s i P h o n e i s m o r e s uc c e s s f u l a t c a p t u r i n g v a l u e t h a n c e l l p h o n e s l o a d e d with the latest functions, such as those developed by technologically s u p e r i o r N E C a n d P a n a s o n i c . T ho s e p r o d u c t s a r e s u c c e s s f u l b e c a u s e customers
have
found
in
them
value
far
beyond
their
mere
t e c h n o l o g ic a l f u n c t i o n s . A similar trend is also observed in the production goods sector. An i n d u s t r i a l s e n s o r m a n u f a c t u r e r , K e y e n c e , w h ic h h a s m a i n t a i n e d i t s r a t i o o f o p e r a t i n g i n c o m e t o s a l e s a b o v e 4 0 % o n a v e r a g e f o r t h e pa s t twenty years, is not technologically superior to its rival firms such as O m r o n . N e v e r t h e l e ss , K e y e n c e h a s c r e a t e d v a l u e b y o f f e r i n g p r o d u c t s t h a t " s c r u p u l o u s l y m e e t s u b tl e a n d l a t e n t c u s t o m e r ne e d s . ” T e r um o , a
- 18 -
successful manufacturer of blood bags and other medical materials and e q u i p m e n t , a l s o o f f e r s v a l u e t r e as u r e d b y p h y s i c i a n s a n d n u r s e s i n areas
outside
semiconductor
mere
f un c t i o n a l i t y .
m a nu f a c t u r e r ,
t e c h n ic a l l y
MediaTek,
a
inferior
to
Taiwanese its
Japanese
counterparts, has achieved great success by offering semiconductors that
its
corporate
development.
customers
Successful
find
easy
manufacturers
to go
use
in
beyond
their
product
mere
product
f u n c t i o n s a n d p r o v i d e v a l u e t r u l y a p p r e c i a t e d b y c u s t o m e rs . T h e v a l u e o f a p r o d u c t i s t h e r e f o re n o t o n ly v a l u e a s s u r e d b y o b j e c t i v e l y m e a s u ra b l e f u n c t i o n s o r s p e c i f i c a t i o n s b u t a l s o v a l u e th a t customers attach to the product based on their interpretation and p e r c e p t i o n . I n t h i s a r t i c l e , t h e f o r me r t y p e o f v a l u e i s c a l l e d f u n c t i o n a l v a l u e , a n d t h e l a t t e r , n o n - f un c t i o n a l v a l u e o r no n - f u n c t i o n a l p r e m i u m v a l u e . A m o n g c o n s um e r g o o d s , s u c h p r o d u c t s a s t h e W i i a n d t h e i P h o n e and among production goods, such products as Keyence sensors and M e d i a T e k s e m i c o n du c t o r s h a v e h i g h n o n - f u n c t i o n a l p r e m i u m v a l u e .
5. Definition of Non-functional Value and its Contents 5 - 1 D e f i n i t i o n o f n on - f u n c t i o n a l v a l u e T h e f u n c t io n a l v a l u e o f a p r o du c t i s d e t e r m i n e d by t h e e v a l u a t i o n o f p r o d u c t f u n c t i o n s a c c o r d i n g t o o b j e c t iv e l y f i x e d c r i t e r i a , w h e r e a s n o n -
- 19 -
functional
value
is
created
when
customers
attach
s u b j e ct i v e
significance to a product. Both functional and non-functional values e x i s t w h e n c u s t o m e r s r e c o g n iz e i t s v a l u e . H o w e ve r , a d i f f e r e n c e i s th a t while functional value exists according to objective criteria, nonfunctional value is attached to the product according to individual c u s t o m e r s' s u b j e c t i v e c r i t e r i a . O n e s i m p l e w a y t o d e f i n e n o n - fu n c t i o n a l v a l u e i s i l l u s t r a t e d i n Figure 5, which shows the relationship between product specifications and
prices.
In
the
case
of
a
digital
camera,
for
example,
basic
functional features such as the pixel count, zoom range and image stabilization can be adopted as variables and statistically integrated into one index, "basic functions/specifications," to be marked on the horizontal axis of the graph. If this index has a high correlation with t h e c o rr es p o n d i n g p r i c e i n d e x , v a l u e o f t h e pr o d u c t c o n s i s t s o f o n l y functional value. P r o d u c t s r e p r e s e n te d b y t h e g r e y c i r cl e o n t h e g r a p h a r e p r i c e d i n c o n s i d e r a t i o n o f t h e ir b a s i c f u n c t i o n s . T h a t i s t o s a y , c u s t o m e r s p a y f o r t h e i r f u n c t i o n a l v a l u e d e t e r mi n e d a c c ord i n g t o o b j e c t i v e l y f i x e d c r i t e r i a . O n t h e o t h e r h a n d , p r o d u c t s r e p r e s e n te d b y b l a c k c i r c l e s d e v i a t e f r o m t h e d o m in a n t t r e n d o f f u n c t i o n - p r ic e c o rr e l a t i o n s . I n o t h e r w o rd s , c u s t o m e r s p a y h i g h e r p r i c e s t h a n t h o s e g e n e r a l l y c o r re s p o n d i n g t o t h e
- 20 -
value of the products’ functions. To sum up, non-functional value c o r r e s p o nd s t o t h e d i f f e r e n c e b e t w e e n t h e s t a n d a r d p r i c e s ( d e t e r m in e d by functional value) expressed by the dotted line and the actual prices of the products.
F i g u r e 5 F u n c t i o n a l V a l u e v s . N o n - f u n ct i o n a l V a l u e High
Non-functional Subjective Value
Price
Low
Functional Value
Only Functional Value w/ Non-functional Value
Low
Major Function / Specifications
High
P r o d u c t s s u c h a s P C s a n d f l a t s c r e e n T V s u su a l l y s h o w a c l e a r f u n c t i o n - p r i c e co r re l a t i o n , a s t h e g re y c i r c l e s d o i n F i g ur e 5 , i f t h e i r indices of basic functions/specifications are appropriately obtained. M e a n w h i l e , i n t h e c a s e o f a u t o m o b i l e s , e ve n wh e n f u n c ti o n s s u c h a s size, engine output and quietness may be carefully measured, a clear correlation cannot be found between functions and price. A correlation
- 21 -
with price may be found when the brand name, rather than other functions, is added as a variable. Brand, however, does not constitute a p r o d u c t s p e c i f i c a t i o n ; i t i s a s y m b ol i c f a c t o r o f non - f u n c t i o n a l v a l u e . In fact, there is nothing extraordinary about non-functional value. T h e co m me r c i a l v a l u e o f p r o d u c t s w i d e l y c i r c u la t e d o n t h e m a r ke t i s r a r e l y d e t e r m i n e d so l e l y o n t h e b a s i s o f t h e i r f u n c t i o n a l v a l u e . T h i n k o f y o u r p er s o n a l e f f e c t s : c l o t he s , w r i s t w a t c h e s , g l a s s e s a n d h a n d b a g s — t h e c om me r c i a l v a l u e o f n o ne o f t h e se i t e m s p u r e l y re p r e s e n t s th e i r basic functions and specifications. The same holds true for household p r o d u c t s , f r o m f u r ni t u r e t o ta b l e w a r e a n d k i t c h e n u t e n s il s , o r o f f i c e supplies such as desks and cabinets. Their prices are not based e x c l u s i v e l y o n a n o b j e c t i v e e v a l u at i o n o f t h e ir b a s i c f u n c t i o n s a n d s p e c i f i c a t i o n s . R a t h e r t he y a re d e t e rm i n e d a s a re f l e c t i o n o f v a l u e th a t customers recognize in the products, based on their comprehensive and s u b j e c t i v e e v a l u a t i o n o f t h e p r o d u c t s i n t h e i r e n t ir e t y , i n c lu d i n g i m a g e , perceived quality, design and so forth (Figure 6-(1)). To varying d e g r e e s , no n - f u n c t i o n a l v a l u e o c c u p i e s a c o n s i d e r a b l e p a r t o f t h e t o t a l v a l u e o f m a n y g o od s a n d s e r v i c e s , a n d t h e i m p o r t a n c e o f n o n - f u n c t i o n a l value is growing year by year.
- 22 -
Figure 6 Value of Products and Services
6-(1)
Function
Function
Function
Function
“Value”
Non-functional premium value
6-(2)
Non-Functional Non-Functional
Value
Non-Functional Function
As
indicated
Function
in
Figure
Function
6- ( 2 ) ,
this
article
assumes
that
the
c o m me r c ia l v a l u e o f A L L g o o d s i s d e f i n e d a s t h e s u m o f f u n c t i o n a l a n d n o n - f u n c t i o n a l v a l u e . C o n c e pt s s i m i l a r t o t h a t o f n o n - f u n c t i o n a l v a l u e have already been presented in academic journals or media, expressed in a variety of terms (Holbrook, 1999), such as "experiential value (Schmitt, 1999),” "psychic value (Khalifa, 2004)," “Exclusive Value Premium （Groth, 1994）,” and "hedonic value (Hirschman and Holbrook, 1 9 8 2 ) . ” T h e s e c o nce p t s a r e a l l c a t e g o r i z e d i n t o n o n - f u n c t i o n a l v a l u e i n t h a t t h e y r e f e r t o v a l u e t h a t i s n o t r e p r e se n t e d b y t h e f u n c t i o n o r u t i l i t y o f a p r o d u c t . I n f a c t , t h e a d j e c t i v e s u s e d i n th e s e te r m s ,
- 23 -
"experiential," "psychic" and "hedonic," express different aspects of non-functional value that customers attach to a product. That is to say, t h e c o nc ep t o f n o n - f u n c t i o n a l v a l u e c o n t a i n s a l l t h e o t h e r c o n c e p t s . I t is
for
this
reason
that
the
term
"non-functional
value"
and
the
f r a m e w o rk p r e s e n te d i n t h i s a r t i c l e e n a b l e c o mp r e h e n s i v e d i s c u s s i o n s of all sorts of goods, ranging from personal computers with relatively low non-functional value to Louis Vuitton bags with relatively high non-functional value, regardless of the different aspects by which their value is recognized.
5-2 Relationship between functional value and non-functional value In many cases, non-functional value originates from a product’s functions. This can be explained using the typical examples of highp e r f o r m a n c e a u t o m o b i l e s a n d s i n g l e - l e n s r e f l e x ca m e r a s . C u s t o m e r s d o not
necessarily
pay
prices
for
those
products
that
reflect
their
functionality. Some consumers may never drive at 250 km/h, but they a t t a c h s i g n i f i c a n c e t o t h i s e ng i n e p e r f o r m a n c e i f i t c o r r e s po n d s t o t h e i r t a s t e o r st y l e . T h e v a l u e o f a B M W i s n o t t h e t o t a l s u m o f t h e d i f f e r e n t e l e m e n t s o f f u n c t i o n a l v a l u e c o n t r i b u t e d b y i t s e n g i n e , ch a s s i s a n d s o f o r t h ( F i g u r e 6 – ( 1 ) ) . T h e c o m m e r c i a l va l u e o f a p r o d u c t i s d e t e r m i ne d when its functional value is combined with non-functional value.
- 24 -
H o w e v e r , i t s h o u l d b e n o t e d t h a t t h e f u n c t i o n a l e x c e l l e n ce o f a B M W , such as
its high-performance engine, does contribute
to its non-
f u n c t i o n a l v a l u e . A t t h e s a m e t i m e , f o r t h o s e w h o d o no t re c o g n i z e th e s i g n i f i c a n c e o f ce r t a i n f u n c t i o n s , t h e s e fu n c t i o n s re p r e s e n t li t t l e v a l u e . It is inappropriate to consider non-functional value separately from f u n c t i o n s s i n c e i n m a n y c a s e s t h e f o r m e r d e r i ve s f r o m t h e l a t t e r . N o n functional
value
is
often
s u b j e c t iv e
customer
interpretation
of
a
specific function. This means that non-functional value can be created i f m a n u f a c t u r i n g c a n p r o d u c e s o m e t h i n g t h a t t o u c h e s t he h e a r t s o f c u s t o m e r s.
5-3 Non-functional value as subjective value S i n c e n o n- f u n c t i o n a l v a l u e i s r e co g n i z e d s u b j e c t i v e l y , a n i d e n t i c a l p r o d u c t c a n r e p r e se n t d i f f e r e n t t y p e s o r d e g r e e s o f no n- f u n c t i o n a l value to different individuals and firms. Subjective valuation is mainly motivated by (1) customer taste and sensibility, and (2) the context or situation in which a customer is placed. F i r s t , n o n - f u n c t i o n a l v a l u e i s m o t i v a t e d b y c u s t o m e r ta s t e a n d sensibility. For example, if a product design aesthetically pleases a c e r t a i n c u s t o m e r , sh e i s w i l l i n g t o p u r c h a s e t h e p r o d u c t a t a h i g h p r i c e . F o r t h i s c u s t o m e r , t h e p r o d u c t h a s h i g h c o m me r c i a l v a l u e , a n d n o n -
- 25 -
f u n c t i o n a l v a l u e i s c r e a t e d . Fo r a n o t h e r e x a m p l e , s o m e c us t o m e r s f i n d considerable non-functional value in specific product functions that match their taste, such as automobile enthusiasts who attach great importance to the engine performance of a certain model. T h e s c a l e o f n o n - f u n c t i o n a l v a l u e d e p e n d s o n c u s t o m e r s u b je c t i v i t y , such as personal taste and sensibility, regardless of the objectively a p p r e c i a b l e f u n c t i on a l s u p e r i o r i t y o r i nf e r i o r i t y of a p r o d u c t . C o n s u me r taste and sensibility as sources of non-functional value are particularly i m p o r t a n t f o r co n s um e r go o d s . H o w e ve r, e v e n i n t h e c a s e o f p r o d u c t i o n g o o d s , i t i s a l s o p o s s i b l e t h a t a c o r p o r a t e c u s t o me r ( o r p e r so n i n c h a rg e of purchasing) develops a strong sense of trust and security toward a s p e c i f i c s u p p l i e r . I n s u c h a s i t u a t i o n , t h e c o r po r a t e c u s t o m e r p r e fe r s b u y i n g f r o m t h e su p p l i e r , e v e n i f t h a t s u p p l i e r ’ s p r o d u c t s a r e n o t q u a l i t a t i v e l y a c t u a l l y s u p e r i o r t o o t h e r s u p p l i e r s ' a n d i t s p r i c e s ar e s l i g h t l y h i g h e r . N o n- f u n c t i o n a l v a l u e h a s t h u s c o m e i n t o p l a y . Secondly,
non-functional
value
is
recognized
within
a
given
customer context or situation. In the case of production goods, high n o n - f u n c t i o n a l v a l u e i s c r e at e d f o r a c o r p o r a t e c u s t o me r w he n a product
promises
to
so l v e
a
problem
with,
for
example,
product
development or assembly within a particular manufacturing plant c o n t e x t . In o t h e r w o r d s , t o c r e a t e c o n t e x t - d e p e n d e n t n o n - f u n c t i o n a l
- 26 -
value, it is necessary for the supplier to thoroughly understand the situation in which the customer intends to use a product and make sure t o p r o p o s e a p r o d u c t o r s ol u t i o n t h a t s o l v e s t h e p r ob l e m i n t h a t particular situation. N e v e r t h e le s s , i t i s i m p o r t a n t t o n o t e t ha t n o n - f u n c t i o n a l v a l u e , e v e n i f w e l l e st a b l i s h e d s u b j e c t i v e l y a n d c o n t e x t u a l l y , d o e s n o t n e c e s s a r i l y r e s u l t s i n l a r g e - s c a l e v a l u e c r e a t i o n i f t h e v a l u e i s r e c o gn i z e d b y t o o s m a l l a m a r k e t , si n c e t h i s w i l l o n l y l e a d t o l i m i t e d s a l e s . S u b j e c t i v e v a l u e r e cog n i z e d b y a n e x t r e me l y l i m i t e d c u s t o m e r p o p u l a t i o n t e n d s to b e l e s s gen e r a l i z e d t h a n o b j e c t i v e l y e st a b l i s h e d f u n c t i o n a l v a l u e . I t i s possible to add a generalizing edge to subjective value. In fact, m a n u f a c t u r i n g p r o d u c t s a s w e l l a s m a n y o t h e r c o m m e r c ia l g o o d s t h a t h a v e c r e at e d g r e a t v a l u e h a v e b o t h c ha r a c t e r i s t i c s o f v a l u e ; s u b j e c t i v e c u s t o m e r v a l u e a n d g e n e r a l i z e d v al u e . O u t s i d e m a n u f a c t u r i n g , h i t songs and best-selling novels are good examples. In manufacturing, Apple's
products
have
both
these
types
of
value
and
epitomize
successful value creation. Non-functional value is often generalized by word of mouth and via the media. The importance of non-functional v a l u e h a s i n c r e a s e d p a r t i c u l a r l y i n r e c e n t y e a rs , p a r t l y b e c a u s e t h e I n t e r n e t a n d a d v a n c e s i n IT f a c i l i t a t e t h e g e n e r a l i z a t i o n o f n o n functional value.
- 27 -
6. Characteristics of Non-functional Value and its Management 6 - 1 C o n t e n t s o f n o n- f u n c t i o n a l v a l u e L e t u s e xa m i n e t h e c o n t e n t s o f n o n - f u n c t i o n a l v a l u e , w h i l e f o c u s i n g m a i n l y o n c o n s u m e r g o o d s . T w o i m p o r t a n t s o u r c e s o f no n - f u n c t i o n a l value in consumer goods are "self-expression value" and "attachment value." A c u s t o m e r r e c o g n i ze s s e l f - e x p r e s s i o n v a l u e i n a p r o d u c t n o t w h e n i t i s m e r e l y o w n e d o r u s e d , b u t w h e n i t s e r v e s a s a t o o l o f se l f - e x p r e s s i o n vis-à-vis other people. Many customers are willing to pay a large premium for this value when purchasing apparel and automobiles. More than 100 years ago, Veblen (1899) referred to this concept in his " c o n s p i c u o u s c o n s u m p t i o n , " a n d B a u d r i l l a r d ( 1 9 7 0 ) a n d m a n y o th e r researchers have since elaborated discussions on this theme. It is a u n i v e r s a l l y r e co g n i z e d c o n t e nt o f s u b j e c t i v e v a l u e t h a t c u st o m e r s f i n d in certain products. A t t a c h m e n t v a l u e , o n t h e o th e r h a n d , e me r g e s f o r a c u s to m e r w h e n h e or s he f e e l s a s ub j e c t i v e "s p e c i a l s e n t i m e n t a l a t t a c h m e n t " t o w a r d a specific function or qualitative attribute of a product. In the case of an a u t o m o b i l e , f o r e x am p l e , a cu s t o m e r ca n r e c o g ni z e a t t a c h m e n t v a l u e i n subtle feeling of maneuverability or exhilarating engine note that is
- 28 -
n o t d i r e c t l y r e l a t e d t o t h e t r a n s p o r t in g f u n c t i o n o f t h e c a r . I n o t h e r products, it can be found in design, aesthetic appeal or sensation of use, unrelated to functionality or utility. S e l f - e x p r e s s i o n v a l u e a n d a t t a c h m e n t v a l u e c o r re s p o n d t o e x t e r n a l and internal axes of non-functional value respectively, and form a f r a m e w o rk t h a t e x h a u s t i v e l y e x p r e s s e s t h e w h o l e s p e c t r u m o f n o n f u n c t i o n a l v a l u e . Se l f - e x p r e s s i o n v a l u e i s e x t e rn a l s i n c e i t i s c r e at e d w i t h i n t h e c u s t o m e r ' s r e l a t i o n s h i p s w i t h o t h e r s a n d s o c i e t y , wh i l e attachment value is internal since it is created within the customer's mind.
6-2
Characteristics of non-functional value T h e n o n - f u n c t i o n a l v a l u e o f a p r o d u c t i s s u b j e c t i v e l y r e c o gn i z e d o r
created by customers according to their tastes or sensibilities within a s p e c i f i c c o n t e x t o f pr o d u c t u se . N o w le t u s e x a m i n e t h e c ha r a c t e r i s t i c s of non-functional value in its three particularly important aspects: implicitness, indivisibility, and latency. First, explicitly intricately
non-functional formulate. influenced
value
is
Customers' by
such
highly
implicit
su b j e c t i v e fa c t o r s
as
value their
and
difficult
standards past
to are
personal
experiences, value systems and sensibilities, and the non-functional
- 29 -
value deriving from these factors is inevitably implicit. For example, it is
almost
impossible
to
formulate
the
value
standards
by
which
individuals assess certain hit songs or best-selling novels as being particularly valuable. It is difficult to identify constituent factors of v a l u e , a n d t h e r e f o re t h e r e a re n o s i m p le l a w s f o r e n h a n c i n g v a l u e . S e c o n d , n o n - f u n c t i o n a l v a l u e i s e xt r e m e l y d i f f i c u l t t o d i v i d e i n t o c o m p o n e nt s ; r a t h e r, i t i s i n d i v i s i b l e . A s i n d i c a t e d i n F i g u r e 6 - ( 1 ) , t h e value of a product is not the sum of its individual functions. The value of Apple's iPhone or the Porsche 911 is not the total sum of the a t t r i b u t e s o f i t s v a r i o u s f u n c t i o n s o r sp e c i f i c a t i o n s . A p r o d u c t ' s v a l u e i s r e c o g n iz e d a s s u c h i n t h e o v e r a l l i n t e g r a l i t y o f t h e p r o d u c t . T h i r d , n on - f u n c t i o n a l v a l u e i s s u b j e c t i v e a n d t h e r e f o re l at e n t d e e p within
the
customer.
Given
all
these
c h ar a c t e r i s t i c s ,
implicit,
i n d i v i s i b l e a n d a m b i g u o u s , e v e n t he c u s t o me r w h o re c o g n i z e s n o n f u n c t i o n a l v a l u e f i n d s i t d i f f i c u l t t o d e s c r i b e . F ur t h e r m o r e , s i n c e n o n functional value is recognized in a specific product, it usually cannot exist on its own without a host product. For these reasons, customer n e e d s f o r n o n - f u n c t i o n a l v a l u e a r e r a r e ly c l e a r l y i d e n t i f i a b l e .
6-3 Management of non-functional value Considering the contents and characteristics of non-functional value
- 30 -
described
thus
manufacturers
far, to
three manage
important
points
non-functional
can
value
be
cited
for
creation:
(1)
s t r a t e g i c a l l y , i t i s e s s e n t i a l t o c re a t e a n e w m a r k e t / c us t o m e r v a l u e with a product, instead of adapting a product to customer needs; (2) in managing
product
development,
it
is
n e ce s s a r y
to
employ
a
Heavyweight Product Manager (HWPM); and (3) design is an important product attribute. L e t u s r e ca p i t u l a t e . F i r s t , n e w m a r k e t o r n e w c us t o m e r v al u e m u s t be created, instead of attempting to respond to existing customer needs. N o n - f u n c t i o n a l v a l u e i s l a t e n t ; m a n y cu s t o m e r s b e c o m e a w a r e o f i t f o r the first time only when they see a product that embodies it. For example, until the wildly popular Wii or iPhone appeared on the m a r k e t , no b o d y h a d c o n c r e te l y d e m a n d e d s u c h p r o d u c t s . C u s t o m e r s w h o h a d n e v e r t o uc h e d a n i P h o n e w o u l d h a v e b e e n u n a b l e t o e x p r e s s t h e i r n e ed f o r s o me t h i n g l i k e t h e f u n a n d e a s e o f h a n d l i n g t h e mu l t i t o u c h s c r e e n , w h i c h a c c o u n t s f o r a l ar g e p a r t o f t h e n o n - f u n c t i o n a l value of the iPhone. For general customers, it is also impossible to c l e a r l y e xp r e s s t h r o u g h w o r d s o r d r a w i n g s t h e d e s i g n s t h a t t h e y l i k e . I t i s f o r t h e s e re a s o n s t h a t c o m p a n i e s m u s t c r e a t e v al u e f i r s t a n d p r o p o s e i t t o c u s t o me r s . S o m e c u s to m e r ne e ds d o n o t e x i s t f o r p r o d u c t s t h a t a r e y e t t o c o m e
- 31 -
i n t o b e i n g , a s m e nt i o n e d a b o v e . Y e t , e x p l o r i n g l a t e n t n e e d s t h r o u g h m a r k e t r e s e a r c h o f t e n e n c o u nt e r s g r e a t d i f f i c u l t y . F o r t h i s r e a s o n a s w e l l , i t i s n e c e s s ar y t o c r e a t e a n d p r e s e n t ne w v a l u e t h a t p l e a s e s c u s t o m e r s, i n s t e a d o f u n e a r t h i n g l at e n t c u s t o m e r n e e d s . T h e r e fo r e , companies capable of successfully creating non-functional value do not s i m p l y d e v e l o p p r o d u c t s , w h e t h e r co ns u m e r g o o d s o r p r o d u c t i o n g o o d s , w h i c h d i r e c t l y r e s p o n d t o c us t o m e r v o i c e s . R a t h e r , a r m e d w i t h a s o l i d knowledge
of
customers'
c i rc u m s t a n c e s
of
product
use
and
value
s t a n d a r d s , t h e y d e v e l o p p r o d u c t s t h a t s u r p a s s c u s t o m e r s ' c o n cr e t e desires and engender true satisfaction. Second, a heavyweight product manager (HWPM), who is talented in p r o d u c t c o n c e p t c r e at i o n a n d d e m o n s t r a t i n g e x c e l le n t l e a d e rs h i p , p l a y s a vital role. The HWPM is not only a product development manager but a l s o a p r o d u c t d e v e l o p m e n t l e a d e r , wh o i n i t i a t e s a n d l e a d s p r o d u c t c o n c e p t cr e a t i o n . Th e c o n ve nt i o n a l d e c i s i o n - m a k i n g p r o c e s s c e n t e r in g o n a n a l y t i c a l m a n a g e m e n t an d c o n s e n s u s f o r m i n g i s i n a d e q u a t e f o r creating non-functional value with its specific characteristics. Due to the
great
difficulty
involved
in
quantifying
and
verbalizing
the
c o m me r c ia l v a l u e t o b e r e a l i z e d , c on s en s u a l c o o rd i n a t i o n a m o n g p r o je c t m e m b e r s c a r r i e s t he h i g h r i sk o f d i s t o r t i n g t h e c o n t e n t s o f t h e n on f u n c t i o n a l v a l u e t o b e a c h i e v e d . T h e HW P M , w ho p e r f e c t ly u n d e r s t a n d s
- 32 -
the
target
non-functional
value,
must
strongly
lead
the
product
development. Clark and Fujimoto at Harvard University demonstrate in their study that in the case of an automobile, for which nonfunctional value such as design and maneuverability is important, a p r o d u c t w i t h h i g h c o m m e r c ia l v a l u e i s m o r e li k e l y t o re s u l t f r o m a development project led by an HWPM. Thirdly,
product
design
is
an
extremely
i mp o r t a n t
factor
in
customer evaluation of the non-functional value of a product in its entirety. This does not mean that only design matters. Non-functional value, indivisible and only perceptible and appreciable in a product as a w h o l e , is s y m b o l i z e d b y i t s o v e r a l l d e s i g n . I t i s k n o w n , f o r e x a m p l e , t h a t t h e l a r g e s t d e t e r m i n a n t o f a u t o m ob i l e s a l e s i s e x t e r i o r d e s i g n ( a n d non-functional value is very important for automobiles). Apple cell phones, Dyson vacuum cleaners and Samsung LCD TV sets are some of many
successful
examples
of
n o n- f u n c t i o n a l
value
symbolically
expressed by their design.
7. Conclusion I have clarified the conditions necessary for realizing sustainable v a l u e c a p t u r e a n d d i s c u s s e d t h e c o n ce pt o f n o n - f u n c t i o n a l v a l u e , w h i c h is
particularly
important
among
those
- 33 -
conditions.
There
are
two
conditions for value capture: (1) acquiring sustainable differentiation and originality and (2) matching originality with customer value. To f u l f i l l t h e s e c o n d i t i o n s , i t i s n e c e s s ar y t o p u r s u e " d e e p v a l u e cr e a t i o n , " as illustrated in Figure 7. In this article, I have stated that (1) for sustainable differentiation and
originality,
firms
m u st
focus
on
building
up
organizational
capabilities from a long-term perspective, instead of focusing only on management of individual products; and (2) for high customer value c r e a t i o n , b o t h f u n c t i o n a l a n d n o n - f u n c t i o n a l v a l u e m u s t b e c re a t e d . A s compared to superficial value creation founded on the product functions and specifications of individual products, deep value creation aims at cultivating originality through organizational capabilities and creating n o n - f u n c t i o n a l v a l u e . D ee p v a l u e c r e a t i o n i s r e q u i r e d o f J a p a n e s e companies today.
- 34 -
Figure 7 Value Creation and Value Capture at Deep Layer
Differentiation
Customer Value
Superficial layer Functions Specifications
Individual Products
Organizational Capabilities Core Competences
Deep layer Non-functional Premium Value
I n t h i s e n d e a v o r , t h e g r e a t e s t c ha l l e n g e f a c i n g J a p a n e s e c o m p a n i e s i s c r e a t i n g n o n - f u n c t i o n a l v a l u e . I t s s oc i e t a l a n d e co n o m i c s i g n i f i c a n c e i s e x t r e me l y l a r g e . C r e a t i n g a d d e d v a l u e , w h i c h i n t u rn s u p p o r t s private
business
p e r f o r m a n ce
and
the
national
e c o no my ,
r e q u i re s
i n c r e a s i n g c o mm e rc i a l v a l u e o f p r o d u ct s , a l a r g e p a r t o f w h i c h i s n o n f u n c t i o n a l , r a t h e r t h a n f u n c t i o n a l . N e v e r t h e l e s s, b u s i n e s s m a n a g e r s , p o l i c y m a k e r s a n d p r o d u c t d e v e l o p m e n t p e r s o n n e l a r e st i l l f o c u s i n g their
discussions
on
new
technologies,
patents,
functions
and
specifications. In terms of functional value, the significance of the manufacturing c o m p e t e n ce o f J a p a n e s e c om p a n i e s h a s b e e n d i m i n i s h i n g y e a r b y y e a r because
it
is
now
possible,
in
many
- 35 -
product
sectors,
to
p r o v id e
functions
that
standardized
satisfy
modules.
average
c u st o m e r s
Modularization
is
si m p l y good
for
by the
assembling worldwide
economy and industrial development and is expected to accelerate in the future. However, this trend will in turn destroy the raison d'être of many Japanese companies. The only way to break away from this situation is creating customer value founded on manufacturing that only Japanese companies can accomplish, customer value that is nonfunctional and incorporated into products by optimizing Japanese manufacturing expertise. Developing organizational capabilities that make uniquely Japanese manufacturing possible and thus offering u n i q u e l y J a p a n e s e n o n - f u n c t i o n a l v a l u e t o t h e re s t o f t h e w o r l d i s t h e contribution to the world community that is expected of Japanese companies henceforth.
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I.
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Sense , Feel, Think, Act, Relate , F re e Pr e s s , Ne w Y o r k , N Y V e b l e n , T . ( 1 8 9 9 ) The Theory of Leisure Class: An Economic Study in
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This pape r share s mo st co nte nts with Nobeoka (20 10), w hich has been written and publis he d in Ja pane se .
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