Innovation and Measuring Business Planning Using Value Added Modeling

Vale Added Modeling (a.k.a VAM) is one of the hottest topics in business today. VAM is used to find and measure the most effective strategy, person, or approach for getting a desired outcome. In discussing the use of VAM, businesses often speak of finding innovative ways to do or conduct business effectively.  Most often businesses feel that VAM is achieved by presenting innovative programs and techniques that reduce the noises that outside elements may cause on desired outcomes without performing analysis to ensure value is effectively added.  However, what is often lost when using VAM, is measuring the effectiveness of innovation.

The classic example of VAM as an innovative practice is the development of hybrid cars. The technology of combining gas and electric power claim to produce a more energy efficient, fuel saving, and cost effective mode of transportation. While it may seem obvious that hybrid cars adds value to drivers’ life. Is the car indeed more cost effective than non-hybrid cars? If so, how much more effective are hybrid cars? Is the effective of hybrid cars enough that drivers feel satisfied in the product?

On the innovative side of the argument, the hybrids seem to be a no brainer. However, the true answer will not occur until this value added technology is measured over time. This is the beauty of VAM, which suggest measuring the effects of factors on desired outcomes overtime. In this case, measuring if factors associated with hybrid cars adds more value to the driver’s lives. To understand the effectiveness of hybrids compared to different types of non-hybrid cars (gas-powered and diesel-powered), we must take into account factors such as the cost of purchase, gas per mile, maintenance cost, and pollinates.

Given these factors, some have argued if hybrids are as good as the carmakers claim. Ann Job of MSN Autos reported that in a test by Consumer Reports magazine, which calculates its own fuel economy stats, noted that the Toyota Prius hybrid test car got 44 miles a gallon in real world driving, not the city/highway rating of 55 mpg that the government reports. While 44 mpg is still lower than most cars and the difference in the mpg of a hybrid is a reported 30% higher than like-sized non-hybrid; we still have to ask, what is the true value added? For instance, comparing the Primus to a VW Jetta TDI, is that there are greater value added on mpg. Further, Roy Rex of AOL Auto reports that hybrids are $1750 to $15,000 higher than like-size non-hybrid gas-powered cars. Even with tax breaks and some company incentives, is the difference in gas mileage enough to off set the price difference between hybrid and non-hybrid like-size cars?

Another question is whether than is a greater difference between hybrid and diesel-powered cars than between hybrid and gas-powered cars. The noticeable difference between hybrid and diesel cars is that hybrid cars are cleaner. But Ben Stewart of popular motors explains, “today’s diesels have been engineered to burn cleaner while still delivering impressive mileage.” This further brings to question, what is the true value of hybrid cars versus diesel cars?

The point being made here is not that hybrid technology does not provide more value. The point is that to truly understand the value added by this innovative approach, we must complete the VAM process by measuring the effects of factors (cost of purchase, gas per mile, maintenance cost, and pollinates) associated with hybrid cars against other cars. In this process, we might find that the hybrid is strong in many areas, but lacking in other areas.

Further more, while we can see how hybrids may add value to the driver’s (customer’s) life, VAM is more than just see what the customer values and producing a product based on that value. For years, the US auto industry listened to customers and produced bigger cars that were not cost-effective. The result is the collapses of the US auto industry. Because of this type of outcome, VAM is about sustaining customer satisfaction so to ensure that customers will return or the customer will lead to more sells. The best way to ensure this result is by developing VAM that produces innovative services and/or products; and ways of measuring the effectiveness of services, service delivery, and products over a period of time.

Why using statistics analysis is an important step in the VAM process?

We have all seen list of 10 effective ways to make a sale, or 10 effective ways to win customers. The burning question is how do we know the techniques presented are effective? In social science research, we ask are these approaches valid and reliable? This suggests, are these approaches accomplishing what they claiming, and can we rely on these techniques every time we go to make a sale. The best way to truly know if these approaches are effective is by statistically measuring the effects of these approaches on actual sales made.

In a VAM sense, we want not only the measure the effects of these techniques on sales, but to measure these techniques on multiple person over a period of time. In additional, we want to eliminate factors that may bias the effectiveness of the 10 effective ways to make a sell. Let’s say 5 of the 10 effective ways to sale are 1) Networking, 2) Respecting client’s time, 3) Listening to clients needs, 4) Product Knowledge, and 5) Sell customer only what they need. To measure the effectiveness of these techniques on sales growth overtime, it is importance to only focus on measuring the effects of techniques on sales by collecting data associated with sales. So, do not measure things like quality of product, product warrant, or specials associated with the products. By uses these factors, you are not measuring the value added by the sales techniques. You are measuring the value of the product. Additional, but adding these factors, you can bias the value of the sales technique.

Further, if you are interested in measuring the effectiveness of an innovative product, think about what sets you product a part from other similar products. Here, you do want to assess data associated with the product and not data on the approach of the salesperson. 

Keep in mind that statistically measuring the effects of factors on desired outcomes are not as simple as saying, in the first quarter the company sold ten products using the 10 techniques and this month the company sold 15 products using these 10 techniques. Like the situation with the hybrid car, you are not sure if all 10 techniques are effective, which technique produces the greater sales growth, or if a combination of difference techniques produced the greatest sales growth.

By developing effective or innovative approaches to developing a better product is a start to VAM process. However, it is key that companies continue the VAM process by analyzing data to ensure that they approach or product is 1) valued by the customer and 2) can be sustained over time.

For companies wrestling with implementing VAM, appropriate steps are needed to develop effective VAM to your business.

  1. Brainstorm to understand the strengths and weaknesses of reaching your desired outcomes,
  2. Develop plans to build on your strengths and improve on your weaknesses,
  3. Develop measurable factors (what makes the new improvements better) so to assess effects on your desired outcomes,
  4. Compare again benchmarks from prior years or quarters, and
  5. Use VAM statistical technical to determine if the method used for desired outcomes are total effective.