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Glossary of Terms

The purpose of the Glossary of Terms section of the web site is to enable you to use common terminology during the development of your strategy and tactics. This Glossary includes all of the terms used throughout the strategic system on the web site. We also include abbreviations for those terms that recur frequently throughout the system.

Acquire (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost a Final Customer incurs to become aware of the suppliers of the product, to understand the differences among the products of the alternative suppliers, to order and test the product, to put it in place, and to learn how to use it. (See also, Dispose Cost, Life-Cycle Cost, Maintain Cost,Use Cost )

AUMD

Acquire, Use, Maintain, Dispose. (See Customer Life Cycle Costs.)

Basis of Charge

The unit measure the supplier uses to quantify a transaction with customers. This unit of measure could include time, dimension, volume, user or another unit. Each unit of product, as well as each other component of the price, has a basis.

Building Block Costs

These include the costs of people, purchases and capital. Every business uses these basic building blocks to produce customer benefits. (See also Capital Costs, People Costs, Purchases Costs)

Business

A group of customers who buy defined products from a set of competitors. The business changes if either the competitors or the customer group changes. The business is the focus of strategy development.

CAGR

Compound Annual Growth Rate. See (Strong Competitor.)

Capacity

The total unit volume a facility or group of facilities can produce annually, using its highest practical operating mode.

Capacity Creep

The natural addition of capacity to an existing facility due to the "learning curve" effect, where the facility produces more using the same assets and work force as the company makes incremental improvements in work processes. The rate that this form of new capacity adds to industry capacity depends on the growth of the industry. In general, capacity creep adds 1/2% to 1-1/2% a year to industry capacity. The faster an industry grows, the more capacity creep adds to the annual capacity of the industry. For example, capacity creep may add as little as two-tenths of a percent of total industry capacity in a market where demand is growing at less than 2% a year to as much as 6% in industries where demand is growing in excess of 30% a year.

Capital Costs

All expenditures the company incurs in order to finance its operations and growth. Capital costs include interest on debt, taxes and profits. (See also Building Block Costs, People Costs, Purchases Costs)

Centralized Purchasing

A term denoting a process of selecting a supplier whereby corporate headquarters makes the decision of which supplier or suppliers the field will use for a particular product/service and in what proportions. (See also Independent Purchasing, Standardized Purchasing)

CMSS

Create, Make, Sell and Service. (See Functional Costs .)

Component of Price

A potential add-on element to the product’s price per unit. This add-on component increases or decreases the effective cash cost of the product for the customer by using fees, bonuses, extended payment options, rebates and other optional components.

Consolidation

The combining of productive capacity into a single operating entity that was formerly managed by more than one overhead group. Joint ventures, mergers, acquisitions or the combination of facilities within a company can all reduce overhead through consolidation.

Constraints on Expansion

Anything that prevents competitors from increasing their capacities in an industry. These can be legal constraints, such as patents, or low profit potential, or substitute products, or satisfied customers who are unwilling to change suppliers.

Convenience

As a measure of product performance on the Customer Buying Hierarchy, this term refers to the ease with which the customer may acquire the product. Essentially, this is the order cycle time (abbreviation: OCT), the elapsed time between the moment a customer decides he needs a product and the moment he begins to use it. Convenience benefits included advertising to create awareness, differentiation of one product from another, the location where the sale takes place, and any services offered the customer to find, chose and pay for the product. (See also Customer Buying Hierarchy)

Convenience Innovation

A Performance Innovation change in the product/service package that reduces the customer's cost to acquire and install the product. These innovations change the awareness of the product, the methods of differentiating one product from another, the locations where the purchase may take place, or the services that allow the customer to find, choose and pay for the product. (See also Performance)

Core customer

A customer whose pricing and cost-to-serve requirements will allow the company to earn at least its cost of capital on sales made to the customer through the business cycle. (See also Near-Core Customer, Non-Core Customer)

Cost Driver

As a basis for customer segmentation, a Cost Driver is a need of some group of customers that, when met, raises the cost per unit of the supplier. Physical, emotional or intellectual characteristics of the customer are the major Cost Drivers.

Cost Structure

A company's total costs, including operating costs plus capital costs.

Cost to Serve

The full cost the company incurs, on behalf of a particular customer or customer segment, to create and make a product and then sell and service the product and customer relationship.

Create (Company) Cost

In the analysis of a manufacturing company's approach to managing functional costs, this term refers to the cost of designing and developing a product. (See also Functional Costs )

Customer

Any buyer or company purchasing location that has the choice to purchase a product or service from more than one supplier.

Customer Buying Hierarchy

The order in which customers evaluate alternative products. Customers consider function, reliability, convenience and price, in that order, to arrive at their purchasing decisions (abbreviation: FRCP).

Customer Size/Supplier Role Matrix

A matrix showing the dispersal of total industry sales volume according to both the sizes of customers (e.g. Very Large, Large, Medium, and Small Customers) and the roles (e.g. Primary, Secondary, Tertiary and so forth) available to suppliers in customers relationships.

Customer Sizes

The segmentation of customers where they are rank ordered by their total unit purchases from all suppliers in the market (abbreviation: VL, L, M, S).

Decrease Use

The amount of volume a company loses during a period as a result of a customer decreasing the proportion of its total purchases it buys from the company (abbreviation: DU). (See also Get In, ,Get Out, Increase Use,and Stay In)

Design to Value

An approach to managing costs by designing a product and its supporting cost structure only after the performance and price a customer wants have been established. Each benefit, and the cost incurred to provide it, is identified by the company. The company then designs its cost structure to stay within the target benefit cost.

Deteriorating market

An industry characterized by a Leader's Trap, where annual volume in excess of 2% of the industry's total volume, or more than 25% of annual industry positive volatility, moves from one set of suppliers to another on the basis of low price. This volume movement on low price occurs because the industry's larger customers respond to the low price offers.(See also Leader's Trap, Volatility)

Developing market

An industry characterized by average sales growth rates in excess of 20% per year.

Diseconomies of Scale

The phenomenon where units of an Input cost increase at a rate greater than the increase in the units of Output. (see also Economies of Scale and Super-economies of Scale)

Dispose (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the costs a Final Customer incurs to disassemble, remove or otherwise get rid of the product after the customer has finished using it. Dispose costs may be positive if the product has significant resale value. (See also Acquire Cost, Maintain Cost,Use Cost )

Do Employees

Employees of the company who have no one reporting to them. These employees are the primary executors of the company's activities. They are usually the most numerous and least costly of the company's employees. (See also Supervise Employees, Think Employees)

EBIT

Earnings Before Interest and Taxes.

Economies of Scale

The phenomenon where unit costs decline as the number of units sold increases. This phenomenon occurs because part of the cost structure grows at a fraction of the rate of growth of unit volume sold (abbreviation: EOS).

Effective Life of an Innovation

The period of time from the introduction of an innovation to the market until half the competitors in the market offer that innovation as part of their products and services.

Effectiveness

A component of Productivity. This component measures the Effectiveness of an Intermediate Cost Driver (ICD/O), the number of ICDs required for an Output. This component is the ratio of the units of an ICD to the units of Output (e.g., sub-assemblies completed per customer order). Effectiveness times Efficiency equals Productivity. (see also Efficiency, Intermediate Cost Driver, Productivity )

Efficiency

A component of Productivity. This component measures the Efficiency of the Input (I/ICD), the number of Inputs required for an ICD. This component is the ratio of the units of Input to the units Intermediate Cost Driver (e.g., People per sub-assembly). Efficiency times Effectiveness equals Productivity. (see also Effectiveness, Intermediate Cost Driver, Productivity)

Elimination Sequence

A term used in determining a company's needs to improve its product/service package performance. A customer can eliminate a potential supplier during one of three sequential activities: invitation to bid on the business, preliminary review of the initial bids or detailed evaluation of the bids.

Evaluation Failure

A company suffers an evaluation failure when it fails to win the business of the customer after the customer has considered all the competitive proposals.

Fail market

A market where the majority of volatility occurs due to the failure of incumbent suppliers to offer something more than half the market's suppliers offer. (See also Win Market, Customer Buying Hierarchy)

Final customer

The buyer who makes the final decision on what product to buy and from which supplier to buy it. Examples of Final customers would be installers and other specialized contractors, consumers, government entities purchasing products for their own use and original equipment manufacturers purchasing a product for inclusion in their own products.

Free Liabilities

In the calculation of Net Capital Employed (NCE) in the business, the total amount of all non-interest bearing liabilities of the business. Free Liabilities include such balance sheet items as payables and reserves.

Function

As a measure of product performance on the Customer Buying Hierarchy, the term refers to the characteristics of the product that affect the way it is used by the customer. Function includes all of the features of a product. For the customer of a channel of distribution, function includes the product selection or choice offered the customer along with the physical surroundings where the product is presented for sale. For the customer purchasing a manufactured product, functions affect the operating capability of the product, the environment in which the product can function, or the capability of the product's operator.

Function innovation

A performance innovation changes the customer's cost of using a product. For the customer of a channel of distribution, function innovations change the choice of a product available or the physical surroundings where the product is presented for sale. For the final customer of a manufactured product, function innovations change the operating capability of the product, the environment in which the product can function, or the capability of the product's operator.

Functional Cost

A cost incurred by a company to offer benefits to its customers. In a manufacturing company, these costs would include Create, Make, Sell and Service. (Abbreviation: CMSS) In a wholesale or retail company, these costs would include: Locate, Present, Sell and Service. (Abbreviation: LPSS)

Get In

The portion of a company's unit volume sold during a period resulting from the acquisition of volume from new customers (abbreviation: GI). (See also Decrease Use, Get Out, Increase Use, Stay In)

Get Out

The amount of volume a company loses during a period as a result of a customer removing the company from its relationship (abbreviation GO). (See also Decrease Use, Get In, Increase Use, Stay In)

Gold Competitor

A Standard Leader who holds the largest or second largest unit market share in its industry, gains share and enjoys above industry average returns. (See also Silver Competitor)

Guarantee (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost an Intermediary Customer incurs to keep the product in working order for the Final Customer, including the cost to assess the problem, correct it, and credit the final customer for the returned product. (See also Obtain Cost, Sell Cost, and Return Cost)

Heart of the Market

This term refers to the total unit volume of a market in the Primary and Secondary role positions with the Very Large and Large customers.

High-Extender Product

A type of Performance Leader product where the user benefits are higher than the Standard Leader product while the buyer benefits are the same. Standard Leader competitors usually introduce High-Extender products to broaden their product line to cover the higher end of the market.

Hostile market

An industry characterized by low industry average returns on investment for the majority of the industry and by industry average sales growth rates below 20% per annum. These low industry average returns fall below 7% ROE, below 9% RONCE or 7% pre-tax allocated operating profits to allocated assets for business segment measures. This condition, the result either of a fall in demand or of the expansion of competitors in the market, is marked by intense price competition and, often, unit volume growth below 5% per annum.

Increase Use

The portion of a company's unit volume sold during a period resulting from an increase in the company's penetration of its relationship with existing customers (abbreviation: IU). (See also Decrease Use, Get In, Get Out, Stay In)

Independent Purchasing

A term denoting a process of selecting a supplier whereby the individual field location of a customer makes all decisions about which suppliers to use and in what proportions. (See also Centralized Purchasing, Standardized Purchasing)

Index

A measure of the performance of one entity relative to another entity. The index is the ratio of the performance of the first entity divided by the performance of the second and then multiplied by 100. An index above 100 indicates that the first entity has a higher result than the second entity. An index below 100 indicates that the first entity has a lower result than the second.

Industry Leader Effect

An increase in sales volume the company receives from smaller customers because of the good reputation the company acquires by serving the industry's leading few customers.

Intermediary customer

A customer who purchases the product for re-sale or who plays the major role in recommending the final product purchase. Examples of Intermediary customers would include wholesalers, distributors, retailers and consultants.

Intermediate Cost Drivers

A term used in the analysis of productivity and economies of scale. An intermediate cost driver is an activity, such as an entry of an order, that adds value and contributes to the acquisition or retention of the customer and the unit volume he represents (abbreviation: ICD). (See also Economies of Scale, Effectiveness, Efficiency, Productivity)

Invitation Failure

A company suffers an invitation failure when it fails to be invited by a customer to join the bidding process for the customer's business.

Last Look

A market practice where a customer who when offered a low price by a current or potential supplier then advises the other current or potential suppliers of that low price in order to give them the opportunity to match the low priced supplier's price.

Leader's Trap

A situation in which an established industry competitor maintains a price umbrella and cedes share to a discounting competitor in the mistaken belief that customers will stay loyal to the established competitor by paying a premium for his product. Over time, the company in the Leader's Trap not only loses share, but also sees prices fall to a level near the price established by the discounting competitor. (See also Price Umbrella)

Life Cycle (Customer) Cost

This term applies to the customer costs analyzed to develop new products and services. This is the cost of the product either to an Intermediary or Final Customer. The Intermediary Customer's cost of obtaining, selling, guaranteeing and returning the product through the entire time the Intermediary Customer has possession of the product. (abbreviation: OSGR) The Final Customer's cost of buying and employing the product through the product's entire life cycle. These costs include the customer's cost to acquire, use, maintain and dispose of the product. (abbreviation: AUMD)

Locate (Company) Cost

In the analysis of a wholesale or retail company's approach to managing functional costs, this term refers to the cost of finding and acquiring a site and constructing the building to hold the company's products. (See also Functional Costs)

Low-Extender Product

A type of Price Leader product where the user benefits are lower than the Standard Leader product while the buyer benefits are the same. Standard Leader competitors usually introduce Low-Extender products to broaden their product line to cover the lower end of the market.

LPSS

Locate, Present, Sell and Service. (See Functional Costs.)

Maintain (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost a Final Customer incurs to keep the product operating properly. The costs include obtaining maintenance service, parts, trained labor, plus only the costs the customer incurs due to product downtime. (See also Acquire Costs, Dispose Costs, Use Costs)

Make (Company) Cost

In the analysis of a manufacturing company's approach to managing functional costs, this term refers to the cost of manufacturing, assembling and packaging the product.

Market share

The percentage of the industry's total unit or dollar volume that a competitor sells.

Measure of productivity

Productivity is measured as unit of input per unit of output. (e.g., employees per pound sold.) Productivity has two components, Efficiency and Effectiveness, and is the product of these two components. (See also Effectiveness, Efficiency, Productivity)

Mix of Costs

Mix refers to the percentage of a company's total cost structure which is made up by each building block cost: people, purchases and capital. This mix measure is used in comparisons between alternative functional cost approaches to creating productivity in providing customer benefits.

Near-core customer

A customer whose pricing and cost-to-serve characteristics enable the company to earn a positive return on net capital employed, but a return below its total cost of capital, on sales made to the customer through the business cycle. (See also Core Customer, Non-core Customer)

Negative Volatility

The percentage of industry or individual company volume sold during a period of time that is lost by a company, or by a set of suppliers, to another company or set of suppliers. Negative volatility is the sum of Get Out plus Decrease Use volume. (See also Positive Volatility, Volatility)

Net Capital Employed (NCE)

The amount of the business' total assets less its free (i.e., non-interest bearing) liabilities. Alternatively, the sum of all interest bearing dept plus all forms of equity used in the business.

Net Volatility

The percentage of industry or individual company volume sold during a period of time that is the difference between the positive volatility and the negative volatility. (See also Negative Volatility, Positive Volatility, Volatility)

Next Leader

A competitor or product that offers much better than industry-standard performance for a low price to a specific subset of the industry customers. A Next Leader can do this because it has a low cost structure (abbreviation: NL). (See also Performance Leader, Price Leader , Standard Leader, Reformer Product, Transformer Product)

Next Leader: Next Leaders are an industry's golden children because they are able to violate the rule that performance and price move in the same direction. Next Leaders create a value proposition offering higher performance for a notably lower price than the industry Standard Leaders. Next Leaders offer this attractive value combination to a niche segment of customers in the industry. The better-than-standard performance of a Next Leader product results either from an application of new technology or from a unique approach to benefit bundling in their products. The new technology or benefit bundling not only improves performance but also reduces the cost-to-serve for a segment of customers. This low cost structure allows Next Leaders to offer pricing in the range of 20-50% below the prices on Standard Leader products.

Next Leaders do not appear in many industries. When they do appear they can transform an industry, whether the industry is in manufacturing, retail or service. Toys R Us invented the toy retailing category killer, much as Home Depot has done in hardware retailing. These companies offer great depth and breadth of products, in massive stores, with limited personal assistance and low prices. Other Next Leader examples include the early Apple in the personal computer industry and Intuit in personal financial management software. Both of these firms exploited a new technology to become Next Leaders. Jiffy Lube, in auto services, used a new approach to benefit bundling, where the company eliminated the expense of mechanics and built outlets equipped solely for oil and fluid changes. Jiffy Lube's conveniently located stores promised a twenty-minute while-you-wait oil change and prices below those charged at local gasoline stations. Domino's Pizza offered the original, mass marketed, delivered-to-your-home pizza, also at low prices, by eliminating most of the costs of the restaurant.

The eventual market share of these companies is difficult to forecast. Next Leaders tend to create new industries of their own. Next Leaders usually become Standard Leaders in their new industries. On occasion, as in the case of Apple, they become Performance Leaders.

Non-core customer

A customer whose pricing and cost-to-serve characteristics allow the company to realize a positive cash flow, but a negative return on net capital employed, on the sales made to the customer through the business cycle. (See also Core, Near-core)

Obtain (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost an Intermediary Customer incurs to become aware of its potential suppliers of a product, to understand the differences among the products of its alternative suppliers, to order and test the product, and prepare it for sale.(See also Sell Cost, Guarantee Cost, Return Cost.)

Operating Cost

The combined costs of people and purchases.

Opportunistic Customer

A customer the company serves only when trying to use excess capacity. Such a customer would normally be a non-core customer offering the company positive cash flow on sales but little or no return on invested capital through the business cycle. (See also Core, Near-Core, and Non-Core Customer)

Optional Component of the Price

A potential add-on element to the product's price per unit. This add-on component increases or decreases the variable unit price of the product by using fees, bonuses, extended payment options and performance charges. The optional add-on component changes the net cash-equivalent payment the customer makes to the supplier for a product.

Order Cycle Time

The elapsed time between the moment a customer decides he needs a product and the moment he begins to use it (abbreviation: OCT).

Overcapacity

A condition in which competitors in an industry can supply more than the market demands at the current market price.

Peer Competitor

Competitors within the same leadership category (i.e. Standard Leader, Performance Leader, Price Leader or Next Leader) who have virtually equal standing in the customer's mind. Typically, peers' prices within a customer relationship are identical.

People Cost

A basic building block cost which includes wages, salaries, benefits and payroll taxes for all employees, including management employees. This cost may also include purchase or capital costs related to specific employee groups, such as office supplies and automobiles. Where functions are outsourced, the people costs of outside contractors are part of purchase costs. (See also Building Block Costs, Capital Costs, Purchases Costs)

Performance

The total package of benefits a company offers to a customer. Performance and price are two components that define Value for a customer and of competitors. Performance includes function, reliability and convenience (abbreviation: FRC). (See also Value)

Performance Leader

A competitor or product that offers higher than industry-standard performance for a higher than industry standard price. More than 50% of a Performance Leader competitor's total unit volume is sold at price points above the Standard Leader product (abbreviation: PL). (See also Next Leader, Price Leader, Standard Leader)

Performance Leader: Some customers prefer more performance in return for a higher price. These customers choose Performance Leaders for their purchases. Performance Leaders are high-end specialists, with the majority of their sales at the higher end of the industry price spectrum. Their products have prices that start about 10% over the Standard Leader price and may reach levels many times the standard price. BMW in automobiles, Robert Mondavi in wines, American Express in credit cards, Cannondale in bicycles, and Restoration Hardware in hardware retailing are notable examples of Performance Leaders.

Performance Leaders play in niches. Their products' higher prices discourage the average customer. As a group, their total market share averages below 15% of the total market, and rarely reaches 30% of total sales. Individual Performance Leaders are usually less than a quarter of the size of the leading Standard Leaders.

Position

As a basis for customer segmentation, a customer segment defined by both the size of the customer and role a supplier plays in the customer relationship. (See also Customer Sizes, Role)

Positive Volatility

The percentage of industry or individual company volume sold during a period of time that is gained by a company, or by a set of suppliers, from another company or set of suppliers. Positive volatility is the sum of Get In plus Increase Use volume. (See also Negative Volatility, Volatility)

Predator product

A type of Price Leader product where the user benefits are equivalent to and the buyer benefits are less than those of the Standard Leader product.

Present (Company) Cost

In the analysis of a wholesale or retail company's approach to managing functional costs, this term refers to the costs of creating an ambience on the sales floor through decorations and other amenities, choosing the products to sell, and purchasing and displaying those products. (See also Functional Costs)

Price Gaps

Differences, either premiums or discounts, between products within the same leadership category (i.e. Next Leader, Performance Leader, Price Leader or Standard Leader).

Price information

A role reason, usually in the secondary role, where the customer seeks a "peer" of the primary supplier in order to ensure that the customer knows what competitive pricing is in the marketplace. (See also Peer Competitor, Role)

Price innovation

A change in the net cash equivalent the customer pays the supplier. This term includes such items as new payment terms, contract length, financing, and discounts of all types.

Price Leader

A competitor or product that offers below industry-standard performance for a very low price. More than 50% of a Price Leader competitor's total unit volume is sold at price points below the Standard Leader product (abbreviation PRL). (See also Next Leader, Performance Leader, Standard Leader, Predator Product, Stripper Product)

PriceLeader: At the other end of the value scale from Performance Leaders are the Price Leaders. These companies offer customers lower performance in return for a lower price. The major reason for these companies' existence is their very low prices. They provide a basic product, missing some costly benefits included in the Standard Leader products. Their product prices average 25-50% below the industry's Standard Leader price level. The Price Leaders include such companies as Borland in software, Dean Foods in dairy and food manufacturing, Drypers in disposable diapers and Perrigo in drug manufacturing.

The Price Leader group, like the Performance Leader specialists, controls a minority share in the marketplace. The benefits that Price Leaders exclude from their products are of value to the majority of customers in the market. Their principal customer segment is a relatively small, price sensitive niche. As a group, Price Leaders average less than 15% of industry market share. Individual Price Leaders are also a fraction of the size of the leading Standard Leaders.

Price Leverage

A role reason, usually in the tertiary or lower position, though occasionally in the secondary role, where the customer uses a Price Shaver competitor or other low price supplier to force its suppliers in higher roles to offer it a lower price. (See also Price Shaver, Role)

Price Point

A product or service defined by a combination of performance and price. Price points in a market differ from one another by having higher or lower levels of performance for prices that usually are more than 10% apart. Examples include Cadillac and Chevrolet automobiles, first class and economy air travel and Ritz and Courtyard hotel rooms. (See also Next Leader, Performance Leader, Price Leader, Standard Leader)

Price Shaver

A competitor who discounts less than 10% from the market's standard price for a product comparable to other products in the same leadership category, often to compensate for slightly lower benefits. (See also Shaver Product)

Price Umbrella

A situation where one or more competitors in an industry hold prices up and allow other competitors or new entrants to discount against them and take market share with the discounts. (See also Leader's Trap)

Primary supplier

The position held by the competitor that supplies the highest percentage of a product in a customer relationship. Every customer has a Primary Supplier. (See also Secondary Supplier, Tertiary Supplier)

Product Parochialism

A situation in which an established industry competitor cedes share to another competitor by refusing to copy a new product benefit or price point.

Productivity

Productivity is the amount of units of output a competitor produces from a given amount of units of input. (See also Effectiveness, Efficiency, Measure of Productivity)

Purchases Cost

One of three building block costs a company incurs. Purchases costs include all expenditures a company makes for such things as raw materials, energy and other supplies. (See also Building Block Costs, Capital Costs, People Costs)

Rate

This Return Management term measures the dollar cost per unit of building block cost employed to produce products and services. Examples include dollars per hour for people, dollars per unit for purchases, and the required dollar amount of pre-tax profits per dollar of capital invested in the business. (See also Building Block Costs)

Recycling of Capacity

The re-use of apparently unneeded capacity in a market with overcapacity. When a company leaves the industry or is acquired, most of its productive capacity usually survives. The new owner, often an expanding competitor, usually reduces overhead and puts the capacity back into the marketplace with a lower cost. (See also Capacity, Overcapacity)

Reformer product

A type of Next Leader product that reduces the benefits for the user while increasing benefits for the buyer compared to the industry Standard Leader product.

Reliability

As a measure of product performance on the Customer Buying Hierarchy, this term refers to the consistency with which the company delivers on the promises made, or implied, to the customer by its product/service package. For the customer of a channel of distribution, Reliability refers to the predictability of product availability, the return policy of the channel, and the quality of problem resolution the channel offers the customer. A customer purchasing a manufactured product sees three categories of Reliability: reliability of delivery, the supplier's performance record in getting the product to the customer at the promised quantity and time; reliability of function, the consistency with which the product performs the function promised; and reliability of market presence, the consistency with which the company supports its customers and distributors. (See also Customer Buying Hierarchy)

Reliability innovation

A Performance Innovation which alters overall reliability, including product failure rates, delivery failure rates, customer focus changes, management policy changes, or changes in responsiveness to customer and distributor problems. (See also Customer Buying Hierarchy)

Replacement Potential

The probability that one supplier, either inside or outside a customer relationship, can fulfill the role requirements of a position in the relationship currently filled by another supplier. (See also Role, Role Requirements)

Reprieve market

An industry characterized by using prices as the industry leaders come out of overcapacity. A Reprieve Market continues and prices continue to rise until demand falls or new capacity comes on-stream.

Return (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost an Intermediary Customer incurs to return defective or excess product to its supplier, including the cost to deliver the product to the supplier and receive credit for the returned product. (See also Obtain Cost, Sell Cost, Guarantee Cost)

Role

This term refers to the position a supplier fills in its relationship with a customer. Typically, there are three main roles: Primary, Secondary and Tertiary (abbreviation: P, S and T).

Role Requirements

These are the particular value attributes a customer requires from a supplier in a particular role in the customer's relationship.

RONCE

Return On Net Capital Employed. This measure is earnings before interest and taxes (EBIT) divided by the sum of total of debt plus equity.

Secondary supplier

The position held by the competitor who is the second largest supplier of a product to a customer. Many, but not all, customers have a Secondary Supplier. (See also Primary Supplier, Tertiary Supplier)

Segment

A group of customers with similar characteristics in the way they buy or use a product or service.

Sell (Company) Cost

In the analysis of a company's approach to managing functional costs, this terms refers to the cost the company incurs to sell the product. In a manufactured product, Sell Costs include all the costs of creating customer awareness, differentiating the company and the product from its competitors, and making the product available to the customer. These costs would include advertising, marketing, sales, and most outbound logistics expenses. In a wholesale or retail company, these costs would include the cost the company incurs to make the customer aware of the company and its products, to differentiate the company and its products from competition and to help the customer find, choose and pay for the product.

Sell (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost an Intermediary Customer incurs to display the product for sale, to train its sales people to sell the product, and to help the final customer find the product, choose among alternative products and pay for the product. (See also Obtain Cost, Guarantee Cost, and Return Cost.)

Serve (Company) Costs

In the analysis of a company's approach to managing functional costs, this term refers to after-sale support of the customer or the product. In a manufactured product, Serve costs include all costs of warranties, part supplies, trained repair employees, service centers, customer hotlines, and so forth. In a wholesale or retail company, Serve costs include after-sale services such as handling returns and crediting the Final Customer for the returned product. These costs may also include the costs of installing the product for the Final Customer and training the customer in the product's use. (See also Functional Costs)

Service Leverage

A role reason for secondary or lower roles in the customer relationship, where the customer uses another supplier in addition to its primary supplier to ensure that the primary supplier will offer it competitive service levels on quality, delivery, market support, and so forth. (See also Role)

Shakeout

A period in a market when competitors are squeezed out, or bought, by other competitors.

Share "Failed Away"

Market share that changes from one supplier to another because the share-losing competitor fails to perform according to the standards common throughout the industry or consistent with the history of the customer relationship. (See also Fail Market, Volatility, Win Market)

Share "Won Away"

Market share that changes from one supplier to another because the winning competitor has raised the standard of performance. (See also Fail Market, Volatility, Win Market)

Shaver product

A type of Price Leader product where the normal benefits for both the buyer and user are equivalent to the Standard Leader product, but the product's price carries an average discount of less than 10% off the Standard Leader product. Usually, weaker Standard Leaders in the market introduce Shaver Products or pricing in an effort to use a slightly lower price to gain marginal volume.

Silver competitor

A Standard Leader who holds the third largest or lower unit market share in its industry, gains share and enjoys above industry average returns. (See also Standard Leader, Gold Competitor)

Stable customer

This term refers to a customer who has not changed the position or purchase proportion of any of his suppliers during the period under study.

Stable market

An industry characterized by both low positive volatility on price and attractive average returns on investment.

Standard Leader

A competitor, or one of several competitors, or products that set the standard for performance and price in an industry. More than half of a Standard Leader's unit volume is sold at the most common product price point in the market. (See also Next Leader, Performance Leader, Price Leader)

Standard Leader: Standard Leaders set the benchmarks for performance and price in their industries. They are the reference points for both customers and all other competitors when using phrases such as "better than…" or "cheaper than…." They have the best known brand names. Standard Leaders include the major names in every industry. Examples include IBM in mainframe computing; Deere in agricultural equipment, Procter and Gamble in consumer packaged goods, McDonalds in quick service restaurants and Safeway in food retailing.

Standard Leader companies are the most common competitors in an industry. They come to dominate the market shares of their industries. In a recent study of nearly 400 large industries, we found that the median sized industry has twelve competitors. Most of those competitors are Standard Leaders in their industries. In the median industry of these 400 industries, the top four competitors command a combined eighty- percent of total industry sales.

Standardized Purchasing

A term denoting a process of selecting a supplier whereby corporate headquarters provides field offices with a definitive list of suppliers from whom the field may choose to purchase. The field office then decides the number of suppliers and the volume to be purchased from each supplier.

Stay In Volume

The portion of a company's unit volume, sold during a period, resulting from the retention of existing customers and customer volume. Stay In volume has three components: (1) the proportion of the customer relationship volume that remains the same as in the beginning of the period; (2) the proportion of volume which remains from customers which have decreased use during the period; and (3) the original proportion of volume from customers who have increased the proportion of their purchases from the company (abbreviation: SI).

Stripper product

The typical Price Leader product where both user and buyer benefits are lower than the Standard Leader product.

Strong Competitor

A strong competitor is a company that gains unit market share during a period of time. For example, if a market has a unit Compound Annual Growth Rate (abbreviation: CAGR) of 5%, and Company "A" has a unit CAGR of 7%, then Company "A" is strong. (See also Weak Competitor)

Super-economies of Scale

The phenomenon where units of an Input cost decline as the number of Output units increases. The Super-economies of Scale occur during major changes in technology, when many employees are replaced by capital investment. (see also Economies of Scale, Diseconomies of Scale)

Supervise employees

Employees of the company who have a few people reporting to them or who are technical specialists. These employees are usually middle-rated, exempt employees. (See also Do Employees, Think Employees)

Tertiary supplier

The position held by the competitor who is the third largest supplier of a product to a particular customer. Some, but not all, customers have a Tertiary Supplier. (See also Primary Supplier, Secondary Supplier)

Think employees

The more senior employees in the organization. These employees set policies and have middle managers reporting to them. (See also Do Employees, Supervise Employees)

Tiers

The classification of competitors according to their ability to fill roles with different Customer Sizes. Tier I competitors tend to fill Primary and Secondary Roles with Very Large customers and Primary Roles with Large customers. A supplier achieves membership in a tier by proving, through its presence in customer relationships and its mix of business in alternative roles and particular sizes of customers, that it can compete on equal terms with other members of the tier. (See also Peer)

Transformer product

A type of Next Leader product that increases benefits for the user but offers, at least initially, fewer buyer benefits than the Standard Leader product.

Unstable customer

This term refers to a customer who has replaced one of his suppliers or changed the share of volume assigned to one of his suppliers during the period. (See also Volatility)

Use (Customer) Cost

In the customer life-cycle cost of a product, used to develop product and service innovations, the cost a Final Customer incurs in employing the product in its normal application. These costs include the product price, operating costs (including labor), and inputs such as energy or other materials needed to use the product.(See also Acquire Cost, Dispose Cost, Maintain Cost)

Volatility

The percentage of industry or company volume sold during a period of time that changes from one set of suppliers to another. Volatility can be either positive volatility, the sum of Get In plus Increase Use, or negative volatility, the sum of Get Out plus Decrease Use. Unless many customers are entering or leaving a market, the industry's positive and negative volatility are very close in size. However, an individual company's positive and negative volatility may be quite different from one another. (See also Negative Volatility, Net Volatility, Positive Volatility)

Weak competitor

A Weak Competitor is a company that loses unit market share over a period of time. For example, if a market has a unit CAGR of 5%, and Company "B" has a unit CAGR of 3%, then Company "B" is weak. (See also Strong Competitor)

Weak Win

Sales volume gained by a company in competition with other suppliers when the customer has opened his relationship to new bidders because of the failure of his incumbent supplier. (See also Fail Market, Win Market and Volatility.)

Win market

A market where the majority of volatility occurs due to one or several competitors offering customers something less than half the market's suppliers could, or would, offer. (See also Fail Market, Customer Buying Hierarchy)