Value is the Key (Quality
is Only One Component)
Morgan Hall
I t is generally agreed that to be successful in business
we must satisfy our customers, that is, achieve cus-
tomer satisfaction. High performance in customer
satisfaction is thought to build loyalty and retain existing
customers while a reputation for satisfying customers will
attract new ones. Improving customer satisfaction is
looked upon as a means to grow the business.
“If you can’t measure it, you can’t improve it,” so
tracking and responding to measures of customer satis-
faction should be a beneficial exercise for an organiza-
tion. But attempts to measure, track, and respond to
customer satisfaction indicators have not been complete-
ly successful. Increases or decreases in customer satisfac-
tion measures have not always been accompanied by
correlating changes in sales or repeat business.
A re we looking at the right thing? Do we re a l l y
understand what customer satisfaction is? Customer sat-
isfaction is an end, not a means. It is the result of doing
“something.” Understanding what this “something” is
and doing it better is the real key to customer satisfaction
improvement.
Staying focused on a customer satisfaction measure
is analogous to obtaining a gross measure of quality at
the end of the line. You know (after the fact) if it is good
or bad, but the overall metric doesn’t help you make
things better. In the case of quality, we generally under-
stand the “means” to obtain it. We work upstream on the
means to effect improvement. In fact, today’s leading
organizations track and respond to upstream metrics in
o rder to prevent quality nonconformance. It is also
important to understand the means to achieve customer
satisfaction, which will allow us to make the upstream
decisions and implement upstream metrics needed to
ensure the desired end results.
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What is Value?
The customer will be satisfied if your product
or service has a high relative worth, utility, or importance
to them. According to Webster’s Ninth New Collegiate
Dictionary, something with “relative worth, utility, or
importance” has value.
Customers will be satisfied when your product or
service is perceived to have a high level of value, but how
do you put maximum value into your product or service?
This can be answered if we understand the concept of
value. The subject of value has been discussed in recent
writings where it is considered to increase with improved
quality and diminish with increasing cost. We have no
a rgument with this relationship, but this simplistic
model leaves us uncomfortable because we know intu-
itively it is incomplete.
The elements of cost and quality are direct compo-
nents of value, but in fact, value associated with a product
or service has both direct and indirect components. A value
model reflecting both direct and indirect components is
represented by the following value parameters.
f (Q,F,P,O,E)
V= xPF
f (C)
V = Perceived value
Q = Quality
F = Features
P = Prestige
O = Ownership experience
E = Exclusivity
C = Total cost
PF = Paradigm fit
The meaning of each of the value equation param-
eters may be made more clear with the following expla-
nation and examples:
V - Perceived Value
Value in a given product or service varies from per-
son to person because value is a perception. Despite this
variation, there are elements common to everyone’s value
equation. Manipulating these elements, one relative to the
others, will result in increased or decreased value as per-
ceived by an individual.
In the equation, value is represented by the division
of a complex function in the numerator by a cost function
in the denominator, the result of which is multiplied by the
PF factor (paradigm fit). Each parameter has a relative
weight which determines the magnitude or importance of
that parameter. Weights are associated with diff e re n t
parameters on the basis of personal predisposition, expec-
tations, and prevailing environmental factors. Personal
predisposition is relatively constant while expectations and
environmental factors can be more transient in nature.
Some examples to consider:
Predisposition
Price or cost may tend to be more important to an
individual who was brought up with little access to mate-
rial things.
Environmental influence
The importance of cost is inflated in hard economic
times. Fads or “what’s in” can influence several parame-
ters. Everybody had to have a hula hoop. A standard set
by the competition, as applied to a given parameter, can
be a strong environmental weighting factor.
Expectations
Reputation and past and present experience all
have a bearing on expectations.
The general value equation is individualized by the
weights associated with each parameter.
Q - Quality
The definition of quality has changed over the past
three decades. It started with relatively simple definitions
like conformance to specifications, freedom from defects,
fitness for use, and conformance to requirements. More
complex global definitions such as “meeting customer
requirements and expectations” and “doing the right
things right the first time, every time, to delight our cus-
tomers” came later. The definition continued to evolve. It
was changing because it was never fully satisfactory.
T h e re was always something missing. It didn’t quite
explain what we meant when we said quality.
We were trying to get the word quality, rooted in the
concept of doing things right, to somehow encompass
doing the right things. Maybe the reason quality is so elu-
sive is that we can’t decide what it is. Recognizing that
quality is a component of value allows us to go back to a
simpler, more easily understood definition and still feel
comfortable about capturing the essence of customer sat-
isfaction. Conformance to specifications will do nicely for
the quality parameter in the value equation. All those
other things (and more) that we were unsuccessfully try-
ing to wrap up in quality are covered under other param-
eters in the value equation.
F - Features
These are the physical, aesthetic, and performance
characteristics determined in design. Some examples of
features of a physical nature are: space to take notes on the
trainer’s hand-out, electric door locks, air bags or cup
holders in a car. Features associated with performance
include 0-60 mph in 6.6 seconds in a vehicle, user friendli-
ness in software, or it always works (reliability). Aesthetic
features may be things like a pleasing appearance, pleas-
ant texture, or even cleanliness at Disney World.
P - Prestige
This parameter involves the strong re c o g n i t i o n
(usually positive) that gives a sense of importance and/or
power to the owner or one who controls a product or ser-
vice. One may view prestige as a heavily weighted factor
in the value equation of that group of individuals who
either own or aspire to own a Rolex watch rather than the
usual department store variety. Today, market leading
tennis shoe and sports equipment companies as well as
makers of jeans exploit the prestige parameter. Sports fig-
u res are used in advertising and company logos are
prominently displayed to allow product owners to vicari-
ously share in the prestige of the VIPs.
O - Ownership Experience
This parameter encompasses a broad spectrum of
experiences — how the customer feels about the experi-
ences he associates with acquiring, owning, and dispos-
ing of the product or service. Some examples of
ownership experience, positive and negative are:
• unknowledgeable or high pressure sales persons
• maintenance and/or repair experiences
• getting it when you want it
• on-time or late delivery
• it feels good to use a recyclable product
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 • being able to say, “My laundry detergent is bio-
degradable.”
• inconvenience of getting problems handled
• loss of use and lost opportunity due to return of prod-
uct for repair.
E - Exclusivity
That which is unique or where supply falls short of
demand will have exceptional value for those who
weight this parameter heavily. Moon rocks, works of art,
limited editions, proprietary products or processes, John
K e n n e d y ’s golf clubs, and Morgan Motor Cars are all
examples of items which are valued for their exclusivity
... but only by individuals where the exclusivity parame-
ter is weighted heavily.
C - Total Cost
Traditionally the only cost of concern to the gov-
ernment or OEM purchasing person and to many indi-
viduals was purchase price. Today, many people realize
that total cost involves more than purchase price alone.
Even so, initial price is probably still the most important
consideration in most purchases. This is likely because
purchase price is in the very real here and now, while the
other cost components are in the future and more diffi-
cult to understand. The following expression re f l e c t s
Total Cost (C), as it is used in the value equation:
C=Pi+Cc+Cd
C = Total cost
pi = Initial price
Cc = Continuing cost
Cd = Cost of disposal
Pc-Initial Cost
This is the purchase price, or price paid to acquire
the product or service.
Cc-Continuing Cost
These costs are recognized as a real and often sig-
nificant element of the total cost of the product or service.
They include costs to maintain, repair, and operate the
product or service.
Cd-Cost of Disposal
Recognition of this cost component is relatively
new to most organizations. The importance is driven by
environmental concerns and, in many cases, legislation.
PF-Paradigm Fit
This parameter varies from zero to one. A one is for
a perfect fit to the paradigm for that product or service.
A product that does not fit can have a PF approaching
zero. A product or service can have high levels in many of
the value components and still have low value if it does
not fit the existing paradigm. A product can be too late or
too early in time. For example, one could have the best
automobile engine carburetor ever conceived and it
would be of little value when the paradigm for supplying
fuel to automobile engines is a fuel injection system. On
the other hand, Joel Barker points out that digital watch-

Applying the Value Equation Concept

Quality Forum XII, an internationally televised seminar celebrating National Quality Month, was held October 3, 1996. The annual program was
sponsored by Hewlett-Packard, AT&T, Fortune, US Robotics, and ASQC. Three speakers at the forum illustrate where the concept of value and the
value equation may be applied.
Hewlett-Packard
Lewis E. Platt, chairman and CEO of Hewlett-Packard (HP), described his company’s “Quality 1 on 1” program, a corporate initiative which
allows a cross section of employees and managers to interface with customers and prospective customers. The program is driven by the realiza-
tion that customer experience is important. Platt stated, “Customers want more than good products and services” and “quality from the cus-
tomer’s point of view is more than a good product. It’s an impression assembled from a whole set of experiences.” Platt listed the following
characteristics a customer associates with the quality of a service such as watching a movie or drinking a fine wine: presentation, cost, accessi-
bility, pleasure, and meeting or exceeding expectations. He stated, “At HP we have come to realize the same is true for high-technology prod-
ucts.” These are characteristics associated with the value equation.
Although HP is still expressing their actions in terms of an expanding definition of quality, they are, in fact, trying to understand the value equa-
tion of the customers that make up their target market. Would defining the “Quality 1 on 1” program in terms of the concept of value and the
value equation make it more effective? No one knows, but the framework, organization, and clarity of purpose provided by the idea of value may
make it easier for participants to understand the program. It appears that HP has identified quality, features, ownership experience, and total cost
as highly-weighted components of their customers’ value equation. Prestige and exclusivity are less important.

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es were originally rejected because they didn’t fit the
watch paradigm when they were invented.
An excellent example of applying the idea of value as
the driver of organizational effort can be found in the
Toyota Production System, synchronous manufacturing,
and lean production; whatever name you give it is not
important. It is the system under which the Japanese oper-
ated so successfully to produce products that displaced com-
petition and dominated their targeted markets. One hears a
lot of talk about “quality” but the most cursory look at the
system shows that there is a lot more going on than just
producing high quality. The system addresses other ele-
ments of the value equation as well. It is a system designed
to put more value in the products by focusing on features,
ownership experience, and total cost as well as quality.
Total Quality Management (TQM) has become a
much maligned term because of its largely unfulfilled
promise. Do you think there could be more successes with
TQM if it were defined in terms of value instead of quali-
ty? A revised TQM definition might be: “TQM is an orga-
nizational culture characterized by a mind set that drives
the organization to maximize the value it puts into its
products and/or services.”
This definition keeps the focus on organizational
culture, a shared mind set, and the importance of putting
value into its products and services.
Another application of the value equation concept is
in matching products or services to markets. Groupings of
individuals using similar weights associated with the
parameters of their value equations constitute a market
segment. The actual individual weights account for the
variation observed within a market.
Organizations generally look at establishing a mar-
ket niche as finding a need and fulfilling it. How they go
about fulfilling that need should be influenced by the fact
that the market niche is composed of a group of cus-
tomers with a shared perception of the value in a given
product or service. Identifying the most significant com-
ponents of the shared value equation will help appropri-
ately focus efforts, thereby conserving resources. In some
products or services, one or two value components are
dominant, and may be the primary cause for perceived
high value. Identifying the primary value components of
some well-known products or services is a helpful exercise
for better understanding the value equation
Morgan Hall is a senior manufacturing consultant with the
Maryland Center for Quality and Productivity, University of
Maryland, College of Business & Management. He has 35 years’
manufacturing experience with GM, holding senior management
positions ranging from production engineering to assembly and
quality control. Hall is an adjunct professor at Loyola College and
a member of the Loyola College Quality Advisory Council. He is a
Certified Quality Engineer and a Certified Quality Auditor.
© 1997 AME®
For information on reprints, contact: Association for Manufacturing Excellence
380 West Palatine Road, Wheeling, Illinois 60090-5863 847/520-3282

Newton Vineyards
After seeking the definition from a dictionary, Dr. Su Hua Newton, wine maker and owner, Newton Vineyards, concluded, “Quality is all things to
all men.” She falls back on her personal view of quality. When speaking of wine, Newton, with obvious passion for her work, stated that perfec-
tion is quality: “Something that is quality is truly unforgettable.” The objective, therefore, is to produce a “superb bottle of wine,” and this is what
she and the people at Newton Vineyards pursue. If it were possible to produce such a wine and repeat the process so that you could produce
thousands of bottles, the perception of quality would be gone. Newton said, “Quantity has a way of destroying the image of quality. The minute
there is quantity, quality goes out the window.” Clearly, exclusivity is a dominant factor in Newton’s value equation relative to wine. Is this repre-
sentative of the value equation of her current customer base? If it is, Newton Vineyards should seek to produce perfection in small quantities.
The value model would separate quality from exclusivity. Quality would be determined by clarity, chemistry, etc. Exclusivity would be associated
with the scarcity of that wine with the unique and unforgettable flavor and bouquet. Each characteristic would then be pursued in accordance with
its weight in the value equation of the target market.
3M
By developing their Earning Customer Loyalty initiative, 3M has done some valuable work on the relationship between perceived value and loyal
customers. L. D. DiSimone, president and CEO stated, “… customer satisfaction with specifications has become a prerequisite for participation
in the marketplace.” And “…[the] loyal customer perceives it [specific brand] as a higher value,” and “… customers want us to deliver on our
promises — [which are] product features to the feeling they get when they use the product.” The initiative focuses on providing value by deter-
mining what is the brand promise and then delivering on it. The brand promise for a product will be attractive to the people in the group of cus-
tomers whose value equations have factors weighted in a manner consistent with the brand promise. Perhaps consideration of the ideas of value
and the value equation along with brand promise would provide a more complete picture of what is required to earn customer loyalty.

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