In today’s competitive business landscape, companies often focus their innovative power on creating new products or technologies, but forget to prioritize the most important aspect: creating unique value for their customers. I recently read a book キーエンス 高付加価値経営の論理 on Keyence’s value-added approach and how it contributes to its high profit margin. Keyence is quite notorious for turning down interviews, and this book’s author, Professor Nobeoka from Osaka University has done a good job at exploring its business model on high value creation. Let’s see how they accomplish this.
who is Keyence?
Keyence is a Japan-based company that specializes in industrial automation and inspection equipment. It is known for its direct sales approach and innovative solutions that enhance factory efficiency and reduces production cost. It operates with a fabless model, focusing on designing while outsourcing manufacturing. This asset-light approach is similar to Apple’s strategy of focusing on design and technology while partnering with manufacturers like Foxconn.
Keyence’s profit margin and operating costs are legendary among its competitors, as seen from the following table.
| Category | Keyence | NEC | Mitsubishi Motors |
|---|---|---|---|
| Revenue | 7,552 | 30,141 | 44,768 |
| Cost of Sales | 1,340 | 21,277 | 32,122 |
| Gross Profit | 6,212 | 8,864 | 12,646 |
| Gross Profit (%) | 82% | 29% | 28% |
| SG&A Expenses | 2,031 | 7,630 | 10,137 |
| SG&A Expenses (%) | 27% | 25% | 23% |
| Operating Income | 4,180 | 1,325 | 2,521 |
| Operating Income (%) | 55% | 4% | 6% |
Fig 1: Annual Income comparison as of March, 2022. Unit in hundred million yen (億日圓). Table from book.
According to Professor Nobeoka, the key drivers for Keyence’s high profit are a strong focus on helping customers achieve higher goals, utilizing deep know-how of their workflows gained through direct sales. This contrasts sharply with just listening to customer voices and creating something that they claim they need, using the latest technology or gadget.
What is Value?
Value-based pricing is essential for capturing the true worth of your product. It’s not just about covering costs but also understanding and leveraging the added value you created. For example, if a product helps a customer save $100 million in operating costs, the product’s selling price can be set at $50 million, even if the product costs $10 million to produce. This “sharing value” model has the customers paying proportionally for the gains they acquire. With the same product, if a customer can only save $20 million, they are more likely to pay around $14 million for your product, a drastic reduction in your margin.
What is Innovation?
Innovation isn’t just about new products or technologies; it’s about creating new types of customer value. Customers care less about how a product is made and more about how it improves their bottom line. Keyence’s approach challenges traditional business strategies. Rather than focusing on market-oriented strategies, which often lead to over-competition, Keyence adopts a customer-oriented approach by deeply understanding each customer’s domain and proposing customized solutions that improve their business. This deep knowledge fosters trust and grants Keyence access to confidential information, further enhancing their ability to deliver tailored solutions.
Innovative companies avoid price wars by focusing on creating unique, high-value products that customers genuinely need, thereby reducing waste and enhancing customer satisfaction.
Essential Skills for Innovation
Innovation needs a blend of customer domain knowledge, business acumen, and product planning expertise. The author explains that Keyence’s staff are not just product experts, but also possess consultancy skills that enable them to propose solutions to increase customer value. This requires significant investment in understanding customers and building strong know-how, as well as having the ability to identify areas where Keyence’s products can make a meaningful impact.
A company culture focusing on know-how and autonomy
Keyence’s staff are empowered to act autonomously according to shared values, with a focus on increasing customer value daily rather than sticking to long-term plans. This autonomy, combined with continuous learning about products, customer needs, market trends, and technological innovations, fosters a dynamic and responsive organizational culture.
Product Development and Sales Integration
At Keyence, all disciplines need to know how their clients’ businesses are run, and product development and sales are closely integrated. Product developers focus on creating products that can be easily demo’ed by sales teams on-site, simplifying the user experience to wow customers. Sales teams, in turn, must be flexible enough to scale these products to a wider customer base. This is termed mass customization by the author, where only products that can improve lots of use cases are developed, and sales engineers can utilize their deep knowledge of both Keyence and their client to recommend a customized solution.
The synergy between engineering and sales ensures that product innovation is complemented by effective sales proposals, increasing both functional and meaningful value of a product. By leveraging each other’s strengths, product development can design with sales strategies in mind, while sales can effectively communicate the value proposition.
Immersive Customer Understanding
A critical factor in Keyence’s success is its profound domain knowledge.
Two Types of Customers
Keyence identifies two types of customers: those who know what they need to solve a problem and those who don’t. The former type will usually focus on the functional value of a product, and procure the cheapest offerings available. The latter type of customer is more valuable, as they are willing to pay for the know-how and consultancy skills that Keyence brings to the table. This surplus is the additional value that Keyence differentiates itself with competitors.
Implicit vs. Explicit Needs
Understanding both explicit and implicit customer needs is crucial. Explicit needs are straightforward and often lead to price competition, while implicit needs require deeper insight and offer opportunities for higher value solutions.
For example, surveys and feedback provide only a snapshot of customer needs that are explicit. Rather than just asking customers what they want (desire), Keyence staff immerse themselves in customer workflows onsite, focusing on understanding what customers are challenged with, and what they want to achieve (outcome). By working backwards from the outcome, Keyence develops solutions with meaningful value that transcends functional value, resulting in higher profit margins and customer loyalty by exceeding their expectations. This approach is exemplified by Steve Jobs’ philosophy of not just giving customers what they want, but creating products that they didn’t know they needed.
The author cites an interesting example of a microscope that must be used in dark room. By enclosing it in a box and attaching a screen, the user can now view results outside the dark room and also share screen with many people. Keyence’s proposed solution is not a mere improvement of the condition in a dark room, but transcending that problem to change how a microscope can be used. Thus it is apt for FT to claims that they are selling “not a product, but a way to make a factory more efficient…..sales engineers can often provide an idea of how to improve your manufacturing set-up literally on the site with an idea of the payback time and return on investment”.
Rewarding Value Creation
Keyence rewards employees not just for results but for the processes that lead to those results. This approach filters out random successes (e.g., a new factory causing a surge in order, or taking over ex-staff’s account) or volume games (resulting from low margin how volume items), but about the highest value solutions for customers. By emphasizing the causation process, Keyence ensures that innovation is driven by genuine customer needs and insights.
Another interesting tidbit is how Keyence views everything in the lens of value. Planning for a meeting, writing a business plan, commuting to a customer site all involve both time and people. At Keyence, these are heavily scrutinized as to whether the use of such resources justifies the business value created. This definitely cuts down unnecessary meetings and reports that are merely procedural.
Major takeaways
So, what can business leaders learn from Keyence’s success?
- Focus on creating value, not just products: Prioritize understanding customer needs and pain points to develop solutions that deliver meaningful value.
- Invest in customer domain knowledge: Immerse yourself in customer workflows to gain a deeper understanding of their needs and develop customized solutions.
- Adopt a customer-oriented approach: Move away from market-oriented strategies and focus on creating unique and valuable products for your segment.
- Integrate product development and sales: Ensure that product development and sales teams work together to create products that can be easily proposed by sales teams to improve customer value.
- Develop consultancy skills: Train your staff to possess consultancy skills that enable them to propose solutions that increase customer value.
- Focus on results, not just demand: Understand what customers want to achieve and work backwards to develop solutions that exceed customer expectations.
Conclusion
Keyence’s approach to innovation and customer value creation offers valuable lessons for businesses aiming to differentiate themselves in competitive markets. By focusing on deep customer understanding, value-based pricing, and continuous learning, companies can create unique and high-value products that meet both explicit and implicit customer needs. This strategic focus on customer outcomes, rather than just product features, is key to sustainable success and growth.