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The discipline of market leaders

Bookcover

by Michael Treacy and Fred Wiersema, Harper Collins, 1997.

Abstract

The authors invite us to choose one approach from three; operational excellence, product leadership; customer intimacy. All selling propositions should reflect the chosen value discipline.

(Reviewed by Edgar Wille created in August 2004)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

Introduction

An Ashridge client asked for a summary of this book so that VLRC users might consider its challenging themes. We are happy to meet the request.

The book was a runaway success from the start. This was not because there was anything startlingly new, but because old ideas are expressed in a vivid new way, so that what you may have previously missed you now welcome and even put into practice.

The many stories with which the themes are illustrated and which occupy about half the book do not lend themselves to summaries. Stories have to be told not summarised. Another problem with the stories is that they are at least 10 years old and some companies, then successful, have now lost their shine. However, the principles they illustrate still stand and any failures could be because they didn't stick to their principles.

There are two editions of the book. One in 1995 has an extra chapter telling British and other European stories. The 1997 edition is virtually identical, but has some 11 diagrams to illustrate the text.

You don't have to agree with everything in a book in order to gain benefit. I would urge managers who read this book, or even this summary, to enter into dialogue with it, adapting its ideas to their own purposes. I have noted some areas for discussion.

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Focus in business

The overall theme consists of three major needs in business:

  • To offer a unique and focused proposition offering a specific value to customers.
  • To support this with a practical operating model of processes which will ensure that the values are truly realised for the customers.
  • To focus on a specific discipline which will control all activity and avoid being all things to everybody, which can end up being nothing in particular to anybody.

Treacy and Wiersema emphasise the need to focus in business and not to dissipate energy in following a wide diversity of purposes. The focus is on adding value to the customer and thereby to one's own company. Although it ranges widely and revisits earlier themes at several stages, the book may be distilled as follows under the above three categories:

  1. A company needs to have a clear value proposition. It is focusing on one major value needed by the customer, such as price, quality, performance, time, service or convenience. The authors suggest that you should not confuse the customer by giving equal priority to a number of such factors. Be outstanding in one respect, while not neglecting other matters.

  2. The value proposition needs to be supported by effective and efficient processes, by a sound operating model. Its operating processes, its management systems, its business structure, its culture will all ensure that the value proposition is fulfilled in a smooth and acceptable manner.

  3. To achieve the first and be effective in the second there are three value disciplines from which one, and only one, should be selected as the way of proceeding. The content will be dependent on specific situations, but the discipline applies wherever similar needs apply.

The three value disciplines are:

  • Operating excellence - the best price with the least inconvenience. (Best total costs).
  • Product leadership - being the best in some field, having generally recognised excellence in it. (Best products).
  • Customer intimacy. You don't just go out and sell a product or service, but you nurture a relationship with customers. You develop closeness to them, particularly in business to business situations, so that you are there to help them to achieve success as a business. You come to understand them and help them to solve their problems or to seize their opportunities. You become extensions of each other, in ways that go beyond traditional marketing. (Best solutions).

Of course we have to recognise that categories are not actual realities, but are verbal "buckets" into which thinkers place items which seem to them to share common factors. So the three themes and the three value disciplines of our authors cannot be invested with the status of holy writ. They are one way of looking at things, of labeling activities to help managers to develop their own strategies.

In fact the authors do themselves exercise some flexibility at times in applying their principles. Their value disciplines tend to have some overlap. They give examples of customer intimacy in companies to which they attribute operating excellence; product leadership is not always seen as incompatible with either of the other two value disciplines. But for clarity they treat them as distinct concepts.

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The value proposition

The need for strategic focus dominates the book from the start and is encapsulated in the first theme - the value proposition.

Many companies fail because their value proposition is not related to what customers value now, but rather to what they used to value in an earlier and successful period of a company's life cycle. The value proposition gains strength from the expectations which an effective company can create in potential customers. An effective company is constantly redefining value by highlighting the factors which can raise customer expectations in the direction which the company can provide. Companies have all the time to be developing new propositions which will appeal. They can never rest on their laurels. This year's value is not necessarily next year's.

Examples are given in this book of companies which did not learn the lesson that customers want more of the things that they value. This means that if it is low cost they value above all else, then they want the lowest. Of course price is part of the low cost equation, but ease of access, convenience, speedy distribution, high quality, with less waste and less maintenance requirements can all keep costs low. However some customers just want the lowest possible price, period. They are less concerned with the other cost refinements. Others may focus on one of the other components of cost, depending on their particular area of expertise.

Yet other customers may value reliable expert advice that will put them on the road to higher levels of success. Some will want state of the art design. Whatever they value will bring success to the company that can provide it in a unique way and degree. Brand popularity alone will not maintain a reputation for providing the value proposition which will appeal to a particular customer or class of customers.

Time can be the key element of a value proposition for some - the avoidance of delay. Speed of response is a key value dimension. This means that there must be an unrelenting search for ways of providing this value. Whoever sold to supermarkets customer self service check out systems, where they scan their own purchases and pay by credit card, was on to a good thing. But the advantage would not last long as everybody would follow suit. The next value proposition has to be ready even before the current one is launched.

New has to be new; improvements cannot be seen as of value if they are simply a matter of adding a few odd ornaments, "bells and whistles" as the metaphor goes.

All too often companies become complacent as they are bombarded with forecasts of doom that they have heard so often. They are often blinded by their "features" which reflect their skills but not necessarily the customers' values. Or they are complainers against the unfairness of their competitors and even the unreasonableness of their customers. Some are impeded by a belief in the sacrosanct nature of their culture.

Such companies place faith in special promotions, selective discounts, throwing bodies at problems, dressing up the accounts (even legally), introducing new and improved products without checking sufficiently the potential value in the customers' perceptions. And the key, in the view of the authors, is that unprecedented focus and discipline is required "to define an unmatched value proposition, build an operating model, and sustain it through constant transformations and improvement".

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Operating models

The second major theme of the book is that value propositions must be implemented through operating models that consist of value driven processes. The actual operation processes, the management systems, the organisational structures and the culture must all enable the value proposition to be fulfilled. The concepts behind the operating model will be the same, but the content will vary depending on the specific nature of the value proposition.

The appropriate operating model ranges over all the activities of the company. High levels of innovation will mean that companies are working on the next two inventions, before the current one has even been launched. They compete within the company to make redundant every new offering. Thus they keep ahead. Levels of service which go beyond anyone's expectations are maintained, even if individually they are not immediately profitable. The profit follows the reputation gained.

Of course you can't be the best at everything, so choices have to be made, choices of customers who will appreciate your value propositions. You narrow the focus of your activity - your operating model - to ensure the uniqueness of your value proposition in practice. In this connection four rules are offered:

  • Provide the best offering in the market place by excelling in a specific dimension of value.
  • Maintain threshold standards in other dimensions of value.
  • Dominate your market by improving value year after year.
  • Build a well tuned operating model dedicated to delivering unmatched value.

These concepts of the value proposition and the connected operating model are claimed to be new and superior to other concepts such as those of the learning organisation and core competencies, which are said to be only parts of the whole value approach. Perhaps we should maintain a little reserve when theories claim to supersede all others. But we may usefully add them to our repertoire to be applied as appropriate to our situations.

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Value disciplines

We now come to the third category of focusing a business, the three disciplines from which it is proposed we select our way of delivering a value proposition and the kind of operating model we follow. We are invited to run businesses either by:

  • The value discipline of operational excellence or
  • The value discipline of product leadership or
  • The value discipline of customer intimacy.

Note the "or". It seems the authors will not allow us to pick and mix. It must be one, even if in their detailed descriptions they seem to allow a little flexibility. There are echoes in this approach of the view expressed in 1980 and 1985 by Michael Porter on generic strategies, where you could concentrate on being the firm with the lowest cost structure in your field or on being the ultimate in differentiating your product or service. But you couldn't do both said Porter, yet many companies have succeeded with a hybrid approach. Gerry Johnson and Kevan Scholes discuss this in their valuable book Exploring
Corporate Strategy
and show how there are other categories and that focus does not have to be absolute.

We now follow our authors through their discussion of the three value disciplines, which occupies over half the book and is reflected in its title.

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The discipline of operational excellence

The book is mainly concerned with the choice of value discipline by which the value proposition is conveyed. Different value disciplines demand different operating processes. McDonald's customers value consistency of product and service. Thus the company concentrates on smooth production, according to rigid standards, good demand management and developing people indoctrinated into the way value is produced. Management systems measure and reward what is most important. This is a matter of employing the operational model in a way which will provide what the authors call operational excellence, the first of the value disciplines.

Operationally excellent companies deliver a combination of quality, price and ease of purchase that no one else in their market can match. Dell is offered as an example of operating excellence as its operating model cuts out intermediaries and offers a direct delivery system. Operating excellence as a value discipline operates according to four features in their operating model:

  • Processes for end to end product supply and basic service that are optimised and streamlined to minimise costs and hassle.
  • Operations that are standardised, simplified, tightly and centrally controlled, leaving few decisions to the rank and file employees. (Some might not see this "leave your brains at the door" approach as particularly excellent.)
  • Management systems that focus on integrated, reliable, high-speed transactions and compliance with norms.
  • A culture that abhors waste and rewards efficiency.

Operating excellence does not mean only price when it offers best total costs. Price will be kept as low as possible, but it will be accompanied by high reliability and durability, which sustains a low cost of using the product over a period of time.

Operating excellence still follows to a large extent the rules, regimentation and proceduralised approach established by Henry Ford: only one way to do everything. Variety is seen as killing efficiency.

Treacy and Wiersema differ from many business management authors in seeing such an approach as reasonable for a certain kind of activity, whereas the norm in current management teaching is to encourage all employees to use their brains and to have active involvement, even within rules and procedures. Employees are to be trained to be flexible if it is in the customers' interests, whereas this book tells us that within the operational excellence discipline "these companies are not looking for free spirits".

Avoiding waste is seen by our authors as a key factor in operational excellence, but this requires intelligent employee involvement. The quality guru, Deming, placed great emphasis on this personal involvement of line employees. It contrasts with companies mentioned, who in pursuing operational excellence go in for the razzmatazz of praise meetings, with plaques and medals for good work. They suppose that these "rewards" are sufficient to secure dedication.

Operational excellence is also obtained by running an efficient supply chain, where cooperation supersedes conflict, to the benefit of all. Paper, transportation and distribution costs are thus slashed and time saved. Information technology is a key factor in the achievement of this discipline, and has taken vast strides since the book was written ten years ago.

Operationally excellent companies fuel their growth in three ways. "They work to assure a constant, steady volume of business so as to keep their assets continually working; they find new ways of using their existing assets; they replicate their success formulae in other markets. There are reflections of Igor Ansoff's market penetration model in this perspective, (existing products in existing markets; existing products in new markets; new products in existing markets; new products in new markets). Ansoff was not restricting these four approaches to one kind of value discipline. Readers may wish to debate whether the restriction of such approaches to one value discipline is warranted. Contrary to the book's main thrust, it may be true that product leadership and customer intimacy can also be associated with low cost operational excellence.

This first value discipline is summed up by the authors in one word: "Formula". This can mean precise, clear procedures, with little opportunity to deviate and it may succeed. That might be less acceptable10 years later, when the emphasis in management literature tends to oppose the mechanistic approach and favour flexibility and even emergent strategies.

The section on this value discipline ends with an extended interview with managers of the old AT&T organisation on how they marketed their universal card (UCS). Their value proposition focused on "no fee". They simplified life for the user and offered discount for frequent use. This got them ahead of the competition, a position which they maintained for at least some time. It would be an interesting piece of research to see where they are ten years later.

UCS also seemed to follow this operating excellence discipline without demotivating people by minimising the use of initiative as per Henry Ford. They claim to have created a high spirited attitude in people performing routinised work. Its approach has been to hire eager people with a lot of potential, train them to view excellent service as routine, and assemble them in teams to solve problems that lead to continuous improvement. That seems to me to go well beyond Fordism. Indeed the UCS chapter seems to expand the value discipline beyond our authors' emphasis on one focus. It therefore encourages readers to debate the issues and not accept them at face value. In the debate new ideas may emerge starting from the stimulus the authors have provided, but going beyond.

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The discipline of product leadership

This is the second value discipline set out by Treacy and Wiersema. A company pursuing it "continually pushes its products into the realm of the unknown, the untried or the highly desirable. Its practitioners concentrate on offering customers products or services that expand existing performance boundaries". They must be creative, embracing ideas from anywhere; they need to commercialise their ideas quickly and they need to leapfrog their own latest idea with newer ones, so that if anyone is going to render their product obsolete, they do it themselves.

Product leaders create and maintain an environment that encourages employees to bring ideas into the company and they listen to such ideas, however unconventional. They avoid bureaucracy which slows up the commercialisation of innovations; they look for new ways to shorten cycle times. They react to situations rather than engage in endless planning and analysis. The staff they recruit are in the entrepreneurial mould - of a creative and innovative disposition. Product leaders are their own fiercest competitors, as mentioned above in the leap frog comment.

Their operating model has four main features:

  • A focus on the core processes of invention, product development and market exploitation.
  • A business structure that is loosely knit, ad hoc, and ever changing to adjust to the entrepreneurial initiatives and redirections that characterise working in unexplored territory.
  • Management systems that are results driven, that measure and reward new product successes, and that don't punish the experimentation needed to get there.
  • A culture that encourages individual imagination, accomplishment, out of the box thinking, and a mindset driven by the desire to create the future.

The authors comment on the way that too many companies leave invention alone, because they find it easier to refine, repackage and reformulate what they are already doing. That way they will not become product leaders in their field.

Product leaders are perceived as those who don't tinker but really offer products at the edge of what is possible. They become known for this. Once Harley- Davidson climbed out of their decline period they became an object almost of worship. People in 1994 were already ordering the 2003 model.

Edison is presented as almost the patron saint of innovation and his operating model is described and compared with more modern cases. "He saw breakthrough products as the sustenance his enterprise needed to keep on working... [he] maintained a fluid organisation [around the creation of products rather than around functions}... His business wasn't driven by procedure, but by the extraordinary talents of key individuals who developed and marketed breakthrough after breakthrough… [to get these people may mean] encouraging the gadflies, the concept champions, the mavericks, the unconventional and the eccentric."

Rewards are the opportunity to be on the newest team facing the most daunting challenges, with maximum opportunity to learn from the experience. A stream of mind blowing problems are what motivates them most of all.

How different the spirit of this second value discipline is from the first. Of course we might ask whether every company needs at least an enclave where tomorrow's success is being developed by idiosyncratic, second discipline entrepreneurs.

There is another case study to illustrate this discipline, based on discussions between the authors and Intel representatives. This case mentions a wide range of products in which Intel were active and perhaps still are. So although their Pentium chip was their flagship product, they didn't precisely illustrate the total focus on one product, though all the products depended on chips.

The staff at Intel did not restrict themselves to one area; they were constantly crossing boundaries in the company. Roles were deliberately ill defined and valuable human resources were moved around from lower to higher areas of return. If roles were not defined, tasks were, but how to achieve them was largely left to the individual or more likely a team. People moved around, now with a large number reporting to them and then as members of a small team.

"The company follows no simple formula to achieve product leadership. Multiple competencies, extending well beyond outstanding product design and manufacturing, have contributed to the company's earning its preeminent position in the industry." Everyone in the company is poised to change direction in a snap, as need - customer need - determines.

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The discipline of customer intimacy

One is entitled to wonder whether this is a separate value discipline as claimed by the authors. Do not all companies need to stay close to the customer? Isn't relationship marketing a key management concept nowadays? But perhaps the authors have in mind companies where living in close contact with your customer is not just highly desirable but absolutely essential.

Perhaps the next two quotations sum up why the authors have singled this out as a unique value discipline:

"Customer intimate companies don't deliver what the market wants, but what a specific customer wants. The customer intimate company makes a business of knowing the people it sells to and the products and services they need…"
"Their greatest asset is their customers' loyalty. They don't pursue transactions; they cultivate relationships. They are adept at giving the customers more than they expect."

The operating model for this third value discipline includes:

  • helping the customers to understand what they need and helping them to implement the solution properly.
  • delegation of decision making to employees who are closest to the customer
  • management systems which are geared to results for customers who are carefully selected and nurtured.
  • a culture concerned with specific rather than general solutions as part of a deep and lasting client relationships.

Stories are told of the period in IBM's history where it was the closeness to the customer that meant more than the actual products. Here was advice from the frontiers of knowledge which helped companies advance down the road of information technology. True it sold IBM equipment, but went beyond this as is reflected in my own experience. I remember how in British Coal computer headquarters there were few days when the IBM representatives were not closeted for hours with the managing director or meetings of all the senior staff. More than the merits of equipment were discussed. In fact the whole philosophy of computer usage for the business benefit of British Coal was being thrashed out.

A number of examples are given of customers who benefited from discussion with their suppliers who were interested in helping the customer company to make profit. Sometimes it is difficult to realise that the supplier is not part of the customer's staff! The point is also made that advertising and promotion costs are reduced when customer intimacy is the key value discipline.

As to the staffing of companies following this value discipline, more than product leadership companies and far more than operationally excellent companies, the customer intimacy companies tend to be a loose collection of people who in one way and another are all focused on customer related issues. The employees have a broad range of skills and are adaptable, flexible and multitalented, who can respond to any reasonable request and even some unreasonable ones. The words "it's not my job" will not be heard.

Customer intimate companies make their profit out of growth within accounts and, as word gets round, growth in the number of accounts. They tap the unrealised potential of the customer's operations. To make sure they can do this they don't chase too many customers. They choose to target companies where the potential for synergy exists.

The case study for this value discipline is of Airborne Express, smaller than the big companies like Federal Express, but unrivalled for its specific involvement in its customer's development. They entered into a partnership with their customers to "build an integrated, highly customised logistics and package delivery system that would improve the customers' business".

Where the big boys offered a narrow range of services to a broad spectrum of customers, Airborne offered a broad service to a narrower range of companies. By being so close to the customer this company was able to uncover many needs which the client had not recognised and then work with them to meet the needs. In particular they were very close to Xerox who relied on them for much of their logistic activity.

All staff were involved. The front line drivers were particularly able in noticing needs, problems and opportunities. They built significant bonds with customers. Again it would be interesting to find out where this company stands now, ten years on. Certainly the aim of customer intimacy is long term. One is building for a future which will last as long as the customer.

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The value discipline agenda

A chapter is given suggesting how to set about determining your value discipline:

  • First, determine the dimensions of value that customers care about and where your company stands in relation to each of these.
  • Next, develop options for realistic value propositions and the related operating models.
  • Then, say the authors, the management must commit to one value discipline and a related operating model; the changes that would be involved in one's own company must be identified along with any necessary restructuring.

A new approach to setting strategy, with new rules of competition is thus created:

  • Put unmatched value of one selected type in the market place.
  • Meet only threshold standards in other dimensions of value.
  • Improve the value proposition every year.
  • Build a superior operating model to deliver on the promise. Let this be your only focus.

This is challenging stuff and worthy of debate. A key issue is whether carrying differentiation to such an extreme of focus is in danger of putting all the eggs in one basket. Or is the value to be reaped if successfully chosen and implemented so great that it is worth the risk?

Further help is given by five questions:

  • What dimensions of value do customers most care about?
  • For each dimension how dominant is it in the customers' concerns?
  • Which competitors provide the best value proposition in each dimension?
  • How do you compare with these competitors?
  • What are the reasons for your company falling short of the value leaders in any dimension?

Then this data has to be reflected upon. In relation to a proposed value proposition a precise outline of the required operating model needs to be created. Its superior value needs identifying. The levels of threshold standards in other dimensions need to be determined. The size of the specific market needs measuring; the critical success factors need to be decided; and finally how can your company make the transition?

Beyond this there is a chapter on the cult of the customer which for emphasis reiterates points already made. Then there is a chapter in the 1995 edition with European examples which has been omitted in the 1997 edition. Finally there is a chapter which emphasises the need to sustain what you have started.

An epilogue makes two valuable points:

  • You have to choose your customers deliberately and walk away from those who don't fit your new visionary mould. You need to narrow your operational focus, not broaden it. You can't be all things to all customers.
  • It is then essential to build operating models which will turn visions into reality and deliver unprecedented levels of customer value.

Writing in 1994, the authors suggest that in years to come business historians will marvel that such a simple idea - better value for customers, year after year - had such profound ramifications for customers who loved the approach and kept expecting more and more, and for companies who adopted the approach and whose success skyrocketed.

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