Value Disciplines: Customer Intimacy, Product Leadership and Operational Excellence

In their book ‘The Discipline of Market Leaders‘ M. Treacy and F. Wiersema argue that no company can succeed today by trying to be all things to all people. It must instead find the unique value that it alone can deliver to a chosen market. This is quite in line with Porter’s Generic Strategies in which Porter describes how companies gain competitive advantage by either focusing on low cost (cost leadership), differentiation or a niche market. If a company tries to pursue all of these strategies, it is likely to end up somewhere ‘stuck in the middle’ offering average products for average prices. Similarly, Treacy and Wiersema suggest three ‘Value Disciplines‘ to choose from which should act as a central piece that shapes every subsequent plan and decision a company makes. These three value disciplines are: Operational Excellence, Product Leadership and Customer Intimacy. This article will go into what each value discipline stands for and how a company’s operating model should look like to best serve these value disciplines.

Value Disciplines Customer Intimacy Operational Excellence Product Leadership

Figure 1: Value Disciplines Model

Define your customer, narrow your focus

Different customers buy different kinds of value. Some customer segments appreciate low prices, while others want the most superior and innovative products. Some customers expect the best of the best customer service, while others want to be able to quickly get a reliable product without much hassle. It is therefore important to clearly choose your customer and narrow the value you want to focus on. Market leaders choose to excel in delivering extraordinary levels of one particular value while maintaining a threshold standard on other dimensions of value. In other words: market leaders are extremely good at being the best at delivering one particular value without being bad at the other value disciplines. Consequently by focusing on one (and one only) particular value to excel at, they beat competitors who are dividing their attention and resources among more than one discipline. Customers know that to expect superior value in every dimenion from the same company is unreasonable. After all, you don’t go to Wal-Mart for the best personalized service and you don’t buy Nike sneakers because of the cheap prices they offer.

The Disciplines of Market Leaders

The Discipline of Market Leaders by Michael Treacy & Fred Wiersema

Value-driven operating model

The particular value that you decide to offer has the effect of defining your way of thinking about your business: it shapes the company’s operating model. Different value disciplines demand different operating models in order to best capture the value that is being pursued. Operating models are made up of core processes, organizational structures, management systems, information technologies and culture. All of these element have to be adapted and aligned with the value discipline that the company is focusing on. If a company focuses on superior quality and innovation, you need a culture where employees can challenge the status quo and try new things. If a company’s focus is on cutting costs and becoming as efficient as possible, you need a centralized organizational structure and a standarized production process. Down below we will go more into each value discipline and how the underlying operating model should look like.

Operational Excellence

The first value discipline we discuss is Operational Excellence: providing customers with reliable products or services at competitive prices, delivered with minimal difficulty or inconvenience. Operationally excellent companies deliver a combination of quality, price, and ease of purchase that no one else in their market can match. Their value proposition to customers is garantueed low price and/or hassle-free service. An operational excellent company has an operating model based four distinct features: 1. Its core processes are aimed at end-to-end product supply and basic service that are optimized and streamlined to minimze costs and hassle. Costs in this context does not merely mean the price that is paid for a product. It also includes costs in terms of time spent to purchase the product, product maintenance needed in the future and the ease of getting swift and dependable service. 2. Operations are standarized, simplified, tightly controlled, and centrally planned, leaving few decisions to the discretion of rank-and-file employees. 3. Management systems focus on integrated , reliable, high speed transactions and compliance to norms. 4. A culture that abominate waste and reward efficiency. Especially, efficiency is a key word in operational excellent companies. Variety kills efficiency because it burdens the business with cost. A narrow product line and standarized products are therefore central features in the operating model. Some great examples of operational excellent companies are McDonald’s, Southwest Airlines, Wal-Mart and IKEA.

Operational Excellence Operating Model

Figure 2: Operational Excellence Operating Model

Product Leadership

Product Leadership is about consistently striving to provide your customers with leading-edge products or useful new applications of existing products or services. In order to do so, they must be creative, agile and fast. Their strenght lies in reacting to situations as they occur. Consequently, product leaders avoid bureacracy at all costs because it slows down the commercialization of their ideas. The operating model of a product leader is completely different from an operational excellent company and includes: 1. A focus on the core processes of invention, product development and market exploitation. 2. An organizational structure that is loosely knit, ad hoc and ever changing to adjust to the entrepreneurial initiatives and redirections that characterize working in unexplored territory. 3. A management system that is results-driven, measures and rewards new product success and that doesn’t punish the experimentation needed to get there. 4. A culture that encourages individual imagination, accomplishment, out-of-the-box thinking, and a mindset driven by the desire to create the future. Examples of product leaders are Apple, Nike, Rolex, Microsoft and Harley-Davidson.

Product Leadership Operating Model

Figure 3: Product Leadership Operating Model

Customer Intimacy

A company that delivers value via customer intimacy builds bonds with customers like those between good neighbours. Customer intimate companies don’t deliver what the market wants, but what a specific customer wants. It continually tailors its products and services to the customer in a way that it can offer the ‘best total solution’. Because of this approach, customer initmate companies’ greatest assets are their customer loyalty. Their operating model allows them to produce and deliver a much broader and deeper level of support. It features: 1. An obsession with the core processes of solution development, results management and relationship management. 2. A business structure that delegates decision-making to employees who are close to the customer. 3. Management systems that are geared toward creating results for carefully selected and nurtured clients. 4. A culture that embraces specific rather than general solutions and thrives on deep and lasting client relationships. Customer intimate companies know that their clients have a hierarchy of needs beyond their requirement for a product and instead have a broader, underlying problem that they are trying to solve. Examples of companies that show this level of understanding are Home Depot, Salesforce, Amazon and Nordstrom.

Customer Intimacy Operating Model

Figure 4: Customer Intimacy Operating Model

Value Disciplines In Sum

Treacy and Wiersema argue that companies need to make tough strategic choices in order to become market leaders. Market leaders choose to excel in delivering extraordinarily levels of one particular value to their customers. This way they can remain focused and become the absolute best in a certain value proposition. It also means that a company’s entire operating model should be adapted in a way that it is aligned with the chosen value discipline. This however doesn’t mean that a company should allow performance in other dimensions to slip so much that it impairs the attractiveness of the other ‘secondary’ value disciplines. Maintaining thresholds of performance on those secondary disciplines is therefore important as well. If a company has reached a leadership value in one discipline and threshold values in the other two, it is ready on its way up to become a market leader. If your company is not there yet, don’t wait longer and: choose your customers, narrow your focus, and dominate your market.

 

Further Reading: