Value disciplines and customers’ stakes

Byadmin

Since my study, I am a fan of Treacy & Wiersema’s typology of three strategies for customer value. Their article, published in 1993, on the value disciplines of market leaders, identified three beneficial strategies with high face validity: operational excellence, product leadership, and customer intimacy. Although those strategies are often combined (Treacy and Wiersema are explicit: the disciplines are mutually exclusive at the leadership level. You can maintain threshold performance in all three. But you can only lead in one), each strategy offers unique value to customers.

In the book ‘Fundamentals of Global Strategy’, Cornelis A. de Kluyver, explains the three disciplines well:

A strategy of operational excellence is defined by a relentless focus on providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience. They seek ways to minimise overhead costs, to eliminate intermediate production steps, to reduce transaction and other ‘friction’ costs, and to optimise business processes across functional and organisational boundaries. They focus on delivering their products or services to customers at competitive prices and with minimal inconvenience. Because they build their entire businesses around these goals, these organisations do not look or operate like other companies pursuing other value disciplines. [..] Achieving market leadership through operational excellence requires the development of a business model that pervades the entire organisation. Thus, becoming operationally excellent is a challenge not just for the manufacturing department but for the entire organisation. And while operationally excellent companies are focused on cost and efficiency, they are not necessarily the lowest cost producer or supplier. The notion that an operationally excellent company is fixated on costs and cost cutting, has a rigid command and control organisation, and is focused on plant and internal efficiencies is a limited view that seriously misstates the intent and goals of operational excellence.

Product leadership means offering customers leading-edge products and services that consistently enhance the customer’s use or application of the product, thereby making rivals’ goods obsolete. Organisations that pursue product leadership are innovation-driven, and they constantly raise the bar for competitors by offering more value and better solutions. Product leaders work with three basic principles. First, they focus on creativity; constant innovation is the key to their success. They look for new ideas inside as well as outside the company, have an ‘experimentation is good’ mind-set, and reward risk taking. Second, they know that in order to be successful, they must be fast in capitalising on new ideas; they know how to commercialise new ideas quickly. To do so, all their business and management processes have to be engineered for speed. Third, product leaders must relentlessly pursue new solutions to the problems that their own latest product or service has just solved. In other words, if anyone is going to render their technology obsolete, they prefer to do it themselves. [..] They create and maintain a culture that encourages employees to bring ideas into the company and, just as important, they listen to and consider these ideas, however unconventional and regardless of the source. In addition, product leaders continually scan the landscape for new product or service possibilities; where others see glitches in their marketing plans or threats to their product lines, companies that focus on product leadership see opportunity and rush to capitalize on it. Product leaders avoid bureaucracy at all costs because it slows commercialization of their ideas. 

Organisations that excel in customer intimacy combine detailed customer knowledge with operational flexibility so they can respond quickly to almost any need, from customising a product to fulfilling special requests. As a consequence, these companies engender tremendous customer loyalty. [..] While organisations pursuing operational excellence concentrate on the operational side of their business models, those pursuing a strategy of customer intimacy continually tailor and shape products and services to fit an increasingly fine definition of the customer. This can be expensive, but customer-intimate organisations are willing to take a long-term perspective and invest to build lasting customer loyalty. They typically look at the customer’s lifetime value to the company, not the value of any single transaction. This is why employees in these companies will do almost anything, with little regard for initial cost, to make sure that each customer gets exactly what he or she really wants. [..] Customer-intimate companies understand the difference between profit or loss on a single transaction and profit over the lifetime of their relationship with a single customer.

Delivering superior customer value

Treacy and Wiersema use a strategic lens and emphasis on specific pathways that organisations can follow to provide superior value for their customers and the importance of value creation and capture capabilities for achieving competitive advantage. They emphasise the need for firms to focus their attention but simultaneously urge firms to make complementary investments, noting:

Companies that have taken leadership positions in their industries [..] typically have done so by narrowing their business focus, not broadening it. They have focused on delivering superior customer value in one of three value disciplines. They have become champions in one of these disciplines while meeting industry standards in the other two.

The logic is that each discipline is based on a different operating model, culture, set of trade-offs, etc. According to Treacy and Wiersema, trying to run all three simultaneously may create internal contradiction that slows down processes. But it’s important to state that large firms may combine different disciplines in different business units (or emphasise on different discipline(s)). Nowadays, many large, global operating organisations can have a decentralised structure, and business units may work autonomously, adjusting to their local context, based on where to concentrate competitive energy, how to allocate capital, what kind of talent and processes to prioritise, etc. But originally, their framework focuses on the entire organisation’s operating model.

Different configurations of the customer’s stake

Treacy & Wiersema operate in an organisational, inside-out strategy paradigm. Their value disciplines describe:

  • organisational positioning choices
  • how an organisation intends to compete and organise itself
  • strategic trade-offs in operations, innovation, and relationships

A value discipline is a statement of strategic focus and provides a context for an organisation to set its corporate vision and objectives, and to focus and align its activities. Value disciplines don’t look at customers as geographical segments, based on for instance demographics, but look at customers according to the full range of benefits that are most valuable to them. 

The three disciplines imply different configurations of the customer’s stake. Let me dive into them:

1. Operational excellence

The organisation (mainly) competes through:

  • efficiency
  • reliability
  • low total cost
  • convenience
  • standardisation
  • scale.

From an SoC perspective, the customer’s stake may be heavily concentrated around:

predictability, accessibility, affordability and low customer effort.

But there can also be an interesting trade-off.

A highly standardised operating model may create tremendous value for the customer through efficiency while simultaneously reducing:

  • choice
  • personalisation
  • flexibility
  • agency.

For SoC we would ask and analyse:

Which aspects of the customer’s stake are taken into account through standardisation and efficiency, and what weight are they given in the design of the model?

2. Product leadership

Here the organisation is (mainly) oriented around:

  • innovation
  • superior products
  • performance
  • differentiation
  • being first.

The customer’s stake may therefore be strongly related to:

access to superior outcomes, innovation, performance and future possibilities.

But again, there are trade-offs.

A product-leadership model might deliberately make the customer accept:

  • higher prices
  • shorter product lifecycles
  • experimentation
  • complexity
  • ecosystem changes
  • less stability.

For SoC we would ask and analyse:

What does the customer gain from a focus on superior products and performance, and which aspects of the customer’s stake are given weight in the organisation’s emphasis on innovation?

3. Customer intimacy

Last but not least, this organisation (mainly) seeks:

  • deep relationships
  • customer understanding
  • customisation
  • responsiveness
  • tailored solutions.

The customer’s stake may therefore involve:

  • being understood
  • having individual circumstances accommodated
  • continuity
  • relationship quality
  • flexibility
  • reduced customer effort.

But even here SoC gives us an important corrective: Customer intimacy doesn’t automatically mean that the customer has more weight. A company can know its customers extraordinarily well and still have a business model that prioritises profitability, exclusivity, risk reduction, etc. SoC lets us separate: depth of customer understanding from magnitude and treatment of customer stake.

Different value logics

To look at Treacy & Wiersema’s framework and SoC, the three disciplines represent different value logics. And different value logics create different customer stakes. This makes Treacy & Wiersema’s framework a contextual lens, rather than a component of the SoC construct itself. First SoC helps you scan your business model and reveal the customer’s stake within it. T&W’s framework then becomes one of the lenses through which you interpret why that stake has been configured the way it has.

Remember, Treacy & Wiersema’s original logic is often interpreted as choosing a dominant discipline while meeting acceptable standards in the others. But in my opinion, organisations frequently combine them. Instead of one or the other, you could represent the business as a position in a strategic space. With that, SoC can help you ask:

What customer stake does this particular configuration create?

And more concrete:

Where is there a mismatch between the strategic promise and the customer’s actual stake?

Let’s look at an example. Imagine an airline that is operational-excellence driven. Its model says:

low cost + standardisation + efficiency.

Its customers’ stake may reasonably include:

affordable travel + predictable transportation.

But suppose the operating model increasingly transfers:

  • complexity
  • waiting
  • self-service work
  • disruption risk
  • ancillary fees

to the customer.

The SoC analysis could reveal:

The strategic discipline hasn’t changed.

But:

the distribution of customer value, effort and risk has changed.

I will write about this in another article in more detail.

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