customer intimacy and other value disciplines intimacy and...customer intimacy and other value...

Customer Intimacy andOther Value Disciplines

by Michael Treacy and Fred Wiersema

Reprint 93107

Harvard Business Review

Copyright © 1992 by the President and Fellows of Harvard College. All rights reserved. DRAWINGS BY PAUL MEISEL

How was Dell Computer able to charge out ofnowhere and outmaneuver Compaq and other lead-ers of the personal computer industry? Why areHome Depot’s competitors losing market share tothis fast-growing retailer of do-it-yourself supplieswhen they are all selling similar goods? How didNike, a start-up company with no reputation be-hind it, manage to run past Adidas, a longtime solidperformer in the sport-shoe market?

All three questions have the same three answers.First, Dell Computer, Home Depot, and Nike rede-fined value for customers in their respective mar-kets. Second, they built powerful, cohesive busi-ness systems that could deliver more of that valuethan competitors. Third, by doing so they raisedcustomers’ expectations beyond the competition’sreach. Put another way, these industry leaderschanged what customers valued and how it was de-livered, then boosted the level of value that cus-tomers expected.

The idea that companies succeed by selling valueis not new. What is new is how customers definevalue in many markets. In the past, customersjudged the value of a product or service on the basisof some combination of quality and price. Today’s

customers, by contrast, have an expanded conceptof value that includes convenience of purchase, after-sale service, dependability, and so on. Onemight assume, then, that to compete today, compa-nies would have to meet all these different cus-tomer expectations. This, however, is not the case.

Companies that have taken leadership positionsin their industries in the last decade typically havedone so by narrowing their business focus, notbroadening it. They have focused on delivering su-perior customer value in line with one of three val-ue disciplines – operational excellence, customerintimacy, or product leadership. They have becomechampions in one of these disciplines while meet-ing industry standards in the other two. (For a dis-cussion of companies that excel at more than onediscipline, see the insert “Masters of Two.”)

By operational excellence, we mean providingcustomers with reliable products or services atcompetitive prices and delivered with minimal dif-ficulty or inconvenience. Dell, for instance, is a master of operational excellence. Customer inti-macy, the second value discipline, means segment-ing and targeting markets precisely and then tailor-ing offerings to match exactly the demands of thoseniches. Companies that excel in customer intimacycombine detailed customer knowledge with opera-tional flexibility so they can respond quickly to al-most any need, from customizing a product to ful-filling special requests. As a consequence, these

Three paths to market leadership.

CustomerIntimacy andOther ValueDisciplinesby Michael Treacy and Fred Wiersema

Michael Treacy is president of Treacy & Company, andFred Wiersema is vice president of CSC Index, Inc., aninternational management consulting firm. Both arebased in Cambridge, Massachusetts. Operational excellence means

HARVARD BUSINESS REVIEW January-February 1993 85

companies engender tremendous customer loyalty.Home Depot, for example, is better than any othercompany in its market at getting the customer pre-cisely the product or information he or she wants.And product leadership, the third discipline, meansoffering customers leading-edge products and ser-vices that consistently enhance the customer’s useor application of the product, thereby making ri-vals’ goods obsolete. Nike excels in product leader-ship in the sport-shoe category.

Companies that push the boundaries of one valuediscipline while meeting industry standards in theother two gain such a lead that competitors find ithard to catch up. This is largely because the leadershave aligned their entire operating model – that is,the company’s culture, business processes, man-agement systems, and computer platforms – toserve one value discipline. Knowing what theywant to provide to customers, they have figured outwhat they must do to follow through. And with thehard work of transforming their organizations be-hind them, they can concentrate on smaller adjust-ments that produce incremental value. Less fo-cused companies must do far more than simplytweak existing processes to gain this advantage.

Companies that pursue the same value disciplinehave remarkable similarities, regardless of their in-dustry. The business systems at Federal Express,American Airlines, and Wal-Mart, for example, arestrikingly similar because they all pursue opera-

tional excellence. An employee could transfer fromFedEx to Wal-Mart and, after getting oriented, feelright at home. Likewise, the systems, structures,and cultures of product leaders such as Johnson &Johnson in health care and pharmaceuticals andNike in sport shoes look much like one another.But across two disciplines, the similarities end.Send people from Wal-Mart to Nike, and theywould think they were on a different planet. More-over, homogeneity exists only among leaders in thesame value discipline; mediocre performers are notdistinctive enough to look like anything exceptother mediocre performers in their own industries.

The conclusions we’ve drawn about the valuedisciplines are based on a three-year study of 40companies that have redefined performance expec-tations in their markets. Through this research, wehave come to understand what each value disci-pline demands of an organization and why.

Operational Excellence

The term “operational excellence” describes a specific strategic approach to the production anddelivery of products and services. The objective of a company following this strategy is to lead its in-dustry in price and convenience. Companies pursuingoperational excellence are indefatigable in seekingways to minimize overhead costs, to eliminate in-termediate production steps, to reduce transactionand other “friction” costs, and to optimize businessprocesses across functional and organizationalboundaries. They focus on delivering their productsor services to customers at competitive prices andwith minimal inconvenience. Because they buildtheir entire businesses around these goals, these or-ganizations do not look or operate like other com-panies pursuing other value disciplines.

Dell Computer is one company that has focusedon such operational excellence and, in doing so, hasshown PC buyers that they do not have to sacrificequality or state-of-the-art technology in order tobuy personal computers easily and inexpensively.In the mid-1980s, while Compaq concentrated onmaking its PCs less expensive and faster than IB-M’s, college student Michael Dell saw the chanceto outdo both IBM and Compaq by focusing not onthe product but on the delivery system. Out of a dorm room in Austin, Texas, Dell burst onto thescene with a radically different and far more effi-cient operating model for operational excellence.

Dell realized that Compaq’s marketing strategy –selling PCs through dealers to novices – could becustomer transactions are hassle-free.

Masters of Two

86 HARVARD BUSINESS REVIEW January-February 1993

outperformed by a model that cutdealers out of the distribution process al-together.

By selling to customers directly, building toorder rather than to inventory, and creating a disci-plined, extremely low-cost culture, Dell has beenable to undercut Compaq and other PC makers inprice yet provide high-quality products and service.While Dell has risen to $1.7 billion in revenue inless than ten years, Compaq has been forced to cutprices and overhead.

Other leaders in operational excellence includeWal-Mart, American Airlines, and Federal Express.Yet another, less well-known example, is GeneralElectric’s “white goods” business, which manufac-tures large household appliances. It has focused onoperational excellence in serving the vast market ofsmall, independent appliance retailers.

In the late 1980s, GE set out to transform itselfinto a low-cost, no-hassle supplier to dealers, and itdesigned its so-called Direct Connect program inpursuit of that objective. The Direct Connect pro-gram was ambitious. It required that GE reengineerseveral of its old business processes, redesign its

information systems, reconfigure its manage-ment systems, and create a new mind-set amongemployees. In effect, General Electric reinventedits white goods business to embody its operationalexcellence discipline. As a result, the company haslowered dealers’ net-landed cost of appliances andsimplified its business transactions.

Historically the appliance industry had endorsedthe theory that a loaded dealer is a loyal dealer. If a dealer’s warehouse were full of a manufacturer’sproduct, went the argument, the dealer would becommitted to that company’s product line becausethere was no room for goods from anyone else.Manufacturers’ programs and pricing had beenbuilt around the idea that dealers got the best pricewhen they bought a full truckload of appliances andwere offered the best payment arrangements if theyadhered to the manufacturer’s floor plan.

But changes in the retail end of the industrycaused GE to question that assumption. For one,the loaded-dealer concept was costly for indepen-dent appliance dealers, whose very existence wasbeing threatened by the growing clout of low-price,multibrand chains like Circuit City. Independent

While market leaders typically excel at one valuediscipline, a few maverick companies have gone fur-ther by mastering two. In doing so, they have resolvedthe inherent tensions between the operating modelthat each value discipline demands. A decade ago,Toyota successfully pursued an operational excellencestrategy; today, it retains its mastery in operational ex-cellence, and, through its breakthroughs in automo-bile technology, it is moving ahead in product leader-ship as well.

USAA, a Texas-based insurer that caters mainly topeople in the military, has mastered both customer intimacy and operational excellence. USAA is every-thing an operationally excellent company would wantto be: centralized, highly automated, and incrediblydisciplined. Its immense, state-of-the-art informationsystem is an information technologist’s wish cometrue. By virtually eliminating paperwork, it allows thecompany to be quick and responsive. The informationsystem at USAA is the process.

Other insurance companies–Northwestern Mu-tual and Allstate come to mind – have beenbuilding equally excellent operations. But USAA continues to set the pace by doing a better job of tailoring its services tocustomers’ particular needs. USAA

segments its customer base by, among other charac-teristics, life stage–at what point a customer is in life–and develops products, services, and servicing ap-proaches for each of those segments. In addition to ex-ecution, USAA has mastered customer intimacy.

Staples, the office supply giant, also has becomeadept at both operational excellence and customer in-timacy. Staples achieves the lowest net-landed cost inthe entire office stationery business, but it also has be-come intimate with a particular market: companiesemploying fewer than 50 people. To further the inti-macy with that market segment, it has created a club.Customers join it at no cost and get at least a 5% dis-count on the fastest moving items. But to get the dis-count, customers have to show their club card, whichmeans Staples can track sales by customer, and thatgives the company all kinds of data it can use in satis-

fying its market. Store managers now have incen-tives based on customer retention.

Toyota, USAA, and Staples are today’s rare exceptions. But mastery of one discipline

will eventually become the minimumthat a company will need to get itself

into the game. Chances are thatthe big winners of the future will

have mastered two.


VALUE DISCIPLINES

stores could hardly afford to carry a large stock ofappliances, especially when faced with competi-tion from multibrand chains. Moreover, the chainscould put price pressure on manufacturers, causingmakers’ margins to shrink.

Realizing that it had to supply high-quality prod-ucts at competitive prices with little hassle, Gener-al Electric abandoned the loaded-dealer concept andreinvented its operating model – the way it made,sold, and distributed appliances. Under the com-pany’s new Direct Connect system, retailers nolonger maintain their own inventories of major appliances. They rely instead on General Electric’s“virtual inventory,” a computer-based logistics sys-tem that allows stores to operate as though theyhad hundreds of ranges and refrigerators in the backroom when in fact they have none at all.

To make Direct Connect work, retailers acquire a computer package that gives them instantaneousaccess to GE’s on-line order-processing system 24hours a day. They can use the system to check onmodel availability and to place orders for next-daydelivery. The dealers get GE’s best price, regardless

With Direct Connect, GE manufactures in response to customerdemand – not inventory.

of order size or content. Direct Connect dealers alsoget, among other benefits, priority over other deal-ers in delivery scheduling plus consumer financingthrough GE Credit, with the first 90 days free of interest. In exchange, Direct Connect dealers makeseveral commitments: to sell nine major GE prod-uct categories while stocking only carryout prod-ucts, such as microwave ovens and air condition-ers; to ensure that GE products generate 50% ofsales and to open their books for review; and to payGE through electronic fund transfer on the 25th ofthe month after purchase.

Under the Direct Connect system, dealers havehad to give up some float time in payables, the com-fort of having their own back-room inventory, andsome independence from the supplier. In return,they get GE’s best price while eliminating the has-sle and cost of maintaining inventory and assem-bling full truckload orders–and their profit marginson GE products have soared.

Virtual inventory, it turns out, works better thanreal inventory for both dealers and customers. “In-stead of telling a customer I have two units on or-der,” says one dealer, “I can now say that we have

2,500 in our warehouse. I can also tell a customerwhen a model is scheduled for production andwhen it will be shipped. If the schedule doesn’t suitthe customer, the GE terminal will identify otheravailable models and compare their features withcompetitive units.”

Meanwhile, GE gets half the dealers’ businessand saves about 12% of distribution and marketingcosts. And since dealers serve themselves throughthe network, GE saves time and labor in order entryand in responding to inquiries. At GE, the new Di-rect Connect system is the order-entry process.Most important, GE has captured a valuable com-modity from its dealers: data on the actual move-ment of its products. Most appliance manufactur-ers have been unable to track consumer salesaccurately because they can’t tell whether dealers’orders represent requests for additional inventoryor actual customer purchases. With Direct Con-nect, GE knows that vendors’ orders are, in fact, ac-tual sales to customers.

GE links its order-processing system to other sys-tems involved in forecasting demand and planningproduction and distribution. The company now, ineffect, manufactures in response to customer de-mand instead of to inventory. It has reduced andsimplified a complex and expensive warehousingand distribution system down to ten strategicallylocated warehouses that can deliver appliances to90% of the country within 24 hours.

Other businesses that vigorously pursue a strate-gy of operational excellence have reinvented theircompanies in similar fashion. They have reengi-neered the process that begins with order entry andends with product or service delivery in a way thatemphasizes efficiency and reliability. Specifically,they have adopted automated inventory replenish-ment and invoiceless payments and have integratedformerly disparate logistics systems. Companiesthat have adopted a strategy of operational excel-lence also have built their operations around infor-mation systems that emphasize integration andlow-cost transaction processing.

Customer Intimacy

While companies pursuing operational excel-lence concentrate on making their operations leanand efficient, those pursuing a strategy of customerintimacy continually tailor and shape products andservices to fit an increasingly fine definition of thecustomer. This can be expensive, but customer-intimate companies are willing to spend now to

VALUE DISCIPLINES


build customer loyalty for the long term. They typically look at the customer’s lifetime value tothe company, not the value of any single transac-tion. This is why employees in these companieswill do almost anything – with little regard for ini-tial cost – to make sure that each customer gets ex-actly what he or she really wants. Nordstrom is oneexample of such a company; IBM in its heyday wasanother; Home Depot is a third.

Home Depot clerks spend whatever time is re-quired with a customer to figure out which productwill solve his or her home-repair problem. Thecompany’s store personnel are not in a hurry. Theirfirst priority is to make sure the customer gets theright product, whether its retail price comes to $59or 59 cents.

Individual service is Home Depot’s forte. Clerksdo not spend time with customers just to be nice.They do so because the company’s business strate-gy is built not just around selling home-repair andimprovement items inexpensively but also aroundthe customer’s needs for information and service.Consumers whose only concern is price fall outsideHome Depot’s core market.

Other companies that have embraced a strategyof customer intimacy include Staples in office-sup-ply retailing, Ciba-Geigy in pharmaceuticals, andKraft and Frito-Lay in consumer packaged goods.These companies have designed operating modelsthat allow them to address each customer or smallsubsegment of their market individually, as muchfor the sake of the company’s profitability as for thecustomer’s satisfaction. Their infrastructures facil-

itate multiple modes of producing and deliveringproducts or services. They gladly split hairs whensegmenting a market.

One principle that such companies understandwell is the difference between profit or loss on a sin-gle transaction and profit over the lifetime of theirrelationship with a single customer. A leading fi-nancial brokerage firm, for instance, knows thatnot all customers require the same level of serviceor will generate the same revenues. The company’sprofitability, then, depends in part on its maintain-ing a system that can differentiate quickly and ac-curately among customers based on both the degreeof service they require and the revenues their pa-tronage is likely to generate. The company recentlyinstalled a telephone-computer system capable ofrecognizing individual clients by their telephonenumbers when they call. The system routes in-vestors with large accounts and frequent transac-tions to their own senior account representative.Other customers – those who typically place onlyan occasional buy or sell order, for instance – maybe routed to a trainee, junior rep, or whoever isavailable. In either case, the customer’s file appearson the rep’s screen before the phone is answered.

The new system, which embodies this compa-ny’s pursuit of customer intimacy, lets the firm seg-ment its services with great efficiency. If the com-pany has, say, just 400 clients around the countrywho are interested in trading in a particularly ar-cane financial instrument, it can group them underthe one account rep who specializes in that instru-ment. It does not have to train every rep in everyfacet of financial services. Moreover, the companycan direct certain value-added services or productsto a specific group of clients whose interest itknows to be strong. It could, for instance, search itscustomer database for affluent retirees interested inminimizing inheritance taxes, customize a serviceor a product just for them, and train a rep in the newoffering’s sale and use.

In its move toward customer intimacy, KraftUSA has created the capacity to tailor its advertis-ing, merchandising, and operations in a single storeor in several stores within a supermarket chain tothe needs of those stores’ particular customers.Kraft has the information systems, analytical capa-bility, and educated sales force to allow it to devel-op as many different so-called micro-merchandis-ing programs for a chain that carries its products asthe chain has stores. The program can be differentfor every neighborhood outlet. But to accomplishthis, Kraft had to change itself first. It had to createthe organization, build the information systems,and educate and motivate the people required toCustomer intimacy means customers get...


pursue a strategy of customer intimacy.Like most companies that choose this strategy,

Kraft decentralized its marketing operation in orderto empower the people actually dealing with thecustomer. In Kraft’s case, this was the sales force.Instead of pushing one-size-fits-all sales promotionprograms, Kraft salespeople now work with indi-vidual store managers and regional managers to cre-ate customized promotional programs from an ex-tensive computerized menu of program models.

Kraft does not just give its salespeople permis-sion to work with customers, it also is giving themthe data they need to make intelligent recommen-dations that will actually work. To do so, Kraft hasassembled a centralized information system thatcollects and integrates data from three sources. Thedata it collects from individual stores break outconsumer purchases by store, category, and productand indicate how buying behavior is affected by dis-plays, price reductions, and so forth. They also pro-vide profiles of customers who have bought partic-ular products over the past several years and theirrates of purchase. A second database contains de-mographic and buying-habit information on thecustomers of 30,000 food stores nationwide. A thirdset of data, purchased from an outside vendor, con-tains geo-demographic data by nine-digit zip code.

At Kraft headquarters, its trade marketing teamsorts and integrates the information from thesethree databases and uses the results to supply salesteams with a repertoire of usable programs, prod-ucts, value-added ideas, and selling tools. For in-stance, the trade marketing team sorted all shop-pers into six distinct groups, with names such asfull-margin shoppers, planners and dine-outs, andcommodity shoppers. Kraft then determined for itsmajor accounts which shopper groups frequentedeach of their stores. A Kraft sales team even per-suaded one chain to create a drive-through windowin stores where planners and dine-outs–people whoplan their shopping trips and dine out often – were a large segment, making it more convenient forthem to pick up staples between big shopping trips.

Kraft is also able to develop promotion packagesfor store clusters for special events like the Super-bowl. It can design a product mix more likely tosucceed in one cluster than another. Pinpointingwhich store gets which product reduces inventoryand delivers the right product to the right place atthe right time.

In reinventing itself, Kraft emulates other com-panies in different industries that also choose topursue the strategy of customer intimacy. Its busi-ness processes stress flexibility and responsiveness.Its information systems collect, integrate, and ana-

lyze data from many sources. Its organizationalstructure emphasizes empowerment of peopleworking close to customers, and its hiring andtraining programs stress the creative decision-mak-ing skills required to respond to individual cus-tomer needs. Its management systems recognizeand utilize such concepts as customer lifetime val-ue, and the rules and norms that management fos-ters among employees are consistent with the“have it your way” mind-set that must prevail in a company built on customer intimacy.

Product Leadership

Companies that pursue the third discipline, prod-uct leadership, strive to produce a continuousstream of state-of-the-art products and services.Reaching that goal requires them to challengethemselves in three ways. First, they must be cre-ative. More than anything else, being creativemeans recognizing and embracing ideas that usual-ly originate outside the company. Second, such innovative companies must commercialize theirideas quickly. To do so, all their business and man-agement processes have to be engineered for speed.Third and most important, product leaders must relentlessly pursue new solutions to the problemsthat their own latest product or service has justsolved. If anyone is going to render their technologyobsolete, they prefer to do it themselves. Productleaders do not stop for self-congratulation; they are

...exactly what they need.

VALUE DISCIPLINES


too busy raising the bar. Johnson & Johnson, for example, meets all three

of these challenges. J&J seems to attract new ideas,but it is not happenstance that brings good ideas in, develops them quickly, and then looks for ways to improve them. In 1983, the president ofJ&J’s Vistakon, Inc., a maker of specialty contactlenses, heard about a Copenhagen ophthalmologistwho had conceived of a way of manufacturing dis-posable contact lenses inexpensively. At the time,the company’s Vistakon unit generated only $20million each year in sales primarily from a sin-gle product, a contact lens for people who have astigmatism.

What was unusual was the way Vistakon’s presi-dent got his tip. It came from a J&J employee whomhe had never met who worked in an entirely differ-ent subsidiary in Denmark. The employee, an exec-utive for Janssen Pharmaceutica, a J&J Europeandrug subsidiary, telephoned Vistakon’s president to

Vistakon’s disposable lensescaught rivals off guard –andthey never caught up.

pass along the news of the Danish innovation. In-stead of dismissing the ophthalmologist as a meretinkerer, these two executives speedily bought therights to the technology, assembled a managementteam to oversee the product’s development, andbuilt a state-of-the-art facility in Florida to manu-facture disposable contact lenses called Acuvue.

By the summer of 1987, Acuvue was ready fortest marketing. In less than a year, Vistakon rolledout the product across the United States with ahigh-visibility ad campaign. Vistakon – and its par-ent, J&J – were willing to incur high manufacturingand inventory costs even before a single lens wassold. Its high-speed production facility helped giveVistakon a six-month head start over would-be ri-vals, such as Bausch & Lomb, Inc. and Ciba-Geigy.Taken off guard, the competition never caught up.Vistakon also took advantage of the benefits of de-centralization–among them, autonomous manage-ment, speed, and flexibility–without having to giveup the resources, financial and otherwise, that onlya giant corporation could provide. Part of the suc-cess resulted from directing much of the market-ing effort to eye-care professionals to explain howthey would profit if they prescribed the new lenses.In other words, Vistakon did not market just to con-sumers. It said, in effect, that it’s not enough tocome up with a new product; you have to come up

with a new way to go to market as well.In 1991 Vistakon’s sales topped $225 million

worldwide, and it had captured a 25% share of theU.S. contact-lens market. But Vistakon is not rest-ing on its laurels. It continues to investigate newmaterials that would extend the wearability of thecontact lenses and even some technologies thatwould make the lenses obsolete.

J&J, like other product leaders, works hard at de-veloping an open-mindedness to new ideas. Productleaders create and maintain an environment thatencourages employees to bring ideas into the com-pany and, just as important, they listen to and con-sider these ideas, however unconventional and re-gardless of the source. “Not invented here” is not apart of their vocabularies. In addition, product lead-ers continually scan the landscape for new productor service possibilities; where others see glitches intheir marketing plans or threats to their productlines, companies that focus on product leadershipsee opportunity and rush to capitalize on it.

Product leaders avoid bureaucracy at all costs be-cause it slows commercialization of their ideas.Managers make decisions quickly, since in a prod-uct leadership company, it is often better to make awrong decision than to make one late or not all.That is why these companies are prepared to decidetoday, then implement tomorrow. Moreover, theycontinually look for new ways –such as concurrentengineering – to shorten their cycle times. Japanesecompanies, for example, succeed in automobile in-novation because they use concurrent developmentprocesses to reduce time to market. They do nothave to aim better than competitors to score morehits on the target because they can take more shotsfrom a closer distance.

Companies excelling in product leadership donot plan for events that may never happen, nor dothey spend much time on detailed analysis. Theirstrength lies in reacting to situations as they occur.Fast reaction times are an advantage when dealingwith the unknown. Johnson & Johnson’s Vistakonmanagers, for example, were quick to order changesto the Acuvue marketing program when early mar-ket tests were not as successful as they had expect-ed. They also responded quickly when competi-tors challenged the safety of Acuvue lenses. Theydistributed data combating the charges, via FederalExpress, to some 17,000 eye-care professionals. Vistakon’s speedy response to the concerns raisedby its competitors engendered goodwill in the marketplace.

Vistakon can move fast and take risks because itis organized like a small, entrepreneurial company.At the same time, it can call on the resources and


capabilities of a multibillion-dollar corporation.This combination makes Vistakon – and J&J – apowerhouse competitor and strong product leader.

Product leaders have a vested interest in protect-ing the entrepreneurial environment that they havecreated. To that end, they hire, recruit, and trainemployees in their own mold. When it is time for Vistakon to hire new salespeople, for example,its managers do not look for people experienced in selling contact lenses; they look for people whowill fit in with J&J’s culture. That means they donot first ask about a candidate’s related experience. Instead, they ask such questions as, “Could youwork cooperatively in teams?” and “How open areyou to criticism?”

Product leaders are their own fiercest competi-tors. They continually cross a frontier, then breakmore new ground. They have to be adept at render-ing obsolete the products and services that theyhave created because they realize that if they do notdevelop a successor, another company will. J&J andother innovators are willing to take the long view ofprofitability, recognizing that whether they extractthe full profit potential from an existing product orservice is less important to the company’s futurethan maintaining its product leadership edge andmomentum. These companies are never blinded by

their own successes.One final point about product leaders: they also

possess the infrastructure and management sys-tems needed to manage risk well. For example, eachtime J&J ventures into an untapped area, it risksmillions of dollars as well as its reputation. It takesthat chance, though, in part because its hybridstructure allows it to combine the economies ofscale and resource advantages of a $12 billion cor-poration with the cultural characteristics of a start-up company. In the case of Acuvue, J&J could man-age the tremendous risk associated with developingand launching the lens because it represented onlya small portion of the company’s outlays.

Sustaining the Lead

Becoming an industry leader requires a companyto choose a value discipline that takes into accountits capabilities and culture as well as competitors’strengths. (For more on choosing a value discipline,see the insert “Choosing Disciplines or ChoosingCustomers?”) But the greater challenge is to sus-tain that focus, to drive that strategy relentlesslythrough the organization, to develop the internal

Product leaders are open to new ideas wherever they can find them.


consistency, and to confront radical change. Many companies falter simply because they lose

sight of their value discipline. Reacting to market-place and competitive pressures, they pursue initia-tives that have merit on their own but are inconsis-tent with the company’s value discipline. Thesecompanies often appear to be aggressively respond-ing to change. In reality, however, they are divert-ing energy and resources away from advancing theiroperating model.

Sears is a good example. Under enormous pres-sure from Wal-Mart and other competitors, Sears’sretailing division in the late 1980s launched a num-ber of initiatives aimed at winning back customersand boosting its sagging bottom line. First came“everyday low prices,” a component of an opera-tional excellence discipline. For that gambit to payoff, Sears needed to cut costs – which it did to someextent by eliminating many in-store employees and

slashing front-office expenses. But the cost cuttingdid not go nearly far enough, in part because Searshad not consciously focused on the discipline of op-erational excellence. Had it done so, it would havescrutinized each part of its organization, includingthe order-fulfillment process, to see where it couldrealize savings. The consequence of not focusingmeant, among other things, that Sears failed to re-structure its end-to-end distribution costs, as Wal-Mart, for instance, has done.

In another attempt to regain market share, Searsinaugurated “Brand Central,” whereby the retailerwould carry branded products in addition to itshouse brands, Kenmore and Craftsman. Creatingmore product variety in an attempt to meet theneeds of different market segments is a componentof a customer intimacy discipline. But again, Searsdid not go far enough. By just plucking Brand Cen-tral from a quiver of random ideas, Sears shot wide

Choosing Disciplines or Choosing Customers?When a company chooses to focus on a value disci-

pline, it is at the same time selecting the category ofcustomer that it will serve. In fact, the choice of busi-ness discipline and customer category is actually a single choice.

One set of potential customers defines value withina matrix of price, convenience, and quality, with pricethe dominant factor. These customers are less particu-lar about what they buy than they are about getting itat the lowest possible price and with the least possiblehassle. They are unwilling to sacrifice low price orhigh convenience to acquire a product with a particu-lar label or to obtain a premium service. Whether theyare consumers or industrial buyers, they want high-quality goods and services, but even more, they wantto get them cheaply or easily or both.

These are the customers who shop for retail goods atdiscount and membership warehouse stores. They buyPC clones directly from manufacturers. They seek ba-sic transportation when they buy a car and discountcom-missions when they buy or sell stocks and otherinvestments. The business that succeeds by servingthese customers focuses on operational excellence.

The second set of customers is more concerned withobtaining precisely what they want or need. They arewilling to make some sacrifice – in price or deliverytime, for instance – if the sacrifice helps them acquiresomething that meets their unique requirements. Thespecific characteristics of the product or the way theservice is delivered is far more important to them thanany reasonable price premium or purchase inconve-nience they might incur.

Customers in this group ascribe value to a productor service according to how closely it appears to be de-signed just for them. Chain stores – whether in thefood, book, or music business – that customize theirinventories to match regional or even neighborhoodtastes serve this category of customer. Other retailersand catalogers attract this customer type by offeringthe largest imaginable range of products. They won’tcarry just standard Scrabble, for instance, but everyversion of the game. An industrial distributor weknow carries 12 pages of water heaters in its catalog.Its breadth of inventory is a strategic asset in appealingto this second customer category. These customers require a company to focus on customer intimacy.

To the third category of customers, new, different,and unusual products count most. These are cus-tomers who, as clothing buyers, are primarily interest-ed in fashion and trends. In an industrial context, theyare buyers who value state-of-the-art products or com-ponents because their own customers demand the lat-est technology from them. If they are service com-panies, they want suppliers that help them seizebreakthrough opportunities in their own markets. Fora company to succeed in serving these customers, ithas to focus on product leadership.

One point to bear in mind: the same people can befound in all three customer categories, depending onwhat they are buying. An individual might buy officesupplies primarily on price, groceries strictly on thebasis of personal taste, and clothes as fashion dictates.The same people will define value differently as it ap-plies to different goods and services.


VALUE DISCIPLINES

of the target. Brand Central only confused existingcustomers, who did not know which brand to buy.Sears’s strategy also cut into sales of its own brands.And since the move did not give Sears any moreproduct variety than competitors had, it did little toboost sales.

Sears’s third initiative, meant to give the retailera trendy image, was to have models and actressesendorse its fashion line. This tack, which corre-sponds to a product leadership discipline, also hadlittle impact on profits. One problem was that Searsstruck just one deal, with model Cheryl Tiegs. Thesecond problem: J.C. Penney was following thesame strategy but was outdoing Sears with moreendorsements, slicker advertising, better catalogs,more sophisticated marketing, and better productdesign. In trying to be all things to all people, Searspursued strategies that steered it away from its cho-sen value discipline and into unproductive deadends. It tried to fuse together incompatible philoso-phies and practices and got predictable results. Inits time, Sears was a value leader, but to regain thatdistinction in today’s competitive market, the com-pany will have to pick one value discipline and vig-orously pursue it while meeting industry standardsin the other two.

The key to gaining and sustaining value leader-ship is focus, but the management of a companythat’s a value leader must stay alert. The operatingmodel that elevated a company to value leader-ship – Compaq’s model, for instance – is superiorand worth exploiting only until a better one – Dell’sdistribution model, say – comes along.

Companies that sustain value leadership withintheir industries will be run by executives who notonly understand the importance of focusing thebusiness on its value discipline but also push re-lentlessly to advance the organization’s operatingmodel. They will personally lead the company’sdrive to develop new capabilities and to change theimbedded work habits, processes, and attitudesthat prevent them from achieving excellence in thediscipline they have chosen. By leading the effort totransform their organizations, these individualswill be preparing their companies to set new indus-try standards, to redefine what is possible, and toforever change the terms of competition. This article is based on our consulting work and the researchthat we have conducted in Index Alliance, a research and advi-sory service of CSC Index. Jay Michaud, principal of CSC Index and director of Index Alliance, contributed significantlyto this article.

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