Whether its customers prize personalized service, leading-edge products, or speed and efficiency, a company should choose an operating model (and technology) that supports its chosen value discipline.

For companies to survive in the future, they must provide more of what customers value most---before the competition can. Whether their customers prize personalized service, leading-edge products, or speed and efficiency of operations, a company's overall operating model should support its chosen "value discipline" with unwavering focus. This article explores the unique information requirements of each value discipline, and shows how IT and business executives can work in lock-step to develop an IT blueprint to create more value for customers where it matters most.

In this issue of Innovations, we continue a discussion of customer value disciplines. A companion articleon Value Disciplines is also available on this web site (click here). This article was adapted, by permission, from an article published in Information Strategy, Summer 1996.

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What makes a real market leader? Is it the company that brings to market leading-edge products while the competition is only dreaming of it? Or the one that boasts the most streamlined, cost-effective operations in the industry? Or is it the one that's renown worldwide for its knock-your-socks-off levels of customer service? It depends entirely on what qualities and characteristics are likely to be most important to the buyers of a company's products and services. And what customers value most will be affected by a whole host of variables, including their industry type, level of competition, price sensitivity, direct personal experience, and the demographics of the end-customer.

In the business of hotel management, for example, some travelers place speed at check-out far above the front desk staff's ability to remember their name each time. For others, a lower room rate or the number of amenities may be the deciding factor. The La Quinta Hotel chain has become a market leader among customers who value a clean, safe room at a reasonable rate. The Ritz Hotel chain has earned a market leadership position among those travelers who value impeccable service and luxurious surroundings at any price. Marriott Corporation has become a market leader among guests who look for friendly, consistent service, good value and a predictable level of quality. All three hotel chains are competing in the same industry, but each leads the field in fulfilling or exceeding the expectations of a particular market segment.

How well a company is able to surpass its customers' expectations depends first on its ability, and willingness, to thoroughly understand and internalize the qualities and characteristics its customers and prospects most value. For many organizations, this work is often disheartening, especially when they discover that their current strategy may in fact be leading them away from providing the kind of value their customers are really looking for. Other organizations may find that they have accurately anticipated customer wishes and need only to concentrate more fully to gain a leadership position in the market.

The discipline to focus

In their best-selling book, The Discipline of Market Leaders, Michael Treacy and Fred Wiersema underscore the need for companies to discipline themselves to select one key area (or "value discipline") where they alone can provide unique value to targeted customers, and then direct their energy and resources to consistently excel in their chosen discipline. The three distinct "value disciplines" Treacy and Wiersema describe are product leadership, operational excellence and customer intimacy.

A company's "value proposition" is the promise, explicit or implicit, that a company makes to deliver a particular combination of benefits, such as level of service, convenience, price, performance and speed, to a targeted segment or group of customers. This value proposition becomes the overarching principle around which the company will develop its business system, or operating model. Consider the following statements from some widely-hailed market leaders :

• "To make people away from home feel that they're among friends" --Marriott Corporation · "Service to the customer above all else" -- Nordstrom Department Stores

• "We provide society with superior products and services-- innovations and solutions that satisfy customer needs and improve the quality of life." -- Merck & Co., Inc.

• "We exist to provide value to our customers...to make their lives better via lower prices and greater selection. All else is secondary" --Wal-Mart Corporation

In each case, the company clearly identified what values were most important to its targeted customers, created a succinct and powerful statement to drive behavior, and developed an operating model to deliver the promised benefits to its customers better than anyone else.

In the case of Marriott and Nordstrom, customer intimacy is the chosen value discipline; for Merck, it is product leadership; for Wal-Mart, operational excellence has made it a market leader. An operating model is the business system that effectively and efficiently delivers the specific value proposition to customers.

The core elements of an operating model include business processes; organization, jobs and skills; management practices and systems; culture, rules and behavioral norms; and information and information systems.

For a company to make good on its value proposition, all elements of this operating model must be closely aligned and all employees of the company focused on delivering the value proposition.

Depending on the particular value discipline, operating models will look very different from one company to another. In fact, two companies in the same industry who have different value disciplines will have far more discrepancy between operating models than would two companies in different industries that have the same value discipline. For example, the operating model for Toyota (operational excellence) would look very different from that of Mercedes Benz (product leadership). The operating models embraced by two customer-intimate companies, Nordstrom (department stores) and Four Seasons (hotels) may look strikingly similar, even though they compete in different industries.

This article explores each value discipline in detail, and shows how --and why-- different operating models are needed to support a company's ability to deliver distinctive, unbeatable customer value in the chosen discipline. The development and implementation of information systems needed to support each value discipline will be a major focus.

Operational excellence: speed, cost and efficiency

Staples, Wal-Mart, Southwest Airlines, Federal Express, Taco Bell and Dell Computers typify market leaders whose primary value discipline is operational excellence. All lead their given field in the ability to deliver products and services effectively, efficiently and at reasonable cost. They delight their customers with the speed, reliability, accuracy, and low cost of each transaction. For an operationally excellent enterprise, the business is the system, and the system is the business. When the system goes down, the company simply cannot function. Take Staples' mail-order system, for example. Its phenomenal success is based on its ability to sell and deliver a wide selection of office products, at low cost, using the most convenient and expedient means possible. Customers who place a phone order by 5 PM are guaranteed to receive their order the next business day, with free delivery on orders of $50 or more. A Staples delivery person will cheerfully pick up any products that don't meet customer needs. Staples may not offer the widest array of products, nor may the customer service representative be intimately familiar with the needs of each customer, but they do have a streamlined system for order, payment and delivery that is unmatched by the closest competitor.

In an operationally excellent company, all organizations and employees work as a tightly-integrated team, abiding by the same precise (and widely-publicized) rules, regulations, and standards. TQM initiatives, time-and-motion studies, root-cause analysis, affinity diagrams, and meticulous record-keeping of all transactions are instrumental for success. A command-and-control, highly-regimented style of management is typical of operationally excellent firms, with the most valuable skills and knowledge residing in the "command center" of the organizational structure. Few significant business decisions are made by the rank-and-file. Compliance to norms, conformance to operating procedures and efficiency are rewarded, rather than creative problem-solving or risk-taking. A high degree of structure is required to make the system operate efficiently, reliably and at the lowest possible cost.

An operationally excellent company may be thought of as "business-by-the-numbers," or one-size-fits-all. Disruptions and exceptions are the bane of any smoothly-running operationally excellent company. Success is achieved by creating a "standard" business process that is streamlined to minimize cost, time and aggravation, both for itself and its customers.

Transactional-based information systems

In an operationally-excellent company, the information systems are strategic and provide competitive advantage. Employees throughout an operationally excellent company are highly proficient in the use of the company's information systems, and the processes they support. Performance of business transactions is constantly tracked by group, compared to targets, and widely publicized throughout the organization.

The information systems that support an operationally excellent company are highly-automated, transaction-based, and require massive database engines, which usually reside on a mainframe system. The huge databases are rich with data, which is easily analyzed, regarding transactions in progress, as well as historical transactions. An operationally-excellent company makes extensive use of on-line communications, both inside its company and outside, with partners, suppliers and customers. Wal-Mart has become an industry leader, in part, by giving its suppliers access to daily sales data; suppliers, in turn, use this data to generate orders to replenish Wal-Mart stock if and when necessary.

Thousands of terminals with limited intelligence, whether desktop or hand-held, are used widely throughout companies like Federal Express, Staples, and Dell Computers, to easily and quickly capture and output data, and to make this data available to anyone in the organization who needs to view it or use it. An operationally excellent company places a priority on providing the information and tools most critical for decision-making to the "command center" of the company.

Many creative operationally excellent companies are beginning to deploy client/server systems at the departmental level, giving more autonomy and control to individual operations, while retaining the central corporate database. Federal Express is taking this concept far beyond the departmental level, by deploying client/server technology to enable more than 70,000 small customers to choose the time and manner in which they access Federal Express services. Installed at no cost to customers who ship as few as three packages per day, "Powership," a client/server extension of Federal Express' global information system, is redefining the way Federal Express provides services. Customers enjoy the freedom they now have to initiative services when they're most needed, and they appreciate the ease by which they can generate a shipping label, schedule a pick-up, track a package and capture billing information. The result: The number of packages shipped by customers who use Powership are nearly double what the were before Powership was made available. Not only has volume increased, but the speed with which Federal Express can bill customers has improved significantly as well, thanks to the fact that some two-thirds of its customer transactions are now on-line.

Information systems organizations at some operationally excellent companies, however, are reluctant to abdicate any control of information systems to the departments, and see "two-tier" computing as the only viable alternative. Others may be reluctant to employ client/server computing due to the unknown costs that may be associated with making the change. Companies like Federal Express, however, believe that the power of client/server computing lies not in its promise to reduce operating costs, but to deliver services that are simply not available any other way.

Companies that focus on operational excellence as their core discipline will have to examine the trade-offs, costs, risks and benefits associated with overhauling the company's information system. Most have found the choice very clear: The business, after all, is the system and the system really is the business.

Customer intimacy: "personalized service" takes on new meaning

Companies that lead the pack by providing a high degree of personal service are "customer intimate." Examples include Home Depot, Land's End, Airborne Express, Nordstrom, Four Seasons and Whirpool's large home-appliance division . These companies are characterized by their dedication to taking care of the unique needs of each and every customer. They continually surprise their customers by demonstrating a deep understanding of their customers' business needs, preferences, and critical "success" factors. Regardless of whether that customer is a company or an individual consumer, each one is made to feel special and important.

The goal of a customer intimate company is to attract and retain customers who value service, above price and product, and who will become increasingly dependent on companies who provide them customized service. Customer intimate companies place a high premium on maintaining loyal, long-term customer relationships. They know the lifetime value of a customer, and are aware that it may cost up to five times as much to replace a customer as it does to take actions that would have kept the customer in the first place.

A customer intimate company is obsessed with satisfying their customers at every possible opportunity. For example, one of the chief performance measurements for employees at Home Depot is how thoroughly they address a customer's questions or concerns, whether the customer plans to spend $1.50, or $1,500. Home Depot is more concerned with its employees' ability to make a customer feel comfortable and confident with his or her purchases than it is with the time it takes for an employee to service the customer.

Employees at all levels of a customer intimate company are empowered to take whatever action they feel is required to satisfy their customers. The knowledge base of the customer-intimate company, therefore, is focused on the front line. At Nordstrom, for example, Rule #1 (and the only rule) is: "Use your good judgment in all situations." Stories abound about the unusual heroics Nordstrom associates have employed to satisfy their customers. For example, one "Nordie" happily gift-wrapped packages a customer bought in another department store. Another refunded money for a set of tire-chains, even though the store has never sold tire chains, and another warmed her customer's car on a cold winter day, while she was shopping.

The business processes of a customer intimate company are geared toward creating specific results for carefully selected and nurtured customers, and are designed for exceptions, rather than the enforcement of standards or rules. Customer satisfaction and repeat business are important metrics for success. A customer intimate company will want to know: Did the customer love us more this week than they did last week? The IBM of old, for example, would measure their "share" not by total market share, but by its share of each individual customer's IS budget.

Granular customer database

The lifeblood of a customer intimate company is its ability to collect, analyze, and share customer data, down to the most minute level of detail. Information systems at customer intimate companies rely on databases that can slice and dice data down to the smallest granule of customer information, down to a customer size of one. Such databases may take the form of either a mega-database with easy access by all employees, or a client/server-based, small and nimble database.

The culture of customer intimate company encourages employees across all organizations to constantly collect, organize, and share any snippet of customer data that will help the company provide the optimum level of service to each individual customer. Lotus Notes and other workgroup computing applications are widely used for this purpose. Such data is easily accessed from remote locations, especially by those on the "customer front line."

These companies pride themselves on their ability to analyze customer data in creative and meaningful ways, thereby allowing them to reveal customer trends and preferences, turning this information into services that can benefit the customers. Land's End, one of the customers with an unbeatable level of customized services. For example, a Land's End sales associate who takes your order for a striped rugby shirt you're buying as this year's Christmas present for your 18-year-old nephew may ask you whether this shirt is for the same person you bought one for at about the same time last year. If so, the sales associate may point out that the one you ordered last year was a larger size than the one you're ordering today. Or he may point out that the last one you ordered was nearly identical in color and pattern to this one. You're presented with valuable information that will save you from some potential embarrassment at gift-giving time. Without such a finely-tuned database, Land's End could not possibly have helped you select the right shirt for your nephew.

Powerful field support systems, which are often accessible through laptop computers, are critical for a customer intimate company's front-line employees to access and analyze data quickly in order to provide value for customers on the spot. Field support systems may come in two different forms: those that let the support personnel serve the customers, and those that let customers serve themselves.

Product leadership: steady stream of profitable innovations

Intel, Johnson & Johnson, 3M, Microsoft, Merck, Nike, Sony, and Disney are among the most highly-regarded product leaders in the world. Their ability to provide a steady stream of innovative new products, before anyone else can, takes precedence over streamlined operations or highly-customized services.

Product leaders continually dazzle their customers with the latest, greatest and most cutting-edge products, whether it's a new microchip, contact lens, adhesive page-marker, running shoe design, television screen, or software application. Customers look to these companies to set new standards in product excellence and innovation. These companies create and define unparalleled new products and technologies, in order to secure a leadership position before their customers may have articulated a need, and long before the competition has had time to identify and react to the opportunity.

Product leaders measure success by the breakthrough products they have brought to market and the customer share they have captured. To do this, innovation, creativity, and risk-taking are actively encouraged in their cultures. 3M, for example, expects its people to "do something interesting" about 15% of the time, even though that 15% may have no direct relevance to their day-to-day jobs. Some of the most innovative ideas coming out of 3M were incubated in that "15% time." For example, Post-its_ were invented when a 3M chemist became frustrated with the torn pieces of paper he used to mark his hymn book for the church choir. It so happened that in his "15% time," this chemist had been experimenting with new adhesives "just to see what would happen." Post-Its were born because this product innovation could be immediately applied to solve a real-life problem.

The business structure of a product leader is typically loosely-knit, with a combination of teams, superstars, and individual contributors. The working environment is usually collegial and informal, with frequent impromptu conversations and meetings where valuable information and ideas are exchanged. Experimentation, trial-and-error, unconventional work hours, and geographically-disparate teams are all hallmarks of the work environment of a product leader. Members of the organization are usually rewarded based on their capacity to innovate, and to bring products to market for which there is (or will soon be) a customer need. Risk and exposure management, ROI and product profitability are among the key metrics that are important to the management of a product leader.

Facilitating the interchange of knowledge

Flexible, powerful information systems that allow a continual rich interchange of ideas, collection, cultivation and dissemination of organizational knowledge, and easy access to external information sources are vital for companies that want to retain a product leadership position. The information system of a product leader has few boundaries. Pharmaceutical companies, for example--many of whom are renown for their product leadership-- maintain interactive links with universities, private research labs, the Federal Drug Administration, industry associations, customers, and other companies.

Team-to-team communications are just as valuable as person-to-person communications. Concurrent engineering has become a standard practice of many product leaders, especially for those who have geographically dispersed development organizations. It is not uncommon for a dozen or so people to share data and work on the same set of documents while working together on a development project.

Document and data management tools facilitate information storage, flow and exchange. Easy access to past research documents speeds product development by building upon previous learnings; some product leaders have invested in scanning technology and large data storage devices to support on-line access to research documents that formerly existed only on paper.

For example, Ciba-Geigy, a leading pharmaceutical company, will be accelerating clinical trials and dramatically shortening time to market by standardizing on a new client/server-based global data collection system. Until now, data has been gathered and manually entered into standalone personal computers, and eventually uploaded to a mainframe in N.J. or in Basel, Switzerland. A new distributed worldwide system of more than 150 workstations with large integrated databases will be replacing these standalone systems, allowing data managers, physicians and others to use standard reports and data definitions for the first time, resulting in simpler, faster and more uniform management of clinical data in six sites across Europe and North America.

Some product leaders connect into dialogues with experts in the industry and share in information exchanges, whether they take place within the company, or outside. Such information may take the form of electronic mail, electronic notes conferences, Internet relay chats or videoconferences. The ability to tap into external databases is crucial, whether it is to retrieve articles relevant to current research activities, or to maintain a constant pulse of industry trends and market needs by monitoring leading industry indicators.

Product leaders maintain a hierarchy of portfolio, program and task management tools, all aimed at helping them concentrate their resources and energy on those areas that are most likely to result in the highest possible profit. Portfolio management systems allow product leaders to evaluate the expected return on investment associated with specific product development projects at key project milestones. Cost in terms of time, dollars, and people and skills is considered along with the expected benefits, both short- and long-term. By objectively assessing product development expected results against business objectives, product leaders can quickly decide which product development projects are likely to have the most positive impact on their company's bottom line, and which are likely to drain more resources than they are worth. Portfolio management systems often reside on PCs; the software applications may be developed in-house or purchased.

Program and task management systems provide product leaders with needed tools to efficiently and effectively manage the research and development process. These systems automate certain routine and repetitive tasks, such data collection, administration, performance analysis, and testing. Pharmaceutical companies, for example, often use state-of-the-art laboratory systems to automatically measure and record lab tests.

The courage to persevere

Creating and maintaining an enterprise-wide operating model whose elements are closely aligned in one key discipline is very hard work, and despite the best intentions, many do not succeed. In fact, many companies have intellectually understood the need for organizational focus, but have found that the disruption to their current business system to be too great to withstand. Some companies have identified new target markets whose needs can be fulfilled by their current strategies; some have blithely ignored customer data that calls for drastic change to the status quo; and others have given up on their chosen value discipline, when results are not forthcoming within a short period of time.

Sears is a good case in point. In reaction to competitive pressures from Wal-Mart and some of other leading discount department store chains, Sears tried to win back customers with a new "everyday low prices" campaign in the late 1980s. When that ploy failed, they turned to a new "Branding Central" initiative, meant to provide a wider array of products, but causing only confusion to the customer. In its next attempt to regain lost customers and stave off red ink, Sears hired famous models and actresses to establish its new image as a provider of trendy clothes. In short, Sears adopted elements from all three value disciplines in a scattershot approach to regain market leadership. By trying to be all things to all people, and cobbling together a set of incompatible philosophies and approaches, Sears failed in all areas. To regain its once-stellar reputation as a value leader, Sears needed to pick one value discipline and pursue it with vigor, while meeting industry standards in the other two.

Today, Sears is well on the road to recovery. In 1994, its Merchandise Group reported its best income performance in a decade. The resolution of Sears' "identity crisis" was a major factor, according to Chairman and CEO Arthur C. Martinez. In addition to abolishing its signature catalog in January 1993, Sears has also divested itself of non-core businesses such as Allstate Insurance, Coldwell Banker, Dean Witter, and Discover & Co. Today, Sears has refocused its efforts on becoming a "moderate, promotional, full-line department store--perhaps the last of its kind--serving the mid-American market." The clarity of focus has paid off: 1994 income increased by 18.4% over the year. Had it not been for catastrophic losses to Allstate in the wake of the California earthquake, Sears' income for 1994 would have leaped by a full 25%.

The great balancing act

A market leader cannot realistically excel in all three areas. It must choose a single focus area, based on a combination of customer needs and the organization's current competencies and probable ability to meet those needs. To succeed, however, a company must achieve at least a threshold level, or passing grade in the other two disciplines. For example, a computer mail-order company that exceeds customers' expectations for price, speed of delivery and overall quality, but fails to handle customer complaints, an area its competitors do well, will not remain a market leader for long.

One company that has traditionally excelled in one category, a leading telecommunications company known for its excellent operations, cannot expect to also excel in the area of customer intimacy, but it must achieve a passing grade in that area. The foundation of this company's excellent operations is a large, inflexible transactional-based system that was written in a language that predates COBOL. By design, this system is unable to accommodate the kind of granular data that is required to send personalized mailings to customers. Instead, all customers are sent a full listing of service promotions in their monthly statements, even though some customers live in areas where the services are not yet available. To be a market leader, this telecommunications provider must overcome this discrepancy.

Value disciplines as blueprints for information systems strategy

The fact that market leaders develop, nurture and implement information systems strategies that map perfectly to their chosen value discipline is no coincidence. Market leaders work hard and invest heavily to create information systems strategies that will enable their companies and employees to provide optimum value for their customers.

In many cases, this has meant a total overhaul of an organization's information systems, including management processes, hardware and software platforms, skill levels of IS professionals, and training programs for business professionals who rely on their company's information systems to make well-informed decisions. In other cases, companies have examined their current IT investment strategy in light of their value discipline, and have elected to preserve as much of their existing IT investments as possible, while migrating toward a new strategy at every opportunity. In this case, achievement of value discipline leadership will inevitably be a slow process.

Most market leaders regard IT as an indispensable competitive weapon and situate the IT executive among the top tier of company executives. These IT executives work alongside their executive team counterparts to develop the new operating model and a shared organization-wide vision for delivering unmatched value to customers.

Business and IT executives at many of the most successful companies develop value discipline-based operating principles that provide guidelines for IT decision-making. For example, an operating principle for a product leader might be: "We will provide information systems that allow cross-functional product development teams worldwide to efficiently and effectively collect, update, analyze, and distribute data to anyone else in the organization who needs it." Such a statement has profound implications for IT support, including the type of network, workstation, database, and application development tools that will be employed.

A customer intimate company may have as one of its operating principles: "Every employee who has direct customer contact shall have the ability and authority to make decisions in the best interests of the customer at all times." Again, the information and support implications are far-reaching if the company is to consistently uphold this principle. At minimum, each customer support representative must have access to the customer database.

Developing jointly-held principles is not enough. The next step is to communicate those principles, clearly articulating the rationale and implications for each, and outlining what standards might be adopted as a result. Successful companies do not confine this principles- development and communications process to the top-tier executives. [See another KCG article on Principles. Click here to go there directly.] On the contrary, employees representing a cross-section of all affected organizations are fully engaged in this principles- and standards-development process. (Imagine what the information systems might look like if Land's End failed to include their telephone sales representatives in these up-front discussions! Or if 3M neglected to solicit input from their researchers! Or if Federal Express discounted ideas from its delivery personnel!)

Taking the first steps toward market leadership

For many organizations, the first step is often the hardest and requires courage, tenacity, and confidence to discover what customer truly value. If the products and services that companies are prepared to provide are not in synch with customer needs, they must be changed. The means of making such changes is the company's operating model, whose elements all must be directed toward providing excellent products and services in a particular value discipline. Of all of the components of the operating model, only information systems may serve the dual role of catalyst and enabler of the changes that must be invoked to build and maintain a market leadership position.

For companies that see a focused value discipline as a prerequisite to building and maintaining a market leadership position, information systems executives have a unique opportunity to influence how information and information systems are used to achieve critical business objectives. When business and information technology executives work in lockstep to create the chosen value discipline, an information architecture that's closely mapped to key business objectives will result.

After all, there can be no value from technology if there is no value for the business. And there can be no value for the business if there is no clear and direct value for the customer.

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Innovations is KCG's publication focused on organizational and technological change. Each issue of Innovations presents one or two case studies on a key topic as well as an approach or methodology relating to the situation. A recent issue is published here. Other articles at our web site can be reached via links at the bottom of this page.