1 © 2013 Hadley Williams & Richard McKnight

Choosing a Source of Competitive AdvantageStep One on the Path of Strategy Execution

By Hadley Williams and Richard McKnight

STRATEGY BY DESIGN is a series of papers for business leaders who have accountability for delivering strategic results

Choosing a Source of Competitive AdvantageStep One on the Path of Strategy Execution

Hadley Williams, PhD, MBA is a Managing Director for Human Productivity, LLC, a Philadelphia based consulting firm that specializes in strategy implementation, strategic human resource management and positive change management. E: hadley.williams@humpro-llc.com. Ph: 610-742-9703.

Richard McKnight, PhD has written exten-sively about strategy execution and is the author of Victim, Survivor, or Navigator: Choosing a Response to Workplace Change and coauthor, with Tom Kaney and Shan-non Breuer, of Leading Strategy Execution. E: RMcKnight@McKnightKaney.com. Ph: 610-742-6388

© 2013, Williams and McKnight. All rights reserved.

By Hadley Williams and Richard McKnight

If you want to grow your company and stay profitable, you have to choose a value dis-cipline and then build your entire organi-zational infrastructure around that choice.

The above quote is not new wis-dom: Jack Welch said it and for almost two decades GE’s

business units lived and prospered by it:

“If you don’t have competitive advantage, don’t compete.”

What Welch meant, of course, is that if a business unit wasn’t number one or number two in its industry and the prob-lems limiting success couldn’t be fixed in a reasonable amount of time—then it would be spun off.

Most leaders who have successfully grown their companies will tell you that they employed an orderly and focused approach to creating value for their cus-tomers and clients. We’ll use the term “value discipline” to refer to this practice and outline how to go about choosing

the right one for your company given the dynamics at work in your chosen markets. Consciously choosing a value discipline will get you to the starting line in the race for competitive advantage. However, running and winning the race is a leadership challenge that requires de-cisiveness, long-term commitment, and skill in building a profitable organization around the chosen value discipline.

Enterprises that are widely admired, like Southwest Airlines, Nike, and Apple, started out with a good idea, business savvy, and ambition. They created advan-tage by committing to a value discipline and building an organization and a cul-ture around that choice. This means that they match their organizational structure to their value discipline, align their core processes with it, and build rewards and HR systems that line up with it. Some use the word “design” to refer to the fit of organization infrastructure to the value discipline.

With the need to do this in mind, we’ll end this paper (P. 6) by posing a

STRATEGY BY DESIGN is a series of papers for business leaders who have accountability for delivering strategic results

3 © 2013 Hadley Williams & Richard McKnight

challenge. We will present a short sum-mary of a business situation and ask you what the organizational infrastructure or design should look like given this choice of discipline. Completing this exercise will enable you to deepen your knowl-edge of the vital link between value dis-cipline and organizational infrastructure.

Making decisions about who your cus-tomers are, the value you will create for them, and organization design is hard work. But here’s the good news: your competitors are not likely to muster the tenacity and strength of purpose to see that choice through. Many companies entertain the idea of choosing a value discipline and even do so, but most are not willing to make the tough choices re-quired to make it part of the company’s DNA. If you choose your value disci-pline wisely and conform your organi-zation design to the choice, you are far more likely than your competitors to win in the marketplace.

The challenge of growing a profitable organization is encapsulated in the words of one leader who told us:

Back when we were a $15 million dollar company it took good ideas, savvy and hard work to be profitable. Then we learned first-hand how quickly profits could evaporate as we ramped up to $60 million in revenue. Now, we realize that being a profitable $260 million dollar company requires do-ing everything we did at $15 million and calls for a lot more discipline in every aspect of our operation. Individual heroics just won’t carry the day as you grow. You have

to figure out what value you’re producing and then bend everything to this end.

Choosing a Value DisciplineIn the mid 1990s Brian Treacy and Fred Wiersema introduced a powerful con-cept to the business world, one that is, to this day, widely mentioned—if not con-sistently applied—in discussions of busi-ness strategy. Simply put, their message was this: you attain market leadership by producing a unique value consistently for a specific customer segment better than any of your industry rivals.

By answering the questions, “What unique value—and for whom—are we bringing to the marketplace?”—you are committing yourself to what Treacy and Wiersema called a value discipline.

Treacy and Wiersema identified three types of buyers noting that it is crucial for leaders to be clear about which buyer they’re playing to and by what combina-tion of values they will serve that cus-tomer segment. Those buyers fall into three categories. It is folly for one com-pany to try to serve them all:1. The economy-minded buyer who

wants to pay as little as possible for goods and services of acceptable quality

2. The customer who is willing to pay a premium for the leading-edge prod-uct or service

3. The customer who pays handsomely for highly tailored, often complex so-lutions to meet his/her needs

Table 1

Value Discipline Creates Value By Examples

Operational Excellence Packaging cost, quality, and convenience

Dell, McDonald’s, Wal-Mart, IKEA, Southwest Airlines

Product LeadershipOffering cutting-edge products, useful features, and new applications

3M, Apple, SONY, Lexus, Google, Disney, WL Gore

Customer Intimacy Customizing for a total client solution

IBM Services, ARAMARK, Marriott Vacation Properties

In using the term “discipline,” Treacy and Wiersema meant rigorous control and restraint, saying:

The selection of a value discipline is a central act that shapes every subsequent plan and decision a company makes color-ing the entire organization, from its com-petencies to its culture. One you’ve chosen a value discipline you must then conform ev-ery aspect of the organization to the choice. And no fudging: you must commit to one value discipline, not to two, and certainly not to three. Overlook or simply give this choice lip service and your company—re-gardless of its size—will under-perform.

These value disciplines choices are shown in Table 1.

Declaring a value discipline won’t make you all things to all customers—far from it. The choice will actually cause you to reject some customers in favor of focus on those customers your operating model is designed to serve. For example, while Southwest Airlines has made a few adjustments as market conditions have changed over the years, they have not strayed from their original value proposi-tion of reliable, low-cost airfares; theirs is the cost-conscious customer. They are still the same operationally excellent (and consistently profitable) airline they have been for four decades, still appeal-ing to and serving the economy-shopper. If your habit is first-class air travel, you may not like flying Southwest but you have to like their success!

A Value Discipline Enables Planned Organizational GrowthExcelling at one value discipline also requires that you are at par with your industry segment on the other two disci-plines, so management attention towards all three value types is necessary. It’s a matter of trade-offs: the temptation to try to be superior at two or three disci-plines is misguided. Trying to become so will create serious conflicts and generate significant costs within your organiza-tion since the operating models for the

4 © 2013 Hadley Williams & Richard McKnight

Table 2

If this is your chosen value discipline...

…Operations at your company will have…

…Product/service value promised by your company will be…

…Customer/Client relationships at your company will be…

Operational Excellence

Highly defined processes with emphasis on performance metrics

Operational decisions are driven by a search for efficiencies: “Get the cost out.”.

Commodity-like (e.g. Dell Computers) or “no frills” services (e.g. Southwest Airlines).

Designed to provide a hassle-free buying and user experience.

Product Leadership

Loosely defined processes in the design phase, highly defined and disciplined in the product launch and manufacturing realms

Cutting edge, best in class; often little or no customization, (e.g., Mercedes Benz).

In service of creating a positive user experience with a superior product.

The customer is paying a premium for your product/service and expects friendly, expert product support. Customer services levels may lead the industry (e.g., Apple).

Customer Intimacy

Loosely defined processes

Little management attention placed on process improvement

Operational decisions based on individual client needs: “Build tailored solutions.”

Highly customized to solve unique client problems and challenges. (e.g., most consulting firms)

Personalized and frequent to a relatively small client base

Leads to anticipating client needs

Company may have representatives co-located with key clients

three disciplines are quite different. The principle that makes the value discipline approach so effective is that it causes a growing company to focus on the value a specific buyer segment is looking for versus all buyers in the marketplace. For example, Apple targets buyers who are attracted to innovative products—and who are, therefore, willing to pay a pre-mium for them—while Dell attracts the economy-shopper, one who is not will-ing to pay for the gee-whiz polish and ease of use of an Apple product, but one who wants basic functionality.

Table 2 gives you a closer look at how committing to a given value disci-pline creates different operating models, value propositions and customer/client relationships.

Choosing a Value DisciplineChoosing and using a value discipline rigorously requires airtight alignment among the senior-most executives. If the leadership team wishes to use organiza-tional assets wisely and to good effect in the marketplace, it must choose its cus-tomers carefully, declare the type of value they intend to create for those custom-ers, and then conform every aspect of the organization to it. This has to start with deep agreement among those lead-ers about what the core competitive ad-vantage is they are trying to create. Most don’t, it seems: In a 2011 global study, McKinsey & Company found that only 33 percent of North American executives could agree with the statement that “Our strategy incorporates a detailed under-standing of our competitive advantages.”

By contrast, 48 percent of Indian execu-tives agreed.

Choosing a value discipline is a deci-sion that will affect all major business decisions for years to come. And making the right decision is hard work. The good news is that while working through the choice of primary value discipline is time consuming and sometimes contentious, it’s always worth it for two reasons: it gets the top team members aligned and it informs intelligent debate and decision-making for every subsequent decision that you will make along your growth path.

Table 3 (next page) shows the top team tasks that will enable wise decision mak-ing with respect to value discipline.

Imagine for a moment that you’ve completed the top team tasks listed in Table 3. Congratulations! You’ve made it

5 © 2013 Hadley Williams & Richard McKnight

to the starting line in the race for com-petitive advantage. You made the central decision needed to actually be in the race, one that many top teams discuss but ultimately fail to act on. To be sure, there is still work to be done around your chosen value discipline. For example you still have to:

• Define the role of your secondary value disciplines in supporting your primary discipline

• Communicate and “socialize” the decision and rationale to the entire workforce

• Make refinements to your value dis-cipline proposition based on input from market-facing managers and supervisors

The Race AheadYou can deepen your knowledge about value disciplines and their implications for your organization by completing the exercise on page six of this document.

Once you make the choice of your company’s primary value discipline, you (and by the word “you” we mean the en-tire leadership team) face the ongoing

methodology to drive execution. A strat-egy management system calls for identi-fying the core metrics that define one’s strategic intentions and setting perfor-mance targets relating to them. In turn, this allows the users to create budgets for initiatives that drive results. A good strat-egy management system also asks the users to make choices about the design of their organization—its structure, pro-cesses, reward system, people practices, and so on—and fit these components to the strategy. Everything needs to work in sync.

Finally, leadership teams must ex-ecute their value discipline in a way that produces an educated, enthusiastic workforce, the only kind that can create superior customer value and thus, the fi-nancial results you seek. Other titles in this series address these tasks.

We wish you well as you clarify your value discipline and think through its implications for your organization.

work of creating an organization and a culture that will deliver the value prom-ised by it. A well facilitated process lead-ing to the choice of a value discipline can have a very beneficial effect on team-work and the conceptual alignment of the senior executives in your company, both essential to strategy execution. In another paper in this series, we provide guidance on how to build the kind of top team necessary for strategy execution.

To execute against your value disci-pline you’ll also need to put a strategy management system in place that in-tegrates your choice of value discipline into daily operations. In another paper in this series, we introduce you to such a system, the Balanced Scorecard, the world’s most widely used strategy man-agement approach. Many business lead-ers are familiar with the original bal-anced scorecard and think of it merely as a performance tracking methodology. It has evolved, however, into a comprehen-sive strategy execution system capable of enabling breakthrough customer and fi-nancial results.

Whether you adopt the balanced scorecard methodology or create a sys-tem of your own, you need some kind of

Table 3

Top Team Tasks Required OutcomeLearn the basics about value

disciplines The leadership team gets on the same page regarding background knowledge, defini-tion of terms and key principles of creating a value discipline.

Understand the status quo—where do you stand now and why?

Top team reaches agreement on the following:

• What are the dimensions of value in your industry that your chosen customer seg-ments care about?

• Which competitors are standouts at delivering each dimension of value?• How do we do we compare on each dimension and why?

Generate realistic options for your future

Top team gets clarity on the following:

• How do standout competitors create high value?• How might customer segments change their expectations in the next three years?• How would the standouts have to change their approach if customer expectations

change?

Identify your company’s primary value discipline to achieve competi-tive advantage

Using the information from 1-3 above, identify:

• Which standouts can we beat at their own game?• Which value dimensions are viable for us?• Which operating model will create the best advantage for us?

6 © 2013 Hadley Williams & Richard McKnight

ProPlan sells on-line product planning software and ser-vices to small and to mid-sized manufacturing and technology companies in the U.S. market. Over 70 percent of ProPlan’s revenue comes from OmniP-lan, a Web-based application that supports detailed project scheduling and tracking in real time across multiple locations. ProPlan also sells document management and time tracking systems along with end-user training. Customer appreci-ate OmniPlan’s good technical support and frequent upgrades and enhancements.

Annual sales revenue at ProPlan has remained at a plateau of $25 million for the past four years. The executive team recognizes that OmniPlan has a strong subscriber list with very few customer defections to ProPlan competitors. However, the plateau has made it clear that market penetration for OmniPlan has been reached. The offshore market for Omni-Plan is attractive but there are several barriers to entry includ-ing entrenched competition in EU countries and the Far East.

In response, the executive leadership team plans to introduce a new generation of product planning software that fully integrates with enterprise

resource planning (ERP) appli-cations used by most of their customers. The new offering will manage new products from inception to retirement—not just at launch. Lifecycle product planning will open a significant new market for ProPlan but will pit the company against new competitors; others are also envi-sioning this new market.

The ProPlan executive team recognizes that the company’s success to date does not guar-antee future results in a new marketplace where other firms will be targeting the same new customer. The team knows that in order to create competitive advantage in this new market-place they must discipline their organization as never before. As one of the team said, “Without value discipline there is a real risk of trying to design something for everyone, satisfying no one and taking too long to do it.”

ProPlan’s leadership team used the four-step process described in this article to create the value discipline statement you see to the left. What is most important about the statement is the deep meaning and conviction held by the team as a result of the process.

Product Leadership is the value discipline that gives us competitive advantage

• Applied innovation is our lead competitive discipline—enabled by employee innovation

• Customer intimacy will inform our innovative efforts and build customer loyalty

• Operational excellence is re-quired to sustain our success — we will invest time and effort in improving our operating process es and business processes

Choosing A Value Discipline—Case Example

ProPlan®

7 © 2013 Hadley Williams & Richard McKnight

Organization Design Dimensions

1. If our organization’s value discipline is customer-intimacy, our organization’s reward system must be designed to encourage mostly...

_____ A. Teamwork, reducing waste, and adhering to processes

_____ B. Inventing and bringing new technologies and practices to market

_____ C. Knowing the customer deeply and going the extra mile to deliver exactly what products and services they need

2. While each may be important, if our organization’s value discipline is customer-intimacy, our most valued employees must be...

_____ A. Team players who improve key processes

_____ B. Creative integrators who can implement solutions as needed drawing on the portfolio

_____ C. Pioneers who develop new technologies and practices

3. If our organization’s value discipline is customer-intimacy, our core processes will be...

_____ A. Loosely defined and highly customized for individual clients or customers, optimized for customized customer results and solutions

_____ B. Fast new product/service development, product/service launch and market exploitation

_____ C. Traditional supply chain (source, plan, make, deliver), optimized for efficiency and low cost with lots of process measures

4. If our organization’s value discipline is customer-intimacy, management attention must be focused above all on...

_____ A. Buyer loyalty, cultivating long-term relationships

_____ B. Building leading edge service/product lines

_____ C. Standardization of processes, simplification, tight controls, central planning

5. Planning and controls in our organization, our organization’s value discipline is customer-intimacy, need to be...

_____ A. Highly centralized throughout the value chain

_____ B. Centralized but loose in R&D, highly centralized and tight in supply chain

_____ C. Highly decentralized to permit serving customers the way they want

Answer key:

The correct answers are 1-C, 2-B, 3-A, 4-A, 5-C.

Deepen Your Knowledge About Value DisciplinesAfter an analysis of their industry, the leaders of Service, Inc. have concluded that the company will be best positioned to compete if the leaders build their organizational infrastructure around the value discipline of customer-intimacy. Pretend you sit on their senior leadership team. From the alternatives presented, choose the advice you would put forward to your colleagues as the team grapples with the question of “If our value discipline is customer-intimacy, how must our organization be designed?” The correct answers are below.