Value Disciplines:

What are they? Do you need them? How do you use

them?

What enables some companies to command the respect and loyalty of their customers,
while others can't find their niche and must continuously cut costs and retrench in their
business? What are the dynamics of the market that let a company be a star for years and
then suddenly slip from its leadership position?

The answers can be found in an aggressive new approach to marketing and competitive
strategy, reengineering and business change developed by Michael Treacy and Fred
Wiersema called "Value Disciplines" and written about in their best seller The Discipline
of Market Leaders (1995).

Kendall Consulting Group has developed and implemented a practical methodology for
using the Value Discipline concept. Our experience, approach and coaching have been an
essential catalyst to client teams to reshape their businesses with a strong customer focus.

In this issue of Innovations, we introduce the concept of Value Disciplines and a short
checklist for companies to use in testing their need for the Value Discipline approach. We
have also included a brief description of key steps to getting started.

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"Value Disciplines" is the term used for three dynamic business leadership strategies -
operational excellence, product leadership or customer intimacy - that companies effect
to differentiate themselves and provide unmatched value to their customers. A Value
Discipline strategy provides the context for a company to set its corporate vision and
objectives, target it’s most profitable customers, and focus and align its functional
departments.

According to reengineering guru Dr. Michael Hammer, seventy percent of business

change initiatives fail due to a narrowly defined scope of change and inadequate attention
to the dynamics of an organization's marketplace (Reengineering The Corporation: A
Manifesto For Business Revolution, 1993). Most recent organizational change initiatives
have been focused on improving existing internal operations and reducing costs. These
are no longer enough for business success. Today, a company must develop and execute a
winning strategy aimed at true differentiation and profitable growth.

Value Disciplines force a company to look outward and listen to the voices of its
profitability: customers. Traditional marketing segmentation strategies group customers
by geography, product mix or demographics. Value Disciplines, however, segment
customers according to the product and service benefits which are most valuable to them.
Based on research done by Treacy and Wiersema, customers have three distinct value
preferences:

•Best total cost

•Best product features
• Best total solution

Customers richly reward suppliers who they believe are uniquely positioned to provide
the benefits that are most valuable to them. For example, customers who value the best
total cost, no-hassles service, and speed of delivery will be most loyal to an Operationally
Excellent supplier. A customer segment demanding state of the art product features will
pay a premium price to a supplier who demonstrates Product Leadership. Finally, a
customer segment that values a Customer Intimate supplier requires customized products,
highly personalized services and will be less price sensitive. Figure 1 shows the
landscape for value disciplines.

Figure 1 - The Value Discipline Landscape

The challenge for a supplier is to identify what its customers value in product and service
benefits, and to mobilize its organization to provide them. The statement of a value
discipline leader's intent is called a value proposition. A value proposition focuses on the
benefits to be provided to a specific set of targeted customers. It also describes the
products and services used to provide those benefits.

The greatest pitfall companies’ face today is "trying to be all things to all customers." The
strength of Value Disciplines is its focus on the most profitable customer segments, and
its focus of company resources on developing and maintaining leadership in one Value
Discipline. Companies should not try to be leaders in Customer Intimacy, Operational
Excellence and Product Leadership simultaneously.

Commitment to one Value Discipline will use most corporate resources to their capacity,
and thus excellence in more than one discipline is extremely rare. For example,
technology can be used for operational excellence, for innovation in product development
or for customization of products and services. Organizational structures and cultural
norms can stress customer service, internal efficiency or creativity. Rarely can all of these
objectives be met simultaneously in one organization.

While an organization must choose one Value Discipline to drive all aspects of its
business operations, the organization must maintain industry parity with its competitors
in the other two Value Disciplines. For example, if Dell Computer pursues Operational
Excellence (best total cost) in its market place, it can only achieve market leadership if its
products and services are as good as its competitors. If MBNA credit card services are
Customer Intimate, its customers will expect highly personalized service, and a credit
card with a competitive annual fee and wide acceptance in merchant locations. If Sony is
a Product Leader, its customers will maintain their loyalty only if its products are
innovative and its maintenance services are as good as its competitors.

Does Your Organization Need Value Disciplines?

Your customers are leaving you. Has your best customer just informed you that they are
changing to your competitor? Or are your customers just "trickling away" to your
competition each year? Are you losing old customers as quickly as you are adding new
ones?

Sales revenues are declining. Are you losing market share, especially in a growing
market? Are you fighting through cost reductions to maintain your margin, while your
sales are flat or decreasing? Are employees overworked, demotivated and cutting
corners? Are sales campaigns failing to deliver sought after results?

You are losing competitive advantage. Is your unique reputation in the market place
declining as new solutions are being offered by your competitors? Are customers'
expectations being consistently raised by your competition? Are your products and
services "me too's," too late and too expensive? Are your manufacturing costs greater
than your competitor's price?

Objectives for your change programs are unclear and frequently changing. Does your
company chase fad after fad? Do people in your organization disagree on your company's
priorities? Is the connection between your market position and your vision and change
programs missing? Do departments have trouble defining their "strategic role?"

Your knowledge of your customers is dated and incomplete. Did you survey your
customers, but after the data was analyzed, realize that you asked the wrong questions?
Can you answer with confidence "Why is this customer doing business with us?" Have
you developed too many products that missed the mark with your customers? Do your
competitors seem to understand your customers better than you do?

You are sometimes disappointed in the results of your strategic initiatives. Do you find
yourself forced to react more to competitor initiatives than framing the competitive field
yourself? Are your customers demanding that you equal competitive offerings? You are
blind-sided by non-traditional competitors?

Your employees are frustrated in their ability to serve the customer. Do your
organizational procedures make it difficult for your employees to do the right thing for
the customer and your company?

What Should You Do?

If you have identified with any of these scenarios, you will benefit from Value
Disciplines. Here are some steps you should consider:

1. Get an introduction to Value Disciplines. Understand what Value Disciplines are and
how to use them. Learn about value discipline leaders. Understand the implications of
each discipline in strategy formulation, structure, technology deployment and human
resource development. Explore how we at Kendall Consulting Group have applied our
Value Discipline methodology in companies similar to yours. Learn how to introduce the
Value Discipline concept to your management.

2. Determine your present explicit and implicit value alignment. Assess the value
direction and success of your strategic initiatives and management directives. Compare
your organization's capabilities to your perceived customers' value preferences. Assess
your organization's capabilities and vulnerability to its competitors. Determine whether
value disciplines represent an opportunity (or threat) to your business.

3. Develop your strategic plan using the Value Disciplines concept. Use our methodology
and coaching to segment your markets by value discipline, identify opportunities (or
threats), and choose a differentiated value proposition that you alone are uniquely able to
provide your customers. Identify blocks to your implementation and develop tactics to
deal with them. Learn from the experience of a firm who has done this before. Use
proven techniques which can reduce your time and effort. Develop the skills of your
management team so that they can apply the methodology in the future.

4. Use Value Disciplines to set priorities and direct business change efforts. Identify the
most important aspects of customer value and prioritize processes for business process
redesign. Develop relevant measures of performance and procedures to reinforce
customers' perceptions of value.

Summary

Establishing Value Discipline leadership is hard work. Implementing Value Disciplines

requires a company-wide ambition which is championed by the executive team; a
compelling and detailed vision that is understood throughout the organization; a
management directive that gives this activity priority and redirects the necessary people
to do the work; and an openness and willingness to share information, opinions and
experience across work management levels, functions and geographic boundaries.
Why has Airborne Express been able to achieve sales growth of 20% per year since
1985? Airborne Express succeeded in growing its Customer Intimate business because its
management targeted a set of customers who valued overnight delivery at special times
with special delivery instructions. Because Airborne Express was uniquely able to deliver
these benefits, they did not have to depend on low prices and high volume to survive.
Airborne refined its organization and systems to be the best at serving its customers'
special delivery needs.

Striving for Value Discipline leadership is not trivial. It is the most aggressive strategic
initiative that a company can choose to implement. Success with Value Disciplines
requires that organizations find a new way of thinking beyond a traditional approach to
business strategy.

A Value Discipline leader cannot be a partially customer intimate organization,

demonstrate some product leadership, and be operationally capable. Instead, the company
must develop and maintain its organizational capabilities in a way which delights its
selected customers and continues to raise their expectations to a level which none of its
competitors can come close to equaling, now and in the future.

Case Study

Painting the Town Red

TrueTone Chemicals, an industrial paint pigments supplier, used Value Disciplines to

offer new products and services and capture market share in a rapidly changing
marketplace.

Not long ago, suppliers of lead chromate pigments to government contractors found
themselves in a mature industry with purely price-based competition. As a result, leading
suppliers (like TTC, who held 40% of the market) generally adopted "Operationally
Excellent" business models.

As new environmental regulations swept across the country, however, some states began
reviewing and/or prohibiting use of lead chromate. The market for industrial paints began
to split into two segments: customers who used paints with a lead chromate pigment base
and customers who used paint with an organic pigment base which cost five times as
much to manufacture.

Driven by the belief that the market would be dominated by the supplier who could
develop a cheaper and better functioning organic pigment, competitors of TTC began to
shift their operations towards a "Product Leadership" model.

After analyzing data about the changing market, however, members of TTC"s strategic
planning team discovered a need for service that other competitors had overlooked.
Specifically, the new environmental regulations meant that customers with large multi-
state contracts were having difficulty keeping track of various states" positions on lead
chromate. While committing to production of both lead chromate and organic pigments,
TTC also established a regulatory consulting service to help clients understand individual
state contract bidding regulations and identify opportunities.

TTC"s new, "Customer Intimate" value proposition and consultative selling approach has
brought immediate success. While maintaining a strong presence in the lead chromate
segment, the company has also captured over 80% of sales in the new pigment market!