Digital Disciplines. Wiersema Fred

because companies pursuing a value discipline need to align their culture, management, IT, organization, and processes.

      It's a challenge to focus on one discipline. What company wouldn't rather have streamlined processes than cumbersome ones, great products rather than outdated, shoddy replicas, and delighted, loyal customers rather than high churn, lawsuits, and bad word of mouth? However, a key component of Treacy and Wiersema's argument is the need for focus. They argue that Sears tried operational excellence, offering everyday low prices and cutting costs. However, Sears didn't match Wal-Mart's single-minded focus on cost reduction through its innovations in supply chain management and logistics. In what Treacy and Wiersema considered a customer intimacy strategy, Sears then tried expanding beyond its Kenmore and Craftsman brands by carrying well-known ones, which merely matched competitors' product variety. Finally, Treacy and Wiersema pointed out that Sears attempted a product leadership strategy via celebrity endorsements, but didn't execute as well as a top competitor at that time, J.C. Penney.45 Trying to be all things to all buyers – simultaneously pursuing operational excellence, product leadership, and customer intimacy – can be like trying to undercut Hyundai pricing with a custom-designed Lamborghini.

      Their advice is still often valid. After the market close on January 28, 2015, McDonald's, the world's largest restaurant chain, ousted its CEO after a two-year tenure. McDonald's financial results had gone stale, but the CEO had gone from out of the frying pan and into the fire partly because of his attempt to simultaneously pursue multiple disciplines: operational excellence by offering low-cost Dollar Menu items and quick-service – i.e., fast food – convenience; product leadership through a broader selection of menu items including some “premium” items such as McWrap; and customer intimacy through a “make your own burger.” As one investment advisory firm said, “Trying to please everybody is one of the issues that they're dealing with.”46

      There are multiple problems with such an approach. Product leadership conflicts with operational excellence as customers balk at items not on the Dollar Menu. Operational excellence conflicts with product leadership because food is partially prepared in factories and then flash frozen, pitting efficiency against freshness. Customer intimacy and product leadership conflict with operational excellence as customization and extensive menus slow down the drive-through lines.

      Less than 40 hours after the McDonald's shake-up, Shake Shack sizzled as its IPO (initial public offering) opened at more than double its offering price. Shake Shack is focused on a 100 percent, all-natural product leadership strategy, offering fresher, higher-quality ingredients at premium prices: they advertise “100 % all-natural Angus beef, vegetarian fed, humanely raised and source verified. No hormones or antibiotics – EVER. We pride ourselves on sourcing incredible ingredients from like-minded artisanal producers.”47 A double SmokeShack bacon cheeseburger goes for $9.49, compared to say, a McDonald's Bacon Clubhouse Burger: $4.99.

      In short, Treacy and Wiersema's position was that companies should ideally pick one (although they also pointed out that some companies, such as USAA and Toyota, were excelling at more than one) value discipline, and do whatever is required to attain a leadership position in that discipline and at least maintain parity in the others. Today, the economics of information goods and technologies may enable more companies to pursue multiple disciplines. For example, Netflix can deliver individualized entertainment recommendations (customer intimacy) across a broad portfolio of titles including award-winning Netflix-produced content (product leadership) via convenient, streamlined delivery channels (operational excellence).

      The Unbundled Corporation

      John Hagel and Marc Singer, in a Harvard Business Review article titled “Unbundling the Corporation,”48 took this notion of focus one step further. They argued in 1999, a few years after the value disciplines model emerged, that companies often have three separate virtual businesses, or core processes, related to operations, products, and customers, and should consider “unbundling” themselves – that is, splitting into those separate businesses. Or, if the company is not already integrated, continue to maintain focus on one area, and leverage other companies that have expertise in the others.

      Hagel and Singer used slightly different terminology than Treacy and Wiersema, because they were focused on organizational entities rather than value disciplines – that is, strategies that deliver differentiated customer value. Thus, they argued for the separation of the customer relationship management business, which would appear to typically require a customer intimacy strategy; the product innovation business, which would presumably require a product leadership strategy; and the infrastructure management business, which would obviously benefit from operational excellence.

      Hagel and Singer argued that the culture and competitive mandates for each business are often different. For example, they said that the customer relationship management business should have a culture of customer focus and service orientation. They argued that the product business should have a culture of innovation, rewarding creativity, and collaboration. The infrastructure business, in their view, should have a culture focused on cost, efficiency, and standardization.

      Hagel and Singer argued that companies should not only choose which of these three to embrace as core strategy, but that they actually should split into three separate companies: one company per discipline, as it were. The customer relationship management business can achieve benefits through economies of scope – gaining a large fraction of wallet share by selling not only traditional products but those from partners. The product innovation business can achieve strategic advantage through speed. And the infrastructure management business should focus on economies of scale.

      This is the exact opposite of the philosophy of a highly vertically integrated organization of a century ago – say, with Ford and automobile manufacturing, or Hollywood movie studios, which integrated production and distribution via company-owned theaters, or AT&T, which had a captive manufacturing unit, Western Electric, as well as owning its distribution business, the operating companies such as New York Telephone.

      Representing the unbundled approach, consider Coca-Cola. Partly of necessity borne of the limited assets of its founder, it had a highly unbundled business from the very start. Most of Coca-Cola is water, which was acquired by soda fountain operators from municipal water infrastructure. When Coke became a bottled drink, it was independent bottlers who invested in bottling plants and machinery, and trucks and drivers for physical delivery to stores and restaurants, which were someone else's investment. And, in terms of materials such as sugar and corn syrup, these were not produced in Coca-Cola facilities, but were commodities bought from other firms, such as Monsanto and Cargill.49

      As another example, consider Apple's iPhone. Apple itself is focused on product design and innovation. It does not own infrastructure such as manufacturing facilities; manufacturing is outsourced to Hon Hai Precision Industries, better known as Foxconn. And, although its retail stores are masterpieces of architecture and merchandising, in one recent quarter, only 15 percent of US iPhones were sold in the company stores. About 70 percent of the phones are sold through the four major carriers and another 10 percent at Best Buy.50

      Or, consider a different Apple business, apps, which now generate $15 billion annually. Here, the product innovation business has almost completely been separated from the main corporation and given to app developers such as Rovio (Angry Birds), King Digital Entertainment (Candy Crush), and even a direct rival: Microsoft (Office). Although there are a number of Apple apps, such as Keynote for presentations and the Safari browser, product innovation for apps has mostly been outsourced to other businesses, while Apple retains customer relationship management through the hardware, the Apple App Store, Apple ID, and, of course, payments.

      Information technology enables the unbundled corporation as never before. The App Store enables unbundled product innovation pure-plays to often thrive without any end-customer relationships, only a relationship with Apple. Uber, a “ridesharing” service, is arguably mostly a customer relationship app. Uber connects people who would

45

Treacy and Wiersema, The Discipline of Market Leaders, 92–93.

46

Katie Little, “McDonald's CEO Don Thompson Steps Aside, Stock Jumps,” CNBC.com, January 28, 2015, www.cnbc.com/id/102376552.

47

www.shakeshack.com/ (accessed May 14, 2015).

48

John Hagel and Marc Singer, “Unbundling the Corporation,” Harvard Business Review (March–April, 1999): 133–141.

49

Bartow Elmore, “How Coca-Cola Built a Sugary Empire, by Outsourcing as Much as Possible,” Fortune.com, November 25, 2014, fortune.com/2014/11/25/coca-cola-capitalism/.

50

AppleInsider Staff, “Selling 50 % of iPhones through Apple's Retail Stores Viewed as an Unrealistic, Lofty Goal,” AppleInsider.com, July 17, 2013, appleinsider.com/articles/13/07/17/selling-50-of-iphones-through-apples-retail-stores-viewed-as-an-unrealistic-lofty-goal.