Digital Disciplines. Wiersema Fred

these issues and gotchas in Chapter 20.

      Finally, let us admit that technology itself – information or otherwise – does not directly correlate with profitability at the industry level.

      On the one hand, for example, one of the highest-technology industries is surely airlines. Computationally complex operational processes for global scheduling of crews and flights; modern jet airliners made of carbon composite frames and titanium alloy turbine blades; state-of-the-art dynamic pricing systems. These are complex amalgams of physics, aerodynamics, control systems, entertainment systems, navigational systems, information technology, and who knows what else. Yet, as strategy guru Michael Porter points out,35 airlines are among the least profitable of all industries. Porter's Five Forces model – rivalry among competitors, threat of new entrants, threat of substitutes, bargaining power of customers, and bargaining power of suppliers – explains why.

      On the other hand, the soft drink industry, which, after all, is just selling sweetened water – a century-old “technology,” if one could call it that – is among the most profitable industries.

      However, the point is not that higher information technology investments automatically lead to higher profitability. The point is that within a given industry and its profitability envelope, technology in general, and information technology in particular, can enhance performance and profitability relative to competitors. It can also enable new means of creating customer value, create barriers to entry, and reduce the appeal of substitutes.

      We live in an era of immense technological change, thanks to the confluence of key technologies such as connected things, cloud computing, and social networks. While traditional elements of competition, such as brand and distribution channels, are still important, information technologies can be ignored only at the risk of ending up like Blockbuster and Borders, overtaken by new, digitally savvy entrants such as Netflix and Amazon.com. Ignore IT and risk irrelevance or death; exploit it and survive or thrive. This is true across verticals: healthcare, manufacturing, consumer packaged goods, aerospace, pharmaceuticals, and so forth.

      Regardless of the vertical that your company is in, whether it's old or new, legacy or startup, SMB (small/medium business), Fortune 500, government, university, or garage shop, B2B (business to business), B2C (business to consumer), G2C (government to citizen), P2P (peer to peer), or X2X (anything to anything), understanding and applying one or more of these disciplines is likely to be vital for survival and growth. You don't need to be a hip Web 2.0 company to exploit these insights; many of the examples in this book come from century-old manufacturers who are transforming their processes, products, relationships, and innovation.

      While there is no silver bullet, the same patterns – the digital disciplines – keep repeating across winners in these industries, and while they don't offer a simple recipe for success, they do provide a benchmark template to customize and adapt in the context of your own firm's strategy. In short, the digital disciplines are where digital technology meets value disciplines – the foundation of today's and tomorrow's strategies – and could be just what you need to help your company attain market leadership.

      Chapter 2

      Value Disciplines and Related Frameworks

      The digital disciplines framework is a direct descendent of the value disciplines model conceived in the early 1990s by Michael Treacy and Fred Wiersema in their Harvard Business Review article titled “Customer Intimacy and Other Value Disciplines”36 and their seminal, best-selling book The Discipline of Market Leaders.37 Before delving into digital disciplines in the next chapter, it's essential to develop a baseline understanding of the original value disciplines and related strategy frameworks.

      Perhaps business success is just serendipity, but over the past few decades, there have been hundreds – if not thousands – of attempts to determine why some firms succeed while others fail; why some companies or industries are highly profitable and others aren't; and to develop models, frameworks, repeatable processes, and insights that businesses can utilize.

      Some strategists, such as visiting professor Gary Hamel of the London Business School and the late professor C. K. Prahalad of the University of Michigan, have argued for what might be called an inside-out view. They claimed that companies should build on their core competencies to offer new products and services or enter entirely new markets. One example that they highlighted is NEC, which identified three major evolutionary trends in the 1970s: from mainframe to distributed processing; from simple components to complex integrated circuits; and from mechanical/analog telecommunications to digital. By focusing on developing deep internal knowledge and skills including process technologies in these areas, and leveraging those competencies into interrelated products and businesses, NEC grew into a global leader.38 Today, we see companies like Tesla taking a core competency such as lithium-ion batteries and using it to expand beyond cars into home energy storage.39

      Other strategists, such as professor Michael Porter of the Harvard Business School, have been primarily concerned with a firm's competitive strategy, so their focus is outward, but primarily oriented to competition, not customers. In Porter's five forces framework, customers, often referred to as buyers, are just one of the five major considerations for strategy – others being suppliers, substitute products or services, the threat of new competitors entering the business, and the intensity of rivalry among existing competitors.

      Yet another approach to strategy would be to work from the outside in, starting from the customer perspective backwards to the firm's positioning and strategic architecture. Treacy and Wiersema did just this, and after studying 40 companies for several years, concluded that companies could lead their industry through the delineation and delivery of differentiated customer value in one of three ways, which they called value disciplines: operational excellence, product leadership, and customer intimacy.

      Value Disciplines

      Treacy and Wiersema counseled that companies could advantageously differentiate themselves through better processes, better products, or better relationships. Their ideas about competitive strategy were structured according to three related components: the value discipline and its supporting value proposition and operating model.

      According to Treacy and Wiersema, the value proposition is the implicit promise, that is, the offer that the company makes to its customers regarding the value – benefits less costs – that the customer can expect if he or she does business with the firm. Perhaps the simplest such proposition is Geico's famous “15 minutes could save you 15 percent.” In other words, an investment (i.e., cost) of 15 minutes of your time could save you 15 percent on your car insurance premiums (i.e., benefit).

      Value is not only measured in cost reduction, of course. It might include access convenience, purchase convenience, elegance, design, ego gratification, entertainment, emotion, user experience, or personal or business transformation, to name a few.

      Treacy and Wiersema then defined the value-driven operating model as the integrated mechanism by which that value is delivered: processes, resources, data, plant, equipment, IT assets, location, organization, culture, leadership, management, governance, and employee skills and motivation. Different companies may have different approaches to delivering value: Toyota uses a very different model for manufacturing Camrys than Rolls-Royce does with its handmade Phantom Coupé. Each creates value for its target segments, but they are different kinds of value with different kinds of operating models.

      Each value discipline is a combination of a generic value proposition with its corresponding operating model.40 A company pursuing operational excellence through cost reduction, for example, will think about controlling costs everywhere, and is more likely to invest in automated self-service and interactive voice response (IVR) systems than in front-line account teams to build customer

37

Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Reading, MA: Addison-Wesley, 1995).

38

C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review (May–June 1990): 79–90.

39

Ucilia Wang, “Tesla's Elon Musk: On Creating a ‘Cool’ Battery System for Home Energy Storage,” Forbes.com, May 7, 2014, www.forbes.com/sites/uciliawang/2014/05/07/teslas-elon-musk-on-creating-a-cool-battery-system-with-a-beautiful-cover-for-home-energy-storage/.

40

Treacy and Wiersema, The Discipline of Market Leaders, xiv.