Value Disciplines & Differentiation

by Paul Simister on September 23, 2011

The value disciplines are an interesting extension to Michael Porter’s generic strategies for competitive advantage.

The Origin Of The Value Disciplines

The value disciplines have been developed and promoted by Michael Treacy and Fred Wiersema in a famous Harvard Business Review article “Customer Intimacy and Other Value Disciplines” and in their book “The Discipline Of Market Leaders”.

value disciplines

The conclusions are based into research into successful businesses in the USA and Europe and emphasise the importance of market segmentation and staying focused on the key success factors of your decision.

The Three Value Disciplines

The three value disciplines are:

  1. Operational excellence – based around the market segment who want a standard product at a low price
    .
  2. Customer intimacy – based around the market segment who value customised products and close relationships
    .
  3. Product leadership – based around the market segment who want and appreciate the latest innovations and fancy product features

According to Michael Treacy and Fred Wiersema, every market divides into these three generic segments although the size of each will vary.

For a firm to be successful, it must choose to follow one of the value disciplines while striving for reasonable levels of performance in the other two.

The Value Discipline Of Operational Excellence

The authors define operational excellence as “providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience.”

At first glance that sounds like a low cost operator providing a standard product and winning business by providing it at the lowest price in the marketplace. That doesn’t sound like it offers much opportunity for differentiation.

It’s certainly true that firms following the operational excellence value discipline will tirelessly look for ways to take cost, time and energy out of the production process.

But it doesn’t mean that the customer doesn’t value the “quick and easy” way of doing business with a company following this strategy.

Price is one factor in the buying decision but I’d like you to just stop for a moment and think about examples where you wanted to buy but the supplier got in the way:

  • what you wanted wasn’t in stock
    .
  • they couldn’t get it quickly enough
    .
  • the transaction was difficult for some reason – poor knowledge, bad attitude, difficult payment process etc

It’s true that if multiple competitors in a market follow the operational excellence value discipline there will be a tendency towards commoditisation but that doesn’t mean that they will all excel at all aspects of operational excellence.

Trade-offs exist and even in a commodity business like steel, there is a chance to emphasise different aspects of operational excellence like cost, quality, speed and reliability of delivery.

The Value Discipline Of Customer Intimacy

In this second of the value disciplines, the focus moves from internally within the business to the customers.

In particular how the market can be segmented into different groups of wants and needs and how products can be created to closely fit the requirements of the niches.

Businesses that choose to excel at customer intimacy will also need to develop flexible operational capabilities to allow products to be customised to meet special requests from customers.

The customer intimacy value discipline is very much one of product and service differentiation.

Recognising that the market has many different combinations of needs doesn’t mean that the business has to offer solutions in all of them. It can pick and choose which are most appropriate to its capabilities and where the biggest opportunities appear. This means that many different competitors can follow a customer intimacy strategy without driving the market towards commodity levels.

Following the customer intimacy value discipline rather than operational excellence will move the focus away from transaction profits to customer lifetime relationship profits.

The Value Discipline of Product Leadership

In the third value discipline, the emphasis moves away from the customer and its current needs towards creating a continuous stream of state-of-the-art products and services which anticipate and create future customer needs.

Companies following the product leadership strategy know that they must make their own successful products obsolete with the next generation of solutions, because if they don’t, a competitor will and the business will lose its reputation for product leadership.

This product leadership value discipline is another classic differentiation strategy focused on providing unique features to win customer preference.

The emphasis is on generating new innovations and speed to market them before a competitor can beat them to the punch.

Choosing Which Of the Value Disciplines Is Best

Michael Treacy and Fred Wiersema argue that for a business to be successful, it must choose which of the three value disciplines – operational excellence, customer intimacy or product leadership – it must follow.

This is a multi-dimensional decision since it combines:

  • Who the customer should target as its customers – price and convenience buyers, relationship buyers, innovation seekers
  • How to compete

This makes sense and although it seems obvious when presented here, you may be able to think of examples where there is a mismatch which leads to confused customers and broken promises.

It’s not done intentionally but is often a reaction to competitive pressures. If a competitor appears to be getting an advantage from following a particular strategy, it is tempting to copy aspects of it rather than improving the way the business implements its own chosen value discipline.

I think this is a difficult choice because of the need to maintain some kind of proximity on all three of the value disciplines. yes you will lead with one which you want to excel but you need competence in all three. I discussed this in The Experience Curve & Innovation.

Do You Find The Value Disciplines Approach Helpful?

I’d appreciate your thoughts on whether the value disciplines approach to business strategy and differentiation in particular is helpful so please leave me a comment.

Have they added to your understanding of the generic strategies created by Michael Porter?

Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.

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