Three Value Disciplines: Characteristics of organizations - Essay Example

Three Value Disciplines: Characteristics of organizations, Best NRM Practices and Leadership Styles 2008 In their 1993 Harvard Business Review article Michael Treacy and Fred Wiersema offered a unique strategic framework of three value disciplines. Their work was based on the three-year analysis of 40 successful business organizations. The authors suggested that the companies sell value, which is different for various groups of customers. While it is impossible to satisfy all the customers’ requirements, companies usually focus on some particular value. Depending on the value an organization sells, it operates within one of three value disciplines: operational excellence, customer intimacy or product leadership. The whole culture and operational processes of a successful organization are usually built around only one of the values, while standards are observed in the remaining two disciplines. The idea was later expanded in the best-selling book The Discipline of Market Leaders (Cambridge, Mass.: Perseus Books, 1995). This paper examines characteristics of organizations focused on different values, discusses integrated HRM practices and processes and suitable leadership styles. Organizations within three value disciplines basically differ in cultures, visions, goals, and operational practices. A. Characteristics of Organizations: i) A customer intimacy focused organization uses a combination of Porter’s differentiation and focus strategies. Customer intimacy targets segments with products created specifically for those segments. Differentiation of product, brand or service is the strategy aimed at creation of unique features valued by customers and perceived as better or absolutely different from the products and services of the competitors. This value added by the uniqueness allows the company to set premium prices. To succeed in differentiation strategy a firm must have such strengths as strong R&D department, highly skilled and creative work teams in all the sectors, perfectly-trained sales personnel, and strong corporate reputation. Firms pursuing customer intimacy would tailor and shape their products and services to fit the specific interests of different market segments. Though expensive, the strategy allows creating customers’ long-term loyalty (Treacy and Wiersema 1993; Schnaars 1998). A customer-intimate company is tailoring, partnering (co-innovating) and coaching (it guides its employees towards better results). It delivers fitting solutions, offering right products at the right time, crafting custom-made solutions and solving each customer’s specific problem. It collaborates with its customers and suppliers on products, services and solutions. Sharing information and building trust, it takes responsibility for its customers’ results, perceives customers’ problems as its own (Kotelnikov 2008). Classical examples of customer-intimacy focused organizations are Nordstrom, IBM and Home Depot, Staples, Ciba-Geigy, Kraft and Flito-Lay. Those companies split their products and services into tiniest segments, focusing on specific groups of constant customers. Using IT technologies, databases of customers and wide marketing research the companies were able to identify potential customers, learn customers’ wants and needs, as well as the ways to meet and exceed them, categorize their current and potential customers, obtain regular customer feedback, and implement a continuous improvement process. Due to specially tailored advertising, merchandizing, and operations, specially trained personnel, they could occupy the smallest niches, offering very specific services and products. These companies were characterized by decentralization, flexibility and responsiveness (Treacy and Wiersema 1993). Among modern organizations one can name Disneyland, or Tesco (high differentiation). In the late 1990s Motorola SPS changed its focus to customer intimacy. They reorganized Sales Dept. into sales teams, business units into market segments with responsibility for specific customers, developed customer support strategies and communicated them to their clients. Communication and responsiveness became the centre of the company’s attention. Customer satisfaction monitoring followed by the adjustment of action plan took place on weekly bases (Schweighart 2001). ii) An operational excellence focused organization is the one using Porter’s low cost strategy. Operational excellence (OpX) targets consumers caring less about service or quality and more about prices. Business process is optimized across functional and organizational boundaries. Such organizations focus on delivering their products and services at low prices and minimal inconvenience. There are several methods of maintaining a low-cost position: cost can be reduced on purchasing prices, production and cheap distribution channels. Supermarkets like Tesco or Asda sell no-frills products, removing any frills and extras. Dell Computer and General Electrics are the classical examples of organizations pursuing this value. Other companies are Wal-Mart, American Airlines and Federal Express (Treacy and Wiersema 1993; Schnaars 1998), Whirlpool and Tyco (Stuart 2007). Founded in 1984 with only $1,000, Dell Inc. managed to become the fastest growing company in the industry due to an unprecedented idea of Michael Dell to build relationships directly with customers. In 1992 it was added to the Fortune 500 list. In 1999 it became a global company with a full range of products, its revenues being $18,3 billion. In 2004 its sales were more than $44 billion. Dell’s vision is selling high quality PCs at low cost. This is achieved due to direct sales, building to order and superior customer service. It was the first computer company using direct customer feedback (In Neal 2005 and Kotelnikov 2008). Dell Value Chain Integration scheme includes such rules as: make your customers partners (focus-groups served with the largest gross margins); have few suppliers and keep them till they are technical and quality leaders; focus on adding value through information sharing. The company “substitutes information for inventory” and ships only when it has “real demand from real end customers,” explained Michael Dell. Their virtual inventory “basically stitch together a business with partners that are treated as if they’re inside the company” (In Neal 2005). The Direct Connect program designed at GE in the late 1980s is another example of “virtual inventory”. It allowed the company to supply high-quality products as competitive prices with little hassle. The program was based on a computer based logistics system working 24 hours a day. The delivery was done from the nearest of the company’s ten warehouses, situated in strategic locations. Direct Connect dealers got products at best prices, and had priorities in delivery scheduling and GE Credit, while GE got half of their business and saved about 12% of distribution and marketing costs. The order-processing system was linked to other systems forecasting demand and planning production and distribution. As a result, the company was manufacturing in response to customer demand (Treacy and Wiersema 1993). OpX organizations reengineer their business to begin with order entry and ending with product or service delivery, with emphasis on efficiency and reliability. They widely use IT technologies providing integration and low-cost. However, costs can be reduced not only on inventory. As Mike Neal suggests, OpX strategy is about strict planning and implementation of vision and goals into reality. There is a variety of operational excellence elements, the most popular being such as: Six-Sigma, Value Chain, Kaizen, Continuous Improvement, Total Quality, Lean Manufacturing, and Balanced Scorecard. Strategy Maps and Balanced Scorecards allow seeing what must be done to implement strategic decision at all the levels. OpX strategy implies constant, day-to-day improvements in the production process. This is achieved through Kaizen strategy (tiny day-to-day improvements) and TQM. Six Sigma is “a long-term, forward-thinking initiative designed to fundamentally change the way corporations do business”, a business process enabling companies to increase profits dramatically due to streamline operations, constant quality improvement, and defects or mistakes elimination in everything a company does. Six Sigma methods are aimed at re-creation of the process itself “so that defects are never produced in the first place” (Kotelnikov 2008 b). Driven by cost, quality, delivery, safety, and morale, Lean Manufacturing (or the Toyota Production System) includes the systematic elimination of waste and the implementation of the concepts of continuous flow and customer pull. It is viewed as the production system of the 21st century (Kotelnikov 2008 b). In fact, operational excellence cannot exist without customer focus. These two strategies are often aligned within organizations. So General Electric is one of the companies that managed to remain competitive on price providing excellent service, while their knowing of customer made it possible to refine processes according to customer demand sustaining operational excellence (Anderson, Healey & Locke 2005). Moreover, already in 2005, Anderson et al. claimed that differentiation through service excellence had become increasingly hard for companies, while customers were no longer willing to pay high prices for mere customer intimacy. Sharing the results of their research, Phil Anderson and Malcolm Locke (2005) suggeste that operational excellence could be “a strategic option for sustainable success.” iii) A product leadership focused organization stresses speed and continuous innovation. It avoids formal planning model and rejects bureaucratic systems, quickly moves into new markets with innovative new products. As Steven P. Schnaars (1998) puts it: “Product leaders introduce a rapid-fire array of new products that leave competitors perpetually playing catch-up” (p. 67). Product leadership strategy is targeted at customers who want innovative, different products. Such an organization has to challenge itself in three ways: 1) it must be creative and be able to recognize ideas originating outside it; 2) it must commercialize those ideas quickly, all its business and management processes being engineered for speed; and 3) it must constantly pursue fresh solutions for the existing technologies or be ready to render them obsolete. “Product leaders do not stop for self-congratulation: they are too busy raising the bar,” summarize Michael Treacy and Fred Wiersema (1993, p.89). Johnson & Johnson is a classical example of a company meeting all three of challenges. Yahoo and Google are modern examples of successful product leaders. Disposal contact lenses called Acuvue were only one of the successful innovations of J&J. Having heard of a new Danish invention from one of the Danish employees, Vistankon’s president hurried to buy the technology, assemble a management team and build a state-of-art facility in Florida and launched the new product in less than a year. The competitors were never able to catch-up with the company. Moreover, Vistankon sold new product not only to consumers but offered it to eye-care professionals. Product leadership is not only about new products but also about new ways to go to the market (Treacy and Wiersema 1993). Yahoo has a practical approach to technology, first making accurate marketing research and then introducing the innovations people want, investing money mostly into marketing and sales. Google has a laissez faire approach to technologies, first embracing all the cool innovations and only then fitting them into their business plan, investing huge sums of money into obtaining and development of new technologies (Yahoo News 2004). Product leadership focused organizations develop open-mindedness to new ideas among their employees, creating and maintaining the environment that encourages employees to bring new ideas and managers to listen to those ideas. Such organizations are constantly searching for new products and service possibilities. They see opportunities in innovations perceived as glitches or threats by other companies and quickly capitalize on them. Having to make decisions and manufacture quickly, such companies also seek ways to shorten their cycle times and do not spend much time on detailed analysis. They are usually organized as small entrepreneurial companies, but can simultaneously rely on resources and capabilities of big corporations. Product leaders compete with themselves. Finally, the infrastructure and management systems of product leaders are designed to face potential risks (Treacy and Wiersema 1993). B) Three Value Disciplines and Integrated HRM Practices. Michael Treacy and Fred Wiersema (1993) claim that the three value disciplines vary greatly in the specificity of the work and employees with the work experience at a company of one type will find it difficult to adopt in a company following another value discipline. While the specificity of work varies in organizations of the three value disciplines, there should be some specific HRM practices either. On the other hand, any HR practice should first of all align personnel with the strategy of the company. David Norton (2006) underlined the necessity to communicate strategy down to employees and importance of HR processes for moving strategy from the top to the bottom, which includes both top-down “bridging process” (to share the strategy and align the workforce) and bottom-up process (to internalize and execute the strategy). The alignment takes place in four major steps. One is: 1) create strategic awareness; 2) align personal goals; 3) align personal incentives; and 4) align competency development. Kaplan and Norton (2005) even offered to create a special department – the offices of strategy management –responsible for implementation of the strategic decisions. CCH Report 2003 supports the point. Jeffrey Pfeffer (1998) argues that there are seven “best practices” that result in superior economic performance if properly used by any firm, those being: employment security, selective hiring (selection of the necessary type of personality fitting in the positions and strategic vision), teams and decentralized decision making, high performance-associated pay, extensive training, reduced status distinctions that separate individuals and groups within an organisation; extensive information sharing about the organisation’s goals, strategies, plans and performance. Though the HRM practices in organization of the three value disciplines are almost the same, yet different aspects are important. The differences start at the level of selective recruitment: each organization needs people with particular characteristics. It goes not about employees’ functional abilities, but rather of their personalities matching the strategic line chosen by the organization. A customer intimacy focused organization will search for people able to communicate with customers and make independent decisions. So Nordstrom has an approach which can be formulated like Rule#1 - Use your good judgment in all situations and there will be no additional rules (In Luthans 1998). An operational excellence focused organization needs people functionally multiskilled, and smaller, less expensive staffs. Spencer Stuart (2007) found that a manager’s skills required for OpX success include: leadership, technical proficiency and strategic understanding, project planning and execution, change management, communication and teaming and collaboration. “It often is difficult to find someone who can do it all — lean, Six Sigma, supply chain, quality — as a generalist”, explained one of the interviewees. A product leadership focused organization needs employees able to work in team and be open to criticism. Sharing information is an important part of creating a corporate culture. A customer intimacy focused WaltDisney Co. teaches its ‘cast members’ to create ‘magic moments’ for all ‘guests’ of Disneyland. This message is communicated by all the managers, to all the employees already in the process of recruitment (Paton 1997). All the articles dealing with operational excellence emphasise the importance of such factors as: support from the top, the integration of OpX initiatives into the company’s strategy, cooperation from business units, a common language, credibility within the organization and ability to measure results (Stuart 2007; CCH Report 2003; Perez-Wilson 1997). OpX requires everyone to impart the company’s strategy to every employee. A standard approach must be defined clearly, creating a common language for all the employees. At this stage it is very important to formulate clear goals. For instance, regarding the quality goal, it is not right to inform people of what should not be done – but exact figures for achievement must be set. The goal must be visible. Further, the author points to the necessity of defining the priorities in planning and reminds that the strategic plan is not something rigid: one should have a variety of responses to possible situation (Perez-Wilison 1997). The example of Vistakon demonstrates the importance of sharing information in the product leading organizations. Performance monitoring, evaluation and feedback measurement is vital. 360° performance appraisal can be useful for a customer-oriented firm, providing feedback to target employees from the supervisor, peers, subordinates, consumers, and other relevant parties, giving “the clearest, most objective assessment of an individual’s performance,” leading “to better ways of identifying those worthy of salary adjustments and merit increases, improved communication” and helping to identify potential training needs, and more objective promotion decisions (Luthans 1998). OpX requires constant review and audit of the plan. Each step of the teams, their progress or lack of it must be strictly documented. Such documents are to be available to other teams. Monthly reports are to be submitted by each team, and both internal and external experts are to provide their vision of the situation. The progress is permanently to be compared to that planned initially. This is to guarantee the absence of surprises, to keep the entire program in motion and focus (Perez-Wilson 1997). Risk management is vital for product leaders. Teams and decentralization, participation and empowerment are significant at the organizations of all three types, being of special importance in product leading firms, as well as at geographically distant parts of a customer-oriented corporation. However, employees will get incentive payment for different skills and qualities of theirs. Reward system must always fit with the strategy of the organization. A customer-intimacy focused firm will reward those of employees who establish good relationships with customers. It is not enough to pay for high sales only. It is significant not only to sell, but to make the customer return again and again. An OpX oriented company will focus on performance-based pay, giving rewards for suggestions for improvement or reduction of operating costs, and for positively impacting other productivity and efficiency measures (Luthans 1998). Perez-Wilson (1997) suggests healthy competition between separate employees and teams as the way to improvement of the organization and its performance. Awards should comprise such elements as a plague and attachment, a pin and nomination in the teams’ competition. It is possible to organize annual competition among the best teams, adding excitement and emotions. Separate employees should be rewarded for ideas in performance improvement. Finally, product leaders will reward for new ideas, entrepreneurial mind and ability to react quickly. Each type of three value disciplines requires specific training for its employees, aimed at aligning people into the culture of the organization. A customer-intimacy focused organization demands great opportunities for promotion, which is to stimulate employees. A reduced status distinction is vital for product leading organizations, but can be milder at the other two types of enterprises. C) Leadership Styles In 2007 Phil Anderson supposed that our perceptions of the leaders’ ideal qualities and traits can be different from the reality. He studied several hundred managers from all over the world, focusing on leaders working in organizations that pursued one of the value disciplines. Anderson checked whether it was true that these different approaches would require different leadership traits. The measurement was based on the five dimensions of leadership, distinguished by George Binney and Colin Williams and described in their book Living Leadership1. Each of the dimensions offers a continuum along which responses could be made, those being: Timing (from waiting and seeing to accelerating progress); Relationships (from getting close to maintaining distance); Self belief (from showing vulnerability to being strong); Control (from keeping control to letting go); and Loyalties (from putting your own needs first to serving the organization) (p.7). Anderson interviewed the employers about the qualities they expect from managers and successful leaders from highly performing organizations and marked them on diagrams. The results showed that there was a considerable discrepancy between perception and reality across all value disciplines. Below we will dwell only on the real traits of leaders within three disciplines. Creativity and dynamism are important for the managers of product leading organizations. Yet, delivery is critical. Innovations are perceived as “the successful exploitation of new ideas” where waiting and seeing are needed to make sure that the current set of concepts works. Though being constantly in movement, these managers often need “to slow down to ensure certain priorities get done.” They encourage others to take risks and discuss their own fallibilities and failures. Ideas do not emerge from nowhere. Managers may spend the whole day in games rooms to stimulate their creativity. Product leaders need to keep control on creative procedures. Though the democratic leadership style prevails, leaders keep “a firm hand on the tiller” avoiding overstretch. Contrary to expectations, customer intimacy leaders tend to maintain distance from both customers and employees. This is conditioned by the necessity to immediately settle problems with customers and call to account the guilty employees. In their approach to timing these leaders are expected to be chameleon-like and be able to hold back or accelerate progress as required by the situation, yet, with the focus on “acceleration” being significantly greater than in Product leadership.. As Joe Levin out it: “It’s so important to anticipate people’s needs, so that they don’t say ‘why the hell aren’t you doing this?’…it’s critical to constantly innovate to offer more” (p.12). leaders should be also be adaptable in Self-belief dimension, being both vulnerable to criticism and strong in different situations, with the focus on “being strong.” In these environments leaders serve as role-models and should never yield. Most of decisions are made by them. So in CI organizations the leadership style tends to be autocratic. OpX leaders should know precisely what must be done at each stage and guide people. If something is wrong, people should be made to correct the mistake. Like in CI, OpX leaders constantly seek to make things better, quicker, simpler and cheaper, encourage people do things in new ways and ask a lot of questions. it is impossible to control everything, so these leaders encourage others to be leaders and think for themselves. Unlike CI leaders, OpX leaders keep close with other employees through monthly one-to-one meetings or walking around their departments, as well as with clients. “Share a smile, know your stuff and show you care” is the slogan used in Tesco. Finally, good OpX leaders encourage their employees to maintain work-life balance and follow this golden rule themselves (Anderson 2007). In fact, OpX leadership demands a democratic style, based on close relationships with teams and allowing a fair degree of freedom in employees’ work. Conclusion: The three value disciplines are oriented at different customer expectations. Customer intimacy is focused on differentiation and segmentation of products and services to target various market segments and develop long-term relationships. Operational excellence is a low-cost strategy targeted at price sensitive customers. Product leaders offer innovative technologies and services. HRM practices within three value disciplines are targeted at the development of skills and qualities fitting each particular strategy. The difference lies not in the HRM practices used, but in their content. Value disciplines vary in leadership styles. While CI requires a more autocratic style, a democratic leadership style is preferable in OpX and PL. References: Anderson, P., Healey, G. & Locke, M. When Operational Excellence meets Customer Intimacy. CriticalEYE REVIEW: The Journal of Europes Centre for Business Leaders, www.CriticalEYE.net, September-November 2005, pp. 14-19. Anderson, P. & Locke, M. 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