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The Discipline of Market Leaders:
Choose Your Customers Narrow Your Focus
by Michael Treacy and Fred Wiersema

"The message of The Discipline of Market Leaders is that no company can succeed today by trying to be all things to all people. It must instead find the unique value that it alone can deliver to a chosen market. Why and how this is done are the two key questions the book addresses." (p.xii)

The authors maintain that there are three different types of 'value discipline' that successful companies can adopt to command leadership in their markets. Which of these (if any) is taken by any particular firm depends upon the sort of product or service that they provide, and upon the organizational culture that they maintain. These three 'value disciplines' are summarized in the chart below:

'Value Discipline' Basic Philosophy Examples
1) operational excellencecustomer proposition is simple: low or lowest price and hassle-free service Wal-Mart, McDonalds
2) product leadershipoffer products that push performance boundaries Intel, Nike, 3 M
3) customer intimacydelivering what specific customers want Airborne Express, Nordstrom
The book describes the philosophy and operation of these three value disciplines, and provides a detailed case study of a business that exemplifies the operation of each.

The first value discipline is 'operational excellence', which is an approach to the market dedicated to providing the lowest cost goods and services, while at the same time minimizing problems for the customer. This discipline bases its success on several key principles:

  • the efficient management of people
    employees are trained in the most efficient and lowest cost way of doing things
  • the management of efficient transactions
    for greater efficiency and speed, processes between suppliers and the organization are often merged (for example, the quality control function, which historically has taken place once by the supplier to ensure a good product leaving their shop, and once at the buyer's end to ensure a good product coming in, is merged into one quality control inspection, undertaken under the auspices of both the supplier and the customer - this reduces cycle time considerably, allowing just-in-time supply and at lower overall cost as well)
  • dedication to measurement systems
    to ensure rigorous quality and cost control, businesses dedicated to operational excellence are geared to monitoring and measuring all processes, continually searching for ways to reduce cost, and improve service and quality
  • management of customer expectations
    under the principle that 'variety kills efficiency', operationally excellent companies provide only one or a limited number of product or service options, and manage customer expectations accordingly
The case study that the book uses to illustrate the 'operational excellence' value discipline is AT&T's experience in introducing the 'Universal Card', a combined long-distance calling card and general purpose credit card, featuring low annual fees and very customer-friendly service The second value discipline is 'product leadership', which is dedicated to providing the best possible products from the perspective of the features and benefits offered to the customer. Product leadership is based upon the following principles:
  • the encouragement of innovation
    through small ad hoc working groups, an 'experimentation is good' mind-set, and compensation systems that reward success, constant product innovation is encouraged
  • a risk-oriented management style
    product leadership companies are necessarily innovators, which requires a recognition that there are risks (as well as rewards) inherent in new ventures
  • a recognition
    that the company's current success and future prospects lie in its talented product design people and those who support them
  • a recognition of the need to educate
    and lead the market regarding the use and benefits of new products The company that the book uses to illustrate the 'product leadership' value discipline is Intel, and it describes in some detail how they are organized to encourage constant innovation. The third value discipline is 'customer intimacy', which involves the selection of one or a few high-value customer niches, followed by an obsessive effort at getting to know these customers in detail. This requires anticipating the target customer's needs as well as (if not better than) they themselves do, and sometimes sharing risks with them when the development of new products or services is required. The operating principles of this value discipline include:
  • having a full range of services available to serve customers upon demand
    this may involve running what the authors call a 'hollow company', where a variety of goods or services are available quickly through contract arrangements, rather than the supplier business having everything in stock all the time
  • a corporate philosophy
    and resulting business practices that encourage deep customer insight and breakthrough thinking about how to materially improve the client's business are essential The case study that the book uses to illustrate the operation of the 'customer intimacy' value discipline is Airborne Express, and their special relationships with IBM and Xerox.
Treacy and Wiersema maintain that, because of the focus of management time and resources that is required, a firm can realistically choose only one of these three value disciplines in which to specialize. Most companies in fact, do not specialize in any of the three, and thus they realize only mediocre or average levels of achievement in each area. These companies are in no sense market leaders. In today' s business environment of increased competition and the need more than ever before for competitive differentiation, their complacency will not lead to increased market share, sales or profits.

"...when we look at these managers' businesses [complacent firms], we invariably find companies that don't excel, but are merely mediocre on the three disciplines. Sure, as the ante has risen in their markets, they've improved their cost structure and become more aware of their customers. They've added new products and line extensions over the years. They've kept up with rising parity levels to stay in the game. They've maintained threshold levels of performance in each dimension of value. What they haven't done is create a breakthrough on any one dimension to reach new heights of performance. They have not traveled past operational competence to reach operational excellence, past customer responsiveness to achieve customer intimacy, or beyond product differentiation to establish product leadership. To these managers we say that if you decide to play an average game, to dabble in all areas, don't expect to become a market leader." (p.44)

In the last part of the book, the authors outline a plan whereby companies can examine their existing operations and choose which of the three value disciplines the can and should focus upon. This process that they advocate is for a company to form a senior management team which then goes through a three-stage process, where they ask themselves some quite difficult questions (drawing upon external expertise to supply competitive intelligence, data about market growth potential, customer satisfaction feedback, etc). The three phases of investigation, and the questions to be asked in each, include:
  • Phase 1 - Understanding the status quo in your business
    • What are the dimensions of value that our customers care about?
    • For each dimension of value, what proportion of customers focus upon it as their primary or dominant decision criterion?
    • Which competitors provide the best value in each of these value dimensions?
    • How do we measure up against our customers on each dimension of value?
    • Why do we fall short of the value leaders in each dimension of value?
  • Phase 2 - Identify the realistic options for your company
    Irrespective of industry, what are the benchmark standards of value performance that will affect customer's expectations? How do firms achieve these standards?

    For value leaders, what will be their standards of performance three years from now?

    How must the operating models of these value leaders be designed to attain those levels of performance?
  • Phase 3 - Detailed designs and hard choices
    • What does the required operating model look like - i.e. what are the design specifications for the core processes, management systems, structure and other elements of the model?
    • How will the model produce superior value?
    • What levels of threshold value will the market require in the other value dimensions? How will these be attained?
    • How large will the potential and captured market be for this value proposition?
    • What is the business case - including costs, benefits and risks - in pursuing this option?
    • What are the critical success factors that can make or break this solution?
    • How will the company make the transition from its current state to this new operating model over a two- to three-year period?
    Within the context of redesigning the operating model of a company to focus upon a particular value discipline, Treacy and Wiersema discuss creating what they call 'the cult of the customer'. This is a mind-set that is oriented towards putting the customer's needs as a key priority throughout the company, at all levels. They also review some of the challenges involved in sustaining market leadership once it is attained (i.e. avoiding the natural complacency that tends to creep into an operation once dominance of the market is achieved).

    Altogether The Discipline of Market Leaders is an insightful and interesting book, with much food for thought on how companies might reposition themselves to meet the increasingly challenging times that undoubtedly lie ahead.

    Copyright Michael Treacy. All Rights Reserved.

    END
 
 
 
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