Many companies are qualified to be “stuck in the middle”, offering average products for average prices, without a real competitive advantage. However, few companies emerge as clear leaders in their industry, generating significant value. According to McKinsey, the top-performing companies capture on average 90% of the economic profits of their industry and 30 times as much economic profit as the middle performers. How are those leaders generating significant value?
Narrowing Your Business Focus
According to Harvard Business Review, companies take leadership position in their industries by narrowing their business focus. They focus on delivering superior customer value on one of those three disciplines:
Operational excellence: Organizations focusing on offering the best value for money and delivering the product or services with minimal inconvenience for the customer. Ikea is one of the best examples of an operational excellence model. As their mission states “to offer a wide range of well-designed, functional home furnishing products at prices so low, that as many people as possible will be able to afford them”, Ikea has disrupted the traditional retail model with a focus on operational excellence.
Customer intimacy: Organizations focusing on tailoring and shaping products and services to fit an increasingly fine definition of the customer. Starbuck has had tremendous success with a customer intimacy model. As their mission states “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time”, Starbucks goes well beyond offering a simple cup of coffee. Starbucks wants its customer to develop a sense of belonging and experience human connection: “We connect with, laugh with, and uplift the lives of our customer.”
Product leadership: Organizations that are focusing on producing a stream of state-of-the-art products and services. Tesla stands out as an example of an organization focusing on product leadership. Tesla’s mission “to accelerate the world’s transition to sustainable energy” is supported by the development of cutting-edge products with advanced technology and unique design.
Focusing on a Discipline Also Means Choosing Your Customers
Choosing a value discipline (e.g. operational excellence, customer intimacy or product leadership) also means selecting the category of customers an organization will serve. A company with a discipline of operational excellence targets the mass market and customers that define value based on price, quality and convenience. Those customers typically focus on getting the lowest price possible with the least possible hassle. A customer may prefer Ikea over other furniture stores because of its low price and the fair quality.
A company with a discipline of customer intimacy focuses on customers who are concerned about obtaining a product or service that meets their unique requirement. The specific characteristics of the product or the way the service is delivered is more important than the price or the purchase inconvenience. A customer may choose Starbucks over other coffee shops because of the possibility to customize the beverage to its own taste and to have a personalized experience when buying the coffee.
A company with a discipline of product leadership targets customers that are performance sensitive and that value novelty, trends and distinction. A customer will opt for Tesla’s cars because of their superior autonomy and their unique features like autonomous driving.
The Value Discipline is Ingrained in the Corporate DNA
No matter what discipline an organization chooses to focus on, it has to be part of its DNA. Organizations have to align their activities to ensure their value discipline is shared across the organization. The best-in-class companies with an operational excellence discipline are continuously delivering the best value for their customer. Their operations are standardized and automated, and costs are tightly controlled. IKEA is closely managing its relationships with its broad network of 1800 suppliers in 50 countries.
The best-in-class companies with a customer intimacy discipline are focusing on loyalty management, brand and reputation. Metrics like customer satisfaction and retention are closely tracked, and customer insights are continuously generated. According to Business Insider, the average Starbucks customer visits the store 6 times per month while a loyal 20% of customers go to the stores 16 times per month.
The best-in-class companies with a product leadership discipline are developing products that break down barriers. They support innovation and are more risk-oriented. Their budget is more focused on technology and R&D than its competitors. According to Statista, in 2015, Tesla invested 17% of its revenues in R&D, while other car makers like BMW and GM invested 5%.
Maintaining the Pace on Other Disciplines
Organization must make strategic choices in order to become market leaders. Typically, firms that stand out from the crowds excel at either operational excellence, customer intimacy or product leadership. However, focusing on one discipline is not enough. Organizations need also maintain a threshold standard on the other two disciplines to dominate their market.