In their 1997 book, The Discipline of Market Leaders, Michael Treacy and Fred Wiersema describe three fundamental business strategies: operational excellence, product leadership and customer intimacy. They argue that in strategy formation, focus is critical and therefore companies need to decide which one of these strategic directions to pursue. They can’t do all three.
Treacy and Wiersema define operational excellence as “providing customers with reliable products and services at competitive prices, delivered with minimal inconvenience”. Think Dell in its early days. Customer intimacy, on the other hand, “means segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches”. Nordstrom is a favorite example. And product leadership “means offering customers leading edge products that consistently enhance the customer’s use or application of the product, thereby making its rivals’ goods obsolete”. Think Nike or Apple.
It should be clear that you can’t do all three, and that any company that tries to do so will fail to compete effectively. Operational excellence often means stripping out operational costs wherever possible in order to deliver competitive pricing. It means eliminating production steps, reducing transaction costs, and optimizing business processes. Customer intimacy, as the term suggests, requires heavy investments in customer knowledge, customer service and the ability to customize. Companies competing on customer intimacy are willing to spend now to build customer loyalty later.
Is it possible to pursue customer intimacy while achieving operational excellence? On the face of it, one requires saving while the other requires spending, so they appear contradictory. But there have been brands that have delivered both.
The classic example would be Southwest Airlines. It delivered operational excellence by eliminating meals, interline baggage transfers and seat assignments. It flew short haul only, its routes were point-to-point instead of hub-and-spoke, and its destinations were smaller, secondary airports with far less congestion. Its fleet consisted completely of one model of aircraft. And Southwest’s rapid gate turnaround, achieved by well-paid ground crews and flexible union rules, allowed more frequent departures and greater use of aircraft.
As a result of all these activities, the airline was able to deliver prices attractive to a segment of less affluent customers who were hitherto unable to fly. As Peter Drucker would have it, they ‘created a customer’, one who did not require the comforts demanded by a more affluent flier. But more importantly, Southwest hired flight and ground crew for their people skills. Southwest is famous for its own ad hoc, in-flight entertainment, provided by gregarious, fun-loving attendants who understand that flying economy is not fun. So they do their best to make it so.
Does it cost the airline any extra to hire people who know the value of a laugh? Does it cost them any more to empower customer-facing agents to solve problems without having to stick to the rules all the time? Probably not. Combined with all of the cost-saving activities undertaken by Southwest, this insight into human behavior helped the airline become what Treacy and Wiersema called “Masters of Two” – companies that are able to deliver on two of their three ‘value disciplines’.
Another company cited by them as a “Master of Two” – the same two that Southwest has mastered – was Staples. Staples combines operational effectiveness with a very sharp focus on companies with less than 50 people. Well before the Internet arrived, Staples was tracking consumer behavior by inviting them to join a club that offered a 5% discount with every purchase as long as they were able to show their club card at the cash register. Again, we have a company that was disciplined enough to focus on a specific customer niche and able to track that customer’s behavior to become much more intimately familiar with their needs and spending habits.
It should be noted that operational ‘efficiency’ is different than operational ‘effectiveness’. Since Treacy and Wiersema did their work, the latter term has morphed into the former. But efficiency is only a part of effectiveness – the part related to cost. Effectiveness goes beyond mere cost cutting to look at how the operation is designed at every touchpoint so that it can still deliver quality at competitive prices.
The key is to focus your efforts on a specific group of customers, get to know them better than anyone else does. Because they are a demographic niche, you can easily manage that from both a cost and a time perspective, and design your operational activities to deliver the best possible price.