by Andrzej Gorecki
[As published in Retail Directions, Issue 5, 1995]
Embracing the value disciplines concept is an exciting new approach
for optimising your business and enhancing profits.
The two most significant areas of waste in any business are:
- The money you don't make — lost sales.
- The money you spend on things that don't contribute
to your goals, or even militate against them — unnecessary costs.
Why does it happen? As rational business executives, don't we all try
to maximise our sales? Don't we make every effort to spend wisely? Everyone
tries, it has to be said, but few succeed. The vast majority fail because
their businesses are not optimised, i.e. they have no mechanism in place
to ensure their resources are deployed in the best possible way.
Some businesses attempt to address the shortcoming by using formal optimisation
techniques, but these are usually applied at a micro level. Few businesses
are optimised at the macro level as well; those that are tend to be very
successful.
So how does a business become optimised at the macro level? in the last
issue of Retail Directions we discussed the new concept of value disciplines, originally developed by Michael Treacy and Fred Wiersema,
authors of "The Discipline of Market Leaders". There are three value disciplines
that must be considered in the pursuit of market leadership:
- operational excellence
- customer intimacy
- product leadership
An organisation must meet industry standards in two of these areas, and
exceed them in the third, in order to become (and remain) a market leader.
Putting additional resources into this key discipline, and avoiding the
temptation to try to exceed industry standards in the other two, means
optimising the business as a whole.
Research conducted by Treacy and Wiersema confirms that no company can
succeed by trying to be all things to all people. Today's customers are
too demanding for any organisation to be able to please all of them in
every way. Instead, each company must find the unique value that it can
deliver better than anyone else. Obviously, mastering one discipline does
not mean abandoning the other two, but only one should produce the unique
customer value on which the company builds its own special reputation.
But which value discipline to choose? Since embracing the value disciplines
concept is not a shallow marketing ploy, but a long term commitment to
delivering unique value, this is a crucial point. The decision will affect
every move the company makes.
For some organisations, the choice is obvious: they know that their whole
market formula is about innovative products, or great service, or efficient
operations.
However, if the value discipline choice is not clear, having to focus
on just one area can create internal conflict. It means letting go of
part of what the company used to do, and for some managers this is difficult
to accept. They often think that their company needs to be great in all
areas, and that their customers expect it. They may have a mission statement
that promises "best quality at lowest prices" or something similar and
would be justified in asking: "So what's wrong with that?"
It's a good question. Why choose at all? Why not try to exceed industry
standards in all areas? Because it is actually impossible to excel in
all three areas at once. It all comes down to a simple rule of mathematics,
as applied in Operations Research.
Operations Research (OR), which has been developing since the 1940s,
is aimed at aiding management through the use of formal optimisation formulas
and procedures. One of the fundamental methods of OR is linear programming,
with its core Simplex algorithm. Linear programming is used to maximise
the profitability of available resources.
Without getting too technical, the key requirement for successful optimisation
is that one of the main variables be 'frozen', treated as static, so the
formula can be applied to the other variable in order to maximise it.
For example, you can 'freeze' the resources you use — keep them stable
— and maximise the profit, or freeze the profit requirement and minimise
the resources needed to achieve it. It is impossible to maximise profit
while minimising resources (costs); you cannot shoot at two moving targets
at once. The law of mathematics prevents it.
This obviously goes against the popular business objective of increasing
profits while cutting costs. While this sounds like good sense, in reality
it is just not possible. Companies which strive for this target operate
in an inconsistent (and often ineffective) manner. One day they're launching
a new customer service initiative; the next, it's a cost reduction drive.
And they wonder why the programs don't work.
Organisations that don't focus on a single value discipline send a mix
of conflicting messages to customers and staff; they are jacks of all
trades, and masters of none.
At the other end of the spectrum, those with clarity and focus succeed
in a big way. With everything they do they send consistent, powerful messages
to their customers, and deliver what they promise. The success of Franklins
supermarkets, for example, shows how well a company can do when it is
committed to the value discipline of operational excellence. The products
are not unique, and you don't feel 'warm and fuzzy' when you shop there,
but they have what you need, at a low price.
So if you, too, wish to join the market leaders, you need to employ the
concept of value disciplines to optimise your organisation. By freezing
two out of the three variables (value disciplines) at the industry standard
level, you can successfully maximise the third variable and gain distinct
competitive advantage. All you have to do is choose your discipline, then
make sure all your resources are focused on it. Provided you have chosen
well and remain focused, the market will reward you handsomely.
Andrzej Gorecki is a Director and principal
consultant with Melbourne-based Retail Directions Group, which develops
and supplies state-of-the-art software solutions for retailers worldwide.
Copyright
(c) 1995 Andrzej Gorecki
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