Jotting Number 88, by Joe Podolsky:

From: joe_podolsky@hp.com

Date: March 31, 2000

Getting There From Here

In their 1997 book The Discipline of Market Leaders, Michael Treacy and Fred Wiersema created a simple model for analyzing how companies focus. The Treacy Model, as it’s called, says that any organization has a choice of three value disciplines, operational excellence, customer intimacy, and product leadership. The authors say that no organization can excel at all three because organizational culture, values, and policies must be different for each type of discipline. Trying to be equally good in all three is the classic "Jack of all trades and master of none" sinkhole. Rather, say the authors, a successful organization is world class in one of the disciplines and competitive in the others.

For example, logistics companies like UPS, FedEx, and DHL must be world class at operational excellence. But that doesn’t mean that the UPS delivery people can’t be friendly with the people on their routes.

Nordstrom’s is the classic example of a customer intimate retail organization. Doctors used to provide customer (patient) intimate relationships. We shouldn’t be surprised, then, that conflicts and frustrations explode when we move medical practice into health maintenance organization structures that are, by definition, focused on operational excellence.

HP and most technology companies focus on product leadership. Competitive pressures force operational excellence in terms of cost control and supply chain efficiency, and many technology companies are moving into solution selling, a customer intimate activity, but the primary focus must remain on product leadership.

It’s easy to discover a company’s primary discipline. All we have to do is ask one question: Who gets paid the most: operations people, sales people, or R&D people? A corollary question is: What functions are mostly kept in-house rather than being purchased from other companies?

Treacy and Wiersema did their research before the Web exploded, but I think their rules hold well in cyberspace. The Web raises the standard of competitive performance, especially in the operational excellence category, but organizational policies, driven by organizational values, still define the way the organization treats its employees and its customers. In fact, the Web makes visible these issues, since a company has a much harder time hiding behind the versatility of its sales force.

Some Web sites have their own developers who build unique pages and capabilities. Yahoo!, for example, has proprietary spider technologies and classification expertise that makes this company a true product leader. Many retail sites, however, are happy to buy their Internet technology from a service provider. These on-line stores distinguish themselves either by offering commodities very efficiently or specific types of goods to targeted customer segments.

The concept of "services" (i.e., doing something for a customers versus giving them an "artifact" that they use themselves) has several roles in the Treacy Model. Some services, if highly structured, create operational excellence. For example, order taking in most McDonald’s restaurants is done exactly the same so that every transaction is completed with predefined efficiency. In other cases, however, the customer-facing employees are expected to add personal value to the transaction. Business consultants, for example, are given templates and best practices from previous engagements, but they are still expected to use their own experience and judgment to create the reality of uniqueness (i.e., intimacy) for work done for a specific customer.

The Web does extend the product leadership category in an interesting way. The very business model offered by the Internet business can create exciting innovation. In this context, a "business model" is defined as the way the enterprise makes money. For example, physical auction houses such as Christie’s and Sotheby’s are operationally excellent organizations that also have strong customer intimate skills, especially with services to frequent buyers. They usually make their money by taking a percentage of the sales prices.

Internet auction organizations like eBay, Ariba.com and CommerceOne also hold operational excellence as their major discipline, but their second skill is in innovation. They provided leadership in a whole new class of business transactions, making available different types of auctions and options to many more people than were possible in the physical model. This very expansion of the reach of the business is itself "product leadership." These on-line auction organizations usually make their money by charging membership fees and/or fees per transaction that are fixed regardless of the value of the transaction.

We’re long familiar with traditional physical businesses. These we label "bricks and mortar." In the early days of the Web, hybrid forms of business evolved, combining Internet transactions with physical movement of goods. Pundits call this "clicks and mortar." True Internet businesses have no home except in cyberspace. We’re calling the standalone versions of these, "dot-coms." Some of these businesses exist in cyberspace only to provide services to other Internet-based service organizations. These e-services will be called upon as needed to complete specific transactions for which that e-service is a specialist.

It’s interesting, then, to see what happens when we combine these evolving Internet business models with the Treacy Model. Take a look at the "E-Services Choices Matrix" below and see what you think. Note that, in the first column of the matrix, I have defined the three stages of evolution in terms of the business model and the way that the Web is used.

The matrix highlights a few things:

1. The Web really adds powerful capabilities for organizations of all value disciplines and at all levels of evolution. The Web is usually described as offering particular advantages to operationally excellent or customer intimate organizations, but we can see in column C that product leadership organizations can get a lot from the Web as well.
2. Capabilities are cumulative up the evolutionary ladder. The lessons learned in the bricks and mortar and clicks and mortar stages enable the transition toward the future. In fact, while new companies might try to skip directly to the more advanced stages, they will still have to endure the learning curves inherent in getting the basics under their belts.
3. Our definition of "assets" has to change. Assets in the "mortar" stages may in fact become liabilities as we move into e-services. Flexibility, speed, and innovation are the true assets in cyberspace, and mortar can be an anchor. These true assets are built by people, people who maximize the organization’s value proposition along its core discipline and who see that the organizational functions that are not part of the core discipline are managed competitively, perhaps by outsourcing them.

As an aside, in most of the world, accounting principles still value mortar above human capital and the processes built by those people. Accounting reality is an issue, of course, and organizational results must be reported in accordance with legal rules, but the opportunities in cyberspace are too compelling to be retarded by archaic balance sheet practices.

4. The transition, from clicks and mortar to e-services, is the toughest to make because success involves focusing on core competencies and outsourcing everything else. This is true across all the value disciplines. This is painful to do because we have our friends, our colleagues, real people who are doing the overhead work that’s essential to the way our businesses run now. But, as we move toward e-services business models, we will no longer be able to afford the luxury of doing all the accounting, purchasing, and (dare I say it?) information technology work ourselves. We’ll find others in cyberspace, specialists who will do these tasks for us better and cheaper than we can do them for ourselves.

What do you think of the items in the matrix? What would you add or take away? In which cell of the matrix do you think your organization sits? How well are you taking advantage of the Web capabilities shown in the cell you’re in? Are you moving up the evolutionary ladder? If so, what do you have to do to get ready? If not, what competitive pressures will you face from others who are moving up?

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