Showing papers on "Value proposition published in 1996"

Bringing discipline to strategy

Abstract: Are you making three big and often very bad assumptions? Don't assess uncertainty unless you are willing to abandon your favorite formulas Bets and options may be more important than positional choices Strategy today is an extraordinarily demanding, complex, and subtle discipline. But you'd never know that from reading the management journals and business bestsellers of the past five years. Each season brings a new crop of experts proclaiming that their framework - core competences, customer retention, management ecosystems, strategic intent, time-based competition, TQM, "white spaces," managing chaos, value migration - is the definitive way to think about strategy. Applied to specific cases, these solutions sometimes prove an exquisite fit, but just as often they offer only a mediocre approximation. Nonetheless, managers have reached out to these new theories because the classical microeconomics-based model of strategy is inadequate in a growing number of situations. Consider some recent examples: * A telco executive needs to make a $1 billion "yes or no" decision as to whether to invest in a new network technology to provide new service to customers. One best-practice market research survey predicts a return on investment of 25 percent; a second, equally valid, forecasts minus 25 percent. What should that executive do? * How should executives at a software firm deal with a large customer that is also their chief competitor - and one of their biggest suppliers? * How should the CEO of a credit card company think strategically about positioning, when segments and value propositions come and go every six months? * A large regional bank recognizes that to achieve its aspirations in retail banking, it must shape the nature of competition by discovering huge but as yet unrecognized customer needs, and stimulating other players to follow its bold lead. How can it embark on such a strategy? All these cases lie outside the conditions for which the traditional model of strategy was designed. In fact, our work suggests that up to 50 percent of the strategy situations faced by large companies lie outside of those conditions. Equally, no single one of the new frameworks can address them all. Therefore, it is time for a new approach to strategy. The past twenty years have seen a wider range of business situations emerge than ever before. No single strategy prescription can be appropriate in each one of them. What's needed is a more robust model of business that can handle a much broader set of circumstances and suggest when and how we should use specific theories. The shortcomings of the traditional approach At the heart of the traditional strategy framework lies a microeconomic model of industry. Exhibit 1 illustrates its popularized form, the Porter model. This model combines exogenous forces acting on an industry (such as technology and regulation) with endogenous ones. More importantly, it makes three tacit but crucial assumptions. First, that an industry consists of a set of unrelated buyers, sellers, substitutes, and competitors that interact at arm's length. Second, that wealth will accrue to players that are able to erect barriers against competitors and potential entrants; in other words, that the source of value is structural advantage. Third, that uncertainty is sufficiently low that you can accurately predict participants' behavior and choose a strategy accordingly. Even if the odds of each assumption being individually correct is moderate, the combined chances of at least one of these being wrong is high. So, let's examine the validity of these assumptions. Industry structure The traditional microeconomic model is based on a "rational" industrial structure where each player competes at arm's length not only with its rivals, but also with customers and suppliers for control of the economic rents. …

Re-inventing value propositions

Abstract: While many managers face the challenge of lower profits in increasingly competitive and commoditized industries, a few firms break out as market value leaders generating superior growthand shareholder returns. How do these firms break out of the commoditization trap? In this paper we propose these firms invent unique value propositions and offer them in superior ways to their customers. Based on our study of a number of market leaders, we provide a framework for systematically understanding and reinventing the firm's value propositions. We propose that clearly understanding and defining the dimensions of a firm's value proposition is a critical first step in building an effective strategy.

Spider versus Spider

Abstract: Are "webs" a new strategy for the information age? The key question: should you adapt or shape? How much of the wealth do you share? Managing the dynamics of increasing returns What does it mean when one of the worlds biggest manufacturers of personal computers finds it difficult to stay independent? In the old days, bigger meant more powerful - and often a high market multiple too. But now, just the opposite may be true. Think of Netscape, a company that barely existed 18 months ago, and even today numbers only a couple of hundred employees. Is Netscape overvalued? Perhaps. But if you consider how quickly it has mobilized other companies to support and implement its technology, you begin to see why the excitement may be justified. Netscape exemplifies a new form of industrial structure. "Webs" are clusters of companies that collaborate around a particular technology. Probably the best-known is the Microsoft and Intel personal computer web, in which hardware and component makers, software developers, channel partners, and training providers combine to deliver the overall value proposition of a Windows PC. Other webs have formed around Novell's PC networking systems and SAP's integrated enterprise IT solution for manufacturers. Webs emerge from the turmoil wrought by uncertainty and change. They spread risk, increase flexibility, enhance an industry's innovation capability, and reduce complexity for individual participants. They are characteristically the work of a single architect or shaper, which (unlike a monopolist) maximizes the size of the web by giving away value to other companies. The more companies - and customers - that join, the stronger the web becomes. Webs create powerful new ways to think about strategy, risk, technological uncertainty, and innovation. They help us see why the virtual company may be more than just an abstract concept. They influence management focus, organizational structure, performance measurement, and information systems. They may even represent the opening salvo in the transition from industrial-age to information-age strategies. What are webs? An economic web is a set of companies that use a common architecture to deliver independent elements of an overall value proposition that grows stronger as more companies join the set. Before a web can form, two conditions must be present: a technological standard and increasing returns.(*) The standard reduces risk by allowing companies to make irreversible investment decisions in the face of technological uncertainty. The increasing returns create a mutual dependence that strengthens the web by drawing in more and more customers and producers. Webs are not alliances, however. They operate without any formal relationships between participants. Each company in a web is wholly independent; only the pursuit of economic self-interest drives it into web-like behavior. It prices, markets, and sells its products autonomously. Webs are a natural response to environments fraught with risk and uncertainty - which is why they are so prevalent in high-technology arenas. The "safety net" created by the other participants in a web allows a firm to focus exclusively on activities in which it can offer distinctive value. In this way, webs reduce overall investment requirements, focus individual participants' investments on areas most likely to succeed, and promote the emergence of multiple suppliers for bottleneck components. In such industries as multimedia, where companies are dealing with more than a dozen major technological discontinuities at once, it is only natural for this latest evolution in industrial dynamics to have occurred. But webs are by no means confined to technology providers, as we shall see. Within economic webs, technology webs organize around specific technology platforms. One prominent example of a technology web is the desktop computing business. …

Virtual Vertical Integration: The Key to Success

Abstract: Reasons for success in the machinery industry are changing with astounding speed. Five years ago, factors such as cross functional development teams, single sourcing and group work differentiated the best performing companies from the weaker ones.(*) However, a new McKinsey survey(**) of the European and US machinery industry reveals that these factors became standard practice among companies that survived the recession of 1992 to 1994, when markets in the industry shrank by an average of 2.5 percent per annum. What now differentiates the leaders from the laggards is their relationships with their customers and their suppliers. The leaders in the industry are erasing the traditional corporate boundaries that separate companies from their suppliers and customers, so that suppliers' economics and customers' needs are an integral part of their strategy. Managing the complete value chain in this way is what we call virtual vertical integration. Leading companies realize that the more closely they work with both suppliers and customers, the better the benefits are for all concerned. Supply management and customer orientation the two interfaces between the company and the outside world therefore represent the new opportunities for differentiation. Erasing the company-customer boundary A high level of customer satisfaction manifests itself in high market share and market share growth. Leading companies achieve this by making sure they respond to their customers' needs, which means being able to identify those needs and integrating them throughout the company, from R&D right through to sales and services. The task of customer integration falls upon the marketing department, which is organized quite differently from the marketing departments of the laggards. Leading companies have fewer marketing staff than laggards, and use them differently. Their marketing staff spend less of their time troubleshooting or attempting to generate orders (55 percent for laggards versus 32 percent for leading companies). Those tasks are left to the salesforce. Neither do they write brochures, prepare for trade fairs, or act in any other way as a general backup for the sales department. Instead, they concentrate on understanding their customers in order to improve the company's value proposition and identify new markets. Better understanding comes from spending more time with customers [ILLUSTRATION FOR EXHBIT A OMITTED], and from meticulously investigating the reasons for lost orders. Leading companies also use focus groups four times as frequently as laggards, interview key accounts three and a half times more often, and talk to service technicians twice as often. Customers' needs are also met by marketing being involved in R&D activities. Marketing findings are fed into the product line right at the conceptual stage and are included in performance specifications. To focus R&D activities and exploit synergies between product applications, the right market segmentation is key. Leading companies use market findings on the acceptable degree of product standardization to segment the market right at the beginning of development. Laggards, however, tend to segment the market by product application. Such an approach (and one followed by 86 percent of laggards), tends to divide resources between narrowly defined market niches, without taking customer benefits into account. The result is higher complexity. Erasing the company-supplier boundary Leading companies ensure purchased parts are of high quality, at the same time as cutting supply costs. Those in the survey managed to cut supply costs by 3.1 percent per annum, whereas laggards achieved cost cuts averaging only 1 percent. One important cost cutting method is to reduce complexity. On average, leaders work with 4,840 purchased parts per $100 million, whereas laggards require 8,290 parts for the same volume. …

Marketing Networks: A New Entrant's Approach to Network Equity

Abstract: The research and development team breathes a sigh of relief. They've done it, they have created a new product that offers greater performance with the added benefit of a lower cost. Sales has assured them that this new product is a “can't miss” winner. After all, how can it fail? Just look at the value proposition that such a product has to offer compared with its current rivals. But fail it may. Too often, products that seem to offer exceptional value are unable to get a foothold in the marketplace.