When we set out to engage in innovation, the road ahead can at first appear daunting. The path has many potential roadblocks, hazards, and hidden curves. Most importantly, the journey can appear so long and so complicated that it feels like it makes sense not to try at all. That’s the wrong approach, of course, and why we recommend the Value Disciplines model to focus innovation efforts.
Built into a triangle, Value Disciplines unpack the main concerns within your business’s value proposition. The three value disciplines are:
- Customer intimacy
- Product leadership
- and Operational excellence
In this article, we discuss the pieces of the Value disciplines model and how businesses can use it to guide their innovation practices. As with many of our articles, we explore this topic further, and provide helpful supplementary materials, in our book How to Create Innovation. We invite you to explore the Value disciplines model and other important concepts as you seek to revolutionize your entire business model.
Background to the Values Discipline Triangle
Michael Porter wrote in 1980 that any strategy must target either cost leadership, product differentiation, or focus (on a segment, applicable to small companies only). He discussed the idea that practicing more than one strategy at a time dilutes the focus of the organization and threatens the entirety of the company’s innovation program. The argument is based on the fundamental premise that differentiation will incur costs to the firm; reducing costs is at odds with differentiation.
It has been proven, however, that a combination of those strategies is possible and can lead to lasting competitive advantage for the (very) few firms that manage to achieve it. Such a company is probably already a market leader and likely has a lot of advantages over its competition.
We argue that, for the average company, understanding the value disciplines encourages efficient application of limited resources. Most companies benefit from targeted understanding of the value disciplines model. Digital Leadership understands that value disciplines play a role in the larger business models of most companies, and it appears as part of our Operating Model Canvas, which this article discusses a little later.
What are the Three Value Disciplines?
The Three Value Disciplines appear in the triangle, and each represents a distinct element driving how business processes bring value to the customer. They are operational excellence, customer intimacy, and product leadership.
Each of the disciplines is discussed in more detail below.
1- Operational Excellence Value Discipline
Characteristics of Operational Excellence Value Discipline
Operational Excellence focuses on providing customers with the goods and services they need at the best overall cost. Keeping costs low allows a business to offer competitive prices. Additionally, operational excellence helps minimize overhead costs through scale and resource advantages. Advanced management systems can eliminate intermediate production steps, further reducing costs and improving profit margins.
When we pursue operational excellence we must empower every member of our team to provide insight into doing core business functions better. Companies pursuing operational excellence often are remarkable for the agency they grant to every worker, no matter where they are in the company hierarchy.
In the Value disciplines model, Operational excellence has the following characteristics:
- Reliable product/service at a competitive price
- Minimizes cost through efficiency measures
- Industry leader with regards to price and ease of doing business
- Cross-functional business improvement initiatives
2- Customer Intimacy Value Discipline
Characteristics of Customer Intimacy
When you have extraordinary Customer Intimacy, you are the best at responding to customers’ needs. Customer intimate companies gather and assess detailed customer knowledge so they understand their customers’ needs.
Customer intimacy gives you the opportunity to create customized promotional programs for targeted customer segments which make the best use of your marketing resources. You can leverage your most profitable customers more effectively, and make sure you’re fulfilling special requests for the VIPs in a way that continues to develop the relationship you have with them. This allows for an increasingly fine definition of your customers, which helps identify service possibilities and precisely the product your customers need that can grow your bottom line. Customer intimate companies are known for leveraging their infrastructure and management systems and targeting markets precisely.
In the Value disciplines model, Customer intimacy has the following characteristics:
- Segmented target markets
- Offering tailored to customer demands
- Long-term customer loyalty strategy
- High barriers to entry
- Frontline employees empowered
- Collaborative solution development with customer
- Business decisions are made based on total customer lifetime value
3- Product Leadership Value Discipline
Characteristics of Product Leadership Value Discipline
You show Product Leadership by providing customers with the best product or service quality available. Paired with customer intimacy, your business can generate tremendous customer loyalty when you become known for solving the biggest of customer problems in the best ways with what you offer.
Product leaders continually scan the marketplace and what they know about their customers so they can shape products to effectively attract new customers and retain previous ones. The product leadership discipline leads businesses to analyze consumer purchases to develop leading-edge products that close a gap in the marketplace. True product leaders also focus on continuing to offer the best solutions at competitive prices.
In the Value disciplines model, Product leadership has the following characteristics:
- Offers customers cutting-edge products and services
- Focused on speed, innovation, time to market
- Relentlessly pursues new solutions
- Encourages idea generation at all levels of the organization
One value discipline or all three?
The Value Disciplines triangle, building on Porter’s Generic Strategies, helps you choose which of the three areas you want to focus on. In the beginning, you should choose just one area. There are two reasons for this:
- From an organizational perspective, you don’t have the resources to fund being the best in all three categories—in other words, you can’t fully tailor and customize your products (Customer Intimacy), be the cheapest (Operational Excellence), and have the best products (Product Leadership).
- From an external perspective, customers want to know what sets your company apart; is it technical excellence or great customer service? Focusing on one strategic choice allows you to differentiate yourself as you are getting the company off the ground.
Your strategy to attain your overall Business Intention, therefore, determines the way you choose a Value Discipline position and how you operate it. The Value Disciplines thus help you to create a real strategic focus since they put your relationship to the customer (Are you the best, the cheapest, or the most tailored?) in the center of your overall strategy. Based on your chosen Value Discipline, you will have to adjust your Operating Model, so that it is fully consistent with it. A Customer Intimacy positioning requires very different competencies, processes, and approaches compared to an Operational Excellence positioning, as you can imagine.
Although traditionally companies have had to focus on excelling in one discipline, thanks to digitalization, you can (to some degree) become strong in all three in the longer term. Fantastic technology can solve the Customer Intimacy problem (Facebook and Amazon are great at this). Operational Excellence can be achieved through an automated Supply Chain and a lot of smart technology. And, of course, we can use digitalization to create an excellent product. Being able to break away from having to make a choice with the help of digitalization has been one of the key sources of digital disruption and has made productive strategic focus easier!
Regardless, you will have to make a choice in the short term. So prioritize. At this point, it is also good to be focused on what drives our differentiation.
Why are the Value Disciplines Important?
It’s easy to get bogged down by all the details of innovation as we seek to optimize business processes and exceed customer expectations. The discipline model is intended to help you focus your efforts so your progress doesn’t get impeded by big-picture worries.
Companies pursuing innovation use the value disciplines to better understand their business model and accurately measure operational excellence. They can more easily track product leadership because the value disciplines guide them to look more explicitly at how their products are behaving in the marketplace.
The value disciplines aren’t training wheels, but rather a map that lets you explore your functional and organizational boundaries.
How it Works: Putting the Value Disciplines Triangle into Action
Value Delivery Chains represent the core processes of your business, so let’s start there. Our canvas basically updates the original Value Delivery Chain model proposed by Michael Porter to represent a typical Value Chain in a (digitally enabled) innovation context. This may, however, not best represent your business, so feel free to adapt it to your needs!
Define the process by which you want to get logistics (especially the logistics of physical items like material handling, production, packaging, inventory, transportation, and warehousing) under control. While it is a key process, it is often not a core activity, because it is rare that you can differentiate yourself with better logistics. It is often the case that a company is too small to handle logistics in-house, so this is a great activity to outsource. Always choose a firm that is best in class. Don’t rely on your parent organization for these kinds of activities. They are probably not the best in class in this particular domain, and they don’t want to deal with the small volume of products you will be starting with.
With a growing business, will you have to optimize, standardize and solidify your operations? Not yet. The best strategy is to do all processes manually until it’s no longer feasible. On a small scale, the manual is often cheaper. Why would you introduce expensive automation early? More importantly, you want to be sure of what you really need before you start to build it.
Moreover, you will need to see how you interface and collaborate with your parent company. In most cases, it will be easier to deal with everything by yourself. For instance, a leading insurance company told us that they are simply not interested in managing a product with less than 10,000 customers because their processes are not designed for small operations and they acknowledge that they are not particularly flexible.
Your product is still highly immature and likely not profitable. Continue to refine and experiment with the Value Proposition, your channels, your customer relationships, and your audience as you work through your product management. Also work on pricing, bundling, packaging, partners, and your sales approach. Keep building and shipping, and make sure to maintain a fast iteration cycle with real market feedback.
Now it will be time to start investing in scalable technology. Focus on the key issues first. Carefully consider whether it is time to invest your organization’s resources in large infrastructures. Start building up the required back-end processes and infrastructure (but do the exercises manually first to learn what you really need!). This will involve getting in place core systems such as CRM (you want to know your customers!), ERP, and other systems which you may require to scale your company.
Related Business Models to the Value Disciplines Triangle
The UNITE Business Capability Map
Capabilities are the processes, systems of knowledge, and specific skills that a firm possesses based on which it operates, earns revenue, and competes with other firms, Capability Maps summarize the capabilities of a firm visually. They can exist at different levels of an organization—from an abstract list of capabilities at the enterprise level (such as in the chart we see here), or a much more detailed visualization when focusing on the particular capabilities of organizational units or even something like the IT system.
As a starting point, we suggest working through the following three steps based on the Enterprise Capability Map:
- Ask yourself, to what degree are these capabilities present in our firm?
- Identify what truly differentiates your firm (this should be about 5% of your organization), what has competitive parity (the next 15% of your organization), and what is non-core (the other 80%). These areas should consequently have a high, medium and low strategic relevance for your firm.
- Last, identify which of those capabilities can and should be leveraged in an innovation context. One thing that distinguishes such a capability is that it is portable.
Such an analysis should allow you to determine the majority of your firm’s relevant strengths. To further deepen your understanding, you can conduct more detailed mapping of specific parts of the organization. Your Enterprise Architecture team may already have a more detailed Capability Map covering certain aspects of your firm.
Assessing your assets and capabilities is critical. These will provide the boundaries for any future innovation and transformation initiative. If you do not leverage your unique assets and capabilities, you are likely to end up in competition with quite literally everybody—a fight that is hard to win. By leveraging your strengths, you can outline a unique Search Field and Opportunity Space for your innovations.
The UNITE Strategy Execution Framework
Most organizations do not lack strategy; they lack the ability to execute. This Strategy-Execution Gap is the primary concern of most CEOs, with 2/3rds of large organizations struggling to implement their strategies. Closing this gap is paramount—after all the best strategy or idea is not worth a dime if you can’t execute it!
To successfully execute an innovation, you will require a committed team. What is critical to understand right now is that this team must possess a few key characteristics:
Independence: You want the team to function autonomously and be independent of any existing structure or management. Otherwise, they won’t have the freedom to experiment, learn, and make the required decisions. If you don’t trust the team to do so, you have the wrong team. Independence also means that the team is better off if they have their own distinct and designated physical space away from the H1 corporate structure.
Full-time: You want the team to be full-time and 100% committed. A great way to kill innovation is to put a couple of people on the team at 20% or 50% capacity. In this situation, they spend so much of their time catching up on what’s happening, that they never get around to doing anything.
But temporarily assigned: Innovations do fail. So, it makes sense to form the team with the assumption that it will be a temporary, project-based group. This helps to prevent the mindset that innovation is a linear process that “must” conclude positively. If the idea turns out to be a success, you can consider reforming the team on a more permanent basis, retaining some of its current members.
Strong digital competency: Some or possibly all of the team members should be digital and innovation specialists. Deep industry knowledge or deep understanding of the parent company is typically not required or desired at this stage; this is more often than not an obstacle to innovation rather than an aid.
Entrepreneur-leader: You want a true entrepreneur to lead the team, someone who has been there, created (digitally enabled) innovation, and growth-hacked something. You certainly do not want a project manager to project manage the endeavor into a well-organized failure.
The UNITE Operating Model Canvas
One key ingredient the Digital Leadership experts propose to overcome the Strategy-Execution challenge is to establish how you are going to execute using a well-defined and communicated Operating Model. The Operating Model Canvas expands upon the Value Chain, Key Resources, and Key Partners of your Business Model. The concept of an Operating Model Canvas was originally developed by Andrew Campbell and his colleagues. We have developed an iteration of it that will consider additional aspects and that is more geared towards innovation.
The Operating Model Canvas will help your team achieve alignment with your strategy and with each other, thus bringing together all the different functions of your business. The Operating Model Canvas expands upon the Value Creation aspects of the Business Model. So, when you need to focus on putting your Business Model into action, just replace the more abstract Value Creation aspects of the Business Model Canvas with the more detailed elements of the Operating Model Canvas.
The Operating Model you’ve created using your canvas should clarify how to execute your strategy and thus set up operations. Now we need to consider the best way to grow your innovation initiative. We suggest leveraging the Growth-Hacking framework, a commonly used to set of tactics and shortcuts that high-growth companies have used to achieve massive growth in short time frames.
Be aware, however, that Growth Hacking is not a simple process of scaling more of the same. Rather, it is a process of rapid experimentation across both marketing and product development to identify the most efficient ways to grow a business. At this point, you won’t be surprised that Stage 4 involves building, measuring, and learning as well! Your MVP was set up in a simple way because it was a temporary experiment. Most of what we were doing was manual. As we Growth Hack, we need to find ways to build your real business as effectively and efficiently as possible
The primary focus of growth hacking is two-fold: lowering Customer Acquisition Costs (CAC) and creating long-term customer loyalty (thus increasing the long-term value of a customer—a concept known as Customer Lifetime Value, or CLV). The goal of growth hacking is long-term sustainable growth, not just short-term gain. Creating a sustainable cycle is key. Imagine your business is a bucket and your potential customers are water. You don’t want to pour water into a leaky bucket; it’s a waste of money. That is why a strong Growth-Hacking approach focuses not just on customer acquisition, but on retention.
Connecting The Dots: The UNITE Business Model Framework
How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.
Here is a summary of the key ingredients of the framework:
The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models).
A Business Model can be broken out into its numerous aspects. Depending on what challenges you face, you can zoom in on your area of interest using an appropriate tool or canvas:
- Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
- The Value Proposition Canvas details the central components of your offering (the product or service).
- To dig into your Customer Segments, work with data-driven Personas.
- The JTBD Customer Job Statement and Job Map frame the JTBD of your customers.
- The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
- The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
- The Innovation team structure enables you to draft a team structure for your innovation initiative.
- Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan that will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
- The Operating Model Canvas helps you think through the Operating Model.
We opened this article using a road as a metaphor to describe some of the challenges we face when we decide to move our businesses forward through innovation. To be a market leader, you must truly embrace the journey toward innovation. Understanding the value disciplines, and putting the value disciplines to work, will make that journey a lot easier.
The experts at Digital Leadership are committed to transforming the world for the better by improving the ways businesses bring value to their customers. If you have questions or comments about our commitment or how we can help you meet your innovation goals, please feel welcome to contact us.
The road is long, but it’s easier to travel when we do it together!
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