Delivering Profitable Value A Revolutionary Framework to Accelerate Growth, Generate Wealth, and Rediscover the Heart of Business Michael J. Lanning BASIC B BOOKS A Member of the Perseus Books Group Contents and Plan of Book Acknowledgments xiii A Brief Overview of Delivering Profitable Value xv Introduction - Beyond the looking glass 1 The Introduction challenges the thinking manager to pause and ask, 'Does my organization often look for strategic opportunity in the wrong places? Does it seek to understand and improve customers' real experiences or does it gaze inward, as if into a managerial mirror?' For the manager who may answer even a qualified 'yes' to the latter part of that question, the chal lenge is getting the organization to stop contemplating itself and to start formulating strategy based on profitable delivery of superior value to cus tomers. Unfortunately, conventional management theory (including the fields of strategy and marketing) does not solve but actually worsens this problem by encouraging managers to venture further into the managerial mirror. Managers are invited to consider a revolutionary but realistic alter native philosophy, framework and methodology for accelerating profitable growth: Delivering Profitable Value (DPV). An example of a turnaround in a Hewlett-Packard business introduces some of the essential DPV concepts. The introduction also provides a sense of the resulting experiences organi zations can expect from applying DPV. Finally, the introduction outlines the book's structure, the authority and experience on which it is based, and the kind of real world examples used to illustrate its argument. Part One - Understand the Heart of Business: What Delivering Profitable Value is 17 Chapter One - Internally-Driven and Customer-Compelled Management Aren't Value-Delivery Focused 18 Competent managers, who regularly compare their product and organiza tion to competitors and earnestly solicit customers' opinions, can be de ceived into assuming that they are adequately externally focused. This chap- xii • Delivering Profitable Value ters. Organizations now must write and commit to real business plans. These are structured explicitly by the value delivery framework and carry the power of senior management authority behind them. They are not periph eral exercises, but rather must determine the organization's structure, its success criteria, and all its resources, processes, and the development of capabilities. Managers are shown how to implement chosen VDSs and then to monitor, measure, and improve their design and implementation. The underappreciated power of realistically testing a VDS is illustrated with the New Coke blunder, seen in a more sober light than usual. Finally managers are urged to face again the fundamental questions of Delivering Profitable Value: to start the whole creative and analytic search for strategic insight all over again. For DPV is not a once-off process but a way of business life. Chapter Twenty - What to Do Monday Morning? 282 A practical starting point, from which to start making an organization more capable of Delivering Profitable Value, is offered. Managers are urged to as sess the extent to which their organizations understand and have answered the demanding questions of DPV, versus the extent to which they continue to rely on the product-supply-focused paradigm and its internally-driven and customer-compelled thinking. Then, they are urged to act - to muster the will to pursue breakthrough profitable growth by Delivering Profitable Value. Conclusion - Lead Beyond a Few Improvements, Build a Great Company: Institutionalize DPV 289 In conclusion, managers are challenged to be ambitious, to insist on truly integrating the commonsensical principles of DPV. An example of one great company's success in truly institutionalizing many of these essential tenets of business philosophy over the long term is presented as evidence that this ambitious goal can be achieved. Managers are reminded that they must only stay focused on the few key questions that really matter in conceiving and leading businesses. Glossary of DPV Terms 313 Index 317 vi • Delivering Profitable Value ter urges managers to consider the possibility that their culture may none theless be overly fixated on the product-supply functions of developing, pro ducing, and selling products and services rather than focused on under standing and profitably delivering customer experiences of superior value. This misdirected focus is an astoundingly common occurrence in organiza tions filled with intelligent, educated,and amply advised management. This chapter asks managers to consider this question: does this organization unconsciously ignore the true determinants of business success by conform ing to the two dominant and fundamentally flawed models of management practice, the internally-driven and the customer-compelled? These are illustrated by the spectacular failure of Xerox in PCs, and the initial failed attempts to stop a business decline in one Weyerhaeuser business unit. In contrast, suc cessful application of Delivering Profitable Value is illustrated by the latter's subsequent turnaround and, in greater detail, by an unusual model of suc cess within the embattled Eastman Kodak. Chapter Two - Customers' Resulting Experiences: Essence of a Real Value Proposition 39 This deceptively simple but incredibly powerful concept is explained, illus trated and defined in rigorous, actionable terms. This is the foundation upon which a wholly new perspective for thinking about business will be built. The rich and complex world of customers' resulting experiences, a world altogether different in kind and importance from the tired concepts of 'customer needs, requirements and expectations, and product benefits,' is revealed. Chapter Three - The Good, the Bad and the Unintended: Every Business Delivers a Value Proposition 55 This chapter holds the complete definition of a real value proposition and discusses how fundamental it is to accelerating profitable growth. The VHS/ Betamax example illustrates how unconscious of their value propositions managers can be. Accordingly, this chapter explains how to identify the propositions actually delivered. Some managers will assume value propo sitions concern only consumer businesses, but this chapter shows the equal relevance of the concept to industrial and commodity businesses. Chapter Four - To Choose or Not to Choose a Complete Value Proposition, That Is Management's Question 62 This chapter discusses what must be done to choose a value proposition. Managers will easily recognize the difference between talking about cus- Contents and Plan of Book • vil tomers and genuinely making a strategic commitment - the choice of a value proposition. Some propositions, including many winners, are tradeoffs - they include inferior experiences. Genuinely choosing a value proposition en tails decisions that go beyond defining the customer and the resulting ex periences they will derive. An industrial lubricants value proposition and numerous other industrial and consumer examples illustrate choosing a complete value proposition. The chapter provides practical tools for making this fundamental strategic decision. Chapter Five - Some of What a Real Value Proposition Isn't 72 This chapter briefly dispenses with many of the concepts that can be con fused with a value proposition. These include positioning, slogan, USP, mis sion statement, values statement, strategic intent, value discipline, and value added. Chapter Six - Playing to Win: Choose Good Value Propositions 80 This chapter discusses choosing winning value propositions. Numerous ex amples show why organizations must deliver superior experiences to custom ers, rather than focus on having a superior organization, product, or competen cies. Digital Audio Tape and several other ventures are shown to have failed, despite 'superior technology,' because they offered an inferior value propo sition. Chapter Seven - Provide and Communicate: Delivering Is More Than Lip Service 89 The purpose of choosing a (real) winning value proposition is to profitably deliver it. This perspective is quite different from the traditional view of a business as an entity that supplies a product. The chapter defines and illus trates (with Service Masters, Volvo, and others) the concepts of providing and communicating each resulting experience and argues that managers must think 'forwards,' beginning with customer experiences and ending with business design. This perspective is contrasted with employing the conventional backwards approach, which begins with internal resources or imagined advantages, advances to developing products, and ends with us ing marketing to convince customers to want those products. Advertising is discussed as an example of functions dominated by astoundingly internallydriven thinking and further misdirected by customer-compelled input. Much vin • Delivering Profitable Value advertising is lauded as creative but demonstrably fails to work, since it does not help communicate a superior value proposition. The converse also holds. Illustrations are given from Nissan, Nike, P&G, NEC, British Airways, and others. A summary chart contrasts the value-delivery and product-sup ply focus. Chapter Eight - Design a Business Forwards: the Value Delivery System 116 Chapter Eight introduces and illustrates in depth the central DPV frame work. Southwest Airlines has been much discussed, but its real strategy and that strategy's derivation have not been coherently explained. They are here, through the framework of the value delivery system (VDS). South west, Sensomatics, Sony Walkman and other examples defy the conven tional logic of management but beautifully and simply confirm that of DPV. Chapter Nine - Staying Alive: Adjust and Recreate Your VDS 136 Here the reader learns to use the value delivery system (VDS) as a dynamic framework by which to flexibly reinvent one's business in response to a competitive and shifting environment. The Checklist for a Winning Busi ness is presented. The means for courageously changing a business are dem onstrated so that managers can avoid falling into the comforting but ulti mately suicidal habit of 'leveraging' the organization's strengths until it is unable to compete. Small Glaxo's attempt to garner a small market share of antiulcerants, then dominated by SmithKline, is recognized for the tour de force that it is: a brilliant redesign of the VDS. Organizations must reinvent their businesses, but not in their own image. This chapter also distinguishes between the VDS framework and the Porter Value Chain, which is easily confused with but fundamentally different from the VDS framework. Chapter Ten - and Now...Will the Real Customer Please Stand Up? The Value Delivery Chain 151 The complex, interconnected relationships among an organization, its cus tomers, their customers, and others are made manageable by the value de livery chain framework. Unlike the conventionally accepted approaches of the 'supply chain' and 'value chain/ this DPV framework helps managers prioritize these entities by distinguishing the all-important primary entities from other supporting entities. The long chains of an LED maker, a Weyerhaeuser business, and a plastics manufacturer reveal that the primary Contents and Plan of Book • xi Chapter Sixteen - Stop Listening: Become Customers to Discover What They Really Want 216 The basic principles of the intuitive but systematic and fact-based method of becoming customers are summarized here. An illustration of discovering unexpected strategic opportunity in Kodak's data storage business is given. Despite the resources expended in the name of marketing research, satisfy ing customers, and competitive analysis, most such exercises do not actu ally lead organizations to an adequate understanding of customers' experi ences for the formulation of business strategy. Other illustrations are drawn from HP, Polaroid, P&G, industrial lubricants, Honda and a Caribbean sys tems integrator. Chapter Seventeen - Virtual Videos of the Customer's Life: Structured Method for Becoming the Customer 228 Examples of the 'virtual video' methodology for a UK petrol/gasoline dis tributor, for Australian camera specialty retailers and for HP order-fulfill ment are offered. To become highly competent at developing innovative value delivery strategies, managers must learn to understand and analyze customers' real behavior and experience to the depth of these examples and beyond. This chapter offers pragmatic guidelines for conducting this unconventional but dramatically more productive form of market-space analysis, both for application to business customers and to consumers. Chapter Eighteen - What's Competition Got to Do with It? Understanding Customers'Alternatives 254 Here, competition takes its place within value delivery strategy formula tion. This chapter exhorts managers to stop asking the traditional competi tive questions: 'What will competition do?' and 'What can we do better?' Instead, DPV urges managers armed with the knowledge of the potentially most valuable experiences to ask, 'How well could competitors and other alternatives deliver these?' FedEx's Zap Mail debacle is an illustration. The why and how of making virtual competing videos of the customer's life are discussed. Competitive analysis concludes becoming the customer. Chapter Nineteen - Make Disciplined Choices: Implement VDS-Structured Business Plans 260 The final step in formulating strategy in DPV terms is to articulate the disci plined choices produced by the analysis discussed in the previous four chap- Contents and Plan of Book • ix entity can be further removed than it might at first seem. The case of Fidel ity Investments further demonstrates the dramatic impact of understand ing the identity of the real customer - the primary entity in the value deliv ery chain. Chapter Eleven - Primary and Supporting VDSs: Control the Chain Reaction 159 This chapter discusses the crucial issue of enlisting the coordinated support of other players in order to deliver the winning value proposition to the primary entities in a chain. The concept of delivering both a primary value proposition to primary entities and supporting propositions aimed at se curing the support of other entities in the chain is explained. An example from the world of chickens demonstrates the brilliant coordinated design of both the primary VDS and the supporting VDS to intermediaries, while the floor cleaning business provides an example of creatively changing the interrelationships in a value delivery chain. Chapter Twelve - Don't Sell to Business-Customers: Improve Their VDSs Instead 176 This chapter discusses how to approach complex business-customers with out making the common error reinforced by conventional marketing theory - overly focusing on the buying function rather than truly understanding the customer's business. Results can be dramatically more promising than those derived from a sole focus on the customer's buying function. Conner Peripherals and the early Compaq, Fidelity in pension fund management and others illustrate this potential. Chapter Thirteen - Define the Firm's VDSs: Key Task of Corporate Strategy 180 The concept of understanding a business as a value delivery system in con text of a value delivery chain is expanded to include corporate strategy. The reader learns how to understand corporate strategy in a wholly new light as the definition of the firm's value delivery systems. General Motors's long history is used as a classic example of an organization with initially a clear headed strategy that gradually lost sight of its businesses. DPV urges senior managers to define and redefine their enterprises' VDS's, despite the per spective of conventional strategy theory, which can lead them to believe this exercise too pedestrian. X • Delivering Profitable Value Chapter Fourteen - Define VDSs Within the Context of their Market-Space 190 This chapter completes the picture of business strategy in the DPV perspec tive. A market-space is a group of related potential VDSs and their potential for wealth, while each related potential VDS is a value delivery option in that market-space. Corporate strategy must design, define, and choose the firm's businesses - VDSs - in each market-space where it chooses to compete. Those undertaking this task must remain cognizant of the interrelationship with other existing or potential VDSs in the same market-space. Managers who have understood Part One now understand what a fully developed strategy must be in order to profitably deliver superior value. Armed with this understanding, they are ready for the systematic methodology by which to formulate and implement such strategy. Part Two - How to Deliver Profitable Value 195 Chapter Fifteen - Formulate Strategy by Identifying and Choosing Value Delivery Options 196 This chapter holds an in-depth, practical explanation of the methodology for strategy formulation that starts with identifying value delivery options in a market-space. DPV advocates replacing traditional market and indus try 'segmentation' with this methodology. The chapter discusses how and why conventional segmentation is so different, so unnecessarily complex, and so much less strategically useful than this DPV methodology. In an HP example introduced previously, the organization uses the value delivery options approach to greatly simplify its understanding of the relevant mar ket-space. Chevron, in a supposed commodity business- natural gas - iden tifies the value delivery options in its market-space, and dramatically im proves profitability. Using the DPV methodology, managers evaluate the value delivery options identified, then choose the optimal combination of them for the market-space being explored. Determining the firm's strategy comprises choosing the market-spaces in which to compete and the pri mary VDSs to operate in each market-space, and identifying the capabili ties that the firm must support across these businesses. The relentlessly prac tical character of the methodology is demonstrated by the HP Vectra com puter. Discovery of the option that Vectra was unconsciously executing yields a realistic opportunity. A flowchart visually depicts the DPV methodology. A key element of this approach to strategy is the method of becoming the customer, which is discussed in detail in the next three chapters.
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