Strategy and the art of reinventing value

In "From Value Chain to Value Constellation: Designing Interactive Strategy" (July-August 1993), Richard Normann and Rafael Ramírez argue that successful companies increasingly do not just add value, they reinvent it. The key strategic task is to reconfigure roles and relationships among a constellation of actors--suppliers, business partners, customers--in order to mobilize the creation of value in new forms and by new players. What is so different about this new logic of value? It breaks down the distinction between products and services and combines them into activity-based "offerings" from which customers can create value for themselves. But as potential offerings become more complex, so do the relationships necessary to create them. As a result, a company's strategic task becomes the reconfiguration and integration of its compentencies and customers. Normann and Ramírez provide three illustrations of these new rules of strategy. IKEA has blossomed into the world's largest retailer of home furnishings by redefining the relationships and organizational pratices of the furniture business. Danish pharmacies and their national organization have used the opportunity of health care reform to reconfigure their relationships with customers, doctors, hospitals, drug manufacturers, and with Danish and international health organizations.(ABSTRACT TRUNCATED AT 250 WORDS)     

Business marketing: understand what customers value

How do you define the value of your market offering? Can you measure it? Few suppliers in business markets are able to answer those questions, and yet the ability to pinpoint the value of a product or service for one's customers has never been more important. By creating and using what the authors call customer value models, suppliers are able to figure out exactly what their offerings are worth to customers. Field value assessments--the most commonly used method for building customer value models--call for suppliers to gather data about their customers firsthand whenever possible. Through these assessments, a supplier can build a value model for an individual customer or for a market segment, drawing on data gathered form several customers in that segment. Suppliers can use customer value models to create competitive advantage in several ways. First, they can capitalize on the inevitable variation in customers' requirements by providing flexible market offerings. Second, they can use value models to demonstrate how a new product or service they are offering will provide greater value. Third, they can use their knowledge of how their market offerings specifically deliver value to craft persuasive value propositions. And fourth, they can use value models to provide evidence to customers of their accomplishments. Doing business based on value delivered gives companies the means to get an equitable return for their efforts. Once suppliers truly understand value, they will be able to realize the benefits of measuring and monitoring it for their customers.     

The growth crisis--and how to escape it

At a time when companies are poised to seize the growth opportunities of a rebounding economy, many of them, whether they know it or not, face a growth crisis. Even during the boom years of the past decade, only a small fraction of companies enjoyed consistent double-digit revenue growth. And those that did often achieved it through short-term measures--such as mergers and inflated price increases--that don't provide the foundation for growth over the long term. But there is a way out of this predicament. The authors claim that companies can achieve sustained growth by leveraging their "hidden assets," a wide array of underused, intangible capabilities and advantages that most established companies already hold. To date, much of the research on intangible assets has centered on intellectual property and brand recognition. But in this article, the authors uncover a host of other assets that can help spark growth. They identify four major categories of hidden assets: customer relationships, strategic real estate, networks, and information. And they illustrate each with an example of a company that has creatively used its hidden assets to produce new sources of revenue. Executives have spent years learning to create growth using products, facilities, and working capital. But they should really focus on mobilizing their hidden assets to serve their customers' higher-order needs--in other words, create offerings that make customers' lives easier, better, or less expensive. Making that shift in mind-set isn't easy, admit the authors, but companies that do it may not only create meaningful new value for their customers but also produce double-digit revenue and earnings growth for investors.     

Charting your company's future

Few companies have a clear strategic vision. The problem, say the authors, stems from the strategic-planning process itself, which usually involves preparing a large document, culled from a mishmash of data provided by people with conflicting agendas. That kind of process almost guarantees an unfocused strategy. Instead, companies should design the strategic-planning process by drawing a picture: a strategy canvas. A strategy canvas shows the strategic profile of your industry by depicting the various factors that affect competition. And it shows the strategic profiles of your current and potential competitors as well as your own company's strategic profile--how it invests in the factors of competition and how it might in the future. The basic component of a strategy canvas--the value curve--is a tool the authors created in their consulting work and have written about in previous HBR articles. This article introduces a four-step process for actually drawing and discussing a strategy canvas. Readers will learn how one European financial services company used this process to create a distinct and easily communicable strategy. The process begins with a visual awakening. Managers compare their business's value curve with competitors' to discover where their strategy needs to change. In the next step--visual exploration--managers do field research on customers and alternative products. At the visual strategy fair, the third step, managers draw new strategic profiles based on field observations and get feedback from customers and peers about these new proposals. Once the best strategy is created from that feedback, it's time for the last step--visual communication. Executives distribute "before" and "after" strategic profiles to the whole company, and only projects that will help move the company closer to the "after" profile are supported.     

The coming battle for customer information

Companies collect information about customers to target valuable prospects more effectively, tailor their offerings to individual needs, improve customer satisfaction, and identify opportunities for new products or services. But managers' efforts to capture such information may soon be thwarted. The authors believe that consumers are going to take ownership of information about themselves and start demanding value in exchange for it. As a result, negotiating with customers for information will become costly and complex. How will that happen? Consumers are realizing that they get very little in exchange for the information they divulge so freely through their commercial transactions and survey responses. Now new technologies such as smart cards, World Wide Web browsers, and personal financial management software are allowing consumers to view comprehensive profiles of their commercial activities-- and to choose whether or not to release that information to companies. Their decision will hinge, in large part, on what vendors offer them in return for the data. Consumers will be unlikely to bargain with vendors on their own, however. The authors anticipate that companies they call infomediaries will broker information to businesses on consumers' behalf. In essence, infomediaries will be the catalyst for people to start demanding value in exchange for information about themselves. And most other companies will need to rethink how they obtain information and what they do with it if they want to find new customers and serve them better.     

The ultimately accountable job: leading today's sales organization

In recent years, sales leaders have had to devote considerable time and energy to establishing and maintaining disciplined processes. The thing is, many of them stop there--and they can't afford to, because the business environment has changed. Customers have gained power and gone global, channels have proliferated, more product companies are selling services, and many suppliers have begun providing a single point of contact for customers. Such changes require today's sales leaders to fill various new roles: Company leader. The best sales chiefs actively help formulate and execute company strategy, and they collaborate with all functions of the business to deliver value to customers. Customer champion. Customers want C-level relationships with suppliers in order to understand product strategy, look at offerings in advance, and participate in decisions made about future products--and sales leaders are in the best position to offer that kind of contact. Process guru. Although sales chiefs must look beyond the sales and customer processes they have honed over the past decade, they can't abandon them. The focus on process has become only more important as many organizations have begun bundling products and services to meet important customers' individual needs. Organization architect. Good sales leaders spend a lot of time evaluating and occasionally redesigning the sales organization's structure to ensure that it supports corporate strategy. Often, this involves finding the right balance between specialized and generalized sales roles. Course corrector. Sales leaders must watch the horizon, but they can't take their hands off the levers or forget about the dials. If they do, they might fail to respond when quick adjustments in priorities are needed.     

Value innovation: the strategic logic of high growth

Why are some companies able to sustain high growth in revenues and profits--and others are not? To answer that question, the authors, both of INSEAD, spent five years studying more than 30 companies around the world. They found that the difference between the high-growth companies and their less successful competitors was in each group's assumptions about strategy. Managers of the less successful companies followed conventional strategic logic. Managers of the high-growth companies followed what the authors call the logic of value innovation. Conventional strategic logic and value innovation differ along the basic dimensions of strategy. Many companies take their industry's conditions as given; value innovators don't. Many companies let competitors set the parameters of their strategic thinking; value innovators do not use rivals as benchmarks. Rather than focus on the differences among customers, value innovators look for what customers value in common. Rather than view opportunities through the lens of existing assets and capabilities, value innovators ask, What if we start anew? The authors tell the story of the French hotelier Accor, which discarded the notion of what a hotel is supposed to look like in order to offer what most customers want: a good night's sleep at a low price. And Virgin Atlantic challenged industry conventions by eliminating first-class service and channeling savings into innovations for business-class passengers. Those companies didn't set out to build advantages over the competition, but they ended up achieving the greatest competitive advantages.     

Customer value propositions in business markets

Examples of consumer value propositions that resonate with customers are exceptionally difficult to find. When properly constructed, value propositions force suppliers to focus on what their offerings are really worth. Once companies become disciplined about understanding their customers, they can make smarter choices about where to allocate scarce resources. The authors illuminate the pitfalls of current approaches, then present a systematic method for developing value propositions that are meaningful to target customers and that focus suppliers' efforts on creating superior value. When managers construct a customer value proposition, they often simply list all the benefits their offering might deliver. But the relative simplicity of this all-benefits approach may have a major drawback: benefit assertion. In other words, managers may claim advantages for features their customers don't care about in the least. Other suppliers try to answer the question, Why should our firm purchase your offering instead of your competitor's? But without a detailed understanding of the customer's requirements and preferences, suppliers can end up stressing points of difference that deliver relatively little value to the target customer. The pitfall with this approach is value presumption: assuming that any favorable points of difference must be valuable for the customer. Drawing on the best practices of a handful of suppliers in business markets, the authors advocate a resonating focus approach. Suppliers can provide simple, yet powerfully captivating, consumer value propositions by making their offerings superior on the few elements that matter most to target customers, demonstrating and documenting the value of this superior performance, and communicating it in a way that conveys a sophisticated understanding of the customer's business priorities.     

The old pillars of new retailing

Despite the harsh realities of retailing, the illusion persists that magical tools can help companies overcome the problems of fickle consumers, price-slashing competitors, and mood swings in the economy. Such wishful thinking holds that retailers will thrive if only they communicate better with customers through e-mail, employ hidden cameras to learn how customers make purchase decisions, and analyze scanner data to tailor special offers and manage inventory. But the truth is, there are no quick fixes. In the course of his extensive research on dozens of retailers, Leonard Berry found that the best companies create value for their customers in five interlocking ways. Whether you're running a physical store, a catalog business, an e-commerce site, or a combination of the three, you have to offer your customers superior solutions to their needs, treat them with respect, and connect with them on an emotional level. You also have to set prices fairly and make it easy for people to find what they need, pay for it quickly, and then move on. None of these pillars is new, and each sounds exceedingly simple, but don't be fooled--implementing these axioms in the real world is surprisingly difficult. The author illustrates how some retailers have built successful operations by attending to these commonsense ways of dealing with their customers and how others have failed to do so.     

Making business sense of the Internet

For managers in large, well-established businesses, the Internet is a tough nut to crack. It is very simple to set up a Web presence and very difficult to create a Web-based business model. Established businesses that over decades have carefully built brands and physical distribution relationships risk damaging all they have created when they pursue commerce through the Net. Still, managers can't avoid the impact of electronic commerce on their businesses. They need to understand the opportunities available to them and recognize how their companies may be vulnerable if rivals seize those opportunities first. Broadly speaking, the Internet presents four distinct types of opportunities. First, it links companies directly to customers, suppliers, and other interested parties. Second, it lets companies bypass other players in an industry's value chain. Third, it is a tool for developing and delivering new products and services to new customers. Fourth, it will enable certain companies to dominate the electronic channel of an entire industry or segment, control access to customers, and set business rules. As he elaborates on these four points, the author gives established companies a systematic way to sort through the risks and rewards of doing business in cyberspace.     

Philanthropy's new agenda: creating value

During the past two decades, the number of charitable foundations in the United States has doubled while the value of their assets has increased more than 1,100%. As new wealth continues to pour into foundations, the authors take a timely look at the field and conclude that radical change is needed. First, they explain why. Compared with direct giving, foundations are strongly favored through tax preferences whose value increases in rising stock markets. As a nation, then, we make a substantial investment in foundation philanthropy that goes well beyond the original gifts of private donors. We should therefore expect foundations to achieve a social impact disproportionate to their spending. If foundations serve merely as passive conduits for giving, then they not only fall far short of their potential but also fail to meet an important societal obligation. Drawing on Porter's work on competition and strategy, the authors then present a framework for thinking systematically about how foundations create value and how the various approaches to value creation can be deployed within the context of an overarching strategy. Although many foundations talk about "strategic" giving, much current practice is at odds with strategy. Among the common problems, foundations scatter their funding too broadly, they overlook the value-creating potential of longer and closer working relationships with grantees, and they pay insufficient attention to the ultimate results of the work they fund. This article lays out a blueprint for change, challenging foundation leaders to spearhead the evolution of philanthropy from private acts of conscience into a professional field.     

Creating new market space.

Most companies focus on matching and beating their rivals. As a result, their strategies tend to take on similar dimensions. What ensues is head-to-head competition based largely on incremental improvements in cost, quality, or both. The authors have studied how innovative companies break free from the competitive pack by staking out fundamentally new market space--that is, by creating products or services for which there are no direct competitors. This path to value innovation requires a different competitive mind-set and a systematic way of looking for opportunities. Instead of looking within the conventional boundaries that define how an industry competes, managers can look methodically across them. By so doing, they can find unoccupied territory that represents real value innovation. Rather than looking at competitors within their own industry, for example, managers can ask why customers make the trade-off between substitute products or services. Home Depot, for example, looked across the substitutes serving home improvement needs. Intuit looked across the substitutes available to individuals managing their personal finances. In both cases, powerful insights were derived from looking at familiar data from a new perspective. Similar insights can be gleaned by looking across strategic groups within an industry; across buyer groups; across complementary product and service offerings; across the functional-emotional orientation of an industry; and even across time. To help readers explore new market space systematically, the authors developed a tool, the value curve, that can be used to represent visually a range of value propositions.     

Digital insurance brokers—old wine in new bottles? How digital brokers create value

This article analyzes digital brokers in the countries of the DACH region, Germany, Austria, and Switzerland, from a business model perspective. We argue that the potential to create new value for insurance customers has not yet been fully realized. Our analysis has identified two strategic action areas. The first concerns the exploitation of the wealth of customer data available. Those digital brokers who will succeed in generating new content and services using data analytics have the potential to take customer centricity and individuality to new bounds. The second centers around introducing aspects of community, such as connecting peers and enabling them to interact. The critical success factors are volume, a high degree of automation as well as leveraging the infrastructure and data to delivering new, value-adding content and services that go beyond traditional intermediation.     

Seasoned equity offerings and customer–supplier relationships

We investigate how seasoned equity offerings (SEOs) by issuers with large customers affect both trading partners’ market values and the relationship's health. We hypothesize that SEOs reveal adverse information about an issuer's major customers and find that issuers and their large customers experience negative returns on SEO announcements. These results are more pronounced when customers have higher levels of information asymmetry and when customer-supplier relationships are particularly important. Large customers of issuers experience larger declines in post-SEO sales, operating performance, and credit ratings than large customers of non-issuers. Also, SEO issuer sales to large customers and relationship duration significantly decline.     

"A players" or "A positions"? The strategic logic of workforce management

Companies simply can't afford to have "A players" in all positions. Rather, businesses need to adopt a portfolio approach to workforce management, systematically identifying their strategically important A positions, supporting B positions, and surplus C positions, then focusing disproportionate resources on making sure A players hold A positions. This is not as obvious as it may seem, because the three types of positions do not reflect corporate hierarchy, pay scales, or the level of difficulty in filling them. A positions are those that directly further company strategy and, less obviously, exhibit wide variation in the quality of the work done by the people who occupy them. Why variability? Because raising the average performance of individuals in these critical roles will pay huge dividends in corporate value. If a company like Nordstrom, for example, whose strategy depends on personalized service, were to improve the performance of its frontline sales associates, it could reap huge revenue benefits. B positions are those that support A positions or maintain company value. Inattention to them could represent a significant downside risk. (Think how damaging it would be to an airline, for example, if the quality of its pilots were to drop.) Yet investing in them to the same degree as A positions is ill-advised because B positions don't offer an upside potential. (Pilots are already highly trained, so channeling resources into improving their performance would probably not create much competitive advantage.) And C positions? Companies should consider outsourcing them--or eliminating them. We all know that effective business strategy requires differentiating a firm's products and services in ways that create value for customers. Accomplishing this requires a differentiated workforce strategy, as well.     

Service transition strategies in service-dominant settings: Towards all finance solutions in SME markets

Intense competition and extensive customer needs are motivating companies to develop so-called ‘solution’ offerings in service industries. Building on service transition strategy literature, this article outlines the practical activities that broad-based financial service providers take in transitioning towards ‘all finance’ solutions and accentuates the inhibitors that their business customers perceive in this process. The empirical data consists of 40 semi-structured interviews among two service providers and 17 of their small- and medium-sized enterprise (SME) customers. The results show that the service transition strategies of service extension and relationship focus are increasingly utilized in the financial industry. However, the integration of various components within a comprehensive bank and insurance offering is still in its early stages, suggesting providers rely mainly on a pure component strategy. SME customers, who seem to have taken the role of independent value creators, fail to perceive the benefits of purchasing comprehensive offerings from a single provider. Thereby, they tend to follow price-based purchase behaviour and negotiate their service offering with many different providers.     

Re‐equitizing Corporate Balance Sheets: Choosing Among the Alternatives

Companies are generally reluctant to issue new equity because it can be expensive capital. Among the largest costs of an equity offering are so‐called “market‐impact” costs. To the extent the typically negative market reaction to a stock offering causes an issue to be underpriced, such underpricing dilutes the value of current shareholders. Despite such costs, many companies—particularly financial institutions—are raising equity capital to “delever” balance sheets that have been squeezed by the credit crunch and economic slowdown. And far from transferring value from existing shareholders, these offerings can preserve and even increase the value of highly leveraged companies by shoring up their capital bases and providing the flexibility to get through a difficult period. According to recent studies, announcements of equity offerings by distressed companies have been accompanied by positive stock returns in excess of 5 %. The challenge for CFOs is to determine why and when issuing equity is the value‐maximizing strategy. The kinds of companies that are most likely to benefit from equity offerings are those that score low on credit metrics, have experienced cyclical declines in operating performance, and have growth opportunities as part of their recovery. There are a number of options for raising equity capital, but no set rules for identifying the optimal one. Nevertheless, the author offers a number of suggestions designed to help CFOs make smarter decisions: Communicate clearly to investors the intended uses of the proceeds from the equity offering and how they are expected to create value; Consider judicious cuts to the dividend to preserve capital; Involve current shareholders to minimize dilution, perhaps by considering a rights offering, and strengthen their commitment; Seek out “smart money” such as private equity or SWFs as long‐term investors; Get the offer size right the first time so a second offering can be avoided; and Monetize volatility in uncertain markets by issuing convertible securities.     

Strategic networks,certification, and initial public offerings

This study investigates the certification effect of a firm's strategic alliance network on initial public offerings using a large data set involving 3860 IPO events from the U.S. IPO market. The results show that IPO firms with more direct alliance relationships and a more central position in the strategic network allow them to: (i) attract more prestigious underwriters and greater institutional interest; (ii) experience lower underwriting expenses, larger IPO offer sizes, and higher initial returns; and (iii) achieve superior long-term performance. Further, both the IPO firm and their strategic partners' network positions have prominent impacts on an IPO's initial issuing status and long-term performance. Our results suggest that an IPO firm's strategic alliance network serves as a useful indicator by which to determine the quality of the IPO firm.     

With friends like these: the art of managing complementors

Intel and Microsoft neither buy from nor sell to each other directly, but they are undeniably in business together. They are probably the world's most widely known pair of complementors--companies that independently provide complementary products or services to mutual customers. Complementors increase the value of each other's offerings and the size of the total market. So it's not surprising that so many just assume that their interests are aligned. Nothing could be further from the truth. Discord can develop in many areas, such as pricing, technology, standards, and control of the market--both in terms of which company has the most influence over customers and which one gets the biggest slice of the pie. The issue of pricing perfectly captures this tension. Ideally, you'd like to price your goods high while your complementors price theirs low. Airlines, for instance, would be happy to see vacation lodgings go for a song, while destination resorts could raise rates and still fill their rooms if customers could fly there for free. The first step in managing relationships with complementors is to develop a deep understanding of their economics, their strategies and goals, their existing capabilities, their incentives for cooperation, and any potential areas of conflict. Then, to gain the upper hand, companies can use a variety of tools that fall into two main categories: hard power (inducements or coercion to get what you want) and soft power (persuasion through indirect means to get others to want what you want). The authors explain how to build both hard power and soft, illustrate the strengths and limits of each, and offer guidelines for choosing one over the other. Conflict among complementors is inevitable, but together, hard and soft power can help companies manage the dark side of complementor relationships and take full advantage of the opportunities that cooperation should create.     

Tailored logistics: the next advantage

How many top executives have ever visited with managers who move materials from the factory to the store? How many still reduce the costs of logistics to the rent of warehouses and the fees charged by common carriers? To judge by hours of senior management attention, logistics problems do not rank high. But logistics have the potential to become the next governing element of strategy. Whether they know it or not, senior managers of every retail store and diversified manufacturing company compete in logistically distinct businesses. Customer needs vary, and companies can tailor their logistics systems to serve their customers better and more profitably. Companies do not create value for customers and sustainable advantage for themselves merely by offering varieties of goods. Rather, they offer goods in distinct ways. A particular can of Coca-Cola, for example, might be a can of Coca-Cola going to a vending machine, or a can of Coca-Cola that comes with billing services. There is a fortune buried in this distinction. The goal of logistics strategy is building distinct approaches to distinct groups of customers. The first step is organizing a cross-functional team to proceed through the following steps: segmenting customers according to purchase criteria, establishing different standards of service for different customer segments, tailoring logistics pipelines to support each segment, and creating economics of scale to determine which assets can be shared among various pipelines. The goal of establishing logistically distinct businesses is familiar: improved knowledge of customers and improved means of satisfying them.