We contend that customer value propositions, properly constructed and delivered, make a significant contribu- tion to business strategy and performance. GE Infrastruc- ture Water & Process Technologies’ recent development of a new service offering to refinery customers illustrates how general manager John Panichella allocates limited resources to initiatives that will generate the greatest in- cremental value for his company and its customers. For example, a few years ago, a field rep had a creative idea for a new product, based on his comprehensive understand- ing of refinery processes and how refineries make money.
The field rep submitted a new product introduction (NPI) request to the hydrocarbon industry marketing manager for further study. Field reps or anyone else in the organi-
zation can submit NPI requests whenever they have an inventive idea for a customer solution that they believe would have a large value impact but that GEIW&PT presently does not offer. Industry marketing managers, who have extensive industry expertise, then perform scoping studies to understand the potential of the pro- posed products to deliver significant value to segment customers. They create business cases for the proposed product, which are “racked and stacked” for review. The senior management team of GEIW&PT sort through a
large number of potential initiatives competing for lim- ited resources. The team approved Panichella’s initiative, which led to the development of a new offering that pro- vided refinery customers with documented cost savings amounting to five to ten times the price they paid for the offering, thus realizing a compelling value proposition.
Sonoco, at the corporate level, has made customer value propositions fundamental to its business strategy.
Since 2003, its CEO, Harris DeLoach, Jr., and the executive committee have set an ambitious growth goal for the firm: sustainable, double-digit, profitable growth every year. They believe that distinctive value propositions are crucial to support the growth initiative. At Sonoco, each value proposition must be:
•Distinctive.It must be superior to those of Sonoco’s competition.
•Measurable.All value propositions should be based on tangible points of difference that can be quantified in monetary terms.
•Sustainable.Sonoco must be able to execute this value proposition for a significant period of time.
Unit managers know how critical DVPs are to business unit performance because they are one of the ten key metrics on the managers’ performance scorecard. In se- nior management reviews, each unit manager presents proposed value propositions for each target market seg- ment or key customer, or both. The managers then re- ceive summary feedback on the value proposition met- ric (as well as on each of the nine other performance metrics) in terms of whether their proposals can lead to profitable growth.
In addition, Sonoco senior management tracks the re- lationship between business unit value propositions and business unit performance – and, year after year, has con- cluded that the emphasis on DVPs has made a signifi- cant contribution toward sustainable, double-digit, prof- itable growth.
Best-practice suppliers make sure their people know how
to identify what the next value propositions ought to be.
C u s t o m e r Va l u e P r o p o s i t i o n s i n B u s i n e s s M a r k e t s
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Best-practice suppliers recognize that constructing and substantiating resonating focus value propositions is not a onetime undertaking, so they make sure their peo- ple know how to identify what the next value proposi- tions ought to be. Quaker Chemical, for example, con- ducts a value-proposition training program each year for its chemical program managers, who work on-site with customers and have responsibility for formulating and executing customer value propositions. These managers first review case studies from a variety of industries Quaker serves, where their peers have executed savings projects and quantified the monetary savings produced.
Competing in teams, the managers then participate in a simulation where they interview “customer managers”
to gather information needed to devise a proposal for a customer value proposition. The team that is judged to have the best proposal earns “bragging rights,” which are highly valued in Quaker’s competitive culture. The train- ing program, Quaker believes, helps sharpen the skills of chemical program managers to identify savings projects when they return to the customers they are serving.
As the final part of the training program, Quaker stages an annual real-world contest where the chemical program
managers have 90 days to submit a proposal for a savings project that they plan to present to their customers. The director of chemical management judges these proposals and provides feedback. If he deems a proposed project to be viable, he awards the manager with a gift certifi- cate. Implementing these projects goes toward fulfilling Quaker’s guaranteed annual savings commitments of, on average,$5 million to$6 million a year per customer.
Each of these businesses has made customer value propositions a fundamental part of its business strategy.
Drawing on best practices, we have presented an ap- proach to customer value propositions that businesses can implement to communicate, with resonating focus, the superior value their offerings provide to target market segments and customers. Customer value propositions can be a guiding beacon as well as the cornerstone for superior business performance. Thus, it is the responsibil- ity of senior management and general management, not just marketing management, to ensure that their cus- tomer value propositions are just that.
Reprint R0603F;HBR OnPoint 3544 To order, see page 151.
“What we need are some fresh new ideas. You know, like we had last year.”
P.C.VEY
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h r o u g h o u t m o st o f m o d e r n b u s i n e s s history, corporations have attempted to unlock value by matching their structures to their strategies. As mass pro- duction took hold in the nineteenth century, for instance, companies generated enormous economies of scale by centralizing key functions like operations, sales, and fi- nance. A few decades later, as firms diversified offerings and moved into new regions, a rival model emerged. Cor- porations such as General Motors and DuPont created business units structured around products and geographic markets. The smaller business units sacrificed some econ- omies of scale but were more flexible and adaptable to local conditions.Strategic dreams often turn into nightmares if companies start engaging in expensive and distracting restructurings. It’s far more effective to choose a design that works reasonably well, then develop a strategic system to tune the structure to the strategy.
by Robert S. Kaplan and David P. Norton
THE HEADS OF STATE
How to Implement
a New Strategy
Without Disrupting
Your Organization
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H o w t o I m p l e m e n t a N ew S t ra t e g y W i t h o u t D i s r u p t i n g Yo u r O rg a n i z a t i o n
These two business models – centralized by function versus relatively decentralized by product and region – proved durable for a long time, largely because the evolu- tion of business organization was fairly incremental.
Indeed, the product division structure remained the dom- inant model for 50 years or more. But as competition in- tensified in the last quarter of the twentieth century, problems with both models became apparent, and com- panies searched for new ways to organize themselves to unlock corporate value.
Many multinationals adopted a matrix arrangement in the belief that they could retain both the economies of scale of centralized functions and the flexibility of their product-line and geographic business units. But matrix organizations were difficult to coordinate. Managers op- erating at a matrix intersection had to juggle the dic- tates of two masters, which led to conflict and delay. The business process reengineering movement of the 1990s
introduced another model, in which the corporation or- ganized around its various processes instead of its tradi- tional functional, product, and geographic boundaries.
But multiple process-focused units still had problems coordinating and aligning their activities; a silo is a silo whether it is a business process, a function, or a product group. More recently, we’ve been hearing about “virtual”
and “networked” organizations operating across tradi- tional boundaries and the “Velcro organization,” a com- pany capable of being pulled apart and reassembled in new ways to respond to changing opportunities.
The continual search for new organizational forms is driven by basic changes in the nature of competition and the economy. First, advantage today is derived less from the management of physical and financial assets and more from how well companies align such intangible as- sets as knowledge workers, R&D, and IT to the demands of their customers. Second, the opportunities and chal-
lenges that globalization affords are forcing companies to revisit many assumptions about the control and manage- ment of both their physical and their intangible assets.
Today’s computer company, for example, can manufac- ture components in China, assemble them in Mexico, ship them to Europe, and service the purchasers from call centers in India. This dispersal creates demands for new structures to align internal and outsourced units around the world.
As companies have struggled with these issues, many have gotten caught up in expensive and frustrating cycles of organizational change. ABB is a classic case: The com- pany went through one reorganization after another fol- lowing its first experiment with the matrix form in the late 1980s. As Pankaj Ghemawat of Harvard Business School describes in his November 2003 HBR article,“The Forgotten Strategy,” this restructuring churn is expen- sive and often creates new organizational problems as
bad as the ones they solve. It takes time for employees to adapt to new structures, and a great deal of tacit knowl- edge – precisely the kind that’s become most valuable – gets lost in the process, as disaffected employees leave. On top of that, companies get saddled with the vestiges of previous organizational decisions, such as obsolete local and regional headquarters and legacy IT infrastructures.
Given the costs and difficulties involved in finding struc- tural ways to unlock value, it’s fair to raise the question:
Is structural change the right tool for the job?
We believe the answer is usually no. The lesson we’ve drawn from our work with hundreds of organizations on strategy maps and balanced scorecards is that companies do not need to find the perfect structure for their strategy.
As we will demonstrate in the following pages, a far more effective approach is to choose an organizational struc- ture that works without major conflicts and then design a customized strategic system to align that structure with the strategy.
We will see how two very different organizations – DuPont Engineering Polymers and the Royal Canadian Mounted Police–took their existing structures as given in the belief that tinkering and realigning authority, respon- sibility, and decision rights would not produce the magic needed to achieve corporate-level synergies. Instead, exec- utives in these two organizations used the tools of the bal- Robert S. Kaplan([email protected]) is the Baker Founda-
tion Professor at Harvard Business School in Boston.David P. Norton([email protected]) is the founder and president of the Balanced Scorecard Collaborative, a Palladium com- pany, in Lincoln, Massachusetts. This article is drawn from their latest book,Alignment, forthcoming from the Harvard Business School Press.
Given the costs and difficulties involved in finding
structural ways to unlock value, it’s fair to raise the question:
Is structural change the right tool for the job?
H o w t o I m p l e m e n t a N ew S t ra t e g y W i t h o u t D i s r u p t i n g Yo u r O rg a n i z a t i o n
anced scorecard strategy management system to guide the decentralized units in their search for local gain even as they identified ways for them to contribute to corpo- ratewide objectives.