Operational Excellence: value strategy according to Treacy/Wiersema

This concept is based on the essential premise that not all customers require the same offer. From a customer perspective there are therefore three fundamental manifestations of value expectations. There are customers who base their purchase decision primarily on the best value over the entire operating life, on the best innovative product, or on the best total solution for their individual problems.

Treacy/Wiersema recommend offering each of these customer groups a value proposition aligned with its specific expectations and serving each segment with the appropriate value strategy. Three value strategies are derived from these three different value expectations: Operational Excellence, Product Leadership and Customer Intimacy.

One key message of Treacy/Wiersema is that a company cannot be the best in the market in all three areas. It must opt for one of these three positioning possibilities and strive to become or remain one of the best providers in the market in the chosen value strategy in order to achieve a strong and sustainable competitive position. If a company tries to meet all three value expectations, there are, according to Treacy/Wiersema, always providers in the market who gain crucial competitive advantages by focusing on one specific customer group and the related value expectation. This implies a potential adjustment of the existing customer portfolio.

Another essential key message is that a company does need to strive to be the best in one strategy but should not neglect the other value expectations. According to Treacy/Wiersema, a company needs to fulfil the minimum expectations of its customers in the other two value dimensions, which means offering a so-called threshold benefit. In practice, identifying this threshold benefit is a crucial challenge, as it should be neither too low nor too high.

The value proposition to the target customers under this basic strategy is “best total cost of ownership over the entire life cycle”. It means offering a combination of performance features that leads to the best costs for the customer over the entire life cycle, i.e. from purchase to disposal or to the end of use. The customer benefit is a carefully balanced price-performance ratio over the entire life cycle of the services offered.

Reliability, manageability and durability of the product therefore play a major role, reducing the buyer’s future follow-up costs and increasing the perceived benefit. Key features of the value proposition are consistently high quality, an excellent but not comprehensive product selection, and easy and fast sourcing.

The best total cost of ownership over the life cycle is not always the same as the lowest purchase price. It includes all costs incurred by the purchaser through the purchase and use of the product or service, e.g. purchase price, waiting times, inconvenience caused by premature repairs, maintenance costs over the service life and disposal costs. This requires a twofold observation grid: on the one hand from the customer’s perspective with a view to the best total cost, and on the other hand from the internal perspective with a view to the standardisability of the company’s own core processes.

The consistent choice of, and alignment to, one business strategy (value strategy) has crucial implications for the organisation. Each value strategy focuses on different core processes and core competencies within the company’s activities. The selected value strategy also provides essential decision premises for the operational business, for instance for the design of the core processes of production and logistics, customer management and innovation, as well as HR and IT management. If the strategy is not clear here, this leads to considerable frictional losses in the organisation, as contradictions have to be managed constantly and tie up enormous energy. In this case, competitiveness is weakened.

What are the characteristics of a company aligned with Operational Excellence, and what are the implications for the organisation? Operational Excellence describes a strategic positioning that requires products and services to be generated through highly standardised processes. According to Treacy/Wiersema, the following characteristics are significant for the consistent implementation of the Operational Excellence strategy.

Product delivery and basic service processes are constantly optimised and rationalised, costs are kept as low as possible, and customers are served as simply as possible. Management systems focus on integrated, reliable, fast transactions and on compliance with set performance standards. The company culture is designed to detest waste and to reward efficiency. “Variety kills efficiency” is a key attitude here: management does not accept uncontrolled growth of products and services.

The majority of employees do not have a high degree of decision-making authority, as all important processes are standardised. Cost sensitivity is expected from everybody. Free spirits are not widely required here. What is needed are employees who adhere to the principles of this business model.

The latest measuring and monitoring procedures provide real-time data on quality, cost and compliance with the promised service. Management can use them to identify hourly or daily if something is getting out of hand and to operate highly efficient deviation management. Success is ensured through consistent utilisation and, if applicable, adjustment of existing capacities and through a permanent search for ways to utilise the available infrastructure.

The motto for service is also: do things right the first time, and do them the way the standard calls for. The operationally excellent company has the courage not to do everything the customer’s way.

The strategy of Operational Excellence is often confused with the well-known concept of operative excellence, which strives for effectiveness and efficiency through process management. This is an internal view, pursuing the goal of constantly reducing the internal costs of creating added value while maintaining the set quality level in order to increase competitiveness.

Instead of focusing everything on lowering its own (production) costs, a company pursuing the strategy of Operational Excellence tries to minimise the total costs incurred by the product throughout the customer’s entire value creation process. In contrast to operative excellence, the focus is not on the company’s own costs but on the costs incurred by the customer.

However, this cost concept is understood to mean not only the price of a product but also all other costs incurred by the customer over the entire product life cycle (opportunity costs, maintenance costs, etc.). This means that the entire price-performance ratio is taken into account.

Operational Excellence is therefore one of three basic strategies in this model, while operative excellence, the pursuit of cost efficiency, must be pursued in all three strategies. No matter which business strategy a company pursues, nowadays no one can afford not to take a critical look at their own processes and costs. The two terms therefore refer to very different levels.

In addition to the distinction between Operational Excellence and operative excellence, it is important for understanding to distinguish the value strategy of Operational Excellence from Porter’s competitive strategy of cost leadership.

The cost leader according to Porter has the potential to undercut any competitor in the industry on price, if necessary, while still generating adequate margins. In this sense, only one company in an industry can occupy the position of cost leader. Any company that relies on the strategy of cost leadership must therefore consider very carefully whether it makes strategic sense to back such a position in view of the existing competitive constellation. The risk of constant price wars increases. The cost leader is required to consistently refrain from other competitive dimensions (e.g. additional service offerings). Cost leadership only makes sense if the products and services are absolute commodities.

According to Treacy/Wiersema, on the other hand, several companies can successfully pursue the strategy of Operational Excellence, because it allows a company not to have to surrender to every price war by combining cost-optimised differentiation features. The special customer benefit justifies upward differences in pricing compared to the cost leader, who would destroy its business model with higher prices. The value strategy of Operational Excellence aims to achieve the best price-performance ratio. The aim is the best total cost, thus avoiding a price war over the lowest purchase price. A cost leader in Porter’s sense, on the other hand, focuses on the best costs and prices per unit at the time of closing the deal.

The cost leader strategy focuses primarily on the competitor in order to define the competitive difference in the form of lower costs. The cost leader’s motto is: if necessary, we will lead the price war, because we know we will win it. The operationally excellent company, by contrast, focuses primarily on optimising customer benefits within the business policy framework of an industry.

A value proposition is a combination of value criteria that serves to shape the respective value strategy. A value criterion is therefore a part of the value proposition that influences the purchase decision from the customer’s point of view (external view). Each customer segment that a company wants to serve must be offered a value proposition that is unique compared to the competition, i.e. also compared to competitors with the same value strategy.

Robert S. Kaplan and David P. Norton break down the value proposition into the categories “product and service attributes” (with the value criteria functionality, selection, time, quality and price), “customer relationship” (with the value criteria service and relationship) and “image” (with the value criterion brand). According to Kaplan/Norton, these eight value criteria comprehensively cover all aspects of a value contribution that are relevant for the customer.

As a shared understanding of the value criteria is essential for defining value contributions, they are briefly defined below.

Functionality refers to the specific characteristics of the products or services defined under selection as well as to the associated application and usage options. User-friendliness and ease of processing, the use of new or additional functions, and the compatibility of products and/or their functions also have an impact on functionality.

Selection refers to the width and depth of a product or service range (product variety), in particular the spectrum of product variants, alternatives, combinations, gradations, etc. offered.

Time in this context refers to the time the customer needs to purchase the product or use the service, as well as the time for all product-related services (e.g. maintenance, repair, disposal). The focus is on all time spans that are relevant for the customer in the context of the purchase transaction (time to price statement, time to quotation, time to delivery date, etc.), the delivery (time from order to delivery, etc.) and the service life of the product.

Quality is the degree to which a product or service meets the customer’s requirements and benefit expectations without impairment (e.g. downtime, limitations in functionality, rapid wear, error rate, unpunctuality, unreliability, unfriendliness, insensitivity).

Price in this context is the purchase price of the product or service.

Service is used here to refer to both the scope and the degree of added value of product-related services. The extent to which the services are offered over the entire product life cycle also plays a role. This can be the special service of customised tailoring of products and services as well as the tailoring of the accompanying services themselves.

Relationship is about the intensity of the relationship between the company and its customer. This can be reflected in its duration, the degree of familiarity and the integration of the company into the customer organisation.

Brand refers to the brand name of the product, the service or the company itself and what the customer associates with this brand. In addition, the degree to which the brand influences the customer’s purchase decision plays a role.

All expenses that are necessary to offer a certain functionality or selection are not a service in this model. An example illustrates this: if a chemical company as supplier agrees to fulfil a car manufacturer’s request for a certain shade of grey that is not currently in the product range, this affects selection, namely the fineness of the gradations between two colour shades. The more gradations are offered, the greater the selection. The effort required for this does not fall under the value criterion of service in the strategy of Operational Excellence.

It must therefore always be checked whether the value propositions for functionality and selection can be realised in line with the generic strategy or whether the resulting effort contradicts it (the question for Operational Excellence: can a very fine degree of gradation be standardised at all?).

Services are therefore always product-accompanying services that come in addition to functionality and selection. In other words, they are services that the customer can make use of before, during and after the purchase decision and that have nothing to do with ensuring the functionality or selection of the products or services sold.

When is a service classified under selection?

A service is always classified under selection, i.e. in the area of product and service attributes, if it is “sold” as a service and can be billed separately. A service is always a separate service if it does not result in any changes being made to the products sold.

For example, a maintenance contract for elevators is a product that can be processed and sold in a standardised manner. The purpose of the maintenance contract is not to change the properties of the elevator but to ensure that the elevator continues to function properly. Theoretically, such a maintenance contract can also be sold without selling an elevator, for example if an elevator already exists and the customer is looking for someone to service it on a regular basis. This service is therefore independent of the other products in the portfolio; there is no interdependency.

When is a service classified under service?

A service is to be classified under service if work is carried out specifically for the customer on the product sold; this type of service is therefore product-accompanying. As soon as the service has an impact on the product and service attributes because these are customised, adapted, modified or developed further, it belongs in the area of the customer relationship. If a customer segment demands such a service, with an emphasis on tailoring, this is usually an indicator that the segment should be served with the basic strategy of Customer Intimacy, where it is also possible and required to differentiate through service.

These product-accompanying services are usually included in the purchase price of the respective product, whereby the product may become more expensive due to the additional services, or cannot be produced without additional effort. The main indicator for classifying a service under service is the fact that it accompanies the product: the product cannot be sold without the service and the service cannot be sold without the product. This type of service is included in the price and is part of the product.

At the level of Operational Excellence, these services also include other product-related services such as ordering and change options (online, by telephone, in writing), the standard product advice required to use the product in the first place, or similar. When pursuing the strategy of Operational Excellence, a threshold benefit must be determined for this type of service (cf. Peterhänsel/Sedlák 2019, p. 8 f.).

Combining the Treacy/Wiersema concept with the Kaplan/Norton definition of the value contribution produces a distinct picture for each of the three value strategies of the value criteria in which differentiation takes place and those in which a threshold benefit is sufficient.

In all value strategies, the value contributions in all value criteria must meet a certain threshold benefit (basic criteria), derived from the minimum requirements of the respective customer segment. A threshold benefit is always the minimum value the customer expects. If the value falls below a threshold benefit, the customer will no longer consider buying the product or using the service.

In addition, a company can differentiate itself by means of certain value criteria and thus shape its value contribution individually. However, these differentiation criteria differ between the three value strategies. A value contribution is therefore made up of a combination of basic criteria, for which the threshold benefit is offered, and differentiation criteria, for which individual differentiation is possible.

The threshold benefit can vary in intensity, depending on the minimum requirements customary in the industry. Threshold benefit in this concept also means that the purchase decision is not made on the basis of the value criteria concerned. The customer takes the benefit associated with the threshold benefit for granted; consequently, a company cannot differentiate itself from the competition on this basis. As explained above, it is important to set the threshold benefit neither too high nor too low.

The following example comes from an international project with a business unit of a chemical company that is aligning itself with Operational Excellence. In two workshops, the unit’s leadership team dealt intensively with the question of how the eight value criteria could be defined for the business unit. The summarised results are presented below.

Functionality

We will offer a “one size fits most” product specification and establish a tight target for product specifications in terms of the width and number of specification limits. We will define the widest possible specification limits in order to cover as many customer requirements as possible with a limited number of products. We will actively eliminate old-generation products. We will no longer accept customer-specific product specifications, or lot selection and production plant selection by the customer.

Selection

We will offer our customers an attractive portfolio based on a limited number of standard products covering high-volume markets. We will offer only a defined range of standard products for our core product lines. We will reduce the number of grades offered, which will reduce portfolio complexity.

We actively manage our product portfolio: product development is based on market trends, products must meet a minimum volume criterion and be economically viable (only with a business case and volume potential), and products are listed and delisted according to rules. We drive the consolidation of all products (e.g. by harmonising specifications) and will actively pursue opportunities to simplify our portfolio via co-producer and swap arrangements. We will harmonise and consolidate slight differences from site to site (including improved transparency).

We will differentiate through a “standardised” front-end differentiation (by colour, additives and possibly service). We will not accept (high-margin) niche products. We will offer a differentiation perceived by the customer for our main product groups, based on a standard toolbox. This standard toolbox will be based on standardised internal processes.

Time

We will offer competitive timing and ensure that we always meet our commitments. We respond to customer requests within defined time frames. We are reliable towards confirmed commitments (delivery, price, requests, claims, technical requests) through improved forecasting, disciplined production planning, streamlined processes, greater consistency in lead-time performance and high asset reliability. We will adopt a right-first-time philosophy.

We will not allow exceptions to standard procedures, e.g. short-term order changes in defined time zones (frozen zone for make-to-forecast, purchase of raw materials for make-to-order), changes of priorities that disturb overall operational harmony, and development requests with a payback time of more than two years (from start of sales) and below-target margins (exception: key growth projects).

Quality (meaning product and service quality)

We will offer “only” the global industry standard with the highest consistency, independent of source (driving standard processes and best practices). We pro-actively evaluate future market needs regarding quality and implement according to market needs, not in advance. We will offer consistent quality (lot to lot) and a quality level independent of location or region.

We will follow market trends and invest in quality only for key growth projects. We will achieve the global industry standard in quality through selective asset investment, sophisticated process control and proactive, market-driven benchmarking. We will not supply beyond our own capabilities or adjust quality for a single customer, even if the customer wants to pay for it or threatens to stop doing business with us. We will not use an increasing quality level as a competitive advantage.

Price

We will offer competitive pricing linked to the industry standard, with a limited price catalogue for services as a baseline for all customers. We will constantly challenge our price and service packages. We will increase our capability to understand the individual supply and demand situation and maximise margins in line with the market situation.

We will adjust prices at short notice according to the market situation, e.g. very quickly (monthly) in short markets, and not accept long-term fixed prices. We will reduce output in long markets to stabilise pricing. We will not accept special price clauses such as most-favoured-nation clauses, nor business below defined limits, nor services outside our offer catalogue.

Service (delivery service and technical service)

For simplicity, we distinguish between delivery service and technical service. We will offer a “perceived differentiation” at the customer based on a standard toolbox that rests on standardised internal processes (front-end differentiation).

For delivery service, we will offer a standard set based on the lowest possible cost, high reliability and appropriate availability, independent of location, with disciplined automated processes and fewer, minimised interfaces. The standard set comprises minimum order quantity, payment terms, packaging forms, lead time, on time in full (OTIF), order entry system, order changes up to x days before delivery (frozen zones), Incoterms, etc. We will introduce a uniform standard for confirming delivery dates. We will process justified complaints efficiently and effectively for customers and the company (eliminating re-occurrence). We will offer service on an exception basis to a limited number of customers on the “exception” list (high volume, high margin, strategic value, approved by the business unit’s leadership team).

For technical service, we will offer a basic set of standardised technical service offerings: complaint management, product recommendation (customer advisory) and technical information (technical sales tools). We will focus on new priorities and provide technical service for our key growth projects. All other technical services will only be provided according to a tailored services model and above a minimum threshold, e.g. colour matching, product development, application development, mould-flow analysis, part and mould design, and processing technology development. The same standardised process discipline applies to all services. We will get away from the “can do it all” mentality.

Relationship

We establish professional and reliable contact with customers via multiple efficient, structured and rule-based communication lines according to industry practice (from the internet to personal visits to key account management). We will diligently steer our resources in terms of responsibility (e.g. clearly defined key accounts), frequency and content of customer contacts. We will also clearly define the channels to market for non-key accounts. We do not allow anyone to contact a customer without a clear target and preparation (preparation and visit report to be documented in the CRM tool).

Image

We will be recognised by the customer as the supplier with the best available price-performance ratio for its product and service package. We will be recognised as a supplier that is global, reliable, knowledgeable and innovative in specific areas, based on standardised product and service offerings with front-end differentiation capability. We will be recognised as the solution development partner of choice for selected megatrend projects contributing to the welfare and sustainability of society: weight reduction and mass transportation (including automotive glazing) and electronic applications, energy conservation in lighting and solar applications, and safety and protection in architectural glazing.

We will not be recognised as the problem solver for everything, no longer as the broad innovator of the entire industry, and not as poor value (a high-price supplier).

Companies pursuing the strategy of Operational Excellence have the opportunity to differentiate themselves on the basis of the criteria of price, quality, time, selection and functionality, i.e. more than just the threshold benefit can be offered in these criteria as long as the value strategy of Operational Excellence is not impaired by this. Another criterion that can be used for differentiation beyond product and service attributes is the brand.

It should be noted, however, that a company cannot achieve the highest performance in all possible differentiation criteria. It can and must consciously decide which criterion is to be used for differentiation and to what extent. These decisions should be based on the needs and wants of the particular customer segment.

It is also important to understand that differentiation from the competition cannot be steered by looking at individual value criteria in isolation. The uniqueness of the value contribution results from the combination of different degrees of the differentiation criteria and compliance with the threshold benefits. In the real-life example, this led to a value contribution that differentiates mainly through brand and price, goes moderately beyond the threshold benefit in selection and time, and offers the threshold benefit in quality, service and relationship.

The following overviews summarise the key aspects of the three generic strategies based on Kaplan/Norton (2004) and Treacy/Wiersema (1996). They follow the logic of a strategy map: the quantitative strategic goals to be achieved with the strategic positioning lead to the value proposition from the customer perspective, the core process and the “enablers” staff, organisation, IT and culture.

For Operational Excellence, the value proposition is “best total cost (over the life cycle)”, with favourable price, high availability, consistent quality and appropriate selection; the core process is production and logistics. For Product Leadership, it is “best product (that exceeds existing performance limits)”; the core process is innovation and marketing. For Customer Intimacy, it is “best individual complete solution”; the core process is customer relationship management.

Kaplan, Robert S.; Norton, David P. (2001): Die strategiefokussierte Organisation – Führen mit der Balanced Scorecard, Stuttgart.

Kaplan, Robert S.; Norton, David P. (2004): Strategy Maps – Der Weg von immateriellen Werten zum materiellen Erfolg, Stuttgart.

Peterhänsel, Markus; Sedlák, Robert A. (2019): Innovative Kundensegmentierung und Value Proposition, Ahrensburg.

Treacy, Michael; Wiersema, Fred (1996): The Discipline of Market Leaders, New York.