Ideas

IDEAS: MANAGEMENT NOTES
Strategic Outcomes

However unique they may be, resources aren't your competitive advantage, says a frontal attack on the classic theory of competitive advantage. The real edge lies in delivering visible outcomes to the customer that your rivals cannot.

No revolution in management theory, be it ever so paradigm-shifting, has managed to change the one fundament al equation of business: Selling Price Minus Costs Equals Profits. At the end of all the intermediary outcomes that companies gun for--customer satisfaction, first-to-market status, marketshare et al--lies that one unalterable truth. And the one that leads from it underlies all strategy too: maximise your selling price, minimise your costs, and you'll be the profit-leader. Basic as it may sound, it is this principle that drives an exciting new way of looking at competitive advantage, a perspective offered by Sayan Chatterjee, an Associate Professor of Management Policy at the Weatherhead School of Management, Case Western Reserve University, US, in an article in the California Management Review.

Only in joining the movement seeking to demolish Michael Porter's theories of generic strategy and value-chain-led differentiation does Chatterjee's hypothesis linking outcomes to competitive advantage have anything in common with most contemporary takes on strategy. His thesis: the competence that enables a company to perform one, or more, activities on the value-chain better than anyone else means nothing to the customer unless it leads to a desired outcome from her point of view. Therefore, merely having access to a unique resource is no source of advantage. Only by leveraging it for a value offering that, crucially, competitors cannot imitate even with other resources will a company extract a competitive advantage. Out the window, accordingly, goes the notion of advantage based on superior resources and processes alone: why should the customer care that your company uses a 24-hour service network to ensure speedy repair when your competitor sells machines that never break down?

Wait a minute. Processes do have a vital role to play in Chatterjee's theory. What they achieve, he contends, are essentially internal outcomes--higher productivity or fewer rejections, for instance--which lower the costs of offering the unique value, or the external outcome that the company is trying to generate for the customer. So, while the external outcome determines how much the company can make the customer pay, the internal outcome determines the cost at which this is delivered. The difference, of course, is the profit. The template for companies that want to use this framework for value follows. First, determine the customer's desired outcomes, and pick one or more that enable it to be unique and inimitable. Then, work backwards to develop the internal outcomes that are essential to the delivery of these external outcomes, and aim for efficiency in them. And, finally, use these choices to pick relevant resources and competencies.

Camouflaged in the common-sense--which also links the goal of business process reengineering with that of strategy--is a major piece of heresy for those who accept the value-chain as the best analytical tool for understanding the activities of a company and seeking a source of competitive advantage. Its smaller component is the contention that Porter's advocacy of either cost or differentiation--but, usually, not both--as a generic strategy is anachronistic. As management gurus from Gary Hamel and C.K. Prahalad to Philip Kotler have pointed out, the future belongs to those companies that can provide highest value at low costs, without attempting to enter into a trade-off. And Chatterjee's principle of the monetary value of external and internal outcomes as the source of profits dovetails neatly into those viewpoints.

More important, however, is his argument that the value which a company seeks to capture resides not in its internal abilities and processes--even after taking into account the famous 5 forces--but in the marketplace, in the customer's perception. Everything else must flow backwards from that. And differentiation is a matter of identifying the outcomes that matter to the customer and making them visible while making those that are irrelevant either invisible or extinct. The proof--and the profits--of the competitiveness pudding is squarely in the eating.

ADDITIONAL READING
Readings

Managing in the Marketspace
Turning Customers into Suppliers

In the real world, companies try to delight the customer by doing more and more for her. In the Net-market, they achieve the same effect by doing less and less. And she loves doing the work instead of having it done for her.

Ernie doesn't take over your office, or talk like a 30-year-old know-it-all, or charge you Rs 10 lakh to tell you that you don't know how to run your business. Ernie isn't a flesh-and-blood, pinstriped and Hush-Puppied consultant at all. (S)he is a few ounces of silicon and millions of bytes of data and the distilled wisdom of the breathing consultants of Ernst & Young (www.ey.com), sleepless in Seattle (or Silicon Valley), resting in a server plugged into the World Wide Web, ready to answer the questions you're firing in electronically about how to save your business.

Ernie's ilk is swamping the Net-turned-marketspace-turned-servicemart. At www. greencompany.com, an on-line service wants tax-payers to enter their earnings and have their taxes calculated on the spot in real time. At www.getaway.com, travellers book their own air-tickets, make their own hotel reservations, and plan out their own itineraries. At www.meta-med.com, sick people can get healthcare solutions.

And, somewhere in the world, management consultants, travel- agents, and clinics are wondering why their business is dropping. Lest you wonder, these are leading-edge practitioners of e-industries that are expected to rake in major revenues soon. According to projections made by Forrester Research (www.forrester.com), travel deals done over the Net will take in revenues of $7.40 billion in 2001; services like those provided by doctors, lawyers, and accountants, $19 billion; and books, music, and entertainment, $3.80 billion. Just what makes them so hot?

To understand that, e-ntrepreneurs must realise that the real value that the e-businesses offering these browse-and-buy services is neither the elimination of the bad-tempered intermediary, nor the facility of being able to do business any time of the day or night. It is, actually, the power of self-service--of being able to explore all the options oneself before making a final purchase decision. The one all-important dimension that the marketspace enables any business to hold out before its customers is that of choice--because the networked nature of this mall allows the vendor to put on sale not just his own products and services, but also that of others.

At a simple level, that's just what one search-engine, like AltaVista, does when it offers to run a search for the customer's keywords on one of the competing products, like Lycos. As a business strategy, however, self-service and the resultant multiplicity of choice is becoming a major differentiator between businesses on the Net. Conceptually, it can be explained thus: for the retailing of your products to be a source of unique value to the customer, it must be truly innovative and inimitable.

But in turning over control of the retailing process to the customer, you can ensure that each member of her genre derives value from it in the way that's best for her. Thus, what Amazon. com does, for instance, is to put 3 million book titles on its virtual shelves--and offers powerful devices for the customer to browse those shelves in any way she wants to. The one who likes to go alphabetically can do so. The one who prefers a subject-wise search can do it her way. So can the one who wants to look at every bestseller under the sun today.

The template for a successful e-business that's emerging is, therefore, one that allows the customer to do as much as possible. Interactivity is too mundane a word for a service like that of, say, VirtualFlowers (www.virtual flowers.com), where customers can design their own bouquets--a task that would normally have been left to the shop-assistant in the real world--for sending, either in the form of real or digitised flowers, to the recipient, and actually derive pleasure from having the power to do so. In other words, what e-companies are doing is to outsource their operations from the customer--and being paid a premium for it! On the steel-and-girders shopfloor of the material world, you probably cannot ask your customer to man an assembly-line to get just the shade she wants on her car. In the marketspace, you can get her to do an equivalent job herself, make her feel happy--and beat your rivals to her shortlist of preferred shops. Reason enough for e-lation.

ADDITIONAL READING
Readings

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