Strategic values: the corporate performance engine

Business Horizons, Sept-Oct, 1996 by Richard L. Osborne

In the drive to achieve a competitive edge, much is being made of the central role of core cultural values in shaping organizational attitudes and employee behavior. "Integrity," "customer service," "excellence," and similar values have become the cliches of annual reports to shareholders around the world. Similarly, vision statements are being heralded as the pivotal element in strategic direction--the starting point for all strategic thinking.

I contend that core cultural values are largely a waste of time unless they are anchored in underlying strategic values--the fundamental business concepts that cause customers to prefer a firm's products or services to those of its competitors. My experience suggests that strategic values are what drive success in the marketplace, whether in a startup company or an existing firm, and thus should be the starting point for strategic thinking. Cultural values should enhance and extend a firm's strategic values rather than, as increasingly occurs, serve as an independent expression of corporate beliefs. And a firm's vision should be a synthesis of both.

THE ROLE OF STRATEGIC VALUES

Strategic values provide the very basic rationale for the viability of a business. They focus organizational energies and link the firm to its environment.

Focus Organizational Energies

Because strategic values describe what a business does to win in the marketplace and why, they enable an organization to focus on what is important to success and determine what is irrelevant or counterproductive. General Electric's Jack Welch transformed his company from a sluggish, underperforming giant wandering through hundreds of markets into a dynamic powerhouse. He provided a much-needed focus by deciding that GE would retain or create only businesses that could be number one or two in their targeted marketplaces. This domination principle (or strategic value) became the basis for streamlining GE into just 14 businesses, each with huge power to influence, and sometimes control, marketplace forces toward increased competitiveness.

Other corporate leaders, having less diversity to contend with, frame their strategic values to focus on creating the firm's competitive edge. Microsoft's founder Bill Gates built his software colossus on the precept that designing his products into the emerging products of customers, notably IBM, would erect fortress-like barriers to competitor response.

McDonald's is another example. Even though their food was, in the opinion of many, marginally palatable and demonstrably lacking in nutrition, McDonalds' unrelenting consistency of outstanding service, cleanliness, convenience, and dependability was the driver of legendary acceptance in the marketplace.

Michael Dell, the entrepreneur of Dell Computer, created a $1.7 billion business in just ten years with a paradigm-shattering strategic value. He believed and demonstrated that consumers would purchase personal computers through a catalogue, sight unseen, and teach themselves to use them if the price was sufficiently lower than competitors. Though this may seem less daring today, the concept was outrageous to Dell's competitors at the time, who were convinced that the personal computer's complexity required face-to-face demonstration to be sold.

Link Company To Environment

Strategic values are a mechanism for aligning a firm's products, services, distribution method, and/or marketplace structure with opportunities created by unmet needs. As we have seen, strategic values are inspired by those needs and by changes in the environment that surrounds the firm. Values (or beliefs) that drive successful strategy are fueled by change. They are developed by conceptualizing and reconceptualizing the linkages between the company and its environment-customers, competitors, technology, demographic patterns, social trends, government policy. Surging technology, advanced communication and information systems, and the rapid internationalization of economies everywhere are incubators of potential strategic values.

Change threatens internally focused strategies that fail to comprehend the lurking incompatibility of the firm's concept of doing business with what is happening in its environment. The experience of a regional drug store chain illustrates the reality of this threat. The 30-unit chain was built on the deeply held belief of its entrepreneurs that drug stores succeed with uncompromising customer service and friendliness, along with fair pricing of medicine and the traditional mix of health and beauty products. This customer-driven strategic value impelled the chain to 20 years of growth and profits--a decisive competitive edge.

But then the world changed. Pressure to control spiraling medical costs led those who pay for most prescription medicine (insurance companies, government agencies, and so on) to negotiate exclusive price controlling contracts with national drug store chains. Insureds were increasingly directed to fill their prescriptions with contracted medicine retailers, or pay for them themselves. National chains led the way in signing third-party payer contracts. The regional chain held back, choosing instead to intensify efforts to retain customers through superior service.