Four Propositions to align your strategy

In June 01 1999 Napster launched the peer-to-peer file sharing. People around the world began to share their music. At their height in February 2001 they had over 25 million users across the globe. Soon after this they were shut down by a court order from the music industry. In January 09 2001 Apple announced their online music store iTunes. iTunes allowed users to buy and download songs. There were 200,000 tracks available at launch. In the first week, customers bought more than one million songs. In 2014 iTunes had 800 million accounts. In 2019 Apple announced a change in their music downloading strategy.

But how can we account for the different fortunes of iTunes the follower and Napster, the first mover?

Frances X Frei published an article in the Harvard Business Review in April 2008 about ‘Four Things’ a service business must get right. These four “things” align with the three propositions required for success described by Kim and Mauborgne in the 2015 edition of their Blue Ocean Strategy. In this note we describe how we use these insights in our consulting in StrategyWorks.

For a successful strategy your operation must work. How you deal with suppliers, how you create and distribute your offer and how you manage risk. All these things must work.
According to these authors there also four propositions to be defined, implemented and aligned if your strategy is going have sustainable impact. These propositions are:

Customer Value Proposition: The products and experience you offer your customers.
Profit Proposition: The funding mechanism driving revenue growth within reasonable cost.
People Proposition: How you engage your customers in creating value in your offer.
Employee Proposition: How you empower internal motivation amongst your employees.

It is the strategic task of the top executives in an organisation to design, implement and coordinate these propositions

Customer Value Proposition

Your service offering. This is the heart of strategy.

Your task here is to determine how customers define “excellence”. What is important to them? Convenience? Friendliness? Flexible choices? Price? Your role in strategy is to identify what you’ll do to deliver the type of excellence required by your customers, and what you won’t do.
What you offer to your clients requires careful design. What attributes of your product do your customers value, or what experience do you want to design into your service? It is a really good idea to compare your offer with your competitors. This is why we use a Strategy Canvas to illustrate the offer of our clients at StrategyWorks. Strategy Canvas is a great tool to allow you to decide on the attributes of competition in which you want to meet your competitors, where you want to do better than them and where you choose not to compete at all. In other words what are your trade-offs? Where are you prepared to do poorly in order to be better in other attributes? In which attributes are you willing to perform poorly because they are less important to your customer? Strategy Canvas also allows you to evaluate the congruence in your offer.

With Strategy Canvas you will be able to answer the following questions:

Which service attributes (convenience? friendliness?) do we target for excellence?
Which ones do we compromise in order to achieve excellence in other areas?
How do the attributes of the service match up with targeted customers’ priorities?

In addition to this, if you get the offer right you will attract the clients you want and de-select those with whom you choose not to do business. And to do this correctly it is also useful to define the customer segments in your industry as well as the needs of each segment.

Profit proposition

What is the funding mechanism driving revenue growth within reasonable cost? This proposition addresses the following questions:

Are customers paying as palatably as possible?
Can operational benefits be reaped from service features?
Are there longer-term benefits to current service features?
Are customers happily choosing to perform work (without the lure of a discount) or just trying to avoid more miserable alternatives?

Think about how you’ll pay for the increased cost of the excellence you’re seeking to provide through your service offering. Customers are usually happy to pay for excellence in products though marketing and scarcity do affect price. However with services it may be more complicated to extract price for excellence. And it becomes possible to give away value to someone who does not buy the service (a shopper may use the time of a sales person and still leave empty handed).

Possibilities include:

Find a palatable way to charge the customer. Starbucks customers value lingering in the company’s coffee-house setting. To fund this inviting atmosphere, Starbucks charges a premium for its coffee.
Find a way to reduce the cost of business while at the same time offering value to your clients. When clients of Progressive Insurance are involved in a vehicle accident the company sends out a van to assist the client. The drivers are often paramedics and often arrive on the scene before other support services. They assist the client and provide an immediate assessment of the damage. The clients like the responsiveness and the ability to speedily submit claims. The insurer covers the cost of this service through the reduction of fraudulent claims and the legal fees associated with disputed claims. Progressive are so confident in their ability to choose the right clients that they offer clients comparative quotes from other companies with their client proposals. The Progressive quote is the lowest quote only about half the time. However Progressive believes that their quote is the right one given the probability of that person’s getting into an accident – a probability they are best in class at determining. If indeed its quote is spot-on, then allowing a competitor to insure the customer at a lower rate is doubly effective: It frees Progressive from a money-losing proposition while burdening its competitor with the unprofitable account. Therefore what seems altruistic to the customer actually benefits the company. This is an example of leveraging operations into a value-added service.
Spending now to save later. Intuit offers customer support service free of charge. The company uses callers’ input to improve future versions of its software, so customers will ultimately need less support.
Having customers do the work. Airlines’ self-check-in kiosks not only reduce costs; they also enhance the service offering by liberating travellers from long lines at staffed counters and by providing convenient tools such as seat maps.

Employee Proposition

How you empower internal motivation amongst your employees.

Companies depend on the quality of their workforce, but because service businesses are typically people intensive, a relative advantage in employee management has considerable impact. Top management must give careful attention to recruiting and selection processes, training, job design, performance management, and other components that make up the employee management system. The decisions made in these areas should reflect the service attributes the company aims to be known for. Here are three diagnostic questions though which to review your employee proposition:

What makes employees reasonably able to produce excellence?
What makes them reasonably motivated to produce excellence?
Have jobs been designed realistically, given employee selection, training, and motivation challenges?

Ensure that your workforce management activities (recruiting, selection, training, job design) empower employees to deliver the excellence embodied in your service offerings.

Commerce Bank competes on extended hours and friendly service, not on low price or product variety. It knows it doesn’t need straight-A students to master its limited product set, so it hires for attitude and trains for service. For instance, it uses simple recruiting criteria, such as “Does this person smile in a resting state?” And it encourages employees to recruit people they see providing great customer service in other industries.

The Customer Proposition

How you engage your customers in your creating value in your offer.

Customers themselves can be involved in operational processes, sometimes to a very large extent, and their input influences their experiences (and often other customers’ too). For example, an architectural firm’s client may explain the purpose of a new facility well or poorly, and that will affect the efficiency of the design process and the quality of the end product. A customer who dithers at a fast-food counter makes the service less fast for everyone behind him.

Customer involvement in operations has profound implications for management because it alters the traditional role of the business in value creation. The classic product-based business buys materials and adds value to them in some way. The enhanced value product is then delivered to customers, who pay to receive it. In a service business, however, employees and customers are both part of the value-creation process. A main benefit is that customer labour can be far less expensive than employee labour. It can also lead to better service experiences.

Customer selection and training become significant issues to consider.

Service designs may call for customers to perform important tasks, but for the most part customers have no interview, no background check, and no personality profile.

In addition, despite many organisations’ best efforts, customers are not as easy to train as employees. There are usually many times more customers than employees, and creating effective training materials for such a large, dispersed, unpaid, and often irrelevantly skilled workforce is difficult. When this holds true, firms must accommodate the limited training in the design of the service experience. If tasks are shifted from employees to customers – from higher-skilled to lower-skilled people – then they must be adjusted accordingly. Airlines seem to get this right. Recall (if you can) the last time you checked in with an agent at the full-service counter. Chances are you witnessed the agent complete a dizzying sequence of keystrokes. It would not seem reasonable to expect customers to perform these same steps, and so when the check-in role was transferred to customers, it was dramatically simplified.

Which customers are you incorporating into your operations?
What is their job design?
What have you done to ensure they have the skills to do the job?
What have you done to ensure they want to do the job?
How will you manage any gaps in their performance?

Articulate which behaviours customers must demonstrate to get the most value from your service. Then design your service specifically to foster those behaviours.

Example: To get customers using the new self-check-in kiosks, airlines ensured that travellers could complete the transactions with far fewer keystrokes than check-in personnel used to need. By contrast, retail stores that offer self-service checkout machines haven’t made using those machines easy for shoppers. Moreover, the stores expect shoppers to shoulder responsibility for fraud prevention by weighing bags during checkout. Result? Anxious customers avoid the machines.

The Whole Service Model

The authors all stress the importance of designing propositions that are aligned throughout your business. In a service-focussed business you may wish to consider the following questions:

Are the decisions you make in one dimension supported by those you’ve made in the others?
Does the service model create long-term value for customers, employees, and shareholders?
How well do extensions to your core business fit with your existing service model?
Are you trying to be all things to all people – or specific things to specific people?

Successful service companies have a working plan that incorporates all four elements of service design. Within each of those areas, however, it is hard to spot any best practice. This is because the whole business depends more on the interconnection of the four than on any one element.

Here are two examples of integrated offers:

The first is the Cleveland Clinic, which is consistently ranked among America’s most eminent hospitals and has been a leader in pioneering cardiac care for decades.

The clinic is organised into disease centres rather than in traditional lines of specialisation. And it attracts the highest-severity patients. The doctors therefore face challenges requiring innovative solutions. And because they do not attach financial rewards to doctors’ productivity doctors spend time on innovation, enhanced by close work with specialists from other fields.

The choices made of methods, processes, and personnel complement one another and come together in a smoothly operating system.
Contrast this with Shouldice Hospital, a Canadian specialist in hernia operations. They are therefore highly selective about its customer base. They serve only patients experiencing a certain type of ailment and they have the luxury of operating on otherwise healthy people. It has skimmed the cream of the market.

At StrategyWorks we prime client teams to deliver by working with them to document their key areas of performance in a Strategy Map format. We also work with teams to document their business model by plotting plot choices and outcomes.

Four Things Strategy Map

Figure 1: Strategy Map showing the four key propositions

We also encourage our clients to build a business model to illustrate the congruence and alignment in the choices they make about their business. We like to use the modelling process described by Casadesus-Masanell and Ricart in the January 2011 edition of Harvard Business Review.