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Michael Treacy's Michael Treacy is a Masters Forum legend. He occupies the topmost rung of speakers who have appeared more than once, presented ironclad paradigms, and done so in impeccable style. [Readers unfamiliar with Treacy's core teachings might want to start with the essay on his first Masters Forum appearance (April 11, 1995).] He is best known for his value leadership paradigm: three ways for a company to be great (operational excellence, product leadership, and customer intimacy), that are in exquisite tension with one another. You cannot be great in more than two, the theory goes, so choose one to be terrific at, and settle for being "good enough" with the other two. It's an elegant concept, and managers have embraced it, making his (and Fred Weirsema's) book The Discpline of Value Leaders a monster business best-seller. So it was a little odd to hear Treacy October 27 say that he was reappraising this famous paradigm. But read on, and you will appreciate Michael Treacy's misgivings.
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"My thinking has changed dramatically in the last year and a half," Treacy began.
There seemed to him to be something askew with his famous value discipline concept, and it had to do with his own intellectual journey. He began professional life as a proponent of technology-driven strategy, back in the 1980s. Computers were going to change everything, he believed. When they didn't change nearly enough, at least right away, he soured on the technology revolution, and re-focused on the marketing-driven strategic notions outlined in his book The Discipline of Market Leaders. But now he thinks he's come full circle. It seems to him that a revolution has indeed occurred, that the 20-year period we are in the middle of right now will be seen by history as a time of upheaval and reformation -- in part because of the kinds of ideas he has propounded, but also because technology has finally kicked in as a transformational factor. "I gave up on technology just as it was ripening," he said. And it has ripened into something magical, outstripping the most astute crystal-ballers of ten years ago. So his revamped theory goes back and picks up where he quit, and combines the revolution in business theory with the revolution in information technology. D Something weird is happening, he said. New companies like Wayne Huizenga's car company are coming into existence and achieving $60 billion in sales in a few short years. Good ideas are attracting capital and good people at a frightening pace. And the old ways are lying down in the street to die. The old customer, from the days of June, Wally, and the Beaver, is gone. Industries selling a single product in a single way -- cereal in boxes to grocery stories, for instance -- suddenly resemble the buggy whip industry.
What's happening is that we're maturing from an irrational, inefficient market to a rational, efficient one. It means saying goodbye to a sloppy seller's market where competitors are no big whoop, where good enough is good enough, and you make money by cultivating those customers too dumb to know they can get a better deal somewhere else. It means saying hello to an unforgiving market where competitors spring out of nowhere and steal your lunch from off your plate, where only the best value sells, and everyone knows what the best value is. That's a tough market to make money in. D What can you do?
Reasserting value leadership means going back to basics and being the best at what you already are, growing by better serving that core market. Beyond that, a business can grow by redefining the business it does, so that it is selling to related markets. Beyond that, a business can grow by making a value shift -- addressing new, hitherto unserved markets. Here is Treacy's matrix for creating growth opportunities:
Treacy described how each shape on the grid represents a different kind of play: The re-energize the core square is where you get better at doing the same thing. You have to do this as a minimum in the new economy. It's things like quality and cost competitiveness -- "table stakes." This is the zone of head-to-head competition. To win, you have to do the same thing someone else is doing, better than them. The adjacencies shape goes at least one step beyond table stakes. It may mean opening related markets or improving processes to next generation levels. This is the zone of nichemanship, where you expand what you are doing to the next logical direction. The transformation shape above that is more ambitious still, tapping brand new markets on the upside and creating brand new industries on the outside. This is the realm of business genius, in which you reshape demand around the world. D Treacy used the example of Federal Express as a company which began as a transformation play, creating an entirely new industry, overnight delivery. When competitors arose, FedEx faced ordinariness back in the core zone. FedEx overcame those challenges by staking out new plays all around the grid:
FedEx's overall achievement has been impressive. It has used technology and strategic cunning to thrive in an industry which, for most players, is downright ugly. D It boils down to a question that market leaders have no trouble answering, but which gives market followers the willies: Why should customers do business with you? In an efficient market, they do business with you because are better at the value discipline that matters most to them than your competitors are. Treacy showed a graph showing how a lumber company's systems were succeeding in performing more than a dozen complex tasks. But they were all a waste, because none of the things the company did were thing customers cared about. That company had a tough choice:
Here is Treacy's famous value discipline diagram, showing what the three disciplines are:
D Treacy looked at the problems telecommunications companies face. Basically, no one in telecommunications knows what is going to happen in the industry, but no one denies that a major transformation is underway. It is possible to plot a strategy through this turmoil using the value disciplines as a roadmap.
D Treacy admires how AT&T CEO Mike Armstrong has negotiated these shoals. "Band-aids and baling wire" have been Armstrong's tools of the trade as he moves a very stolid business into the fast currents of the future. He praised other companies as well -- Dole, the pineapple company, for diversifying into logical new lines of business, capitalizing on its core competencies of logistics (brown bananas don't sell) and agriculture. And David Stern of the NBA, who is doing all the right things for his league, even if the basketball players are currently benched by the strike. D This is hard stuff, and there are so many ways to go on Treacy's grid: When Procter & Gamble went into the cookie and orange juice businesses, they were taking on an adjacent market that did not welcome them. Tropicana and Nabisco handed P&G its head. How could P&G's products, or its processes, brand new to a new market, surpass the grizzled market warriors? To succeed in that move, Treacy said, you're better off buying a successful existing company than creating a new brand from scratch. One of the hardest plays is to see a new product or process in a market that is already yours. Treacy used the example of Wal-Mart and home shopping, and Barnes and Nobles, and online book sales. Both efforts were undertaken defensively, to ward off competitors. Both have been mediocre though, because the companies did not pour their best efforts into the new campaigns. A better strategy would be to create new companies to attack your old companies, he said. It's not a given that you must abandon your core strategy to succeed, Treacy warned. Heading off into adjacencies and transformative territory is dangerous for three reasons: D Treacy concluded with a rousing appraisal of the importance of the Internet in future business. It's a cool world, but it is a world of unrelenting pressure. But you can handle it. The Internet is going to supercharge commerce as we know it. Innovation will flourish. Everything will speed up. Best practices will disseminate immediately, and be reabsorbed. Learning will explode today, and business designs will explode tomorrow. So be brave, Treacy said. These are difficult days we are going through right now -- but things should settle down a little, someday. Remember that the greatest personal opportunities come during times just like these -- nova explosions of change. This new world could be loaded onto your back like an ox -- or you can learn to twirl it like a seal. You can be a victim, or a champion. The choice is yours! Z
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The customer we traditionally serve is changing.
Hamburger Helper is considered a home-cooked meal. People not using walkers aren't buying Buicks. People are taking charge of areas they formerly left to "experts" -- healthcare, financial planning. 
You can
reassert value leadership, by becoming the undisputed champion at one of Treacy's three disciplines.
It entered the
adjacent, conventional logistics market by creating Caliber Logistics, competing against UPS and others.
Die slowly, as customer deserted it, one by one.
Product Leadership means you sell the best widget on the market. 
A firm succeeding through
customer intimacy would be one that sells a total solution to the problems of convergence -- the coming amalgamation of phone service, computers, video, and the Internet.
It requires huge bench strength
-- you're creating a new business that requires new people, perhaps in new geographies.