Introduction

This book was written a decade ago in the belief that sound business strategies had to be based on a deep understanding of customer requirements and their anticipated behavior, and the capabilities and intentions of competitors. My approach was also guided by the premise that the process of making strategy mattered more than the plan that eventually emerged. Today, there are many more companies acting on these premises and devising new ways to gain advantage with superior customer value.

While technology and the business environment have changed, Market Driven Strategy continues to offer a comprehensive and productive framework for developing a deeper market perspective. The continued popularity of this book is an indication that it still has much to offer managers. I have been pleased to see that after a decade the senior executives I work with at Wharton and around the world still find the tools and frameworks are useful for guiding their strategy development process.

As managers seek to gain the benefits of market-driven strategies, they soon encounter limitations imposed by their organizations. They find they have to rethink the culture, capabilities, and configurations of their firms. The companion volume to this work published this year, The Market Driven Organization: Understanding Attracting, and Keeping Valuable Customers, addresses the challenges of creating organizations that support market-driven strategies and fully utilize new information technology and emerging organizational structures. This is the next important step in the process of becoming market-driven, building on the foundation established by this earlier work.

The publication of this companion volume is an opportune time to reflect on the distinctive features of this first book in strategy.

Each component of the title -- Market Driven Strategy -- and the subtitle -- Processes for Creating Value -- describes an element of the overall approach. In combination they articulate what it takes for a business to successfully steer through market turbulence and shape the competitive game to its advantage.

MARKET-DRIVEN

Being market-driven is the theme that did most to set this book apart. It had long been an article of faith that successful businesses were driven to be responsive to market requirements and anticipate changing market conditions. They were not product-driven or sales-driven -- instead their beliefs, values, and behaviors emphasized getting close to their customers and staying ahead of competitors. What was lacking was practical guidance on how to implement this theory, which was the gap this book began to fill.

Curiously, there is still some misunderstanding about what it means to be market-driven. One school of thought argues it is better to be market-driving than market-driven. Rather than giving customers what they say they want, firms should be creating markets -- even ones that were never envisaged by customers. This is a distinction without a difference. The real gains from being market-driven come from anticipating opportunities and getting to them ahead of rivals. Another point of confusion equates being market-driven with a customer focus. While a customer focus is an essential condition, it is not a sufficient guide to action. The only way a business can succeed is to deliver superior customer value, and that requires an intense emphasis on the competitors who set the performance standard. Being customer-focused sometimes metastasizes into a compulsion, where customers are given everything they want. Then firms complain that, when they tried to be responsive to their customers, their profits suffered and resources were deflected from developing the next generation of technology. But every customer is not equally valuable, nor does every need demand equal attention. Instead, market-driven firms achieve superior profits by selectively nurturing the customers with the highest profit potential.

STRATEGY

This is the foundation of the book. A sound strategy is a directional statement -- not a fixed location -- that describes the array of choices a firm makes to deliver a particular value proposition to a target group of customers. It includes the distinctive configuration of activities, processes, and investments that the firm deploys to gain a competitive advantage. Everyone in the organization contributes to the strategy, which makes it difficult to condense a strategy into a few snappy shorthand phrases.

There are a myriad of choices for any business to make. This book dealt with the four that collectively determine the market strategy. These became known as the "4A's," which is a tribute to their alliterative appeal. They are: arena, the choice of markets to serve and segments to target; advantage, which uses superior customer value as the litmus test; access via distribution and communication channels; and activities that determine the scale and scope. There was a fifth "A" that tended to get overlooked, but signaled the need to adapt the other four A's to impending threats and emerging opportunities.

Most of the attention was given to how advantage was gained. Clarity of thinking demanded distinguishing between sources (how were the advantages gained), the positions (based on superior customer value or lowest delivered cost), and performance (the rewards of superior customer satisfaction, loyalty, profit, and share). This proved to be a rich framework for understanding strategies because it captured the difference between the sources of advantage that could be influenced by managerial action -- assets, capabilities, and controls -- and the consequences in the market. It also nearly disposed of the lingering controversy over gaining market share as a strategy. It isn't! Instead, market share is something that has to be earned, and is simply one outcome of a successful strategy.

In my mind, strategy was and still is a holistic concept. Nonetheless, the last decade has seen persistent efforts within the strategy field to decompose strategy into the external factors which comprise the positional advantage and internal factors such as core competencies, distinctive capabilities, or critical resources. Those who make these distinctions do so in order to support an argument that what really defines a firm is its superior capabilities, and go on to proclaim the value of reengineering, total quality management, time-based competition, and other worthy initiatives. In practice it is hazardous to concentrate only on internal resources while ignoring the competitive position, for the resources of the firm only gain value if they distinguish a firm favorably in a served market. They have no intrinsic value in and of themselves.

PROCESSES

Here we enter the domain of the subtitle: Processes for Creating Value. Perhaps because this part of the book was subordinated in the title, it did not get the recognition I had hoped. The role of planning processes in the book is a case in point.

At the time this book was written, few companies felt they were getting much value from their planning processes. Some would argue that not much has changed even now. Too often planning was a bureaucratic exercise, following a fixed schedule and devoid of creativity. Managers had good reason to believe that their five-year plan was only a thinly disguised prelude to the annual budget.

Accepted practice implied a linear progression of activities, from mission or vision to objectives, and then to the strategy for achieving the objectives, concluding with the tactics to implement the strategy. This sequence clashed with the reality I found as a facilitator of planning sessions in several dozen companies. The actual process of strategy making was messy, iterative, independent of the calendar, and driven as much from the bottom-up as the top-down. The healthiest processes were team-based with a robust dialogue about the fundamentals of the business, with top-down intentions and resources meshing with bottom-up insights about market opportunities. From this experience, and my observations of best practice companies, I evolved the concept of adaptive planning, with the following features:

* The integrating theme is the creation of competitive advantage. The objectives of growth, market share, and shareholder value creation were treated as constraints to be satisfied.

* Issues are the main currency of the strategy dialogue. They are a useful device for concentrating the plethora of forces, problems, opportunities, and uncertainties into manageable chunks. In this form they are focal points for decision making.

* Strategy making requires the creative development and evaluation of multiple alternatives. If the job of management is to make the best choices possible, then to choose we must have choices; so the planning team must generate two to three viable alternatives. The job of top management is to challenge the planning team to stretch their efforts beyond what can be easily reached and then give them the resources they need.

* The planning cycle starts whenever there is a need, perhaps because the strategy lacks clarity, performance is unsatisfactory, or key assumptions have been proven wrong.

Firms that plan adaptively have an uncanny ability to learn from experience and to seize opportunities ahead of rivals. They apply clear-eyed insights into the market and their own capabilities when they make strategic choices. This is a planning approach that is well suited to market-driven organizations.

After another decade of experience with adaptive planning, I remain comfortable with the base principles and premises. My discomfort is with two persistent problems that bedevil all efforts to use the planning process to guide the allocation of resources. One is the tendency of managers to overstate the rewards from the strategy they are advocating -- perhaps because of optimism, games-playing, or an inability to anticipate competitive actions and counteractions. A partial antidote is a vigorous strategy review that challenges the underlying assumptions in the forecasts. The second problem is an inability to cope with high levels of uncertainty. Sometimes there are so many complex interactions among multiple dimensions of uncertainty that the environment is almost impossible to comprehend. This is what companies face when coming to grips with emerging technologies like gene therapy or intelligent sensors. Managers are pushed to understate the level of uncertainty to make a persuasive case for their strategy. New approaches to strategy making that recognize the need to retain flexibility in the face of uncertainty are needed.

CREATING VALUE

This was a play on words that was intended to signal two arguments. First, that without superior customer value, a firm could not deliver superior shareholder returns. Second, that despite profound differences in approach, variables, and measures, strategy analysis and shareholder value analysis were complementary. Ten years later the two approaches to strategy making are still not reconciled, and if anything there is a growing tension.

Shareholder value analysis (SVA) is widely accepted as the best way for firms to keep score. By holding managers accountable for the cost of the capital consumed by their strategy proposal, the shareholders' interests are kept front and center. As a methodology it is best suited to squeezing returns out of established businesses. The critics argue that it doesn't help managers create strategic breakthroughs that exploit new opportunities. Worse, it is argued, SVA encourages short-teem strategic fixes such as cutting costs or shedding assets. The proponents of SVA reply that short-termism is not an intrinsic flaw, but there has to be a realignment of the incentives toward long-run returns to avoid the problem. No doubt the marriage of modern financial theory and strategic planning will continue because both represent valid approaches, to managing for the future. As always it will take judgment and recognition of the pitfalls to ensure sound choices are made.

A RETROSPECTIVE-APPRAISAL

This opportunity to reissue the book prompted two questions: What are the reasons for the book's continued acceptance, and what would I change if I were writing the book now? With a caveat that these are difficult for an author to address objectively, let me offer some opinions.

The main reason for the book's acceptance is surely that the issues have not changed. The frameworks and concepts presented in the book remain valuable handrails for managers trying to chart a strategic direction and build their organizational capabilities. Managers still struggle to keep their organizations aligned with volatile markets. If anything, it has become more difficult to be market-driven because competitors keep raising the standards of performance. New technologies, especially the Internet, are reshaping the landscape of most markets -- by reducing friction, expanding buyer power, and introducing new competitors and strategies that were only dreamed about a decade ago. Yet the underlying rules of competition haven't changed, and firms will only prevail over rivals by delivering superior customer value. While markets-fragment and mass-customization offers the promise of offerings tailored to segments of one or a few, the platform concepts of market segmentation, channel functions, and choice of value proposition remain valid but in need of significant adaptation. Shareholder value is still the best metric for comparing strategies, but the tough questions to be used to probe the assumptions underlying the financial forecast are even more important to assure the inputs are valid.

The Evolution of Strategic Thinking. The book also benefited from good timing. A compressed history of thinking about competitive strategies would show three phases of development, with this book a precursor of the latest phase.

In phase one, the focus was largely on the outcomes of strategy. Much was made of portfolio models that prescribed market share strategies based on market attractiveness and business strength including the infamous BCG share-growth matrix. Toward the end of this phase, industry structure analysis became influential through Michael Porter's explication of the "five forces" of competition. The emphasis of. this framework was on uncovering differences among industries and helping businesses find attractive positions within the industry that minimize direct rivalry.

The second phase shifted attention to creating positional advantages within the industry to achieve lower delivered costs or superior customer value. This phase peaked in the mid-to-late eighties and focused attention on the dimensions of advantage, such as quality, channel relations, and time-to-market.

By the late eighties, a third phase had emerged as the emphasis shifted from outside to inside the firm. In effect, strategic thinkers were working back along the food chain to unravel the sources of the advantages that were achieved. This was a belated recognition that positional superiority was derived from relative superiority in the skills, assets, collective learning, and prevailing values and culture that are embedded in the firm, and the ability of management to mobilize these resources.

Of course, strategic thinking keeps progressing. Early in phase three there was much enthusiasm for the emerging concepts of core competencies, competing on capabilities, and reengineering core processes. This fit nicely with the emphasis of the early nineties on delayering and restructuring since they required reconceiving a business as a collection of linked processes. This phase ran its course as reengineering became synonymous with cost cutting and downsizing. The strategic priorities shifted to achieving growth- and renewal, while delivering superior shareholder value. An important vehicle for achieving these ends was a disciplined focus on delivering superior customer value and not trying to be all things to all customers. Meanwhile, marketing scholars were exploring the antecedents and consequences of a market orientation to uncover the role of culture, structure, incentives, human resource policies, and leadership. This work persuasively validated the long-standing belief that a market orientation was an important source of advantage and also enhanced business performance.

In light of these advances, what would I do differently if I were writing the book now? A number of new insights have emerged since the book's publication, many of which are addressed by The Market Driven Organization. Heading the list would be an expansion of the meaning of process to embrace the concept of a business as a collection of linked processes, with the distinctive capabilities being exercised through these processes. This has profound implications for how organizations are designed and advantage is gained and sustained.

This process perspective has shaped my own thinking about how organizations can better align themselves with their markets. An evolving hybrid firm has Proven. capable of maintaining deep functional specialization within a horizontal structure based on multifunctional teams. These market-driven organizations also excel at market sensing and market relating, which are two capabilities embedded in their processes.

Another area where learning has been pushed further is the respective roles of customer satisfaction versus loyalty or retention. The awkward reality is that 60 to 80 percent of customer defectors said they were "satisfied" or "very satisfied" on the last survey prior to defection. When combined with the superior profitability of loyal customers, there are profound implications for appropriate strategies and objectives. Similarly, recent research has challenged the usefulness of the distinction between the generic strategies of lowest delivered cost or differentiation. The presumed trade-off does not always have to be made, and the two strategies are not talking about the same things. A differentiation strategy is framed in external customer terms, while cost strategies are framed relative to competitors and do not offer a direct inducement to customers. What is needed is a richer palette of customer value strategies that highlights the need to serve different customers with different models (e.g., make-and-sell versus sense-and-respond).

Finally, all markets are being reshaped by the increased pace of value migration between business models, the fragmentation of markets, and the disruptive potential of the Internet and electronic commerce. Nowhere are these changes more evident than in distribution channels where distributors and retailers are being disintermediated -- and communication-channels where broadcasting is giving way to one-to-one communications with molecular markets.

Despite these forces for change, the concepts and frameworks for making market-driven strategies continue to offer a solid system for navigating through the turbulence.

Market Driven Strategy was written at a different time but addresses enduring issues. It was built on a body of cumulative knowledge contributed by many practitioners whose trial-and-error experiments-expanded the envelope of feasible practice, and scholars who learned from these experiments and extracted generalizable insights. In this way, knowledge keeps progressing. This book is now part of the basic platform of knowledge about strategy, which is being continually refreshed and expanded.

George S. Day

Bryn Mawr, PA

March 1999

Copyright © 1990 by George S. Day