The Strategic CIO

The role of the CIO is evolving at an accelerating pace. The most effective CIOs are shifting their focus from inward-looking operational issues to an emerging set of outward-focused strategic opportunities that are central to their companies’ financial and competitive success.

I call these new opportunities “customer-integrated systems,” a new class of critical systems that link a company to its customers. The most effective customer-integrated systems embody a service-differentiated design, with the CIO insightfully tailoring systems linkages to evolving account relationships.

Three CIO eras

Over the past decades, the CIO role has moved through three eras.

First, CIOs developed horizontal systems that automated and linked their companies’ core functions, like accounting, human resources, and inventory control. I think of this as the era of the Operational CIO.

Second, CIOs helped deploy a range of vertical systems that essentially tuned up these core functions in a variety of ways. I think of this as the era of the Tactical CIO.

While many of these vertical applications were important, they tended to be minimally-integrated with the overall business. All too often they amounted to a series of localized, uncoordinated improvements, each of which required significant organizational change.

This caused a big problem because the gating factor in IT systems effectiveness is a company’s ability to absorb change. Even if each application nominally offered a positive ROI, all too many of these systems failed to achieve their promise – not because they were technically deficient, but rather because the organization was not able to make the changes needed to reap the benefits. CRM systems provide a well-documented example.

The Strategic CIO

Today, CIOs are facing an immensely important opportunity to develop systems that link their companies with their most important customers. These emerging systems are ushering in the era of the Strategic CIO.

These customer-integrated systems form the essential infrastructure for the company to secure and grow its islands of profit, and to convert the accounts in its sea of red ink from marginal performance to solid profit contribution. Strategic CIOs are becoming key players in creating and driving their company’s most important business relationships, making them critical to their company’s profitability and strategic future.

New business era

The source of this emerging CIO opportunity is rooted in a major change that occurred over the past 30 years in the way we do business. We have moved from one era of business into another without realizing it.

The Age of Mass Markets spanned most of the 20th century. In this era, the win strategy was clear: maximize production volume to gain economies of scale and lowest costs. This meant distributing product as widely as possible through mass distribution fueled by mass marketing.

Companies simply dropped their product at their customers’ receiving docks, so distribution processes and costs were relatively uniform. Pricing was relatively uniform as well, so it was reasonable to manage both sales and operating activities separately from each other.

In this era, companies had little need for systems that comprehensively integrated them with their customers. It was entirely appropriate for CIOs to focus on horizontal systems, which automated their companies’ core internal processes, and on vertical systems, which essentially tuned up these core processes in a variety of ways.

Customer-integrated systems

Today, all this is changing. In the current Age of Precision Markets, companies form very different relationships with different customers – some arm’s length, some highly-integrated, and some between. These relationships have very different operational processes and cost structures, and at the same time, pricing varies widely from customer to customer.

This means that CIOs have to shift their focus toward developing a new set of customer-integrated systems that appropriately link their companies with their customers. Importantly, the nature of these links varies greatly from business segment to business segment, depending on the account relationship. And, in many cases, the nature and quality of the inter-company IT links will actually drive the profitability and share of wallet of the customer relationship.

The problem is that CIOs traditionally focus IT on internal processes and linkages. In all too many companies, these new externally-focused customer-integrated systems are largely off the radar screen.

Certainly, most companies today have elementary links such as web-based ordering and portals that display order status, but the true promise of customer-integrated systems is much more sweeping.

For the most important customers, customer-integrated systems will provide actual integration of selected functions between customer and supplier, creating very strong mutual benefits. For other customers, they will enable the flexible “showcase” projects that provide powerful new business initiatives. When well conceived, they will both reflect and accelerate a company’s critical business relationships, improve profitability, and provide enormous competitive advantage.

These new customer-integrated systems create huge opportunities for both revenue growth and cost reduction for both partners. But they also present important challenges for CIOs in three areas: (1) tailoring the customer-integrated systems to the evolving relationships; (2) developing the actual intercompany systems, often in coordination with channel partners; and (3) managing both internal change and change within channel partners.

For CIOs, this is exciting new territory that opens vast opportunities to produce huge, new, sustainable value.

Differentiated customer-integrated systems

One of the most important factors in designing and managing customer-integrated systems is the need to differentiate and tailor them for different business segments. In most companies, defining and building these differentiated customer-integrated systems is one of the biggest strategic imperatives.

Yet most companies today are implicitly viewing their customer systems through a one-size-fits-all lens. Instead, customer-integrated systems must be thoughtfully designed to differentially reflect the needs of different classes of account relationships.

Think about this service-differentiated account classification: (1) strategic accounts are major accounts with a willingness and ability to form integrated supply chain partnerships; (2) integrated accounts are large accounts, important but often somewhat smaller than strategic accounts, with less willingness to join in supply chain innovations; (3) emerging accounts are smaller accounts that are very innovative and generally fast-growing; and (4) stable accounts are smaller accounts that are generally reluctant to innovate significantly. Each account cluster requires a very different set of account relationships, supply chain structures, and customer-integrated systems.

Strategic accounts. These major accounts require a high degree of supply chain and planning integration, customization, and innovation. This creates the important need for a critical set of custom-tailored customer-integrated systems.

First, the supplier and the strategic account should develop an aligned, long-term business strategy. This typically involves a three- to five-year year shared strategic plan for the relationship, and joint long-range planning. The relationship should be innovative and involve shared risk. For example, one strategic account wanted to develop a process for picking up product at a major supplier’s factories, rather than having it shipped from the distribution centers. As another example, several major suppliers are working with their strategic accounts to develop RFID systems to track products as they move along the joint supply chain.

Second, the companies’ supply chains should be fully integrated. This should involve both supply chain processes and systems. Replenishment should be continuous, often involving vendor-managed inventory, rather than discrete orders. Some suppliers are pioneering efforts to develop new vendor management processes and systems that extend all the way to the retailer’s shelf, rather than to the distribution center. For strategic accounts, the supplier should dedicate cross-functional account teams and significant resources to understand the account’s structure and business.

It is essential for the Strategic CIO, in parallel, to devote significant resources to working with strategic accounts to design and develop coordinated, integrated customer-integrated systems with enough flexibility to accommodate rapid strategic innovation. Importantly, the Strategic CIO and the team on-site have to be capable of coordinated change management, not only with their customer IT counterparts, but also with operating managers both within their own company and within the customer. This is very complex because the Strategic CIO has to be adept at working with key channel partners who have their own IT priorities and agendas.

Integrated accounts. These important accounts warrant significant care and resources, but not extensive customization. This can be seen in two areas.

First, a major supplier and integrated account should develop in advance an aligned business plan and scorecard. The joint business plan will not be as customized as in the case of a strategic account. The plan should have a shorter time horizon, perhaps one year, and the relationship should be collaborative and trustworthy.

Second, the companies’ supply chains should be aligned and coordinated, but not necessarily fully integrated. The supplier should use existing internal processes to respond to orders from integrated accounts. Vendor-managed inventory systems may be appropriate for these accounts, as they are a cost-saving measure.

Here, the Strategic CIO faces a far more manageable set of challenges. While more traditional approaches like web-based ordering and order tracking may suffice for core activities, more complex systems support is needed for intercompany systems like vendor-managed inventory.

Importantly, integrated accounts have the potential to grow into strategic accounts, so it is important for the Strategic CIO to develop a strong set of relationships with his or her counterparts both in the customer IT group and among customer operating managers so they can be ramped up later. In many cases, strong coordinated customer-integrated systems can nudge an integrated account into becoming a strategic account, with the Strategic CIO directly driving major increases in revenue and profitability.

Because there is a long lead time in developing and installing coordinated systems, it is imperative for the Strategic CIO to map the IT terrain for integrated accounts as well as for strategic accounts.

Emerging accounts. These smaller accounts are very innovative and fast growing. They warrant significant supplier attention both because of their growth, and because they provide a low-risk opportunity for the supplier to develop new systems and processes. Yet, because they are small, there needs to be a limit to the investment.

The supplier should provide service that is both functionally excellent and flexible. The service must be efficient and largely standardized, or costs will quickly go out of control. However, the supplier often can justify meeting some unique needs, especially if the innovation can be scaled to the larger account base. These accounts are important because they force the supplier to push the innovation envelope.

These emerging accounts present yet another challenge for Strategic CIOs developing their customer-integrated systems. The core coordinative systems can be relatively standardized, like those of integrated accounts. But these accounts need a very flexible overlay of systems that enable coordinated innovation and continuous limited “showcase” experiments. These supporting systems can be ad hoc in nature, but they require thoughtful planning to understand how to scale quickly if the innovations are spread rapidly into the strategic accounts.

Stable accounts. These accounts typically cause a disproportionate amount of costs because many are unsophisticated and have idiosyncratic processes. For example, a stable account may order by fax rather than EDI, and may have unusual shipping specifications.

The key to supplying this group profitably is to offer a menu of service offerings, along with clear rules of engagement, such as minimum order sizes for various lead times, weekly ordering, and shipments to distribution centers only. In this way, the supplier can provide very reliable, consistent, cost-efficient service. This will ensure transactional efficiency for both the supplier and customer.

The customer-integrated systems objective for these accounts is to drive down costs by providing efficient means of transacting business. This is the area of customer-integrated systems that most companies have been focusing on recently because the pathway is clear, and the payback is compelling.

The danger, however, is to view these minimal cost-oriented customer-integrated systems as a one-size-fits-all solution sufficient for the whole account base. The most important accounts – strategic accounts, integrated accounts, and emerging accounts – require completely different types of customer-integrated systems. At stake are the company’s major revenue and profit streams.

One Strategic CIO’s experience

Here’s how the CIO of a major service provider has made the transition to Strategic CIO. He found that his strategic accounts are demanding exactly the types of integration described above, and this was pulling him to be extremely customer-focused.

This CIO now spends 30-50% of his time either in business development or working with existing customers. Customer-integrated systems implementation investments (software and personnel) have already become equal to or greater than the investment in internal company systems.

The problem he encountered is that the customer-integrated systems were so critical and fast-growing, the company’s horizontal and vertical systems couldn’t support them. Consequently, the CIO has been investing in parallel in strengthening the company’s ERP system, and pulling some formerly-independent vertical applications into the ERP system, putting them under direct IT control.

The key success factors: a solid internal data model, efficient core processes, and excellent mid-level IT managers who can take projects to completion while seeing the strategic big picture.

The three-dimensional CIO

Today, CIOs have an enormous new opportunity to shape their companies’ future.

Horizontal systems were essential to ensure that a company’s core activities were efficient, and vertical systems were important to tune up and enhance a wide range of company activities. I think of these as forming two important dimensions of the CIO role.

But the third dimension, customer-integrated systems, enables a company to construct its essential links to its accounts. Today, the Strategic CIO directly drives revenues, profits, and competitive advantage.

If the Strategic CIO is effective, the company’s performance and market positioning will accelerate. But if the CIO neglects this critical opportunity, the company will be left further and further behind. This is the most important challenge facing CIOs today.

The successful Strategic CIOs develop a new set of skills and capabilities in four critical areas:

  • Coordinating with counterpart managers within the company to develop and populate the service differentiation categories;
  • Tailoring the company’s customer-integrated systems to the account relationships;
  • Working with counterpart IT managers in accounts to conceptualize and develop the joint systems; and
  • Managing change, both internal and in channel partners.

We are entering the era of the Strategic CIO. Today, the Strategic CIO faces an historic opportunity to directly drive the company’s financial success, and to shape its strategic future.

In this era of the Strategic CIO, the company’s success depends on it.

Big Data – Big Opportunity or Big Headache?

Big Data is the breaking news story in the IT world.

Here’s the picture. Sometime soon company managers will have an enormous amount of information at their fingertips. They will be able to see everything and optimize everything.

What could be better?

Within the past month, two very senior, astute individuals contacted me about this – one a senior IT industry analyst, and the other a senior editor of a major business publication. They both had the same question: If Big Data actually becomes available, what will be the consequences?

My answer – Big Data offers big opportunities, but it carries the very strong likelihood of creating really big headaches in three areas: (1) paving the cowpaths, (2) managing at the right level, and (3) driving without a roadmap.

Let me explain.

Paving the cowpaths

Remember RFID?

A few years ago, RFID was all the rage. The idea was that it was becoming technically and economically possible to affix an RFID tag to every item moving through a supply chain. (An RFID tag is a small passive label that essentially emits a precise identifier when it is hit by an electromagnetic field.) Armed with this capability, managers could know the identification and location of every item in their company, and even those flowing into and out of their companies.

I remember discussing this with a former student, who is a senior operating executive of a Fortune 20 company. His reaction was similar to mine: What ever would you do with all that information?

In fact, several years ago I co-authored a column, Are You Aiming Too Low with RFID? in Harvard Business School’s Working Knowledge. In this piece, I joined with Sanjay Sarma, co-founder of MIT’s Auto-ID Lab, and John Wass, CEO of WaveMark, to argue that the biggest danger with the flood of RFID information was that almost-irresistible temptation to focus on “paving the cowpaths.”

Here’s how we put it. “One of the most exquisite challenges of living in Boston is navigating the labyrinthine maze of streets in the downtown area. This part of town is the oldest part, and the streets follow the original paths formed by settlers driving their cows to pasture. Traffic flows poorly because the city fathers simply paved the cowpaths, making the ineffective more efficient. It’s much easier to navigate Back Bay, a part of Boston with grid-like streets, built on landfill centuries later.”

In the article, we outlined a number of highly focused, high-value analytical uses for the “Big Data” that RFID could produce, and counseled avoiding the large-scale applications that simply automated routine activities.

In the absence of this disciplined, strategic approach, managers are in grave danger of utilizing Big Data to pave the cowpaths, further entrenching existing practices and rendering the possibility of developing sweeping paradigm-changing initiatives more and more difficult.

This will almost inevitably occur because in the capital budgeting process, the tactical payoffs from paving the cowpaths will be clear and easy to measure, while the payoffs from far-reaching strategic changes in the business will be hazy and unmeasurable.

Managing at the right level

This past weekend, I was reminded again of the Big Data question when I re-read Wired for War, a terrific book by P.W. Singer which traces the robotics revolution and the use of robots in  twenty-first century conflict.

In a particularly telling chapter, Singer describes how the real-time video feeds from drone aircraft – Big Data – led to the systematic leadership problems that I call “managing at the wrong level.” (See my HBS Working Knowledge column, Managing at the Right Level.)

Over many years, improved communications technology has enabled commanders to command increasingly at a distance from the actual battles. This has led to a very effective management structure in which top commanders focus on strategy and personnel, mid-level commanders on operational initiatives, and local officers on tactical issues. This parallels the leadership structure of most effective companies.

However, the widespread availability of drone aircraft information feeds has led to serious and systematic command and leadership problems. The ability of top commanders to see battlefield video feeds in real time has rapidly increased the centralization of command and led to an explosion of micromanagement.

Crack for Generals

Singer relates, “Too frequently, generals at a distance are now using information technology to interpose themselves into matters that used to be handled by those on the scene and at ranks far below them. One battalion commander in Iraq told how he had twelve stars worth of generals (a four-star general, two three-star lieutenant generals, and a two-star major general) tell him where to position his units during a battle.”

Singer continues, “An army special operations forces captain even had a brigadier general (four levels of command up) radio him while his team was in the midst of hunting down an Iraqi insurgent who had escaped during a raid. The general, watching a live Predator video back at the command center…ordered the captain where to deploy not merely his units, but his individual soldiers. ‘It’s like crack for generals,’ says Chuck Kamps, a professor at the Air Command and Staff College. ‘It gives them unprecedented ability to meddle in mission commanders’ jobs.’”

This direct meddling by military leaders has led to the rise of what Singer calls the “tactical general,” as the line between timely supervision and micromanagement has became blurred. Officers in the field lament what they call the “Mother may I?” syndrome which has come with these new technologies.

Moreover, power struggles are common when the feeds are available to multiple command groups.  Singer notes, “At its worst, this pattern can lead to the battlefield versions of too many cooks spoiling the meal. A marine officer recalls, for example, that during an operation in Afghanistan, he was sent wildly diverging orders by three different senior commanders. One told him to seize a town fifty miles away. Another told him to seize the roadway just outside of town. And the third told him, ‘Don’t do anything beyond patrol five miles around the base.’”

But, the biggest problem with top-level micromanagement in the military – just like in business – is the huge hidden opportunity cost of failing to manage at the right level: a leader ignoring the critical issues of high-level strategy and organizational capability because he or she is so caught up in real-time micromanagement. This causes two very big, related problems.

First, the top managers fail to plan for the future. For example, in business, vice presidents should primarily be focused on defining and developing the company as it should be in three to five years, since that is the time it takes to develop a new set of capabilities. Their other critical responsibility: coaching and developing the next generation of leaders.

In the absence of this hierarchical discipline, the company is in grave danger of getting mired in the present, and falling further and further behind.

Second, when top managers – or generals – take over tactical decisions, the lower-level leaders cannot develop their skills. Instead, they must be empowered to act with initiative, even if it means making a few mistakes along the way. No – especially since it means making a few mistakes along the way, since false starts and errors are a natural and necessary part of doing anything significant and new.

The answer? Singer calls it “enlightened control,” a concept he credits to the great Prussian generals of the nineteenth century, whose ideal was that the best general gave his officers the objective and left it to them to figure out how best to achieve it. He cites the commanding general who so trusted his officers that the only order he supposedly issued on the eve of the Prussian invasion of the Danish province of Schleswig was, “On February 1st, I want to sleep in Schleswig.”

The action question for managers: Will Big Data be “crack for your vice presidents,” or will they have the insight and discipline to double down on “enlightened control.”

Driving without a roadmap

One might ask: But won’t Big Data let a company’s managers optimize everything? After all, every manager will have, theoretically, the information needed to get everything right. And if a company’s managers optimize everything, won’t the company be great?

This question embodies one of the biggest false assumptions in thinking about Big Data.

The glib answer is that if it weren’t for the humans, this premise might actually happen. Let me explain.

When I think of Big Data, an analogy comes to mind. Imagine that you were living decades ago, at the time of the invention of the automobile. Assume further that all of a sudden, all the dirt roads and tracks were paved. What would you do? Where would you go?

The obvious answer is that either you would stay local or you would be paralyzed in the face of the enormous number of opportunities. In fact, you would need a roadmap, so you could see how to get to different places. Beyond that, you would need to understand the nature of the destinations so you could decide where to go, since you couldn’t get everywhere in one lifetime.

Further, if you had a number of different drivers, it is likely that each would head in a different direction, since each would go after the goal that he or she thought best. If these drivers had to coordinate, like the managers in a company, what would happen? The result would be chaos.

The problem here is two-fold. First, a company can’t do everything, because it takes significant time and resources to manage the change required to harvest any IT-based initiative. And second, the initiatives have to be coordinated and focused on the right long-term strategic goals to be effective. If the availability of Big Data encourages a massive flock of independent tactical initiatives, it will do more harm than good.

The problem with low-hanging fruit

This raises an important related problem. Managers have an almost overwhelming tendency to focus first on opportunities that are near to hand, and have quick, visible payoff. Sometimes these are called “low-hanging fruit.”

The problem is that these relatively small, parochial projects will absorb the organization’s resources and capability to change, even while they give the illusion of progress. The huge opportunity cost is losing the opportunity and ability to focus on the really important initiatives with the really big long-term payoffs.

Think of it this way. The analogy breaks down because the big money is not in harvesting fruit more efficiently, but rather in changing the location of the orchard and the type of trees you plant.

This dissipation of effort, with its focus on a large number of small, incremental projects – rather than on the smallest number of game-changing, high-payoff initiatives – is the ultimate danger of Big Data.

Keys to Success

Big Data offers great opportunities – and huge dangers. How can you navigate toward the benefits while avoiding the hazards?

The key is management insight and discipline.

The true promise of Big Data is to make your company better, not just to make parts of it more efficient. To accomplish this, you need one part technology to nine parts vision and great management.

Steve Jobs and Customer Value Creation

During the holidays, I read Walter Isaacson’s biography of Steve Jobs – which I strongly recommend.

Steve Jobs was a very complex individual, to say the least. He was abrasive and insightful. He drove people who worked with him to achieve things they didn’t think possible.

Over his career, Steve Jobs weathered near-failures, and built one of the most valuable companies in the world. This book offers a unique and valuable perspective on business strategy and management. The chapters on how Jobs built Pixar and refocused Apple after he returned from being fired are both fascinating and instructive.

At the end of the book, Isaacson quotes Jobs as he reflects on his business career. I offer a few excerpts below, and after that, some things to think about.

My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. But the products, not the profits, were the motivation. [Ex-CEO John] Sculley flipped these priorities to where the goal was to make money. It’s a subtle difference, but it ends up meaning everything: the people you hire, who gets promoted, what you discuss in meetings.

Some people say, “Give the customers what they want.” But that’s not my approach. Our job is to figure out what they’re going to want before they do. I think Henry Ford once said, “If I’d asked customers what they wanted, they would have told me, ‘A faster horse!’” People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.

Edwin Land of Polaroid talked about the intersection of the humanities and science. I like that intersection. There’s something magical about that place. There are a lot of people innovating, and that’s not the main distinction of my career. The reason Apple resonates with people is that there’s a deep current of humanity in our innovation. I think great artists and great engineers are similar, in that they both have a desire to express themselves. In fact some of the best people working on the original Mac were poets and musicians on the side. In the seventies computers became a way for people to express their creativity. Great artists like Leonardo da Vinci and Michelangelo were also great at science. Michelangelo knew a lot about how to quarry stone, not just how to be a sculptor….

At different times in the past, there were companies that exemplified Silicon Valley. It was Hewlett-Packard for a long time. Then, in the semiconductor era, it was Fairchild and Intel. I think that it was Apple for a while, and then that faded. And then today, I think it’s Apple and Google – and a little more so Apple. I think Apple has stood the test of time. It’s been around for a while, but it’s still at the cutting edge of what’s going on.

It’s easy to throw stones at Microsoft. They’ve clearly fallen from their dominance…. And yet I appreciate what they did and how hard it was. They were very good at the business side of things. They were never as ambitious product-wise as they should have been. Bill likes to portray himself as a man of the product, but he’s really not. He’s a businessperson. Winning business was more important than making great products. He ended up the wealthiest guy around, and if that was his goal, then he achieved it. But it’s never been my goal, and I wonder, in the end, if it was his goal. I admire him for the company he built – it’s impressive – and I enjoyed working with him. He’s bright and actually has a good sense of humor. But Microsoft never had the humanities and the liberal arts in its DNA….

I have my own theory about why decline happens at companies like IBM and Microsoft. The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter as much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when [Steve] Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.

I hate it when people call themselves “entrepreneurs” when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be….

You always have to keep pushing to innovate. Dylan could have sung protest songs forever and probably made a lot of money, but he didn’t. He had to move on…. The Beatles were the same way. They kept evolving, moving, refining their art. That’s what I’ve always tried to do – keep moving. Otherwise, as Dylan says, if you’re not busy being born, you’re busy dying.

What drove me? I think most creative people want to express appreciation for being able to take advantage of the work that’s been done by others before us. I didn’t invent the language or mathematics I use. I make little of my own food, none of my own clothes. Everything I do depends on other members of our species and the shoulders that we stand on. And a lot of us want to contribute something back to our species and add something to the flow. It’s about trying to express something in the only way that most of us know how – because we can’t write Bob Dylan songs or Tom Stoppard plays. We try to use the talents we do have to express our deep feelings, to show our appreciation of all the contributions that came before us, and to add something to that flow. That’s what has driven me.

(From Isaacson, Walter, Steve Jobs, Simon & Schuster, 2011, pp. 567 – 570.)

Things to think about

Your product is the value you create for your customers – the totality of your customers’ experience. This is how Steve Jobs saw the world. He saw his essential job as always pushing the envelope on customer value creation.

Here’s a challenge – something to think about as we enter the new year:

Are you focused on pushing the envelope on creating customer value in new ways?

Do you always “try to read things that are not yet on the page” when you think about customer value creation?

Is there a “deep current of humanity in your innovation”?

Does your company “exemplify your industry”? Are you at the “cutting edge of what’s going on”?

Are you building a company that will “stand for something” a generation from now?

Years from now, will you be able to look back and say that you “added something to the flow”?

If your answers to these questions are positive, you will always make money. Real customer value always wins, and gives you sustained high profitability and growth in the process.

Best wishes for a successful and happy 2012.

Holiday Greetings!

Dear friends and colleagues,

I am writing at this very special time of year to thank you for bringing happiness and meaning into my life in so many ways.

I am grateful that so many of you are the source of so many terrific ideas that I write about, and that you share your reactions in ways that encourage me to stretch my understanding.

I am grateful that so many of you give me the deep joy of teaching –  as students, as executives, and as alumni. Most of all, I am grateful that you allow me to stay in touch with you, and experience the great pleasure of seeing you grow and succeed.

I am grateful that I have been able to volunteer for years in alumni affairs, meeting and becoming good friends with so many great people.

I am grateful that so many of you are wonderful friends, often for decades, sharing both joy and sadness, but always deepening our lives with caring.

And, I am grateful to my family for giving me the ultimate happiness in life. I am especially grateful beyond words to my wife, Marsha, for being the blessing of my life since we met in Cambridge 37 years ago.

Marsha joins me in wishing you and your families a wonderful holiday season and a new year full of peace and blessings.

Jonathan

Pictured: Kristin, Dan, Marsha, Jonathan, Steve, Nicole

How to Win the Battle and Lose the War

Sunday, December 7th, 1941. Admiral Chester Nimitz was attending a concert in Washington D.C. He was paged and told there was a phone call for him. When he answered the phone, it was President Franklin Delano Roosevelt on the phone.

He told Admiral Nimitz that he (Nimitz) would now be Commander of the Pacific Fleet. Admiral Nimitz flew to Hawaii to assume command of the Pacific Fleet. He landed at Pearl Harbor on Christmas Eve, 1941. There was a spirit of despair, dejection, and defeat, as if the United States had already lost the war.

On Christmas day, 1941, Admiral Nimitz was given a boat tour of the destruction wrought on Pearl Harbor. Big sunken battleships and navy vessels cluttered the waters. As the tour boat returned to dock, the young helmsman of the boat asked, “Well, Admiral, what do you think after seeing all this destruction?”

Admiral Nimitz’s reply shocked everyone. “The Japanese made three of the biggest mistakes an attack force could ever make, or God was taking care of America. Which do you think it was?”

Shocked and surprised, the helmsman asked, “What do you mean by saying the Japanese made three of the biggest mistakes an attack force could ever make?” Nimitz explained:

Mistake number one: the Japanese attacked on Sunday morning. Nine out of ten crewmen of those ships were ashore on leave. If those same ships had been lured to sea and been sunk, we would have lost 38,000 men, instead of 3,800.

Mistake number two: when the Japanese saw all those battleships lined in a row, they got so carried away sinking those battleships, they never once bombed our dry docks opposite those ships. If they had destroyed our dry docks, we would have had to tow every one of those ships to the mainland to be repaired.

As it is now, they are in shallow water, and can be raised. One tug can pull them over to the dry docks, and we can have them repaired and at sea by the time we could have towed them to the mainland. And I already have crews ashore anxious to man those ships.

Mistake number three: every drop of fuel in the Pacific theater of war is on top of the ground in storage tanks five miles away over that hill. One attack plane could have strafed those tanks and destroyed our fuel supply.

That’s why I say the Japanese made three of the biggest mistakes an attack force could make, or God was taking care of America.

My friend and classmate, Fred Hooper, sent me this story. Supposedly it came from a book that Admiral Nimitz wrote, which is now out of print. Whether it is factual or merely a very compelling urban legend, the story offers important strategic lessons.

Strategic lessons

I thought about this anecdote during a recent meeting. I was reviewing a company’s situation with one of its top officers. A competitor had developed an innovation and was deploying it rapidly. The action question was how the company should respond.

The seemingly obvious answer was to pick up the pace and try to match the competitor. When I thought about how other companies I had worked with had responded in similar situations, two things became clear: (1) the competitor had indeed made tactical gains that raised concerns, but (2) it was not at all clear that this innovation would produce a clear long-term strategic win.

The answer was to look very carefully at the customer value proposition that the tactical initiative created, and to set this against the broader opportunity to develop a more sweeping, strategic value proposition. Was the tactical initiative a long-term win strategy, or merely a short-term gain?

Would it win the battle, or win the war?

What’s especially interesting about this situation, and so many others like it, is that the rush of events – the concerns about keeping up with a competitor’s tactics, or, conversely, enjoying the satisfaction of tactical gains –  can essentially blind a company’s management team to the broader, more subtle opportunities to develop a truly creative, compelling strategic partnership.

Worse, managers all too often feel that they don’t have time to concentrate systematically on the deeper, more subtle opportunities because they are so busy trying to keep up in the tactical battles.

In short, most managers instinctively focus on how to win the battle, rather than how to win the war.

Three steps

How can a management team shift perspective from winning the battle to winning the war? Three steps are essential.

First, walk in your customer’s shoes. There is no better way to build a powerful customer value proposition than to spend significant time physically in a set of customers. The objective is to watch the entire purchase/use cycle for your products. This includes everything from selecting the products, to obtaining them economically, to understanding how to use them.

Here, you are looking for opportunities to build the broadest, most powerful value proposition by expanding your extended product (the full set of activities that relate to the purchase and use of your product). The early development of innovations like vendor-managed inventory and category management provide examples. (For more on this, see my blog post,  Turbocharge Your Value Proposition).

Importantly, building your extended product can offer the opportunity to create compelling value in unexpected ways.

Think about Nalco, a company that provides chemicals to water treatment systems. It installed sensors in the chemical tanks on customer premises. This enabled Nalco to be much more efficient at replenishment and production. But the company didn’t stop there.

Nalco’s managers realized that this innovation allowed it to monitor the actual rate of chemical draw-down, and compare it to the expected rate if the system were operating at peak efficiency. When the Nalco engineers saw a variance, they would call the water system’s managers and alert them to adjust the system. This routinely led to customer savings many times the cost of the chemicals.

In the process, it made Nalco indispensible – transforming the company’s positioning from commodity supplier to essential strategic partner. I think of this as drawing a bigger box around your business.

Here’s my take on the ultimate truth in business: you always have an opportunity to increase your value footprint, and real value always wins.

Second, always move toward the middle. When I was young, I read a book on how to win at checkers. What I remember to this day is that if you are in doubt about what to do, move toward the middle of the board. This is how you develop a dominant board position.

In fact, the classic rookie move in chess is to go for checkmate on an early move, instead of laying out your board position.

What is the equivalent of board position in a supplier-customer relationship? In a nutshell: real value and trust. Once you have worked to understand and develop a truly winning value proposition with a very creative extended product, the next essential task is to systematically put the core pieces in place. And, often the core pieces are subtle.

For example, suppose a supplier wants to develop a highly integrated supply chain with a major customer, and the customer is not interested in this type of relationship. What should the supplier do?

Here, the core building blocks, as always, are real value and trust.

Even with an arm’s length relationship, the supplier can arrange for its operations managers to meet periodically with their counterparts in the customer. Over time, the supplier’s operations managers will develop a trusting relationship with their customer counterparts. Note that this process does not focus on selling products or solving problems, only building trust.

Later, once the trusting relationships have developed, the operations managers can bring the customer counterparts to meet operations managers in other customers that already have productive, highly integrated supply chains with the vendor. These meetings will naturally gravitate toward identification and  confirmation of the value produced.

Through this process, the supplier can build the essential core of real value and trust that will lead to a highly productive, and highly differentiated, relationship with the target account.

Contrast this with another supplier that might instead focus on tactical gains like merely expanding the product portfolio sold to the customer. This supplier might win the battle, but would surely lose the war.

Third, touch the dream. Every top manager in every company has a dream – a vision of what real success looks like. This nearly always centers on business growth and creative new business initiatives.

When your value proposition enables your customers to move toward their dreams, you will be an essential strategic partner. You will win the war.

This can happen in unexpected ways. For example, I’m deeply familiar with the operations of a number of vendor-managed inventory systems and other supply chain innovations. These certainly create important benefits, including customer cost reductions. But surprisingly often, the most powerful, but unexpected, benefit is that the partnership enables the customer to enter new markets or offer new services because it can draw on the supplier partner’s deep, specialized capabilities.

By enabling the customer to grow its business in powerful new ways that the customer alone could not have done, the supplier becomes an essential part of the customer’s success. The supplier wins the war by touching the customer’s dream.

Win the war

It is so tempting to operate close to the surface of a customer relationship, focusing primarily on the day-to-day sale of your products and services, searching out tactical gains. And, if you do achieve tactical gains, it is overwhelmingly tempting to focus on accelerating your “victories.”

However, the top managers that succeed in the long-run have the discipline to remain focused on understanding and developing the most powerful customer value proposition. When they have created this understanding, they redouble their efforts to push the value creation envelope even further – continuing to search relentlessly for new ways to create real value and trust.

I’m reminded of a wonderful exhibit mounted several years ago by the Smithsonian Institution on American Ingenuity: If We’re So Good, Why Aren’t We Better?

The best managers in the best companies are always relentlessly focused on this question, and almost frantic to find an even better answer. This is how they got to be market leaders, and this is why they stay in front.

What is the ultimate secret to success? Remember Admiral Nimitz, and don’t be satisfied with anything less than winning the war.