Companies must understand their focus before setting their strategies

Executives must make vital decisions between product innovation, customer relationships, and operational excellence for their business to succeed

Dear Bob ...

I found your recent column, "May the best panacea win," to be very interesting. In it you said, "... business strategies fall into three categories: Product innovation, customer relationships, and operational excellence."

[ Also on InfoWorld: "Is there more to business than revenue, cost, and risk? No" | Get sage IT career advice from Bob Lewis' Advice Line newsletter. ]

At the end I was wondering what companies out there have successfully combined product innovation, strong customer relations, and operational excellence? Why not have it all?

- Strategist-in-training

Dear Strategist ...

Why not have it all? Two reasons (and it's an excellent question; lots of executives ask it in a very pointed way):

The first reason is called the "discretionary dollar." It asks the question, If you had just one more dollar to invest in your business, what would you invest it in? Companies have to make investment decisions because money, staff time, and executive attention are all finite. This doesn't mean choosing one of the three to the exclusion of the others. It means ranking them in order of priority, so if something has to give, the company can decide which and by how much.

The second reason is more complicated -- a matter of optimization dynamics -- and it has a lot to do with where each strategy leads in the marketplace.

Product innovation

Product innovation companies have to invest serious money in R&D, and more serious money in marketing to explain their new innovative products to the marketplace. Time being a critical element to success, they often have to take shortcuts to get their innovative products out the door, which means operational excellence might suffer. The good news: One reason companies pursue product innovation is to support higher margins, some of which can be devoted to customer service.

Generally this will be generic "good service," as opposed to making deep investments in customer relationships, because product innovation usually leads to the need to sell products broadly rather than deeply -- mass marketing rather than niche marketing.

Customer relationships

Customer relationship companies invest serious time, money, and attention keeping individual customers happy and engaged, one at a time. It's the difference between good service in a retail store and account management in a business-to-business environment.

A challenge here is that product innovations can irritate customers who invested in the last-generation product; think of Apple, which routinely ignores minor issues like backward compatibility among its products. Also, a focus on customer relationships means offering each customer-tailored services -- something that's tough to make coexist with operational excellence, which depends on perfecting repeating processes.

A related challenge is that operational excellence generally means defining what the company does and doesn't do. Operational excellence means explaining to customers that "This isn't how we do things," "It's against our policy," and "If we do this for you we have to do it for everyone." So it takes a backseat to customized service.

Operational excellence

Operational excellence companies sell on price and quality. "Quality" in this context is defined as the absence of defects, as opposed to "excellence," which means the presence of cool features -- a hallmark of product innovation companies. If the distinction isn't clear, consider the Toyota Corolla -- a high-quality car -- and compare it to the Lamborghini. I can't speak to the current crop, but I recall the Countach, which had a reputation for leaking oil all over the pavement. It was an excellent but low-quality automobile.

Operational excellence companies generally pursue mass markets, as this strategy is a high-overhead-cost/low-unit-cost approach to doing business. This trade-off makes the most sense when what you need is for the marginal cost of making one more unit to be low. Mass markets don't exclude good customer service but generally leave out deep customer relationships (as I already mentioned).

You're right that these three aren't mutually exclusive. The challenge for each company is to determine how they want to balance the three, because they do involve trade-offs.

- Bob