Strategy formulation involves the constant search for ways in which the firm's unique resources can be redeployed in changing circumstances.'

Starting resource positions are a very poor predictor of future industry leadership/

It's gone from a game of resources to a game of rate of progress.^

Management literature suggests that competitive advantage comes from unique resources that cannot be easily acquired, imitated, or substituted for by others." It is difficult to argue with this concept, provided that the resources in question are used to produce some-

thing that customers value. However, does the concept provide any guidance to managers except to say that if they have a sustained monopoly on a valuable resource, they can profit from It? A manager seeking guidance needs answer to the following questions: What is the basis for the value that comes from the resource? Is this basis likely to continue in the future? If the basis remains unchanged in the future, how does one know if the resource is inimitable or unstibstitutable? Neither resource-based theory nor its traditional counterjiart, SWOT analysis, is very useful in answering these questions. While the manager may be able to come up with answers, getting them is likely to be a trial and error process. For example, consider the following situation using strialy the guidance of SWOT or resource-based theory.

I would like to thank Vasu Ramanujam, Leonard Lynn. John Aram. Michael Lubatkin and two referees of thif journal for comments on previous versions of this manuscript I would like to thank Persephone Dotiner for editing assistance.

78 CAUFORNIA MANAGEMENT REVIEW VOL 40, NO. 2 WINTER 1998

Delivering Desired Outcomes Efficiently

Xerox knows that its good service network that allows it to enjoy a competitive advantage. Xerox has determined that it is difficult for new entrants to develop a comparable service network. How would Xerox determine if ihis competitive advantage is sustaitiable?

It is not enough to analyze the difficulty of a competitor's imitating the service network. Nor is it enough to figure out the "fit" between all the compo- nent parts of Xerox's distribution strategy that may tiiake it difficult lo copy.^ Rather, the competitor will have to figure out if the service network is the only way the competitive advantage can be gained. Using either SWOT or the resource-based framework, this becomes a completely open-ended question. However, if one moves away from viewing the resource {the service network) as the basis of the competitive advantage and toward seeing the outcome tliat customers value as the basis, the question can he easily addressed. In this case, customers would be loyal to Xerox not because of its service network per se, but because the network prevents downtime. If one now starts the analysis by ques-

tioning if others can deliver this same "uptime" outcome, possibilities beyond mere imitation of the service network open up. A competitor may be able to deliver the same outcome of reduced downtime through a different resource, such as by manufacturing excellence {so that a machine needs few repairs) or by designing a machine that customers can service easily by themselves. Canon's entry into the personal copier market and the office equipment market utilized both design and manufacturing to get around ils lack of service and other infra- structures in the copier market.

Now consider another situation.

There are large efficiency costs if an assembly line has to be stopped for any rea- son. Crown Cork and Seal ran into this problem when it found that its assembly line supervisors had to run from the can seamer end to solve problems at ihe labeling end because of problems with the labeling machine that the labeling end worker was not trained to solve. However, the minute or two that it took the supervisor to reach the other end was enough to cause a blockage and therefore the line had to be stopped even though the problem itself could be resolved in a few seconds. How would you try to solve this problem most efficiently so thai the line did not have to be stopped?

If your solutions involved training the assembly line worker, hiring a new supervisor for the labeling end, or buying a more robust labeling machine, then you have basically applied a resource-based solution to the problem: acquire resources to develop competitive advantage, in this case by reducing downtime costs. However, now look at the situation by considering the cause of the down- time. This can be characterized as the inability of the supervisor to reach the labeling end quickly enough to prevent a blockage. Now try to think ahout a solutionhow can the supervisor reach the labeling end from the can seamer end in a few seconds? Considering this desired outcome allowed Crown Cork and Seal to come up with an unorthodox, creative, and inexpeasive solution. They made the assembly line U-shaped.

CALIFORNIA MANAGEMENT REVIEW VOL 40. NO. 2 WINTER 1998 79

Delivering Desired Outcomes EfFicientiy

Similarly, the Mazda Miata is an anomaly if one compares its features to those considered important in a sports car. The Miata's success can be more easily explained by the outcome that its customers valued, a recapturing of the excitement that the British two-seaters used to provide. The point is sitnply that competitive advantage should not be measured by how unique a particular resource is (i.e., whether any one else can get it), or even by the fit among a company's aaivities. Rather, competitive advantage should be measured hy how unique and valuable the outcome associated with the resource or activities of the firm is. As many industry leaders have found out, relying on the barriers to imi- tation of their unique resources simply invited new entrants to go around those

barriers and deliver the same or better outcotiics using completely different sets of resources or activities. A unique resource does not create competitive advan- tage, but a unique and valuable outcome does.

Strategic management should help managers acquire the optimal resources to deliver unique outcomes more efficiently than their competition does, not just help them find new uses for existing resources (see Figure 1). Thus, for Xerox the relevant question was not the inimitahility of ils resources, hut the inimitability of a key outcomedowntime. For Crown Cork and Seal, the efficient solution was a matter of considering the outcome of quick access to both ends of the assembly line.

By starting with the outcomes of processes and sometimes re-defining outcomes, managers may be able to identify a different value chain as well as unique internal process modifications that lead to competitive advantage. The value thai a firm adds arises from a collection of outcomes, not from activities and processes. A firm's ability to extract value from the marketplace will depend on how it creatively defines, develops, and delivers outcomesinternal and external. There are usually multiple processes or product features that can deliver the same outcome, and it is the outcome that creates value (see Figure 1). Before jumping into an analysis of processes or of underlying resources, managers should step back and try to consider alternative processes that can deliver the satne outcome and select the processes that play into a firm's core competencies. The manager should also consider several outcomes that can add similar value and choose the one that best matches the resources of the finn.

This mindset will open up creative thinking more than concentrating purely on processes or product features, and it will help managers see opportunities for competitive advantages by facilitating re-engineering and exploiting new market opportunities.

Outcomes and Generic Strategies

It is widely accepted that one-dimensional generic strategies of either differentiation or low cost will simply not work any more." While Porter ack- nowledges that Japanese firms have managed to deliver both high quality and low cost/ he still maintains that firms will have to make a trade-off between

80 CAUFORNIA MANAGEMENT REVIEW VOL^O.NaZ WINTER 1998

F I G U R E I .

Resources

Ex: Service Engineers

Resources and OutcomesThe Link with Value

Delivering Desired Otrtcomes Efficiently

Processes

Ex: Service Networi<

Outcome

Ex: Reduced Downtime

Alternative Process A

Service Networic

Alternative Process B

Reduce Mean Time Between Failure

Alternative

Process C

Self-Service

Outcome

Ex: Reduced Downtime

Resource

Resource 2

Resource 3

Resource 4

Resource 5

Resource 6

cost and quality because most firms will run into a produaivity frontier* How- ever, looking at the produaivity frontier is the wrong way of approaching this trade-off. Instead, firms should try to approach the value frontier, as depicted in Figure 2.

Firms have to constantly provide more and more value to customers while lowering prices or at least holding them steady. In terms of the value chain, firms have to come up with creative solutions whereby the value-creating activity can be delivered at costs that are lower than the competition's. The pro- ductivity approach forces firms to look at how to increase efficiencies from cur- rent activities. By focusing on outcomes that reside on the value frontier, firms can more easily identify new activities that can expand the productivity frontier beyond its existing configuration as well have an impact on ihe perceived value.

CALIFORNIA MANAGEMENT REVIEW VOL 10, NO. 2 WINTER 1998 81

FIGURE 2

if

I0 I

I

( Mercedes y

T ^ r\. Lexus )

Delivering Desired Outcomes Efficientiy

High

( ^

K-Mart J)

Price per Unit ofValue

Low

At the broadest level, outcomes can be categorized into two classes. Exter- nal or visible (to the customer), outcomes are the ones that provide value for the customer and revenue to the firm. Internal outcomes are the ones that the firm needs to be able to deliver the external outcomes. To be competitive a firm needs to be unique, inimitable, and valuable in the visible outcomes and to be efficient in the internal outcomes.

The Link between Visible Outcomes, Internal Outcomes, and Competitive Advantage

How can managers identify the outcomes thai can allow their firms to approach the value frontier? Toyota's Lexus, for example, has managed to take a large share of the market dominated by Mercedes. The Mercedes buyer has

Focusing on outcomes allows firms to be creative and reconfigure their value chains, and in doing so they deliver more value to customers at the same or lower costs.

82 CALIFORNIA MANAGEMENT REVIEW VOL40.NO.2 WINTER 1998

Value ^^r \ Frontier

\

C Saturn y \

Delivering Desired Outcomes Efficiently

always valued both the technological sophistication and absence of defects the car offers and has been willing to pay for these qualities. To minimize defects, Mercedes focused on craftsmanship and gave every car a "white glove" treat- ment that caught and repaired all manufacturing defects before the car was shipped to the dealers. While this meant that Mercedes met customers' expecta- tions, it was costing Mercedes one-third of its production efforts to catch mis- takes, which was as much work as Toyota put in to make a nearly defect-free car the first time around.'' This particular internal process, inspection, was delivering a valuable customer outcomea near-perfect car. However, the Mercedes buyer was not going to the factory floor to determine how Mercedes manufactured a defect-free car; Mercedes's internal processes are invisible to the customer. The customer was relying on secondary sources (such as Car and Driver or word of mouth) and perhaps a lest drive to judge the value of a Mercedes. Thus, if a competitor like Lexus could convince Car and Driver to attest to the superiority of Lexus over Mercedes, and such testimony was confirmed by a test drive, the aura of a Mercedes alone would not keep its customers loyal if they could get the Lexus at a significantly lower price. What Lexus basically did was to develop a set of internal outcomes that led to the same high-quality, defect-free outcome

that customers valued. However, since the internal outcomes were invisible to the customers, Lexus focused on different set of processes to deliver the internal outcomes at a much lower costs. Instead of craftsmanship, Lexus focused on designs that could make the manufacturing much more automated and much less prone to defects, which reduced costs both at the manufacturing stage and the inspeaion stage. Lexus had this opportunity primarily because Mercedes felt it did not have to contain costs in any of its activities because it was selling a "differentiated" product.

At the other extreme, K-Mart customers like the low prices the chain offers but in the past have had to deal with uncertainty about whether sale items would be in stock and with shopping in a somewhat gloomy store envi- ronment, K-Mart initially did not spend money on a sophisticated inventory- tracking system, consistent with a generic strategy of "cost leadership." However, this cost cutting (or lack of spending) resulted in a negative external outcome

(frustration) and opened the door for others to lure customers away. K-Mart may have assumed that a customer coming to a discount chain would be satis- fied with a raincheck, but this assumption is dangerous because the manner in which it managed its inventory (an internal outcome) directly affected the shoppers frustration level (an external outcome). Similarly, K-Mart may have avoided spending on store appearances under the assumption that the discount store customer would not be affected by the shopping environment.

The mistake that K-Mart made was to get so focused on the internal outcome of cost cutting that it failed to see the adverse link between its internal outcome and the external outcomes. Target, by providing brand name merchan- dise that was available when advertised and by doing it in much more pleasant store surroundings, proved that these investments directly affected the shopper's

CALIFORNIA MANAGEMENT REVIEW VOL-10. NO, 2 WINTER 1998 B3

Delivering Desired Outcomes Efficiently

feeling of well-being, a valuable visible outcome. The end resuli of the manner in which K-Mart used to carry out both inventory and store maintenance activ- ities (they have since drastically changed both) was an opportunity for others, like Target and Wal-Mart, to enhance shoppers' well-being. This they did in several ways, including investing in service people to greet shoppers on their arrival. K-Mart may have reached the productivity frontier in terms of display- ing products with the least overhead, but they were nowhere near the value frontier that Target and Wal-Mart developed.

The Framework

Belore settling on what resources to acquire or deploy, a firm should con- sider the outcomes that the resource/process is trying to deliver. The firm should selea a resource mix that both matches iis core competence and can be used efficiently. To facilitate this, the firm needs to: categorize the important visible and internal ouicomes; and understand the linkage between the visible and internal ouicomes.

Develop Optima! Processes to Match Outcomes

Every firm needs to list the external (visible) outcomes that are valuable to its customers and the internal outcomes that apply to its internal processes. To see possibilities for simultaneously creating value and becoming efficient, consider the example of the Saturn Car Company, as depicted in Figure 3. Con- sidering external and internal outcomes instead of a standard value chain allows a firm to see which processes help the margin by increasing value (tfie external outcomes). This approach allows a firm to see how the interseaion of support and primary processes can add value and reduce costs. Finally, this approach forces a firm to focus on the outcomes that are the most important for customer value as well as the internal outcomes that contribute most to the cost structure.

Once a firm has defined its high-level, or most important, outcomes, managers need to analyze primary and support processes in more detail with micro level outcomes in mind. For example, in the Crown Cork and Seal case, a micro level productivity outcome under "operations" was uptime. A micro level process that could influence the outcome of uptime was assembly line design (a support process). By re-engineering the processes so that the key out- comes associated with each process could be delivered most efficiently (in this case, the process solution was the supervisor's access) the firm built competitive advantage at every key process level. Figure 3a illustrates Saturn's manufactur- ing outcomes and the first-in-the-industry creative processes that it developed to deliver these internal outcomes most efficiently.

In the traditional value chain, value is obtained by adding the margin to the cost of all the activities carried out by a firm. However, looking at the tradi- tional value chain does not direclly help a firm identify how different activities contribute to the margin. In the framework represented in Figure 3, the external outcomes add to the margin by pushing the value outthat is, by allowing the

84 CAURDRNIA MANAGEMENT REVIEW VOL40,NO.2 WINTER 1998

Delivering Desired Outcomes EfRciently

F I G U R E 3. Saturn Car CompanyKey Outcomes and Processes

External Outcomes

Nimble Handling Low Vibration

Examples of Key Primary Processes

Continuous Improvement in Design

Plastic Body Panels

Worker Optimized Assembly

Moneyback Guarantee

No Haggle

Follow-up Letter

Anniversary Cards Annual Get-together

Internal Outcomes

Productivity through Worker Empowerment

Examples of Key Support Processses

I

firm to charge higher prices for activities that customers valued.'" The firm must spend every dollar needed on the crucial external outcomes to differentiate itself regardless of its generic strategy (Saturn spent nearly $5 billion in developing ils car). Spending on visible outcomes is the strategy that will help the firm reach the value frontier. The internal outcomes help the margin by pushing the cost of activities down. By probing deeply into the links between individual processes, value, and cost, the firm can determine whether the value it provides fits its core competencies and whether ahemate processes can deliver the same external and internal outcomes at reduced costs. Becoming efficient in the internal outcomes will allow the firm to reach the value frontier at the least cost.

Differentiate in External Outcomes

The only way to develop a sustainable competitive advantage is to ensure that sufficient resources are available to achieve external outcomes that not only

CAUFORNIA MANAGEMENT REVIEW VOL 40. NO, 2 WINTER 1998 85

E

I

Si

Qg

Delivering Desired Outcomes Efficiently

F I G U R E 3 A . Saturn's Manufacturing Outcomes and Key Processes

Manufacturing's Internal Outcomes

Examples of Key Manufacturing Processes

Build cost awareness with workers

Workers trained to read income statements

Manual and automatic transmissions on the same line

Assembly workers ride on wooden pallets instead of walking with the car; thereby reducing defects and worker strain.

Lifetime job security

Workers and managers eat at the same cafeteria

Examples of Key Manufacturing Sub-Processes

Productivfty through worker empowerment

meet customers' current expectations about a firm's product, but also meet them better than competitors. In the generic strategic terminology, all firms should try to differentiate themselves from their competitors in the external outcomes.

Although many basic car producer are increasingly providing features traditionally available only in luxury cars, the value fromier of the luxury car remains different from that of the basic car. The basic car producer should con- stantly search for ways it can provide more visible value to its customers com- mensurate with its price point. Also, it should always emphasize activities such as service and the attitude of salespeople, regardless of price point, because these outcomes can be implemented with little aaual cost to the firm. Pursuing these

86 CALIFORNIA MANAGEMENT REVIEW VOL 40, NO. 2 WINTER 1998

Reduce tooling and machining costs

Lost foam casting

Delivering Desired Outcomes Efficiently

Strategies gives a new entrant a means of distinguishing itself (witness the fierce loyalty of Saturn customers) and of exploiting opportunities in the most mun- dane of markets (note Rubbermaid's hold on the housewares plastic market), In the Lexus example, it is interesting to note that while the firm did capitalize on the increased cost structure in Mercedes's craftsmanship-intensive manufactur- ing activities by rethinking how a luxury car should be manufactured, it man- aged activities such as sales and service, marketing, and advertising quite differently. In dealing with these areas that impinge on the customer's experi- ence (an external outcome), Lexus did not spare any expense to ensure that the purchase experience was as pleasant as it could be. Lexus dealers were literally sent to boot camps where they received extensive, and expensive, training in how to ensure that the customer's visit to the dealership was a memorable one. This investment paid quick dividends when an early recall of the first Lexus model actually worked to Lexus's advantage because it allowed customers to experience firsthand how good the dealer's handling of a problem really was. Lexus also advertised that it could instantly retrieve the maintenance history of any Lexus car anywhere in the country through a satellite linkup.'' All this may sound like overkill, and it certainly did cost money, but it created a tremendous post-purchase satisfaction outcome for the customer.

At a much lower price point, Saturn focused on external outcomes that overlap to a large degree with those Lexus pursued. As Figure 3 shows, Saturn started with the features (such as nimble handling, low vibration, and low main- tenance) that import customers prefer. However, unlike Lexus, Saturn used a highly motivated workforce to deliver these outcomes and avoided heavy invest- ments in factory automation. Saturn's workforce has been instrumental in its continuous improvements in design and assembly as well as in reducing defects in assembly. These efforts result in low maintenance for the customer by cutting down post-purchase problems. Saturn could use its workers so effeaively because it focused on two critical internal outcomes of worker empowerment and worker morale and came up with a creative means of meeting these internal outcomes very efficiently. Saturn's dealers are instrumental in two other critical external outcomes. They focus on communicating the value of a Saturn to prospective customers as well as developing the loyalty of existing Saturn cus- tomers. Human resource management is the key support process motivating both dealers and workers. At one point, the Saturn workers chose to automate a manual operation even though it meant temporary layoffs because they were confident that they would be called back when sales grew. Similarly, Saturn stressed its commitment to building a long-term relationship with its dealers. This commitment paid off in dealers being willing to take a longer-term perspec- tive for the good of the relationship. For example, when Saturn needed a larger price increase to meet profitability goals, some retailers offered to cut margins to mitigate the increase in retail prices.

CALIFORNIA MANAGEMENT REVIEW VOL-10. NO. 2 WINTER (998 87

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Be Efficient in Internal Outcomes

Internal outcomes contribute to the overall value of the produa by directly or indirectly influencing external outcomes. However, the customer does not really care about the exact manner in which a firm carries out the activity leading to the internal outcomes. To take advantage of this distinction, a firm must always try to minimize costs in internal outcomes so long as there are no adverse effects on the external outcomes. Further, a firm must do this irrespeaive of the price point for its product or service. This internal cost minimization does two things. First, if the firm is not facing serious competition, it can increase its margins by virtue of achieving efficiencies in the internal outcomes. Second, when competition arrives, as it invariably does, the firm is in a much better posi- tion to meet the challenge because it has a total cost structure that is already low enough to allow it to compete on the basis of price if it needs to. However, just because a firm is currently selling a premium-priced product, it should not be complacent about increasing efficiencies in Internal outcomes. In fact, increasing efficiencies in internal outcomes actually helps a firm provide more value to the customer. Rubbermaid charges a premium price for its basic housewares prod- ucts. However, instead of trying to capture the margin from its premium price, Rubbermaid provides value to the constituents most important to itthe retail- ers. It uses the extra profits realized from manufacturing efficiency not only to offer better margin to the retailers, but also to provide them with what Rubber- maid calls "invincible customer service"an outcome that is very visible to the retailers and that ereas a very high hurdle for Rubbermaid's competitors.'^ Similarly, while Lexus certainly does try to differentiate itself in the external outcomes, it has tried to extract the last penny of cost savings from internal out- comes without affecting the value to the customer. Toyota has taken to painting only the bottom half of a compact car's wheel well because the top half is invisi- ble from most angles. This saves Toyota a penny per car, which illustrates how committed it is to saving costs wherever it can in internal outcomes.'* Both Toy- ota and Honda (see Appendix) have decided to cut content from their cars where the outcomes are not visible to customers while at the same time boost- ing features that are visible to customers. Ford has taken the same strategy in not painting its ashtrays, which will save 25 cents per car. Ford used to have fourteen types of cigarette lighters that they have presently been reduced to a single typetotal savings are expected to be 4 million dollars per year. A luxury hotel chain in Dallas has installed motion detectors in guest rooms that shut off the air conditioners when guests are not in the rooms.

Saturn has taken the standard outcome of produaivity and focused on innovative processes to itnprove productivity through worker empowerment. Saturn workers are trained to read income statements so they can directly see the link between their wages and the company's cost structure (see Figure 3a). Worker involvement has led to many innovative processes that both cut the cost of production by reducing tooling and machining costs and reduce the cost of post-purchase repair to the customer.

CALIFORNIA MANAGEMENT REVIEW VOL 40, NO. 2 WINTER 1998

Delivering Desired Outcomes Efficiently

Outcomes Make It Easy to See Efficiency Improvements

A ready-made concrete mix company in Cleveland was trying to improve ils cycle time so that it could expand its business. This business is very precise because any delay keeps hourly construction workers running up the bill, and any variation from the exact time by which the concrete must be poured can lead to poor concrete performance. The company defined the external outcome that customers (building contraaors) valued as timely delivery of a perishable product and defined the internal outcome as the ability to make a perishable product quickly and precisely and to deliver it very soon after a customer has called in. These definitions allowed this company to see the similarities between their business and the pizza delivery business. A hungry customer ordering a pizza expects a hot and tasty pizza but is very intolerant of delays. The concrete company benchmarked its aaivities against a highly successful pizz.a delivery company and achieved much higher efficiency improvements than it had with previous time and motion studies.

Do Not Ignore the Link Between Internal and External Outcomes

Not all internal outcomes should be the target for cost savings. For exam- ple, innovation through R&D is an internal outcome vital for firms in many industries. Efficiency improvements are to be carried out in internal outcomes that do not have an adverse effect on the experience of the customerthe external outcomes. A disposable pen that leaks ink will soon lose its customers. However, if the final outcome is not adversely affected, then every dollar saved on the internal outcomes will have a direa effect on the margin by shrinking the cost of the total activities. British Airways (BA) has been considering outsourc- ing their pilots to save money. Clearly, BA feels that the amount it spends on its pilots does not translate into perceived value for customers. Sometimes, how- ever, a firm may have to incur additional costs in some internal outcomes because they will both increase the value of external outcomes and in the long run cut costs in other internal outcomes. Typically, the processes that will be involved in additional up-front costs are support processes (such as design, human resource management, and R&D). To reach the ultimate goal of lower manufacturing costs while maintaining high quality, Lexus had to make sub- stantial up-front investments in redesigning and re-engineering (both support processes) which allowed it to substitute automation for manual labor but still produce a car that would be as good as, if not better than, a comparable Mer- cedes. For example, during the design process, Lexus engineers had to go back to the drawing board time and again to ensure that the Lexus had a drag coefficient low enough to beat the gas guzzler taxa savings that could both be trumpeted in advenising and passed on to the customer.'''

Reengineering must be based in an understanding of the link between internal and external outcomes. IBM Credit, like the credit arms of many other companies, is a very profitable business that finances the purchases of IBM's customers. Hammer and Champy point out how IBM Credit used to take up

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Delivering Desired Outcomes EfFiciently

to 14 days to process a loan application, a lag that led to a loss of computer sales to other vendors.'^ Using the outcome-based framework, it is easy to see how the initial long-winded process came to be established and eventually abolished. IBM Credit, like most credit institutions, was focusing on the internal outcome of risk management: it wanted to be profitable by reducing defaults as much as possible. However, the internal outcotne of risk management, which is invisible to the computer customer, resulted in a negative external outcome of anxiety and frustration. What IBM finally realized was that it needed to avoid this negative external outcome and turn it into a positive external outcomequick turnaround. It reengineered IBM Credit so that a credit application could be processed in under a day. In summary, single-minded focus on internal out- comes without considering the key links between internal and external outcomes can lead to loss of competitive advantage.

Exploit Hidden Value in Internal Outcomes

Very often a firm can generate value from customers with very little cost by simply communicating some its internal outcomes to them. To counter the visible value of the Japanese cars, BMW's advertisement copy in 1991 changed from "the ultimate driving machine" to "even people of means are asking . . . What makes this car worth the money?" The advertisement then goes on to explain how the car is manufactured to precise tolerancesoutcomes that are normally invisible to the customer. The BMW advertisement illustrates a gniw- ing trend, exploitation of values from outcomes that are normally invisible to customers. This is a very cost-effeaive way of creating value.'* A Honda dealer in Cleveland makes a point of showing prospective customers its ultra-clean and modern repair facilities (normally, an internal outcome) as well as emphasizing the door-to-door limousine service it offers should the car ever need repairs (an outcome that is invisible until the customer needs to have the car serviced). Lexus advertises its satellite hookup for retrieving individual cars' service histo- ries. A number of firms have taken to publicizing their product's place of manu- facture (normally an internal outcome) as the United States to reap the value of patriotism. Coors has always tried to create value by citing the source of the water that goes into their beer, as has Perrier for its mineral water.

A variation of the above technique would be to deploy inexpensive resources that can contribute to external outcomes that are highly valued by the market. The recent proliferation of talk shows is one such example. While it is clear that there is currently a glut of talk shows, these shows are very cheap to produce (compared to regular programs) and arc easy (less costly) to discontinue if they prove to be unpopular.

Remove External Outcomes with Negative or No Value

Finally, some external outcomes may actually detract from the value that a firm can provide. For example, new models promote a sense of excite- ment for customers trying to select a car. In the 1970s and 1980s, Mercedes did

90 CALIFORNIA MANAGEMENT REVIEW VOL 40. NO, 2 WINTER 1998

Lower Costs

Invisible to Customer (Internal)

Try to reduce costs of activities if ft does not impact any external outcomes

A ^

Visible to Customer (External)

If outcome detracts from value then make (t invisible

Must provide at least as much value as the main competitors even if it

means increased expenses

Delivering Desired Outcomes Efficiently

FIGURE 4. GenericStrategiesfortheFuture Outcome of the Activity

If activrty adds value then make it visible

A ^

not change models very often, thus possibly depriving its customers of this excitement value. Mercedes's advertisements during this period revealed the firm was aware of this, in that they claimed that the Mercedes models were so advanced they did not need changing. In the mid-1980s, some airlines started charging for on-board food in a drive to "unbundle" services, however, custom- ers did not appreciate this change and ultimately most companies reversed the policy." On the other hand. Delta Airlines initiated a cost-cutting move that involves omitting lettuce from its in-flight food service. It seems customers did not care, and the change is saving Delta $1.5 million per year. Breyers Ice Cream removed the pledge of purity from its ice cream packages for the same reason,

at a savings of $100,000 per year. Chock Full O'Nuts stopped including a plastic scoop in each coffee can when it realized thai customers did not care.

A firm needs to concentrate on differentiating itself in external outcomes and becoming as efficient as possible in the internal outcomes without adversely affecting the external outcomes. Further, the firm needs to eliminate external outcomes that detraa from value, or add no value, while making internal out- comes that add visible value. Figure 4 illustrates the overall framework.

Outcomes and Competitive Market Opportunities

Focusing on outcomes will allow a firm to spot market opportunities thai can lead to competitive advantage. Further, focusing on outcomes will allow a firm to identify key processes that build barriers to imitation and that allow the firm to sustain its competitive advantage. There are three stages where value can be created for the customer.

Stage 1. Need-fulfillment-based outcomes designed to satisfy perceived customer needs,

Stage 2. Selection-and-acquisition-based outcomes that affect how easy is it for the customer to identify the optimal product and how easy is it to

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Delivering Desired Outcomes Efficiently

own the product. Reduction in purchase anxiety, ambiguity, and time spent on purchasing capture these outcomes.

Stage 3. Post-purchase-satisfaction-based outcomes that determine if the ex-anie need lulflllment (stage I) expectations from the product are met. These outcomes can be broadly captured by avoidance of cognitive dissonance.

Stage 1 Outcomes

Many of the most innovative success stories can be best explained using visible outcomes. Some of these, such as overnight delivery (Federal Express) and the hassle free vacation (Club Med), were completely new outcomes that were not even on the cognitive maps of customers. Swiss watch makers in the

1940s concentrated on craftsmanshipa resource which led to customers' con- sidering watches as a piece of jewelrywith status as the outcome. This gave Timex ihe opportunity to develop the functionality outcome of watches and to become the dominant player in the 50s and 60s. In general, large initial gains can be made by companies exploiting new outcomes that customers accept and value. However, typically these opportunities can lead to sustainable competitive advantage if firms either continually come up with newer need-based outcomes (such as at Sony or Intel).

Stage 2 Outcomes

Making ii easier for customers to select and acquire a product or service can also be a source of competitive advantage. In Japan, Toyota is reportedly offering five-day delivery from the time a customer personally designs his or her own customized car on a CAD system. The five days are enough for order pro- cessing, scheduling, manufacturing, testing, and delivery. Caterpillar and Motorola have also developed processes by which a highly customized product can be delivered in a very short period of time. These stage 2 outcomes have given these firms a considerable competitive advantage that is difficult to imi- tate. However, these barriers to imitation were developed by first considering outcomes that customers desire rather than resources the firms possessed ex ante. In fact, in some instances the resource position of an incumbent can aau- ally hinder the response to an outcome-oriented competitor. Oracle in the data- base market and Netscape in tlie Internet browser market are allowing potential customers to download their software from the Internet. This bypasses the need for a separate distribution channel to help customers select and acquire prod- ucts. If Oracle is successful, Microsoft will be hard put to imitate Oracle for fear of alienating the resources implicit in Microsoft's long-time dealer relationships. Like Oracle, Prudential is exploring the market opportunity in trying to make home buying less onerous hy developing one-stop shopping for information, selection, negotiation, and financing.

92 CALIFORNIA MANAGEMENT REVIEW VOL40,NO.2 V^INTER 1998

QUESTION

MAKE SYNOPSIS OF THE WHOLE CASE IN STRATEGY MANAGEMENT

Q2 WHATB YOUR LEARNING OUTCOME FROM THIS CASE STUDY