Delivering Desired

Outcomes Efficiently:
THE CREATIVE KEY TO
COMPETITIVE STRATEGY
Sayan Chatterjee
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.^
M
anagement 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 t o 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
Delivering Desired Otrtcomes Efficiently
FI GURE I . Resources and OutcomesThe Link with Value
Resources
Ex: Service
Engineers
Processes
Ex: Service
Networi<
Outcome
Ex: Reduced
Downtime
Outcome
Ex: Reduced
Downtime
Alternative
Process A
Service
Networic
Alternative
Process B
Reduce Mean
Time Between
Failure
Al ternati ve
Process C
Self-Service
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
Delivering Desired Outcomes Efficientiy
FIGURE 2
if
I
0
I
I
( Mercedes y
( ^ K-Mart J)
T ^ r\. Lexus )
Value ^^r \
Frontier \
C Saturn y \
High
Low
Price per Unit ofValue
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.
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
82 CALIFORNIA MANAGEMENT REVIEW VOL40.NO.2 WINTER 1998
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
FI GURE 3. Saturn Car CompanyKey Outcomes and Processes
External
Outcomes
Examples of Key
Primary Processes
Internal
Outcomes
Nimble Handling
Low Vibration
Continuous
Improvement
in Design
Plastic
Body Panels
Worker
Optimized
Assembly
Moneyback
Guarantee
No Haggle
Follow-up
Letter
Anniversary Cards
Annual Get-together
Examples of Key
Support Processses
Productivity
through
Worker
Empowerment
I
E
I
S i
g
Q
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
Delivering Desired Outcomes Efficiently
FI GURE 3A. Saturn's Manufacturing Outcomes and Key Processes
Manufacturing's
Internal
Outcomes
Examples of Key
Manufacturing
Processes
Examples of Key
Manufacturing
Sub-Processes
Productivfty
through worker
empowerment
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
Reduce tooling and
machining costs
Lost foam casting
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
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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
Delivering Desired Outcomes Efficiently
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.
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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
CALIFORNIA MANAGEMENT REVIEW VOL 40, NO. 2 WINTER 1998 89
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
Delivering Desired Outcomes Efficiently
FI GURE 4. Generic Strategies for the Future
Outcome of the Activity
Invisible to Customer Visible to Customer
(Internal) (External)
Lower Costs Try to reduce costs of activities A If outcome detracts from
if ft does not impact any ^ value then make (t invisible
external outcomes
If activrty adds value A Must provide at least as much value
then make it visible ^ as the main competitors even if it
means increased expenses
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
C^IFORNIA MANAGEMENT REVIEW VOL40, NO. 1 WINTER 1998 91
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
Delivering Desired Outcomes Efficiency
Stage 3 Outcomes
Similar opportunity exists when the post-purchase outcomes of satisfac-
tion are not being fully met. For example, in the international airline Industry
an outcome that is extremely valuable to the business traveler is " the ability to
work at peak efficiency after a transatlantic flight." British Airways (BA) decided
to acquire resources to serve this outcome, and the goodwill that this move has
generated has created a considerable barrier for other airlines. An example of
processes that BA focused on to develop this sustainable advantage is the instal-
lation of shower stalls at Heathrow Airport, where transatlantic passengers can
get refreshed before attending early morning meetings. The showers and BA's
well-publicized "most comfortable seats" are two of the key processes that col-
lectively allow the business customer to funciion at his or her peak after a
transatlantic flightthe outcome that necessitates the travel. Competitors'
attempts to imitate this British Airways formula has led to "shower wars"
at Heathrow. However, BA's basic competitive advantage has not changed.
One may ask if there truly are major barriers for imitating the resources
that BA acquired to deliver superior service. The answer is no. Rather, the bar-
rier that BA has developed is the trust customers have come to feel while Hying
with BA, and not the resources needed to deliver the outcome. The futility of
imitating BA's shower stalls underscores this point. As a corollary, post-purchase
satisfaction outcomes provide such strong barriers to imitation not because the
resources necessary to deliver the outcomes are difficult to get, but because cus-
tomers are very averse to the risk of being disappointed. Sometimes the satisfac-
tion outcome can be met if the firm can seamlessly bring a less-than-perfect
product up to par. Surveys have found customers are more likely to be repeat
buyers of PCs from firms that had problems with products but resolved them
quickly (such as Dell) than from firms that did not have as many problems but
also did not respond quickly when problems happened. Post-purchase outcomes
are particularly important for service-based markets, especially when the need-
based outcome has a high emotional content and the resource barriers prevent-
ing competitors from providing the basic need-based outcomes are low. These
markets range from wedding planning and child care to stock brokerage. Firms
in these industries that gain a reputation for delivering valuable post-purchase
outcomes will have a much higher likelihood of developing sustainable competi-
tive advantage.
In summary, firms may be able to exploit competitive market opportu-
nities by looking for new ways of delivering existing outcomes that others have
missed. Stage 1 outcomes are the most easily imitated and it is difficuh to sustain
a competitive position in this stage. Stage 2 benefits first movers if they can
effectively block future entrants and if the seleaion and acquisition outcomes
are best met by scarce new resources. Stage 3 outcomes can usually be Imitated,
but first movers can to develop sustainable advantage because they can win
emotional commitment from customers. As Figure 5 shows. Stage 3 outcomes
have the most visible content, and the resources expended direaly add to value.
CALIFORNIA MANAGEMENT REVIEW VOL 40. NO, 2 WINTER 1998 93.
Delivering Desired Outcomes Efficiently
F I GU R E S. The Processes Associated with
Each Stage and Their Impact on
Outcomes
Impact on
Outcomes
Stage 1 Processes
Stage 2 Processes
Stage 3 Processes
Visible/
External
High/Medium
Medium
High
Internal
Very High
Medium
Low
Stages 1 and 2 offer more opportunity
for creatively offering more visible value
as well as reducing the costs of internal
outcomes.
Conclusion
This framework for competitive strategy
can guide firms in identifying creative
ways to deliver value for customers.
To be effective in this kind of strategy,
managers need to liberate their thought
process and not simply repackage what
their firm is already doing.
APPENDIX
Honda Saved Enough Money in the New Civic
Where Customers Wouldn't Notice . . .
Replaced rear disk brakes with cheaper drums; switched to simpler,
less expensive antilock system.
" Integrated dashboard clock into radio display.
Replaced trunk hinge with a simpler design that cut costs in half.
" Used 30% fewer threads in rear seat materials and replaced vinyl and
interior trim with cheaper fabrics.
Bumpers, dashboard, and other parts are now made with fewer pieces,
cutting manufacturing costs.
Air conditioning that is factory-installedrather than dealer-installed
trims price from $1,200 or more to $850.
. . . t o Add Features and Refinements Where They Would.
A more powerful 1.6 liter engine that meets California's tough new
emissions standards.
Hydraulic engine mounts and electronic controls for automatic trans-
mission make for a quieter, smoother ride.
Radio standard on all models; doubled number of speakers to four.
Rear seat folds in two seaions instead of one, adding versatility.
A higher roof and improved design create a more spacious car with
extra rear legroom.
Source; Business Wteek, September 18.1995,
CALIFORNIA MANAGEMENT REVIEW VOL 40. NO. 2 WINTER 1998
Delivering Desired Outcomes Efficiently
Notes
1. R.P. Rumelt, "Toward a Strategic Theory n( the Firm," in R. Lamn, ed.. The Compet-
itive Challenge (Cambridge, MA: Ballinger Publishing, 1984). pp. 137-158.
2. G. Hamel and C.K. Prahalad, Competing for the Future (Boston, MA: Harvard Busi-
ness School Press, 1993), p. 17.
3. Michael Porter, quoted in Wall Street Journal. December 23, 1994, p. Al.
4. For a summary oi this literature, see J.T Mahoney and J.R. Pandian, "The
Resource-Based View within the Conversation of Strategic Management,' Strategic
Management Journal. 13/5 (June 1992): 363-380.
5. See Michael E. Porter, "What Is Strategy?" Harvard Business Review, 74/6 (Novem-
ber/December 1996): 61-78.
6. G. Hamel and C.K. Prahalad, 'Strategic Intent,' Harvard Business Review, 67Ii
(May/June 1989): 63-76.
7. Poner (1996), op. cit.
8. Ibid., p. 62.
9. D. Woodruff and J.B. Levine, "Miles Traveled, More to Go," Business Week. October
25, 1991, p. 73.
10. Toyota now thinks that it made a mistake in trying to provide customers more
quality than they really wanted in its Camry line. Business Week. July 24, 1995,
p. 66. "We had adopted a Lexus mentality throughout ihe company, where even
the ashtray on the Tercel had to be the best in the world,' according to Toyota
executives. Toyota has cut out nearly a third of the Camry's parts for its 1997
model.
11. Artually, other luxury car makers also provide this service. However, Lexus capi-
talizes on it by making the customer aware of its availability. See the later section
on how to create value hidden in internal outcomes,
12. For example, Rubbermaid helped the inventory management for Wal-Mart by
installing a EDI system. Of course, Rubbermaid had to spend a loi of money to
make this system operational and to some extent maintain it, but it has paid off
in tremendous customer loyalty and access to shelf space. Recently, however,
Rubbermaid tried to pass on some resin cost increases to retailers. This decision
has adversely affected Rubbermaid's relationship with Wal-Mart because it has
affeaed outcomes that are valued by Wal-Mart. Business Week. September 18,
1995.
13. Porter suggests that this is an example of the Japanese car manufacturers' running
into the productivity frontier and that the only way they can keep prices down is
to skimp on quality. This is patently incorrect. Both Honda and Toyota have added
value in visible outcomes in an effort to expand the value frontier and not simply
shrink from the productivity frontier. Although it is correa that Honda did intro-
duce cheaper fabric in its cars to save money, it guessed correctly that customers
would not see the difference but would perceive more value in the other features
they addedat extra costthus pushing out the value frontier and providing a
higher hurdle for competitors. Porter (1996), op. cit., p. 69.
14. Incidentally, Infiniti, the other Japanese luxury car targeted at the same market,
could not beat this tax with its Q45 model.
15. M. Hammer and J. Champy, Reengineering the Corporation (New York, NY: Harper-
Business, 1993).
16. Since then, a number of car manufaaurers have used variations of this theme in
their advertisements, such as the ball-bearitig test for Lexus to demonstrate the fit
of different panels and the wine glass pyramid for Lexus and Altima, to demon-
strate the vibration tolerances.
17. J. Berger,''In the Service Sector, Nothing Is 'Free' Anymore: Selling Service Sepa-
rate from the Product Irks Consumers," Business Week. June 8, 1987, p. 144.
CAUFORNIA MANAGEMENT REVIEW VOL.40,NO.2 WINTER 1998 95