The power of the CVA® concept can be seen in a comprehensive industry study conducted by William Hall. He studied 64 companies in eight industries, four business-to-business industries and four consumer industries.28 The industries Hall studied included steel, tire and rubber, heavy-duty trucks, construction and materials handling equipment, automotive, major home appliances, beer, and cigarettes. All were characterized by single-digit annual growth and intense competition.
In each industry, Hall identified two companies that were leaders in regard to annual revenue growth rate and return on equity, not only in their respective industries, but among all US companies. In his seminal article, he described the strategies of these winning companies with what the author calls the Strategic Themes Matrix (see Exhibit 1.10).
Exhibit 1.10 Strategic Themes Matrix
Source: Adapted from William K. Hall, “Survival Strategies in a Hostile Environment,” Harvard Business Review, September 1980, pp. 74-85.
In Hall’s formulation of the matrix, the horizontal axis is “relative delivered cost.” Relative delivered costs are all costs involved in placing the product or service in the hands of the customer: operations costs, but also costs such as distribution costs and marketing costs. The vertical axis of Hall’s matrix is “relative product/service differentiation” and refers to product or service performance relative to competitors.
In the reformulation of Hall’s matrix for this book, the definitions of the horizontal and vertical axes have been refined.
The horizontal axis is defined here as “variable delivered cost per unit”—all the incremental costs involved in bringing a unit of the product or service to the customer. That definition is fairly close to that of Hall.
The vertical axis is defined here as “perceived value per unit.” Recall that the perceived value per unit is the maximum that a customer is willing to pay for a unit of a product or service. That definition varies from Hall’s definition with the addition of the word perceived. Even if a product or service is differentiated from its competitor’s product or service, that differentiation must be perceived by the customer to have an impact on their purchases.
The most powerful strategic position on the Strategic Themes Matrix is the upper right position—lowest cost per unit and highest perceived value per unit. However, among the 16 leading companies that Hall identified, only 2 companies occupied that position at the time of his study: Caterpillar in earthmoving equipment and Philip Morris in cigarettes. Today, companies in the upper right position arguably include companies such as Southwest Airlines and Trader Joe’s.29 There are two other winning positions on the matrix—the highest perceived value per unit combined with the medium (or acceptable) cost per unit and the medium (or acceptable) perceived value per unit combined with the lowest cost per unit. In Hall’s study, in heavy-duty trucks those positions were occupied, respectively, by Paccar and Ford.
A company would not want to be in the four cells on the lower left-hand side of the matrix—low or medium perceived value coupled with high or medium costs, which Michael Porter of Harvard Business School has memorably termed stuck in the middle. Stuck-in-the-middle companies lose their performance-minded customers to their higher perceived value competitors and their economy-minded customers to their lower cost competitors.
The upper left position is filled by elite companies with high value products such as Hermès, Chanel, or Carlos Falchi.30 The lower right position is filled by companies producing cheap but shoddy products or services. A company can succeed in either of those two positions, but they require very special types of managerial thinking. Elite companies typically focus on market niches, while shoddy product companies do not expect much repeat business.
The Strategic Themes Matrix clearly shows the two main factors driving business success: perceived customer value and cost. These same themes have been identified and discussed by numerous highly regarded management thinkers such as Michael Porter, Peter Drucker, Al Reiss, and Frederick Reicheld. When such diverse thinkers agree, that is a signal that the idea is significant.
The importance of perceived customer value and cost in determining financial performance has also been validated by several diverse empirical studies over many years. (See Exhibit 1.6.) Different researchers such as Jim Gregory of CoreBrand, Stuart Agres of Young and Rubicam, and Robert Buzzell and Brad Gale of the PIMS Project, and professors including David Aaker, Robert Jacobson, Dominique Hanssens, and Natalie Mizik have all arrived at similar conclusions using different data bases—perceived value is clearly linked to measures of financial return.31
When an idea is supported both by well-known management gurus and by highly respected researchers, the idea is not only significant, but one that works and has been proved in practice.