Theoretically Speaking… ETRM Solutions and “The Discipline of Market Leaders” by Patrick Reames

A senior executive at an ETRM software vendor mentioned to me the other day that his management team was discussing strategy and had focused the discussion on the theories expounded in the book “The Discipline of Market Leaders” authored by Michael Treacy & Fred Wiersema, first published in 1995. For those unfamiliar with the book (and I'll have to partially include myself in that category, having heard the theory but not really being familiar with the source), the authors advanced the notion that truly successful organizations embrace a singular value proposition and align their organizations around that value proposition. In Treacy and Wiersema's book, they identified three distinct value propositions that companies can follow to achieve a market leadership position:

• Operationally Efficient—In an operationally efficient company, it's all about the delivery of products and services in the most (as the name implies) efficient and effective manner. These companies are highly process oriented and highly productive. They generally get their products out the door quickly and cheaply. Their customers get reliable products and services; and the company is pretty easy to do business with. You're not getting a leading edge product, but you can be sure that what you're getting will generally meet your expectations and at a price that is lower than the competition. Examples of companies that follow this model are Wal-Mart, McDonalds and Dell.

• Product Leader—In a company embracing product leadership, the focus is on identifying, understanding and responding to market needs, both current and future, and in the process providing the best, most advanced and innovative products. These companies are creative, innovative risk takers. In doing business with these companies, you're getting the best product in the category. However, you're going to be paying a premium for that leading edge product. Example companies for this category include Apple, Sony and 3M.

• Customer Intimate—Customer intimate organizations strive to understand the customer intimately and provide the best total solution. In the process, they strive to gain customer loyalty and develop long-term relationships. These companies are friendly, responsive and adaptable to customer demands. As a customer you're not only getting a customized, personalized product, you're also getting a trusted advisor and partner. However, when you're doing business with these companies, you're paying top dollar. Companies that fit this model include Nordstrom and Ritz Carlton.

In the authors' view, in order for any company to achieve the status of “market leader,” no matter the industry or market they serve, they must embrace one of these value propositions, both internally and externally, and always focus their efforts to achieve the goals that they have elaborated in the adoption of the proposition. Additionally, no company can embrace all three, they must focus on one and do the best they can with the other two, but never to the determent of their chosen value proposition. The theory implies that trying to be all things to everybody will lead to the inevitable state of being nothing for anyone.

The theory is still very popular and widely used today, and it's easy to see why. Focus and discipline are universally accepted as qualities that are necessary for anyone or any company to succeed, and applying those traits around a central value proposition would seem to almost guarantee success (if you truly have a product and a market that wants it).

Applying the “Discipline” Theory to ETRM Products and Markets
However, applying the “Discipline” theory to ETRM solutions vendors can be problematic. The market for these products is extremely small when compared to almost all consumer products, and further, you can divide this small market up into even smaller discrete segments, grouped by commodity, geography, or business model.

Consider this group of fictional companies:
• A small west Texas gas producer sells equity production and schedules gas on a handful of pipelines.
• A Washington State merchant power producer sells power from multiple units into two ISOs, requiring real-time scheduling.
• A Wall Street energy trading company takes positions in virtually every energy commodity across the country. They trade both physically and financially.
• A large Chicago based airline tracks JetA fuel purchases at three regional hubs in the United States and two international hubs. They hedge these purchases whenever its makes sense.
• A global energy company is involved in the production of almost all hydrocarbon products world-wide and markets their products on five continents.

The small gas producer and the merchant generator would probably want to do business with vendors that have embraced the operationally efficient model, a vendor that can provide a low cost product that while not leading edge, still meets their somewhat “generic” needs. These companies probably wouldn't be interested in a “total ownership” experience given that what they do, while not easy, is pretty straightforward. They aren't really looking for a solution partnership, just a product.

The Wall Street firm however, is going to be depending on their ETRM solution to help make them money. They will want a product that can keep up with their needs. They view themselves as a trading shop, not an IT shop, and therefore rely on their vendor to be more than just a software supplier; they want the vendor to be their partner, ensuring that they have the vendor's ear and access to their talent to ensure their systems never hold them back. Clearly, this is a company that would place high value on a Customer Intimate experience.
The airline will be looking to their vendor to provide them with a product that can capture the single commodity (JetA fuel) both physically and financially, but in multiple currencies and possibly in multiple units of measure. Their IT staff is probably not going to have significant experience in these types of systems, so they will most likely be looking to the vendor to supply ongoing support and services, similar to that of the Wall Street firm, but in a less intensive mode.

The global energy producer may have a very large global IT organization. In their business they need a large support staff, not only to service the marketing organization, but also the exploration, production, and refining groups. They have a sophisticated marketing operation and because of their geographic reach, they trade products in all the major market regions around the globe. This is a company looking for a leading edge product, one that they can deploy to address their marketing needs now and that will keep up with their growth. Given the size and experience of their IT staff, they're self-sufficient and aren't looking to the vendor to be a partner. They want to do business with a product leader.

Most of the major ETRM software vendors will view each of those companies as a potential customer for their products. Clearly, the needs of the west Texas gas producer have very small overlap with the needs of the Wall Street firm or the global producer; and the needs of an airline or a merchant generator have even less. Yet in these days of multi-commodity, physical/financial ETRM products, a single vendor will visit all five and demonstrate how the capabilities of their product(s) might meet the needs of these companies.

The Vendor Perspective
So, how does a single vendor address the needs of this heterogeneous market and what are the implications for that vendor when trying to establish their value proposition?

In some cases, the vendors in the ETRM market still develop their products around a monolithic code base. They may disable some features and/or functions depending on the client needs; but, it's still the same code serving the small west Texas producer and the Wall Street trader. It costs the same to produce for both customers, but it is sold at different prices. Given that the vendor's investment in the product was made to address the needs of the top end of the market (the global multi-commodity, physical/financial trader), that vendor will have a very difficult time elaborating a value proposition that makes sense for the small producer market. The market segments are clearly different and have different business drivers. It is impossible for a single product to be stretched over a fractionated market and meet the expectations of the majority of the players therein. So, this vendor would need to focus on that high end market, define their value proposition in terms of that piece of the market, and just do the best they can for the rest, risking a significant amount of market share in the process.

Given the difficulties in developing a market wide value proposition for their product and their company, and if one assumes that the “Discipline” theory is valid, the vendor of the monolithic product is probably not going to become the market leader in the broader ETRM space. They could lead a niche market, but for the majority of the market, they will find themselves in the position of trying to be everything to everybody, with the attendant result.

However, if the vendor can supply a product set built around a modular, service oriented architecture, and deployed with a common integration infrastructure, that vendor can start to view the market as the heterogeneous environment that it is, and develop specific strategies and products to address the different segments. Each combination of market segment and product module can potentially be oriented as a separate entity, all rolling up to the vendor parent. The selection of the value proposition for these separate entities could then be undertaken using the processes outlined in Treacy and Wiersema's book; based upon standardized metrics, including the cost to service, and the value expectations of, the various market segments.

The Buyer Side
So, what does this mean for the buyers of ETRM systems? It means that you must understand and clearly express your expectations to the vendor, and ensure that vendor's value proposition (either explicit or implied) is aligned to meet those expectations. If your's is one of the smaller operations, trading only gas or only power, and you don't have aspirations of triple digit year-over-year growth, the answer may be that you want to do business with an operationally efficient vendor that can give you a decent product at a lower price. If you don't require leading edge functionality, you'll probably find that it's good enough.

However, if you're working for a growing international trading company that takes both physical and financial positions in gas, power, coal, crude, and NGLs; the low cost provider solution is going to be wholly inadequate. The scale and scope of your business dictate that you need the latest functionality. It may even mean that your company's business is unique enough that you need a somewhat customized solution. You're going to be seeking out a product and a vendor that can maintain your pace. Given your circumstances, your vendor will either need to be the superior technology company or the full service, customer intimate organization. But, you should be prepared to pay the cost associated with the product and service level you expect to receive. Trying to buy and implement a sophisticated ETRM solution on the cheap is a receipt for disaster.

You can't expect to shop at Nordstrom and pay Wal-Mart prices.