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Your success as a manager depends upon the perceived value of theproducts and services your organization has to offer. However,client perceptions of value have changed significantly over theyears as criteria such as price and reliability have given way totrust, innovation and / or effectiveness.Â Unfortunately, most management books miss this point by focusingsimply on making better products or running more efficientcompanies. The Effective Organization is different:it directly addresses the challenges of producing business value inthe twenty-first century and proposes practical strategies to helpyou build an effective business organization.
How Clear Is Your Picture of Business Value?
After a superb meal of local dishes at the Auberge de Talloires on the eastern bank of the lac d'Annecy, we retired to the drawing room for an after-dinner drink. The waiter suggested a 125-year-old bottle of Calvados as a perfect complement to the richly appointed atmosphere of this fourteenth-century abode. The eyes of our Scottish colleague, reflecting the intelligence, organization and mischief of thirty years of consulting for the IT industry, suddenly beamed in expectation of another treasured moment. He was not to be disappointed. He savoured the first taste, comparing this unique pleasure to previous experience. In his long career, he concluded, he had never experienced a clearer definition of value.
A manager's job is adding business value to his or her organization. In the preface to The Value Enterprise (Donovan et al., 1998), the authors suggest that the most significant challenges facing management today are communicating clearly what they want their firms to become and how to get there. If we can come to grips with this apparent contradiction between management's quest for value and their apparent inability to share this vision with their employees, customers, business partners and shareholders, we will have taken a major step towards plotting a course for building business value in the future.
The following pages contest a number of commonly accepted management practices. We contend that business value is fundamentally different from either performance or productivity. We demonstrate that the notion of business value has evolved significantly over the last 15 years. We argue that there is no 'one best way' for adding value to organizations or to your careers. We conclude that the search for business value is a perpetual quest that involves applying talent, process and technology to the evolving reality of each business community.
To support our claims, let us explore a number of questions together:
What do we mean by value, and what is the specificity of 'business value'?
Why should we measure value, and why should we care about how we measure it?
How can we measure value, and to what extent can technology facilitate this task?
To what extent has the evolution of organization and technology changed the way we look at value?
What are the paths of a roadmap to adding business value to our organizations?
What Do We Mean by Business Value?
Over the years economists have offered generally consistent views on 'value', 'profits' and 'business value'. Value is a product of labour and is captured in the price of goods and services that is itself set by the balance of supply and demand. Value may be defined as the essence of an organization's identity: why stakeholders (internal and external clients) choose to do business with that organization. Profits are surplus value derived from the proper allocation of capital and labour. Business value has been viewed as a characteristic of industrial innovation, while the function of management has been defined as maintaining competitive differentiation (Schumpeter, 1934). The advent of globalization of markets, technologies and organizations has increasingly provided managers with opportunities to become innovators in their own right, not in producing new products but in elaborating new strategies for value creation.
Simply put, companies invest in a product and/or service offer in the hope of receiving a proportionally greater return on their investment. If they succeed, they have created business value. Since most companies compete in markets with other firms offering similar products and services, creating sustainable business value is intimately linked to the coherence of the firm's business model over time. Business models, formulated either explicitly or implicitly, are built upon four cornerstones:
The client base: How has the company targeted its client base and then segmented it by client needs and objectives?
Expected benefits: What benefits are clients looking for in their relationship with the firm?
Process architecture: How has the organization (human and technological resources) been designed to offer the products and services that meet clients' needs and objectives?
Metrics: How is the organization measuring the revenues generated by these products and services in light of the market and the competition?
Several points can be underlined here. Business value does not come directly from either your products or your company; business value is determined by the relationship you nurture with your clients. Companies have internal (employees, managers and stockholders) and external (distributors, customers, regulatory agencies) clients, each with potentially differing needs and objectives. Clients' perceptions of value change over time, requiring companies to revise their business strategies to maintain their competitive advantage. Information technology plays several roles in shaping business value: it can help us understand this business challenge, enhance the advantages of our product/service offer, and measure and communicate the results of our efforts.
Why Measure Business Value?
Given the difficulty in understanding the roots of business value, it can be legitimately asked why we should go to the trouble of measuring it at all? As with the concepts of productivity, quality and learning, measurement systems reveal both what is actually produced within an organization and what can be done better.
In discussing productivity, Drucker underlined the importance of measurement: 'Without productivity objectives, a business does not have direction. Without productivity measurement, a business does not have control' (Drucker, 1974). In analysing quality, Deming argued that operational definitions give communicable meaning to concepts by specifying how the concept is measured and applied within a particular set of circumstances (Deming, 1982). Scott, Sink and Morris (1995) have in turn stressed the link between measurement and organizational learning in that 'measurement fosters organizational learning when management teams become skilled at converting data to information and information to knowledge'.
Management can provide a strong link between corporate vision and reality in developing operational measures of business value. Measures of business value are designed to promote three objectives: to raise awareness about what business value means to the organization, to establish guidelines to understand the relationships between business value, productivity and performance, and to identify a learning agenda to heighten the business value of future products and services.
How Have Measures of Business Value Evolved over Time?
Measures of business value have evolved over time with the evolution of markets and technologies. In the not-too-distant past, business value was directly associated with a firm's product offer. As a case in point, consider the invention of the Bic pen. In 1950, Marcel Bich created a revolutionary ball-point pen which he called Bic. Ball-point, clear-barrelled, smooth-writing, non-leaky and inexpensive, the advantages of the 'Ball-point Bic' were clearly visible to consumers throughout the world. The product's characteristics were commonly perceived as 'better' value than anything else on the market. As a result, the future Baron Bich built his company in 1953 to 'develop the machines and the industrial processes needed to produce this innovative product and assure its high quality'.
Can the same be said of most products today? Is the value of Chanel No. 5 perfume, Michelin tyres, or the A380 jet in the products themselves or in the information and services that are packaged with the product? On what criteria do we purchase perfume, tyres or aeroplanes? Why do we choose one 'product' rather than another? Are the firms Chanel, Michelin and Airbus Industries structured to produce the machines and industrial processes needed to manufacture these products or organized to service the brand and its market? To what extent do these companies design, manufacture, distribute and service their own products? Is the business value of these companies in their products, in their organization, or in the relationships they maintain with their clients?
It can be argued convincingly that the nature of business value has evolved significantly over the last several decades. For products ranging from tennis shoes to higher education, the importance of criteria such as price, reliability, performance and technology have given way to privileging brand name, service, packaging and appearance. In an era of shopping centres and web stores, the importance of product knowledge, maintenance and proximity has given way to client perceptions of reputation, responsiveness and service.
How Do We Add Value to a Company Today?
Empirically, the relationship between a firm's financial performance and its stock price is becoming increasingly difficult to demonstrate. A company's non-financial performance now plays a critical role in how the company is evaluated: strategy, execution, management experience and attractiveness are currently accepted measures of performance. As a result, investments in brand development, training and R&D now exceed total investments in tangible assets. The accounting firm Cap Gemini Ernst & Young concludes that at least a third of a mature company's value is attributable to non-financial information. For small and medium-sized companies, the proportion is even larger (Low and Cohen Kalafut, 2002).
In a similar vein, the relationship between a product's cost and the customer's perception of the value of a vendor relationship has steadily diminished. Loyalty to a brand or a vendor is increasingly dependent on a number of cost factors not directly associated with either specific products or services. These include:
the nature of the relationship/business model with the supplier or vendor;
acquisition/purchasing and decision-making processes;
supplier capability, consistency and dependability;
learning, knowledge and information transfer and solution development.
In this light, to what extent does business value depend on a firm's ability to manufacture, sell and service its own products? From a customer's perspective, product or service differentiation becomes increasingly more difficult, not only because of diminishing differences in technology and performance, but because productivity gains from one vendor to another have become increasingly marginal over time. In sharp contrast to the formulas for success fifty years ago, improving the machines and processes needed to manufacture the firm's products may be less a guarantee of adding business value than efforts devoted to improving the quality of client relationships.
How Do We Measure Value?
Is what you measure what you get? From a customer's point of view, value is measured in a number of ways. We refer to attribute-based value when a customer privileges a product's characteristics or functions. Marketing specialists have also referred to consequence-based value when customers identify value with their perceptions of the impact of their use of a product on their own performance. Finally, we can refer to value when customers associate the value of a purchase with an outcome they would like to achieve.
These measures of value are quite different from those deployed by most companies for evaluating the value of their business. Accountants have suggested a panoply of measures (recorded value, assessed value, earning potential, etc.) that reflect their own conception of business and business logic. Economists offer much the same in proposing notions of use value, exchange value or cost value that correspond to their views of economic units and market mechanics. Purchasing and materials management offer yet another set of metrics (stock value, esteem value or replacement value) that are closely tied to theories on stock management and logistics.
There is no best way of measuring value, but there are metrics that have been designed to measure how business value is created and enhanced. Managers, in recognizing the importance of 'intangibles', are increasingly adopting non-traditional methodologies of measurement. Current approaches include the Balanced Scorecard, Economic Value Added, Total Cost of Ownership, and Value-based Management.
Consider how the 'efficiency' paradigm of bigger, faster, better has conditioned the way managers look at business and business value. Process-centric applications have focused management's attention on organization and technology rather than people. Organizational culture, individual and team competencies and the quality of human relationships have taken a back seat while driving down cost is the predominant aim. In many cases, strategic decision-making has been performed using spreadsheets and process diagrams rather than observing how people and markets actually work. Taken to the extreme, as with the examples of WorldCom and Enron, the paradigm has even distorted the reasons why, and how, we do business.
Can information technology be designed to offer a different vision of reality? Can we design information architectures that will help management focus on factors other than cost and time, on the quality of interaction rather than the quantity of transactions, and on human motivation and innovation as the primary source of sustainable competitive advantage? This vision will require the introduction of a new paradigm of business value, new metrics for measuring 'better', and new models for structuring how we interpret data on our products, companies and markets.
What Are the Ingredients of Value?
Different client conceptions of exactly what constitutes value lead to conflicting visions of business value. As a result, information technology's measurable impact on the organization depends upon which elements or components of value we take into account. These elements include the following.
Efficiency can be seen as an input/output ratio that addresses the question of how work is being done today and what can be done tomorrow. Measuring efficiency involves capturing transaction costs of how people and/or technologies perform in a given process. Process-centric application systems, such as enterprise resource planning suites, focus our attention on the costs involved in managing key processes.
Profitability measures the added value of an organization in comparing the cost of its resources with that of its products and/or services. Financial performance is usually equated with business success. The related concept of budgetability allows financial measurement of interdependent organizational units: cost centres, government departments or internal services. Measures of profitability usually form the nucleus of decision-making software packages.
Utilization focuses on the extent to which company resources are employed at any given time. Measuring utilization involves evaluating how people, machines and materials are used in the production process. Stock management systems, for example, are often used not only to measure resource allocation, but also to suggest optimal uses of physical resources.
Quality has been defined variously as 'conformance to standards' and as 'conformance to expectations'. A common characteristic of quality measures is the evaluation of organizational products and services against external norms, legislation or objectives. Since these are basically benchmarking techniques, they can be easily adapted to measuring value in supply chains, markets or industries. Client relationship management software, to take one example, has been built on the premise that we can measure quality.
Excerpted from The Effective Organization by Lee Schlenker Excerpted by permission.
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Foreword by Sergio Giacoletto.
Chapter 1: In Search of Business Value.
Chapter 2: The House of Mirrors.
Chapter 3: Is What You Measure What You Get?
Chapter 4: It Takes Two (or More) to Tango.
Chapter 5: Going Around in Circles.
Chapter 6: The Joined-up Economy.
Chapter 7: Soldiers of the Shadows.
The Effective Organization.