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Value Creation Models

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Value Creation Models The Value Shop and the Value Network are two additional models of value creation. Managers need to re-think some familiar strategic insights. The world has changed. From 1960 to 1999 manufacturing companies' share of GNP in the US, as well as its workforce, fell from 30 per cent to 15 per cent, with the consequence that such businesses are now a minority of the S&P500. Banks, transportation, building, healthcare, research pharmaceuticals and other services companies have taken over. Strategic models of the world, however, have not changed. When managers develop strategies for their companies, they still use the tools and language of the manufacturing organisation - most commonly the concept of the Value Chain (see Figure 1 - see PDF or print), introduced by Michael Porter. His seminal work, Competitive Advantage: Creating and Sustaining Superior Performance, (Free Press 1985), argued that you could create sustainable competitive advantage by tailoring your Value Chain to your competitive strategy. A large number of prescriptions for good strategic management were developed. The question managers now need to ask themselves is where these strategic prescriptions come from - and whether they still are valid. Does the Value Chain accurately portray value creation in the new firms of the S&P500, and should managers of these firms follow the standard Value Chain ideas? In this article, we offer two additional models of value creation - the Value Shop and the Value Network. We will show how they make description of the value creation process easier and can offer insights into what drives the true new economy, an economy where value is created by knowledge and where networks have been opened to competition. The call for new models The Value Chain is an excellent model for describing and analysing manufacturing companies. Describing value creation as a series of sequential steps that transforms raw materials and components into products, it has been fundamental in highlighting the importance of supply chain integration.


Senior personnel conduct this dialogue - in fact, to quote Bjørn Ivar Danielsen, a former senior partner in the consulting firm Accenture: "This is the only business where you are promoted to salesman." The reason is simple: nothing is more dangerous to a Value Shop than the young consultant or aggressive salesperson who comes back to the organisation after having committed to solving a problem it cannot or should not solve, or a problem which will tie up expensive resources in repetitive nonlearning activities. Similarly, nothing is more convincing to a prospective client than a lawyer, investment banker or engineer who appears to understand the client's specific predicament, as opposed to one who pushes previous cases not quite seeming to fit. In the Value Shop, Reputation is King. The better firm is the one that can combine the attraction of good cases with mobilisation of the right competence. Reputation both facilitates and is built from this. People with important problems want to ensure that they are being solved by the best available competence. For important problems like heart surgery, corporate tax management, and choice of firm strategy, the payoff to the client from small increases in the competence applied to their problem far outweighs the increased cost - knowledge is expensive because the cost of ignorance is huge. However, since the provider cannot demonstrate the solution and there may not be second chances, the reputation and past experience is often the customer's only guide when choosing which firm to work with. Furthermore, reputation gives access to the building blocks for competencies - smart people and challenging problems. The people with the most promise want to work with the most promising firm. Reputation can both be built and be acquired by association. If your firm is too small or a problem too specialised to have the competence in-house, make sure it is available through a networking relationship that allows access to people - e.g.


Alliances can create first mover advantages that are relatively stable, since they lock up the most attractive partners, leaving the rest to link up to form incomplete networks. It does not pay to be late to join - witness the power of the Star and One World alliances in airlines. Conclusion - the value of perspective Strategic frameworks are not one-size-fitsall recipes for what to do. They need both to be differentiated enough that they fit the company one seeks to analyse, and general enough to facilitate abstractions. In our experience, many companies have applied industrial models - the foremost being Michael Porter's Value Chain - to companies that have a different value creation logic. Applying Value Chain logic to network firms can do harm. It can create undue focus on product profitability rather than the lifetime value of the customer, it creates a focus on market share rather than coverage of customer to customer interaction, and it wrongly segments customers into groups that look alike (say, the teenage market or people in a certain income bracket) rather than groups in which the customers interact with each other through the mediating company (such as extended firms or extended families). Applying Value Chain logic to problem solving firms (Value Shops) can also do harm. It can create undue focus on standardisation rather than knowledge development, drive the organisation into cost-based rather than value pricing, and significantly undermine efforts to build and exploit processes of organisational learning. Many a high class consulting company has become a victim of its own growth, turning itself into a 'sweat' shop renting out relatively low-priced workers applying standard techniques by the hour and alienating customers who feel their unique problems are misunderstood. Many a hospital has misguidedly focused on measures of local efficiency at the expense of a value measure for patient well-being. The world has indeed changed. By providing the two additional models and some examples of their managerial and strategic implications, we hope managers will have a tool to aid their understanding of how value is created in their companies and to better understand this changed world.

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