Having studied Porter’s Value Chain theory (1985) and following our concept of the ValueHub™ (2012), we started to wonder whether the analogy of a chain and in particular how we measure individual performance while using the theory may have contributed to the formation of functional silos. We’re suggesting to consider an out-of-the-box solution.
If you are unfamiliar with Michael Porter’s Value Chain theory, please read this piece.
What’s wrong with a chain analogy?
Michael Porter described how certain activities could be linked together to provide a company with a competitive advantage, thereby using links in a chain as an analogy. As such, a firm can create a variety of chains as there are many ways to orchestrate, optimize and coordinate (sub)activities that rely on or benefit from other (sub)activities, to create, deliver, or capture more value.
Porter’s Value Chain isn’t one straight-chain. At best it is a cluttered pile of chains, some old and rusty, some new and still unexploited. It represents a complex orchestration of known and unknown interdependencies between, potentially, thousands of activities, implying a criss-cross of countless chains.
This criss-cross of relationships and interdependencies can be pretty confusing. As such, it resembles the complexities we also find in matrix organizations: to newcomers or outsiders, it is often unclear who is responsible for what, how activities are interrelated, and why we do things the way we do. Therefore, to get a clear picture of the current orchestration, Porter suggests a Value Chain Analysis.
However, next to being complex, Porter’s systematic approach to value creation seems to ignore the human side of things. Because, how can we assess individual contributions to the company objectively, if much of what the employee does is ‘chained’ to activities that are beyond their control?
For instance, if we measure the performance of a salesman, can we simply ignore the conditions of the interrelationships that are beyond his control, i.e., the number of unqualified leads, the recently affected reputation of the brand, the low quality of promotional materials, the lack of consistency in products and services, returning failures in logistic planning, and so on? Of course not.
So, despite the fact that the Value Chain theory is a great tool to orchestrate, optimize, and coordinate the activities that contribute to a firm’s competitive advantages, it does not provide an objective framework to assess and reward individuals and teams. It would simply be too complex. So we ignore the complexity, allowing employee evaluations to become affected by personal opinions, feelings, and biases.
If we fail to recognize this omission, we are at risk of disqualifying talents on the bases of systemic failure, rather than individual qualities.
Why did we select a ValueTrain™ as an analogy?
While considering the series of steps in the Customer Lifecycle Map and the ValueHub, we realized that every activity is a ValueHub. The familiar pattern, also recognized by Porter, is that of Input, Process, Output, and Feedback.
Every entity is a ValueHub with an input and an output, while the process defines what value is being created, to perform the job-to-be-done, and at what cost.
- A hospital needs to procure medical equipment (input) to monitor a patient’s health during treatment (process) to make the patient better (output).
- The government needs to raise taxes (input) to provide citizens with social benefits (process) to offer them the opportunity to have a roof over their heads (output).
- A building company needs to buy materials (input) to construct offices (process) to allow companies to house their employees (output).
- An employee needs to get a wage (input) to pay for the education of his/her children (process) to provide them a fair chance in life (output).
ValueHubs can not thrive on their own: they need input and output to allow their value-creating process to sustain. If they can’t procure what they need, they will seize to exist. If they can’t find a buyer, the ValueHub cracks. We can add ValueHubs together to form a ValueString (or Chain if you want). As such, a company’s frontline activities can be seen as a string of functional ValueHubs.
We’ve left one element of the pattern unspoken: Feedback. Because to know whether the value that we have delivered satisfied the receiving ValueHub and is expected to also meet future demand, we need customers to provide feedback so that we can improve or adapt our value-creating process.
- Are we creating the desired value?
- Do we deliver in a timely fashion?
- Are we on par with your expectations?
- Are your considering alternatives?
- Are we charging a fair price?
The idea of a ValueString™, a series of collaborating ValueHubs, opens up the possibility for each delivering ValueHub to ask the receiving ValueHub for feedback. And we could even consider using the feedback mechanism as a Performance Indicator. Because isn’t that what we do with NPS (Net Promotor Score)?
So, by perceiving the frontline as a constellation of subsequent ValueHubs, in which each ValueHub’s right to exist relies on the premise of fulfilling the need of the adjacent ValueHub(s), we get the following schematic of (six, per example) collaborating ValueHubs:
And by grouping a series of ValueHubs, we get to a department. And if we consider the fact that all ValueHubs together form a trainset, we get a ValueTrain™. Let’s take the frontline activities:
To measure the performance of each ValueHub, all we need to do is to measure the Rate of Satisfaction (R0S), based on reviews by the receiving ValueHub. To determine the cause(s) of a change in performance of the ValueTrain™, i.e., all frontline processes, the percentages will tell the story, allowing us to intervene immediately at the weakest ValueHub.
Mind you, this does not tell the whole story. We still need to investigate what caused the change in satisfaction of an individual ValueHub but at least we know where to look. And it might just be the case that multiple ValueHubs show a similar change in RoS, potentially pointing to a similar interdependency. To dive in deeper, we need to resort to a Value Chain Analysis by looking at the primary and supporting activities and assessing their direct, indirect, and quality assurance subactivities.
So, the Value Chain theory is very much viable (and don’t forget about the VRIO framework if you want your competitive advantages to sustain). It just doesn’t provide a good analogy or framework for measuring individual performance or quickly detecting the causes for a sudden change in performances or conditions.
If we were to put the ValueTrain™ on a track, it would -of course- be round (ROUNDMAP). Regular train rails consist of two beams kept at an equal distance by sleepers.
Please consider the following image: we’ve placed the seller’s ValueTrain (green wheels) on a track circling around its own major ValueHub. By signaling its value, the seller can attract a nearby buyer’s ValueHub. This is represented by purple wheels. The seller’s ValueTrain takes the buyer’s ValueTrain around the track, passing the various departments. When the buyer isn’t convinced that the seller has the capacity to fulfill its needs, it will disconnect and take the next available exit.
The green arrows on the grey track entrance indicate the attraction toward the propagated value, while the red arrows indicate the absence of attraction, causing the buyer’s ValueTrain to depart from the value-based relationship.
Transactional versus Relational
Obviously, riding around in vicious circles would be quite boring, especially if what the seller does is merely transactional. If we were to shift our mindset to become more relational, we could learn from feedback, leading to compound learnings, so we can develop in an upward (progressive) spiral, allowing us to reach a ‘more meaningful level’.
Or, if the conditions or our performance deteriorate, we may get a downward spiraling track ─ and we all know how much faster a downward spiral goes.
Love to read your thoughts on this notion.