5 rules for value creation

It sometimes happens that people ask me how I create value in companies. The funny of this situation is that this question arises usually during informal meetings, just like if I had a todo list, or a silver bullet in my pocket that I could hand over instead of my business card.

The answer is complex, and can only be addressed with a commitment of the top level management. It’s usually a rather long process that will most likely involve a lot of the corporation’s structure. But most important, the benefit of an external and unbiased advice must be recognized and approved at the corporate governance’s level. That’s a very difficult task for the manager of a company to recognize that there’s place for improvement in his organization. But it’s the first pre-requisite to the engage into the process of value creation.

" I see … So, how much does it cost, how long does it take and what result can I expect? "

Yes, of course, this next question was expected.

So let’s break it down and check the different approaches. Starting from top to bottom, my method consists of 5 different rules. Resulting from the application of those rules, the outcome is a more efficient company structure and a better employee involvement for the sake of better serving the clearly identified customer. By itself, this is how the company will improve its value creation process.

Rule #1: Mission, Vision and Values must be clearly stated, with real sense, and understood by everyone.

A specific article on this topic is expected soon. Check our Article section.

My first work is to review the company’s Mission, Vision and Value, making sure they make sense, and checking how they are converted into real short term action plans. I also want to make sure that the customer (meaning, the one who is paying for the product/service) is clearly identified and that the action plan places this customer at the center of the game. And finally, I’ll have a check around, inside the company, to make sure the Mission, Vision and Values are understood and that everyone knows how they’re expected to contribute to the action plans. At this step, it is not uncommon to find place for improvement, either because the customer’s profile is blurred, because the fundamental statements are not correctly understood, or even clearly expressed.

• I had the chance to work once for a mid-sized company (500+ employees) where the mission was not clearly stated. For different reasons, one day, the CEO went to retirement and was replaced by a new one. This new CEO led the company very strongly and firmly towards more challenging targets. His ambitions were clearly higher than the previous ones, which created an internal split between those employees pro-new and those more reluctant to evolution. Eventually, a bit more than a year after his appointment, he got dismissed by the board, arguing that he was exercising unnecessary and unacceptable pressure on the employees. What it was really, is a mis-understanding between the CEO and the board’s Vision to fulfill the company’s mission because... no mission was stated. The following CEO was nominated by the former retired CEO. The following CEO clarified his mission and now leads the company perfectly in line with the board’s spirit. The cost of such mishap is very difficult to calculate but affected strongly the company’s performance during at least the next two years. "

Check also our articles on the importance of a good governance.

Rule #2: Short term (12 month) goals with clear action plans must be derived from Rule #1.

There’s nothing really special about the above rule. They are available from any good management publication. It’s even the starting point to engage for a serious Lean management project. But it’s still the case that those starting points are bypassed, or have not been updated since a long time for whatever reason, assuming that everyone in the organization knows what he’s got to do.

Sorry to insist, it may not be very comfortable to stop and think, but it’s a fundamental cornerstone for the company.

Rule #3: Analyze and recognize how the market trends should impact the company’s strategy

Since the foundations are now clearly understood, it’s more than time to come back to the customer. Today’s market is very Versatile, or Volatile Uncertain Complex Ambiguous (VUCA). The market reacts quickly with different products, different standards, and new business models arising.

Monitoring the market is an essential activity but following the market may be, or may not be the appropriate strategy. The corporate strategy must periodically review the market trends to anticipate and decide how to position itself in its regard. With a regular review, the management should be able to anticipate the next trends and take action to position the products/services in an appropriate way. Some level of agility is required to maintain the company steadily above the floating level, without falling into the trap of permanent changes of strategy. In other words, the overall corporate strategy must remain rock solid, with an agile adaptive capability at operational levels.

" When I started Ingecom in 2005, we opened the market for Active RFID carrying a new range of disruptive performances. It was a product driven company, with approximately a half of its revenue out of off the shelf products, the rest being custom products. We were hit by the 2008-2009 recession the following year. At that time I was pointing the recession, but what it was really was an evolution of the market’s requirement. Customers were no longer expecting products but solutions. With a solid cashflow in hands, we took the aim to invest and to shoot for the Industrial IOT: consolidate the hardware (product) portfolio and develop the application level, specific to industrial requirements. Those of our competitors who chose to stick to the product driven revenue have been removed from the scene. "

Just like for the rules #1 and #2, the rule #3 doesn’t look like a fancy silver bullet.

However, following tightly this rule is a major aspect of the management to create value inside the company. When it comes to market monitoring, the analysis should also include the competition monitoring. The suggestion is to carry out formal external factor reviews once per quarter.

Rule #4: Implement a positive Risk Management System

Managing a business is not gambling.

Different sets of standards are available to help the company build a robust and resilient structure. Back in the late 1980s, the new ISO9000 set of standards was perceived by contractors as a constraint. At that time, very few companies understood the benefit of this certification. By now the mentalities have changed, the standard has also positively evolved, up to the level where corporations use it as a positive guideline. In the mean time, other standards have made their way, like the ISO14001 for environmental management. But the manager operates at least with technical, financial, human and business considerations, requiring the agility to move forward on often unsteady supports called risks.

A new standard is here to provide guidance for the Risk Management. According to ISO,* In addition to addressing operational continuity, ISO 31000 provides a level of reassurance in terms of economic resilience, professional reputation and environmental and safety outcomes*. There is no ISO31000 certification program, which provides even more power to this standard. Let’s face it; everyday’s life is a permanent balance to address all the surrounding risks. Whenever there’s uncertainty there’s risk. The short term goals from the rule #2 are all tainted or risks. The ISO31000 helps to consider the risk as a management tool, not necessarily to discard any risk from the company but to identify it and take action to mitigate it.

The ISO31000 defines a framework with 11 principles to structure a Risk Management System (RMS). The purpose of the RMS is to ensure that the company goals are met and integrated into all the areas of the company in such a way that all the important decisions taken carry this risk assessment dimension. By using this top-down approach RMS framework as part of the global consolidated tools, the management has a clear vision of the company’s risk situation in order to make sound decisions accordingly. When done appropriately, the time and cost incurred with the RMS pays off by either reducing risks or addressing new challenges; so if done properly, creates value.

The risk management is not a new discipline in itself. Since the early 2000s the risk is considered as an important topic within corporations, very often considered as a restricting factor. Concurrently, the same corporations are making a very strong point in favor of innovation, since the innovation is the fuel for the growth in any sector. So how about managing the risk in the innovation process? If the risk is perceived as a limiting factor, the innovation remains within the boundaries of the known territories. With the RMS, the risk is managed in such a way that innovative ideas can make their ways up to the adoption, hence bringing tangible value to the company.

" One of the companies I was consulting for had a CRO, Chief Risk Officer. In his position, all the contracts had to undergo his approval before receiving a legal signature. Because of the weight of his responsibility his job consisted really in chasing any risk into a contract and reject it. At that time, while all the other industries in the same sector were growing at a 2 digit rate, this company was hardly achieving 3% per annum. There was no way to bypass the CRO’s signature, and he would not sign if a risk was detected, whatever the reason An intense level of frustration was arising among the engineers who were unable to express their creativity. This risk aversion culture is one of the reason why the company remains stagnant."

Just like the previous rules, the rule #4 is usually not associated with value creation. However, when correctly applied, the RMS uses a framework to identify and assess the risks based on analysis. It provides information on how to mitigate and control those risks in order, either to reduce and avoid it, either to take a supervised advantage of its potential. This second option leaves the door open to creativity, which is the fuel for innovation and value creation.

Rule #5: Challenge and empower the value propositions.

Finally, this doesn’t mean it’s the least important rule; a customer centric approach is usually what works the best when it comes to growing a business. Having a true empathy with the identified paying customer, spending enough time to understand his business, his worries and his challenges helps to strengthen the company’s value proposition.

A striking value proposition is not limited to what is being sold. The formulation of a solid value proposition presents the results to be expected by using the company’s product/service. There’s no point of being proud of a technical performance that doesn’t bring a tangible value to the user. A technical performance may lead to a strong value proposition but it’s not the customer’s job to set the link between the fantastic technical performance and the resulting value that is brought to his organization. “XYZ’s product characteristic is setting the new standard in terms of range”. That’s a typical useless value proposition. Does the customer really care about the range, or does he care about reduced amount of investment to cover the same population, and by how much?

I must admit that it’s probably the rule that’s the most difficult to implement. Crafting a strong value proposition takes time and effort. It must be challenged and tested among a panel of representative customers. From my experience, the strongest value propositions have been created by characters not related to the product/service, or not even related to the company.

This rule #5 is perhaps the one by which it is tempting to start. After all, there’s no reason why a solid value proposition would not be the only remedy to generating a better value creation. That’s partly true, but can't resist an organization un-sufficiently prepared, because a value proposition by itself does not create any value. It’s a part of an overall value creation process; it’s only the first step to prepare for an active sales strategy.

 Conclusion

Those are the 5 rules that I like to consider when consulting to grow the value of a company. Usually a good starting point is the internal and external diagnostic of the company and its products/services. Among this diagnostic, the financial statements is a very useful tool, which may reveal a lot when carefully analyzed. Marketing considerations such as the Porter 5 forces analysis are very useful tools to quickly understand the environment in which the company operates.

Notice that the Strengths Weaknesses Opportunities Threats (SWOT) matrix hasn't been mentioned as useful tool in this article. I like to use it in a non academic way, with the OT, or Opportunity-Risk section separated from the SW. But the OT and SW sections don't operate within the same time frame, making it inconvenient to place in the same matrix.

All together, setting the company to engage into the process of value creation is not a slim task. Overall, it requires a clear dedication of the top level governance in a top-bottom approach. Since the value creation process is a strategic decision, many different process of the company may be impacted, consequently to the application of rule #2. With an improvement in the working environment, a better understanding of the customer’s requirements, a stronger value proposition and a reduction of the wasted process, the value creation process is estimated to bring a direct increase on the EBITDA.

The question of how much depends on the company’s maturity in regard to the above mentioned management rules and to how seriously the value creation process is engaged.

Triggered some thoughts ?