At the recent course I run, Designing Operating Models, Mark Lancelott and I put our views on the importance of value chains to the test. We started the tools part of the course with the following exercise
1. Choose a part of your business to focus on that has more than one product/market segment (or customer segment)
2. Identify the different segments – not more than 4 or 5, so that the analysis is doable in 3o minutes
3. Draw up the value chain for each segment – not more than 4 or 5 steps in the value chain, so that the analysis is doable
4. Compare across the value chains looking for similar steps where there are economies of scale that mean the steps should be “aggregated”, or opportunities to standardise that mean the steps should be “linked” or opportunities to differentiate that mean the steps should be kept “separate”.
We used some different language on the course, but the meaning was the same. The exercise was a big success and started a snowball of energy amongst the group for operating model tools and work.
It confirmed that value chains are the best way of starting work on operating models (at least for those not familiar with other ways such as that used by Enterprise Architects) – see example of a value chain map .. I think, in this example, red meant “centralise”.
In another example we looked at a business in central Africa. The business had four product segments and operated in five countries. We tried doing the analysis for the four product segments and concluded that every step in the value chain should be “aggregated”: there were in our judgment important economies of scale in manufacturing, marketing, distribution and sales. But this then raised the question of at what level to aggregate – at the country level, at the central Africa level, at the Africa level or at the world level. So we did the analysis again across the four countries. This time it made sense to aggregate some activities, like marketing, at the central Africa level or above. But other activities, like sales, should only be aggregated at the country level.
A different group started by looking at three completely different product areas within one company. They quickly concluded that all parts of the value chain should be separate. This made them less enthusiastic about the analysis. But then they tried a second example where it was clear that manufacturing should be centralised and sales should be separate and in other functions there were difficult judgments to make. The two examples helped them see the power of the tool: sometimes the operating model is simple; often it is complex and requires difficult trade-offs.
This is pretty simple analysis – but powerful in its simplicity. In 30 minutes a group of 6 people understood many of the operating model challenges of the businesses they analysed, just by doing a simple value chain map.
Try it on your business.
Of course an operating model is much more than a value chain map – but it is a great place to start.