In both my consulting work and teaching, I am finding that good value chain analysis is the foundation of good operating model work. Moreover, participants on my recent course – Designing Operating Models – voted “value chain mapping” as the best tool on the course.
But there is one tricky part in value chain analysis – segmentation. Good value chain analysis involves doing a value chain for each segment being served. But how to define a segment? The idea is really about doing a value chain for each “offer” because each “offer” is likely to require a slightly different value chain to deliver. So a good segmentation involves thinking hard about the different offers. Let me give an example.
Ashridge Business School (now Ashridge Executive Education) has tailored offers (courses tailored for a particular company). It also has open offers (standard courses anyone can attend). It also has qualifications courses (like an MBA). There is a research offer. There is even a weddings offer in our beautiful house. So clearly we need a value chain for each of these. But is this enough detail.
Within “open courses” there is an operating model offer, a finance for non-financial managers offer, a marketing offer and so on. Hence, at a more detailed level, it makes sense to do a value chain for each of these courses to see if there are significant differences and to assess where economies of scale lie.
But one can go into even more detail. My course Designing Operating Models has different sessions taught by different faculty. Maybe it is necessary to do a value chain for each of these – one for the value chain mapping session, one for the organisation modelling session, one for the whole day case study. Typically, this level of detail is unhelpful. But it is usually worth going down one level of detail below what seems useful to check that more insight is not available.
So my advice is to segment at multiple levels of detail.
The other segmentation issue involves different ways of segmenting the customer or consumer. Ashridge could segment by country of nationality because we have participants from 50 or more countries. For most countries we do not have any tailored offer. But for the Middle East we do. So it would be worth doing a value chain for the Middle East separate from other geographies. If we thought that we wanted to offer something different in Asia, then we could also do an Asia or China value chain.
Another way of segmenting customers might be by industry. But Ashridge does not have any industry specific offers. So doing value chains by industry would not bring in any new insights to help with operating model decisions.
So the guiding thought about segmenting customers or consumers is to segment when there are differences in offer which are likely to require some differences in the value chain needed to deliver the offer.
In conclusion, value chain maps are about exposing the different activities that are required to deliver different offers. Having laid out the differences it is then possible to decide where the differences are so important that the activities need to be kept separate, where there are economies of scale that need to be captured and where there are opportunities for synergy and linkage – centralise, link or separate (my CLS tool).
Good to see your advocacy for the merit of value chain analysis. One little tip I have sound useful is to use a stratified approach.
Do the key value creating activity chain analysis, then juxtapose the support/enabling functions in parallel to these – much like your operating v support in mapping org designs. Works very well . Can explain further if of interest.
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Richard, Do expand on your idea of parallel analysis. Maybe I can use your inputs as part of a further blog.
Richard, You raise a good point, which exposes the need to do operating model work one layer (of the organisation) at a time (e.g. Group, Division, Business Unit, Function) – the same as you do with organisation design work. I prefer to focus my value chain analysis on the operating work and then add in the support work, when I do an organisation model (as you point out). This makes it possible to design an operating model for a layer without also designing the detailed operating models for each of the support activities, like IT or Finance or Legal, at that layer. These support function operating models can then be designed by the leaders of each support activity so that they fit with the larger operating model they are supporting. I am not sure I have made this fully clear. Maybe it deserves a separate blog. Andrew
Hi, you raised a good point on segmentation. I have used a segmentation model, where the difference between main segments are the overall needs differences. Then I’m mapping the services for each segment and finally creating a high level need customer journey to start with.
Interesting comment Petri. Do you have this written out anywhere? Can you expand a little? I find that need alone is usually not quite sufficient: that it helps to think about need and offer together because it is really the differences in offer that drive the differences in value chains. For example, five people may go into McDonalds each with slightly different need, but they are all given the same offer: hence only one value chain. Of course this is segmenting from the perspective of operations rather than from the perspective of marketing.
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