Over the years, I have become convinced that a value chain map is a more powerful and more easily accepted starting point, both in consulting and teaching, for operating model work (compared, for example, to a capability map). This blog explains what a value chain map is.
A Value Chain Map is a high-level process map or value stream map: the term value chain coming from the strategy literature – Michael Porter. I prefer the term value chain because it reminds me that we are trying to link operations to strategy. But any other term is acceptable so long as the tool does the same thing.
To create a Value Chain Map, you first need to identify the different “value propositions” (the products or services) that the organization provides. Ashridge Business School provides tailored courses for executives, open courses, qualifications courses, research papers and books and even weddings using our beautiful building. An HR function might provide talent development, recruitment, remuneration and organisation development services. A factory might produce standard products and specials.
Figuring out the best way of defining the value propositions is not a trivial task (see separate blog). Should I think of Ashridge as offering courses, research papers and weddings, or should I think of Ashridge as offering open courses, tailored courses, qualifications courses, etc, or should I think of Ashridge as offering finance courses, marketing courses, leadership courses, etc, or should I think of Ashridge as offering 1 day courses, 2 day courses, 3 day courses, etc? The answer should come from the strategy: how does the strategy chunk up Ashridge’s different services into groups/segments/offers and how does this link to the way Ashridge thinks about its customers ? If the strategy is silent on this issue, it is probably better to work on strategy than on operating models.
Armed with a way of defining the value propositions, lay out the high-level process steps needed to create each value proposition. So for “tailored courses” the steps (the value chain) would be
- Market to companies
- Design courses for prospective clients
- Agree terms and contract with the client
- Deliver course
- Invoice and collect money
- Follow up with the client
It is helpful to keep the number of different value propositions and the number of steps in each high-level process to less than seven (aggregate if needed). The reason is that you need to be able to hold the whole Value Chain Map in your head at one time; and a matrix of 36 (6 value propositions with 6 process steps each) is about the maximum you can cope with. It is always possible to go into more detail later, as needed.
When you have done high-level process steps for each value proposition, you can then create a Value Chain Map. Draw the process steps as chains of chevrons along the horizontal, placing different chains above or below each other. Then arrange individual process steps into columns of like capability. So that, in the Ashridge example, the “design” activity in each chain sits in one column and the “deliver” activity sits in another column, etc (see exhibit 1).
Once created, additional information can be added to the value chain map (see exhibit 2).
- Identify which chevrons in each chain are critical success factors as opposed to commodity factors for delivering the chain’s value proposition.
- Identify in which chevrons the organization currently has difficulties or is under performing. For these problem chevrons, it is often helpful to go to the next level of detail: breaking the chevron down into five or so more detailed chevrons and considering where the problem is at the next level of detail.
- Identify how the organization’s costs or headcount divides amongst the chevrons.
However, the main benefit of the Value Chain Map is that it provides a visual background for considering organization structure. The people doing the work in each chevron of the map could report in two ways: along the value chain to someone responsible for ensuring that the total value chain delivers the value proposition; or within a vertical column to someone responsible for a single capability across all the value chains. So, the people doing course design for open courses at Ashridge, could report to the head of open courses or to the head of course design for all types of courses.
Fortunately, there is a rule of thumb to help you decide which way the people should report. The rule says that the default reporting line should be along the value chain (the design people for open courses should report to the head of open courses), unless significant improvements can be made to the value proposition by reporting in a different way. In other words, report along the value chain unless reporting by capability significantly lowers cost or significantly improves the value delivered.
The reason for this rule of thumb is that it is easier to create the value proposition and adjust it to match changing customer preferences, if all of the people doing the work for this value proposition report to one person and are focused only on delivering this value proposition to this customer type. The rule of thumb means that the onus is on those who want to organize by capability to create a convincing business case. If in doubt, report along the value chain.
The wonder of the Value Chain Map is that it gives a visual representation on one page, of the core work that needs to be done to deliver the products or services; and it provides the platform for thinking about organization structure. With a picture of the core work of the organization and how this work should be structured, you are already half way to an operating model.