In the current economic climate, organizations often resort to radical cost-cutting, restructuring and opportunistic price increases in an attempt to preserve profitability in the face of declining demand. Inevitably value creation is neglected, and the organization loses credibility with both consumers and investors.
Sadly one of the first casualties is likely to be investment in innovation (a key driver of value addition), which is seen as a ‘nice to have’ expense item, instead of an integral company value. Absence of a drive for innovation, leads to an increasing inability to attract and retain innovators, the weakening of core competencies, and an inevitable slip towards mediocrity.
The ‘belts and braces’ mood which pervades the organization leads to an intolerance of risk-taking and mistakes, and its small wonder that the creative thinkers within the organization jump ship at the earliest opportunity, further exacerbating the decline.
Inevitably the market no longer identifies value in the organization, leading in a worst case to failure and collapse.
To avoid this dismal scenario painted above, organizations must have a clear understanding of how value addition can be incorporated in everything it does so that it becomes a part of its DNA.
Value addition for any business rests on the premise that to increase the market value of a firm (MVA), additional value must be captured for investors (in the form of EVA) and this depends fundamentally on the additional value that it provides its customers through the way it differentiates itself from competitors.
In interactions with CEO’s, I often ask the question “as a customer, why should I make you my supplier of choice – what is it that you bring to the table that your competition doesn’t?” It is imperative that the question can be answered in a concise way, clearly spelling out how the firm seeks to differentiate its offering.
This is vital to an appreciation of how the firm creates value and is the prerequisite for process design and management; this is underpinned by the recognition that in order for customer value elements to be delivered consistently, without fault, the organization must design and manage the key supporting processes for effectiveness and efficiency.
These processes which drive value addition must in turn be resourced by a skilled, motivated and empowered human capital component; and will be the determining factor for designing the optimal organizational structure.
It is obvious that this framework – people excelling at processes to drive customer value, and thereby value for investors – is a dynamic concept requiring creativity and innovation both within an organization and across its supply chain. Organizations that succeed are characterized by an unceasing drive for ‘the clever stuff’, a search for the differentiators at every point in the business, and a total antipathy towards any suggestion of “business as usual”.
The Evolving Organizational Landscape
The struggle to create value in a dynamic environment, is re-defining the organizational landscape.
Traditional structures are becoming less rigid, expanding and contracting as circumstances change, and being increasingly defined by coalitions formed with both internal and external entities in synergistic relationships.
Formal employment is giving way to contracting in skills on a project by project basis, which requires firms to manage actors external to the organization, often operating in a virtual environment. The lines between customers and employees and suppliers and employees are also blurring as coalitions across the supply chain increasingly move to co-development of solutions.
Hierarchical leadership is changing to a catalyst leadership style, where the centre of gravity is moving more to individuals and cross-functional teams who are accountable for innovation and strategic execution, backed by systems which enable decision making, harness knowledge, and continuously measure, track, evaluate and optimize individual performance.
These changes are being facilitated and made possible by rapid advances in information technology and management information systems which have become the defining currency in the quest for the holy grail of competitive advantage.
The Contribution of Information and Technology Systems
Faced with these new demands, organizations are increasingly looking at new ways of applying information and technology systems, not least those associated with collaborating across borders with new breeds of stakeholders.
Traditionally Enterprise systems provide the engine room, and interfaces between the organization and its stakeholders, but can carry a high degree of risk..
Given the high cost and potential for failure of many IT projects, organizations are understandably wary of the risk associated with IT investment; there is a plethora of case studies documenting failures of ERP, CRM and other Enterprise systems.
The risks are further highlighted by the provisions of King 3 which place the responsibility for effective IT governance on the shoulders of directors, who must ensure that IT is correctly aligned to the performance objectives of the business and its operational sustainability. Guidelines are provided on how IT governance is to be ensured. Nor least is the importance of putting in place robust and continuously updated security systems.
CEO’s can no longer afford the luxury of delegating responsibility for IT design to IT specialists, and must engage directly with not only the risks, but more importantly of the exciting opportunities that IT offers for leveraging competitive advantage, and value addition.
A number of new technologies have emerged in recent times which offer the potential for organizations to engage with sophisticated systems to maintain competitiveness, build in flexibility, while significantly limiting cost and risk.
Notable amongst these are Cloud Computing and Virtualization. Equally promising is the rapid development and growth of new mobile technology and applications which offer exciting ways of collaborating with coalition and other partners, in addition to traditional means of collaboration.
Cloud computing enables organizations to save the cost of developing new software applications, data storage and having to set-up elaborate IT infrastructures, leaving this responsibility to third party service providers to provide; this means organizations can access what they need at any given time and allow for peak requirements without having to build in excess capacity. Although bandwidth considerations and security fears might tend to limit the migration to cloud services, there are ways of securing both to mitigate risk.
Organizational survival cannot be obtained by simply ‘juggling the books’ to create margin; instead CEOs’ are required to have a fundamental understanding of how value is created in their organization; at the same time they must recognize the importance of innovations in information and technology systems and how these contribute to maintaining competitiveness in a challenging and ever-changing environment.