By: Kirill Derevenski & David Winders March 2018
In the earlier article we spoke about placing value delivery chains at the heart of a Target Operating Model. We continue in this post with clear identification of necessary prerequisites for subsequent detailed operating model design using the Operating Model Canvas methodology.
What actually creates value?
For teams working on operating model design, identification of value delivery chains looks to be one of the easier tasks. From our experience, a much bigger thinking piece then becomes the understanding of what makes those chains actually deliver that value, and then what needs to be tweaked to ensure a delighted beneficiary. In other words, we need to build up a set of prerequisites that, once put in place, will assist the process of ensuring that the value is delivered efficiently and effectively.
A big thinking piece in Operating Model Design is the understanding of what makes Value Deliver Chains actually deliver that value, and then what needs to be tweaked to ensure a delighted beneficiary.
The dry language of economics calls these prerequisites ‘inputs’. Contemporary business language is good at dressing things up in plethora of terms, but in the end we all know that the process of value creation works through a conversion of inputs into outputs. The inputs may be tangible as well as intangible, financial as well as non-financial, and conceptual as well as practical.
Value delivery chains used in Operating Model design contain six prerequisite groups or categories of inputs. They cover the traditional economic factors of production whilst including new emergent value creation drivers. The six groups are (not in any prescribed order as this may well be different from organisation to an organisation):
- People… This input group covers the: headcount, skills, experience, motivation, behaviours and job families available within organisational; human capital to help deliver value to the beneficiaries, as well as the organisation itself.
- Physical assets… This input group includes material things such as: buildings, machines and resources that the organisation needs to create value.
- Knowledge… This is one of the newer groups that emerged over the last few years, especially with the nascent shift to “Big Data Analytics” and the better management of dispersed knowledge inside organisations. This input group also includes intellectual property, research & development expertise as well as special differentiating abilities such as innovation or speed to market.
- Technology… Another newer group has been made more important by the continuing focus on digital transformation. This input group covers a full spectrum of technologies from the back of the office applications such as ERP and accounting tools, to customer-facing apps and websites; with Cloud and the Internet in between.
- Capital… This input group is for money. This input group may appear overly important for “bootstrapped” startups as opposed to established organisations. Whatever its apparent importance is, it is nevertheless paramount to keep an eye on capital prerequisites during operating model design in order to avoid negative impact on financial stability. An additional focus is that of cash flow because an operating model change can drastically affect working capital requirements and in turn financial survival.
- Management/Processes… This is the most recent prerequisite group identified in contemporary management thinking. It stems from the fact that there may exist (or be needed) within an organisation a unique management process that would create a sustainable advantage when servicing customers. For example, if there is an organisation that after much effort managed to instigate a truly integrated CRM process across all of its business units, the place to boast about it is here. In recent years the recognition of the importance of corporate governance, transparency and a focus on the social responsibilities of business through heightened Corporate Social Responsibility (CSR) has led to a greater emphasis in management processes.
Let us have a look at a real life example of how understanding these prerequisites can be harnessed to drive value for beneficiaries (and organisations themselves). We will use the example of a premium bicycle shop called “Mes Ten Speeds”.
The shop is dealing in expensive machines priced over $1,000 to demanding customers, who are not always bicycle pros and so often need help when choosing a suitable bike.
The shop’s value delivery chain to new customers is fairly straightforward. They sell bicycles in person through the showroom, or through their online shop. Some bicycles are held in stock, others need to be ordered. All bikes need preparation through tuning and accessories added prior to final delivery to the customer.
On the picture below, we map out the complete shop’s Value Delivery Chain covering all prerequisites for successful client engagement.
The value map for Mes Ten Speeds has four value stages in its value delivery chain. Each value stage is examined to see what things are needed to make the value happen using the pre-requisite group headings: People, Physical Assets, Knowledge, Technology, Capital and Management. Taking each value stage step by step we can start to appreciate how value is created in this small business.
As the firm has both a web channel and a shop, the people skills are varied needing both face to face selling attributes as well as roles with focus on procedures and logic for web offering design.
In the shop, people who have an affinity with cycling and have people orientated personalities to engage with customer’s needs are really important. Open questioning and the ability to establish needs and match those to the products are essential in order to sell the right package to the customer. Often this results in up selling to ensure the customer’s real expectations are fulfilled and also the selling of accessories – cross selling – to ensure a fulfilled client experience. Coupled with the correct personality traits is the product and sector knowledge that sales staff needs to be effective.
To undertake face-to-face selling and to present the bikes in a pleasant environment, the physical asset of a spacious and well-fitted showroom is required. The showroom has to have appropriate POS equipment technology and access to cycling databases to assist customers with making their choices. In the e-channel an appropriate e-commerce website has to be made available and maintained with payment facilities and customer service interfaces. These physical assets need capital investment to put in place, as well as working capital to pay sales staff, maintain stock levels and income in cash to serve the interest on the investment capital.
Behind the scenes the management of stock, the purchasing of product and compliance with the usual regulatory constraints around data, finance, and health and safety of the showroom is needed. Integrating sales with ordering, preparing and delivering requires an integrated approach to make the customer experience successful.
This value stage is about administering the sales and making it happen. The people in the store need attention to detail and focus, which forms part of the employee profile the firm seeks to recruit. In the web team their people need to understand process design and how to operate e-commerce functionality. In the latter case we need to have access to I.T. hardware for the webserver and underlying databases – whether this is in house or outsourced is a decision for later.
The business has built well-defined processes to support ordering and these form part of their knowledge in the form of process maps and documentation and automated workflow for the e-channel. Stock management and knowing what they have in stock is essential to an effective ordering process. Keeping the appropriate inventory, whilst managing down working capital requirements, is a constant challenge for this business and, through combining knowledge with capital management, is a key principle behind integrated management monitoring and control process.
Preparing bikes correctly post-sale is about assembling and setting up bikes for individual customers. In a specialist shop like this correct set up is what makes the reputation and is perceived by customers as a differentiating value item.
In order to prepare bike correctly they need staff with deep cycling and technical knowledge to ensure gears, pedals etc. are correctly set up for each and every client. Mes Ten have to have people who have the patience and duty of care to ensure clients leave the shop with bikes that are well adjusted. The staff members that undertake this task have to have the training and knowledge to prepare bikes in a “best practice” fashion supported by manuals, online guides and quality control processes.
The preparation team have to have measurement devices and test equipment to fulfill the quality required and his requires investment and the cost of paying good people to do this role correctly. To ensure cost effective use of these key staff the firm needs to plan its preparation and this is supported by knowing when customers are due to collect bikes and how much activity is needed through a well measured integrated sales, stock and ordering management regime.
The final value stage in the chain is the delivery or collection of the bike by the customer. Here the firm has to have the client success with the product in mind all the time ,requiring core skills of patience, calmness, attention to detail with a philosophy of interest and care to ensure the client is well prepared for the road. The “training” mentality is a core trait identified in delivering this value stage.
Ideally, Mes Ten have a test track so that the customer can try out the product and “iron out” any minor issues before leaving the store.
The employees who carry out this aspect of the business have to have the knowledge of how to operate the various gear changing technologies and how to advise customers on maintenance of new technologies such as hydraulic brakes and suspension systems.
This value stage also requires the measuring technology to finally ensure the bike is set up and fitted correctly for rider height, reach, body angle positioning and pedal cleat adjustment.
This level of customer care has capital costs in acquiring the fitting and measuring equipment and the running costs of employing skilled staff. The quality control processes and scheduling of deliveries allowing quality time to be spent with clients is provided by an integrated sales, stock and order system. The success of delivery is underpinned by the organization-wide quality assurance management programme and compliance with health and safety legislation to protect both clients and staff.
Once the prerequisites are identified, heat-mapping is a useful technique to identify areas of improvement. It is important is to single out those prerequisites that are imperative to effective and efficient operating model and those that will really “move the needle” on the value generating scale.
Mes Ten Speeds identified that they needed to optimise their operating model to further delight new customers whilst making sure that their financial stability is not negatively impacted.
By mapping their value delivery chain to the prerequisite input groups, using the experience and customer feedback, the shop owners quickly realised that significant value for customers (and themselves) was being lost.
On the graph above, key prerequisites per value delivery block have been identified and heat-mapped based on their severity, with those in orange and red needing corrective work.
- In the Sell block, a major up-/cross-sell skill deficiency was observed with shop’s Sales Assistants. Rather than discussing intelligently customer needs and expectations and pointing out readily available options from the existing inventory first (perhaps of a different brand or component setup), they would simply turn potential ready-to-buy-now customers away. The clients did not feel they were taken care of by someone who actually could “talk bikes” (this is a very passionate subject and a key customer value perception).
- In the Order block, the absence of integrated stock management between the website catalogue and physical inventory in the shop meant that some items marked ‘immediately available’ online were not in fact there. In some cases the site recommended some models in lieu of waiting for delivery on others, thus creating disappointment and dissatisfaction. Again a similar issue of unhappy customers and unsold inventory.
- In the Deliver block, too many customers kept coming back in the first two weeks complaining about their bikes with unfulfilled expectations. This was either because ‘they were not what they expected performance-wise’ or because something was ‘defective’; gears being a classic example with ‘the gear change being broken after just three clicks’ was heard on many an occasion.
On questioning customers to explore quality issues it was found that many riders were unhappy because the bikes were poorly fitted (i.e. rider height, reach and pedal cleat alignment not being properly setup). Due to insufficient joint delivery testing with the client, the shop had no way of knowing whether the mechanical fault was a genuine manufacturing defect or was a result of mis-use by the client. On reflection, the inappropriate use was perhaps because there was no facility for riders to practically learn how to change gears under shop supervision. What is needed is good predelivery checks coupled with product training to ensure all is well before the consumer takes the bicycle away.
Now that the bicycle shop knows what the value prerequisites are for new customers, what can it do to its operating model to make it better?
We will explore how Operating Model Canvas makes it easy in subsequent articles.
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