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Xavier Van de Lanotte

[July 16, 2003]

Functional And Operational Performance In The Value Chain Management Context


The recurring question on the minds of our readers is whether they can still profitably operate a business in the telecommunication industry. Margins are low and stocks are depressed, yet we are intuitively buoyed by the knowledge that telecommunication technologies will affect our lifestyles to a far greater extent in the future than they do today.

A lesson learned from the latest economic depression is that rogue competitors aren�t only interested in eroding the incumbent leaders� market share by a few percent points; they are motivated to change the rules of the game. To them the telecommunication business is a nascent industry and they might very well mold what the future may hold for it. They play hardball and, whether they win or lose, they have begun to effect significant changes in the marketplace already; shaping opinion and demand and forging new competitive business models.

Competitive firms in the telecommunication industry must relentlessly work on two key objectives: Meeting the demands of its markets and managing its capabilities to improve their effectiveness and efficiency. The relentless pursuit to improve performance with regards to these objectives is at the pinnacle for achieving growth and profitability, especially in highly competitive sectors and when market conditions are volatile. But when new products and services abound and technology clock speed revs up, can firms hold on to the prospect of profitability and growth?

They most certainly can when they manage their value chain successfully and develop their competitive strategies with clear objectives for:

  • Customer value
  • Functional and operational performance
  • Core competency and focus
  • Strategic relationship management
  • Network and collaborative management systems

Figure 1

Last month, in the first of a series of five articles on value chain management �Managing Customer Value: A Keystone In Competitive Strategy,� I discussed the opportunity for firms to gain competitive advantage by focusing on customer value. In this second article, the focus is on managing the firm�s capabilities to strengthen its competitive position and meet its corporate goals.

Unless a company can produce and deliver customer value cost effectively, it is not competitive as it can not sustain viability. Hence, it is critical that functional and operational performance be addressed in the competitive strategy formulation. Meanwhile, as is explained below, value chain management unleashes significant opportunities for firms to cost effectively improve their performance and even accrue their capabilities in order to meet their customer value objectives. In subsequent articles of this series, other keystones of competitive strategy, and how they tie together, will be discussed.

The object of any firm is to serve a market for which it produces and markets products or services in order to make a profit. To that effect, firms organize functions and activities to basically acquire resources, transform them, sell products and services, and deliver them. Amongst the various tasks that companies perform some are core, some are support and others are management or governance. The quality with which successive tasks are arranged and co-managed within the firm determines both the efficiency and the effectiveness of the firm.

But firms aren�t home free by merely seeking to achieve effectiveness and efficiency in each and every function of their departmental organizations. For instance, benchmarking studies could show how individual departments fulfill their goals economically and with great efficacy against their peers in the industry. Yet in the realm of the firm�s overall performance, their individual contribution in creating customer value may blemish. As corporate organizations evolve, they are prone to succumb to some of the following behaviors:

  • Departments continuously vie for the limited corporate resources. Industry data typically provides the guiding benchmarks for allocations but, in an effort to stimulate innovation, differentiation, and greater productivity, funding allowances for special activity projects usually alter the final distribution of resources.

  • As internal organizations develop their identities, their natural tendencies are to base their goals and objectives on the flow of the money. An organizational hierarchy is established based on the source of funding, in other words, on how the money comes in and flows through the firm. Hence, departments develop myopia and shift their focus from the customer to the internal organizations.
  • Internal processes become burdensome and proliferate at the expense of inter-organizational linkages. At the execution level, corporate strategy and objectives are obscured and callousness develops with regard to the effective utilization of the corporate resources.
  • An increase in the division between organizational lines causes a lack of joint accountability for corporate results and limits effective concentration of resources on value creation.
  • Employees have limited inter-departmental involvement. They follow guidelines and are aware of their objectives and the corporate results, but fail to perceive how their tasks and activities affect customer value and the company�s bottom line.

The symptoms or consequences of these types of behavior are that:

  • In an attempt to improve productivity and effectiveness, these firms are affected by the law of diminishing returns;
  • The cost basis goes up without the customers perceiving any additional value from their relations with the firm;
  • Cost-cutting measures are precarious as firms have limited visibility into what exactly is producing value for the customer;
  • Inter-departmental relations become somewhat antagonistic as, in the ranks, employees fail to perceive the objectives and the value of other organizations� activities;
  • Instead of considering business model changes and putting a greater emphasis on customer value, firms tend to address their problems by focusing on product innovation, reorganization and management changes; measures that are costly (even with the prospect of future cost savings) and without lasting effects on their competitive advantage in the market.

Competitive firms cut costs when they have achieved productivity gains in excess of what the demand can profitably absorb. Their customers perceive the value as they willingly pay the competitive firms� prices. Their profits result from a greater effectiveness in performing value activities over alternative customer solutions available in the market.

The attitude of competitive firms is to first and foremost solve their customers� problems, not to create one by limiting their focus on their products and services and burdening the customers with the complexities of acquisition, integration and upkeep. To that effect, they engage all of their resources to maximize value creation. They align their processes and organizations to most effectively channel and preserve value in the course of addressing the specific needs of their respective customer segments. These firms continuously optimize their business models, seek alternatives and assess trade-offs to maximize the total sum of gains.

Hence, the priorities for effectively managing functional and operational performance in the competitive firm are thus established:

  • Ensuring that all operational and functional activities operate with clear customer value objectives (as opposed to internal service objectives), establishing performance metrics accordingly, and sharing accountability for level of service, cost and profitability across the board.
  • Managing and organizing the activities based on the unique requirements of the customer segments to most effectively channel and preserve the value created along the value chain.
  • Continuously seizing opportunities embedded in the value chain to gain productivity through synergy and economies of scale and to cut cost.

Achieving operational and functional performance is truly a collaborative effort requiring all organizations and departments not only to pull in the same direction, but also to be extremely cognizant of how their respective outputs affect customer value. Furthermore, it behooves firms to extend this philosophy beyond the confines of the enterprise and engage other companies within the value chain to actively collaborate in achieving these objectives.

A functional value analysis is suited for identifying the firm�s value creating abilities and the efficiency and effectiveness with which activities are performed. Benchmarking is in fact very useful in that it provides an effective diagnostic tool to indicate which areas operate at sub-optimal performance levels. Yet, to improve competitive performance, it is recommended that the actual capabilities be gauged against customer needs and customer value objectives as resulting from a customer value analysis (see last month�s article on this subject).

The following are some examples of fundamental performance assessment questions that you could ask yourselves to determine whether your firm�s activities have the proper focus in order to increase your competitive advantage:

  • Can my employees tell me how their activities contribute to customer value creation? Do they understand their roles and objectives within the value chain? Are my department heads aware of the premium customers are willing to pay in exchange for their contributions?
  • Does my model favor collaborative decision making versus internal services selling? Do my processes (and systems) equally emphasize value preservation (effectiveness) than they do value creation (efficiency)?
  • Are my offer platform and organization flexible enough to engage exactly the resources necessary to meet my customers� specific requirements (no more, no less) and thus avoid value destruction? What steps are taken to promote cost variability?
  • How do I manage my sales process and my funnel? Are my other organizations, such as product management, marketing, training and engineering, actively involved in the sales process? Are they part of the sales team or are my account managers the only sounding board to the customer?
  • Can my product and service development initiatives benefit from collaboration with other companies (customers, suppliers, peripheral vendors, etc.) and access to specialized resources that they control? What steps are taken to actively manage that process?
  • Where in my value chain are the opportunities for leverage, synergy and economies of scale? Is my firm prepared to capitalize on our strategic relationships and manage the organizational ramifications effectively?

With this approach to value chain management, firms monitor more effectively the allocation of their resources and ensure that their capabilities are directed with the proper focus, i.e.: The customer. They achieve greater functional and operational performance as their processes are more effective, efficient and productive. The competitive advantage thus achieved grants these firms greater latitude to take advantage of emerging opportunities, manage their market strategies accordingly and grow.

We recommend that firms actively engage in analyzing the value creating abilities of their operations and functional organizations as this also holds the key to defining the firms� focus, core competency and differentiation strategies. Next month, we will discuss the significance of these strategic elements in creating a competitive advantage and how they play out in the successful management of the value chain.

Xavier Van de Lanotte is the president of VXTConsulting, Inc. Xavier advises telecommunication services and equipment firms on Competitive Strategy, Customer Value, Alliance Management, and Distribution and has worked in this industry in various parts of the world for 15 years. For more information on value chain management, please visit us at www.vxtconsulting.com, or contact us at [email protected]. We welcome your questions and thoughts about this article.

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