Customer Value and the Value Chain8 months ago
Customer value and purpose are essentially two sides of the same coin. How customers perceive an organization, its products and services, is the most important general factor for achieving purpose. Purpose is the organization’s reason for being, which must align with customer values for shared, sustained success.
Value can be simply defined as benefits minus costs. How benefits and costs are conceptualized depend on cultural, economic, and social factors. They can be generally understood in terms of basic human motives. People want to be autonomous, able to meet their own needs and free to pursue their interests. They don’t want to be controlled let alone coerced or forced. People value independence.
At the same time, people want to belong. They want to feel like they are part of something bigger than themselves. Practically, this means being recognized by others and having a role. Sense of competence, which comes from carrying out a role and being recognized for it, is the other fundamental motivating factor.
Together, autonomy, belonging, and competence defining people’s sense of agency and self-efficacy. They apply regardless of a person’s relation to an organization. These three factors define value for customers, employees, partners, and other stakeholders. They are essential to people’s general and special roles and how they fit together to form a value chain, pictured below. The value chain describes the full range of basic business functions that exist in any organization, and how they fit together to create customer value.
The value chain encompasses the full range of activities or business functions necessary to create customer value.
The core of an organization is “making,” producing products or providing services. Making combines resources to generate value. Clarity on how and what to make and adequate resources are necessary for production and providing. The “what” is defined by the customer via marketing, sales, and service. The “how” involves “buying” capabilities and materials by human resources, procurement, and purchasing.
Buying connects to making via inbound logistics. Making fulfills marketing via outbound logistics. Customer service ensures value and solidifies the customer relationship. All these functions require infrastructure and support of various sorts, and they must be administered, coordinated, managed, etc., for them to operate as an organization. The administrative and internal support functions span the other functions and connect them in series to form a value chain.
The value chain is comprised of everything an organization does, driven by customer value, constrained by available resources, including capabilities to carry out its functions. It is a general model but also a practical tool for identifying and addressing organizational issues. One important application is to ensure your organization has the capabilities it requires to achieve—and define—success, which is the topic of our next post.
The power of the value chain model comes from analyzing the jobs involved in each function in your organization, their required capabilities, and how they interconnect. Workforce gaps, overlaps, and risks become apparent with value chain analysis. It also points to opportunities to be more efficient, effective, and resilient. Each function equates to a set of basic performance metrics that are best understood in context. We will dig into these metrics in a future post.
The value chain is a powerful model for analyzing and managing organizations. Our next post shifts the focus to capabilities, what they are, how to develop and measure them. Capabilities literally determine actual (as distinct from intended) business functions.