Pocketblog has gone back to basics. This is part of an extended management course.
The Value Chain is the complete set of processes that links everything an organisation does. Let us say you make widgets. The value chain starts with the process of sourcing raw materials, which you then purchase from a supplier, who then delivers them to you, which you process into finished widgets, that you market and sell, after which you deliver them to your customers, who incorporate your widgets into their value chain.
Most often, the value chain is represented as links in a single chain. I think that this is unrealistic. Instead, it is better to think of it as links in multiple chains, all joined up…
Understanding the value chain is essential for any manager who wants to step beyond their parochial role within it. Understanding and analysing your value chain will allow you to:
spot opportunities to create efficiencies within your part of the value chain
improve hand-offs with other parts of the value chain
appreciate the full strategic scope of the value chain and where you fit into it
determine where most and least value is added and review how to improve the value to cost ratio
find where your competitive advantages lie
benchmark your performance against industry norms and best practices
Michael Porter distinguished primary business activities (the value generating activities described in the value chain) from secondary business activities, which are necessary in supporting the primary activities. These include:
technology and systems infrastructure implementation and maintenance
personnel and human resource management, including recruitment, development, appraisal, remuneration, succession, discipline
financial planning and management
We can view these as further side links to the value chain.
Porter was clear that a successful business must ensure that all links between elements of this full value chain are strong, if it is to thrive under the pressures of competition.
Two previous Pocketblogs will add to your understanding of the Value Chain:
We take it for granted when new products appear on the market. Perhaps they were made by elves! Well, they must have been made by someone, who followed a process. And that process was the New Product Development, or NPD, process.
The New Product Development process is now mature and well understood. There are many ways to articulate it, and none is that different from what mediaeval craftsmen would have used. But it’s still a big idea. And it’s an idea every manager should at least be familiar with.
What if you want to improve the performance of your business or public service? You could study it carefully and hope to find inefficiencies and novel approaches. But maybe you could compare your practices to those of another organisation. That’s the essence of Benchmarking.
The idea of benchmarking is to compare yourself with others, to get new ideas from them, and to learn from what works for them. It’s a powerful idea that allowed Japanese manufacturing to catch up with and overtake the US. And then it helped the US regain lost ground, by codifying what the Japanese had learned, and the improvements they had made.
But it’s not universally loved. There are problems. That said, benchmarking is a big idea that every manager should be aware of.
Kaizen should be at the heart of every business and organisation’s operating model. After all, who could deny the appeal of Émile Coué’s* affirmation:
‘Every day, in every way, I’m getting better and better.’
But personal affirmations on their own, they don’t create change.
Kaizen does. It translates from the Japanese as change (kai) for the good (zen). And it comes with action. So, what is the origin of this big idea, and how can you implement Kaizen in your organisation?
In the 1980s, globalisation was the ‘Big New Thing’. Never mind that Chinese and Levantine traders had traded across half the globe at the start of the first millennium BCE. At the forefront of thinking about how multi-national corporations could organise themselves to prosper were a truly multi-national pair: an Australian, who’d worked in London and Paris and now occupied a professorship in the US, and an Indian who’d studied in the US and was a professor in France.
Christopher Bartlett and Sumantra Ghoshal surveyed the way multinationals organised themselves and categorised when each of the structures would be appropriate. Their legacy is visible on our high streets, in our back-offices, in factories and in building services today. A huge proportion of the goods we use are sold by multinationals.
Christopher Bartlett was born in 1943, and grew up in Australia. He studies Economics at the University of Queensland, gaining a BA in 1964. He worked as a marketing manager for the Alcoa company in Australia, before becoming a consultant with the London office of McKinsey and Co, and then a General Manager in France, for Baxter Laboratories.
But academia called to Bartlett, and he travelled to the US, to do a Masters (1971) and then PhD (1979) in business administration at Harvard, joining the faculty of Harvard Business School in 1979. He remained there and is not an emeritus Professor.
Sumantra Ghoshal was born in Calcutta, India, in 1946. He studied Physics at Delhi University, gaining his BSc. From there, he worked from 1969 to 1981 at the Indian Oil Corporation.
In 1981, a Fulbright scholarship took Ghoshal to the US, where he took a an SM at MIT in 1983, then did something extraordinary. He worked on and completed two different PhD theses at two different universities, at the same time. He was awarded a PhD by MIT in 1985 and a DBA by Harvard the next year.
And in 1985, he took up a position at Insead, where he became Professor of Business Policy in 1992. Two years later, he moved to the London Business School to become Professor of Strategic Leadership. He remained there until his untimely death from brain haemorrhage in 2004.
Managing Across Borders: Strategies for Multi-National Corporations
Surveying 250 managers from 9 multinational companies, Bartlett and Ghoshal concluded that there are three principal models that multinationals followed:
The Multinational – ‘Multi-domestic’ – Corporation
The Multinational structure is a decentralised, federal organisational structure that focuses on local markets and has only loose central control. They later called this model ‘multi-domestic’, and is most responsive to local demand. The corporation looks most like a portfolio of different companies. Now, these will be seen as band portfolios in which the brands have a lot of autonomy and much of their own infrastructure.
Food and drink, and household appliances are products that most need this strategy.
The Global Corporation
The global organisation tries to gain maximum economies of scale by centralising as many of its functions as possible. This often results in brands sharing infrastructure and services, leading to a lot of strategic decisions being driven by functional expertise and priorities. Brands therefore become increasingly global and undifferentiated in local markets.
Plant and heavy machinery, technical equipment, and raw materials production are products that most need this strategy.
The International Corporation
Here, there is a lot more centralisation than in the multi-domestic corporation. But there is also more local autonomy than in the global model. One role of the centre is to facilitate knowledge transfer among the trading divisions, so they can share technologies and achieve economies, while making some of their own choices to optimise use of domestic supply chains and expertise.
Textiles, light machinery, and printing and publishing are products that most need this strategy.
A Fourth Model…
Bartlett and Ghoshal considered that these three models left open the possibility of a new, fourth structure. This would combine elements of all three, and they also assessed which of the four models would work best, according to two pressures:
When both pressures were high, their new model would be most suitable:
The Transnational Corporation
The transnational corporation is the most complex. It balances widespread global integration of technology and supply chains against the need to adapt products and services to local market preferences. It is supported by a strong central headquarters, that is able to move managers around to gain international experience and share knowledge.
Cars, consumer electronics, and pharmaceuticals are products that most need this strategy.
From Systematic Efficiency to Responsive Innovation
Bartlett and Ghoshal also discerned powerful shifts in the fundamental needs of a business strategy. Where Michael Porter had laid out strategies that would allow companies to win the largest share of a market, Ghoshal and Bartlett argued that corporations need a strategy to create value anew, and grow their market as a way of winning business. They said companies need to innovate their way out of market pressures, rather than push against them.
They also challenged the orthodoxy that began with the Scientific Management movement of Taylor, Gantt, Adamiecki, and the Gilbreths, and then the efficiency drives of people like Ford and Sloane. Sloane’s approach of Strategy, Structure, and Systems became the McKinsey 7S model. But Bartlett and Ghoshal wanted to replace Strategy, Structure, and Systems by Purpose, Process, and People.
The three Ps were the new building blocks of a corporation. In a series of articles for the Harvard Business Review, they placed responsibility for each of these firmly on the shoulders of top management.
So here we are, in 2017. And our world is dominated by a range of global, multinational, and transnational corporations, whose focus is on process and whose mantra is people. Not a bad body of work to act as a symbol of what multinational collaboration can achieve!
While not quite the classic ‘rags to riches’ story, Alan Sugar is a genuine example of the trope of a smart, hard working street trader, who makes it to the big time. And what a big time it is. The Sunday Times Rich List rates him as a Sterling billionaire. It’s easy to feel we know Alan Sugar, through his successful appearances on the UK version of The Apprentice. I suspect that what we see on screen, however, is a character: part Alan Sugar, and part the creation of the shows directors, producers and editors.
Alan Michael Sugar was born in 1947 and grew up in Hackney, in East London. His father worked in the East End garment industry, as did my grandmother. After leaving school at 16, Sugar spent a short time in the Civil Service, before investing £50 of his savings in a van and some electrical goods to sell from it.
Sugar was an adept street trader and gradually moved up the value chain to wholesaling and import, founding his first company, Amstrad (AMS Trading), in 1968. But Sugar realised he would only find the big profit in manufacturing. The business he understood best was consumer electronics, so Amstrad’s first manufacturing venture was record turntables. This was the first of many examples of Sugar finding ways to reduce manufacturing costs substantially, so he could out-compete rivals on price.
The 1980s were great years for Sugar and Amstrad, starting in 1980 with its flotation on the London Stock Exchange. The company grew rapidly and launched its first computer in 1984. Although outcompeted by Apple, Commodore and the BBC Micro, it did sell well domestically, as did the following year’s business-oriented word processor. The 1980s ended with the launch of Amstrad’s first satellite TV receiver dish – a line that was to be extremely profitable, with the growth of satellite broadcasting by Sky, BSB, and later, the merged BSkyB. The 1990s were more troubling for Amstrad, which suffered a number of commercial setbacks.
I cannot help wondering if Sugar ‘took his eye off the ball’ in the 1990s, because this was the time too, that he bought and chaired the Premier League football Club Tottenham Hotspur (1991-2001). He later described this period as a waste of his life, and it was certainly a fractious time at the club.
In 2007, Sugar cleared house, selling off Amstrad to business partners BSkyB and his final stake in Tottenham Hotspur.
In 2000, Sugar was knighted “for services to the Home Computer and Electronics Industry” and became Sir Alan Sugar, and then in 2009, was enobled as Baron Sugar of Clapton, to take up a place in Gordon Brown’s Labour Government, sitting in the House of Lords. In 2015, Sugar resigned the Labour Whip, saying that the party’s policies had drifted too far in a direction away from the needs of British business.
Amstrad is also a serious philanthropist, donating substantial funds and time to care and arts organisations. He has written four books too, of which the most important and best selling is his autobiography, What You See Is What You Get. And, of course, he is best known in the UK for his appearance in every series of BBC TV’s The Apprentice.
Business Lessons from Lord Sugar
Much has been written on this – including by me, in a series of blogs drawing lessons from episodes of The Apprentice over a number of years. So let’s keep it simple. Here are five important lessons for managers and business people to bear in mind.
Lesson 1: Character is Destiny
Whether you like or loathe the image he portrays in public, Sugar cleaves firmly to his own principles and business values. If I had to assess ‘the real Alan Sugar’ – and bear in mind, I have no privileged knowledge here – I would speculate that he is someone who has deep respect for people who can demonstrate their capabilities and expertise at the highest level, and has no time for people who have little ability. Anyone who tries to make up for their shortcomings through ingratiation or deception will incur his wrath.
I suspect trusting his closest allies and advisors profoundly has been important in building his success, but his blunt, no nonsense, and occasionally abrasive style has created detractors. His management style has been criticised, as has his attitude to women at work.
Lesson 2: Spot the Next Big Thing… then move quickly
Computers, word processors, TV satellite dishes, email, PDAs, satellite TV receivers… Sugar was in on the ground floor of all of these. At each stage, he used the knowledge and skills gained in earlier ventures to move quickly and seize market share. He also has a strong insight into customer desires and behaviours, which is critical in commercial decision-making. Not all his ventures have been hugely successful, but in business, it is the cumulative success that matters. Indeed, not all his customer predictions have been sound either: he famously predicted the demise of the iPod within a year. Whoops.
Lesson 3: Out-compete ruthlessly
Sugar’s primary competitive strategy is to out-compete on price. Take early stage technology that has started to stabilise, and find a way to manufacture and ship it at vastly reduced costs. The Amstrad computer was reportedly designed on an airline napkin, on a flight from Japan (where he’d seen early computers on sale) and Hong Kong, where he had business contacts that could help with manufacturing.
Lesson 4: Roll with the Punches
Sugar is a great example of business resilience. Not every venture was a success and he has had difficult times in his commercial life. Maybe a stable family life (40+ years of marriage) helped, but I suspect his personal resilience is also down to his character. Expect set backs, take them on the chin, learn from them, and come back fighting.
Lesson 5: Learn how to Negotiate well
I don’t know what Lord Sugar’s negotiating secrets would be – or even if they are anything more than consistent and ruthless application of sound basic principles. But it is certain that he is able to secure every last ounce out of a deal and is scathing of people who ‘leave money on the table’ in a negotiation.
Sam Walton founded Wal-Mart, growing it to over a thousand stores. He is a serial early-adopter whose commitment to innovations made them ubiquitous and his investors extremely rich.
Samuel Walton was born in Oklahoma, in 1918, and grew up on the move in Missouri, during the great Depression, as his father worked at a series of sales jobs. Walton worked too, during his education, pausing to take a degree in Business at the University of Missouri at Columbia.
On leaving, he started working as a management trainee at JC Penney, where he also started learning the management skills that would help him grow his own business in the future. As for many young men of his age, the Second World War put the brakes on his career, when he served in the US Military Police. Returning to civilian life in 1945, he decided not to return to JC Penney, but to open a franchise Ben Franklin store in Arkansas, funded by a loan from his father-in-law.
This thrived, but he was unable to renew his lease, so opened a new one in a nearby town in 1950. Gradually, he bought more and grew his empire, using a light aircraft to get from one store to another and to scout possible new locations.
In 1962, he opened his first Wal-Mart store, on a new model he’d seen in Chicago – a Kmart, owned by competitor Sebastian Kresge. He had started his experiment with bulk retailing. Over the coming years, he experimented further in stock lines and layouts, and opened a second Wal-Mart in 1964. Then, in 1970, he raised $5 million in equity through a stock issue (at $16.50 per share), and opened six new stores and a distribution warehouse. By the time of his death, one of the original Wal-Mart shares had grown in value to $26,000 and the Wal-Mart empire was the biggest retailer in the US, with over a thousand stores.
Sam Walton stood down as CEO of Wal-Mart in 1988, to fight both leukaemia and bone marrow cancer; and finally died of it in 1992.
Five Retail Lessons from Sam Walton
1. The Personal Touch
Walton would get to know his employees (or Associates, as they are known) personally in the early days. He maintained this as long as he could, having gained a pilot’s licence so he could fly from store to store. The use of the term ‘Associate’ was a deliberate choice to create a sense of inclusion and what we would now call engagement. Indeed, he encouraged managers of new stores to take shares in the business to create a sense of their ownership. Walton practised, from his earliest days at JC Penney, a management style that can be called MBWA: Management by Walking About.
2. Rigorous Standards
In visiting stores, Walton set and expected strict quality standards. If he did not find them, he was sanguine about just shutting the store and not re-opening it until the management and staff could get it right.
3. Control your Supply Chain
There is a story about Walton that reminds me of one I recounted about Ingvar Kamprad (founder of Ikea). In the early days (his second Ben Franklin store), when a local competitor sold out of a product – women’s rayon underwear – instead of ordering himself a stock, he bought the distributor. In one move, he deprived his competitor of stock and assured his own supply chain. The money he raised in 1970 from a stock issue was used in part, not to expand his retail base as much as possible, but to fund a distribution centre. Like a good military general, Walton understood the criticality of his supply chain. He invested heavily in warehousing, logistics and, early on, in networking his stores and warehouses to one another.
4. Embrace the New
Less of an innovator and more of an early adopter, Walton frequently saw and rapidly embraced new ideas that would help him grow his business (Jim Collins’ Flywheel principle). I mentioned satellite networking of his stores, above, but other examples abound: self-service retailing, discounting, and hypermarkets. Each step made him more successful.
Walton believed in achieving the best results he could, so he was constantly experimenting to test the effects of different layouts, promotions, and stock lines. Once again, the flywheel principle at work, but the salient lesson for me is test-evaluate-improve – then test something new.
If all this sounds a little familiar, take a look back at the blog on Ingvar Kamprad, which I posted just over a year ago. I cannot help feeling that these two retailers, born only eight years apart, are kindred spirits.
The engineer behind many aspects of the Toyota Production System (TPS) can justly be described as instrumental in creating one of the world’s great manufacturing businesses. But his influence goes far wider, with many of the management ideas that we take for granted originating as a part of the TPS. I promised you we’d look at him when we examined the lessons from his boss, Eiji Toyoda, so let’s see what we can learn from Taiichi Ohno.
Taiichi Ohno was born in China, where his father was working on the Manchuria Railway, in 1912, and grew up in the Aichi prefecture of Japan, attending the Nagoya technical High School. In 1932, he joined the Toyoda Automatic Loom Works, which had been established by Sakichi Toyoda, who was highly innovative in the looms he designed and built. When Toyoda sold off the loom business to a British company, he determined to invest the money in an automobile business, to be headed by his son, Kiichiro Toyoda.
Kiichiro Toyoda set out to learn from US motor manufacturers, and started manufacturing vehicles in 1936 and it was he who first introduced the idea of ‘Just in Time’. However, it was when Taiichi Ohno was tasked with increasing productivity that the company started to make the breakthroughs which would later form the groundwork for Toyota’s great commercial achievements of the 1960s onwards, under Eiji Toyoda.
In looking at Toyota’s productivity levels shortly after the war, Ohno realised that the gap in performance between Toyota and the top US manufacturers of a factor ten could not be due solely to a poor Japanese workforce. He considered that the significant factor was waste; ‘Muda’. As he experimented, and took on board Kiichiro Toyoda’s ideas of Just in Time production, he gradually, over the years from 1945 to the mid-1970s, built up a coherent set of principles and practices that has come to be known as the ‘Toyota Production System’.
Towards the end of his life, Ohno spoke and wrote extensively (most notably: ‘Toyota Production System: Beyond Large-Scale Production‘) about the TPS – perhaps more than his superiors really felt comfortable with. In doing so, he frequently used the metaphor of a supermarket to describe how Just in Time principles work. He had first seen, and been captivated by, supermarkets on a visit to the United States in 1956. Ohno died of heart failure in May 1990.
The Toyota Production System
The three principles at the heart of the the Toyota Production System are easy to state:
Produce components just in time for their use (‘Just in Time’ production)
Build quality in every part of the process (‘Jidoka’)
Create one continuous process (the ‘Value Stream’)
Just in Time Production
As if the phrase Just in Time has not become well-enough known, it is supported by an idea and a practical tool that have each become central to manufacturing processes world-wide… and, indeed, to other business and organisational processes.
The first of these – and Ohno’s starting point for his reforms – is the idea of waste, or ‘Muda’. Ohno waged a systematic campaign to eliminate all possible forms of waste. In so doing, he identified the seven categories that are often known as the ‘Seven Wastes’.
Defective Production – producing defective products
Overproduction – producing more than is needed
Waiting – idle, non-productive time
Transporting – the wasted time and risks of damage or loss
Inventory – holding unnecessary stock and therefore incurring capital costs
Motion – the wear and tear and the accidents that arise in moving things around a plant
Excessive Processing – over-specification of components, or unwanted functionality, for example
Some people add other wastes to Ohno’s original seven, most commonly placing Non-used employee talent (wasting skills) between number 3 and 4 in my ordering, so create the mnemonic acronym: DOWNTIME.
Ohno also developed a system of signboards that track progress of goods through the manufacturing process, which are called ‘Kanbans’. The kanban board is now widely used to track progress in projects throughout commerce, especially in managing software projects under agile project management methodologies.
Ohno examined every part of the manufacturing process and looked for ways to reduce errors, increase safety, and improve reliability. When he found them, he instituted rigorous staff training. The principle of building quality into everything is ‘Jidoka’. And, although he did not originate the idea of continuous improvement, known as ‘Kaizen’, Ohno’s concept of Jidoka involved daily improvement in a cycle of detecting problems, stopping production, removing the cause of the problem, and then incorporating the improvements into the standard workflow.
Another of Ohno’s greatest innovations is his problem solving methodology, the Five Whys, a way of getting at the root cause of a problem. This intelligent approach to stopping a machine when a fault arises and injecting human problem solving is Ohno’s idea of intelligent automation, or ‘autonomation’; ‘ninben no tsuita jidoka’.
Instead of seeing a factory as a series of inter-connected processes as Henry Ford had done, Ohno saw it as one continuous connected process. And ensuring that its efficiency is optimised is the idea of work levelling; ‘Heijunka’. This is central to eliminating waste, or Muda and is about rearranging (dynamically) the allocation of work to ensure that every resource is fully utilised at all times.
Many of Ohno’s ideas seem obvious to us now but they did not at the time. And, inevitably, he encountered much resistance from the Toyota workforce. He employed one principal strategy to deal with this, that had two simple components: patience and persistence. Evolving the Toyota Production System took thirty years and, no doubt, it is ongoing today.
Adoption outside of Japan
Outside of Japan, Ohno’s ideas have been widely adopted and modified. The TPS is now more generally known as ‘lean manufacturing’ and the principles of lean thinking are increasingly being applied throughout the economy in sectors like retailing, services, telecommunications and even government service.
There does seem to be a difference, however, between Ohno’s and the two Toyodas’ philosophy and that of modern western businesses with which I am familiar. Here, we see organisations seeking to use lean principles to ‘sweat their assets’ to cut staff numbers and compel them to work harder to achieve greater productivity with fewer resources. Toyota instead thought that by making its process more efficient, its workforce could produce more without significant increases in the cost base, and so exploit new markets to create more profit.
At the heart of this is a different approach to pricing. The Western approach is to lower your cost base as low as you can, to determine a profit level, and then to sell at the price that these dictate.
Toyota’s success was build on a different philosophy: that the market fixes the price it will pay, and you optimise your processes to set your unit costs. Your profit is the difference.