The Value Chain Network: Unlocking Organizational Excellence through Effective Operating Models 9783031380006, 3031380002

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Future of Business and Finance

David W. Walters Deborah A. Helman

The Value Chain Network

Unlocking Organizational Excellence through Effective Operating Models

Future of Business and Finance

The Future of Business and Finance book series features professional works aimed at defining, analyzing, and charting the future trends in these fields. The focus is mainly on strategic directions, technological advances, challenges and solutions which may affect the way we do business tomorrow, including the future of sustainability and governance practices. Mainly written by practitioners, consultants and academic thinkers, the books are intended to spark and inform further discussions and developments.

David W. Walters • Deborah A. Helman

The Value Chain Network Unlocking Organizational Excellence through Effective Operating Models

David W. Walters University of Technology Sydney Sydney, NSW, Australia

Deborah A. Helman DeVry University Iselin, NJ, USA

ISSN 2662-2467     ISSN 2662-2475 (electronic) Future of Business and Finance ISBN 978-3-031-37999-4    ISBN 978-3-031-38000-6 (eBook) https://doi.org/10.1007/978-3-031-38000-6 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Paper in this product is recyclable.

Contents

Part I The Development of the Value Chain Network 3.0 1

Introduction������������������������������������������������������������������������������������������������   3 The Focus on a Sales Approach ����������������������������������������������������������������    4 The Influence of Marketing ����������������������������������������������������������������������    5 Logistics and PDM������������������������������������������������������������������������������������    5 The Value Chain 1985–2020����������������������������������������������������������������������    6 Value Chain Management 1.0����������������������������������������������������������������    6 Physical Distribution Management (PDM) and Supply Chain Management����������������������������������������������������������������������������������������������    6 Value Chain Management 2.0��������������������������������������������������������������������    8 A Dynamic Business Environment and the Future for Value Chain Networks����������������������������������������������������������������������������������������������������    9 Some Basic Network Structures����������������������������������������������������������������   11 Intra and Inter-Industry Network Performance Leverage��������������������������   13 Value Adding as a Collaborative Process����������������������������������������������   14 The Importance of Industry and Market Dynamics: Developments and Shared Resources����������������������������������������������������������������������������   16 Shared Capabilities as Resources: Cloud Based Platforms ������������������   17 Covisint®������������������������������������������������������������������������������������������������   17 Elemica®������������������������������������������������������������������������������������������������   18 Evaluating Value Added: Value Contribution����������������������������������������   18 Innovation, Profitability, Productivity, and Risk Management: A Role for Value Chain Management����������������������������������������������������   19 The Future of the Value Chain Network����������������������������������������������������   20 Value Chain Management 3.0����������������������������������������������������������������   22 Looking Forward�����������������������������������������������������������������������������������   23 References��������������������������������������������������������������������������������������������������   24

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 Industry and Market Dynamics ��������������������������������������������������������������  25 Introduction������������������������������������������������������������������������������������������������   25 Knowledge Management ��������������������������������������������������������������������������   27 Technology Management��������������������������������������������������������������������������   27 Process/Activity Management ������������������������������������������������������������������   29

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Relationship Management ������������������������������������������������������������������������   29 Network Relationship Management������������������������������������������������������   29 Customer Relationship Management����������������������������������������������������   29 Competitor Relationship Management��������������������������������������������������   30 Supplier Relationship Management������������������������������������������������������   31 Process/Activities Management����������������������������������������������������������������   31 Geopolitics ������������������������������������������������������������������������������������������������   32 Industry and Market Dynamics: Emerging Topics������������������������������������   32 ‘Global Institutions’ Regulatory Compliance and Governments’ New Interventionism������������������������������������������������������������������������������������������   34 Education and Employee Capabilities Development��������������������������������   34 Populism/Nationalism��������������������������������������������������������������������������������   35 Stakeholder Value Management, EESG, and the UN’S 17 Development Issues����������������������������������������������������������������������������������������������������������   36 Climate Change������������������������������������������������������������������������������������������   37 Globalisation and MNCs����������������������������������������������������������������������������   37 International Financial Management ��������������������������������������������������������   37 International Macro-Economic Management��������������������������������������������   38 Managing Geostrategic Risk����������������������������������������������������������������������   38 International HealthCare Management������������������������������������������������������   39 International Human Relations������������������������������������������������������������������   39 Pathways to Competitive Value Advantage Using Industry and Market Dynamics ��������������������������������������������������������������������������������������������������   39 References��������������������������������������������������������������������������������������������������   40 3

Managing Value������������������������������������������������������������������������������������������  41 Introduction: What Is Business Value?������������������������������������������������������   41 Value Creation Is Increasingly Being Recognised as a Better Management Goal than Strict Financial Measures of Performance����������   42 Value Added and Added Value, Economic Profit and Economic Value Added��������������������������������������������������������������������������������������������������������   43 Economic Profit and Economic Value Added��������������������������������������������   44 Economic Profit = Revenues Less Operating Costs Less the Allocated Cost of Capital Usage����������������������������������������������������������������������������   44 Economic Value to the Customer/Value in Use/Price/Value/Equality ������   45 Setting Value Not Price������������������������������������������������������������������������������   46 Value Management: Structure and Process������������������������������������������������   50 Value Innovation: Structure and Process ��������������������������������������������������   50 Value Engineering: Structure and Process ������������������������������������������������   53 Value Production: Structure and Process ��������������������������������������������������   54 Value Delivery: Structure and Process������������������������������������������������������   55 Value Serviceability: Structure and Process����������������������������������������������   56 Value Sustainability: Structure and Process����������������������������������������������   58 Value Chain Positioning: Value Migration: Capability Response Management Structure and Process ����������������������������������������������������������   58

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Managing Value through the Value Proposition����������������������������������������   61 What Is a Value Proposition? ����������������������������������������������������������������   61 Economic Profit = Revenues Less Operating Costs Less the Allocated Cost of Capital Usage����������������������������������������������������������������������������   61 Creating the Feasible (Customer Acceptable) and Viable (Value Chain Partnership Network) ��������������������������������������������������������������������������������   63 Using the Value Chain Network to Manage “Intra and Inter Organisational Collaboration” and Interactivities��������������������������������������   64 References��������������������������������������������������������������������������������������������������   68 4

 Performance Value Drivers and Builders������������������������������������������������  69 Introduction������������������������������������������������������������������������������������������������   69 Identifying Performance Value Drivers��������������������������������������������������   69 Performance Value Drivers, Customer Feasibility and Viability Are Essential for Success������������������������������������������������������������������������������   73 Value Drivers and Value-Led Response Capabilities��������������������������������   74 Network Operational Response Capabilities as Performance Value Drivers����������������������������������������������������������������������������������������������������   74 Exploring Customer Expectations and Developing an Acceptable and Workable Value Proposition������������������������������������������������������������������   76 Response Options and Calculating the Cost of the Value Proposition��   80 Impact on “Network Organisational Excellence Performance”������������   81 Managing Customer Operational Performance Value Drivers Expectations, Problems and Realistic Capability Responses����������������   82 Strategic Value Performance Builders ������������������������������������������������������   83 Using the Organisational Excellence Model to Create and Manage Stakeholder Value����������������������������������������������������������������������������������   86 Business Environmental Changes and Challenges��������������������������������   87 References��������������������������������������������������������������������������������������������������   96

Part II Capability Responses and Organisational Excellence 5

Introduction������������������������������������������������������������������������������������������������  99 Strategic Excellence Policy Issues������������������������������������������������������������  103 Strategic Excellence����������������������������������������������������������������������������������  106 Operational Excellence������������������������������������������������������������������������������  107 Operational Excellence Component Activities������������������������������������������  108 Organisational Excellence�������������������������������������������������������������������������  110 Organisational Excellence: A Model for Success in a Digital Economy����������������������������������������������������������������������������������������������������  111 An Operating Model����������������������������������������������������������������������������������  111 References��������������������������������������������������������������������������������������������������  119

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Performance and Positioning�������������������������������������������������������������������� 121 Introduction������������������������������������������������������������������������������������������������  121 Performance: Introduction ������������������������������������������������������������������������  121

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Strategy Excellence + Operations Excellence = Operational Excellence����������������������������������������������������������������������������������������������  123 The Primary Benefits of an Optimal Network Value Contribution-­Led Operating Model������������������������������������������������������������������������������������  123 Positioning: Introduction ��������������������������������������������������������������������������  124 Changing and Challenging Industry and Market Dynamics Confronting the Business����������������������������������������������������������������������  127 Competitive Value Proposition Positioning: Options for Competitive Advantage and Value Contribution��������������������������������������������������������  128 Performance and Positioning: An Example ������������������������������������������  130 References��������������������������������������������������������������������������������������������������  132 7

Profitability and Productivity ������������������������������������������������������������������ 133 Introduction������������������������������������������������������������������������������������������������  133 Seeking Organisational Excellence: The Primary Benefits of an Optimal Network Value Contribution-Led Operating Model ����������  134 Economic Profit: Economic Value Added and the Impact on Stakeholder Value Management. Value Contribution: Its Derivation��������������������������������������������������������������������������������������������������  138 Calculating EVA������������������������������������������������������������������������������������  139 The Cost of Capital: Quantitative����������������������������������������������������������  139 Cost of Equity����������������������������������������������������������������������������������������  140 Cost of Debt ������������������������������������������������������������������������������������������  141 Cost of Capital: Qualitative��������������������������������������������������������������������  141 Developing Network Based EVA/Economic Profitability Models��������  142 Considerations that Can Have Impact on Current and Future EVA/ Economic Profit Performance����������������������������������������������������������������  144 Productivity������������������������������������������������������������������������������������������������  148 Operating Economic Value Added: As a Quantitative Measure of Productivity��������������������������������������������������������������������������������������������  151 Expanding the Perspective of Productivity��������������������������������������������  157 Managing Cash Flow ����������������������������������������������������������������������������  157 References��������������������������������������������������������������������������������������������������  161

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Producibility ���������������������������������������������������������������������������������������������� 163 Introduction������������������������������������������������������������������������������������������������  163 What Exactly Is Producibility?������������������������������������������������������������������  164 Producibility Enabling Characteristics of Successful Network Organisations ��������������������������������������������������������������������������������������������  166 Effective and Efficient Process Management Business Process Optimisation: And Relationships as Processes������������������������������������������  168 Processes and Activities ����������������������������������������������������������������������������  169 What Are End2End Processes?������������������������������������������������������������������  169 Developing a Value Management Strategy������������������������������������������������  170 Identifying and Costing Activity Inputs: Activity Based Management����������������������������������������������������������������������������������������������  174

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Activities and Activity-Based Management (ABM) and Activity-­Based Costing (ABC) Application to Producibility Decision Making������������  174 Applying Activity Based Management, Activity-Based Costing and Attribute Based Costing ������������������������������������������������������������������������  175 Activity Based Management and the Value Proposition����������������������������  181 Producibility: As an Operating Infrasructure Network������������������������������  181 References��������������������������������������������������������������������������������������������������  183 9

 Collaborative Partnerships and People���������������������������������������������������� 185 Introduction������������������������������������������������������������������������������������������������  185 Seeking Operational Excellence: The Primary Benefits of a Network Value-Led Operating Model—Collaborative Partnerships��������������������  186 Collaborative Partnerships ��������������������������������������������������������������������  188 Collaborative Partnerships: Secondary Stakeholders as Partners����������  188 Collaborative Partnerships: Suppliers as Partners����������������������������������  189 Customers as Partners����������������������������������������������������������������������������  192 Collaborative Partnerships: Employees as Partners ������������������������������  193 Collaborative Partnerships: Employees—Cobots and Humans: Industry 5 ����������������������������������������������������������������������������������������������  195 Collaborative Partnerships: Competitors ����������������������������������������������  196 A Real-World Example of Coopetition��������������������������������������������������  197 Collaborative Partnerships Industry Consortia��������������������������������������  197 Collaborative Partnerships: Clusters������������������������������������������������������  198 Partnership Essentials Collaborative Partnerships: Future Essential Criteria ��������������������������������������������������������������������������������������������������  201 Collaborative Strategic and Operational Alignment������������������������������  201 Digital, Digitalisation, and Connectivity Capabilities ��������������������������  202 Communication and Confidentiality������������������������������������������������������  202 Functional Engagement ������������������������������������������������������������������������  203 Shared Value Creation����������������������������������������������������������������������������  203 Governance��������������������������������������������������������������������������������������������  203 Expansion of Value Chain Network Applications����������������������������������  204 References��������������������������������������������������������������������������������������������������  204

10 Platforms���������������������������������������������������������������������������������������������������� 205 Introduction������������������������������������������������������������������������������������������������  205 Seeking Operational Excellence: The Primary Benefits of an Optimal Network Value Contribution-Led Operating Model������������������������������  205 Platforms and Ecosystems: A Typology������������������������������������������������  207 Production Possibility Curves, Value Equivalence Applications, Platforms and Mass Customisation��������������������������������������������������������  210 Applications: Industry Platforms ����������������������������������������������������������  214 Platform Business Models ��������������������������������������������������������������������  216 Industry Ecosystems������������������������������������������������������������������������������  217

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The Existing Automotive Value Chain Platform: A Composition of Focused Specialist Platform Activities��������������������������������������������������  218 Emerging Platform: EV Construction, Distribution and Serviceability ����������������������������������������������������������������������������������������  220 References��������������������������������������������������������������������������������������������������  223 11 PlanetCare and Sustainability������������������������������������������������������������������ 225 Introduction������������������������������������������������������������������������������������������������  225 EESG and UN Sustainability and PlanetCare��������������������������������������������  227 Sustainability in the Real World����������������������������������������������������������������  227 Applications of Sustainability��������������������������������������������������������������������  233 Environmental Policy��������������������������������������������������������������������������������  234 July 2021������������������������������������������������������������������������������������������������  234 Capability Responses and Sustainability ��������������������������������������������������  235 Capability Responses and Sustainability: Micro Perspectives������������������  236 Performance, Positioning and Sustainability Considerations��������������������  236 Profitability, Productivity, Cash Flow and Sustainability Considerations��������������������������������������������������������������������������������������������  237 Producibility and Sustainability Considerations����������������������������������������  237 Partnerships and People and Sustainability Considerations����������������������  238 Partnership with Suppliers ��������������������������������������������������������������������  240 Partnerships with Specialists������������������������������������������������������������������  240 Partnerships with Employees ����������������������������������������������������������������  240 Platforms and Sustainability Considerations ��������������������������������������������  242 Sustainable: Corporate Sustainability as a Component of Organisational Excellence�������������������������������������������������������������������������  243 The Circular Nature of Future Business Models ����������������������������������  243 Impact Analysis������������������������������������������������������������������������������������������  247 References��������������������������������������������������������������������������������������������������  247 12 Capability  Responses and Organisational Excellence���������������������������� 249 Introduction������������������������������������������������������������������������������������������������  249 Revisiting Organisational Excellence����������������������������������������������������  250 Organisational Excellence���������������������������������������������������������������������  250 “The Future Operating Model”��������������������������������������������������������������  252 Building a Capability/Organisational Excellent Based Operating Model ����������������������������������������������������������������������������������������������������  252 References��������������������������������������������������������������������������������������������������  258 Part III The Changing Business Environment: Industrié 4.0 becomes Industry 5.0, Value Chain Management 2.0 becomes Value Chain 3.0 and Stakeholder Value Management 1.0 becomes Stakeholder Value Management 2.0 13 Introduction������������������������������������������������������������������������������������������������ 261 References��������������������������������������������������������������������������������������������������  264

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14 Network Economics ���������������������������������������������������������������������������������� 265 Introduction������������������������������������������������������������������������������������������������  265 Golden Ponds ����������������������������������������������������������������������������������������  267 White Spaces (Transforming Existing Markets)������������������������������������  268 Network Alliances: Golden Ponds and White Spaces ��������������������������  268 References��������������������������������������������������������������������������������������������������  269 15 Reimagining “Business” Cycles���������������������������������������������������������������� 271 Introduction������������������������������������������������������������������������������������������������  271 The Economic/Business Cycle��������������������������������������������������������������  272 The Changing Characteristics of the Product Life Cycle (PLC) ����������  274 The Product Engineering Life Cycle ����������������������������������������������������  280 Asset Life Cycle Management��������������������������������������������������������������  282 The Value Management Cycle Strategy������������������������������������������������  290 Developing a “Value Management” Cycle Strategy������������������������������  291 References��������������������������������������������������������������������������������������������������  293 16 Digital  Business Model Essentials������������������������������������������������������������ 295 Introduction������������������������������������������������������������������������������������������������  295 Views and Proposals������������������������������������������������������������������������������  298 Developing a Digital Network Based Operating Model������������������������  303 A “Future” Operating Model? Key Capabilities Responses������������������  308 A “Future” Operating Model ����������������������������������������������������������������  308 Secondary (External) Stakeholders’ Value Management Model ����������  309 Multiple Business Models���������������������������������������������������������������������  309 Integrated Networks (Consortia Activities) ������������������������������������������  309 Adaptive and Expandable Scale������������������������������������������������������������  310 A “Growth” Mindset Rather than a Fixed Model����������������������������������  311 Dynamic Agile Innovation that Responds to Opportunities������������������  311 The Rolling Value Proposition ��������������������������������������������������������������  313 Governance��������������������������������������������������������������������������������������������  313 Building and Implementing the Digital Operating Model��������������������  313 References��������������������������������������������������������������������������������������������������  314 Part IV The Developing Value Chain 17 Introduction������������������������������������������������������������������������������������������������ 317 References��������������������������������������������������������������������������������������������������  322 18 Value  Chain Analysis and Mapping �������������������������������������������������������� 323 Introduction������������������������������������������������������������������������������������������������  323 Mapping and Auditing the Value Chain Network����������������������������������  323 Understanding how the Value Chain Works in the Market: Can Price/Value/Equalisation Be Created? ��������������������������������������������������  324

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How Is the Value Chain Positioned in the Market? ������������������������������  326 Understanding how Organisations Position themselves in the Value Chain����������������������������������������������������������������������������������������������������������  330 The Organisation’s Operating Model and its Place in the Network������  331 Response Capability Scoping����������������������������������������������������������������  338 ‘Auditing’: Monitoring the Response—Tracking Value Migration ������  340 Can the Firm Extract Value?����������������������������������������������������������������������  342 Value Chain Network Mapping: Cost Structures����������������������������������  342 Value Chain Network Mapping: Roles, Tasks and Trade off Choices��������������������������������������������������������������������������������������������������  344 References��������������������������������������������������������������������������������������������������  347 19 Reimagining  the Value Chain Network���������������������������������������������������� 349 Introduction������������������������������������������������������������������������������������������������  349 Where Have we Been and where Are we Going.?��������������������������������  350 The Future and Technology: Some Social Issues����������������������������������  353 Creating Value Management������������������������������������������������������������������  354 Value Management/Value Contribution/EVA/Economic Profit ������������  354 An Operating Model������������������������������������������������������������������������������  356 Using Network Organisational Excellence to Achieve Value Management������������������������������������������������������������������������������������������  356 Operational Excellence and Operational Excellence Processes������������  356 Strategic Excellence and Strategic Excellence Processes����������������������  357 A Model for Network Operations Management: Current Operations����������������������������������������������������������������������������������������������  357 A Model for Operations Management Model: Current Operations������  359 Focused Capability Responses��������������������������������������������������������������  359 Reimagining the Value Chain����������������������������������������������������������������  381 Positioning ��������������������������������������������������������������������������������������������  383 Relationship Based Networks����������������������������������������������������������������  388 Product Platforms and the Future Value Chain������������������������������������������  388 Product Platforms and Product Differentiation��������������������������������������  388 Platforms/Ecosystems and Industry Specialisation ������������������������������  390 A Flexible/Agile Value Chain Network ������������������������������������������������  392 References��������������������������������������������������������������������������������������������������  397 Part V Concepts and Cases 20 Concepts and Cases������������������������������������������������������������������������������������ 401 Concepts����������������������������������������������������������������������������������������������������  402 Case Studies ����������������������������������������������������������������������������������������������  402 What Is a B Corporation?��������������������������������������������������������������������������  402 EV Battery Supply Chain Developments��������������������������������������������������  402 Value Chains as Strategic Partnerships: McKesson—Venture Partners������������������������������������������������������������������������������������������������������  403

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Concepts and Definitions ��������������������������������������������������������������������������  403 Case Study: KMD Brands and b Corporation Memberships��������������������  413 What Is a B Corporation?����������������������������������������������������������������������  413 How to Become a B Corporation����������������������������������������������������������  414 Why Become a B Corporation��������������������������������������������������������������  415 KMD and ESG Credentials��������������������������������������������������������������������  416 Case Study: EV Battery Supply Chain Developments������������������������������  417 Improvements in the Supply Chain��������������������������������������������������������  420 European Manufacturers Left behind?��������������������������������������������������  421 Case Study: Value Chains as Strategic Partnerships: MCKESSON: Venture Partners ����������������������������������������������������������������������������������������  423 McKesson Ventures Partners Program��������������������������������������������������  424 Ventures and the Value Chain����������������������������������������������������������������  426 McKesson and Value Based Care����������������������������������������������������������  426

Part I The Development of the Value Chain Network 3.0

1

Introduction

The rise, fall and rise of vertical integration. The vertically integrated organisation survived primarily because its success was based upon economies of scale (and to some extent) economies of scope, but this offered little variety. Initially, this mattered very little, as consumer interest was focused on low price and access to an increasing range of basic consumer products. Today’s joint ventures and strategic alliances may be an early glimpse of the business organisation of the future: in the Value Chain Network within which companies (network partners) can come together quickly to exploit fast-changing opportunities and one that offers companies an opportunity to share costs, skills and to access to global markets, with each partner contributing what it is best at. However, consideration of the early development of manufacturing operations is useful. In the late nineteenth century water and steam power were the basic drivers of the first industrial revolution and initiated the transition to new manufacturing processes. It created efficient manufacturing in terms of cost efficiency and scale. Manufacturing of a large range of products became possible and it created a better standard of living for many. The textile industry was transformed by industrialistion, as indeed was transportation. Machines allowed faster and easier production and made innovation and technology developments that expanded on these new benefits possible. Large self-contained organisations appeared in the early 1900s—Ford and US Steel are examples of large vertically integrated organisation of around that time. Entrepreneurial industrial pioneers Ford, Edison, Bell, Carnegie, and Kaiser introduced products and processes, Ford developed the automobile and the moving production line, and considered customers to be homogeneous and offered a single product in one colour—black, with no customer choice. An inclusive approach for production process was adopted, vehicle components were manufactured internally, and vehicles assembled on “flow-line” production, company owned rubber plantations and processing provided inputs for internally manufactured vehicle tyres. No distribution network existed, and sales and service

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_1

3

4

1 Introduction

were implemented through the one Detroit manufacturing facility, with sales made on a cash basis as no credit facilities existed. Customers were captivated by both innovation and the independence that car ownership introduced. Eventually a response was made to customer needs in a limited way, as General Motors (GM) by the mid-1920s were competitive with Ford and introduced differentiation in the form of convertibles and offered colour choice. Eventually consumer expectations were identified and received responses, albeit in a limited context. Competition emerged in the shape of GM and numerous smaller companies. The ‘operating model’ responded, and specialist supplier activities were introduced. Coase (1937) identified and justified academically an emerging business model that structured the role of external organisations within the overall processes and activities of an expanding operations model leading to increased efficiencies. Outsourcing was rationalised, expanded, and became significant. During the 1990s it expanded at a rate that gave cause for concerns in major manufacturing countries. Increasing labour rates in Asia and the increasing application of technological capabilities to manufacturing led a move towards onshoring. The realisation of a more accurate TCO (total cost of ownership), specifically of transit inventories, prior payments, and wastage costs also contributed to the decision by many organisations. An example of the extent of the TCO problem was given by the Australian Government’s problem when it found that an offshore supplier of steel failed to meet the agreed specification required for submarine construction resulting in not only huge financial implications but also in delays in construction.

The Focus on a Sales Approach Sales and sales management began to have significance in the late 1920s and early 1930s. People were becoming more aware and would no longer just buy products blindly and this sales management approach lasted roughly 20 years. Initially it lacked structure and was very unorganized, where every company was competing no matter what the product. It was all about price, not quality, but price. This fact was a significant part of how everyone operated. Essentially organisations assumed that a better (lowest) price was they key to being competitive. The sales emphasis characterised the period from 1920 to the early 1950s in which, the manufacturers began to increase their emphasis on effective sales forces to find customers for their output. During this period, firms attempted to match their output to the potential number of customers—customers were all seen as having the same expectations—maximum volume/minimum price. Characteristics included: • • • • •

Basic RD&D—based upon product safety Flow line/mass production Large sales forces for local towns and regional areas Lack of product differentiation Advertising was price-led

Logistics and PDM

• • • • •

5

Large sales forces selling to wholesalers who in turn sold to independent retailers Distribution was simply a delivery service No science—if it was in stock it was delivered until it ran out Consumers not involved in marketing research Manufacturers relied upon wholesalers and retailers for feedback

The Influence of Marketing The marketing concept is founded upon four pillars: target market, customer needs, integrated marketing, and profitability. The selling era concept took an inside-out perspective. It started with the factory, focused on the company’s existing products or services, and called for heavy selling and promotion to produce profitable sales. Unlike the selling concept, the marketing concept takes an outside-in perspective. Starting with a well-defined market, it focuses on customer needs, integrates all the activities that will affect customers and produces profits by satisfying customers. Characteristics included: • Extensive marketing research comprising store audits and focus groups • Mass market orientation • RD&D primarily aimed at product management, differentiation, range extension and process development • Flow-line production of volume selling products • Product-market orientation • Initially a “push” orientation with large sales forces • Heavy advertising (TV) and instore promotions • Multiple “supermarket” chains emerged—manufacturers began to service these with direct deliveries but delivered to retailer distribution centres as multiple retailers developed “power-positions” • Independents/local small chains serviced by wholesalers • Customers engaged in promotions and competitions

Logistics and PDM Physical distribution management (PDM) included all the activities associated with managing the supply of finished product at every step, from the production line to the consumers. Important physical distribution functions include customer service, order processing, inventory control, transportation and logistics, and packaging and materials. Management found that it could create more focused responses by looking for trade-off possibilities between the activities to create coordinated cost-­ efficient responses for customers.

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1 Introduction

The Value Chain 1985–2020 Value Chain Management 1.0 Value and Cost is added throughout the value chain model—the individual organisation attempts to reduce individual costs and increase its own margins. Essentially this is a cost efficiency model—the firm infrastructure was essentially a fixed cost structure—variable costs were managed by negotiating inbound costs, operations, outbound logistics, marketing and sales, and service activities Porter (1985) See Fig. 1.1. While Porter’s model was a significant step forward there were criticisms: It was argued that: “…the former (Porter, 1985) takes the company value chain as his starting point, whereas the latter (Normann & Ramirez, 1994) underline the greater importance of the value creating system” (Parolini, 1999). It became: …a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability… (McHugh et al. 1995).

The modified model developed an understanding that unless both customer and delivery organisations’ value expectations are met a sustainable business is very unlikely to develop. Value chain delivery processes include RD&D (Research, Development, and Design), procurement and manufacturing network management, marketing and sales operations, distribution, and service administration. Value delivery is the achievement of both customer and value chain network partners’ expectations. Logistics and supply chain management is the vehicle for coordinating the ‘flows’ of materials and products, information, and transactions and cash. Three important aspects of management are responsible for success; supplier relationship management, customer relationship management, and competitor relationship management and it is the role of the value chain network organiser to integrate and coordinate the network to achieve overall performance. As we discuss later the network processes may well be (and often are) quite separate organisations in the context of ownership and location.

 hysical Distribution Management (PDM) and Supply P Chain Management Following a focus on manufacturing activities attention was focused upon physical distribution management operations. Costs of product distribution were largely unknown, and similarly the cost of service (at that time inventory availability at POS (Point of Sale), in storage facilities and across markets was also vague). Supply Chain Management was clearly a requirement, and what was known as ‘logistics management (usually dominated by transport decisions and included warehousing

Outbound logistics Marketing and Sales

Value and Cost is Added throughout the Organisation’s Value Chain

Operations

Service

Margin

Fig. 1.1  The Porter value chain model

The individual organisation attempts to reduce individual costs and increase its own margins. Essentially this is a cost efficiency model. The firm infrastructure was suggested to be essentially a fixed cost structure - variable costs were managed by negotiating inbound costs, operations, outbo und logistics, marketing and sales, and service activities

Inbound logistics

Procurement

Technology Development

HRM

Firm Infrastructure

The Value Chain 1985–2020 7

8

1 Introduction

management) gave way to an overall activity—supply chain management a discipline that worked with suppliers as well as distributors and/or customers. Supply chain management began to formalize the postproduction operations that included all the activities associated with the supply of finished products at every step, from the production line to the consumers. Important physical distribution functions include customer service, order processing, inventory control, transportation and logistics, and packaging and materials. Management found that it could create more focused responses by looking for trade-off possibilities between the activities to create coordinated cost-efficient responses for customers.

Value Chain Management 2.0 Value chain thinking adopted (and espoused) the notion of outsourcing. It based this notation loosely on the work of Coase (1937) and Williamson (1979), Williams (2013) on transaction cost economics. The essence of their argument was based upon the fact that organisations evaluated the costs of production alternatives when deciding upon manufacturing and distribution strategy and structure. The outcome of decision making prescribed the boundaries of organisations. The literature on outsourcing decision making and its implications is considerable. Suffice it to say that the 1990s/2000s was an interesting time. Many commentators identified the advantages and disadvantages of outsourcing at both the organisation and the national levels. Value Chain 2.0 became a model that allowed businesses to examine their activities and find competitive opportunities for creating customer value. Typically, they have access to end-user customers that provide sufficient information for them to create a value proposition, the next step is to create a value production and delivery model capable of delivering the value proposition cost-efficiently. This “model” serviced both consumer and industrial markets; the product-service and manufacturing process was often the only in-house activities they “owned” of the value delivery activity, the product (or its components) was manufactured offshore and depending upon its complexity, also assembled offshore, and shipped to relevant distributors for resale, service-oriented partners may be involved in a service support activity. Also important was the emergence of the S-SME (Specialist-Small Medium Enterprises), industry specialist intermediaries, strong in RD&D, within technology-led industries (aerospace, automotive and defence) upon whom the OEMs (Original Equipment Manufacturers) began to be dependent. The revised model continues to have success in several product-service-markets, but changes have occurred that restrict its activities. For example, technology has impacted both product and product manufacturing processes such that workforce skills that were adequate (and less expensive than onshore labour) were incapable of the new tasks confronting them. Secondly, the Asian labour markets became more affluent (automotive workers purchased as well as built the product). Thirdly, Asian governments funded skills development and further education programs, the graduates sought and received higher rates of pay. Fourthly, large countries, China for example, and to some extent India, began to develop manufacturing technology

A Dynamic Business Environment and the Future for Value Chain Networks

9

that replaced the low-skilled employment and enabled these markets to become internationally competitive in the context of creativity, quality, and costs. Western political interests began to wake up to the fact that offshore outsourcing had created unemployment and, furthermore, domestic education and industry skills training had failed to keep up with product technology. Some governments introduced financial incentives for companies that were outsourcing large proportions of their product production. For a while these programs were effective, however, advancing product and process technology very quickly had impact as consumers opted to purchase ‘current technology’ not being particularly concerned about its origins. Customers begin to look for ‘something extra’—experiences rather than products. Value Chain 2.0 is undergoing change. OEMs are assuming an RD&D role developing technological applications and undertaking product-development. The development of applications for automotive differentiation is an example of S-SMEs (specialist SMEs) initiatives. Collaborative RD&D between OEMs and (S-SMEs), Aerospace, Automobiles, Agriculture are notable examples. Progressive OEMs identify network partners with relevant capabilities that can meet component and services needs and either acquire them or create exclusivity with strategic alliances.

 Dynamic Business Environment and the Future for Value A Chain Networks Value chain networks are dynamic and meet changes in customer expectations and the ways in which these may be met. Reports from the large industrial and consulting organisations have indicated the extent of these changes and the impact they have on industry value chain network structures. Some companies are learning how to take a more creative approach to mobilising resources. The Bishop Technology Group adopted a holistic business model from a resource management perspective, as rigid resource-based systems, typically highly automated factories operating with rigid and standardised processes that apply resources to specific places at predetermined times, are becoming obsolete. Based on the argument that resource mobilisation (the increasing externalisation of tasks and a corresponding increase in cooperative arrangements or networking) is a necessary response to fragmenting and less predictable demand. Vatne (1995) in a Scandinavian empirical study of the internationalisation of SMEs, explored the use of external resources, and in what senses local resources are mobilised in the process of internationalisation. Capgemini’s (2009) study: Global Networked Value Circle: A New Model for Best-in-Class Manufacturing, undertaken by the University of Edinburgh Business School and Capgemini set itself three objectives: • To identify the key components of the global manufacturing chain as it now is and to explore whether it needed to be changed if it was to be used for assessing or benchmarking capabilities

10

1 Introduction

• To identify the lessons of experience of some top performing companies in different manufacturing industries concerning how they effectively manage different elements of their ‘best-in-class’ global value chains • Derive benchmarks for good practice within different elements of the manufacturing value chains from top performing companies within different segments of the manufacturing industry Their findings suggest collaborative activities would continue an already established trend and that the ‘best-in-class’ organisations will: • Continue to develop global competencies and retain these in-house • Continue to develop relationships and the ‘interactions’ skills and expertise to manage them • Develop the foresight to identify relationships that will become strategic assets (in the knowledge that only a few will deliver competitive and strategic advantage) Key detailed findings: • Product design and innovation is becoming externally resourced rather than in-­ house; dispersed to capture and absorb new ideas from customers, suppliers, partners, competitors • Manufacturing is becoming manufacturing management; collaborative partnerships are being built with sources of expertise in collaborative partnerships offering mutual development opportunity • Supply chain management is shifting from contracts to partnerships; the best-in-­ class manufacturers leverage their purchasing ‘power’ and outsource activities in which they have (or cannot see) competitive advantage • Marketing, sales, and service is moving away from relationship management towards partnerships with customers; customers’ needs, and problems are better resolved by forming collaborative relationships with distributors and customers and this improves and protects innovation and NPD • Support functions are becoming part of a value creating network; greater collaboration with suppliers, customers and competitors is resulting in complex global networks There can be little doubt concerning the continued development of the ‘distributed resources response’ model that subsequently developed as value chain network membership matured and as Fig. 1.2 suggests offers a range of specialist roles and functions within their networks. Figure 1.2 identifies these roles and offers suggestions of industries/markets and companies as examples.

Some Basic Network Structures

11 Network Value Added Management

Customer and Partner Organisation's ‘Value’ Expectations

Collaborative Research Development and Design

Procurement and Manufacturing Network Management

Physical Serviceability Marketing and Distribution Network Network Sales Operations Operations Operations

Value Renewal: Sustainability

Customer Relationships Management Supplier Relationships Management Competitor Relationships Management Stakeholder Value Management

Fig. 1.2  Value chain network ‘organiser’ interactions role

Some Basic Network Structures Value chain networks are holonic structures where each business within the structure is equal to each of the others. McHugh et al. (1995) suggested they are: …a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability and is called a holon.

The network is in dynamic equilibrium, and it is self-regulating. Access to, and exchange of, information throughout the network is open, as is access to and exchange of information across the network boundaries. The network is evolutionary and is constantly interacting with its environment. It is a knowledge network, a learning organisation. The authors suggest several advantages accrue to holonic networks: • Asset Leverage: increased utilisation from distributed operations through synergy • Speed: specialist inputs enhance time-to-market • Flexibility: the ability to meet requests for product and service changes within existing response times • Faster growth and increased profitability: through improved response (time) rates • Increased customer loyalty: longer and more profitable customer relationships • Shared assets and lower total capital investment: investment by partner organisations is limited to its core processes and working capital requirements are influenced by a just-in-time approach • Shared risk at reduced levels: risk is reduced by being dispersed among network members and because of the high aggregate level of expertise that is deployed

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1 Introduction

It follows that the ‘value chain network’ should continue to reflect these advantages. To do so results in: • Lower investment in fixed costs and working capital • Lower operating costs due to optimal economies of production and increased customer response (reducing customer acquisition costs and increased transaction values) • Reduced business risk (defined here as fluctuations in planned market volume (and market share(s)) • Reduced financial risk (defined as the probability of failure to achieve a target return on net assets) • Decreased response times (both time-to-market a strategic consideration and operationally, the order cycle time) Operational roles are occupied by specialist SMEs (S-SMEs) each of which bring a core capability that combines with others to produce or to deliver the product that the end-user buys. Examples include manufacturing, specific services, and logistics etc. A second role supplies a support process, such as procurement or customer service management and or facilities, McHugh et al. (1995) and his co-authors suggest this is a functionally oriented role and that typically there is only one member supporting the value chain. Examples of this can be seen in the large B2B buying exchanges that appeared in industries such as the automotive and chemical processing industries. The third role is that of resource provider to the operational role members. Resources include skilled labour (such as designers), information/data management services and, increasingly important, customised facilities (such as those required for computer chip manufacturing). An ‘integrator’ role completes the structure. The integrator has one of two functions (and may well perform both): one is to provide the initial ‘strategic vision’ around which the virtual organisation is structured. The other is a coordinating role within the value chain, identifying, matching, and directing resources. Piore and Sabel (1984) provide an example of the integrator roles taking place in the Italian textile-apparel industry located around Prato. Small specialist companies have developed long-term relationships with one another along the value chain. An ‘impannatore’ undertakes a strategic visionary role, together with an organising and coordinating role. The result is a highly competitive value chain that offers currency and competitive prices in a fashion led industry. The essence of the value chain network is that it is a coordinated network of assets, capabilities, capacities, and processes that have been identified as the most relevant to a specific market opportunity. A decision confronts the firm; not only is it necessary to match specific skills and resources with opportunities within the value chain but it follows that the attraction of them is very likely to shift and to change as the business environment changes. Successful value chain partners work together with other partners, each of whom offer complimentary expertise—assets, processes capabilities and capacities. This is not new. Millennium (a US based pharmaceutical organisation) is such an example; the CEO, Mark Levin, in the mid-­1980s, described how Millennium identified how value generation in the

Intra and Inter-Industry Network Performance Leverage

13

industry was ‘migrating’ downstream and how the company has pursued the opportunities offered in a rapidly changing business environment by integrating the expertise of Millennium with those of other organisations. Millennium’s approach was one requiring constant appraisal of market opportunities and a clear knowledge of the current ‘worth’ of the firm’s abilities, see Champion (2001). Roberts (2004), again some time ago, discussed organisational design and performance management. He suggested that for many firms an important element of designing the organisation for greater performance is to focus the firm only on those processes that can create the most value. Both Champion and Roberts were well ahead of current thinking at the time. Roberts (2004) considered the role of the ‘value chain organiser’ demonstrating that this role may involve the ‘organiser’ in performing an additional, and important roles within the value chain processes, such as product design marketing, and distribution (as does Nike) or, as in the case of Benetton (fashion) managing the information and logistics flows, and marketing processes. In both cases the ‘organiser’ manages a complex set of relations with other value chain participants and coordinates activities among them. He identified an application of the model in electronic manufacturing services. Solectron and Flextronic are very large organisations with business valued at; tens of billions of dollars a year, but they have no products of their own. Roberts (2004) also refers to computer manufacturers who are beginning to out-source logistics, order fulfilment, and post-sales service, and even the design and manufacture of their low-end products.

Intra and Inter-Industry Network Performance Leverage Iansiti and Levien (2004) using a biology analogy of Keystones, suggest that these exist within business network structures by providing a stable and predictable set of common assets that other organisations use to build their own market offers; they cited Microsoft and Walmart. Their argument has an attractive logic: Keystones provide stability, diversity, and productivity. They can increase productivity by simplifying complex connectivity tasks between network members. For example, digitisation; connection through digital threads and related applications has provided several inter-industry productivity leverage opportunities. The low-cost, rapid, and accurate connectivity of communications applications ‘revolutionised’ insurance broking, travel (SABRE), and internet transactions. The Keystones concept suggests two sources of productivity performance— external and internal. The authors use Walmart’s margin advantage as an example. What they label as benefits attributable to ecosystem management includes global procurement, centralised buying, optimised product mix, distribution efficiencies, information sharing, and other operating efficiencies; a total of 15% of the 22% total. The remainder, lower shrinkage, preferred real estate rental rates, and lower labour costs are efficiencies and scale effects attributable to Walmart. The ability to identify and apply external and internal sources of productivity leverage enhances competitive advantage and indicates where this can best be applied within the value chain network structure. Fig.  1.3 details sources of both external and internal

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1 Introduction

Fig. 1.3  Managing the business model to create productivity advantages using both external and internal sources of efficiency

productivity. Iansiti and Levien (2004) discuss Walmart and Microsoft as users and providers of both sources of productivity. The model is useful in deciding how to structure a value chain network and balance the strengths of network members (the internal sources of productivity) with leverage from external sources. Figure 1.3 suggests there is both short and long-term advantage to be realised by this view (and both would impact upon EVA (economic value added)). This approach could categorise market opportunities. A market in which the internal sources of productivity are large would suggest the available competitive advantage would be more attractive than one in which the external sources are readily accessible.

Value Adding as a Collaborative Process The essence of network organisations is collaborative value production, and this suggests that a relevant business model design results in an increased EVA by increasing revenues and/or decreasing costs for all network ‘system’ members. Specific examples are: Revenue Growth and Market Response Identifying and reinforcing core processes at all points if exchange within a network and optimising the productivity of input and output processes by seeking to make complementary and sequential processes seamless activities through process coordination, and, therefore cost-efficient. Cost management

Intra and Inter-Industry Network Performance Leverage

15

Value chain networks undertake to reduce their own costs and to analyze customer processes with a view to improving value-in-use costs throughout the network partnership. Cost management can be achieved by delivering benefits such as the simplification of assembling components into a final product because of standardising processes and components, and by decreasing the acquisition costs such as operating and maintenance costs that offer customers an opportunity to use these characteristics to gain market advantage. Fixed capital effectiveness Develop a ‘low capital intensity network structure’ that requires members to invest in their core capabilities exclusively and thereby maximise the network ROIC (return on invested capital) and the capital utilisation of the component organisations. Maximise the performance of partner core resources by creating value adding processes that increase performance and reduce risk. Identify important non-core capabilities and work with partners with acknowledged expertise Working capital efficiency By synchronising demand and supply responses it is possible to optimise the use of inventory, payables, and receivables by agreeing payment times in the network based upon production and order cycle times that result in realistic cash-to-cash cycle performance. Consider using vertically integrated marketing facilities, electronic payment systems, JIT deliveries and incoming technologies such as RFID (Radio Frequency Identification). Optimising the use of time Matching demand and response product and materials flows will result in the strategic and operational use of time. Consider product-service design that uses modular components to reduce assembly and maintenance/service-times. Reduce response time to customers. Reduce (eliminate) non-productive time (stationary inventory, downtime) by designing products with remote diagnostics equipment, etc. Risk The nature of network organisations is to share resources, one of which is information, and this aspect of network operations aids the identification, assessment, and prioritization of risk within the network operations. Risks can come from uncertainty in financial markets and imprudent marketing decisions. Risk management should create value by being an integral part of network organisational decision making by explicitly addressing issues of uncertainty in a systematic and structured approach. Cash Flow Close liaison between networked oganisations leads to shorter operating cycles (networked partners share market forecasts—better still, real time order data) and cash-to-cycles (inter-organisationally linked business rely upon their interdependence for smooth flow of payments to ensure network liquidity). Developing and maintaining a strong positive cash flow is an important feature of the current business model. Short-term cash flow is a combination of inflows, (revenues for goods and services sold and other income), and outflow (payments for inputs (materials, labour, and services and to cash for M&A opportunities)).

16

1 Introduction

Customer Satisfaction The primary objective of any business is to ensure that customer expectations and perceptions of the value delivered coincide. Often the delivered value can be increased (added value) by attention to pre- and post-sale details that may reduce operating costs (B2B customers receiving design assistance, installation, and staff training), or increasing convenience (B2C customers—packaging designs that reflect use quantities, product use, and packaging as storage containers). The key is to offer characteristics that augment a product-service with an additional feature that is useful in that it increases the value of the product to the customer, is exclusive and for which the marginal cost is acceptable. Stakeholder Satisfaction Increasingly the impact of business decisions is being related to EESG (Economic, Environmental, social, and governance Goals) and UN (United Nations) SDG (sustainability and development goals). Decisions that threaten these are likely to receive hostile criticism by sustainability group and often sections of shareholders. Clearly product-service-market portfolio decisions require appraisal against predetermined relevant EESG and UN SDG criteria.

 he Importance of Industry and Market Dynamics: Developments T and Shared Resources In recent years there have been significant changes within each of the Industry and Market Dynamics (discussed in Chap. 2) and they can have a large impact on developing new responses to emerging opportunities. Industry and market dynamics should be reviewed with a view to identifying future opportunities for developing competitive advantage or for avoiding threats that may impact upon product-­service-­ market developments under consideration. For example, the approach to innovation leadership (knowledge management) has been rethought. The ‘western’ model of; technological breakthroughs, embodied in revolutionary new products that are taken up by the elites and eventually trickled down to the masses, has been replaced by a model of incremental innovation consisting of improvements to existing products and processes aimed at making them readily accessible by middle and/or lower income groups and much of it is occurring in Emerging Markets. Frugal innovation/ reverse innovation is resulting in the simplification of products and production processes in order that they might better serve these markets with low cost-effective solutions to pressing problems in healthcare market situations. Another significant development is that by a Chinese company, Mindray, who have radically reduced the price of lithium-ion battery production by using less costly materials and manufacturing them at ambient temperatures rather than in expensively heated ‘dry-­ rooms’ thereby reducing their cost from $US40 to $US12 (Wooldridge, 2010). Changes in technology management (Industrié 4.0) have also been applications based. Some have been an expensive application of existing technology, for example, digitisation and digitalisation have facilitated real-time performance management and predictable maintenance scheduling. Artificial intelligence and machine learning have industry wide applications.

Intra and Inter-Industry Network Performance Leverage

17

Changes in process management have been significant for example, Direct Digital Manufacturing (an alternative to traditional manufacturing,) is an innovative approach to agility in manufacturing management. The application of automobile process management principles to healthcare by Devi Shetty, an Indian heart surgeon, has made treatment available at relatively low cost in a country in which heart disease is a significant cause of deaths. (Wooldridge, 2010). The Economist (2011) explored the world of the fabricator, the application of 3D printing technology, to manufacturing. Designers and engineers have been using 3D printers for more than 10 years; initially to produce prototypes rapidly and at low cost. Currently they are now capable of using a wider range of materials (plastics and metals) and their accuracy has been developed such that it is estimated that more than 20% of the output from 3D printers are now final products and is estimated to have increased to 50% by 2020. It is relationship management that some of the most surprising changes have (and continue) occur. Industry wide buying exchanges such as Covisint and Elemica account for significant economies of scale in purchasing in their respective industries. Relationship management has several dimensions. OEM organisations are increasingly collaborating with S-SMEs in RD&D and product-service-market development. Employee relationship management aims at positive manager-employee relationships in the workplace encouraging productivity and cooperation among management and employees. Thus, a mutual level of respect between a manager and an employee brings more willingness from both sides to offer support and improved performance. Some organisations formalise their understandings with employees by creating an employee value proposition (EVP) identifying the set of benefits that an employee receives in return for the skills, capabilities, and experience they bring to a company. An EVP is about defining the essence of your company—how it is unique and what it stands for.

Shared Capabilities as Resources: Cloud Based Platforms Broad scale development in ICT (information and communications technology (or technologies)) services such as cloud computing whereby shared resources, software, and information are provided to computers and other devices on demand has had a major impact across a number of industries resulting in large, shared productivity gains and are an example of Iansiti and Levien’s (2004) keystone concept. Cloud computing describes a recent development of a supplementary, consumption, and delivery model for IT services based on the Internet, and it typically involves over-the-Internet provision of dynamically scalable and often virtualised resources. Two organisations typify ‘cloud’ applications: Covisint and Elemica.

Covisint® Covisint is one of the most comprehensive online communication systems in the world. Originally developed as a supply chain management solution for the automotive industry, it has expanded in scope and now serves many other purposes for a

18

1 Introduction

variety of industries. Covisint has a similar mission now as it did when it began: connecting people, processes, and technologies so our customers can focus on building their businesses. Today, Covisint is available to a variety of industries through a large enterprise communication system. In the auto industry, Covisint is used to connect manufacturers or large Tier I suppliers with manufacturing plants, suppliers, dealerships, employees, and customers. Additionally, it provides dashboards with complete views into automotive operations so managers can monitor performance in a variety of ways. Convisint’s online communication system also includes unique federation capabilities that allow users to work in a secure environment through a single sign-on. Instead of remembering numerous user IDs and passwords for various software systems, users can focus on the tasks of building their businesses. Most importantly, they are encouraged to communicate with one another to build knowledge through the systems that are readily available through Covisint.

Elemica® Elemica was formed through the partnership of many chemical industry leaders and enjoys the strengths of their ongoing support as customers and as advisors; with more than 2500 companies connected through the Elemica network and more than $60 billion of transactions handled annually, the value to customers continues to multiply. Elemica is an independent, global chemicals and plastics industry network hub that facilitates the buying and selling of a broad range of products. By using a single point of contact for information sharing among Dow buyers and sellers, Dow can connect to numerous customers and suppliers in one standard format. Elemica’s enterprise resource planning (ERP) connectivity solutions and services help lower transaction costs for Dow and its trading partners. In turn, the industry benefits from the resulting savings, which are generated through increased visibility into the supply chain, greater data accuracy and reduced working capital and inventory levels.

Evaluating Value Added: Value Contribution Value-Added is a somewhat elusive concept and has endured numerous definitions. We develop this important topic in subsequent chapters. Essentially, we assume it to be the economic profit derived from the net operating profit after tax and the annualised weighted average cost of capital used in the process of developing revenues from the sale of product-services—this is the organisation’s value contribution. There are resource characteristics that impact on the ability to create value contribution. Patentability of a product is an important factor; both Microsoft and Intel have this property that it could not be legally replicated, or an alternative product produced within a reasonable cost. Furthermore, by establishing the design as an

Intra and Inter-Industry Network Performance Leverage

19

industry standard this adds to the strength of their patent. A second reason is the existence of switching costs; typically, over a period time the investment in management software systems becomes considerably larger than the investment in hardware. Eventually the capability and capacity of the hardware becomes unable to cope with the output requirements of the organisation and needs to be replaced, usually by a larger capacity, faster version of the original machine—the organisation finds itself ‘locked-in’. To switch to an alternative hardware option usually requires rewriting software—time consuming and costly process. There is a close connection between creating competitive advantage by creating switching costs and a monopoly position. The EU has had confrontations concerning this relationship with several global organisations. The advent of ‘cloud computing’ may well decrease the ability of both hardware and software companies to create these (often) huge financial obstacles. Switching costs occur across a number of industries such as diagnostic equipment in automotive repair, personal care (razors and razor blades) to name two of the more obvious. Value-added can be intangible; the equipment becomes a means to an end. Computers and software systems offer solutions to problems, and ‘turnkey’ consultancy is required to ensure a match between equipment and solution outputs. Some years ago, Jarillo (1995) suggested reputation as a source of value; here the issue concerns the importance on the output of an input (tangible—equipment, or intangible—a service); often the safe decision is to use a supplier with an acknowledged ‘track record’. Production economics (economies of scale and experience effects) can have an important impact and the ability to use (or access) capacity to meet demand rapidly can be a source of value to both the producer supplier and the distributor customer. Jarillo (1995) cites the impact of flat screen monitors in computing, and it is interesting to note the re-occurrence of this in television receivers in the mid ‘noughties’.

I nnovation, Profitability, Productivity, and Risk Management: A Role for Value Chain Management It will be recalled that earlier in this chapter that very early in the developing understanding of the value chain network concept McHugh et al. (1995) identified the holonic network as an opposite to hierarchical structures offering several advantages, we suggest these are particularly relevant to risk, for example: • Asset Leverage: Increased utilisation from distributed operations through synergy (productivity, reduced business volume risk) • Speed: Specialist inputs enhance time-to-market Productivity, (reduced business volume risk) • Flexibility: The ability to meet requests for product and service changes within existing response times (reduced operational risk) • Faster growth and increased profitability: Through improved response (time) rates (profitability, reduced investment risk)

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1 Introduction

• Increased customer loyalty: Longer and more profitable customer relationships (profitability, reduced market risk) • Shared assets and lower total capital investment: Investment by partner organisations is limited to its core processes and working capital requirements, are influenced by a JIT approach; and an overall benefit (productivity, reduced investment risk) • Shared risk at reduced levels: Risk is reduced by being dispersed among network members and because of the high aggregate level of expertise that is deployed It follows that a ‘network’ or value chain design should reflect these advantages. To do so will result in: • Lower investment in fixed costs and working capital (reduced investment and credit risk) • Lower operating costs due to optimal economies of production and increased customer response (reducing customer acquisition costs and increased transaction values) (profitability, productivity, and reduced operational risk) • Reduced business risk (defined here as fluctuations in planned market volume (and market share(s)) (reduced business volume risk) • Reduced financial risk (defined as the probability of failure to achieve a target return on net assets) • Decreased response times (both time-to-market a strategic consideration and operationally, the order cycle time) (productivity, reduced operational risk) The authors identify risk reduction as a role of the holonic network structure (see italics) it can also be argued that all the advantages suggested in fact contribute to increasing profitability and productivity performance—as well as specifically reducing risk.

The Future of the Value Chain Network It could be argued that the development of the network business structure has travelled too far for it to turnabout. Certainly, restructuring and modification will be an ongoing activity. Kleindorfer et  al. (2009), discussed the notion of a trend from firm-centric business models towards network centric models. They argued that post the 2008/9 financial crisis network-based strategies were becoming ‘crucial’ and identify US legislation (a bill—The American Clean Energy and Security Act) that, during the debate identified elements of the US economy that are interlinked with China, India, and the rest of the world and certainly Europe in the carbon-based economy. The authors (and their contributors) suggest that companies are, more than ever linked to the profitability, viability, health, and resilience of the networks they are part of. And they can no longer ignore these network effects on their strategies. These concerns have not changed, in fact they have increasingly assumed more importance.

The Future of the Value Chain Network

21

Kleindorfer et  al. (2009), suggested the dynamics of consumer empowerment and their lack of trust and confidence in institutions, together with rapid and enormous growth of social networking has fostered a consumer move towards self-­ reliance. Social networking and the business networking that started with outsourcing has led to organisations thinking more of themselves as components in value producing networks rather than as stand-alone corporations. The similarity between business networks and scientific networks is commented upon (using similar arguments to those of Iansiti and Levien’s (2004) concept of ‘Keystones’. The ability to ‘integrate and coordinate’ requires an understanding that there has been a shift towards consumer-centricity, but this alone does not guarantee success, many organisations have done so, but successful organisations are those going beyond this to adopt the integration and coordination roles necessary to connect with social networks and business networks to capitalize upon the opportunity. Kleindorfer et al., 2009, identify Proctor and Gamble’s objective of attempting to have over 50% of their new-product and service offering coming from outside the organisation and InnoCentive with its network of 170,000 experts. They recommend that based upon the increasing success of the emerging socio-network-­ business-­economics based model that organisations identify areas of the business that allow the leverage of current resources and expertise and move from a firm-­ centric model to the network-centric approach by establishing consumer networks as advocates and promoters of the organisation’s product-service value proposition; open innovation follows. The earlier work of Slywotzky (1996) did, in many ways, point to this direction. It will be remembered that the author’s notion of customer-centricity and the need to identify customer value drivers was emerging as a ‘capability’ towards the end of the ‘nineties’, together with his argument that value migration was pointing the way to success in the ‘noughties’. He argued: Increasing obsolescence of traditional designs, and a pattern of accelerating Value Migration away from increasingly outmoded business designs toward others that are better designed to maximise utility for customers and profit for the organisations; and demonstrated shifts in power from manufacturers’ product emphasis (branding) to retailers and then to customers; of the shift in emphasis in performance metrics from market share to share of market value, of; then of revenue to profit, to cash flow, and the necessary change in business model design away from technology based to market based structures and on to the need for flexibility in the designs.

Anderson (2010) refers to options available to outsource capital-intensive manufacturing and distribution business activities to more focused business partners facilitated by the rapid growth of low-cost manufacturing equipment. He identifies work by Stratasys and others in the development of 3D printing and milling machines (based on CAD/CAM) but adds another development; non-CAD technology familiar individuals can simply hold an object in front of a webcam and software programs are currently available to create the necessary 3D model in a computer. For ‘innovators’ with a product idea and little or no capital there are facilities available to build prototypes: TechShop (in the US) is an expanding

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1 Introduction

network of DIY workspaces with sophisticated prototyping tools (3D printers, milling machines, circuit board cutters, etc) available for hire at $100 per month. In New Zealand ‘Ponoko’ websites enable creative individuals to realise their product designs by uploading their designs that are then ‘manufactured’. Moves towards self-designed and self-manufactured products have several implications such as a higher probability of selling, low/no inventories and a reduction of inventory holding costs, no intermediaries’ margins and associated transactions costs, competitive prices at 50–80% of ‘retail’ equivalent, and exclusive/unique products that are immune to comparison shopping. More recently, artificial intelligence served by real-time data and digital twinning is being applied to decision making in numerous aspects of RD&D, manufacturing, and marketing operations. In each of the examples discussed the importance of knowledge, technology, relationship, and process management development and applications is apparent. It could be argued that each of these industry value drivers is being developed to be applicable to more micro-applications. The move by a number of governments (and universities) to provide ‘incubator’ facilities to SME’s and individuals was the initial attempt at creating innovation facilities by providing (then) basic facilities to low capitalized groups who also benefited from exposing their ideas to other ‘thinking individuals’; the recent developments in networking and of each of the industry and market value drivers has accelerated this effect by increasing the probability of success and reducing the associated risks. Recent geopolitical developments have expanded the number of industry and market drivers, these are considered in a subsequent chapter.

Value Chain Management 3.0 Value Chain Management 3.0 is a collaborative business model that describes the full range of activities needed to create a product or service. It is stakeholder (as well as shareholder focused). Value-chain analysis is used to identify production efficiency opportunities enabling a network to deliver customer expected value for the least possible cost, and possibly more importantly, create new pathways to customer and stakeholder satisfaction. Value chain analysis allows businesses to examine their activities and find competitive opportunities. The value chain as a business model commences with customer analysis and identifies the process responses required such as: • Creative OEM identifies product-service applications • OEMs identifying network partners with relevant capabilities that can meet component and services needs • Collaborative RD&D between vendors and vendors, and vendors and customers—customisation • The downstream considerations of ‘serviceability’ and sustainability become critical procurement issues, as intangible assets become significant sources of profitability and productivity. • Collaborative Digitisation and Connectivity • Real Time Data Collection, Analysis and Sharing

The Future of the Value Chain Network

23

• • • • • • • • •

Coordinated Procurement Production Scheduling System Inventory Management Collaborative procurement Coordinated procurement Network based Production Scheduling Network based Inventory Management Transparent Performance Data Digital Thread and Digital Twinning of product-services and manufacturing and supply chain activities • Product-Service-Market-Portfolio Management with PRODUCT-service market, product-SERVICE-market, and product-service-MARKET Management • Identifying changes in customer behaviour as they begin to look for ‘something extra’—‘experiences’ rather than products. Manufacturers look for more control and talk in terms of managing/influencing ‘customer journeys’ • ‘Corporate Sustainability’ ESG/UN Development Objectives (Environmental, Social, and Corporate Governance)

Looking Forward Figure 1.4 summarises the ongoing development of the value chain. It has increased its involvement in the ‘commerce’ of transactions, manufacturing, and value delivery from its initial conception. Its past, ongoing, and future development include: • A set of companies that acts integratedly and organically; it is constantly re-­ configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability. McHugh et al. (1995) • Collaborative networks provide sequential product-services data, materials, and ‘services’ flow • Producibility (strategic and operational Infrastructure); The fusion of; research design and development, of manufacturing and distribution operations, ‘serviceability’, and of product-service renewal activities, into a seamless and continuous (end-to-end process). Capex business models become Opex based models focussing on organisational intangible assets that contribute to Network Value Advantage • Networks that are collaborative business systems that together apply digitisation, connectivity, and data analytics management to create an Integrated-connected and coordinated business model to implement producibility with optimal profitability and resources productivity • Industrié 4.0 is deepening the relationships between manufacturing, customers, and suppliers. Industrié 4.0 shifts manufacturing from isolated, optimized cells of business processes, systems, and resources to fully integrated data and product flows across corporate borders. (SAP White Paper Industrié 4.0: What’s Next) • Value Chain Networks are creating Industry Platforms that are collaborative, integrated ‘techno-economic’ systems within which OEMs and Specialist SMEs (SSMEs) create Value-Added Advantage

24

1 Introduction One: …a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability. McHugh et al. (1995) Identify the Value

Create the Value

Produce the Value

Communicate the Value

Distribute the Value

Service the Value

Two: Collaborative Networks Provide Sequential Product-Services Data, Materials and ‘Services’ Flow Supplier /Customer Relationship Management

Value Engineering …

… Value Delivery

Three: Producibility ‘strategic and operational infrastructure’); The fusion of RD&D, of manufacturing and distribution operations, ‘serviceability’, and of product-service renewal activities, into a seamless and continuous (end-to end process). Capex business models become Opex based models focusing on organisational intangible assets that contribute to Network Value Advantage Customers’ needs & wants Viable value proposition expectations are identified customer/network product -service format options agreed agreement

Production program agreed among network partners. Product & process, design procurement planning; serviceability planning , remanufacturing program

Marketing, sales, Product-service distribution & serviceability remanufacturing & operations planning repurposing planning

Four: Networks that are -collaborative business systems that together apply digitisation, connectivity and data analytics management to create an Integrated-connected and coordinated business model to implement producibility with optimal profitability and resources productivity … Data Analytics …

Interactive & Co-creative RD&D

…. Value Delivery Data ….

… Collaborative Decisions

Five: Industrié 4.0 is deepening the relationships between manufacturing, customers, and suppliers. Industrié 4.0 shifts manufacturing from isolated, optimized cells of business processes, systems, and resources to fully integrated data and product flows across corporate borders. SAP White Paper Industrié 4.0: What’s Next. Customer Value Problem Identification

Value Proposition and Product Specification

Manufacturing and Assembly Processes

Marketing and Sales Operations Management

Distribution: Service Transaction Channels Activities Physical Distribution

Customer Value Delivery Specifics

Serviceability Activities

Value Renewal

Network Value Capture

Six: Value Chain Networks are creating Industry Platforms that are collaborative, integrated ‘techno-economic’ systems within which OEMs and Specialist SMEs (SSMEs) create Value-Added Advantage Current Activities

Current Platforms ….

Developing Demand Management Platforms ….

Fig. 1.4  The evolving interactive customer-centric value chain network 3.0

References Anderson, C. (2010). www.wired.com Capgemini. (2009). The global networked value circle: A new model for best-in-class manufacturing. Global Manufacturing Program, www.capgemini.com Champion, D. (2001, June). Mastering the value chain. Harvard Business Review. Coase, R. H. (1937). The nature of the firm. Economica, 4, 386–405. Iansiti, M., & Levien, R. (2004). The keystone advantage. Harvard Business School Press. Jarillo, J. (1995). Strategic networks: Creating the borderless organisation. Butterworth-Heinemann. Kleindorfer, P., Wind, G., & Gunther, R. (2009). The network challenge: Strategy, profit, and risk in an interlinked world. Wharton School Publishing. McHugh, P., Merli, G., & Wheeler, W. (1995). III. Beyond process reengineering. Normann, R., & Ramirez, R. (1994). Designing interactive strategy: From the value chain to the value constellation. John Wiley & Sons. Parolini, C. (1999). The value net: A tool for competitive strategy. Wiley. Piore, M., & Sabel, C.  F. (1984). The second industrial divide: Possibilities for prosperity. Basic Books. Porter, M. (1985). Competitive advantage: Creating and sustaining superior performance. Free Press. Roberts, J. (2004). The modern firm,. OUP. Slywotzky, A. J. (1996). Value migration: How to think several moves ahead of the competition. Harvard Business School Press. Vatne, E. (1995). Local resource mobilisation and internationalisation strategies in small and medium enterprises. Environment and Planning A., 27, 63–80. Williamson, O. (1979). Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22, 233–261. Williams, O. (2013). The transaction cost economics project: The theory and practice of the governance of contractual relations. Edward Elgar Publishing. Wooldridge, A. (2010, April 17). The world turned upside down. The economist.

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Industry and Market Dynamics

Introduction Grant’s (1995) introduction of the notion of “survival” into critical success factors raised an interesting and important distinction between necessity and advantage. Arguably a lot of what are often identified as key success factors are essentially competitive necessities. Unless they are addressed an organization will be unable to compete successfully in a selected market or market segment. While they may appear to be sources of advantage to outsiders, in fact they are more akin to a simple market entry status than true sources of significant advantage over otherwise evenly matched competitors. Arguably, all the key success factors identified by Leidecker and Bruno (1984) and many identified by Grant (1995) above can be seen as competitive necessities. Much of the work in this area has focused on the divination of critical success factors in particular industries. It is suggested however that what is required is some broader view of what constitutes a key success factor in a digital network economy context. Just as Rumelt (1987) suggested that it is underlying competencies, rather than their current manifestation in the latest product that is important. It is proposed that survival be replaced with sustainable future competitiveness; it is also proposed that a broader, macro, framework is becoming necessary to structure the identification of capability factors rather than simply a list of the latest industry or marketplace drivers. It is suggested that such a framework revolves around six generic focused characteristics of business environmental dynamics; knowledge management, technology management, process management, relationship management, regulatory compliance and managing geopolitical events. But much has changed. Figure 2.1 is a reference point for Industry and Market Dynamics activities in the period 2000. This chapter develops an argument around the notion that industries should respond to business environment industry and market dynamics, and that organisations seek to develop related capabilities and that the successful organisations are those that identify the characteristics that are essential for creating value advantage. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_2

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Technology Management: The collaboration, integration, coordination and implementation of technological capabilities and capacities to meet the strategic and operational objectives of an organisation or combination of organisations

Technology

Industry and Market Dynamics 2000

Geopolitics

Fig. 2.1  Industry and market dynamics: Topics and current examples prior to 2000

Regulatory Compliance Management: Is an activity which identifies, understands, establishes, maintains and reinforces relationships with relevant stakeholder partners to ensure the value proposition complies with local requirements thereby converting a potential threat (problem) to an opportunity

Regulatory Compliance

Knowledge

Knowledge Management: can be defined as the organisational capability which identifies, locates (creates or acquires), transfers, converts and distributes knowledge into competitive advantage

Geopolitics: The influence of overseas governments in the business environment. Regulation of trading activities such as ownership, profit transfer, IP and patents, energy and “Rare Earth” materials. Using political power to insist on the use of local inputs

Processes: Have defined business outcomes for which there are recipients that may be either internal or external to the organisation. They cross organisational boundaries. The scope of process management is such that it may be applied to strategic and operational tasks and structures

Processes

Relationships

Relationship Management: The managerial activity which identifies, establishes, maintains and reinforces collaborative economic relationships with customers, suppliers and other partners with complementary (and supplementary) capabilities and capacities

26 2  Industry and Market Dynamics

Technology Management

27

The increasing presence of value chain networks emphasizes the need, and the capability to identify opportunities to develop value adding customer centric solutions. From the changing business environment. Concurrently the capability to mitigate the impact from threats is just as important. Initially we review:

Knowledge Management Knowledge management (KM) efforts typically focus on organisational objectives such as improved performance, competitive advantage, innovation, the sharing of lessons learned, integration and continuous improvement of the organisation. These efforts overlap with organisational learning and may be distinguished from that by a greater focus on the management of knowledge as a strategic asset and on encouraging the sharing of knowledge. KM is an enabler of organizational learning. Many large companies, public institutions and non-­profit organisations have resources dedicated to internal KM efforts, often as a part of their business strategy IT, or human resource management departments. Consulting companies provide advice regarding KM to these organizations. The most complex scenario for knowledge management may be found in the context of the value chain as it involves multiple companies without an ownership relationship or hierarchy between them, being called by some authors as trans organisational or interorganizational knowledge. That complexity is additionally increased by industrié 4.0, digital transformation, as new challenges emerge from both the volume and speed of information flows and knowledge generation. In a globally connected economy, the drive to “standardisation” is continuous, an increasing proportion of business value resides in trusting, knowledge-based transparent relationships, allowing companies/networks to create value with clients, suppliers, and alliance partners in innovative ways they could not do otherwise. Organisations are realising that outsourcing and offshoring only work if there are effective flows of knowledge between companies. Organisations have found that not only that clients are increasingly demanding knowledge transfer, but also that engaging in collaborative knowledge-based relationships that increase customer loyalty and profitability. Knowledge-based relationships are increasingly important to the future of society and business.

Technology Management The role of the technology management function in an organization is to understand the value of certain technology for the organization. Continuous development of technology is valuable as long as there is a value for the customer and therefore the technology management function in an organization should be able to argue when to invest on technology development and when to withdraw. Technology management can also be defined as the integrated planning, design, optimization, operation

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and control of technological products, processes and services, a better definition would be the management of the use of technology for human advantage. Technology management also represents a social, political, and economic shift from the digital age of the late 1990s and early 2000s to an era of embedded connectivity distinguished by the omni-use and commonness of technological use throughout society (e.g. a metaverse) that changes the ways we experience and know the world around us, that we have created, and are entering an augmented social reality compared to just the natural senses and industrial ability of humans alone, (Dawson, 2021). Technology management is the integrated planning, design, optimisation, operational implementation and control of manufacturing, human resources, process equipment and services to create competitive value advantage. Technology management is a set of management disciplines that allows organisations to manage their technological expertise to create customer advantage. Typical concepts used in technology management are: Technology strategy (a planned role for technology in a network organization, a role in product and process planning and management) Technological forecasting (a planning tool used in dynamic environments which undergo rapid changes. It can be defined as a probabilistic prediction of technological changes in terms of future characteristics of useful machines, systems, or procedures) Technology forecasting (identification of potential strategic directions and possible relevant technologies for the organization, through technology scouting and an interactive matching process between external technologies and internal requirements of an existing organization—for strategic purposes) Technology road mapping (a flexible planning technique to support strategic and long-­ range planning, by matching short-term and long-term goals with specific technology solutions. It is a plan that applies to a new product or process and may include using technology forecasting or technology scouting to identify suitable emerging technologies relevant to business and market needs) Technology product-service-market portfolio planning (from a set of projects currently under development and—the set of technologies in use)

Industry 4.0, suggested by many, as the Fourth Industrial Revolution, led the trend towards automation and data exchange in manufacturing technologies and processes which include cyber-physical systems, IIoT, (industrial internet of things), cloud computing, cognitive computing, and artificial intelligence. Industrié 4.0 focuses, and converges, rapid change to technology, industries, and societal patterns and processes. Increasing product and process digitisation, connectivity and smart automation are seen as more than just improvements to efficiency, but express a significant shift in industrial capitalism. Part of this phase of industrial change is the convergence of technologies like artificial intelligence, gene editing, to advanced robotics. Industrié 4.0 has initiated fundamental shifts in how the global production and supply network operates through ongoing automation of traditional

Relationship Management

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manufacturing and industrial practices, using modern smart technology, large-scale machine-­to-­machine communication (M2M), and the industrial internet of things (IIOT). This integration, increasing automation, improving communication and self-­monitoring, and the use of smart machines will be enhanced by 5G and Industry 5.0 that increases the speed with which connected product-services and processes respond, but also integrates connected product-services and processes with human decision-making involvement.

Process/Activity Management This is a systematic end2end approach to making an organisation’s workflow more effective, more efficient, and more capable of adapting to an ever-changing environment. It is a total design/production activity that includes all relevant activities within the value chain network and creates intra and inter-organisational partnerships to achieve stakeholder satisfaction.

Relationship Management Network Relationship Management Relationship management is increasing collaborative interactive ‘partnerships’ within the network organisation and its stakeholders, rather than considering the relationship as a transactional activity. Network relationship management is a strategy in which an organization maintains an ongoing level of planned engagement with its members. This occurs between a business and its customers (business to consumer (B2C)), a networked organisation and other networks (business to business (B2B)). Although remote, the functions require more proactive and sustained engagement, as they identify and provide solutions to a wide range of mutual needs. New and developing product-services must be analysed for their efficacy and application on a network (end2end/producibility) basis. Regular data feedback to internal teams is an essential component of this proactive engagement.

Customer Relationship Management Customer Relationship Management (CRM) is a strategic approach that is concerned with creating improved shareholder value through the development of appropriate relationships with key customers and customer segments. CRM unites the potential of relationship marketing strategies and IT to create profitable, long-term relationships with customers and other key stakeholders. CRM provides enhanced opportunities to use data and information to both understand customers and co-­ create value with them. This requires a cross-functional integration of processes,

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people, operations, and marketing capabilities that is enabled through information, technology, and applications. (Payne & Frow, 2005). Customer satisfaction has important implications for the economic performance of firms because it has the ability to increase customer loyalty and usage behavior and reduce customer complaints and the likelihood of customer defection. The implementation of a CRM approach is likely to affect customer satisfaction and customer knowledge for a variety of different reasons. Network organisations can customize their offerings for each customer. Advanced data management and analysis accumulates information across customer interactions and by processing this information with artificial intelligence and machine learning discover hidden patterns, enabling CRM applications help firms customize their offerings to suit the individual tastes of their customers. It follows that CRM applications indirectly affect customer satisfaction. CRM applications also enable firms to provide timely, accurate processing of customer orders and requests and the ongoing management of customer accounts. Furthermore, CRM applications also help firms manage customer relationships more effectively across the stages of relationship management cycle. Product-service-market expertise is augmented as relationship managers are becoming increasingly informed and empowered. An understanding of complete product and client applications increases the product-service efficacy for all customers. Applying technology such as augmented reality to visualise data, for ethical conclusions and decision making must also become a significant key result area (KRAs). Customer relationship management is, therefore, an essential process in which network organisations administer structured interactions with customers, using data analysis to study large amounts of information.

Competitor Relationship Management Competitor relationship management (coopetition) is assuming a role as organisations seek the benefits of leveraging jointly owned facilities to achieve greater utilisation of assets and all-round asset management productivity. Coopetition is the act of cooperation between competing companies; businesses that engage in both competition and cooperation are said to be in coopetition. Certain businesses gain an advantage by using a planned mixture of cooperation with suppliers, customers, and other organisations producing complementary or related products. Coopetition is a type of strategic alliance that is particularly common between software and hardware firms. A recent example of coopetition occurred with the Pfizer/BioNTech agreement to develop a COVID-19 vaccine jointly is an example of coopetition. As a result, they were able to get the vaccine to market by the end of 2020 and have produced hundreds of millions of doses in 2021. Ideally, coopetition is intended to improve the performance of the rival firms involved. By collaborating with competitors, companies have access to new resources, capabilities, and opportunities that would not be available to them if they competed using their own assets and probably allows them to apply capital elsewhere in the organisation, often as an intangible asset such as brand expansion and/or improving customer service.

Process/Activities Management

31

Supplier Relationship Management McKinsey research (Guitierrez et al., 2020) reveals close alignment between buyers and suppliers on the relative strength of most dimensions (see below). It also shows a clear drop in perceptions of strength as the discussion moves from theory (strategic alignment) to execution (value creation and sharing, organizational governance). The research identified insights into the challenges companies face in each of the five dimensions, while also revealing some examples of best practices that lower-­ performing companies can emulate. • • • • •

Achieving strategic alignment Joint business planning Communication and trust Cross-functional engagement Improving cross-functional engagement is a leadership issue.

Process/Activities Management Process Management (PM) refers to aligning processes with an organization’s strategic objective and their implementation by designing and implementing process architectures, establishing process measurement systems that align with organizational objectives, and educating, organizing, orienting, and incentivising managers and relevant employees. Activity-Based Management (ABM) is a way of analysing and evaluating a company’s business activities through activity-based costing and value-­chain analysis. The ABM method is used to analyse the cost of an activity in relation to the value added by the activity, with the goal of operational and/or strategic improvement. Activity definition refers to the process of analysing a project into a number of individual tasks which must be completed, before the deliverables can be considered completed. Activity definitions rely on a number of specific input processes. ABM is an essential part of analysing activity components. Business process management (BPM) is the discipline in which people use various methods to discover, model, simulate, analyse, measure, improve, optimize, and automate business processes. Any combination of methods used to manage a company’s business processes is BPM. Processes can be structured and repeatable or unstructured and variable. Though not required, enabling technologies are often used with BPM. Kerpedzhiev et al. (2016), in the Future of Business Process Management in the Future of Work, identified a number of issues critical to future business process management design: • Ethical and work values as well as reputation will play an • important role • Technology will complement human abilities

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• • • • • • • • • • • • • • • • • • • •

2  Industry and Market Dynamics

Work assignments and routines will change constantly Work will be carried out independent of time and place Work will require higher cognitive and creative capabilities Workers will be highly specialized Workers will be required to learn constantly on the job Workers will require entrepreneurial thinking Teams will be assembled and changed dynamically Technology will be used to automate tasks Work will be communication- as well as knowledge-intensive Work will be conducted predominantly in projects Workers will be free agents Workers will be highly connected in communities Collective intelligence will be important in decision-making Decision-making will be decentralized Finding and cultivating talents will be a key challenge Information will be readily available independent of time and place Low-skill, out-of-competence work will be outsourced Market principles will be applied within organizations Organizational hierarchies will be loose and flat Organizations will exhibit a core-periphery structure

Geopolitics Geopolitics has implications for business; It is the potential for international ecopolitical activities to threaten the financial and operational stability of companies around the world. Recent examples of influence of overseas governments in the business environment, has been regulation of trading activities such as ownership, profit transfer, IP and patents, energy and ‘Rare Earth’ materials. A recent example has been the cancellation of a contract for mining lithium between Serbia and Rio Tinto (an Australian company) following the deportation of a Serbian national (Novak Djokovic) for failure to comply with Covid health legislation concerning vaccination status. Figure one is a reference point for the topic in the early 2020/21 time period.

Industry and Market Dynamics: Emerging Topics Post 2000 industry and market dynamics would appear to have increased in number and application and have become more complex. An increase in the number of topics can be expected. Also anticipated is the increase in government influence in many of the ‘traditional’ topics; for example, technology, and knowledge management where subsidies and tax incentives for RD&D are used to advance national capabilities, and the application of industrial technological developments (robotics) are applied to enhance competitive positioning. See Fig. 2.2.

Fig. 2.2  Industry and market dynamics: topics and current examples 2020s

Social, economic and The full benefits of industrial institutions Industrié 4.0 Focused data dominate the process of collection, require changes to A systematic economic development. analysis and the educational end2end They determine curricula of Technology decision approach to attitudes, motivations developed management is the making for making an and conditions for economies. The integrated planning, RD&D and organisation's development. STEM approach design, optimization, innovation workflow more Increased flexibility has met with operation and control of management effective, more encourages people to mixed success due manufacturing. Industrié for NPD and efficient and pursue economic to its being taught 4.0 has emerged as the operations. more capable of opportunities and in a traditional lead driver Patent adapting to an results in a higher manner – as management; ever-changing standard of living, individual subjects ‘two-way’ environment The use of inspiring extra efforts licensing Education/ economic tools to resulting in further Process/Activities Technology Relationship Employee advance economic development Management Management Management Development Knowledge geopolitical “Global Management objectives. Other Institutions” definitions Industry and Market Dynamics in the “Networked Economy” reverse the ends Geoeconomics and means, International Economic Managing emphasizing how International International Macro-Economic Globalisation Geopolitics flexing Financial/Cash flow Health Care Management geopolitical Management Management Economic globalisation was muscle is used for increasing the Optimising working Framework Convention The UN Department of economic results. interdependence of capital (inventory holding on Global Health (FCGH) Economic and Social national economies and has and cash2cash cycles Access to seaports, has recently been Affairs Economic resulted from growing (payments and water, arable land, proposed as a global Analysis, offers ongoing levels of trade between receivables) financing the energy sources, health treaty that would research and analysis, nations, as a result of business (CapEx and minerals, repatriation use stronger domestic examples of these are: technological OpEx business models), of profits, ownership accountability The global economy has advancements (digitisation assessing control of forex of intellectual mechanisms (including suffered a significant and connectivity) that (foreign exchange) and property etc. are incentives & sanctions) slowdown amid allowed for quicker domestic and geopolitical topics that have at in order to close prolonged trade international risks and evaluating one time or another national and global disputes and widecommunication, as well as foreign direct Investment been the subject of health inequities. The ranging policy drastically reduced (inbound and outbound). disputes and, as such, WHO is an effective uncertainties. Lack of manufacturing and International finance are geopolitical in influencer but has no innovation a key distribution costs. involves measuring the their nature. Current powers of enforcement structural challenge for Manufacturing was political and foreign issues in commercial many developing managed effectively and exchange risk associated geopolitics concern countries. Economic efficiently, within a with managing the activities of diversification impeded network of international multinational multinational by structural barriers. locations. An important corporations organizations and the Gender gaps remain aspect of economic global value chain pervasive worldwide, globalization was the networks that have constraining economic increasing level of offshore strong influence on potential investment particularly in the economic welldeveloping nations. Actions being of developing by the USA and PRC suggest nations. Using this is changing political power to insist on the use of local inputs

Relationship management aims to create open, interactive ‘partnerships’ between the organisation and its stakeholders rather than consider the relationship merely transactional.

International Human Relations

US Business Roundtable, (181 signatories spearheaded - suggested the purpose of a corporation is to serve all of its constituents, including workers, customers, investors and the broader society. "While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders," the group said in the statement. The ‘B’ Corporation. Environmental, Social and Governance policy/Investor relations and the UN 17 development goals are relevant here

The term geoeconomics has become popular but it lacks an agreed definition. Most commonly, it is understood as the use of economic tools to advance geopolitical objectives. Other definitions reverse the ends and means, emphasizing how flexing geopolitical muscle is used for economic results. Broadly, one can think of geoeconomics as the interplay of international economics, geopolitics and strategy

A political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups. Patriotism becomes Nationalism. Consumer preferences are influenced for locally produced product-services. Governments incentivise manufacturers to “re-shore” manufacturing. It can be argued that terrorism is a form of populism/nationalism in which religious beliefs are the basis of extreme acts

Understanding talent management, demographic trends, the knowledgebased economy, rapid growth in emerging markets, demand for experienced expats with relevant offshore experience and changes in market structures such as moves towards global activities and approaches, will assist international managers to better face the challenges and changes in international human resources management

Populism/ Nationalism Stakeholder Influence

UN climate report, released on 10 March 2020, shows that climate change is having a major effect on all aspects of the environment, as well as on the health and wellbeing of the global population. Water shortages, deforestation, the erosion of UN endorsed natural features (the Australian Barrier Reef) and the attempt by the UN to persuade governments to pursue its SDG (sustainable development goals) has, to date, not been very successful

Climate Change

Regulation Compliance

Recent actions by governments and industrial organizations suggest regulatory compliance will be a necessary component in strategy processes. This suggests that unless organisations agree an industry-wide set of obligatory standards they, the industry, enforce rather than make it the responsibility of government. Regulators are stepping up their efforts to address the monopoly power of ‘BigTech’

Industry and Market Dynamics: Emerging Topics 33

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‘Global Institutions’ Regulatory Compliance and Governments’ New Interventionism Social, economic, and industrial institutions dominate the process of economic development. They determine attitudes, motivation, and conditions for development. Increased flexibility encourages people to pursue economic opportunities and results in a higher standard of living, inspiring extra efforts resulting in further economic development. The 2019/22 pandemic has seen the World Health Organisation (WHO) become involved in distributing health advice and commenting on vaccination programs. The World Trade Organisation (WTO) is demonstrating interest in international tariff disputes between member nations. Recent actions by governments and industrial organizations suggest regulatory compliance will be a necessary component in strategy processes. This suggests that unless organisations agree an industry-wide set of obligatory standards they, the industry, enforce rather than make it the responsibility of government. Governments’ new industrial policy. (1) Support for favoured industries. (2) Trustbuster approach to industry (3) Regulation, increased regulation, environment, labour, and corporate governance, and (4) An irreversible trend to reduce business taxation. An Economist report suggests the “state” appears to have changed its views of how to influence businesses. Rather than having state owned production support for favoured industries, technologies, or specific organisations, employment roles or specific product categories (computer chips and batteries) are now favoured. Second is the assault on corporate power. Third is the growth of regulation of the environment, labour standards, and governance. Fourth is an apparent reverse in the policy of reducing corporate taxation. The report comments on the fact that the new interventionism coincides with increases to barriers to international trade and that globalisation and fragile value supply chain response are being reined in for economic and security reasons (The new interventionism, 2022).

Education and Employee Capabilities Development Employee capabilities development follows, the full benefits of Industrié 4.0 require changes to the educational curricula of developed economies. The STEM approach met with mixed success due to its being taught in a traditional manner—as individual subjects. Today’s dynamic and changing manufacturing workforce needs personalized guidance and support, as well as continuous learning opportunities in order to effectively sustain and deliver effective on-the-job performance and learn how AI is being used to shape today’s new workforce and address some of manufacturing’s biggest challenges. Industrial companies can no longer train, guide, and support their workers using processes from the past. The new industrial workforce is different. It’s more dynamic and diverse than previous generations. It is also more connected. This new connected worker is a source of valuable enterprise data, but only if the data can be captured and understood. The challenge lies in the fact that connected worker data is inherently noisy, with high variability and confusing

Populism/Nationalism

35

signals. Making sense of this data and turning it into actionable insights is only possible with AI. Technology is being applied to employee development activities, augmented reality is used to train assembly employees for work on the assembly line and for distribution/serviceability activities in post-assembly activities in the value chain. A commonly accepted definition of institutions is that they are the formal and informal rules that organise social, political, and economic relations (North, 1990). They are the systems of established and prevalent social rules that structure social interactions (Hodgson, 2006). Hitt et al. (2021) examined primary and secondary data on 658 firms from 17 countries across three continents, the authors examined the combined influence of country-level institutions on industry attributes and in turn their effects on the choice of a defensive advantage-based strategy and an entrepreneurial strategy. They found that strong and efficient institutions constrain both dynamism and generosity in industries. In turn, industry dynamism has a negative effect on both entrepreneurial and advantage-based strategies. However, firms having strong relational capital with important stakeholders can better navigate these uncertain environments to employ both strategies with increasing strength. Alternatively, in more financially sound environments, firms are less likely to employ advantage-based strategies and more likely to employ entrepreneurial strategies. The study demonstrates the environmental conditions under which firms are more-or-less likely to employ entrepreneurial strategies and defensive advantage-­ based strategies (Hitt et al., 2021). It should be noted that international, government acknowledged ‘institutions’ assume ‘powers’ that put them in positions of both action direction and arbiters when required.

Populism/Nationalism This refers to a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups. Patriotism becomes Nationalism. Consumer preferences are influenced for locally produced product-­ services. Governments incentivise manufacturers to ‘re-shore’ manufacturing. It can be argued that terrorism is a form of populism/nationalism in which religious beliefs are the basis of extreme acts, LibertiesEU (2021): Nationalism is a belief and political ideology that the sovereignty, interests, and identity of one’s own nation take precedence over other states and groups of people. By itself, nationalism can be difficult to define both because the term has changed meaning over time and context, and because it is often attached to disparate political movements. For example, the term fits the platforms of Viktor Orban in Hungary or Jarosław Kaczyński in Poland quite well, but it could also be applied to strong, proud—and democratic—monarchies of the United Kingdom or the Netherlands. These movements maintain their grip on power by rallying people around a common (national) identity that is under threat from “others”—outgroups that are eroding the nation’s identity and threatening its sovereignty. Civil society, mainstream media, judges, academics and the LGBTQI community, among others, are usual scapegoats. And this “rally around the flag” mantra necessarily stokes nationalist sentiment.

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2  Industry and Market Dynamics Populism which is a political strategy of appealing to “the people” in opposition to “elites” who are making the lives of “the people” worse. Like nationalism, populism is not inherently tied to a certain political ideology. But unlike progressivism, which we have already contrasted with populism, nationalism overlaps populism, and especially authoritarian populism, quite a bit. As mentioned above, the power of populist authoritarians is derived from fanning nationalist sentiment and creating a division between “true” Poles, Hungarians, Slovenes, etc., and “others.

More and more consumers are practicing ethical consumerism. Ganjoo (2021) writes in Forbes, “They vote with their wallets by buying ethically made products that support small-scale manufacturers and local artisans and protect the environment, while refusing to purchase non-sustainable products”.

 takeholder Value Management, EESG, and the UN’S 17 S Development Issues US Business Roundtable, 181 signatories spearheaded/suggested the purpose of a corporation is to serve all of its constituents, including workers, customers, investors, and the broader society. The group states, “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders”. The ‘B’ Corporation (Statement on the purpose of a corporation, Business Roundtable, 2019). ESG (Environment, Social & Governance) issues have impact on business, and a second ‘E’; EESG (Equality, Environment, Social & Governance) is a deliberate addition by the authors. Recent events in North America suggest that Equality is an important issue. Equal opportunities in healthcare, education, employment and in the legal/ judicial system should be available to everyone regardless of race, age, religion, and skin colour. The second ‘E’ concerns environmental criteria, and includes energy usage, pollution and from ‘production’ activities, resources management and recycling/remanufacturing. ‘S’ concerns relationships with employees, customers, suppliers, and host communities the organisation interacts with. ‘G’ is the internal system of practices, controls, and procedures an organisation adopts to implement self-governance in making effective decisions that comply with the law, and to meet the needs of external stakeholders. Not only should legally established organisations observe governance requirements but so too should ‘social’ interest groups. Just as EESG is an inextricable part of how organisations ‘do business’, its individual elements are themselves interlocking and interacting (Henisz et al., 2019) in McKinsey Quarterly. To be effective management will require an understanding of these nuances. Society 5.0 is closely related to this topic, specifically to Total Stakeholder Value (TSV) and is a Japanese project. Society 5.0 is Japan’s concept of a technology-­ based, human-centered society, emerging through the fourth industrial revolution. Artificial intelligence will transform big data collected through the Internet of Things into “new wisdom” and it will enhance human ability and expand our infinite possibilities, helping us enjoy more fulfilling lives. Society 5.0 alludes to the new monetary society following the seeker gatherer, peaceful agrarian, modern, and

International Financial Management

37

data social orders. Society 5.0 is both Japan’s development system and the outline for ‘a general public’ that Japan expects to build up. It was drafted by the Council for Science, Technology and Innovation and affirmed by a Cabinet choice in January 2016.

Climate Change The UN climate report, released on 10 March 2020, shows that climate change is having a major effect on all aspects of the environment, as well as on the health and wellbeing of the global population. Water shortages, deforestation, the erosion of UN endorsed natural features (the Australian Barrier Reef) and the attempt by the UN to persuade governments to pursue its SDG (sustainable development goals) has, to date, not been very successful. Despite the evidence clearly available, and the acknowledgement by business of their obligation, and in most cases their acceptance, the politicians continue to approach the issue with the next election in their focus.

Globalisation and MNCs Economic globalisation was increasing the interdependence of national economies and has resulted from growing levels of trade between nations, as a result of technological advancements (digitisation and connectivity) that allowed for quicker international communication, as well as drastically reduced manufacturing and distribution costs. Manufacturing was managed effectively and efficiently, within a network of international locations. An important aspect of economic globalization was the increasing level of offshore investment particularly in developing nations. Actions by the USA and PRC suggest this is changing.

International Financial Management The expansion of offshore activities has increased the need for organisations to embrace international finance disciplines and to be concerned with subjects such as exchange rates of currencies, monetary systems of the world, foreign direct investment and other important issues associated with international financial management. Furthermore, international operations require strict discipline if the important components of cash flow (the critical financial performance metric) are to be maintained. This involves optimising working capital (inventory holding and cash2cash cycles (payments and receivables) financing the business (through CapEx and OpEx business models), assessing control of forex (foreign exchange) and domestic and geopolitical risks, and evaluating foreign direct Investment (inbound and outbound). International finance involves measuring the political and foreign exchange risk associated with managing multinational corporations. Two relatively recent developments in funding business organisations are likely to have influence in international Financial Management decision making should be considered, Adventure Capitalism and Green Investment.

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2  Industry and Market Dynamics

Venture-Capital has funded enterprising ideas that have gone on to transform global business and the world economy. Seven of the world’s ten largest firms were funded by venture capital: the companies behind search engines, iPhones, electric cars and MRNA vaccines (Economist, 2021). The model has proved astoundingly successful, “Although VC-backed companies represent less than 0.5% of American companies created every year, they make up nearly 76% of the total public-market capitalisation of companies started since 1995”. The venture capitalists did not just provide finance. They also played consiglieri, often taking a seat on a company’s board. They offered a wealth of experience and access to a network of contacts and introducing start-ups to professional chief executives. Green Investing seeks to support business practices that have a favourable impact on the natural environment. Often grouped together with socially responsible investing (SRI) or equality environmental, social, and governance (EESG) criteria, green investments focus on companies or projects committed to the conservation of natural resources, pollution reduction, or other environmentally-conscious business practices. Green investments may fit under the umbrella of SRI, but they are more specifically focused.

International Macro-Economic Management The UN Department of Economic and Social Affairs Economic Analysis, offers ongoing research and analysis, examples of these are: The global economy has suffered a significant slowdown amid prolonged trade disputes and wide-ranging policy uncertainties. Lack of innovation a key structural challenge for many developing countries; Economic diversification impeded by structural barriers. Gender gaps remain pervasive worldwide, constraining economic potential.

Managing Geostrategic Risk Access to seaports, water, arable land, energy sources, minerals, repatriation of profits, ownership of intellectual property etc. are topics that have at one time, or another been the subject of disputes and, as such, are geopolitical in their nature. Current issues in commercial geopolitics concern the activities of multinational organizations and the global value chain networks that have strong influence on the economic well-being of developing nations. Other issues include: • • • • • • •

Continuation of Covid-related problems Macro-economic performance and outlook Climate change impacts Technological disruption Regionalisation and fragmentation of the Global Economy Geopolitical tensions between major markets Territorial disputes/ownership

Pathways to Competitive Value Advantage Using Industry and Market Dynamics

39

International HealthCare Management The Framework Convention on Global Health (FCGH) has recently been proposed as a global health treaty that would use stronger domestic accountability mechanisms (including incentives & sanctions) in order to close national and global health inequities. The WHO is an effective influencer but has no powers of enforcement. The recent Covid pandemic has illustrated alternative management approaches, some successful, some not.

International Human Relations Understanding talent management, demographic trends, the knowledge-based economy, rapid growth in emerging markets, demand for experienced expats with relevant offshore experience and changes in market structures such as moves towards global activities and approaches, will assist international managers to better face the challenges and changes in international human resources management.

 athways to Competitive Value Advantage Using Industry P and Market Dynamics Operating within a rapidly changing business environment offers both opportunities and threats. Given an increasing rate of change it is unlikely that very much of an advantage can be made from the existing portfolio of strengths and weaknesses. While intellectual property, transformed into patentable product-services, will offer limited growth opportunities. The ‘mobility industry’ is an example of future trends; the electric vehicle is technically very different to its IC (internal combustion) engine forebear, and this is suggesting not only different manufacturing structures, but also distribution networks and servicing operations. Figure 2.3 identifies some of the changes likely to occur in the areas identified in Fig. 2.2. An overall view of the process of developing network competitive value advantage is suggested in Fig. 2.3. The traditional ‘opportunities and threats’ analysis is applied to an expert-based perspectives view of industry and market dynamics. The impact on opportunities and threats should also be applied to ongoing activities to explore the need for focus on any topics that present threats to ongoing activities that are major revenue and economic profit generators. The futures analysis will be important for future network asset management and investment in plant and processes, and where within the network investment (and shifts of asset and capability responses) within the network structure should take place (value builders ‘asset’ and ‘liabilities’). Given that this takes place and a clear vision of where the network’s strategic direction will be, the network structure options can be identified and pursued. At this point stakeholder liaison activities are essential as decisions are required concerning performance and positioning. A useful input here is a review of

40

2  Industry and Market Dynamics Scenarios Based on Expert Perceptions of Developing Industry & Market Value Dynamics Decisions hMarket Positioning hValue Chain Positioning hAlliance(s) ‘Fit’ hPrice/Value Equality hManaging Customer Response

Network Competitive Value Advantage: Current and Future

Network Shared Objectives hEconomic Value Added hFree Cash Flow hFuture value hAsset Utilisation hShare of Market Added Value hRisk Management (EROCE/EROAM Spread) hAsset Intensity (Financial Gearing) CapEx/OpEx /OptmlEx Structures

h h h h h

Stakeholder Value Added (TSV) Equitable relationships with: • Customers • Employees • Suppliers • Shareholders & Investors • Community • Government • Competitors • EESG and UN sustainability goals

Strategic & Structural Cost Drivers Scale/Scaleability hScope Experience hTechnology Complexity Integration and coordination Collaboration (Scale, Experience, Scope)

Network Structure Options iAcquisition iMerger iStrategic Alliance iOperational Partnerships

Typical Value Builders: ‘Assets (Exclusive Distinctive Capabilities) • Innovation, Creativity, RD&D, Product-Service & Process Research and Design • Market Entry Networks Management Networks • Access to Resource Markets • Access to Capital • Integrate and Coordinate Network Interactions • Planning Abilities: Strategic & Operational Typical Value Builders: ‘Liabilities’ (Externally Owned Reproducible/Leverageable Capabilities) • Production Facilities and Networks • Specialist Assets, Processes & Capabilities • Partner Owned: Exclusive Capabilities • Integrated Procurement • Inter-organisational Production Facilities and Networks • Access to Emerging Distribution & Transactions Channels • Complementor/Facilitator Networks • Externally Generated ‘Market Opportunities’

• Knowledge Management • Technology Management • Process/Activities management • Relationship Management • Regulation Compliance ‘Institutions’ • International Human Relations

Impact on Opportunities and Threats

• Populism/Nationalism • Stakeholder EESG (Equality, Environmental, and Social Governance) • Climate Change • International Health Management • International Financial Management • International Macro-Economic • Management • Economic Globalisation • Managing Geopolitics

Fig. 2.3  Developing competitive value advantage using value builders and industry dynamics

current strategic and structural cost drivers to validate network shared objectives and the impact on network competitive value advantage.

References Business Roundtable. (2019). Statement on the purpose of a corporation. Business roundtable opportunity. www.businessroundtable.org Dawson, R (2021) Ross Dawson blog. Retrieved Dec 07, 2021, from www.rossdawson.com Hitt, M. A., Sirmon, D. G., Li, Y., & Ghobadian, A. (2021). Institutions, industries and entrepreneurial versus advantage-based strategies: How complex, nested environments affect strategic choice. Journal of Management and Governance, 25, 147–188. Ganjoo, A. (2021, November 16). How disrupted supply chains impact retail sustainability efforts: Five key strategies For The post-pandemic world. Forbes. https://www.forbes.com/sites/forbestechcouncil/2021/11/16/how-­disrupted-­supply-­chains-­impact-­retail-­sustainability-­efforts-­ five-­key-­strategies-­for-­the-­post-­pandemic-­world/?sh=462e558c4008 Grant, R.  M. (1995). A knowledge-based theory of inter-firm collaboration. Academy of Management. Best Paper Proceedings, 38, 17–21. https://doi.org/10.5465/ AMBPP.1995.17536229 Guitierrez, A., Kothari, A., Mazuera, C., & Schoenherr, T. (2020, July 7). Taking supplier collaboration to the next level. McKinsey. Henisz, W., Koller, T. & Nuttall, R. (2019, November). Five ways that ESG creates value: Getting your environmental, social, and governance (ESG) proposition right links to higher value creation. Here’s why. McKinsey Quarterly. Hodgson, G. (2006, March). What are institutions? Journal of Economic Issues., 40, 1–25. Kerpedzhiev, G., Roeglimger, M., & Lehnert, M. (2016). The future of business process management in the future of work. In Twenty fourth European conference on information systems (Vol. 24). Leidecker, J. K., & Bruno, A. V. (1984). Identifying and using critical success factors. Long Range Planning, 17(1), 23–32. LibertiesEU. (2021, August 12). Nationalism and populism: What is the difference? How are they Connected? www.liberties.eu North, D.  C. (1990). Institution, institutional change, and economic performance. Cambridge University Press. Payne, A., & Frow, P. (2005, October). A strategic framework for customer relationship management. Journal of Marketing, 69, 4–176. Rumelt, R. P. (1987). Theory, strategy, and entrepreneurship. In D. Teece (Ed.), The competitive challenge: Strategies for industrial innovation and renewal (pp. 137–158). Ballinger. The new interventionism. (2022, January 15). Special Reports. The Economist.

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Managing Value

Introduction: What Is Business Value? ‘Business value’ does not have a single, agreed-upon definition; however, examining several sources that attempt to define what business value is can give us more insight into its meaning and application. According to popular sources, BusinessDictionary.com, in order to assess the value of the business or an owner’s interest in a company, a ‘business valuation’ is often performed. A business valuation is the process of examining various economic factors of a business using predetermined formulas. Third-party accountants often perform these valuations using several different types of methods to identify the value of the business. Each of these methods describes the business value in monetary terms. Wikipedia defines business value as an informal term that includes all forms of value that determine the health and well-being of the firm in the long run, and as an informal term that includes all forms of value that determine the health and well-­ being of the firm in the long run. In an article about business value and quality, Alan Koch states that “the ‘Business Value’ is the net benefit that will be realized by the customer” of a project (Koch, 2011). For the purpose of this text and in the context of applying business value to project management, consider the following definition: Business value is the net benefit that will be realized by the customer of a project and can be measured in either monetary or non-monetary terms. Therefore, a relevant definition for use in this discussion is suggested as: Value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_3

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3  Managing Value

 alue Creation Is Increasingly Being Recognised as a Better V Management Goal than Strict Financial Measures of Performance When broadly defined, value creation is increasingly being recognised as a better management goal than strict financial measures of performance, many of which tend to place cost-cutting that produces short-term results ahead of investments that enhance long-term competitiveness and growth. As a result, some experts recommend making value creation the priority for all employees and all company decisions. This will provide an enormous advantage in building a company’s ability to achieve profitable and long-lasting growth. The first step in achieving an organization-wide focus on value creation is to understand the sources and drivers of value creation within the industry, company, and marketplace. Understanding what creates value will help managers focus capital and talent on the most profitable opportunities for growth. “If customers value consistent quality and timely delivery, then the skills, systems, and processes that produce and deliver quality products and services are highly valuable to the organization. Kaplan and Norton (2004) argued; “If customers value innovation and high performance, then the skills, systems, and processes that create new products and services with superior functionality take on high value. Consistent alignment of activities and capabilities with the customer value proposition is the core of strategy execution.” Although the intangible factors that drive value creation differ by industry, some of the major categories of intangible assets include technology, innovation, intellectual property, alliances, management capabilities, employee relations, customer relations, community relations, and brand value. According to Kaplan and Norton (2004) the link between these intangible assets and value creation is corporate strategy. It is important to note that investments made to enhance intangible assets (research and development, employee training, and brand building, for example) usually provide indirect rather than direct benefits. In this way, focusing on value creation forces an organization to adopt a long-term perspective and align all of its resources toward future goals. Three important considerations should be addressed. Strategic Market Network Positioning: the process of identifying market opportunity(ies) and matching these with existing and required Response Capabilities. An important consideration is how the Value Proposition will be integrated into a Value Management process. Another concerns Market Positioning, this impacts all aspects of how the ‘total market’ perceives an organisation, as it identifies and influences everything a business network represents. Market Positioning is based upon the collective capabilities and capacities identified as essential for market success. It is an essential point of reference for network partners as well as potential and existing customers, and service and support teams as they create more delightful and on-brand experiences for customers. Value Chain Positioning: indicates the roles and tasks of successful intra-network collaboration and coordination (and this often adds inter-industry network and international networks) if the opportunity is to be pursued successfully.

Value Added and Added Value, Economic Profit and Economic Value Added

43

Strategic Market Network Positioning: matching process of identifying market opportunity(ies) with existing and required Response Capabilities. An important consideration is integrate the Value Proposition into a “Value Management” process

Managing Value Market Positioning: impacts all aspects of how your “total market” perceives an organisation it identifies and influences everything the business network represents. It is based upon the collective capabilities and capacities identified as essential for market success. It is an essential point of reference for network partners as well as potential and existing customers., and for service and support teams create more delightful and on-brand experiences for customers

Value Chain Positioning: indicates the roles and tasks of successful intra- network collaboration and coordination (and this often adds interindustry network and international networks) if the opportunity to be pursued successfully. Value chain positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within a valueecosystem

Fig. 3.1  Positioning roles that create value

Value chain positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within a value-ecosystem. Fig. 3.1 identifies the roles of the positioning changes in these critical decision areas. As the value chain network—the value creation network—(and is best now considered to be Value Chain Management 3.0) has developed it has become more closely connected and collaborative; data analytics throughout the network are making networks become increasingly strategically effective and operationally efficient. As a result, product-service-market development became a shared activity, and the notion of customer-led stakeholder value management optimization has impacted network activities and processes that now require to be managed optimally rather than totally biased towards a specific member or group of participants.

 alue Added and Added Value, Economic Profit and Economic V Value Added Value adding and adding value are used interchangeably to describe the processes by which network partners can increase network efficiencies. In some cases, the product-services produced will be new offerings or modifications to delivery to the customer and will provide new value (directly in revenue generating terms due to increased competitive value advantage effects) to the business. In other cases, existing product- services will be modified in some way that will create new value for the customer or business as the impact of the increased value occurs over time. Examples of such benefits are philanthropic activities, direct/indirect employee involvement with customers (non-specific liaison visits), and assuming community roles in the delivery of services or facilities, the financial impact(s) of which are typically difficult to calculate. We suggest that value added activities are ‘hard’ dollar benefits and can be calculated using EVA methodology and added value activities are

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3  Managing Value Value Added Process Characteristics Network Standard Processes ------- Specialist Providers Optimising ∑ Network Economic Value Added

Increasing Customer Revenues and Profitability Increasing Value Added (EVA) Quantitative

● Technology transfer ● Relationships ● Knowledge ● Processes ● Exclusivity ● Patents ● Performance management* ● Switching costs ● Maintenance ● Remanufacturing ● Customer service

Short/Medium Term “Hard” Apparent Dollar Benefits

Increasing Added Value Qualitative Increasing Customer Perceptions of Product-Service and/or Vendor: Ongoing

* Real-time Performance Management using digital thread/digital twinning technology

Added Value Process Characteristics ∑ Customer Perceptions of attitudes and behaviour of suppliers – Ongoing and typically long-term. ● Creativity/Innovative formal/informal relationships ● Branding ● Sustainability ● Philanthropy ● Customer/Employee liaison relationships ● Community involvements ● EESG considerations

Short and Long-Term “Soft” Dollar Benefits that are difficult to Quantify

Fig. 3.2  “Hard” and “soft” benefits

considered to be “soft” dollar benefits that are intangible and are positive in their impact. Fig. 3.2 identifies the two entities.

Economic Profit and Economic Value Added Some confusion also exists concerning the use of ‘economic profit’. Economic profit (or loss) is the difference between the revenue received from the sale of an output and the costs of all inputs used, as well as any opportunity costs (opportunity cost is the ‘benefit’ (profits) that would have been derived from an option not chosen). To evaluate properly opportunity costs, the costs, and benefits of every opportunity available must be considered and weighed against the other opportunities; in a networked organisation this is difficult and requires considerable time.

 conomic Profit = Revenues Less Operating Costs Less E the Allocated Cost of Capital Usage McKinsey Suggests, “Economic profit has four components: revenues, margins, asset turns, and the tangible-capital ratio (TCR). Revenues and margins are familiar enough. Asset turns, sometimes described as asset leverage, measure the capacity to extract revenue from a given quantity of assets. TCR is the ratio of physical to total capital, including goodwill (which is an intangible asset).” Bradley et al., 2013). A more manageable definition is: Economic value added is an estimate of a firm's economic profit, or the value created more than the required return of the company's shareholders. EVA is the net profit less the capital charge. Investopedia offers: Economic value added (EVA) is a measure of a company's financial performance

Economic Value to the Customer/Value in Use/Price/Value/Equality

45

based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, as it attempts to capture the true economic profit of a company. Economic value added (EVA), aims to calculate the true economic profit of a company and is used to measure the value a company generates from funds invested in it. (The measure was devised by management consulting firm Stern Value Management, originally incorporated as Stern Stewart & Co. The topic will be reintroduced in a subsequent chapter).

 conomic Value to the Customer/Value in Use/Price/Value/ E Equality Forbis and Mehta (2000) developed an inhouse staff paper from 1979 and suggest an opportunity cost approach to ‘economic value’ by arguing that the goal of economic value to the customer (EVC) is to quantify the additional value a product brings to customers above what they already receive from their present suppliers by calculating how much the customer will pay to switch from one product to another. It is also useful for solving strategic pricing problems by identifying customer segments that value a specific supplier’s product most, and why, enabling more precise segmentation. This may be focused on designing product-services with features that better meet the needs of the most profitable customers/segments, and to charge those segments a premium for the extra value they receive. The authors suggest the model is well-suited to B2B industries that or, more generally, to industries that require buyers to absorb significant start-up or operating costs to use their products. Since EVC varies from one customer segment to the next, the first step in the process is the selection of a segment to focus on. A ‘reference product’, is often a competitor’s, and typically none favoured by a majority of users. The authors suggest finding the right reference product is critical and depends upon the strategic choice you are tasked with making, any product the customer uses to satisfy the same underlying need that your product satisfies can. The main principle of EVC is that for any customer currently using the reference product, there are two possible benefit pathways; increasing functional benefits that enhance the customer product thereby enabling a higher price. Alternatively, the organisation’s planned “product offer” may require fewer activities by the purchaser. The reference product might require its buyer to incur costs, for example, insurance, installation, and employee training. Alternatively, there may be operating costs, maintenance, data entry, ongoing employee training, and so on. Economic value to the customer is simply the purchase price that customers should be willing to pay for a vendor product, given the price they are currently paying for the reference product and the added functionality and diminished costs provided by the organisation’s product. Start with the purchase price of the reference product and then add improvements in functionality and cost savings to the customer. This identifies the amount that should be able to be charged to customers to capture the business of the maker of the reference product. The process is only as

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3  Managing Value

good as the information put into it. Identifying a product’s true value to a customer often calls for a series of detailed interviews and observations of the product processes. It will not only help solve pricing problems but also, over the long term, permit creative market segmentation that can yield strategic advantages. However, it is time consuming and therefore has a cost that may be difficult to compute accurately.

Setting Value Not Price Leszinski & Marn (1997 p. 4), have commented, “The first task is to map benefits versus price—as the customer sees them. Bearing in mind that equal value doesn’t mean equal market share. The key decision: do you stay on the line of value equivalence, or get off?” The authors proposed a model that may not necessarily result in setting a precise value related price; rather it raises several concerns which management should address. Their model identifies an important and fundamental factor: Customers do not buy solely on low price. They buy according to customer value perceptions, that is, the difference between the benefits a company gives customers and the price it charges. Or, more precisely, customer value equals customer-perceived benefits minus customer perceived price. Within this equation the costs involved in obtaining and owning the product-service may be seen as “negative” benefits or a component of the price. The authors proposed a value map to explore customer value and price/benefit trade relationships. They suggested that with constant market shares the market’s offers will align themselves along a value equivalence line (VEL) identifying the range of choice available to customers. Any changes in market share will be indicated by horizontal movement (left suggesting share loss as the customers perceive less value—right suggesting an increase in relative value). Customers at CPV1 and CPV2 are content with the offers being made by their supplier albeit quite different combination of value benefits and price. See Fig. 3.3. The authors argued the VEL may be perceived as shifting downwards and/or towards the right (or possibly seen as upwards and to the left) reflecting a decrease in market prices or perhaps an increase in the benefits that are available, or possibly a situation in which the customer has developed the application and use of the product beyond the suppliers offer. This may occur because of production efficiencies developed by one or more competitors, or due to design or technology advances that individual organisational RD&D processes have developed. Since the Leszinski and Marn (1997) article a large (and possibly unforeseen at the time) number of technological applications impacting on the supplier/customer transactions dialogue have occurred and have varied the benefits existing at the time of the authors’ contribution; they have also added to them. For example, Industrié 4.0 digitisation, digitalisation, and connectivity enabled developments such as digital threads and twins that have created opportunities for individual organisations and networks to collaborate

Setting Value Not Price

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Value Disadvantage

VEL

Price/Value Equivalence Line

CPV 2

Price

Losing Market Share

VEL Gaining Market Share

CPV 1 Value Advantage

(Value Equivalence Line) A combination of competitive offers of nonprice/price led benefit offers available in the “market”

Customer Perceived Value Added Total Acquisition/Ownership/Operations Costs ● Asset management ● Time management ● Performance management ● Installation, training operating and retirement costs management ● Risk management ● Information management ● Network Collaboration ● Non-price/cost features; prestige, convenience

Fig. 3.3  Value, price and value equivalence

on the development of ‘intra-organisational’ exclusive IP based product-service benefits that contribute towards exclusive value benefits. Accor Hotels use the ‘Setting Value Not Price’ in their product portfolio strategy. Demonstrating the rewards to management of “value innovation”. Kim and Mauborgne (2004) present the approach taken by Accor (an international hotel group) when the budget hotel market segment was undergoing problems caused by stagnation and overcapacity. Prior to the launch of the Formula 1 hotel chain, they undertook a research program to identify customer expectations of “budget hotels”. The research identified a series of questions requiring answers based upon identifying factors (product-service characteristics) taken for granted by the industry that should be eliminated; which factors that could be reduced below the industry’s standard? which factors should be increased above the industry’s current standard? and which factors should be created that the industry had never offered? The outcome of the research was a Value Curve identifying the relative importance of factors (elements of product-service) to the budget hotel segments Accor has been and continues to be successful applying the concept across its range of hotel offers. Fig. 3.4 demonstrates the concept as applied to Accor. The concept of differentiation offered by mass customisation (see Gilmore & Pine II, 1997) has successfully contributed towards product-service-market differentiation. Industrié 4.0 together with increased network partner collaboration and a broader and deeper perspective of business accountability has extended the significance and application of value strategy application. Fig.  3.5 illustrates the

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3  Managing Value

Value Disadvantage

Price > Value Added

Price/Value/Equivalence Line

● ● ● ● ● Luxury: Sofitel

● ● ● ● Upscale: Sebel

Perceived Price

● ● ● Midscale: Novotel, Mecuré

● ● Economy: ibis, ibis styles

● Budget: ibis, Formula 1

Value Added> Price

Value Advantage

Customer Perceived Value Added

● Very Basic Accommodation ● Location Larger Rooms, Restaurant Service ● ● ● CBD/Tourist Locations, Additional features , Room Service Catering ●●●●● Spacious- Larger Rooms, Wider choice menus, Business Services ● ● ● ● ● Location, Personalised Care packages, Gymnasium, Pool

Fig. 3.4 Example: Accor Hotels lifestyle value management (branding). See: Kim & Mauborgne (2017)

application of value management in consumer durables and industrial equipment markets of “setting the value not the price”. It should be emphasised that the value equivalence line (VEL) identifies expectancies (and acceptances) the fact they occur at differing price points/benefit packages is indicating ‘purchaser satisfaction’ not a profit/cost profile; at any level of product-service price/features offer the objective is to equate customer perceptions of price and value. In Fig. 3.5 the value equivalence line may shift downwards and/or towards the right, reflecting either a decrease in market prices because of production efficiencies or perhaps an increase in the benefits that have become available due to innovation of components suppliers. Value Migration, the shift of value-creating activities either towards suppliers that offer the same (or very similar benefits packages at lower cost to the customers) or additional benefits/product-service features that offer to create greater competitive value advantage at an acceptable cost to the customer. Value migrates from outdated business models towards value propositions that are better able to meet customers’ expectations the factors that determine value are constantly changing (Slywotzky, 1995). Another application of ‘setting the value not the price’ is illustrated by Fig. 3.6. Given that the objective of value management is to ensure total customer satisfaction the diagram identifies two VEL practices. Clearly, they may not occur within the one organisation but given the overall role of the value chain network (end2end/

Setting Value Not Price

49

Increasing the Consumer Value/Price/Equality by focussing on specific product-service features

VEL

Value Disadvantage CPV (1) Price > Value Added

Perceived Price

VEL (Value Equivalence Line)

Value in use = Price paid + Costs of acquisition and ownership

CPV (2)>Price

Mass Customisation: Reimagining products and markets by removing unnecessary benefits from existing product-services to met lower price Price/Val/Equality markets

A of competitive offers of price/benefit offers available in the “market”

New VEL

CPV (1)

Value Added> Price Value Advantage

45º Perceived Benefits - Value Drivers

● Asset management ● Time management ● Performance management

● Installation, training operating and retirement costs management ● Risk management ● Information management ● Network Collaboration ● Non-price/cost features; prestige, convenience

Fig. 3.5  Mass customisation

producibility operations) it is very likely that when overall product-service-markets are examined they may occur. Figure six demonstrates that it is possible for nonlinear VELs to occur. At the disposable product (commodity-based product) end of the VEL continuum we can observe a pricing effect being effective with ‘three-for-the-­ price-of-two’ being a valid example of “setting the value not the price”. At the opposite end durable products are built on platforms (automotive manufacturers using vehicle bodies) to contain cost and adding interiors and electronics to differentiate the vehicles. See Fig. 3.6. The ongoing convergence of Industrié 4.0/Industry 5.0, Value Chain Network Management 2.0/3.0 and the developing acceptance (and broadening influence) of stakeholder value expectations and this has enhanced communications across the network. In Fig. 3.7 we illustrate the impact responses to creating value packages to meet budget constraints. At the ‘budget constraint’ level the GE Healthcare response to the low purchasing volumes of health diagnosis equipment in Asian markets was to research which elements of the equipment were seen as essential, to identify local manufacturing and distribution facilities and reposition the project. In the luxury/ prestige automotive vehicle market Toyota and Nissan have developed additional

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3  Managing Value NPLV>>PLV

NPLV>>>PLV

‘Exclusive’ products e g, Audi cars based on VW platforms, e.g., vehicle body shell, reducing the cost of style differentiation

A combination of competitive offers of non-price/price led benefit offers available in the “market”

VEL (Value Equivalence Line) Customer Ambivalence Value NPLV=PLV

Perceived Price Value in use = Price paid + Costs of acquisition and ownership

VEL (Value Equivalence Line)

Quantity discount-based offers e g, commodity grocery ’multi-buy’ products; Price differentiation

Price competitive commodity based products

Value Added> Price Customer Perceived Value Added Total Acquisition/Ownership/Operations Costs ● Asset management ● Time management ● Performance management

● Installation, training operating and retirement costs management ● Risk management ● Information management ● Network Collaboration

● Non-price/cost features; prestige, convenience

Fig. 3.6  Using the VEL to differentiate by pricing and features. Based upon: Leszinski and Marn (1997). Setting value, not price. The McKinsey Quarterly. No 1

product ranges to ‘distance’ the new products from those offered by their existing products.

Value Management: Structure and Process There are stages involved in value management. They comprise value innovation, value engineering, value delivery, value sustainability, and value migration response management. Each is discussed below.

Value Innovation: Structure and Process In an increasingly technologically driven society, there is great potential for growth in new markets, and new business models. With this comes an increasingly fierce competition which makes it harder for companies to maintain value competitiveness. The purpose of innovation is to create business value. Value can be defined in many ways, such as incremental improvements to existing products, the creation of entirely new products and services, or reducing cost. As most companies focus on matching and beating their rivals their strategies tend to take on similar dimensions; typically, product modifications and/or cost reductions. What typically ensues is competition based largely on incremental improvements in cost, quality, or both. In an often-quoted study Kim and Mauborgne (2004) from INSEAD,

Value Innovation: Structure and Process

51 Value, Price and Value Equivalence

CPV (1)

CPV (1)> CPV (2)

Value Disadvantage Price > Value Added Value Focus Tuning (1) Enhancement: Adding benefits available from a Auto-technology developments

Luxury Product: Wide Range of Features

Toyota/Lexus Nissan/Infiniti

New VEL Multiple VELs (Value Equivalence Lines) Using product platform technology to differentiate the product-service offering competitive offers of price/benefit offers in emerging market segments

Original VEL Value Focus /Tuning (2) Identifying essential product-service ) features that meet needs and budgets of less well-off customers. GE Healthcare

Value Added> Price 45º

Basic Product: Offers Most Used Features

Value Advantage

Perceived Benefits - Value Drivers ● Asset management ● Time management ● Performance management

Basic Needs Product: Narrow Range of Features

● Installation, training operating and retirement costs management ● Risk management ● Information management ● Network Collaboration ●Non-price/cost features; prestige, convenience

Fig. 3.7  Market value positioning

researched how innovative companies break free from the pack by staking out fundamentally new market space by creating product-services for which there are no direct competitors. Their findings suggested that value innovation requires a different competitive mind-set and a systematic way of looking for opportunities. Instead of searching within the conventional boundaries of industry competition, managers can look methodically across those boundaries to find unoccupied territory that represents real value innovation. Nowadays the stage of value creation is the essential point of any business. Creating value for customers helps the company to sell its products or services, while at the same time it makes the investors happy. Moreover, as the value for the customers increases, the revenues together with the stock prices of the company increase. This guarantees the future access to capital that can be used for future investments and creating even greater value for customers. This suggests a more structured approach. Several capability requirements need to be considered. Clearly Analytical Logic is the primary requirement; a structured focus that identifies realistic possibility rather than fantasy is essential. Its approach should be based upon the knowledge of what contributed to recent successes, their relevance to the future and clear perspectives on what the capability responses for

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success when considering opportunities are. Ongoing research of Market and Industry Dynamics should be maintained, this will suggest future possible ‘directions’ and identify those areas of development that, while appearing attractive, should not be persisted with if the capability requirements are likely to be out of reach. Knowledge of (and perhaps the involvement in) the identification and implementation of Value Builders and Capability Requirements that influence strategy and structure decisions throughout the network suggest the need for close collaboration and trust Existing Cross Network and Functional Interactions are essential characteristics that may or may not be sufficiently robust and/or flexible to enable market success. The EV (electric vehicle) debate suggests problems for the existing automobile market companies. Reported collaborative activities concern critical areas of value competitive areas (components, supporting infrastructure, and ownership patterns) suggest this may be a very different industry. Customer Experience/ Journeys are very likely to differ. The impact of product/process digitisation and connectivity are trending towards very close relationships becoming essential characteristics in industrial markets where digital threads enable real-time performance management involvement by technology suppliers in the cost efficiencies of their customers. This is suggesting a different role for marketing, a role requiring detailed knowledge of downstream customer activities and relationships, this consideration is closely linked to Continuous Customer Centricity requiring a listening/testing/ modifying approach to customer relationship management. Creating value for customers helps the company to sell its products or services, while at the same time it makes the investors happy. Moreover, as the value for the customers increases, the revenues together with the stock prices of the company increase. This guarantees

Analytical Logic Measure and structure design by using standard metrics: revenues and costs throughout the network structure to ensure equitable balance between workload volumes, complexity and margins

Market and Industry Dynamics Identify relevant criteria (80/20) and rank order by impact. Identify impact in context of end-user price/value equivalence, and importance for applications and competitive value advantage

Creativity/Innovation Problem identification and resolution capabilities. Awareness research activities and applications potential . Real-time customer performance management. Predictive Maintenance. Asset management

Technology Applications • Focussed data management & Analytics • Artificial Intelligence/Machine Learning/Algorithms • Real-Time-Economy applications • Bioinformatics • Collaborative RD&D

Value Innovation: Structure and Process

Continuous Customer Connectivity Reduce risk by continuous listening/testing iteration with end-users

Value Builders and Capabilities Requirements Response capabilities characteristics and Positional Capabilities (market positioning and value chain network positioning)

Cross Network and Functional Interaction Design interacts with , and integrates across, activities, processes and functions. Identify opportunities for an increase in collaboration and improved synergy

Customer Experience/Journeys Remove “internal obstructions” and between digital, physical serviceabilty design activities. Develop algorithms for planning and measurement

Value Innovation Capabilities Requirements Response capabilities are aligned with identified customer expectations (value drivers and builders) and with managing the performance efficiencies of operational activities. At the innovation stage all required response capabilities should be identified. Access issues are addressed when concept feasibility is positive

Fig. 3.8  Value innovation: components and activities. Based on: McKinsey (2019)

Value Engineering: Structure and Process

53

the future access to capital that can be used for future investments and creating even greater value for the customers, Osterwalder and Pigneur (2003). See Fig. 3.8.

Value Engineering: Structure and Process Value Engineering is a systematic method to improve the ‘value’ of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be adjusted by either improving the function or reducing the cost. Value Engineering (strategic in context) develops productservice-markets that meet customer value delivery expectations and “matches” value chain participants’ expertise with value proposition tasks. A significant part of value delivery is a technique called Functional Analysis, where the product is systematically subjected to ‘tear-down’ analysis and reviewed as several assemblies. The criteria for the tear-down should reflect market change, for example, it may be based upon changes occurring in an Industry and Market Dynamic analysis, a process innovation, or a regulatory change concerning materials inputs, packaging requirements, as well as changing consumer use practices. It may be the threat of a component failure suggesting modification of the product-­ service prior to a large incident resulting in a product-service recall. The use function is identified and defined for each product assembly and the new user expectations used to redesign the assembly or its components. The analysis considers the efficacy of the current product-service and of its current producibility network. Costs are also assigned to each component and to alternative manufacturing and servicing options. This is assisted by extending the analysis to consider an alternative producibility infrastructure should this appear to be a possible solution. It can be argued that Value Engineering can be an optimising activity; it enables management to optimise benefits delivered to customers and the acquisition costs involved at the time of purchasing and subsequently during installation, operations, product-service retirement, and renewal. It is becoming increasingly important as it responds to customer expectations and, as we have established, they have become increasingly dynamic, as OpEx business models are favoured rather than CapEx models in industrial markets as serviceability (‘performance output’ focused customer centric transactions) becomes more significant. If it is to be effective an analysis of Value Engineering options should be undertaken before any capital is invested in tooling, plant, and equipment. This is important, because according to many reports (see www.advice-­manufacturing.com), up to 80% of product costs that occur throughout its life cycle, are committed at the design development stage. This is understandable as the design of any product-service determines many factors, such as tooling, plant and equipment, labour and the skills, training costs, materials, shipping, installation, maintenance, as well as decommissioning and remanufacturing (and repurposing) costs that are significant in the overall process as the PRODUCT-service becomes a product-SERVICE.  Some important considerations are identified in Fig. 3.9. Technology Applications are occurring frequently and when the influence of regulatory organisations, geo-politics, economics and

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3  Managing Value Market and Industry Dynamics Consider the impact of end-user price/value equivalence, (i.e. value characteristics favoured ) and their importance, on the value engineering options and comparative competitive value advantage. Identify product-service and process options

Data Management/Analysis Review existing information flows to ensure suitability for network data transparency across operations activities

Continuous Customer Connectivity Maintain continuous listening/testing iteration with end-users. Identify potential for changes in value engineering opportunities to add value to end-user activities

Value Engineering: Structure and Process

Cross Functional Interaction Reinforce cross functional practice of producibility/end2end operations. Create closer network collaboration with network partners integrates across activities, processes and functions

Best Practice: Competitive Comparative Analysis Undertake “best practice” survey across the industry and with organisations sharing product-service similarities

Positioning Implications Consider the implications of value engineering changes on existing positional capabilities (market positioning and value chain network positioning). Identify any changes that may be required ascertain feasibility and viability of any likely changes and their implications

Strategic Fit: Ongoing and Future Activities Review the future network strategic direction and the implications for integrated business processes to maintain operational competitive requirements . Identify investment and operating costs. What will be the impact on economic profit?

Technology Applications • Focussed data management & Analytics • Artificial Intelligence/Machine Learning/Algorithms • Digital Threads/Twins • Integrated Product & Process Design • Augmented/Virtual Reality

Value Engineering Capabilities Requirements Identify key opportunities and benefit areas and the demand for new/additional value builders and response capabilities. Explore the impact of any impact changes that may occur – determine investment and operating costs. Identify and evaluate access to response capabilities

Fig. 3.9  Value engineering: Components and activities. Based on: McKinsey (2019)

EESG (and the 17 UN development expectations) are considered, the development of economically and environmentally viable product-services is becoming increasingly difficult in increasingly competitive international product-service markets, this suggest an increasing importance for vigilant Best Practice: Competitive and Comparative Analysis, the development of additive manufacturing technology adds another reason for monitoring technology applications, 3D and 4D Printing is seeking and finding applications across a wide range of industries. See Fig. 3.9

Value Production: Structure and Process Clearly the production of value is important and the ability to create value and then implement the operational processes and activities to achieve the growth objectives of the network organisation is paramount to success. Johanson and Strömsten (2005) suggest that the industrial network has its own logic, which is understandable to those participate in, or otherwise have experience with, the network. Taking not only the firm or the dyad into consideration but also the network of firms and relationships, we argue that the mechanism behind what produces value is better understood if we separate the value process into two parts: value creation (innovation and RD&D) and value realisation (value production). Creating and realising value is a process for those who have patience, experience in relations with other actors, and knowledge about the use of complex resource constellations. Realising optimal value within a network value requires an understanding of the impact of; dynamics of the industry and market(s), and their importance in identifying value production options to create comparative competitive value advantage. Decisions on changes in production structure and process may require a review of both value

Value Delivery: Structure and Process

55

chain positioning, and cross functional interactions, for example, the increase in online transactions capabilities (augmented reality and artificial intelligence and additive manufacturing have resulted in the repositioning of processes within the value chain network, most notable is that of using additive manufacturing by third party distributors and their clients to reduce inventory costs and increase availability. The convergence of Industrié 4.0, value chain 2.0, and stakeholder value management manifested by data management/analysis, technology applications and collaboration providing Best Practice Analysis facilitates ongoing competitive and comparative analysis of operational practices and, therefore, the opportunity to develop cost efficient operations and provides insight into strategic developments. Fig. 3.10 identifies the important issues.

Value Delivery: Structure and Process Value Delivery is concerned with existing product-services, it includes the overall operational activity of distribution, support service (and serviceability) and remanufacturing/repurposing activities. It involves a current product being analysed and evaluated against competitive product-services (and against changing customer expectations), by a team, to reduce costs, and improve product function or both. Value delivery activities use a plan which step-by-step, methodically evaluates the product-service in a range of competitive value advantage areas. These include costs, functionality, alternative components, and design aspects such as ease of manufacture and assembly and increasingly the ability to remanufacture all, or part of, the product hardware. Both value engineering and value delivery are group-led activities involving suppliers and customers that bring in wider experiences of Market and Industry Dynamics New product and process engineering activities are being introduced at a remarkable pace . Most have interest for operations managers. They include: enhanced network collaboration, connectivity & visibility, Flexible (APS) advanced planning systems, Process alignment & synchronisation. Predictive performance management, Behavioural marketing, Demand Driven Materials Requirement Planning (DDMRP), “Borderless boundaries” across intra and inter organisational production systems, Consumer2Manufacturer manufacturing systems (C2M) - Personalisation/Customisation (consumers): , Collaborative Asset Management, 5G, Automated Systems, Personalisation (employees)Cooperation between robotics and human beings by combining their diverging strengths Data Management/Analysis Review existing information flows to ensure suitability for network data transparency across operations activities. Utilise data availability to introduce automated systems and ”Smart Operations” Continuous Customer Connectivity Maintain continuous listening/testing iteration with end-users. Real-time customer performance management and predictive maintenance. Asset management and product portfolio management

Value Production: Structure and Process

Value Chain Network Positioning Implications Consider the implications of value engineering changes on existing positional capabilities (market positioning and value chain network positioning). Initiate and implement changes. To improve strategic effectiveness and operational efficiencies

Value Production Capabilities Requirements Identify key opportunities and the benefits of industry production technological activities;, robotics, (RPA) real time processing. Intelligent process automation. Scale production efficiencies. Intelligent (Smart) manufacturing, and, the collaborative benefits of network connected-real time accessibility Identify and explore accessibility to required response capabilities

Fig. 3.10  Value production: Components and activities

Supplier Relationships; Selection, Management and Development Short Term • Monitor partner‘s congruence and contribution towards organisational objectives; its positioning and its performance • Monitor current supplier performance • Identify alternative sources/suppliers • Monitor suppliers’ business models and customer portfolios Long Term • Identify and evaluate relevant changes in current competitors’ business models, explore motives • Identify and evaluate changes in suppliers’ business models • Monitor long-term resource prices and availabilities • Identify potential partners

Technology Development and Applications Additive Manufacturing 3D/4D Printing • Digital Threads/Twins • Product Platforms • Real-time Processing • Intelligent Process Automation • Consortia/Business Process Outsourcing Platforms

Cross Functional Interaction Reinforce cross functional practice of producibility/end2end operations. Create closer network collaboration with network partners integrates across activities, processes and functions Best Practice: Competitive Comparative Analysis Undertake ongoing “best practice” surveys across the industry and with organisations sharing product-service similarities

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product-­service applications and of serviceability issues. Value Management is often used to refer to the overall activity of value engineering and value delivery; this is now becoming an ongoing activity facilitated by the convergence of Industrié 4.0, value chain 2.0, and stakeholder value management. Specifically, data thread analysis and digital twinning (a physical product-service supported by a digital replica) are being applied on an ongoing basis resulting in a ‘rolling’ value proposition. Among important issues are, Integrated Supplier-Customer Relationships, the use of ‘big data’ to improve network productivity by increasing data accuracy, availability and transparency as network partnerships collaboration increase due to the acceptance of end2end, producibility structures. The ability to identify resource availability problems and to advise network partners allows downstream partners to advise end-user customers of the problem(s) and to adopt alternative solutions. Configuration life cycles facilitate the ability to include ‘what if?’ decision points. Customer Experience/Journeys/Personalisation ‘The Rolling Value Proposition’, customer expectations are changing and becoming ‘individualised’ the increasing number of ‘applications’ is being driven by Technology Applications and by Market and Network Dynamics. Technology applications to healthcare activities are having impact on ‘delivery’. Three applications that have become critical to many countries’ health systems (and budgets) are electronic patient records, e-prescriptions, and patient remote monitoring, where you enable doctors to really look at their patients’ vital signs offline, several times a day if needed. For example, in a COVID-19 setting that would mean that patients would submit their breathlessness, their body temperature, their blood oxygen saturation levels about three times a day. And the doctor could then monitor these patients and look after them online (Eisenberg, 2021). Health insurers can orchestrate quite a lot of current digital health offerings into broad ecosystems of offerings that make sense together instead of being just a collection of solutions. Fig. 3.11 details other aspects of value serviceability management.

Value Serviceability: Structure and Process The term servitisation was first introduced in 1988 by Vandermere and Rada (1988), who argued that manufacturers needed a way to firstly set themselves apart from competitors, and more importantly to retain their customer base and increase levels of differentiation. Since then, there have been many other contributions that have added to the concept as well as providing detailed case applications. Subsequent contributions have identified numerous requirements and benefits; real-time communications and collaboration, product-service and process connectivity, real-time “performance” management, predicted maintenance, producibility management, (end2end process management), real-time product-service modification and upgrade, organisational and network effective and efficient asset management. The increasing number of applications are an indication of its success. Real-time Digital Performance Management provided by digital thread connectivity to a digitised, sensor packed hardware installation identifies opportunities for a change of user

Fig. 3.11  Value delivery: Components and activities

Customer Experience/Journeys/Personalisation/”The Rolling Value Proposition Use artificial intelligence/machine learning/algorithmic processes to build profiles of customer groups. Customer personalisation is becoming an important “expectation” and clearly requires consideration. The possibility of changes to delivery modes should be considered, for example, the delivery of healthcare services is undergoing significant changes , as is tertiary education

Cross Functional /Organisational Interaction Value Delivery activities/processes that rely upon successful intra-functional involvement should be designed to enhance functional intra-activity performance (and interorganisational activity) management. Identifying costefficient trade-off potential by interacting across activities, processes and functions within networks improves productivity and customer satisfaction.

Technology Applications • Focussed data management & Analytics • Artificial Intelligence/Machine Learning/Algorithms • Network integration & Delivery • Collaborative Platforms • Virtual reality

Value Delivery: Capabilities Requirements Value Delivery implements the Value Proposition. Response capabilities are aligned with managing the performance efficiencies of operational activities of the network organisation

Value Delivery: Structure and Process

Continuity of Producibility Collaboration Seamless connectivity between all network partners creates cost-efficient data and, materials flows and total network productivity

Data Analytics Reduce risk by real-time performance data streams for performance monitoring of core and non-core delivery activities. Identify impact in context of end-user perceptions of value delivery performance. Price/value equivalence, should include competitive-sensitive topics. Real-time performance management enables “rolling value propositions” to be implemented thereby increasing the competitive value advantage of network members

Integrated Supplier-Customer Relationships Integrating the supplier and customer relationships via information transparency offers substantial benefits within networked organisations. are substantial. They range from reducing “waste” in time, materials and labour through to improving design both to reduce cost and improve the performance of the final product. Fully effective mutual relationships take time to develop and both customer and supplier should commence by identifying those processes and activities that have most importance for the overall performance of the network, such order cycle times within the network, inventory level management, individual and network organisational cash flows, and economic profit and EVA performance.

Market and Network Dynamics Recent events, Covid, supply chain activities, resources and component shortages are presenting challenges. However, web based activities have increased offering convenience an enhanced delivery services. Online and real-time searching, selecting and transactions On-Demand delivery, “Connected Pull” oriented distribution systems, optimal-inventory systems, product variety/choice at minimal cost

Value Sustainability: Structure and Process 57

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operating activities that improve productivity of the installed hardware product, these may include volume, quality, or cost efficiencies. Real-Time Predicted Maintenance offers improved user performance (for example, eliminated (or reduced) downtime. Asset management the primary benefit is the release of capital for investment into intangible assets (brand, product-service development, supplier, and customer relationships systems). Figure 3.12 identifies the important issues.

Value Sustainability: Structure and Process Both corporate and environmental sustainability are required if the organization and the network it works with are to succeed in creating satisfied stakeholders. Clearly primary stakeholders lean towards commercial success, while secondary stakeholders will favor policy and strategies that support long-term environmental sustainability. Commercial sustainability is a measure of continued financial and market success that provides employment, taxes and a contribution to GDP, and a measure of philanthropy. Clearly, they should interact with each other, and management’s task is to ensure the interaction is planned to ensure longevity. Environmental sustainability refers to the rates of renewable resource harvest, pollution creation, and non-renewable resource depletion that can be continued indefinitely—If they cannot be continued indefinitely then they are not sustainable. To clarify: Organizational and Network Sustainability: growth of revenues, profits, and cash flows. Environmental Sustainability: optimal use of resources, optimizing producibility operating costs; process and component standardization, ‘zero-loss’ manufacturing and substitution policies for ‘rare earth’ inputs. Economic Sustainability: business continuity, longevity, and contributions to GDP. Social Sustainability: levels of employment, employee satisfaction, work/leisure balance, community commitment. The increasing attention by senior management to the “stewardship” responsibilities; investment and divestment, and positioning alignment statements reflecting (equality, environmental, social and governance (EESG) policies and the UN development guidelines suggest value sustainability is becoming a significant corporate concern. Fig. 3.13 identifies these together with other important concerns.

 alue Chain Positioning: Value Migration: Capability Response V Management Structure and Process Successful value chain positioning is dependent upon intra-network collaboration and coordination. Value Chain Positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within the value chain network—the roles and tasks required and the capabilities and capacities of the

Connectivity Digitised supplier and customer relationship management operations to achieve optimal data/material flows in end2end systems. 5G Industry 5.0 has the promise of increasing data richness, reach and response capabilities. Digital thread and twinning

Value Serviceability: Capabilities Requirements Extend across the activities and processes involved in identifying an opportunity, expectation or customer need to transform the characteristics of a product-service (i.e., transforming a PRODUCTservice (a predominantly “hardware product”) into a product-SERVICE. In this context “transformation” includes RD&D application, installation, user training, performance monitoring, servicing, modifications, and renewal activities. Value Serviceability is also consider to include Performance Management of customer value production and delivery processes using digital connectivity and, of Predictive Maintenance that provides planners and operators with comprehensive insight into asset risk, enabling them to maintain higher levels of asset availability

Real-Time Predicted Maintenance Uses to machine learning analysis, using as many sensor data points as possible, such as vibration, temperatures, currents and voltages. Some machine learning algorithms can accurately predict failure as far as four months or more in advance

Real-time Digital Performance Management Digital Performance Management a process by which organizations can monitor the performance levels and productivity of digital transactions and applications using realtime digital threads and digital twins

Technology Applications • Artificial Intelligence/Machine Learning/Algorithms • Digitally connected products and processes • Collaborative Platforms

Fig. 3.12  Value serviceability: Components and activities. Real-time digital performance management real-time predicted maintenance asset management

Asset Management A systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings or equipment) and intangible assets (such as human capital, intellectual property, goodwill, financial assets, supplier/customer relationship bases). Asset management is a systematic process of developing, operating, maintaining, upgrading, and disposing of assets in the most cost-effective manner (including all costs, risks and performance attributes

Value Serviceability: Structure and Process

Provide data sets that facilitate product-service portfolio designs AND that provide supplier/customer real-time product-service management service. Applying Artificial Intelligence/Machine Learning to support (replace repetitive) decision making, governance, process and activity design/redesign and strategic portfolio profiling. . Intelligent Edge applications add the analysis of data and development of solutions at the site where the data is generated, reducing latency, costs, and security risks, thus making business more efficient. Data Management and Analytics

Produce–Service –Management Portfolio Design and Management Technological developments, primarily Industrié 4.0 has enabled the expansion of the product-service concept into PRODUCT-service (a hardware product supported by traditional notions of service, and the product-SERVICE format one in which the emphasis is placed on output and extensive SERVICE. Industry 5.0 is facilitating wider choice and customisation and personalisation

Serviceability is rapidly becoming a factor requiring the attention of senior management. The notion of service as a product is well established in aerospace (and its customers) and other industries in which investment decisions are becoming critical activities. Most airlines consider their brands and customer relationships as major in their sustainable growth planning . Their investment spending is dominated by these intangible assets and their product portfolios are product-SERVICE led. It follows that aircraft manufactures/assemblers are clearly aware of their perspectives of asset management Strategic “Fit”

Value Chain Positioning: Value Migration: Capability Response Management... 59

Value Sustainability: Structure and Process

Educating the Value Chain Network

Fig. 3.13  Value sustainability: Components and activities

• Delivering value to our customers by meeting or exceeding customer expectations. • Investing in our employees, . compensating them fairly and providing important benefits supporting them through training and education to develop new skills for a rapidly changing world. • Dealing fairly and ethically with our suppliers. And to serving as good partners to the other companies, large and small, that help us meet objectives • Supporting the communities in which we work. ● Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. Commit to transparency and effective engagement with shareholders. Business Round Table 2019

“Stewardship”: Stakeholder Value

Developing “Sustainability” Technologies Green tech refers to a type of technology that is considered environmentally friendly based on its production process or its value chain network . Green technology can also refer to clean energy production, the use of alternative fuels, and technologies that are less harmful to the environment than fossil fuels

Technology Applications • Asset management strategies that encourage deign programs for: long-term/re-use, design for material recovery, design for re-use in manufacturing design for serviceability support. Measuring success ”Circulytics” – measures company’s entire circularity performance. • Comprehensive, comparable data management & analytics • Collaborative Platforms

Education for sustainability develops the knowledge, skills, values and stakeholder expectations for business organisations to contribute to more sustainable patterns of living. It enables individual organisations and networks, together with communities to reflect on ways of interpreting and engaging with the EESG expectations and the UN’s SDG 17 interlinked global goals

Sustainable Value-Led Response Capabilities Requirements Concern for performance can be the impact of environmental and corporate sustainability policies that may impact on current stakeholders’ expectations and the required changes to value proposition fit4purpose, and value delivered they impose. The adoption of the circular economy/value chain will impact on product-service format decisions and on “Total Cost of Ownership” profiles

Developing Circular Product-Service-Market Portfolios Circular Design: comprises – materials selection, standardised components, designed-to-last- components, easy end-of-life sorting, separation or reuse of products and materials, and are designed-for-producibility criteria that take into account possible useful applications of by products and waste

Sustainability Capabilities the ability to maintain programming and its benefits over time. The creation of organisational structures and processes that allow a network to leverage resources to effectively implement and maintain stakeholder acceptable organisational structure, policies and activities

A circular economy is an industrial system that is restorative or regenerative by intention and design. It replaces the end-of-life concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse and return to the biosphere, and aims for the elimination of waste through the superior design of materials, products, systems, and business models. WEF Circularity

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Managing Value through the Value Proposition

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network partners for efficient value delivery to occur. Successful value chain positioning is dependent upon intra-network collaboration and coordination. It also requires a validated employer value proposition (EVP) as a set of associations and offerings provided by an organisation in return for the skills, capabilities and experiences an employee brings to the organisation. An EVP must be unique, relevant, and compelling if it is to act as a key driver of talent attraction, engagement, and retention. See Minchington (2006, 2010).

Managing Value through the Value Proposition What Is a Value Proposition? The phrase ‘value proposition’ (VP) is credited to Michael Lanning and Edward Michaels, who first used the term in a 1988 staff paper for the consulting firm McKinsey and co. In the paper, which was titled “A business is a value delivery system”, the authors define value proposition as “a clear, simple statement of the benefits, both tangible and intangible, that the company will provide, along with the approximate price it will charge each customer segment for those benefits”. See Lanning and Michaels’s (1988). A value proposition refers to the value a company promises to deliver to customers should they choose to buy their product. A value proposition is part of a company’s overall marketing strategy. The value proposition provides a declaration of intent or a statement that introduces a company’s brand to consumers by telling them what the company stands for, how it operates, and why it deserves their business. A value proposition can be presented as a business or marketing statement that a company uses to summarize why a consumer should buy a product -service. The statement, if worded compellingly, convinces a potential consumer that one particular product-service the company offers will add more value or better solve a problem for them than other similar offerings, (Twin, 2020). A value proposition can apply to an entire organization, or parts thereof, or product portfolios, or specific product-services. Developing a value proposition is based on a review and analysis of the value that can be delivered; revenues less the costs (capital usage costs and operating costs) i.e. economic profit, that a network organisation can deliver to its customers, prospective customers, and stakeholder group interests within and outside the organisation. It is also a positioning of value, where:

 conomic Profit = Revenues Less Operating Costs Less E the Allocated Cost of Capital Usage “Creating a value proposition is a part of the business strategy and is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation”, Kaplan and Norton (2004). A well-articulated value proposition replaces the traditional ‘Mission Statement’—it describes how both organisations (the customer within the value chain network) can be ‘World Class’ in

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their markets. To gain market access, potential customers must be convinced of the ‘value’/ ‘benefits’ and that the costs of acquiring them from your product is a viable economic transaction. Stakeholders across markets perceive value differently and often have unique evidence requirements to support their decision-making process. As such, a core value proposition needs to be targeted and evidence-based (endorsements from existing users), but also flexible enough to accommodate different market needs. Value propositions need to be informed by robust evidence reviews, stakeholder research, insights, and strategy. A Value Proposition describes the bundle of product-services that create value for a specific market, segment, or customer. It is the reason why customers select one company over another—and often the reason why they return. The value proposition is a response, a solution, to an identified customer need. A value proposition consists of a package of products and/or services—or possibly a reimagined PRODUCT-service that has become a product-SERVICE because of changes in customers’ business models or product-service applications. Typically, the value proposition is an offer to a specified target. The acceptance of the notion of ‘customer-centricity’ implies that the value proposition is a purpose-­ led bundle of benefits to targeted customers. Some value propositions may be innovative, solutions, to problems; others may be market entrants offering alternative performance management, cost management, or time management benefits—in other words an alternative business model application. They all should include reference to acquisition costs. A Value Proposition should: Make clear to the target customer that it has been developed from a clear understanding of customers’ businesses and of the industry and market dynamics, and:

• Substantiate the ‘Value Claims’ • Document Value Delivered • Make the Customer Value Proposition and Supplier Implications an Important Input into the Network Market Planning • Ensure that value chain network partners understand their role in the value engineering and value delivery processes • Reflect the changes occurring in the industry and market business environment and demonstrate that the network organisation is adapting to meet these changes An example of a value proposition that meets these criteria is that of Haier: Haier’s market value proposition has gradually broadened since Zhang Ruimin became CEO in the mid-1980s. The company first took the role of a category leader, maintaining top market share because of its reputation for quality in China. Then it became a customiser (adapting its products to customer demands) and a solutions provider (helping consumers manage issues like water quality and home design). Haier now sells not just home appliances but related services, adapted to consumer demand in China, and, increasingly, other markets. Haier excels by developing differentiating capabilities

Creating the Feasible (Customer Acceptable) and Viable...

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 reating the Feasible (Customer Acceptable) and Viable (Value C Chain Partnership Network) When creating a value proposition, it is important to think about five key questions: What is the PRODUCT-service-market, product-SERVICE-market, or the product-­ service-­MARKET? Who is the target market? What value does the product or service provide that competitive products do not offer? What are the acquisition costs to the customers? How does this differ from competitors offers? Many businesses that can answer these questions will have a relatively strong value proposition as they know how their product or service differentiates from competitors. But it is more than just understanding and recognising what makes them different; it is about creating a statement that engages customers to purchase goods or service. There are many benefits that the value proposition can have on a business. By creating a more personal and honest relationship with consumers and supplier partners, the value proposition also gives them another reason to choose you. These benefits will help the networks’ businesses grow and succeed in the market. A strategic decision confronting the value chain network concerns the positioning of the product-service and the value chain positioning of network partners: • Market Positioning: what are the network organisation’s market response capabilities during the life cycle of product-service? • Value-chain positioning: where should specific organizations be in the network in the foreseeable future and what principles will guide the journey? • Where are the value/profit/productivity pools; what is their dollar value, how competitive are they? • Value proposition relevance: what is/are the value proposition(s); customer target(s); market category, value experience, offerings, benefits, acquisition costs (life cycle costs, alternatives, and value differentiation (with evidence) and how is it congruent with the strategic positioning? • Value-focused operating (value delivery) model: What are the “Kipling Factors”: the ‘what, who, how, where why and when’ factors (the network organisations, response capabilities and who owns them, where are they located) for the delivery of the Value Proposition to achieve the strategic Intent? • Value-engineering/creation-based management and execution: How will you execute and manage all of this to ensure maximum value delivery? • An employer value proposition (EVP) is a set of associations and offerings provided by the organization in return for the skills, capabilities and experiences an employee brings to the organization. An EVP must be unique, relevant, and compelling if it is to act as a key driver of talent attraction, engagement, and retention. Minchington (2006, 2010).

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 sing the Value Chain Network to Manage “Intra and Inter U Organisational Collaboration” and Interactivities A successful value chain is based upon an understanding of potential customer expectations and their application of the product-service. It also requires a coordinated and collaborative approach to delivering the value. Figure  3.14 considers these considerations by taking an account of the interests of both primary and secondary stakeholders. For primary stakeholders topics such as seeking profitable growth and continuity of the business is usually uppermost in the expectations of Shareholders and Investor’s. Customer Perspectives relate to their price/value/ equality expectations, and Network Partners look to maintain quality products at cost-efficient pricing and realizing an economic profit. Secondary stakeholder topics are based upon EESG (equality, environmental, social and governance), and the Community’s Expectations are for; sustainable employment opportunities, innovative products-services, processes, current business practices, employee training and skills, development, lifestyle -work/life balance. Figure 3.15a,b identifies the process of developing a value proposition. An important consideration is to integrate the value proposition into a ‘value

Value Proposition for the Customer

Value Proposition for the Network Partnership “Value Production and Delivery” Organisation/Primary Stakeholders The Supplier Partners’ Perspective: Ongoing and long-term volume business offering strong margins and collaborative product-service-market development The Firm’s Management’s Perspective: Revenue growth and market response. Financial efficacy, Customer Satisfaction Employee Perspectives: Task/hours related pay. Job satisfaction Skills development and opportunity to progress. The Distributor Partners’ Perspective: Product range with customer appeal, mutual growth financial and marketing support; customer service support. Order winning capabilities. Value Advantage Characteristics

The Network Community’s Expectations: are for a balance between corporate sustainability and environmental stability

Customer Value Drivers i“Personalisation/Customisation” i Differentiation i’Time’ availability iQuality iFlexibility iServiceability support iChoice options iAesthetics iProduct-Service Continuity iPrice/Value Equivalence iDigitisation (Product-services & Processes) iReal-time connectivity iPlanetCare

Value Proposition for the “EESG”/Secondary Stakeholders Governments’ Expectations Employment, Innovation, Tax revenues, and contribution to national prosperity and international reputation. Circular economy activities and processes The Community’s Expectations Sustainable employment opportunities, innovative products and processes, current business practices, employee training and skills Development, lifestyle – work/life balance The Competitors’ Perspectives Ethical competition, Collaborative profitable collaboration activities such as RD&D and operational cooperation and opportunities to supplement /enhance competitors value propositions where and when it is mutually advantageous

Fig. 3.14  The implications of the value proposition

Fig. 3.15 (a) The value proposition: Design—structure and process (1). (b) The value proposition: Design—structure and process (2)

(b)

The Value Proposition a value proposition must identify for the target customer how customer expectations –are to be met, how the “offer” compares with competitive value propositions … and how the ‘value‘ is to be delivered and ‘serviced.’. It is an explicit statement of customer value attributes (both value criteria, and how acquisition costs are minimised for the customer). It includes both product or service characteristics and service-support features. It becomes the basis of a set of agreed performance processes and metrics for network partners. Value Engineering; (strategic in context) develops product-services that meet customer Value Delivery (their operational expectations) and “matches” value chain participants’ expertise with value proposition tasks. Earnings equity is an important issue. Typically the “profit” earned by partners is based upon transfer price less cost (cost includes relevant capital costs).

Sustainable Capabilities reflect the ability to maintain programming and its benefits over time. The creation of organisational structures and processes that allow a network to leverage resources to effectively implement and maintain stakeholder acceptable organisational structure, policies and activities .

Value Renewal (the Circular Value Chain /Economy) is an economic system aimed at eliminating waste and the continual use of resources. Circular systems employ re-use, sharing, repair, refurbishment, re-manufacturing, and recycling to create a closed-loop system to minimize resource inputs and reduce waste, pollution, and carbon emissions. The key to building this economy is to keep products, equipment, and infrastructure in use for longer periods of time, which makes these critical resources more valuable.

Monitoring and Maintaining the Value requires consideration of customer response capabilities consisting of: creating and managing customised “serviceability” operations, real time performance management and interpreting and managing customer operations data, delivering predicted service management, suggesting and implementing optimal production operations management changes, asset management advice i.e. productservice-market procurement, in-use activities and retirement.

(a)

Value Delivery and Value Chain Positioning: is operational and monitors ongoing activities for efficiency; it attempts to improve output characteristics. Value Chain Positioning decisions require an understanding of the horizontal and vertical relationships that exist within the value chain network – the roles and tasks required and the capabilities and capacities of the network partners.

Value Deliver : is operational and monitors ongoing activities for efficiency; it attempts to improve output characteristics is concerned with existing products, it includes the overall operational activity of distribution, support service (and serviceability) and remanufacturing/repurposing activities. Value delivery is operational and operates ongoing activities for efficiency and service excellence; it attempts to improve output characteristics and is concerned with existing products. It involves monitoring and evaluating current product-services against competitive product-services (and against changing customer expectations), by a team, to reduce costs, and improve product function or both.

Value Engineering and Positioning (a matching process of identifying market opportunity with existing and required response capabilities). An important consideration is to integrate the value proposition into a “value management” process that commences with the network’s strategic market positioning (a matching process of identifying market opportunity with existing and required response capabilities) planned to help develop product-services that meet target customer value delivery expectations and “matches” value chain participants’ expertise with value proposition tasks. Market Positioning is a visual presentation of the unique/exclusive aspects of an organisation (its value proposition) and its effectiveness in how it intends meeting customer expectations.

Value Engineering is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be adjusted by either improving the function or reducing the cost. Value Engineering; (strategic in context) develops product-services that meet customer value delivery expectations and “matches” value chain participants’ expertise with value proposition tasks .

Value Chain Positioning: indicates the roles and tasks of successful intra- network collaboration and coordination (and this often adds inter-industry network and international networks) if the opportunity to be pursued successfully. Value chain positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within a value-ecosystem.

Market Positioning: impacts all aspects of how your “total market” perceives an organisation it identifies and influences everything the business network represents. It is based upon the collective capabilities and capacities identified as essential for market success. It is an essential point of reference for network partners as well as potential and existing customers, and for service and support teams create more delightful and on-brand experiences for customers.

Strategic Market Network Positioning: matching process of identifying market opportunity(ies) with existing and required Response Capabilities. An important consideration is integrate the Value Proposition into a “Value Management” process.

Using the Value Chain Network to Manage “Intra and Inter Organisational… 65

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management’ process that commences with the network’s strategic market positioning (a matching process of identifying market opportunity with existing and required response capabilities). The value proposition is an explicit statement of how customers’ expectations are to be delivered. Product-service-market benefits are identified in terms such that customers will identify the benefits (and the lifecycle/ acquisition costs within the context of their own business activities; information will make comparisons with competitive alternatives identifying how the organisation’s product-service offers more benefits or, perhaps, how it achieves the same outcome(s) at lower costs. Value chain positioning requires an understanding of the horizontal, vertical and support relationships that exist within the value chain network—the roles and tasks required and the capabilities and capacities of the network partners for efficient value delivery to occur. Successful value chain positioning is dependent upon intra-network collaboration and coordination. Value delivery is operational and operates ongoing activities for efficiency and service excellence; it attempts to improve output characteristics is concerned with existing products, it includes the overall operational activity of distribution, support service (and serviceability) and remanufacturing/repurposing activities. It involves a current product-­service being analysed and evaluated against competitive product-­services (and against changing customer expectations), by a team, to reduce costs, and improve product function or both. Figure 3.15a,b illustrates the role of the value chain proposition in creating and delivering value. Each of the value chain activities will require answers to important questions. Furthermore, the questions (and answers) need to be coordinated to ensure optimal value delivery. For example, Manufacturing, Operations, Procurement, Components, Modules and Assembly, Creating ‘Serviceability’, ‘Value Renewal’, and Circular Operations are interconnected activities. Without a focus on how they each operate, and how their operations impact on each other neither the value chain operation nor the value proposition delivery can be functional. Figure 3.16 concludes this section of the chapter by identifying activities involved in developing, offering, the diagram identifies the sequence of activities involved in developing the value proposition and the benefits obtained from iterative feedback from the potential customer(s) and the network partnership members. A Value Proposition describes the bundle of product-services that create value for a specific market, segment, or customer. It is the reason why customers select one company over another—and often the reason why they return. The value proposition is a response, a solution, to an identified customer need. The value proposition consists of a package of products and/or services—or possibly a reimagined PRODUCT-service-market that has become a product-­SERVICE-­ market because of changes in customers’ business models or product-service applications. Typically, the value proposition is an offer to a specified target. The acceptance of the notion of “customer-centricity” implies that the value proposition is a purpose-led bundle of benefits to targeted customers. Some value propositions may be innovative, solutions, to problems; others may be market entrants offering alternative performance management, cost management, or time management benefits—in other words an alternative business model

Using the Value Chain Network to Manage “Intra and Inter Organisational… Idenfy

Design

Build

Maintain

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Sustain Primary (Internal) Stakeholders

Directly Influencing the Strategic Direction of the Organisation

The Firm’s Management’s Perspective: Revenue growth and market response. Financial efficacy, Customer Satisfaction

The Shareholder/Investor’s Perspective: Seeking profitable growth and continuity of the business

The Supplier Partners’ Perspective: Ongoing and long-term volume business offering strong margins and collaborative product-service-market development

Customer Perspective: Seeking to increase the net value benefits delivered Identify and Create the Expected Value Opportunity Searching, Identification, Analysis, Evaluation and Decision

Profile Customer Expectations/ Performance Criteria

The Distributor Partners’ Perspective: Product range with customer appeal, Mutual growth Financial and Marketing support; customer service support. Order winning capabilities. Value Advantage Characteristics

Produce the Value

Develop the ProductService Format Profile Value Proposition

Identify and Create the Expected Value

“Manufacturing” Operations Procurement, Components , Modules and Assembly

Deliver the Value

Identify and Develop Marketing and Sales Operations Activities

Produce the Value

Governments’ Expectations are for: Employment, Innovation, Tax revenues, and contribution to national prosperity and international reputation

Employee Perspectives: Task/hours related pay. Job satisfaction Skills development and opportunity to progress.

The Community’s Expectations are for; Sustainable employment opportunities, innovative products-services, processes, current business practices, employee training and skills. Development, lifestyle – work/life balance

Transaction and Physical Distribution Operations

Service the Value

Create “Serviceability” Operations

Deliver the Value

Network Partner Perspective: Looking to maintain quality products at cost-efficient pricing and realizing an economic profit Renew the Value

Explore & Validate “Value Renewal” Circular Operations

Service the Value

The Competitors’ Perspectives are for: Ethical competition, Collaborative profitable collaboration activities such as RD&D and operational cooperation and opportunities to supplement enhance competitors value propositions where and when it is mutually advantageous

Evaluate Performance and Continue or Make New Capability Requirements

Renew the Value The Network Community’s Expectations: are for a balance between corporate sustainability and environmental stability

Secondary (External) Stakeholders Indirectly Influencing the Strategic Direction of the Organisation

Fig. 3.16  Interpreting stakeholders’ expectations and their impact on the value proposition

application. They all should include reference to acquisition costs. To be effective they all should: • • • •

Identify a specific target customer/customer group Demonstrate relevance; it should demonstrate how it “fits” customer requirements Be clearly understood Quantify; what it delivers in dollars and what its ‘total-cost-of ownership’ is in dollars • Demonstrate its differentiation show; what, why, how, where, when and for whom it is superior to competitive alternatives A Checklist for Developing a Company’s Value Proposition should, therefore, include: • The industry(ies) and market(s) are clearly identified, and dynamics understood; both should be documented to assure the potential customer(s) of vendor capabilities • Evidence of adequate and on-going demand • Response to immediate customer journey requirements; explicit, specific, and clearly ‘stated’ • ‘Total price/Total Cost of Ownership’ to the immediate customer is clear • Makes clear how this value proposition is superior to competing solutions in the market • The ‘solution’ offered is producible and offers profitably and productively • Evidence of acceptable stakeholder returns in terms of investment made and risk taken is made explicit

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• The value proposition is consistent with (E)ESG (environmental, social and governance) objectives • The best of several alternative value propositions considered relevant to the customers’ needs

References Bradley, C., Dawson A., & Smit, S. (2013, October). The strategy you cannot afford to ignore. McKinsey Quarterly. Eisenberg, D. (2021, July 13). Vital signs: The growing impact of digital 2 health innovation. McKinsey. Podcast interview with Rost & Silberzahn. Forbis, J., & Mehta, N. T. (2000, June 1). Economic value to the customer, delivering value to customers. McKinsey Quarterly. Gilmore, J., & Pine, B. J., II. (1997, January–February). The Four Faces of Mass Customization. Harvard Business Review. Johanson, M., & Strömsten, T. (2005). Value processes in industrial networks: Identifying the creation and realisation of value. In P. Ghauri, A. Hadjikhani, & J. Johanson (Eds.), Managing opportunity development in business networks. Palgrave Macmillan. Kaplan, R. S., & Norton, D. P. (2004). Strategy maps: Converting intangible assets into tangible outcomes. Harvard Business School Press. Kim, W.C, & Mauborgne, R. (2004, July/August). Value innovation: The strategic logic of high growth. Harvard Business Review. Kim, C., & Maugborgne. (2017). Blue ocean shift: Beyond competing - Proven steps to inspire confidence and seize new Growth. Hachette Books. Koch, A.  S. (2011). Quality  =  business value: Part 2: Business value as the measure of quality. Investopedia. http://blog.projectconnections.com/alan_koch/2011/03/quality-­business-­ value-­2.html Lanning, M. J. & Michaels, E.G. (1988, June). The value proposition. McKinsey staff paper. Leszinski, R. & Marn, M.V. (1997) Setting value not price. McKinsey Quarterly. No. 1. Minchington, B. (2006). Your employer brand–attract, engage, retain. Collective Learning Australia. Minchington, B. (2010). Employer brand leadership–A global perspective. Collective Learning Australia. Osterwalder, A. & Pigneur, Y. (2003). Modelling value propositions in e-business. ICEC ‘03 Proceedings of the fifth international conference on Electronic Commerce. Slywotzky, A. (1995). Value migration: How-to think several moves ahead of the competition. Harvard Business School Press. Twin A, (2020, July 5). Value proposition: How to write it with examples. Investopedia Vandermere, S., & Rada, J. (1988). Servitization of value adding services. European Management Journal, 6(4).

4

Performance Value Drivers and Builders

Introduction An aspect of performance common to short-term and long-term perspectives is organisational excellence, performance. Figure 4.1 describes a model for this purpose, its components are performance management, strategic and operational asset planning and management, digitisation, digitalisation, and connectivity, business process excellence management, corporate sustainability, and collaborative network relationship management. “Quantitative Business Performance” requires realistic measure of profitability and productivity, one that relates output to input resources, and for which accountability can be allocated is a primary requirement; here we argue (as does McKinsey, see Gupta et  al., 2021) economic profit is best suited for this purpose. However, there are other important considerations, for example, revenue growth, strategic and operational asset management (tangible and intangible assets), an investment model, a strong cash flow performance, differentiation (a distinctive competence, value delivery advantages (that increase revenues or decreases costs for customers), effective and efficient use of time (end2end process time/ producibility network management), and demonstrable concern for (E)ESG expectations.

Identifying Performance Value Drivers Identifying value drivers begins by asking “What drives value in a business?”; The competitors—the market characteristics. The value drivers in any business depend on the specific setting, competition, and the market structure. Their time perspective is clearly short-term given that they are factors that “drive present value” and as levers of present value. Focus on adjustments to the value drivers results in short-­ term improvements in performance. Performance value drivers include adjustments and operational implementation characteristics such as product mix, manufacturing © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_4

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Stakeholder Liaison Capability Creates Mutual Agreement on: • EESG; Equality, Environment (resources management), Society, & Governance • UNO Sustainability Development Goals Criteria

Fig. 4.1  Organisational excellence capability requirements characteristics and performance: A convergence of primary influence factors

Core Organisational Excellence Capability Requirements: • Customer Centricity Policy & Demand Chain Response Management • Access to Capital Resources (Tangible & Intangible) • Product–Service-Market Design & Development • Enterprise Resource Planning & Control • Supply Chain Response Management • Effective Manufacturing/Production Execution • Strategic & Operational Effectiveness of People, Processes, & Assets • EESG & UNO Sustainability Goals Criteria

Corporate Sustainability

Business Process Excellence Management

Business Process Management Capabilities: • Management Engagement and Leadership • Clear Strategic Direction & Implementation Activities • Process Management Structures • Resource Management Strategies • Employee Communications & Engagement

Connectivity • Digital & Analytics Capital • Ecosystem & Networks • Digital Thread • Digital Twinning

Meeting Stakeholder Expectations with something unique, different &distinct from items their competitors may offer in the marketplace.

Digitisation, Digitalisation, & Connectivity

Organisational Excellence: Characteristics & Contributions

Collaborative Network Relationship Management

Strategic & Operational Asset Planning & Management

Performance Management

Capability Requirements - Growth from revenues based on: • Innovation & Creativity • RD&D Product-Services & Processes • Order winning product-service criteria based on customer facing processes (business performance value drivers) Economic Profit (EVA) Revenues less NOPAT less Cost of Capital (AAWACC) used = Economic Profit (EVA), Value Contribution Market Value Added (MVA)* MVA = V – K**

Collaborative Partnership Capability Facilitates Producibility an (End2End) Value Management Process, facilitating: • Time2Market (RD&D/NPD/EU) • Order Management Cycle • Serviceability Response Cycle • Producibility (End2End) Cycle • Customer delivery satisfaction

Asset Management Capability Requirements: Positive Free Cash Flow generated from: • Operations • Market Management • Asset Management • Strategic Management

Value Management Capability Requirements: Strategic Asset Management involves; Planning & managing the capital investment towards a long-term program of increasing the EROA (economic return on assets) &; Operational Assets Management – requires a systematic process of developing, maintenance, upgrade, & disposal of assets in the most cost-effective manner (Includes all costs, risks & performance attributes)

**MVA is closely related to the concept of economic value added (EVA), representing the net present value (NPV) of a series of EVA value

*Market value of the common stock or market cap + market value of preferred shares + total debt (including long and short-term debt) + minority interests

70 4  Performance Value Drivers and Builders

Introduction

71

and distribution capacity, employee motivation, supply chain configuration, generating strong positive cash flow, excellence in customer service etc. Phelps (2004) argues there are no generic value drivers; they can be as diverse as brand image for one organization and employee recruitment policies for another: what is common to all organizations is that value drivers create short-term performance improvements. Phelps (2004), considers performance value drivers (and builders) from the perspective of the organisation. Identifying performance value drivers begins by asking “What drives value in a business? The performance value drivers in any business depend on the specific setting, target customer expectations, competition, and the market structure. Their timeline perspective is clearly short-term given they are factors that “drive current value.” A focus on adjustments to the performance value drivers results in short-term improvements in performance, these include adjustments to product portfolio offer (offering extensive service with hardware products such that a PRODUCT-service becomes a product-SERVICE, manufacturing and distribution capacity, employee motivation, supply chain configuration, generating strong positive cash flow, excellence in customer service etc. Understanding the importance of “value” to customers and other stakeholders helps strengthen relationships between, and among, customers, suppliers, shareholders and investors and an organisation, as these “value based” relationships are the link an organisation needs if it is to develop a strong competitive position. To do so it clearly needs to identify the performance value drivers (and future oriented performance value builders) that are important to the end-user customer and to structure a value delivery system that reflects these and the objectives of the other value chain network participants. Using Slywotzky et  al.’s (1997) “customer-­ centric” approach to the value network/value chain the: “things that are so important to customers” are the customers performance value drivers and the most important are those adding significant value to customers (and these are likely to demonstrate a Pareto (80/20) profile). Within the context of a value chain network, performance value drivers assume particular significances. One is clearly that of the role of the process of adding relevant value for customers and its ability to differentiate the value offer such that it creates competitive advantage for both the customer and the supplier organisation. The second is that like their customers, suppliers also have performance value drivers, and creating value creates costs for supplier organisations, thereby raising questions on the impact on the value and cost drivers of the supply/vendor organisation. The third questions the impact on the value and cost drivers of the ­supply/ vendor organisation network. Accordingly, an analysis of the impact of enhancing a customer value driver should be accompanied with an evaluation of its impact on the supplier’s own performance value drivers and on the impact of the supplier’s cost of focusing on the customer’s value driver(s). In the increasingly network structured world in which network businesses are becoming responsible for an increasing role in the value creation process six questions emerge:

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• What are the value expectations of customer organisations? How do these translate into their performance value drivers? How do they impact on suppliers’ capability responses? What are the implications for costs? • What is the combination of performance value drivers (or is it only one) required by the target customer group? What is the customer groups’ order of priority? • What are the implications for differentiation decisions? Are there opportunities for long-term competitive advantage? • What are the implications for supplier/vendor’s cost structures and performance value drivers? • Are there opportunities for leveraged trade-offs to occur between the value chain network partners assets that may result in increased customer value (and stakeholder value) or decreases in the value system costs or the costs of the target customer group?—but either way they increase the asset’s productivity. • What are the implications for corporate productivity of a focus on performance value drivers (and their associated) cost drivers? How are they linked? Phelps (2004) approaches value from a corporate performance perspective. He argues that it is insufficient simply to measure outputs to determine if we are creating value; the value performance drivers of present and future value must also be measured. Measuring output indicates success (or perhaps lack of it) whereas understanding (and measuring) what it is that drives value provides management with an indication of the success of resource allocation. The author also argues that it is important to distinguish between factors that drive current value (suggesting cost reduction as an example) and those responsible for creating future value (such as brand development and research, design, and development—these are performance value builders). He makes the point that overlap may occur; performance value drivers may well contribute to building both current and future value. Phelps (2004) considered business performance value drivers from the perspective of the organisation. Identifying performance value drivers begins by asking “What drives value in your business? Who are the competitors? What are the characteristics of the market?” He suggested there are no generic answers or prescriptions; one company may derive the greatest value from improving brand image while another may do so by improving its recruitment policies. Identifying value builders gives the ability to take advantage of risks and opportunities as they arise. Phelps (2004) suggested organisations take a strategic perspective by identifying potential market developments and then addressing the scenarios with ‘positioning decisions’ (i.e., develop ownership or access to resources) that will enable the organisation to move rapidly into an opportunity. Phelps (2004) suggestions are in fact, equally applicable to the value producer and the value consumer in a B2B context. Identifying a response to a customer’s “value drivers” simultaneously identifies the supplier’s cost drivers, activities, and processes, that must be assembled and appraised if the “organisation” is to compete successfully. Value creation responses (economic value added) incur cost. Cost driver analysis examines, measures, and explains the financial effect of the cost driver concerned with the activity.

Introduction

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Creating value creates costs. Having identified a complete specification of the customer’s expectations/value drivers a review of capability response attributes is required. Typically, the value chain is built upon capability collaboration, if it is to be effective partners offer specialist expertise that other partners call down, this is the concept of network partnership leverage, partners processes only overlap where it is cost-effective to do so (where value is added by time e.g., product-service maturing in storage or in transportation). It follows that network efficiency is based upon leverage; there is little or no duplication in the value chain, where it exists it does so for a purpose. For an enquiry that is out with the expertise of the initial contact the assets and expertise of a partner is called upon. This approach ensures cost-effective/efficient input expertise.

 erformance Value Drivers, Customer Feasibility and Viability Are P Essential for Success Customer expectations vary by industry and by customer. Partner/stakeholder expectations are likely to be very similar across industry sectors based upon financial viability. The task of management is to organise an effective response to customer expectations and, at the same time, one that involves its partner/stakeholders on satisfactory terms and returns. This can be achieved by identifying the customer facing processes that create a total value package for customers. Being short-term, focused customer value drivers are concerned with enhancing customers’ competitive positions in existing markets. Customer value drivers are based upon an evaluation of the mix, or trade-off, of benefits and acquisition (total cost of ownership) costs. It is in this evaluation process that service aspects of value delivery become important during the customers’ evaluation of ‘value in use’. Value delivery viability exists when one or more of the value delivery options are acceptable to a group of partner/stakeholders. It is important to emphasise that value delivery viability is not suggesting a cost-led approach to pricing but rather that viability can only exist provided that the partner/stakeholder value drivers (i.e., growth of transactions, customer loyalty, cash flow and profitability) are met. As for customers so too for partner/stakeholders, there is a clear requirement to ‘enhance’ their financial and market positioning if their participation within the value chain network is to be obtained—and retained. This is likely to comprise one of two options, both of which will result in an improvement in their cash flow, profitability, and productivity. A volume increase or an opportunity to improve margin based upon operating efficiency is required. This can occur when an organisation becomes part of an integrated and larger organisation that is coordinated to identify opportunity and deliver ‘value’ using the collective expertise of the specialist expertise available through such collaboration. The primary concern is that unless this occurs partners will see no incentive for joining or remaining within an alliance. Value delivery viability is an important and essential concept for value chain network design. Its existence identifies that a value chain structure is possible, and

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the extent of the overlap identifies the number of potential configuration alternatives that may exist. Again, the greater the overlap the more the delivery alternatives there are seen to be possible. Clearly a minimum overlap is required for a position in which competitive necessity can exist. The insightful visionary is the entrepreneur/manager who combines assets, processes and capabilities and capacities into a combination that results in meeting more closely the expectations of both customers and partner stakeholders. Dell Computers is clearly an example of this phenomenon, but many others exist. The Australian wine industry has a number of virtual wineries, small organisations who focus on niche segments by using the knowledge and intellectual property (intangible assets) and work with the owners of vineyards and processing plants to create value for their customers. Creating a value proposition that meets more closely the expectations of both customers and partner stakeholders is one in which feasibility and viability converge.

Value Drivers and Value-Led Response Capabilities Value drivers can also be components of an organisation’s capability profile. An organisation’s capability set reflects how well it can respond to customer (and market) expectations. In defence organisations ‘capability’ is used to reflect the ability to meet a range of specified situations; for example, the obvious peace keeping roles that are typically associated with military organisations, but also in other non-­ military roles such as humanitarian activities involving disaster relief. Identifying a relevant response to a customer’s “value drivers” simultaneously identifies the supplier’s cost drivers, activities, and processes, that must be assembled if the “organisation” is to compete successfully. Value creation responses incur cost. Cost driver analysis examines, measures, and explains the financial effect of the cost driver concerned with the activity.

 etwork Operational Response Capabilities as Performance N Value Drivers Response Capabilities are specific characteristics derived from an industry dynamic (or dynamics) that are exclusive, possibly unique, to an organization, (Walters & Helman, 2020). They are focused on to a specific asset, process, or activity within an organization to facilitate the delivery of the organization’s value proposition and to create value advantage. Typically capabilities are created from combined industry dynamics; the value proposition is enabled by; the convergence of a direct selling approach to customers (relationship management), digital order and transactions management systems (technology management), JIT inventory management/production assembly methods (relationship management and process management), current computing capabilities through collaboration with specialist component suppliers (knowledge management and relationship management) and the

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enhancement or “halo” effect of using components manufactured by leading industry brand owners (relationship management)—and, by collaborating with other members of the value chain network. We established (above) that performance value drivers assume two-fold significance. One is clearly that of the role of the process of adding relevant value for customers and its ability to differentiate the value offer such that it creates competitive advantage for both the customer and the supplier organisation. The second is that like their customers, suppliers also have performance value drivers, and creating value creates costs for supplier organisations, thereby raising questions on the impact on the value and cost drivers of the supply/vendor organisation. Capability Management seeks to integrate the network organization’s capabilities to ensure it achieves a value competitive position in an industry/market value chain. Capability Management has become a method of creating Enterprise Architecture in recent years. It seeks to build a model of an enterprise that identifies its component parts and their relationships. A capability management perspective suggests the organisation (networked organisation) is viewed as a collection of capabilities (for planning the evolution (and continuity) of the enterprise rather than a collection of loosely connected functions, or silos) comprising how an organization responds to market opportunities. Typically, response capability is based upon tangible and intangible assets of the firm comprising the traditional business functions that have become “silos”. A response capabilities approach views the firm as a portfolio of capabilities that evolve in response to the (perceived) demands of the business environment. An “enterprise” comprises one organization or collaborative networks of firms. Examples from large corporations suggest that the traditional structural model based upon functions (or silos), is rapidly losing support in favour of holistic structures reflecting response capabilities; these are characteristics that reflect an understanding of the marketplace and of the opportunities offered and the characteristics of capabilities essential for successful engagement. The evident changes in management approaches of; narrowly defined customer centricity, a changing view of the enterprise, stakeholder value-management rather than just shareholder value-­ management, a positive approach to network collaboration, network “digitisation and connectivity”, and the availability of real-time data analysis and management that this offers suggests the demise of the silos and replacement by a holistic, interactive, approach that enables an organization to identify the capabilities that market opportunities require and the ability to structure a relevant response that meets the market demand precisely rather attempting to mould the market need into an opportunity that fits the silo’s requirements.

 alue Drivers as Response Capabilities V It follows that if the network organisation is to be successful its performance value drivers reflect its response capabilities: alternatively, it could be argued that its performance value drivers reflect its response capabilities. Either way they are linked and are deployed to meet/respond to customer expectations. This becomes an important concern for the “network organisation”. “Network organisations” are

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linked via sets of end2end performance value drivers throughout a value creating process to an end-user customer whose value expectations are—its “performance value drivers”. It also follows that, like their customers, suppliers also have performance value drivers, and that creating value creates costs for supplier organisations, thereby raising questions on the impact on the value and cost drivers of the supply/ vendor “organisation”. Management’s task within network structures is to create an optimal stakeholder solution whereby both vendors’ and purchasers’ value driver expectations are met, and benefits are shared. The dynamics of change suggest the need for a model that considers the impact of alternative solutions on the core business response capability model components of; Performance Management (the value engineering and value delivery proposition; stakeholder-wide, performance, fit4purpose, etc.), Profitability (financial viability, economic profit), relevant Positioning, strategic, market, product and value chain network positioning, Productivity (total factor productivity, optimal utilization of capital, labor, materials, and service inputs), Partnerships, (building and managing network partnerships possessing relevant skills, experience to meet current and future capabilities requirements for future growth opportunity requirements, and ethical business policies throughout the network), producibility; (the seamless intra and inter-organizational infrastructures of processes and activities of value engineering and value delivery, that creates, produces, delivers and captures value), Platforms (business models that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers), and PlanetCare (a socially responsible use of environmental resources used in creating stakeholder value, and the concerns of environmental and corporate sustainability); an organisational structure, the network value chain model, that identifies and analyses customer value expectations/drivers, and the cost implications of addressing them with a relevant product-service. See Fig. 4.2. This suggests an alternative approach to that proposed by Phelps (2004). We are suggesting that operational and strategic operating models benefit from an approach in which an organisations network operational response capabilities form the basis of its analysis of the opportunities on offer from the current business environment (and its future developments) when analysing potential customer expectations and the resulting performance value drivers. The suggested approach is shown in Fig. 4.3 Exploring Customer Expectations and Developing an Acceptable and Workable Value Proposition.

 xploring Customer Expectations and Developing an Acceptable E and Workable Value Proposition Customer expectations (their performance value drivers); will be enhanced through differentiation by providing specific benefits through specific product-service attributes. The identification of the relevant benefits (and the subsequent response by the producer in the shape of product or cost led differentiation) is typically based upon the uses for which the product is to be put by the customer. It follows that there can

Producibility

PlanetCare

Productivity

Platform businesses focus on facilitating interactions across many participants. They are both short-term transactions & longer-term business activity relationships The role of the platform business is to provide a governance structure & a set of standards & protocols that facilitate interactions at scale, to achieve (E)ESG and UN SDG objectives as well as mutually beneficial commercial outcomes

A workable network strategy & structure that meets balanced stakeholder expectations. Management & operations staff that possess relevant skills & experience to meet current & future capabilities requirements for growth opportunity requirements. Ethical employment policies

Partnerships

Platform Development

The “utilisation” of relevant assets, capabilities, capacities, processes & relationships positioned in relevant locations to achieve stakeholder performance expectations. Ownership or location of resources is no longer relevant

Strategic market positioning (a matching process of identifying market opportunity with existing and required response capabilities). Successful value chain positioning is dependent upon intra-network collaboration & coordination. Value Chain Positioning decisions require an understanding of the horizontal, vertical & support relationships that exist within the value chain network – the roles and tasks required & the capabilities and capacities of the network partners for efficient value delivery to occur

Positioning

Developing Value Chain Network 3.0 Organisational Excellence

Profitability

An understanding of the profit expectations of ALL Stakeholders is essential for profitability targets to be met. Exploring the notion of added-value & how this can deliver enhanced stakeholder value

Fig. 4.2  Organisational excellence and the connected holistic capability response model—retreating from conventional functional silos

Organizational & Network Sustainability; growth of revenues, profits & cash flows. Environmental Sustainability; optimal use of resources, optimizing producibility operating costs; process & component standardization, “zero-loss” manufacturing & substitution policies for “rare earth” inputs Economic Sustainability; business continuity, longevity, & contributions to GDP Social Sustainability; levels of employment, employee satisfaction, work/leisure balance, community commitment

A relevant strategic & operational infrastructure. The fusion of design & development, of manufacturing & distribution, & of serviceability & product-service renewal activities into a seamless & continuous process to contribute to a Network Value Advantage

Performance

Maximize the “economic value added” by a network to its “stakeholders” by managing customer & other network partners operational performance drivers & their strategic value builders to create unique or exclusive “Value Advantage” for ALL Stakeholders

Value Drivers and Value-Led Response Capabilities 77

Profitability Economic Return on Capital Invested • Operating/NOPAT • Tangible/Intangible Assets •Strategic /∑EVA/Enterprise Value (Tangible/Intangible Assets)

Revenue Generation Effective product-service-market management

Sustainability Operational environmental & corporate led. Design for restorative and regenerative operations to maintain products & components at an optimal value

Risk Profiling & Management Collaborative RD&D, manufacturing, distribution &serviceability operations

Serviceability/Customer Asset Management “Product” Portfolio Management . PRODUCT-service & productSERVICE options.

Geotechnology Locational/Availability Management Product-Service-Market customer supply response services that are relevant to customer markets. Omnichannel-technology services

Productivity Management/Operating Efficiency Management/Digital Connectivity Organising operations around network protocols & practices Selective use of offshore manufacturing in offshore markets Digital technology & analytics. Real-time data management Predicted maintenance. Customer performance management

Producibility Management/Value Adding Network Alliances Optimal use of end2end value delivery time (order cycle management) Process overlap management/Value Stream Management

PlanetCare EESG/UNSDG Targets in Business Strategy • Equality • Environmental • Social • Governance

Partnerships • Data management transparency • Partner earnings equity • Employee equity & life/work balance

Effective & Efficient Partnerships/Networks/ Employees: Partnership Characteristics • Governance • Decision making processes/constraints • Extent of interdependence

Producibility •Innovation, RD&D •Manufacturing •Distribution & Serviceability •Seamless infrastructure process sequence with network partnering • Time cycle

Productivity • Operational (Tangible/Intangible assets) • Strategic (Tangible/Intangible assets)

Positioning Market positioning Value chain positioning

Margin Management: Cost/Price /Value Equality Product-service modifications to meet specific market requirements (GE and healthcare equipment in Asia)

Network Asset Management Capital intensity decisions. Network asset base leverage. Develop intangible assets (brands, data analytics, CRM/SRM)

Performance: Operational • Supplier relationships • Customer relationships

Financial Management Efficacy CapEx/OpEx/OptmlEx * Business Model Investment Effective financial management. Efficient working capital management

Supplier identification of constraints on capability response performance

Response Options Considerations Value Proposition for the Network Partnership’s Stakeholders The Customer Relationship Perspective • Fit4Purpose • Differentiation • Price/Value/Equivalence • Serviceability The Firm’s Management’s Perspective • Revenue growth & market response. • Financial efficacy • Customer Satisfaction The Supplier Partners Perspective • Ongoing & long-term business • Volume business to offer strong margins • Relationship building • Inter-Organisational cooperation for product-service-market development The Employee Perspectives • Task/hours related pay • Job satisfaction • Skills development • Opportunity to progress The Distributor Partners’ Perspectives • Product range with customer appeal • Inventory financing • Marketing support • Customer service support • Availabilities, (items and locations), • Frequent & reliable deliveries • Differentiation Characteristics The Network Community’s Perspectives • Employment • Lifestyle - Work/life balance • Contributions to “community well being” The “EESG” Stakeholders • “Equality” (employees, customers, suppliers • Environmental concerns • Social concerns • Governance Governments’ Expectations • Employment • Innovation • Tax revenues • GDP growth The Competitors’ Perspectives • Ethical competition • Opportunities to supplement /enhance competitors value propositions • Collaborative profitable activities such as RD&D & operational cooperation

Fig. 4.3  Exploring customer expectations/value drivers and developing an acceptable and workable value proposition

• Partnership Management • Collaborative RD&D, Procurement • PlanetCare Environmental Responsibility • Integrity (EESG) • UN Environmental Guidelines

• Performance Management : Meet customer capability requirements Price/Value/Quality: • Specification: Fit4Purpose, quality • Differentiation • Availability: “product”, service • Reliability: “product” life cycle, applications • Time/Location Based Product-Service Availability • Positioning management • Strategic positioning • Market positioning • Value chain positioning • Connectivity • Profitability Management • Buying margins • Operating margin • NOPAT • Productivity Management • Digitisation/Connectivity • Capabilities & expertise “Fit” • Capacity utilisation; scale & scope • Product design: Ease of assembly, range platforms • Asset Management • Producibility Management • Connectivity • Seamless end2end system management • Optimal cost • End2End time cycle • Optimal stakeholder value contribution (EVA) • Economic Profitability

Ongoing Customer Operational Performance Value Driver Expectations of Suppliers’ Value propositions

Generic Supplier Operational Network Value Driver Capability Response Performance to Customer Expectations

Customer Feasible & Vendor Viable Value Proposition

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be a wide range of uses for a product (which will vary by customer), all of which should be identified by the supplier: Customer groups (or segments): are identified as those who share similar needs or characteristics which are relevant in a strategic planning context. Segmentation proposes that companies focus on a specific set of needs (benefits), customer characteristics, or customers with similar sets of expectations. Technologies: describe the ways in which customers’ needs can be satisfied or functions performed—value delivered. Clearly there are often several ways in which a need may be satisfied. For example, digital thread and twinning (digitisation and connectivity) have “revolutionised” customer relationships and serviceability. Digital threads enable equipment manufacturers to monitor installations and to offer customers a productivity management’ service that includes suggestions for changes to operations that improve efficiency, but also plan maintenance, predicted maintenance, that is cost effective in the context of maintenance costs, but also in the use of the equipment. Scope: refers to the extent of the business’s involvement in a market. This may take several perspectives to describe. For example, a company may decide on geographic scope by which it specifies an area within which it will operate. This decision may be based on either inbound or outbound logistics costs. Day’s (1988) approach considered scope from what is best described as a supply chain perspective. He proposed that management consider scope from an activity perspective by identifying where within the supply chain in the production process, i.e., how far forward (toward the end use customer) or backward (toward the supplier), the business should participate. Increasingly scope can become a competitive issue as technology is applied to value production and delivery problems. For example, from news media products now use digital formats to ‘edit’ or customise their products and for transmission over long distances so as not to lose the impact of content currency and to ‘publish’ internet editions of their publications, to identify product portfolio options that favour alternative asset management options for customers.

 ngoing Operational Performance Value Drivers Expectations O of Suppliers’ Value Our research suggests the customer is well organised when evaluating supplier options and uses an approach based upon the perceptions of their own customer needs and matches these with their assessments of their response capabilities when formulating their own value proposition and appraising suppliers whose inputs will contribute to a successful outcome for the customer’s customer, the customer, and the supplier of the resource input. The listing of resources capabilities ensures that the analysis is both comprehensive and rigorous.  eneric Supplier Operational Network Value Driver Capability G Response Performance to Customer Expectations Customer expectations are used to develop specific details concerning the expectations of supplier response. They are used to modify assumptions that may have been made concerning the basis of satisfactory transactions with customers and to provide information input into improving the relationships with a customer (or with a market segment).

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 upplier Identification of Constraints on Capability S Response Performance Suppliers review customer enquiries/orders against their own response capabilities and identify constraints. The network structure should identify partners by their relevant strengths. For example, Li and Fung based in Hong Kong—Li and Fung perform the role of a value chain network coordinator that works with partner organizations in some 40 countries manufacturing a range of apparel products from high quality woolen sweaters to synthetic slacks. Li and Fung sit at the hub of a network of specialist enterprises that mobilize resources in different combinations depending upon the rapidly changing demand and coordinate a response. They operate a number of flexible value chain networks that reflect the needs of their ‘client organisations. These are global operations, sourcing from a range of locations, based upon a series of criteria such as input costs, local taxation policies and labour legislation and, increasingly, the availability of a potential domestic market for their products. Li and Fung have undertaken an interpreneurial role by integrating and coordinating the productive capacity of these organisations. Li and Fung are an example of a value chain integrator/supplier who have identified the response capabilities of suppliers relevant to the markets within which their customers are active.  onsidered Response Options and a Value Proposition C for the Network partnership’s Stakeholders Response process considerations are based upon the expected competitive value efficacy of the value proposition offer. A clear indication of product-service superiority and an uncomplicated, and convincing, indication of total cost of ownership cost is an essential feature of the value proposition. As Fig. 4.3 suggests it should be comprehensive and focus on competitive characteristics. Emphasis should be placed on customer sensitive areas for example, the competitive impact of differentiation in enhancing competitive positioning, or perhaps the opportunity of reducing cost and therefore favourably impacting the end-customer price/value equality perspective of the end product. A comprehensive approach may be required when sensitive issues exist the value proposition would then comprise, a customer needs-based value proposition, a value proposition for the network partnership identifying roles and tasks and the reward benefits, and a value proposition identifying and dealing with government, community, and competitor concerns.

 esponse Options and Calculating the Cost R of the Value Proposition  takeholder Expectations/Value Drivers S The value proposition was introduced in Chap. 3 (Managing Value) and the notion of an offer that reflected the interests of not only the prospective (and ongoing customers) but also the remainder of the stakeholders was discussed and these form part of the process of developing a network value proposition. Their various interests are identified and considered as important concerns in the process, some of

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which are included in the diagram. Clearly the underlying important factors are will it generate sales revenues and probability.

Impact on “Network Organisational Excellence Performance” There are numerous options available but clearly the impact of revenue generation growth is very important to the customer and to network partners. The value proposition is an offer to meet identified and agreed customer requirements by deploying relevant capability responses. It is essential this is the primary objective of the network partners. The topics or activities supporting revenue growth are to be considered in the context of how they are integrated into a network value delivery infrastructure. Capital/investment and operating costs typically involve improving network operating efficiencies to contain costs (continuous improvement) but also to strengthen competitive advantage. Enhancing customer relationships by introducing real-time collaborative communications that offer continuous operating performance management (digital thread and digital twinning software) can strengthen customer relationships and two-way dependence. Network structures can also enhance supplier relationships the digital/connectivity investment (above) may be used to manage supplier production capacity planning and improve total system inventory management. Economic profit/Value Contribution (NOPAT less capital cost) is becoming increasingly applicable as well as accurate given the massive advances in data analytics. Volkswagen has been using economic profit to measure plant efficiencies for some years. Cash flow management is also a critical performance metric for any organisation, networks, or large single product manufacturers. Network performance (Chap. 14, value chain analysis and mapping (Chap. 18) provides detailed analysis of this very important topic in the context of network collaboration. While performance value drivers are short-term operations entities, they have reference to the medium and longer term Strategic and Operational Asset Management decision making. One very important consideration is the increase in “serviceability/servitisation”; the notable increase of a “pay-by-use” becoming popular in customer relationship management. The importance of intangible assets (brand building, customer service, SAAS (software as a service), etc.) as an investment in business development is increasing rapidly. The result is that large “hardware” assets are purchased as a product-SERVICE rather than PRODUCT-service; returns on assets managed are based upon enhancing both customer and supplier relationships, furthermore, many of the hardware asset items have shorter productivity lives and as such have unattractive resale prices introducing an alternative approach to product portfolio management. Another important consideration is the impact of the circular economy (EESG and the 17 UN development/sustainability goals). Chap. 11 discusses aspects of sustainability, one of which considers its impact on product-service-market design and manufacturing involving RD&D and

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NPD in creating products for which core aspects of the product are designed for longevity. This all suggests that developing a feasible and viable product value proposition now requires management to consider product range platforms (offering products that share core components or accessories (hand-tools with standard electric motors and charging accessories).

 anaging Customer Operational Performance Value Drivers M Expectations, Problems and Realistic Capability Responses Customer Communicated Problems in Ongoing Relationships Customer Relationship Management)

Management

(Competitive

Price/Value

Equivalence

‘Localise’ products for local needs and localised production enhances ‘stakeholder’ value. ‘Captive offshoring’ (shifting manufacturing to low-cost locations) while retaining ownership is also an alternative as is local manufacturing. Price/Value Equivalence Operating Productivity Management (Improve Delivery Reliability and Availability) Loss of production due to inbound delivery delays, planned/unplanned maintenance. JIT, JIC and JISequence programs can improve downtime production losses. Equipment suppliers using digital connectivity are using planned maintenance to improve customer productivity Operational Risk Management (Supplier Relationship Management) Select additional/alternative suppliers and use them to ensure resource input continuity

 ecurring Problems Appearing from Monitoring R Real-Time Performance Supplier Relationship Response Times)

Management

(Flexibility/Agility

Improves

Customers’

Accept excess production capacity, and cross skilling of the work force on multiple products, spread production across multiple locations in different regional locations creating a network of dispersed sites with differing capabilities and capacities facilitates Long-Term (agile responses) and Short-Term (flexibility) Customer Relationship Management (Flexible/Agile Order Management) Several large organisations develop ‘reliability chains’ with their suppliers (long-term relationships with trusted suppliers in order to improve value chain network quality Customer Relationships Management (Improves Customer Competitiveness) Simplifying the design of products with manufacturing and downstream activities (maintenance and repairs) in mind can reduce supplier and end-user costs. Large suppliers can purchase inputs on behalf of their suppliers to generate VCN efficiencies

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Operating Profitability Management (Improved Financial Performance) Containing fixed and working capital levels by reviewing process coordination and capability and capacity matching. Consider collaborative inventory programs (VMI, JIT) Operating Producibility Management (Productivity/Producibility/Collaboration) Efficiency in procurement, production, distribution, serviceability, and sustainability by adopting end2end connected processes (Producibility)

Strategic Value Performance Builders Value performance drivers are short-term; they can be identified and need to be addressed reasonably quickly. Strategic Performance Value Builders are long-term and may or may not have any relationship with the current business model. They comprise Capability Characteristics skill sets, expertise, such as Innovation, creativity, RD&D product-service and process research and design, digitisation and connectivity and Executional Characteristics, features/characteristics the organization has (or is) investing in, that have a long-term pay-off such as access to, resource markets, sources of capital, specialist assets, and processes and capabilities, and strategic and operational planning abilities, Phelps (2004). Creating value in the long-run differs from the short-run not only in the context of time, but in relevance to the future business environment. Value builders also differ in that there is an amount of risk involved and the available information for decision making is limited. Furthermore, value builders (especially capabilities) are intangible in their nature and as such are very difficult to measure. Phelps (2004) made a point with comments concerning matching current managerial expertise with future opportunities and the extent to which value can be added. An executional value builder suggests that for several organizations they are future options; the development of digital-led-manufacturing offers potentially higher profitable investment by saving time (product development and testing) and in the manufacturing of ‘one-off’ components for ‘one-off’ products. Access to emerging distribution networks is another example; the development of FMCG home-shopping delivers both failures and successes. For those companies without established distribution (i.e., conventional retail outlets with national coverage) a high rate of failure is observed due to the investment required in physical distribution facilities and systems. The concept was new, and many problems existed (e.g., redeliveries if customers were not available to receive purchases ordered); however, the national multiples (e.g., Tesco, Sainsbury in the UK, Woolworths, and Coles in Australia) each had an efficient supply chain to leverage when they introduced their services, and this subsidized the very high initial costs when the service was introduced. It is of interest to note the success of Ocado (UK) in this respect as they had no existing (traditional) outlets or identifiable brand to leverage but used communications technology to develop an online value proposition that met with the emerging change in consumer expectations that rated time as an important lifestyle

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factor. The Amazon acquisition of Whole Foods is another example, here we see an organization acquiring in a market segment within which it expects significant growth. Capability value builders are more of a challenge; they are intangible resources and as such are key components of any business. Phelps (2004) argued that structure and organizational culture, perspectives on customer trends, and awareness of and willingness to accept change, are all examples of capability value builders. MinuteClinic now part of CVS added a value adding component in the healthcare value chain network by introducing a complementary component—not a service that is directly competitive and threatening to others. MinuteClinic offered a relatively low-cost, conveniently accessible method of identifying and treating a range of common ailments by the application of quick service auto-maintenance processes to healthcare, Champy (2008). Key was the development of relationships with users having specialist needs (in this case employers wishing to offer healthcare benefits to employees (and at the same time reduce their absenteeism) and with healthcare professionals who saw MinuteClinic as a means by which they could concentrate on more serious (and higher revenue generating) needs) is an example of how these characteristics combined to create a very successful auxiliary healthcare business. An analysis of what made fitting just vehicle exhausts and tires successful as a niche business in a very large market was convenience and time, and a focus on the most frequent elements of vehicle servicing. When applied to healthcare it met with huge success. Champy (2008) summarized the success of MinuteClinic as being based upon an understanding of customer/patient expectations and the application of philosophies and practices from outside of the industry. Applications of customer service techniques from retailing and the adoption of operating processes from quick service organizations has given MinuteClinic a strong position in the healthcare value chain network. The ability to capture value in a dynamic market environment requires management to provide ‘customer aligned solutions’, developing adaptive organizational structures, creating network modularity and network orchestration, and developing value chain loyalty relationships that encourage increased comprehensive customer cooperation and commitment. An overriding factor concerns the ability of management to identify and analyze macro-developments in the business environment and their implications for the future of competitive capability. An understanding of the development of industry dynamics is helpful. Identifying the “dynamics” for which little doubt concerning their continued impact exists, provides a basis for capability planning. However, there may be indications of emerging dynamics that may have an impact on potential opportunities, some of which exist and for others they are likely to emerge in the future. These have a strong influence on the development of the strategic value builders relevant for organizational and network partnerships, and how these are structured. Industry and Market Dynamics (see Chap. 2 for a detailed discussion) Industrié 4.0, Value Chain Network Management 2.0 and adopting Stakeholder Value expectations have shown a powerful influence on organisational responses to a remodelled Business Environment. By the turn of the millennium four influential

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characteristics of the Business Environment were apparent: Technology, Knowledge, Relationships Processes, were topics that influenced management decision making both directly and indirectly. By 2010 two additional topics had emerged; geopolitics/geostrategy (for example, the increasing importance of Asia as a consumer market, not just a source of low cost labour became important as competitive entities in many markets), and regulatory compliance (ever present in workplace safety and shop floor relationships and consumer protection, began to reinforce relationships with relevant stakeholder partners to ensure business organisations’ value proposition complied with (and delivers) a much wider range of requirements, that hitherto, had been ignored or not considered. Increasingly business is being called upon to comply with regulatory requirements by Governments and Industry Associations. Identifying customer strategic value performance builders, the required capability response, and relevant cost drivers required to compete for the customer’s future product-service requirements in a period of rapid change has its difficulties. The following contributions suggest why this should be so: The first revolution mechanised the textile industry. The second industrial revolution gave us the assembly line, high volume industrial production and high mass consumption. The third allowed information to be captured in digital format and to be cost-effectively transformed, manipulated, and transmitted. The fourth industrial revolution has provided us with robotics, artificial intelligence, augmented reality, and virtual reality. There were nearly two centuries between the first and second industrial revolutions. Along the way, we picked up globalisation, climate change, environmental degradation, and multinational conglomerates with annual revenues larger than the GDP of many countries. More efficient production has meant increased pollution, reckless consumption of non-renewable resources, and ever-­ improving quarterly profit statements. The “Fifth Industrial Revolution” can be summarised as the combination of humans and machines in the workplace and is engineered to greatly increase the speed and responsiveness of wireless networks. 5G will enable a sharp increase in the amount of data transmitted over wireless systems due to more available bandwidth and advanced antenna technology. But this is vastly oversimplified and does not even begin to explain the magnitude and complexity of the change that will occur. It poses a few questions. Can we envisage the future and the sixth industrial revolution? Possible emerging technologies include nanotechnology, biotechnology, quantum computing, and AI. This is where the physical, digital, and biological worlds could converge (Agrawal et al., 2019). And: Quantum mechanics is an essential catalyst in the development of quantum nanoscience and quantum biology, and it will be a platform for studying quantum technology and quantum computing in the next technological revolution. It is possible that two or three independent technological systems could converge into one system, which would then trigger the explosive take-off into the sixth technological revolution. Atoms, DNA, bits, and synapses will supply the basic elements and foundational tools that will make it possible to integrate several emerging technologies, including nanotechnology, biotechnology, information technology, and the latest cognitive technologies, into multifunctional systems. Anticipating a future involves changing the techno-economic paradigm. Are we ready for the age of the quantum? Will modern microscopy lead the way? Will we see a convergence across a range of disciplines in anticipation of the sixth industrial revolution? Will the manipulation of DNA molecules and the rearrangement of atoms reorganise our societies, our values, the economy, and the environment as well? Can we imagine scenarios that capture both opportunities and threats, negative as well as positive effects? (Roco & Bainbridge, 2003).

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Organisations develop around opportunity. One way of observing this is to explore the development of organisational balance sheet structures. Companies in “heavy” industries build their assets around plant and machinery and develop capabilities. Olvé et al. (1997) proposed “The Network Enterprise Capability Response Balance Sheet”, see Fig. 4.4. “Assets” are labelled as “market entry network”, “production facilities and networks”, and “market management networks”. Some of the assets may be tangible and others intangible. “Liabilities” are identified as being “Temporarily Employed Capabilities”, “Enterprise Owned Capabilities”, and “Individual Partner Owned Exclusive Capabilities”. The notion of “leveraged assets” is suggested by the individually owned liabilities.

 sing the Organisational Excellence Model to Create and Manage U Stakeholder Value Three activities are required. The first is to identify and explore the likely developments of the business environmental changes and challenges. Given the above brief "Assets" Market Entry Network • Customer databases • Coordinated customer based design & development • Positioning Strategies • Market liaison • Brand and Reputation equity Production Facilities & Networks • "Access" to specialist facilities, equipment & processes • "Access" to specialist inputs • Buying exchange agreements • Inter-organisational process management • Capacity & quality management Market Management Networks • Market reach • Market influence • Loyal customer base(s)

"Liabilities" Temporarily Employed Capabilities (Contracted) • High volume/low cost processes

• • • •

"Enterprise" Owned Capabilities Exclusive ‘production’ processes Customer liaison Transactions Processes Service management expertise

Individual Partner Owned (Exclusive Capabilities) • Patents and Brands • Specialist processes & services e.g. design &development • Service management networks • Product/service performance delivery & maintenance

Fig. 4.4  The network enterprise “capability response balance sheet". Based upon: Olvé, , N, J. Roy, J., & Wetter, M. (1997). Performance Drivers, Wiley

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review of healthcare developments (above) this does not suggest that projecting the status quo into the future is a sufficient approach, rather what is needed is one that uses a review of research across a range of activities to establish trends that while suggesting little or no relationship to current industry trends responds to a what would happen if approach. For example, a developing capability to miniaturise monitoring devices is leading to an increase in healthcare wearable devices. The MinuteClinic success example (above) came about because of a consumer acceptance of quick service approaches in an entirely unrelated industry. The second activity, developing value a proposition to meet opportunity emerging from business environmental changes and challenges, requires an understanding of the capability requirements for success. These may not be immediately accessible for several reasons. First, they have not yet been developed, or, secondly, they have not been considered as useful in the industry/market under consideration. A benefit of value chain networks is the structural flexibility that encourages organisational changes as and when they are considered to be competitively advantageous. The third activity, estimating investment and strategic operating costs to meet the value proposition: costing the value proposition and estimating its impact on the net performance of net business performance model, is an exercise in costing the what if value chain format options that can possibly create a product-service-market based value proposition feasible (to a target customer group) and economically viable to the existing (or modified) value chain network.

Business Environmental Changes and Challenges Identifying a relevant (to the organisation) starting point is clearly difficult, as the contributions from Agrawal et al., 2019) and Roco and Bainbridge (2003), suggest.

I ndustry and Market Dynamics Industry and market dynamics were the topic of Chap. 2. Here our purpose is to consider how they impact on the process of identifying performance value builders; capability characteristics (skill sets, expertise) and executional characteristics features/characteristics the organization has (or is) investing in, that have a long-term pay-off.  onsumer and Industrial Market Trends C Ideally relevant consumer and industrial markets are being monitored and assessment of those in which a network is active examined for growth opportunities. Figure  4.6 identifies trends in markets that are showing interesting directions. FMCG trends, consumer durables markets, healthcare, automobiles/mobility and for industrial “smart” manufacturing. However, incumbents may find “limitations” (activities of existing competitors and/or new entrants) and search either for niché opportunities in existing or new market segments or look for opportunities in adjacent sectors. For example, the automotive market is one that some existing organisations see as a “mobility market” and activities such as vehicle-based services are

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attractive. Another example is in food and food preparation in which menu services are expanding and food synthetics are being explored.

 acro Assessment Criteria M A useful approach is to identify broad criteria (macro assessment criteria) that enable a wide enough scope to be established. In Fig. 4.5 socioeconomics, geoeconomics, geopolitics, and techno economics are suggested as areas to use when assessing direction for strategic growth. Each offers sufficient detail to identify how and why it developed as well as scope to explore what, when, where and who will be involved in future industry and market activity. Figure 4.5 provides an example. Working from Industry and Market Dynamics by using published (and referenced) forecasts we identify futures: for FMCG Trends, Consumer Durables, Healthcare, Automobiles/Mobility, and Industrial/ Smart Manufacturing (technology and time will have outpaced some of the forecast items). We have then used the criteria to develop topics that are very likely to have impact on the decision to select value builders from the assets and liabilities that will have positive impact on the desired characteristics of organisational excellence. Figure 4.6 moves further on to consider the business environmental changes and challenges with examples. It has identified some with “what ifs” that would have significance on potential product-service-market developments manufacturing, distribution, serviceabilty offers, and sustainability programs as well as the organisational excellence and network optimisation performances. The data suggested by the socioeconomics, geoeconomics, geopolitics, and techno economics topics came from RISE (Research Institutes of Sweden) and are used as examples with no specific industry/market in mind, rather they are indicative of the width and depth of data that would need refinement. Figure 4.7 adds more direction using a generic approach. It uses the macro criteria to “translate” the capability response characteristics. These need to be translated to a level that identifies precisely the “matching” capability response. The more detailed this can be the more likely the value proposition will match the customer requirements. This is a detailed activity because from it will emerge the asset/liabilities profile necessary to implement the value proposition and, meet the profitability and productivity expectations of the network partners in terms of asset structures and value delivery. Before making investment (or leverage) commitment, research should be undertaken to identify likely growth characteristics within a product-service-market. Figure 4.7 expands the notion of micro assessment criteria using the automobile/ mobility industry to identify trends that indicate emerging characteristics that may be used to identify value delivery opportunities and provide a guide into the profile of strategic performance value builder characteristics requirements. The organisational excellence and network optimisation model evaluates industry/market opportunities, identifying the resource input options required to achieve them. The benefits of working with these and a feasible and “economic” viable value proposition is that the process works towards reaching realistic and acceptable solutions for all stakeholders. The required data inputs comprise an assessment of

“Industrial”/Smart Manufacturing • Universal automation “plug& play” software for specific solutions • Agile solutions • Multi-local operations • Optimised energy & process control • Circular economy • Local & sustainable manufacturing processes Schneider Electric Website 2021

DialDesk.Com Healthcare • General health monitors • Physical activity & nutrition • Diabetes tools Automobiles/Mobility • Vehicle self-awareness on connected platforms accessing road traffic information, emergency services etc. • Vehicles with internet connected engine control units • “Mobility Bundles” subscriptions; parking, EV charging, ride sharing • AI driven insurance based on real-time data • Fleet services for charging point operations Forbes 2021

Fig. 4.5  Industry and market dynamics trends revisited

• Managing Geostrategic Risk

• Globalisation & MNCs & International Financial Management

• Stakeholder EESG (Equality, Environmental, & Social Governance) & Climate Change

• Populism/Nationalism

• Digitisation & Connectivity

• Regulation Compliance “Institutions”

• Employee Capabilities Development

• Relationship Management

• Process/Activities management

• Technology Management

• Knowledge Management

Industry & Market Dynamics

Consumer & Industrial Market Trends

FMCG Trends • A billion new middle-class consumers in emerging markets • The rise of the digital consumer • The shift to value •The impact of demographic shifts, including aging, on consumption patterns • Increasingly volatile input costs, driven by natural-resource shortages & the emergence of fewer, bigger suppliers. • End2End/Producibility solutions increasing McKinsey & Co 2010/2021 Consumer Durables • Healthcare features • Automation - household tasks • Conferencing technology • Affordability • Gaming consoles • Innovative - home centric appliances • Shift toward alternative economical & \ eco-friendly resources

Techno Economics Developments

Geopolitics Developments

Geoeconomics Developments

Socioeconomics Developments

Organisational Excellence?

Market Opportunities?

Strategic Value Performance Builders 89

“Tariff Wars”?

“Automation” At work? At Home? At Leisure?

Digital Communities?

Globalisation?

Laboratory: Developed food?

Impact of Educational Inflation? Standards? HealthCare Disposable Incomes? Services?

Infrastructure Improvements for Productivity?

Electro Mobility?

Decentralised Mobile Energy Communications? Production? Alternative Power Energy Poverty? Sources?

Defence Partnerships?

Foreign Owned National Icons?

Multi-national businesses? Foreign Owned Foreign Owned National Businesses? Infrastructure? Projects

Housing & Accommodation?

Nuclear Family Size Increasing

Immigrant Labour?

Economic Partnerships?

Sustainability?

Employment Futures?

Aging Population

Off-shore owned energy sources?

Techno Economics Developments

Geopolitics Developments

Geoeconomics Developments

Socioeconomics Developments

Temporarily Employed Capabilities (Contracted) • High volume/low cost processes "Enterprise" Owned Capabilities • Exclusive ‘production’ processes • Customer liaison Transactions Processes • Service management expertise Individual Partner Owned (Exclusive Capabilities) • Patents and Brands • Specialist processes & services e.g. design & development • Service management networks • Product/service performance delivery & maintenance

Market Entry Network • Customer databases • Coordinated customer based • design & development • Positioning Strategies • Market liaison • Brand & Reputation equity Production Facilities and Networks • "Access" to specialist facilities, equipment & processes • "Access" to specialist inputs • Buying exchange agreements • Inter-organisational process management • Capacity & quality management Market Management Networks • Market reach • Market influence • Loyal customer base(s) "Liabilities"

Fig. 4.6  Business environmental changes and challenges—examples. Developed from data: RISE Research Institutes of Sweden

Developed from data: RISE Research Institutes of Sweden

• International HealthCare ?

• Managing Geostrategic Risk

• Globalisation and MNCs &International Financial Management?

• Stakeholder EESG (Equality, Environmental, Social, Governance) UN SDG Acknowledgement?

• Populism/Nationalism?

• Personalisation?

• Digitisation & Connectivity?

• Regulation Compliance “Institutions” and Government Interventionism?

• Employee Capabilities Development?

• Relationship Management?

• Process/Activities management?

• Technology Management?

• Knowledge Management?

Identify Relevant Industry and Market Dynamics Macro Trends

"Assets and Liabilities” “Assets”

Organisational Excellence? Network Optimisation?

Market Opportunities?

90 4  Performance Value Drivers and Builders

Geopolitics

Techno Economics Considerations

Geoeconomics Considerations

Socioeconomics Considerations

Macro Assessment Criteria

Forbes 2021/Authors

• “Rare Earths” materials e.g. Lithium

• Expertise

• Sensors & relevant new technology

• “Fleet services “ power providers (Shell, BP) for charging point operations

• AI driven insurance based on real-time data

• Ride sharing

• “Mobility Bundles” subscriptions; parking, EV charging

• Vehicles with internet connected engine control units

• Vehicle self-awareness on connected platforms accessing road traffic information, emergency services etc..

• Acceptance of EV versus ICE motive power

Automobiles/Mobility

Individual Partner Owned (Exclusive Capabilities)

“Enterprise “ Owned Capabilities

Temporarily Employed Capabilities (Contracted)

"Liabilities"

Market Management Networks

Production Facilities & Networks

Market Entry Network

"Assets and Liabilities” “Assets”

Fig. 4.7  Profiling the impact of an emerging opportunity and assessing its impact on the organisational excellence network

• International Healthcare

• Managing Geostrategic Risk

• Globalisation & MNCs & International Financial Management

• Stakeholder EESG (Equality, Environmental, and Social Governance) & Climate Change

• Populism/Nationalism

• Digitisation & Connectivity

• Regulation Compliance “Institutions”

• Employee Capabilities Development

• Relationship Management

• Process/Activities management

• Technology Management

• Knowledge Management

Industry & Market Dynamics

Collaborative Network

Corporate Sustainability

Business Process Excellence Management

Digitisation, Digitalisation, and Connectivity

Strategic & Operational Asset Planning & Management

Performance Management

Impact Implications for Organisational Excellence Model

4  Performance Value Drivers and Builders 91

92

4  Performance Value Drivers and Builders

revenue expectations, the scope and cost of the alternative capability and executional characteristics together with mandatory constraints, these may be based upon market constraints (cycle times, product portfolio expectations, quality, etc). Given the nature of the variability of the inputs it is unlikely the model will deliver a recommended structure, however it will identify several potential alternatives thereby shortening the assessment process significantly. Figure 4.8 matches customer expectations with relevant responses to move towards a plausible value proposition. The diagram suggests a format for responding to anticipated customer expectations. This assumes either a close relationship with the customer (for example, “connected” planning activities) resulting in the networks input for response, or some realistic scenarios concerning likely strategic direction are being used. The existing network assets/liabilities is matched to the “expectations” and those capable of a response identified together with deficiencies presenting problems that need further consideration. Identified response can be compared with the specifications for both organisational excellence and network optimisation as an initial exercise followed by a review of the current asset/liability profile and decisions concerning network structure are addressed and resolved. Figure 4.9 describes in detail a procedure for generating a value proposition that would be feasible (acceptable to the target customer(s)) and viable (acceptable to the network in terms of investment and costs). By identifying impact on strategic response capability requirements: for performance, profitability, positioning, productivity, producibility, partnerships and people, planetcare, it matches a researched customer “future” against changes that can be expected to be made to the existing response capabilities and is likely to suggest changes to the asset/liability profile and, probably to the value chain network structure. This activity follows up on the “probables and possibles” that will have emerged from the previous analysis (Fig. 4.8), confirming (or otherwise) internal network changes. Figure 4.10 suggests a larger scale review of the business environment to take planning response capabilities further ahead in time. It suggests an analysis of industry and market dynamics “probables and possibles” using macro assessment criteria that address both response opportunities and possible developments in government and regulatory mandates. The “future” output of such research is likely to extend beyond the topics suggested by Fig.  4.10 and clearly this will impact on response capabilities and the current asset/liability profile. The “future” is very likely to create impact implications for the existing objectives, strategies and structure of both organisational excellence and network optimisation.

Temporarily Employed Capabilities (Contracted) • High volume/low cost processes "Enterprise" Owned Capabilities • Exclusive ‘production’ processes • Customer liaison • Transactions Processes • Service management expertise Individual Partner Owned (Exclusive Capabilities) • Patents & Brands • Specialist processes & services e.g. design & development • Service management networks • Product/service performance delivery & maintenance

Market Entry Network • Customer databases • Coordinated customer based design & development • Positioning Strategies • Market liaison • Brand & Reputation equity Production Facilities and Networks • "Access" to specialist facilities, equipment & processes • "Access" to specialist inputs • Buying exchange agreements • Inter-organisational process management • Capacity & quality management Market Management Networks • Market reach • Market influence • Loyal customer base(s) "Liabilities"

"Assets"

Assess Supplier Strategic Performance Value Builder Responses Requirements

Organisational Excellence?

Market Opportunities?

Fig. 4.8  Matching network customer expectations with relevant responses to move towards a plausible value proposition

• Profitability Management: Projections of; • NOPAT • Buying margins • Operating margin • Economic profit (EVA) • Enterprise Values • Productivity Management • Asset Management/Portfolio Management • Real-Time Data Management • Operational Capabilities & Expertise “Fit” • Capacity utilisation; scale & scope • Product design; ease of assembly, range platforms • Producibility Management • Digitisation • Connectivity • Real-Time Data Management • Seamless end2end system management • Optimal value added & cost • End2End time cycle • Optimal stakeholder value contribution (EVA) • Partnership Management • Totally Collaborative RD&D, Procurement, Manufacturing, Distribution, Serviceability, Sustainability • Ecosystem development • PlanetCare Environmental Integrity/Responsibility • (EESG) • UN SDG Guidelines

• Positioning management: Relevant to Opportunity • Assessment • Strategic positioning • Market positioning • Value chain positioning

• Performance Management: • Meet Primary (Internal) Stakeholder Expectations • Meet Secondary (External) Stakeholder Expectations • Optimal stakeholder value contribution (EVA) • Economic & Traditional Accounting Profitability

Strategic Performance Value Builders Required to Respond to Anticipated Future Customers Expectations of a Relevant Value Proposition

Collaborative Network Relationship Management

Corporate Sustainability

Business Process Excellence Management

Digitisation, Digitalisation, & Connectivity

Strategic & Operational Asset Planning and Management

Performance Management

4  Performance Value Drivers and Builders 93

• Capital Intensity • Financial gearing • Operational gearing • Scale Effects • Cost (pricing) advantages due to volume production process design & management • Scale Effects • Product range management of branding • Product-portfolio • Product-Service design, product platforms • Serviceability as a “Product” (SAAP) • Economics of Differentiation: Product-Service-Market • Mass customisation • Customisation • Personalisation • Economics of Integration and Collaboration • Intra/Inter-organisational contributions to RD&D, procurement, manufacturing, etc. • Economics of Experience & Collaboration • Accrued knowledge & expertise over time, application & management • HR Analysis, Recruitment & Deployment • Specific, relevant skills &expertise • Data Analytics • Identifying relevant data - creating focused data structures • Using data based product-processes to create competitive value advantage • Economics of Network Partnership Management • Integration & Collaboration • Design of cost-effective & efficient network structures • Identifying commercially effective & efficient partner roles within the network • Platforms, Ecosystems and Protocols • Managing Complexity • Product-Service & Processes • Application of advanced technology

Identifying Impact of Strategic Response Capability Requirements: for Performance, Profitability, Positioning, Productivity, Producibility, Partnerships & people, PlanetCare.

Sustainable Value-Led: Response Capabilities Requirements Concern for performance can be the impact of environmental & corporate sustainability policies that may impact on current stakeholders’ expectations & the required changes to value proposition fit4purpose, & value delivered they impose. The adoption of the circular economy/value chain will impact on product-service format decisions & on “Total Cost of Ownership” profiles.

Value Serviceability: Capabilities Requirements Extend across the activities & processes involved in identifying an opportunity, expectation or customer need to transform the characteristics of a product-service i.e., transforming a PRODUCT-service (a predominantly “hardware product”) into a product-SERVICE. In this context “transformation” includes RD&D application, installation, user training, performance monitoring, servicing, modifications, & renewal activities. Value Serviceability is also considered to include Performance Management of customer value production & delivery processes using digital connectivity &, of Predictive Maintenance that provides planners & operators with comprehensive insight into asset risk, enabling them to maintain higher levels of asset availability.

Value Delivery: Capabilities Requirements Value Delivery implements the Value Proposition. Response capabilities are aligned with managing the performance efficiencies of operational activities of the network organisation.

Value Production Capabilities Requirements Identify key opportunities & the benefits of industry production technological activities; robotics, (RPA) real time processing. Intelligent process automation. Scale production efficiencies. Intelligent (Smart) manufacturing, & the collaborative benefits of network connected-real time accessibility. Identify and explore accessibility to required response capabilities.

Value Engineering: Capabilities Requirements Identify key opportunities & benefit areas and the demand for new/additional value builders & response capabilities. Explore the impact of any impact changes that may occur – determine investment and operating costs. Identify and evaluate access to response capabilities.

Value Innovation: Capabilities Requirements Response capabilities are aligned with identified customer expectations (value drivers and builders) & with managing the performance efficiencies of operational activities. At the innovation stage all required response capabilities should be identified. Access issues are addressed when concept feasibility is positive.

Value Proposition Specific Capabilities Deliverables

Fig. 4.9  Estimating investment and strategic operating costs to meet the value proposition: Costing the value proposition

• Human/Robotic Integration • Human intelligence working with cognitive computing • Adding value in production • Creating personalisation, customisation & mass customisation • International Activities

• Managerial Expertise Scale Scope Complexity Quality

• Ecosystem/Platform/Protocol Structures

• “Smart” Manufacturing, Processes & Products

• Product-Service-Market Portfolio Management

• Integrated & Collaborative Partnerships

• Advanced Analytics

• Digitisation & Connectivity Infrastructure

• Innovation/RD&D

• Positioning Strategic Market Value Chain Network Partnerships

Organisational/Network Value Builder Capability Response Topics

Generic Investment/Cost Driver Response Profile Considerations & Modifications to the Response Requirements Review

Individual Partner Owned (Exclusive Capabilities)

“Enterprise“ Owned Capabilities

Temporarily Employed Capabilities (Contracted)

"Liabilities"

Market Management Networks

Production Facilities & Networks

Market Entry Network

"Assets & Liabilities” “Assets”

94 4  Performance Value Drivers and Builders

Geopolitics

Techno Economics Considerations

Geoeconomics Considerations

Socioeconomics Considerations

• International Activities/Markets

• Human/Robotic Integration • Human intelligence working with cognitive computing • Adding value in production • Creating personalisation, customisation & mass customisation

• Managerial Expertise Scale Scope Complexity Quality

• Ecosystem/Platform Structures

• “Smart” Manufacturing, Processes and Products

• Product-Service-Market Portfolio Management

• Integrated & Collaborative Partnerships

• Advanced Analytics

• Digitisation & Connectivity Infrastructure

• Innovation/RD&D

Profitability Management: Projections of: • NOPAT • Buying margins • Operating margin • Economic profit (EVA) • Enterprise Values Productivity Management • Asset Management/Portfolio Management • Real-Time Data Management • Operational Capabilities & Expertise “Fit” • Capacity utilisation; scale and scope • Product design: ease of assembly, range platforms Producibility Management • Digitisation • Connectivity • Real-Time Data Management • Seamless end2end system management • Optimal value added & cost • End2End time cycle • Optimal stakeholder value contribution (EVA) Partnership Management • Totally Collaborative (RD&D, Procurement, Manufacturing, Distribution, Serviceability, Sustainability • Ecosystem development PlanetCare Environmental Integrity/Responsibility • (EESG) • UN SDG Guidelines

Positioning management: Relevant to Opportunity Assessment • Strategic positioning • Market positioning • Value chain positioning

Performance Management : • Meet Primary (Internal) Stakeholder Expectations • Meet Secondary (External Stakeholder Expectation • Optimal stakeholder value contribution (EVA) • Economic & Traditional Accounting Profitability

Strategic Performance Value Builders Required to Respond to Anticipated Future Customers Expectations of a Relevant Value Proposition

Individual Partner Owned (Exclusive Capabilities)

“Enterprise “ Owned Capabilities

Temporarily Employed Capabilities (Contracted)

"Liabilities"

Market Management Networks

Production Facilities & Networks

"Assets & Liabilities” “Assets”

Market Entry Network

Value Builders Assets and Liabilities

Fig. 4.10  Developing a strategic value proposition to meet opportunity emerging from business environmental changes and challenges

• Managing Geostrategic Risk

• Globalisation & MNCs & International Financial Management

• Stakeholder EESG (Equality, Environmental, and Social Governance) & Climate Change

• Populism/Nationalism

• Digitisation & Connectivity

• Regulation Compliance “Institutions”

• Employee Capabilities Development

• Relationship Management

• Process/Activities management

• Technology Management

• Knowledge Management

Industry & Market Dynamics

Macro Assessment Criteria EESG/UN SDGs

• Positioning Strategic Market Value Chain Network Partnerships

Organisational/Network Business Model Capability Response Considerations

Impact Implications for Organisational Excellence Model

4  Performance Value Drivers and Builders 95

96

4  Performance Value Drivers and Builders

References Agrawal, A. K., Gans, J., & Goldfarb, A. (Eds.). (2019). The economics of artificial intelligence: An agenda. University of Chicago. Champy, J. (2008). Outsmart. Pearson Education. Day (1988). Gupta, V., Koller, T., & Stumpner, P. (2021, October 19). Which metrics really drive total returns to shareholders? McKinsey & Company. Olvé, N., Roy, J., & Wetter, M. (1997). Performance drivers. Wiley. Phelps, B. (2004). Smart business metrics. FT Prentice Hall (Pearson). Roco, M., & Bainbridge, W.  S. (2003). Converging technologies for improving human performance: Nanotechnology, biotechnology, information technology and cognitive science. Springer. Slywotzky, A. J., Morrison, D., & J. (1997). The profit zone. Times Books. Walters, D. W., & Helman, D. A. (2020). Strategic capability response analysis. Springer.

Part II Capability Responses and Organisational Excellence

5

Introduction

A capabilities response approach views the firm as a portfolio of capabilities that evolve in response to the (perceived) demands of the business environment. An “enterprise” comprises one organization or collaborative networks of firms; examples from the large corporations suggest that the traditional structural model based upon functions, (silos), is rapidly losing support in favor of holistic structures reflecting capability responses. These are characteristics that reflect an understanding of the marketplace and of the opportunities it offers, and of the characteristics of the capabilities essential for successful engagement. The evident changes in management approaches of; narrowly defined customer centricity, a changing view of the enterprise (stakeholder value-management rather than just shareholder value-­ management) to a positive approach to network collaboration, network “connectivity”, and the availability of real-time data analysis and management, suggests the complete demise of the silos and replacement by a holistic, interactive, approach that enables an organization to identify the capabilities that market opportunities require and the ability to structure a relevant response that meets the market demand precisely rather attempting to mould the market need into an opportunity that fits the silo’s requirements. The growth of business model ecosystems such as Amazon, eBay, Alibaba in consumer markets and industrial ecosystems that encompass an entire flow of goods and services from source to end consumption for example Li and Fung (Hong Kong). Industry ecosystems are dynamic entities that can change depending on customer and market need, able to scale up to meet increased volume and demand, but at the same time, evolve to be resilient, innovative, and open in the face of disruption, competition, and change. Typically, they offer shared data and understanding, awareness and perception. Figure 5.1 identifies the components of a value management model. Value Management is an important feature and requires a detailed pragmatic definition. This is suggested as:

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_5

99

Organisational Excellence

Fig. 5.1  The components of value management

Operational Excellence

Strategic Excellence

Profitability Productivity PlanetCare Partnerships & People

Positioning Performance

Producibility Platform Development

Core Capability Responses

“Value” Management Economic Profit and Cash Flow

Value Contribution and Cash Flow (1)

Economic Profit NOPAT less AWAC (Capital Costs) (Value Contribution) and Cash Flow

An Opportunity and Time Responsive Operating Model

Flexible TimeLine Current/Future/Advanced

100 5 Introduction

5 Introduction

101

Value Management is concerned with the creation of sustainable value, throughout identification and creation, production processes, distribution, serviceability, and value renewal. It is concerned with improving and sustaining a desirable balance between the needs and wants of primary stakeholders (customers, employees, partners, (suppliers, and distributors)) and secondary stakeholders (the community, competitors, regulators, and government). Stakeholder value judgements vary, and Value Management reconciles differing priorities to deliver optimum value for all stakeholders. Value Management is based on defining and adding measurable value, focusing on the profitability and productivity objectives of primary stakeholders (customers’ operational performance drivers and value builders) and the expressed interests of secondary stakeholders (employment opportunities, EESG and UN sustainability goals) before finding solutions. It applies a structured holistic approach, while managing complexity, risk, and uncertainty. See The Institute of Value Management https://ivm.org.uk/value-­management Important developments impacting the business environment in recent years have been digitization, digitalization, and connectivity, and the acceptance of the wider application of the increasingly collaborative value chain management approach, and the importance of stakeholder value management as a more equitable corporate response than shareholder value management. Stakeholder value-led management is becoming important to enlightened CEOs who are publicly mindful that they are answerable to more than just shareholders; their role is one of being answerable to a much broader group as pressure from customers, suppliers, employees, government and other regulators, environmental groups, as well as shareholders make them answerable to “everyone”—the outcome is they must deliver a balanced performance. On August 19, 2019, the Business Roundtable released a new “Statement on the Purpose of a Corporation”. The group seeks to “…move away from shareholder primacy”, a concept that had existed in the group’s principles since 1997, and a move to “…include commitment to all stakeholders”. It notes that “businesses play a vital role in the economy” because of jobs, fostering innovation and providing essential services, and because it places shareholder interests on the same level as those of customers, employees, suppliers, and communities. “Each of our stakeholders is essential” the statement says. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country”. (“Our Commitment—Statement on the Purpose of a Corporation” Business Roundtable, 2021). This suggests the future direction of the business’ response to change and major disruption and furthermore suggests the need for a model capable of considering the impact of other possible, and expected, and unexpected, major economic, social, and economic impacts on the core business capabilities of the business model. The four components of value management are: a positive value contribution and cash flow, a core capability response portfolio, an opportunity and time responsive operating model, and organisational excellence. See Fig. 5.1. the components are described as:

102

5 Introduction

Positive Value Contribution and Cash Flow, NOPAT/EVA Economic Profit/ Value Contribution; measurement in financial terms of the effective and efficient use of inputs, substitution, and sustainability activities (E)ESG) competitiveness (comparative end-user price/value/equality assessments. Considering EVA to be a primary performance metric implies managing EVA involves the cost items that operating management has responsibility for and, therefore, has immediate control over. It assumes that investment in operating assets be identified, and the interest be calculated as an annualised average cost of capital when calculating the Operating EVA. Other interest income and other equity income are very unlikely to have a significant impact on operating decisions, therefore, we suggest this to be an Operating EVA. The concept and applications of EVA will be fully explored in Chap. 7. Positive Cash Flow Management consistency and continuity, growth, successful applications (operational partnerships, strategic partnerships, transformation (strategic and operational objectives). Core Capability Response Portfolio Model: comprising the components of; Performance Management (the value engineering, value delivery, and the value proposition; (stakeholder-wide, performance, fit4purpose, etc.), Positioning (strategic positioning) is the creative response to an identified consumer-led opportunity, market positioning is a visual presentation (value proposition) of the unique/exclusive aspects of an organisation and its effectiveness in how it intends meeting customer expectations, and value chain positioning is dependent upon intra-network collaboration and coordination. Profitability (financial viability, sustainable economic profit, positive cash flow), Productivity (total factor productivity, optimal utilization of capital, labor, materials, and service inputs), and EVA (economic value added), Partnerships (expertise and skills of value generating employees, workplace cultures and management styles), Producibility (the seamless intra and inter-organizational infrastructures of sequential processes and activities of value engineering and value delivery, that creates, produces, delivers and captures value) and PlanetCare (a social and a commercial oriented approach, to the responsible use of environmental resources used in creating stakeholder value, and the concerns of environmental and corporate sustainability and responsibility). An Opportunity and Time Response Operating Model: value creativity, value production, value delivery, value-serviceability timeline in a dynamic competitive time2market/fit4purpose/end2end value chain cycle. In many respects this represents a shift away from what have been short-term operational issues and responses, and developing future strategic opportunities, into one in which operational activities exist in parallel with future strategic opportunity. Given that the increasing dynamism of the business environment may result in an organisation finding itself in a situation where it has an ongoing market requiring operational responses together with a parallel situation in which an evolving/developing strategic market (market segment) opportunity requires different RD&D, procurement and production, marketing, distribution and serviceability, and will require remanufacturing (sustainability)—such as the replacement/succession situation with the internal combustion engine and its electrical successor, the EV, in the automotive/mobility market, it would appear logical for this (and the industries confronted with equally

Strategic Excellence Policy Issues

103

large disruptions) to favour a business model that includes an Operating Model that is both opportunity and time responsive. Organisational Excellence: helps an organization to excel in all its sphere of activities. It allows the organization to achieve and sustain outstanding levels of performance which meets or exceeds the expectations of all the stakeholders. We suggest organisational excellence is achieved from a combination of strategic excellence and operational excellence and that both have their basis in “excellent” management of strategic and operations management. Strategic Excellence can be derived from features from the 2022 European Foundation for Quality Management (EFQM), model in which direction, execution, and results are primary features of the model that reflect clear and sound purpose, vision, and strategy. They must be consistent reflecting, formulation, implementation, evaluation, and modification and are clearly communicated, applied, and implemented through an operational strategic plan, with key objectives cascaded across the organisation. They are interdependent and interactive. To be successful they should include leadership, decision making, people work processes and systems, culture, implementation, rewards and remuneration, lifestyles (work/leisure balance), communications, contact with primary stakeholders, and secondary stakeholders. It is difficult to define organizational excellence and even more difficult to achieve it. For achieving organizational excellence requires a shift in the thinking of the organizational leadership and its stakeholders. This approach is expanded on by the 2022 European Foundation for Quality Management (EFQM), model.

Strategic Excellence Policy Issues Figure 5.2 identifies policy issues impacting the pursuit of Strategic Excellence and the capabilities of the organisation (network and individual partners) to implement relevant responses to the business environmental changes that are occurring, and are particularly relevant: Direction: Purpose, vision, and strategy; focus on the future; organisational culture and leadership; and harnessing creativity and innovation. One important concern is the process of anticipating the future and developing methods of minimizing the effects of shocks and stresses of future events. Future Proofing is typically active in, industrial design, and more recently, in design for climate change. Product-­ Service-­Market portfolio decisions are dependent upon vision and strategy and adds to the importance of “direction” in creating an appropriate future vision. Execution: Leading with vision, inspiration, and integrity, driving performance and transformation, engaging suppliers, engaging employees, developing organisational capability responses, engaging customers, creating value for customers, creating current and future sustainable value, and engaging with stakeholder groups. Achieving Results: Positive stakeholder perceptions, succeeding through the talent of people, strategic and operational performance, sustaining outstanding results, and customer satisfaction.

Strategic Excellence Policy Issues

Operations Excellence

Organisational Excellence

Fig. 5.2  Components of network organisational excellence

Operations Management

•Performance management: maintaining and improving further performance through additional value creation/value contribution initiatives and performance management •Partnerships/people management: establishing an awareness of operational excellence amongst the entire value chain network by identifying the relevance of operational excellence for a centralised system for building capabilities, that implement value management •Process management: creating a digitised/digitalised value production system to capture, codify, and institutionalize standards for operations excellence across the organisation and the network partners utilising digital connectivity. •Product portfolio management: maintaining product-service-market relevance by focusing on customer fixed asset management activities together with marketing strategy decisions and matching these with appropriate capability responses by an economically viable value proposition.

•Results

•Execution

•Direction

Planned Response Performance for Competitive Advantage

•Platform Development and Management

•PlanetCare Management

•Partnership & People Management

•Productivity Management

•Producibility Management

•Profitability Management

•Positioning Management

•Performance Management

Planned Performance for Competitive Advantage

Core Capability Response Portfolio

•Stakeholder orientation •Value-Led strategic direction by identifying a strategic portfolio of industries in which it engages •Framework of structured activities and processes •Collaborative network partnership strategies are identified by their roles and tasks within the overall strategic direction and their contribution to creating Competitive Value Advantage and a targeted Value Contribution Planned Performance for Competitive Advantage •Risk is identified and quantified •Network employees aware of strategic direction and are committed •Digitisation, Digitalisation and Connectivity •Total transparency Strategic Excellence

Strategic Management

104 5 Introduction

Strategic Excellence

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Successful achievement is “serviced” by an input from ongoing operational activities plus an effective Business Analytics monitoring activity of the dynamics of the business environment. These include an acceptance that the business environment will be strongly influenced by: Industry 5.0 will be focussed on cooperation between man and machine as human intelligence works in harmony with cognitive computing by putting humans back into industrial production with collaborative robots, workers will be upskilled to provide value-added tasks in production, leading to mass customisation and personalisation for customers. Value Migration, is the shifting of value-creating processes and activities towards alternative ways of satisfying customer needs. Value migrates because customer expectations have changed or migrates from redundant business models to business designs that are better able to satisfy customers’ priorities. Either by offering lower costs to the customer or by offering more benefits (quality and/or product-­ service-­market applications) at the same purchasing price. Risk Profiles, markets change (either the “product” changes, or the suppliers/ competitors change, or perhaps both) requiring a qualitative and quantitative analysis of the types of threats an organization, asset, project, or individual faces and its impact on the business. The purpose of a risk profile is to provide an objective understanding of risk by assigning numerical values to variables representing different types of threats and the opportunities or threats they pose. Developments in Digitisation, Digitalisation, and Connectivity, increasing digitalization is presenting immense challenges. A high-performance digital infrastructure ensures the secured acquisition, transmission and storage of all relevant data and information. Sustainability and (E)ESG & UN SDGs, management needs to embrace the reality of the many aspects involved to be able to improve their company’s sustainability performance, multiple perspectives of sustainability and sustainability management exist. An approach to sustainability management from a stakeholder perspective, with a focus on companies’ relationships with the many actors that shape sustainable outcomes is required, these have implications for policy setting and management, having opportunities and threats on offer. Stakeholder Value Management, is the process by which the organisation organises, monitors, and improves relationships with stakeholders. It involves identifying stakeholders; analysing their needs and expectations and planning and implementing various tasks to engage with them. Diversification of Revenues, provides financial stability, and reduces business risk. Diversification can be by market and or market segment, industry, number of customers, geography of customers, and product-service-market offering. Economic Growth, is an increase in the production of economic goods and services, as compared from one period to another. It can be measured in nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used. The importance for the organisation is that it offers a “macro” on the growth of categories within which the

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organisation operates and offers a relative check on the organisation’s “strengths, weaknesses” and “opportunities and threats”. Financial Markets and Change, Impacts—Monitoring the financial markets provides information on investor views of product-service-market prospects, the financial returns they offer (and future perceptions of returns). They also provide a view of their willingness to invest in projects and the returns they would expect. Value Chain Management Development and Changes—Connectivity, cloud computing, A.I. and IIoT are changing the way the world does business. It represents a new era of greater efficiency, and customer profitability along the value chain. Network digitisation, digitalisation and connectivity develop more effective and efficient connected activities in RD&D, manufacturing, distribution, serviceability, and value renewal/remanufacturing operations. Monitoring value chain management activities across industries identifies opportunities for profitability, productivity, and cash flow improvement. Cyber Security, is the activity taken to protect internet network assets against any criminal activity that involves a computer, networked device, or a network. Most cybercrimes are carried out to generate illegal profit. However, cybercrimes are carried out against computers or devices directly to damage or disable them, to access personal information on personnel or customers. Future Proofing is the process of anticipating the future and developing methods of minimizing the effects of shocks and stresses of future events. Future Proofing is typically active in, industrial design, and more recently, in design for climate change.

Strategic Excellence Strategy is becoming, to an increasing extent, the art of managing assets that one does not own. the nature of business challenges evolved significantly during the second half of the twentieth century … significant changes in our legal, managerial, and technological capabilities made it much easier for companies to collaborate and distribute operations over many organizations …companies leveraged multiple organisations in distributed supply chains, integrated technological components from a variety of business alliances, collaborated with a number of channel partners to distribute their products, and leveraged complementary services from banks, insurance providers or retailers. This pushed many of our industries toward a fully networked structure, in which even the simplest product or service is now the result of collaboration among many different organisations. (Iansiti & Levien, 2004).

The technological developments of Industrié 4.0 has made a major impact on operations management. Walters and Helman (2020) argue that more recently three other developments have contributed to the business environment: digitisation, digitalization, and connectivity, the acceptance of the wider application of the value chain and the importance of stakeholder value management as a more equitable corporate response than shareholder value management. Digitization, in the shape of Industrié 4.0, has resulted in an extensive application of “connectivity” across the

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manufacturing and servitisation delivery of product hardware and serviceability software. The value chain has matured and has enhanced collaboration, coordination, and communication amongst value chain partners. Stakeholder value-led management is becoming important to those CEOs who are publicly mindful that they are answerable to more than just shareholders; their role is one of being answerable to a much broader group as pressure from customers, suppliers, employees, government and other regulators, environmental groups, as well as shareholders make them answerable to “everyone”—the outcome is they must deliver a balanced performance. Capex (high capital intensive) business models are becoming Opex (low capital intensity—intangible fixed assets) based models focusing on organizational intangible assets (brands, developing supplier and customer relationships) and OptmnEx (a networked model that optimises capital, labour, and materials to meet a customer-centric value proposition) that contribute to Network Value Advantage. It follows that Operational Excellence is a network performance based operating model for collaborative stakeholder satisfaction.

Operational Excellence A pragmatic perspective of Operational Excellence is provided in a working paper from ARC suggesting: Operational Excellence (OpX) is a systematic approach for industrial organizations to attain best-in-class performance in productivity, quality, and delivery of services and/or products across the manufacturing value network. OpX spans product design and development; enterprise resource planning and control; supply chain management; manufacturing execution; and operational effectiveness of people, processes, and assets. However, rather than a destination or endpoint, OpX is an ongoing journey. (Resnick, 2017) Operational excellence is the process of optimising an organization's business operations. It is a common phrase used by management to refer to the process of making a commercial company more successful. Operational excellence is about identifying and implementing processes that are consistent with the organization's strategy and goals. The goal is to achieve continuous improvement that is measurable, actionable, and far-reaching. The entire organization should benefit from the operational excellence of a single activity or process (Wrike Consulting, n.d)

Operational Excellence, clearly, is a system of activities that aim to maximise the “value added” by a network to its “stakeholders” by coordinating network partners’ operational drivers and strategic performance builders that are integrated and coordinated over a specified timeline to create unique or exclusive “value advantage” for all stakeholders. Performance management of operational excellence involves a continuous process of identifying, measuring, and developing performance in network organisations by digitally connecting and linking each network partner organisations’ performance to the network’s agreed objectives and managing the roles and tasks of partners, that result in optimal economic profitability.

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The Value Proposition is an essential component part of organisational excellence as it describes the bundle of product-services that create value for a specific market, segment, or customer. It is the reason why customers select one company over another. The value proposition is a response, a solution, to an identified customer need and consists of a package of products and/or services—or possibly a reimagined PRODUCT-service that has become a product-SERVICE because of changes in customers’ business models or product-service applications. Typically, the value proposition is an offer to a specified target. The acceptance of the notion of “customer-centricity” implies that the value proposition is a purpose-led bundle of benefits to targeted customers. Successful value proposition delivery is essential for success.

Operational Excellence Component Activities The primary benefit of an OpEx model (optimising value deliverables/costs) is its ability to search for an optimal solution for delivering a value competitive value proposition, that achieves Optimal Network Value Contribution (Economic Profit/ EVA) for all stakeholders by integrating: Creative/Innovative—the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering exclusive goods or services. Profitable Revenue Growth resulting in Business value (enterprise value, market value added), productive asset base, revenues of RD&D expenditure, Patents granted, licenced to and from competitive organisations. Investment Model Risk and return criteria, (rate of return—weighted average cost of capital), use of financial gearing (debt/equity//capital intensity) policy. Use of operational gearing fixed costs/variable costs relationship optimise return and risk for all stakeholders. Political, Environmental, Technological, Operational, and Organisational Risk Profiles that are becoming dynamic and require resilient-based monitoring by building scenarios and stress testing into risk governance programs. Differentiated Product-Service-Market Portfolio—an awareness that managing intangible assets is increasingly important to very large organisations making customer-centric decisions globally. Their focus is on developing brands, customer relationships and strong operations links in their markets. The traditional PRODUCT-service-market has become a product-SERVICE-MARKET—This releases capital that may be tied up in fixed tangible assets and affords a closer fit4purose with customer needs. It is also low risk as far as geopolitics is concerned. Timeline Management—Effectiveness and Efficiency Customer relationships perspectives;—use of time as a component of the value proposition mix, time2market (new product cycle), total order completion cycle time between network partners, total end2end (order-to-customer cycle time), response2service times.

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Supplier relationships perspectives;—cash-to-cash, payments cycle. Operations management cycle time perspectives; order cycle time, days inventory, distribution time service levels, complete/partial orders. Stakeholder Value Management—(E)ESG Criteria/UNSDG (united nations organisation sustainability development goals); materials substitution and ­sustainability activities, and process development, ((E)E S G) acceptance and governance practice. Positive Responses to its Value Proposition—stakeholders; customers, suppliers, employees, investors, community interests, government, and other regulators. Positioning Strategy—The purpose of positioning (strategic, market, value chain organisation, and/or product-service-market) is to determine a targeted audience for your organisation and product to obtain the best response possible and create a loyal customer base. Productive Use of Resources—Network producibility structured organisations offer the opportunity for collaborative procurement, manufacturing, and serviceability. Customer-Led (AKA) Customer-Centricity is a focused strategy that attempts to develop a response capability that comprehensively meets the expectations of a target customer, or the expectations of a target market segment. Reputation Management—Strong Positive Reputation is the practice of influencing stakeholder perceptions and public perceptions, and expectations about an organisation and its brands. It includes monitoring the perceptions and responding to reputation threats and proactively seizing opportunities to enhance reputation. Reliability is defined as the probability that a product, system, or service will perform its intended function (Fit4urpose) adequately (it’s value proposition/specification), or for a specified period, or will operate in a defined environment without failure. Focused outsourcing allows a company to focus on its distinctive capabilities and to contract out more standard work to qualified third parties. In this way, the company can reduce timelines, spread costs, and maximize its responsiveness to changes in demand or capacity constraints. Valid Value Proposition—a valid value proposition is one that is acceptable to customers, network partners and meets secondary stakeholder expectations and is economically viable. A network performance model’s purpose is also to create an environment where connected organisations can perform to the best of their abilities and deliver the highest-quality product-service-management most effectively and efficiently, thereby achieving an optimal aggregate EVA network value contribution (economic profit).

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Organisational Excellence Organizational excellence helps an organization to excel in all its sphere of activities (operational and strategic excellence). It allows the organization to achieve and sustain outstanding levels of performance which meets or exceeds the expectations of all the stakeholders. A pragmatic view of organisational excellence suggested by Harrington (2005) identified five key elements that need to be managed for an organization to excel. The author labelled these “The five pillars of organizational excellence” suggesting organizational excellence is designed to change permanently the organization by focusing on managing the five key pillars of the organisation. Harrington admitted that each of the five organizational pillars is not new by itself, but the approach taken to organizational excellence is one of combining and managing them together. The five pillars Harrington (2005) suggests are: • • • • •

Process management Project management Change management Knowledge management Resource management

All five must be managed simultaneously. Senior management’s job is to keep all of them developing and interacting at the same time. Not to do so is likely to result in failure. However much has changed since 2005, notably the impact of Industrié 4.0 and the application of digitisation, digitalisation, and connectivity providing agility, improving efficiency, the ability to reduce timelines, and the structure, content, and application of data, such that a more current perspective of organisational excellence should be considered. An internet blog by Ispat Guru, (Sarna, 2014) shows a development in thinking concerning the nature of organisational excellence. Sarna (2014) takes the view that the pillars should be increased to eight they are: • • • • • • • •

A customer centric approach Development of capabilities Focus on creativity and innovation. Visionary leadership Agility Sustainable future Harnessing peoples’ talents Sustenance of outstanding achievements

This list contains a few of the topics that are current and continue to be important but miss the point where application and interactivity and interdependence are concerned. This is identifiable in model offered by the European Foundation for Quality Management (EFQM, 2022) model in the section on Strategic Excellence which follows. It is argued that Organisational Excellence, occurs when strategic

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excellence and operational excellence are coordinated by best practice strategic management and operations management.

 rganisational Excellence: A Model for Success O in a Digital Economy Organisational Excellence, then, is a combination of strategic excellence and operations excellence. Organisational excellence manages the success of strategic and operations initiatives and ensures the benefits of the enhanced efficiencies of the collaboration. It is essential that the reasoning and logic behind the decision to “connect” strategic excellence and operations excellence are understood and accepted; • Are the value management activities processes consistent, understood, and accepted across the network organisation? • What network operations capabilities and alignments (e.g., scale, sourcing, and scope) are essential to ensure that the strategic plan and operations processes will work synergistically? • Can the network operational capabilities be modified to meet as the strategy evolves? • How can changes in strategy be accommodated? • Is the available date sufficiently robust (content accuracy, delivery timeline, and transparency) to evaluate new strategic opportunities? • Can managers in non-operations roles, but essential to the overall success of the (“project”), evaluate and manage the implications of their new strategies on the operations function? Creating and maintaining organisational excellence, illustrates the overall process in which Organisational Excellence = Strategic Excellence + Operational Excellence can be created and managed. It is an iterative process in as much as strategic intent needs to be matched with operational capabilities. Clearly a task of senior management is to monitor the business environment for indications that the organisation’s strategic capability responses are adequate to remain competitive. Given the dynamism of industry and market change this should be an ongoing task. In many instances it may require a review of the “organisation’s” role with changes in the value chain network’s structure as well as considerations of the current market positioning.

An Operating Model Closing the gaps between strategic decisions and results; being strategically effective and operationally efficient. The need for an integrated network, multiple business models (i.e., Product-SERVICE-market “products”), dynamic intra and

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inter-relationships, relationships, adaptive and scalable, innovative, empowering employees, transparent, flexible, and agile, growth, rapid response, opportunity, and future output focused. Business today needs a structure that makes strategy fluid and decentralizes execution to continuously align the networked organization. The current operating model puts the focus on execution and ensures data is accessible to create the best possible outcomes for the networked organization. McKinsey (2017) suggested five essential components/activities: Digitization is the process of using tools and technology (digital threads and twins) to track and improve customer/vendor journeys (transactions and experiences) before, during purchasing, and in use after procuring a product-service-market, to identify barriers and create the best possible product-service-format for every customer. Advanced analytics is an autonomous (and often distant processing) of data management and application using software tools to discover additional uses of equipment and make recommendations (for example, performance and predicted maintenance), and to provide intelligence to improve decision making. It is especially useful in enhancing journeys where nonlinear thinking is required for example, customer service management. Intelligent process automation (IPA) is an emerging set of new technologies that combines fundamental process redesign with robotic process automation and machine learning. IPA replaces human effort in processes that involve aggregating data from multiple systems or taking extracting information from a written document and entering it as a standardized data input. There are also applications that can take on higher-level tasks. One application of specific interest to network management is to track the status of the end2end/producibility process in real time, managing materials/components transfers between different groups, providing data on bottlenecks. Business process outsourcing (BPO) uses resources outside of the main business to complete specific tasks or functions. It often uses labor arbitrage (wage rates for the same or similar processes/activities) to improve cost efficiency. It has most success works best for processes that are manual, are not primarily customer facing, and do not influence or reflect key strategic choices or value propositions. The most common example is for administration/processing of documents and correspondence. Lean processing/redesign helps networked companies streamline processes, eliminate waste, and foster a culture of continuous improvement. It is equally applicable to short-­ cycle as well as long-cycle processes, transactional as well as judgment-based processes, client-facing as well as internal processes. It is particularly useful in end2end producibility production processes,

In the short period of time since this McKinsey contribution we have seen technological advances that introduced additional components/processes. These include, network integration (producibility/end2end value management production), collaborative innovation, product teams, circular supply chains and sustainability, governance, multiple business models (a complex operating model that is capable of supporting multiple value propositions across a range of product-service-markets), and time/specific/relevant talent being built into operating models. Raval (2022), Senior Vice President and Chief Growth Officer, PepsiCo Foods North America reports that at PepsiCo.

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We try to organize our financial investments, and our resourcing across the short term, the medium term, and the long term. That manifests in how we set all our objectives. The expectation is, you’ll be making progress against what we need for tomorrow, … It’s impossible to overemphasize the importance of thinking, planning, and delivering for today and the future in an integrated way. You can work on many changes now to create a future-ready operating model that both supports an evolving array of business models and delivers immediate value. Raval (2022).

The current business model is identified in Fig. 5.3. It is the product of a grounded research project which included a literature search within consultancy services research papers and reports of applications in established applications journals. Figure 5.3 Current Network Operations Management Activities and Competences (value management operating model one) is representative of operating models in progressive organisations. The diagram builds a range of tasks on the six topics that are seen as essential activities. Figure 5.4 expands the model and introduces activities and technological applications that facilitate the delivery of internal and external information to fulfil the value proposition. Typically, this model is focussed on current activities that meet customer expectations. Before looking at future models and their components it is helpful to identify the changing background of the business environment. The rapid development of ecosystems has been commented upon by IDC (International Data Corporation— International Data Corporation (IDC premier global provider of market intelligence, advisory services). IDC (2020) suggested that: The future of industry ecosystems is open, dynamic, and shared, evolving like a biological ecosystem that changes in response to pressure, competition, or disruption. Businesses that consider their ecosystem as an expansive set of building blocks and are driven by the opportunity to better deliver values, outcomes, and experiences to individuals and industry ecosystem participants will be able to adjust to meet market change or opportunity as required, much in the same way nature finds a way to adapt. (IDC, 2020).

Figures 5.5 and 5.6 (value management operating model two) considers the future development developments that will be required to meet “future” organisational value management operating model that can meet the digital business environment with an operating model that is, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders. It assumes full digital connectivity and is probably working in real-time with large customers—digital thread connection with a digital twin (verifying current performance and exploring opportunities). Digital connectivity enables all network members to receive operating data in real time figure seven offers suggestions for performance measurement from customer activity back to raw material production if required. Clearly this has attraction for networks where traceability is required, as well as production and marketing performance. See Fig. 5.7.

Performance Management

Fig. 5.3  Current network operations management activities and competences

•Identify Changes Required (if any) in Partnership Arrangements • Monitor Network Relationships (Existing Product-ServiceMarkets and Potential NPD Requirements •Harnessing and focussing talents •Network Agility and Flexibility

•Visionary Leadership •Review of current and planned future direction •Creating a sustainable future •Impact on Commercial Sustainability •Impact on Socio-economic Sustainability •Impact on Environmental Sustainability •Continuity of outstanding achievements

• Review Existing Processes for Expansion of Volume Potential • If considered Appropriate Explore cost and TimeLine for Replacement Processes Business Process Excellence Management • Review Existing Operating Activities • Review Efficiencies of Existing Employees Corporate Sustainability

Digitisation, Digitalisation, and Connectivity

Current Network Operations Management Model

Strategic and Operational Asset Planning and Management

•Identify efficiencies existing in Digitisation and Connectivity Installations •Review impact on Network Connectivity •Review Employee Current Skills -Identify Upgrade Requirements

Creativity • Focus on creativity and innovation •Review Research Requirements (Pure/Applied Collaborative Network •Access to Capabilities for new research Relationship Management •Monitor RD&D Costs and TimeLine •Using AI to manage supplier and customer •Review and Develop Capabilities of Existing VCN Structure relationships •Consider Impact of changing volumes and activities

•Customer Centric Objectives and their Impact on Current and , Potential/New Customers •Network Economic Profitability and Productivity •Development of Customer Facing Capabilities

•Monitor Efficiencies of Capital Equipment and partner asset leverage arrangements. •Check on Capital Recycling of Existing Assets •Check Impact on Partnership Leverage

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Agile/Lean Product/Process Design

Business Process Management (Outsourcing?)

Network Optimisation Integrated Collaborative Network Management

Sustainability Operations

Fig. 5.4  A current/typical digital operational—operating model

Generative AI/Machine Learning for Production/Marketing Decisions e.g./Inventory Management

Finance and Investment Operations Activities Value Engineering and Value Delivery (Investment Effectiveness and Cost Effectiveness)

Aspects of Organisational Excellence that are a balanced and coordinated performance of strategic and operational excellence

Digitisation , Digitalisation and Connectivity

Human Resources Relationships, Strategy and Operations Activities Workplace/Technology Relationships Value Engineering and Value Delivery (Cost Effectiveness and Efficiency)

Manufacturing and Distribution Operations Activities Value Engineering and Value Delivery (Cost Efficiency)

Focus on creativity and innovation Review Research Requirements (Pure/Applied) Access to Capabilities for new research Monitor RD&D Costs and TimeLine Using AI to manage supplier and customer relationships (Effective and Efficient Current and Future Value Propositions

Advanced Analytics

Intelligent Process Automation

Organisational Excellence

Value Management Operating Model (1)

Enterprise Resource Management Systems

Cyber Security - customer and Supply Chain Security (Cost Effectiveness) Sustainable Corporate Operations and Activities Socially Responsible, Environmentally Responsible and Commercially Responsible (Cost Effectiveness)

Sustainable Corporate Operations and Activities Socially Responsible, Environmentally Responsible and Commercially Responsible (Cost Effectiveness)

Marketing & Sales Operations Activities Value Proposition Value Delivery (Cost Efficiency)

Serviceability Operations Activities Value Delivery & Value Renewal Options (Cost Efficiency)

Strategic and Operations Activities: Value Proposition, Value Engineering Value Delivery and Value Renewal (Cost Effectiveness)

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•Identify Impact of NPD on existing Digitisation and Connectivity •Review impact of NPD on Network Connectivity •Review Employee Current Skills -Identify Upgrade Requirements

Fig. 5.5  Developing (future) network operations management capabilities

Strategic and Operational Asset Planning and Digitisation, Digitalisation, • Review Existing Processes for Continuity Potential Management and Connectivity • Explore cost and TimeLine for Replacement Processes Performance • Identify Implications for Existing Operating Activities Management Developing Future Network Business Process • Explore Impact on Existing Employees Operations Management Model Excellence Management •Type of Research Required (Pure/Applied)) • Implications of the Development of Network ecosystems (Opportunity and Time Response Based) •Increase Network Collaboration Creativity Corporate •Product Portfolio Direction •Impact on Commercial Sustainability Sustainability •“Serviceability” opportunities Collaborative Network •Impact on Socio-economic Sustainability Integrated Relationship Management •RD&D Costs and TimeLine Decision Making •Impact on Environmental Sustainability Teams •Access to Capabilities •Internal •Implications for Operating Models of the •Review Capabilities of Existing VCN Structure •Consider Impact of NPD Activities •External Development of industry ecosystems •Identify Changes Required (if any) •Collaborative Network and •Impact on Network Relationships (Existing ProductCustomers Service-Markets and Potential NPD Requirements •Regulators •Implications for Operating Models of the Development of industry ecosystems

•Review Strategic Objectives and their Impact on Potential New Customer and Network Economic Profitability and Productivity

•If New Capital Equipment is Required Consider impact on NPV Profile(s) •Funding the Investment •Check on Capital Recycling of Existing Assets •Check Impact on Partnership Leverage

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Core Drivers

Resilience to Global Risk

Intelligent Process Automation

Changing OEM/S-SME Relationships

Advanced, Advanced Analytics

5G/6G Artificial Wireless Digital Thread & Intelligence/ Machine Digital Twinning Learning

Organisational Agility/Lean: Strategy and Structure

Distribution Channels Futures

Value Creation

Digital, Easily Accessed , Simple, Rapid Response, Convenient to use for Customers , Partners , Employees, Suppliers, and other Stakeholders,.

Future of Outsourcing Activities and Costs

Network “Sustainability” Management: Circular Value Chain

Customer Centricity

Product Personalisation

Marketing and Sales Operations Management

Value Management Operating Model (2)

Digitisation, Digitalisation and Connectivity

Network Product-Service Portfolio Format Management

Stakeholder Governance Integrated Platform and Collaborative Based Network Platform Networked Structures Scalability Ecosystem Customer and Product, Process Organisation Cybersecurity Collaborative Application IP Blockchain Activities

Smart Manufacturing Systems

Industry 5.0/6.0 People and Organisation Orientation

Generative AI “Product “Quality Control

Metaverse Applications

Human/Cobot Co-working

Business Process Sourcing Management

ERP: Optimal Network Resources Flow Management

Ability to capture Customer requirements directly

Physical Distribution Management Operations

Real-Time Data Connectivity Performance management Network and customer operations Product-service modification and NPD GPS data Limitations

“Serviceability” as a Product Analysis and Operations Management

Future Trend Scenarios “Scientific” Organisational Change “New Logic” Competition “Business Model Design”: Value Chain Network Positioning the Impact of Technology “New Dimensional Diversity” “Optimised “Social and Business Value”

Resources management Time management Capabilities management Capacity management Efficiency management Talent Requirements

Sustainability Operations “Value Renewal” Circular Operations Management Impact on Design

Operations Management Production Distribution Serviceability Producibility (End2End Development)

Total Life Costs/Total Cost of Ownership Core/Non-core processes Cost-efficiency improvements Specialist processes

Culture of Experimentation & Innovation

Investment Future and Network Leverage Futures

Augmented /Virtual Reality

Stakeholder Relationship Management

Network Producibility End2End Value Management

Organizational Excellence Advanced Additive Manufacturing

Product Portfolio Management

Fig. 5.6  A “future” organisational value management operating model

Based Upon Ideas from Infosys Blog

Value Stream Mapping & Analysis

Network Collaborative RD&D

ProductServiceMarket Orientation

Planned Revenue Generation Management: New Sources

Customer Journey Modelling Integrated Teams Search and Order Order management Transactions Product-service uses Loyalty Future? Implications for Operating Models of the Development of industry ecosystems

Integration and Coordination: RD&D, Procurement, Operations, Serviceabilty and Sustainability Futures?

Procurement and Resources Supplier availability Consortia procurement Negotiations & ordering Transactions management

Changing “Manufacturing” Operations Management

Product-Service-Market Portfolio Format Performance management Modification and NPD Serviceabilty Modification and NPD

Supplier Relationships Operations Management Future Supply Chains

Customer Relationship Management: Current and Future

Developing Operating Model

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Customer-led Product-Service-Market responses RD&D Partnership Collaboration Production Process management Serviceability product development

Stakeholder Liaison EESG • Equality • Environment • Society • Governance UNO Sustainability Development Goals Criteria

• Customer Centricity and Demand Chain Response Management • Product – Service-Market Design and Development • Enterprise Resource Planning and Control • Supply Chain Response Management • Manufacturing Execution • Operational Effectiveness of People, Processes, and Assets

Corporate Sustainability

Business Process Excellence Management

• Digital & Analytics Capital • Ecosystem and Networks • Digital Thread • Digital Twinning

Meeting stakeholder expectations with something unique, different and distinct from items their competitors may offer in the marketplace.

Digitisation, Digitalisation, and Connectivity

Organisational Excellence Management -

Collaborative Network Relationship Management

• Time2Market (RD&D/NPD) • Order Management Cycle • “Serviceability Response “Cycle • Producibility (End2End) Cycle • (Customer delivery satisfaction)

Creativity

Strategic and Operational Asset Planning and Management

Performance Management

Growth from Revenues Based on: • Innovation & Creativity • RD&D Product-Services & Processes • Order winning product-service criteria based on customer facing processes (business performance value drivers) Operating Economic Profit (EVA) Revenues less NOPAT less Cost of Capital Used = Economic Profit (EVA) Market Value Added (MVA)**

Fig. 5.7  “Operational excellence performance”: A convergence of primary influence factors

• • • •

Strategic Asset Management - involves managing the capital investment towards a longterm program of increasing the EROA (economic return on assets) and; Operational Assets Management - systematic process of developing, maintenance , upgrade, and disposal of assets in the most cost-effective manner. (Includes all costs, risks and performance attributes).

Positive Cash Flow from: Operations Market Management Asset Management Strategic Management

**Market value of the common stock or market cap + market value of preferred shares + total debt (including long and short-term debt) + minority interest - Liabilities OR **MVA is closely related to the concept of economic value added (EVA), representing the net present value (NPV) of a series of EVA value–

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References Business Roundtable. (2021). Business Roundtable redefines the purpose of a corporation to promote 'an economy that serves all Americans’. Business Roundtable. www.businessroundtable.org. European Foundation for Quality Management (EFQM). (2022). The EFQM model. https://efqm. org/the-­efqm-­model/ Harrington, H.  J. (2005). The five pillars of organizational excellence (Vol. 6, pp.  107–114). Handbook of Business. Iansiti, M., & Levien, R. (2004). The keystone advantage-what the new dynamics of business ecosystems mean for strategy, innovation, and sustainability. Harvard Business School Press. IDC. (2020, December 23). The future of industry ecosystems: Built on the platform and sharing economy. IDC (International Data Corporation). https://blogs.idc.com/2020/09/23/ the-­future-­of-­industry-­ecosystems-­built-­on-­the-­platform-­and-­sharing-­economy/ Raval, P. (2022). Research report on the MIT SMR connections/EY global survey of CP (consumer products) leaders In: Basili S. How operating models must evolve for the future. EY Building a Better World. Resnick, C. (2017, June 17). Operational excellence (OpX) achieved by companies that ARE operationally resilient. ARC. Sarna, S. K. (2014). Organizational excellence. Ispat Guru Blog. Walters, D. W., & Helman, D. A. (2020). Strategic capability response analysis–the convergence of industrié 4.0, value chain network management 2.0 and stakeholder value-led management. Springer. Wrike Consulting. (n.d.). Empower teams with seamless business project management. https:// www.wrike.com/teams/business-­operations/

6

Performance and Positioning

Introduction This chapter addresses performance and positioning. Performance management is the process of ensuring that a set of activities and outputs meets an organization’s goals in an effective (strategic) and efficient (operational) manner. Positioning strategies reflect the process of identifying market opportunity(ies) with existing and required capability responses. It is an important consideration when integrating the value proposition into a “value management” process.

Performance: Introduction Performance management is the process of ensuring that a set of activities and outputs meets an organization’s goals in an effective (strategic) and efficient (operational) manner. Performance management integrates the performance of a network organization, partners, activities and, processes and employees in managing specific tasks. Essentially this is a capability response reinforcement or development program with the objective of creating operational excellence while continuing to deliver value management performance improvements. These efforts should help maintain the operations’ excellence already achieved, develop additional capabilities, and renew the commitment surrounding the transformation. In particular, the second stage worked across four primary dimensions, within the operational excellence envelope. Operational Excellence: A system of activities that aim to maximise the “value added” by a network to its “stakeholders” by coordinating network partners’ operational drivers and strategic performance builders that are integrated and coordinated over a specified timeline to create unique or exclusive “value advantage” for all stakeholders. Performance management of operational excellence involves a continuous process of identifying, measuring, and developing performance in © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_6

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network organisations by digitally connecting and linking each network partner organisations’ performance to the network’s agreed objectives and managing the roles and tasks of partners, that result in optimal economic profitability. Performance management comprises: Performance Management: Maintaining and improving further performance through additional value creation/value contribution initiatives and performance management Process Management: Creating a value production system to capture, codify, and institutionalize standards for operations excellence across the organisation and the network partners utilising digital connectivity Partnerships/People Management: Establishing an awareness of operational excellence amongst the entire value chain network by identifying the relevance of operational excellence for a centralised system for building capabilities, that implement value management Product Portfolio Management: Maintaining product-service-market relevance by focusing on customer fixed asset management activities together with marketing strategy decisions and matching these with appropriate capability responses, i.e., serviceability and market selection requirements, supported by an economically viable Value Proposition

Both strategic and operational performance management activities aim to maximise the “value added” by a network to its “stakeholders”, by coordinating other network partners’ operational performance drivers and their strategic value builders to create unique or exclusive “value contribution” for all stakeholders. Performance management is a continuous process of identifying, measuring, and developing performance in network organisations by linking each network partner organisations’ performance and objectives to the network’s agreed objectives and the roles and tasks of partners, resulting in optimal economic profitability. Industrié 4.0 has deceased the timeline between strategic and operational “thinking and doing”, for example digital twinning technology and artificial information/machine learning/ deep learning, (and Industry 5.0 will have further impact in terms of speed and scope capabilities), it follows that an operating model should be capable of aiding “thinking and doing” decision making and implementation by using an operating model capable of exploring optimal solutions’ what ifs? A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. This chapter considers the role of performance and positioning in the network value contribution model. However, we need to identify and define topics used in developing the approach: Strategic Performance: Comprises the determination of the basic long-term goals and the objectives of a network organisation and the determination and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. The overall network strategy identifies a strategic portfolio of industries in which it engages. Network partnership strategies are identified by their roles and tasks within the overall strategic direction and their contribution to creating Competitive Value Advantage. Strategic performance requires relevant response capabilities.

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Operational Performance: Network operational performance management is the alignment of all business units within a network to ensure that they are working together to achieve core business goals. Essential aspects of successful operational performance include achieving contribution tasks to allocated overall network strategy relevant capabilities and capacities, a relevant and balanced approach to asset management (i.e., capital intensity) and an ongoing “economic profitability performance enhancement”

Figure 6.1 summarises operational excellence criteria.

 trategy Excellence + Operations S Excellence = Operational Excellence Strategic and operational excellence activities aim to maximise the “value added” by a network to its “stakeholders” by coordinating other network partners’ operational performance drivers and their strategic value builders to create unique or exclusive “value advantage” for all stakeholders. Performance management is a continuous process of identifying, measuring, and developing performance in network organisations by linking each network partner organisations’ performance and objectives to the network’s agreed objectives and the roles and tasks of partners, resulting in optimal economic profitability. As discussed in the Introduction to Part ll. organisational success is enhanced when strategy and operations are coordinated.

 he Primary Benefits of an Optimal Network Value T Contribution-­Led Operating Model A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. Figure 6.2 is based upon the Introduction to Part ll, to identify specific interest and consideration for performance management, they are suggested as: NOPAT/EVA Economic Profit/Positive Value Contribution: Clearly strong economic network performance across activities is an essential requirement for long-term viability Profitable Revenue Growth: Current and future revenue growth are core drivers for network success. “Top-Line” Growth—Sales Efficiency Revenue and “Bottom Line” Growth— Efficiency of operations in generating revenues are indicators of growth patterns Positive Cash Flow Management: Consistency and continuity, growth, successful applications (operational partnerships, strategic partnerships, transformation (strategic and operational objectives) Stakeholder Value Management and (E)ESG Criteria/UNSDGs: As a rapidly increasing expectation of overall business activity this topic should reflect an organisational commitment.

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Positioning: Introduction Positioning strategies reflect the process of identifying market opportunity(ies) with existing and required capability responses. It is an important consideration when integrating the value proposition into a “value management” process. Market positioning: decisions impact all aspects of how your “total market” perceives an organisation, it identifies and influences everything the business network represents. It is based upon the network collective capabilities and capacities that are necessary as essential for market success. It is an essential point of reference for network partners as well as potential and existing customers and serviceability support teams for customers. Value chain positioning indicates the roles and tasks necessary for successful intra-network collaboration and coordination (and this often adds inter-­ industry network and international networks) if the opportunity to be pursued successfully. Value chain positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within a value-ecosystem: Strategic Positioning: Is a matching process of identifying market opportunity(ies) with existing and required Capabilities Response. An important consideration is to integrate the Value Proposition into a “Value Management” process Market Positioning: Impacts all aspects of how your “total market” perceives an organisation. It identifies and influences everything the business network represents. It is based upon the collective capability and capacity responses identified as essential for market success. It is an essential point of reference for network partners as well as potential and existing customers, and for service and support teams to create more delightful and on-brand experiences for customers. Value Chain Positioning: Indicates the roles and tasks required for successful intra-­ network collaboration and coordination (and this often adds inter-industry network (and international networks) if the opportunity is to be pursued successfully. Value chain positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within a value-ecosystem. Operational Positioning: Monitoring and maintaining the value requires consideration of the network’s aggregate capability responses consisting of: creating and managing customised “serviceability” operations, real time performance management and interpreting and managing customer operations data, delivering predicted service management, suggesting and implementing optimal production operations management changes, asset management advice i.e. product-service-market procurement, in-use activities and product-service retirement.

Given that a network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. Figure 6.2 also identifies specific interest and considerations suggested for positioning management. Positioning core activities are suggested as:

Fig. 6.1  Components of network organisational excellence

Strategic Excellence Organisational Excellence Operations Excellence • Performance management: Maintaining and improving further performance through additional value creation/value contribution initiatives and performance management • Partnerships/people management: Establishing an awareness of operational excellence amongst the entire value chain network by identifying the relevance of operational excellence for a centralised system for building capabilities, that implement value management • Process management: Creating a digitised/digitalised value production system to capture, codify, and institutionalize standards for operations excellence across the organisation and the network partners utilising digital connectivity. • Product portfolio management: Maintaining product-service-market relevance by focusing on customer fixed asset management activities together with marketing strategy decisions and matching these with appropriate capability responses by an economically viable value proposition

• Stakeholder orientation • Value-Led strategic direction by identifying a strategic portfolio of industries in which it engages • Framework of structured activities and processes • Collaborative network partnership strategies are identified by their roles and tasks within the overall strategic direction and their contribution to creating Competitive Value Advantage and a targeted Value Contribution • Risk is identified and quantified • Network employees aware of strategic direction and are committed • Digitisation, Digitalisation and Connectivity • Total transparency

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“Producibility” - End2End Value Delivery Programs Circular Value Chain being developed

Productive Use of Resources & Focused Outsourcing

Product, Industry & Global Platforms

Revenue Growth

Positive Customer Response to ProductService-Market Fit4Purpose & Serviceability profiles

Positive Value Proposition Delivery Responses

Business Process Excellence Management

Positive “Price”/Time/ Elasticity/Responses

TimeLine Management: Effectiveness & Efficiency

Collaborative Network Relationship Management

Data Analytics & Analysis Management Monitoring current market positioning & value chain positioning and strategic opportunities for current & future positioning decisions

Stakeholder Value Evidence of EESG/UN SDGs activities Management ((E)ESG Criteria/UNSDGs)

Positioning Strategy

Business Intelligence

Strong Positive Reputation Positive stakeholder & public perceptions and expectations about the organisation and its brands

Multiple-Use Applications Products at relevant price points Differentiated Product-Service-Market Portfolio

Performance Management Response

Digitisation, Digitalisation, & Connectivity

Profitable Revenue Growth

Operational Excellence: Operations Performance -

Supplier & Customer Risk Profiles identified & applied to transactions

Reliability: “Risk/Resilience Parameters”

Future Proofing

Performance Management

Positioning Based On Customer Price/Value/Equivalence.

CustomerDriven Excellence

Cash Flow Management

Strategic & Operational Asset Planning and Management

Investment Model

Stakeholder Investment Response

Planned stability of: • Revenues • Gross Margins • NOPAT/EVA

Fig. 6.2  Operational excellence: Components of performance and positioning characteristics

Business Platforms • Consumer Platforms • Network Platforms • Global Platforms

• RD&D Budget for remanufacturing/Total % • Remanufactured products/Total % • Employee satisfaction Creative/Innovative • Investor Satisfaction • Customer Satisfaction – Fit4Purpose • Aggregate Stakeholder Response

Value-Based Management allows the success of the Organisation & its Divisions to be monitored and reported NOPAT/EVA Economic Profit/ Positive Value Contribution

Fixed & Current Assets “Productivity” management contribution to Cash Flow

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Positioning: A matching process of identifying market opportunity(ies) with existing and required Capabilities Response. An important consideration is to integrate the Value Proposition into a “Value Management” process. Valid Value Proposition: A valid value proposition is one that is acceptable to customers, network partners and meets secondary stakeholder expectations and is economically viable. Positioning repositioning/strategy: The purpose of positioning (strategic, market, value chain organisation, and/or product-service-market) is to determine a targeted audience for your organisation and product to obtain the best response possible and create a loyal customer base. Creative/Innovative: Is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering exclusive goods or services. Reputation Management: Is the practice of influencing stakeholder perceptions and public perceptions and expectations about an organisation and its brands. It includes monitoring the perceptions and responding to reputation threats and proactively seizing opportunities to enhance reputation. Stakeholder Value Management and (E)ESG Criteria/UNSDGs: As a rapidly increasing expectation of overall business activity this topic should reflect an organisational commitment. Profitable Revenue Growth: Current and future revenue growth are core drivers for network success. “Top-Line” Growth—Sale Efficiency Revenue and “Bottom Line” Growth— Efficiency of operations in generating revenues are indicators of growth patterns Reliability: is defined as the probability that a product, system, or service will perform its intended function (Fit4urpose) adequately (it’s value proposition/specification), or for a specified period, or will operate in a defined environment without failure.

 hanging and Challenging Industry and Market Dynamics C Confronting the Business Corporate Sustainability is currently a topic that is both changing and challenging and while its acceptance is expanding, some doubts continue to be argued. The term ESG was coined nearly 20 years ago. Currently more than 90% of S&P 500 companies now publish ESG reports and companies of various sizes across industries and geographies have been allocating more resources toward improving ESG.  More than 90% of S&P 500 companies now publish ESG reports, in some form, and in several jurisdictions, reporting ESG elements is either mandatory or under active consideration for being so. Inflows into sustainable funds rose from $5 billion in 2018 to nearly $70 billion in 2021, (Pérez et al., 2022). Critics argue that the importance of ESG has peaked, that it is just a distraction from more pressing global matters; and that it is not feasible because it’s too difficult to measure; and there is no meaningful relationship with financial performance. Others have argued that ESG represents an unstable combination of elements, and that attention should focus only on the “E” part: environmental sustainability. In

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“Does ESG really matter—and why?” (Pérez et al., 2022), senior McKinsey partners Lucy Pérez, Dame Vivian Hunt, and team acknowledge these concerns but argue that that true ESG is consistent with a well-considered strategy that advances a company’s purpose and business model. Long-term value is created from the perception by stakeholders that a business is acting in a way that is fair, appropriate, and deserving of trust. Organizations that are successful with ESG, approach it in a rigorous, strategy-­ driven, socially attuned way, making ESG intrinsic to their strategy by defining, implementing, and refining a carefully constructed portfolio of initiatives that connect to the core of what they do. They also contribute to a competitive landscape of good corporate citizenship facing existential challenges, notably climate change. They also act to operationalize ESG throughout the organization, synchronising it with operations. The authors have noted earlier their preference to consider this topic as EESG, the initial “E” referring to Equality issues. Futureproofing. A process of anticipating and exploring the impact of time, a logically determined future timeline that can be related to the business model life cycle and developing methods of minimising the effects of shocks and stresses of future events. Futureproofing is used in industries such as electronics, medical industry, industrial design, business model design, and increasingly in exploring climate change. Technological Forecasting techniques using specialist/expert scenarios are useful here as the scenarios can be developed to identify various aspects of markets. For example, developments in consumer future problem solving and product-service applications can be explored as can the production feasibilities and viabilities of the production technology. Life Cycle Analysis is explored in a subsequent chapter. Value Chain Analysis Management and Development presents both change and challenge. Value chain network analysis reviews the processing steps that a business follows to deliver goods and services. The objective is to locate those processing steps at which value is added to the final product. In addition, the chain of activities is reviewed to see where costs are being incurred. Producibility is a network optimising process that searches for acceptable price/value-fit4pupose/equalisation solutions across network demand/supply capability response opportunities, this facilitates resource allocation research across emerging product-service-markets.

 ompetitive Value Proposition Positioning: Options C for Competitive Advantage and Value Contribution The options are as follows: Time Related Response Positioning Strategies Facilitating customer TimeLine management is a valid component of the value proposition. Time is considered critical for many customer facing processes, in Aerospace, Process Industries, Healthcare, Financial Management etc. In March 2022 Uber created Shippit, a delivery service for the fast fashion industry/market.

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Stakeholder Aware Positioning Strategies Responding to relevant customers with sustainability programs that design products around a concept of remanufacturing and renewable existence products. There is an increasing list of companies using the circular economy/value chain concept and includes Renault. Focused Product-Service-Market Positioning Strategies Creating value propositions that integrate with local end-user practice, manufacturing, marketing, and distribution practices. Labelled reverse innovation by GE and its Asian healthcare equipment product ranges. Customer Experience/Journeys Positioning Strategies Consumer product-service customers for durables, FMCG, travel products etc., are beginning to expand their expectations for additional features to their purchasing activities. Examples can be seen in short video “visuals” that appear positioned in current affairs and news sections of internet news programs. The emphasis is exacerbated by their willingness to switch regular (or difficult to access purchases) to online services. Task Related Purchases Positioning Strategies Applications/in use product-service related purchases that require users to have skills (or have help available) to complete purchases are demanding and receiving this assistance, either at the POS or made available online. Home ­improvement product-service-markets use instore and online visual help; many have data bases containing details of skilled sources of help. Preferred Transactional Mode Positioning Strategies The introduction (and rapid growth) of “purchase now/pay later options (Zip, LattitudePay, PayPal etc.) has accessed a segment of customers preferring immediate ownership that has attracted purchasing of durables and electronic product-services. Price/Value/Equivalence Positioning Strategies We referred to the Price/Value/Equivalence model in an earlier chapter (Chap. 3: Managing Value) and make further reference in this chapter. The example of the use P/V/E by the hotel group Accor to position its hotel range is a working example of the concept. Creativity/Innovation Positioning Strategies “Innovators” are a profitable target segment in several product-service groups. They respond to “New” rapidly, often exchanging recent and fully serviceable products, for replacement models. Knowledge of this segment formulated the marketing strategy of a UK television rental service organisation in the UK. As new “models” were introduced by manufacturers the company contacted its “innovators”, identifying technology developments (and the benefits). The response was profitable, new contracts at higher rental rates were sold. The “trade-ins” were “positioned” to attract “early adopters and the early majority” groups, many of whom upgraded their rentals. The organisation had a program for “laggards” (a relatively large group) for whom a “no-frills” model sufficed. Unique/Exclusive Features Positioning Strategies

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This proposition is usually attached to a benefit that has powerful attraction. Safety is an important consideration for most automobile purchases. For some considerable time, Subaru offered an all-wheel drive feature which was unique/exclusive until competitors (either licensing the Subaru patent or having developed an alternative process) adopted the safety feature. Unique/exclusive features continue to be important across a few markets but developing technology has enabled the development of competitive/comparable systems diluting the original impact of the feature’s exclusivity. Flexibility/Multiple-Use Applications Products Positioning Strategies There are notable examples of product-services that have been adopted by unrelated industries and markets. Non-skid braking devices (a military and commercial aerospace product) that was in service in the 1950s was adapted and adopted for automobiles and is now an expected product feature. GPS positioning equipment (another military product-service) has received the same application. Alternative competitive value proposition positioning options for competitive value advantage and performance excellence management are suggested in Fig. 6.3.

Performance and Positioning: An Example  esponding to Customer Expectations by Restructuring the Value R Chain Network Customer expectations for rapid response to orders is often competitor driven as this case example suggests: Speaking to The Australian Financial Review at the Business Summit, Woolworths CEO Mr Banducci said that “15 minutes is the new black” as Uber join forces with logistics

Positioning Based On Product Use on Flexibility of Applications

Value Contribution Product-Services

Rapid Response Product-Services Competitive Stakeholder Response Positioning

Positioning Based on Unique/Exclusive Product Characteristics

Digitisation & Connectivity

Positioning Based On Price/Value/Equivalence Profiling Product-Service-Market Positioning

Competitive Value Proposition Positioning Options that Create Organisational Excellence & Positive Value Contribution

Creativity & Innovation

Customer Experiences

Data Analysis and Management

Positioning Based Upon Task Related Benefits

Positioning Based On Price/Value/Equivalence Value Chain Management

Customer Transactions Preferences

Fig. 6.3  Competitive value proposition positioning options for competitive value advantage and performance excellence management

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company Shippit (Shippit is company, which has created a multi-carrier logistics platform using artificial intelligence to connect retailers with the best delivery options enabling them to offer same-day delivery and track the last mile logistics. The company was founded in 2014 by Will On and Rob Hango-Zada to allow retailers like CUE, Sephora, Kathmandu, Big W, Target, Super Retail Group and Harvey Norman to deliver within the hour in the same way as food. Woolworths and Coles partner with Uber to deliver basic shopping and liquor while Deliveroo and Menulog offer similar services for a limited offering of groceries. Uber and Shippit are teaming up to get retail to consumers within the hour (Durkin, 2022). Amazon Flex have introduced their own delivery fleet in Australia while start-up Wing, owned by Google’s owner Alphabet, launched a pilot program with Coles last week to deliver groceries by drone to several suburbs in Canberra from their “dark warehouses” within minutes. “Once consumers’ expectations lower to 15 minutes, you can never go back,” Mr Banducci said, citing the battle over the last mile as the top issue for retailers and supermarkets. The convenience economy is estimated to have surged to more than $650 billion globally—over two billion people purchased goods or services online in 2020—with Asia Pacific the largest regional parcels market by value, accounting for around 42% of that market, a new report by consultants WSP “Australians spent a record $50 billion online in 2020 and the value of the purchases has doubled as buyers become more comfortable buying online.” (Durkin, 2022). Shippit’s integration with Uber means their clients will be able to access Uber’s more than 55,000 riders and drivers to offer next-hour delivery. Delivery quotes and estimated time of arrival will be viewable in their shopping cart and packages tracked using real-time GPS in the same way as consumers track their food deliveries. “We saw an explosion in e-commerce through COVID with online sales up 60% and continued strong growth this year. The consumer trend for immediacy and ultra-convenience is here to stay,” general manager of retail for Uber Eats Lucas Groeneveld told The Australian Financial Review. He said the deal also unlocked more earning opportunities for drivers and riders by avoiding Uber’s ordering peaks at lunch and dinner. Shippit’s co-CEO Rob Hango- Zada said they had also witnessed a major shift in consumer’s expectations. We have retailers of all shapes and sizes, whether you’re sending a spark plug or kayak, a new appliance or furniture, there really is a carrier for every product.” “We wanted to work with retailers to close out that final mile to deliver anything, really, within the same hour,” he said. “There’s a slight stagnation in order volumes as lockdowns lift but home furnishings, electronics and appliances are still strong, and fashion remains stable. But people are spending more, with the average value of the purchases up 50% as people become more familiar with buying online. (Durkin, 2022). Merchants are billed by Uber on a distance-based charge and then determine the cost of delivery for consumers, with most passing on fixed fees typically of around $10 or $20. Others are offering free delivery and some retailers are passing on the full cost. Terry White a pharmacy chain in Logan (Brisbane, Queensland Australia) signed on last year to deliver small items to residents using Wing’s delivery drones.

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Mr Groeneveld, Uber, agreed that within-the-hour deliveries were about driving sales and not making more on delivery fees, saying most consumers would be able to get delivery within the hour for around the same cost as same-day delivery has traditionally been offered.

This case example illustrates how increased customer performance expectations prompts repositioning within the value chain.

References Durkin, P. (2022, March 10). Uber launches ‘fast fashion’ arm, boss/Australian financial review. Pérez, L., Hunt, V., Samandari, H., Nuttal, R., & Biniek, K. (2022, August, 10). Does ESG really matter—And why? McKinsey.

7

Profitability and Productivity

Introduction Profitability has many interpretations, often competing with other metrics as a means of measuring corporate performance. The DuPont ratio spread is explored in this chapter as useful in identifying and providing meaningful interpretations across a range of management activities, strategic effectiveness, investment strategy, operating efficiency, and shareholder returns. However, there are differing views on what comprises “profit”. Kay (1993) argued that while organisations appraise success by size of sales, or share price performance, market share, return on a measure of investment or perhaps sales or growth rate, a realistic measure of corporate success is value added, a derivative of economic profit. To be of use as a performance metric, value added, requires to be quantified. Operating margins are one indication of value that is added at each stage of production. However, this has problems. One problem concerns the charge made for the use of capital in the production process. Here the concept of economic profit can be used. Economic Value Added (EVA) is a financial management technique developed by Stern and Stewart (1996), a financial consultancy that built upon Kay’s (1993) conceptual work. Other topics having an influence on profitability include cost driver analysis, total cost of ownership, and the importance of cross business network synergies. Walters and Rainbird (2007) discussed the application of EVA in the value chain network as have Walters and Helman (2020). We consider EVA to be a primary performance metric which implies managing EVA involves the cost items that operating management has responsibility for and, therefore, has immediate control over. It assumes that investment in operating assets be identified and omitted from the Operating EVA. Other interest income and other equity income are very unlikely to have a significant impact on operating decisions, therefore, we suggest this to be an Operating EVA. Strategic and operational excellence activities aim to maximise the “value added” by a network to its “stakeholders” by coordinating other network partners’ operational performance drivers and their strategic value builders to create unique or © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_7

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exclusive “value advantage” for all stakeholders. Performance management is a continuous process of identifying, measuring, and developing performance in network organisations by linking each network partner organisations’ performance and objectives to the network’s agreed objectives and the roles and tasks of partners, resulting in optimal economic profitability.

 eeking Organisational Excellence: The Primary Benefits S of an Optimal Network Value Contribution-Led Operating Model A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. We return to the Introduction of Part ll., Operational Excellence—an Operating Model, to identify specific interest and considerations suggested for performance management, they include: The primary benefit of an OptmnEx model (optimising value deliverables/costs) is its ability to search for an optimal solution for delivering a value competitive value proposition, that achieves Optimal Network Value Contribution (Economic Profit/EVA) by integrating: Creative/Innovative: Is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering exclusive goods or services. Profitable Revenue Growth: Resulting in business value (enterprise value, market value added), productive asset base, revenues of RD&D expenditure, Patents granted, licenced to and from competitive organisations. Operating NOPAT/EVA Economic Profit/Positive Value Contribution: Effective and efficient use of inputs, substitution, and sustainability activities—(E)ESG competitiveness (comparative end-user price/value/equality assessments). Positive Cash Flow Management: Performance consistency and continuity, growth, successful applications (operational partnerships, strategic partnerships), transformation (strategic and operational objectives). Strategic and Operational Asset Management: The changing roles and importance of tangible and intangible assets. Network leverage strategies. Investment Model: Risk and return criteria, (rate of return—weighted average cost of capital), use of financial gearing (debt/equity//capital intensity) policy. Use of operational gearing fixed costs/variable costs relationship. Business model structure options. Timeline Management: Effectiveness and Efficiency Customer relationships perspectives; use of time as a component of the value proposition mix, time2market (new product cycle), total order completion cycle time between network partners, total end2end (order-to-customer cycle time, response2service times. Supplier relationships perspectives; cash-to-cash, payments cycle, Operations

Introduction

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management cycle time perspectives; order cycle time, days inventory, distribution time service levels, complete/partial orders. Stakeholder Value Management: (E)ESG Criteria/UNSDG (United Nations Organisation Sustainability Development Goals); materials substitution and sustainability activities, and process development, (E)ESG acceptance and governance practice. Productive Use of Resources: Network producibility structured organisations offer the opportunity for collaborative procurement, manufacturing, and serviceability. Business Process Management: The use of various methods to discover, model, analyze, measure, improve, optimize, and automate business processes. Collaborative Network Relationship Management: Creating a network that develops interconnected, interactive, integrated, digitally connected, transparent, and cooperative relationships among its partners. Focused outsourcing: Allows a company to focus on its distinctive capabilities and to contract out more standard work to qualified third parties. In this way, the company can reduce timelines, spread costs, and maximize its responsiveness to changes in demand or capacity constraints. Valid Value Proposition: A valid value proposition is one that is acceptable to customers, network partners and meets secondary stakeholder expectations and is economically viable. A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. Dupont and Managing the Business: Decisions and Performance Measurement. Some years ago, the DuPont Company developed an approach to planning and control which was designed to monitor both corporate and divisional performance. This approach has subsequently been used by numerous companies. Its attraction is that it identifies the activity ratios which measure how effectively and efficiently an organisation (or its strategic business units) employs the resources it controls with the profit margins on sales, and how these ratios interact and determine the profitability of the assets. Figure 7.1 illustrates an example of the model—the classical strategic profit model; this application allows us to relate management activity components quantitatively and helps with managerial decisions in four ways. 1. It identifies one of the primary objectives of the business; to optimise returns to the shareholders 2. It identifies the growth and profit paths available to the organisation (−improve the margins earned, increase asset productivity, gearing) 3. It highlights the principal areas of decision-making asset management, margin management and financial management

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Profitability

Operating profit management revenue pricing and volume options; cost reductions; materials and manufacturing options

Sales Revenue

Product Mix Multiplied By Selling Prices Less Discounts

Operating Profit Profit Margin on Sales Revenue

Divided by

Sales Revenue Return on Net Assets

Less

Cost of Goods Sold

Multiplied by

Sales Revenue Net Assets Turnover

Divided By Net Current Assets Net Assets (Assets less liabilities) AKA Net Worth

Fixed Asset management and productivity

Working Capital Management and Productivity

Fixed Assets Tangible

Goodwill: Intangible Assets

Materials Manufacturing Costs Selling and Promotional Costs Administration Depreciation Interest

Inventory Debtors/Receivables Cash Less Creditors/Payables Overdraft Tax

Tangible Assets Land and Buildings Plant and Equipment Vehicles Intangible Assets Intellectual Property/Patents Brand Capabilities Digital and Analytical Capabilities Organisational & Managerial Practices Relationships (Customers/Suppliers) Ecosystems and Network Capabilities

Fig. 7.1  The DuPont system of financial analysis—a basic profitability and productivity model

4. It provides a useful model for appraising the strategic, marketing, and financial options by providing the facility to ask, “what if?” questions; for example, if the organisational network expanded into an adjacent, but related, market sector by acquiring a specialist activity (strategy) what would be the cost alternatives and implications for both marketing and financial activities and their costs The DuPont model offers an interesting and useful approach to working the interfaces of operations, finance, and marketing by combining operating profit management: Revenue pricing and volume options; cost reductions; materials and manufacturing options and asset management and productivity. Fig.  7.2 follows through on some simple cross multiplication to demonstrate how operations, finance and marketing contribute to creating value added, or a quantitative measure, profitability i.e., “profit”/equity; clearly this is a critical metric, without ongoing profitability an organisation loses the confidence of ALL stakeholders, not only its investors. Fig. 7.2 is important because it demonstrates how the decision-making areas interface and interact, for example, product-service-market strategy is a response to a market opportunity and is responsible for developing a feasible (customer acceptable) and economically viable (producible) response i.e., a value proposition, with significant decisions concerning the market position of the offer and where it envisages the optimal positioning of the organisation in the value chain network. This is a process of value engineering, a process which requires a cost-­ effective coordination of relevant resources to ensure not only customer satisfaction but also satisfactory outcomes for ALL the stakeholders. Operations has a major role in identifying the resource capability alternatives and manufacturing options.

Introduction

Net Income Revenue Profitability

137

Revenue Average Total Assets

X

Productivity

X

Average Total Assets Average Shareholders Equity Leverage

Key Performance Ratios

Net Income Revenue

X

Revenue Average Total Assets

Return on Total Assets Managed

Net Income Revenue

X

Average Total Assets Revenue X Average Shareholders Equity Average Total Assets

Net Income Average Shareholders Equity Return on Capital Employed Fig. 7.2  The DuPont Approach to Planning and Performance Accounting Performance Ratios

The range of options includes where, how much, and who, will be involved in the overall production activity. Finance and Investment management will be required to assess the financial implications of each of the operational options, following with how best the project is to be funded. This takes us back to “profit” the emphasis indicates the need to identify the most realistic measure of “profit” to be used. Profitability performance is influenced by the size and nature of the investment required (this is discussed below) but just as important is what or which measure of “profit” is used and how this contributes to creating stakeholder value. McKinsey uses “Our historical and updated analyses point to a better metric—economic profit is a company’s total profit after the cost of capital is subtracted. “Economic Profit is linked directly to a company’s return on invested capital (ROIC) and revenue growth, both of which are fundamental drivers of value creation. When return on capital exceeds the weighted average cost of capital, Economic Profit will be positive, and value will be created for shareholders. By

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contrast, some actions that boost EPS (stock buybacks, for instance) may not ultimately create value for shareholders—hence the limitations of that metric.” (Gupta et al., 2021). Furthermore, these decisions are not in the remit of senior operational managers but are typically made by CEO and CFO management. We refer later to the use made by Volkswagen (an exception) to the use made of economic profit/ EVA/Value Contribution. We are not suggesting economic should replace accounting profit but that it should be used as a “capital productivity” metric that identifies the actual use of capital at divisional levels, major projects, and for “opportunity appraisals”, and is used internally.

 conomic Profit: Economic Value Added and the Impact E on Stakeholder Value Management. Value Contribution: Its Derivation There are both qualitative and quantitative aspects of value contribution to be considered. Kay (1993) for example, takes a quantitative view, by considering the notion of value added as a measure of corporate performance as “the key measure of corporate success” and defined this as: Value added is the difference between the (comprehensively accounted) value of a firm’s output and the (comprehensively accounted) cost of the firm’s inputs. In this specific sense, adding value is both proper motivation of corporate activity and the measure of its achievement. Kay (1993) calculated value added by subtracting from the market value of an organisation’s output the cost of its inputs: Revenues Less ( wages and salaries,materials,capital costs ) Equals Value added Value added in this context includes depreciation of capital assets and provides for a ‘reasonable’ return on invested capital. Calculated this way value added is less than operating profit, the difference between the value of the output and the value of materials and labour inputs and capital costs. It also differs from the net output of the firm (cost of goods sold) the difference between the value of its sales and material costs (not labour or capital costs). Kay’s (1993) measure of competitive advantage is the ratio of value added to the organisation’s gross or net output: æ Wages + Salaries + Materials ö Revenues – ç ÷ è +Capital Costs ø Competitive Advantage = Wages + Salaries + Materials + Capital Costs



These are viewed as comparisons of value added to either gross or net output. Kay’s (1993) value added has similarity with the concept of a producer’s surplus

Economic Profit: Economic Value Added and the Impact on Stakeholder Value…

139

and has the additional benefit of being able to be calculated from accounting data. However, it should be said that inaccuracies are very likely if direct comparisons between organisations are made on a one-off basis. Local accounting practices differ, and accounting statements therefore are not strictly comparable due to differing procedures and practices. But longitudinal comparisons are worthwhile, particularly over periods of 3 to 5 years when input/output and value added/output ratios may be compared.

Calculating EVA Kay (1993) calculates value added by subtracting from the market value of an organisation’s output the cost of its inputs: Revenues less ( wages and salaries,materials,capital costs ) equals Value added Value added in this context includes depreciation of capital assets and also provides for a ‘reasonable’ return on invested capital. Calculated this way value added is less than operating profit, the difference between the value of the output and the value of materials and labour inputs and capital costs. It also differs from the net output of the firm; the difference between the value of its sales and material costs (not labour or capital costs). Stern and Stewart (1996) introduced EVA (economic value added), a concept very similar to Kay’s (1993) value added but deducted taxation from the result. EVA is net operating profit after tax (NOPAT) less a capital charge for the invested capital employed in the business. EVA is arguably a short-term measure of performance as it is based upon short-term performance. The inclusion of tax in the ‘equation’ may reflect operational decisions concerning manufacturing location and for this reason should be included when making competitive comparisons.

Economic Value Added = Revenues – ( Wages + Salaries + Materials + Tax - Capital Costs )

The Cost of Capital: Quantitative The Stern and Stewart (1996) EVA model uses a weighted average cost of capital in determining the “real” dollar value of its cost of capital. Given the recent long period of low interest rates, and the current increase in interest rates by Central Banks it is suggested that the long-term forecasts of interest rates by Central Banks and commercial lenders should be considered cautiously when making project viability assessments. The argument suggesting this to be too difficult is countered by an argument saying any attempt is going to be difficult. An interesting question is one that asks how much more profitable are projects that were appraised prior to the current period of low borrowing rates. A company’s assets are financed by either debt or equity. The weighted average cost of capital (WACC) is the average of the

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costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company must pay for every dollar it finances. Arithmetically the WACC is:

Weighted Average Cost of capital = %Equity X Interest Costs + %Debt X Interest Costs = WACC% ( $WACC )

Total capital employed (000) Equity Debt

$25000

$15000 $10000

@15.00% @ 5.00%

%Equity X Interest Costs + %Debt X Interest Costs 15/25 60%

X X

15.00% 15.00%

+

+ 10/25 40% X

X 5.00% 5.00% = 11%

The Annualised Average Weighted Cost of Capital = 11% X $25000 = $2750.00

Figure 7.3 (a and b) provides a comparative example of conventional accounting method and the Stern and Stewart (1996) approach to EVA.

Cost of Equity The cost of equity funds is influenced by the relative value of dividend payments to the current value of shares and the expected growth rate of dividends: Return to Investors Cost of Equity = To the Organisaon

Revenues Less Materials Manufacturing Selling & promotion Administration Overhead Depreciation Interest (on long and short term debt 330 Operating Profit (before tax) Tax paid (30%) 6500 Operating Profit (after tax). 10450(000)

Future Dividend Payments Current Value of Shares

30,000(000)

($000)

1500 3000 350 1100 6100 1000

($10m assets depreciated @10% per annum) (LT $10000m@ 5.00% = $300000 (ST $1000@10% = $30000) 16950(000)

The Traditional Operating Profit Statement (Figure 3 (a))

Expected Growth Rate of Future Dividends

Revenues Less Materials Manufacturing Services (Consultancy etc.) Direct Costs of Promotion Direct Costs of Distribution Direct Costs of Serviceability

30,000(000)

($000)

1500 3000 7200

0perating Profit (before tax) 17950(000) Tax paid (30%) 5385 Net Operating Profit (after tax) $12565(000) Cost of capital Total capital employed 25000(000) Equity 15000 Debt 10000 $ %Equity X Interest Costs +%Debt X Interest Costs = WACC % 15/25 X 15.00% + 10/25 X 5.0% 60% X 15.00% + 40% X 5.0% = 11.0% Cost of Capital = $2750(000) Operating EVA = Operating profit (after tax) less Cost of Capital = $ less 2750000 = $9815(000)

@15.00% @ 5.00%

Stern Stewart Approach: Economic Value Added (EVA) (Figure 3 (b))

Fig. 7.3 (a, b): A comparative example of the conventional accounting method and the Stern Stewart approach of EVA

Economic Profit: Economic Value Added and the Impact on Stakeholder Value…

141

Cost of Debt It is usual (but not mandatory) for interest payments and redemption dates to be fixed prior to loan offers being accepted. It is not a difficult task to calculate the cost of debt in either case: Annual Interest Payment Current Value of Debt = Rate of Return Required by Investors However, if a redemption date has been established this becomes:

Current Value of Debt =

Redemption Value of Debt Rate of Return Required by Investors

Typically, these values are based upon balance sheet values. This requires some assumptions that, given, the rapid changes occurring within the business environment in which the organisation operates, together with the “connectivity” characteristics of Industrié 4.0, risk and return combinations of existing tangible and intangible assets are unlikely to be representative of future returns and the risks that accompany them. Furthermore, it is very likely the balance of “value” between tangible and tangible assets will change, both in their characteristics and in their value. This point was raised by Boyd (2017) commenting upon a review (by the Australian Financial Review), CEO Outlook Poll, in which developments of data analytics, standardisation, platform applications, robotics, artificial intelligence, new metals and materials, and totally new forms of existing products (e.g., electric vehicles) will have impact. It was also argued that that the valuation of tangible and intangible assets will likely be very different, with intangible assets being valued higher than they currently are.

Cost of Capital: Qualitative A major qualitative factor for consideration when expanding the financial structure and size of the business is the impact this may have on decision making and control. Equity owning shareholders enjoy voting rights and theoretically can influence major decisions of the organisation. Increasingly shares are being held by institutional shareholders (pension funds, trade unions etc.) and by private equity companies who can, and do, exert influence. During 2017 the General Electric board of Directors was under pressure from a major shareholder who argued that the expansion of the company into industrial markets and away from its financial markets had gone too far, that some of acquisitions were too late and too expensive. The CEO at that time retired and was replaced. Almost immediately announcements were made suggesting the sale of what had become non-core businesses, a reduction in the “standard dividend” and, subsequently, announcements of large global redundancies. Recent changes in the direction of the organisation have not met with “Market” approval resulting in GE’s removal from the “500 Club”. The “new” CEO barely lasted a year, shareholder pressure for a more rapid increase in success led to his

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departure after some 12/13 months. It is interesting to comment that this change was brought about by a specific group of stakeholders concerned about the decrease in the dividend payments. No comments were made concerning the impact on the other stakeholders. In a value chain network context, there are indirect, qualitative, approaches to increasing network value added. Monitoring quality and substituting material inputs and processes can result in quantitative aspects of value added; for example, rigid adherence to quality standards reduces wastage and returns, and possibly component or product failure when the product is in use; for construction equipment operating considerable distances from service-points the down-time penalties can be huge. Replacing conventional metal materials with carbon composite materials (Boeing 787) is an example of a much lighter and fuel-efficient aircraft resulting in fuel economies and longer sector range distances—with impact on increased revenues and cost reduction. Clearly the notion of value added has extensive ramifications for the product-service and process decisions throughout the value chain and we require additional measures in order that we might evaluate alternative business models, their strategies and structures, and their operational delivery alternatives. To this end we explore additional uses of the value-added measure. Before doing so, as an example, we consider the argument for preferring to measure share of market value added to market share as a performance metric.

Developing Network Based EVA/Economic Profitability Models The model can be modified for use by networked organisations; see Fig.  7.4. Figures 7.4a, b, c, and d reproduces the accepted EVA model with variations for value chain positioning and its applications. Figure 7.4a identifies the conventional EVA calculation. Figure 7.4b introduces a modification to the model. The value chain networks’ aggregate performance is realised by the efficient, coordinated, use of resource capabilities in; procurement, Basic EVA Calculation 5.4 (a)

Network Perspective ($ Incremental Value Advantage) 5.4 (b)

Net Revenues (Sales less discounts allowed) Less Operating expenses Equals: Operating profit before interest and tax Less Tax Less Capital charges (weighted average cost of annualised capital employed) Equals Economic Value Added (EVA), Value Contribution and “Productivity”

∑Net Benefit $(Increased Revenues) Less: ∑Incremental increases in operating expenses Equals: ∑Operating profit before interest and tax Less: Tax Less: ∑Incremental investment capital charges (weighted average cost of annualised capital employed) Equals ∑Economic Value Added (∑EVA) Value Contribution and “∑Productivity”

Customer Perspective ($ Incremental Value Advantage) 5.4 (c)

Employee Perspective ($ Incremental Value Advantage) 5.4 (d)

Net Benefits $(Revenues less Acquisition Costs) Less: Incremental increases in operating expenses Equals Operating profit before interest and tax Less Tax (NOPAT) Less Incremental capital charges (weighted average cost of annualised incremental capital employed) Equals Economic Value Added (EVA), Value Contribution, and “Productivity”

Net Benefit $(Increased Departmental Revenues) Less: Incremental increases in allocated operating expenses Equals: Operating profit before interest and tax Less: Tax Less: Departmental incremental investment capital charges (weighted average cost of annualised capital employed) Equals Economic Value Added (EVA) Value Contribution and “Productivity”

Fig. 7.4 (a, b, c, and d) Developing Network Based EVA/Economic Profitability Models

Economic Profit: Economic Value Added and the Impact on Stakeholder Value…

143

operational efficiencies and, the use of organisation’s capital or by leveraging the capital capabilities of network partners. The value advantage created is calculated by deducting from its aggregate revenues, the aggregate acquisition costs, operating costs, tax, and its cost of capital used in the production of its product service; assuming suppliers’ materials sources (raw materials, components, etc.), tax, and capital used at this stage of production have been calculated similarly the aggregate network supply response can be calculated and be used to measure productivity as well as to be used for comparing alternative value chain structures. The ultimate consumer’ value advantage, is shown as, Figure  7.4c. Their value advantage reflects their marketing abilities (understanding of customers, market positioning, and value proposition). It can be calculated from an estimate of benefits received from its upstream supplier, procurement efficiency, and the comparative impact the product-­ service differentiation has on prices their customers are prepared to pay; fit4purose, product quality, serviceabilty, exclusivity, etc. Figure 7.4d identifies the role of EVA as an incentive payment to managers. Managers and employees can be persuaded to adopt a long-term perspective of the firm when offered an incentive remuneration program aligned with their efforts in achieving economic profit. It appears to be more effective if “banked” and paid incrementally on an annual basis. Economists and accountants differ on the proper definition of profit. To the accountant, profit is the excess of revenues over expenses and taxes and is best measured by earnings. To the economist, earnings fail to include an important expense item, the opportunity cost of the equity capital contributed by the shareholders of the firm. A firm earns economic profits only to the extent that its earnings exceed the returns it might earn on other investments. Thus, earnings will always exceed economic profits, and a firm can be profitable in an accounting sense yet unprofitable in an economic sense. (Kimball, 1998). (For another perspective of economic profit see, Strategy to Beat the Odds, McKinsey Quarterly, February 13, 2018). Often an assumption is made concerning opportunity cost, for example the McKinsey article (cited above) makes no reference to opportunity costs, they presumably assume this has occurred during the project evaluation process. This is not an unreasonable assumption, presumably the selected project would have emerged after thorough analysis of qualitative topics. Companies seeking to gain real competitive advantage should not think in terms of specific process improvements. Rather, they should think in terms of transformation, not just improvement. Transformation is the process by which companies, business units or locations make a step-change improvement in their operating performance. This, in turn, enables them to take new strategic approaches—positioning themselves, for instance, as a premium producer, or gaining market share by becoming the low-cost player in the marketplace; or joining a ‘complementor’ organisation in an emerging market segment -Renault-Nissan and Acciona (Spain) electric vehicles and power replenishment facilities. The Volkswagen application is given in their 2020 Annual Report: Value contribution is calculated based on the operating result after tax and the opportunity cost of invested capital. The operating result shows the economic performance of the Automotive Division and is initially a pre-tax figure. Based on our

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companies’ income tax rates, which vary from country to country, we assume an overall average tax rate of 30% when calculating the operating result after tax. The cost of capital is multiplied by the average invested capital to give the opportunity cost of capital. Invested capital is calculated as total operating assets reported in the balance sheet (property, plant and equipment, intangible assets, lease assets, inventories, and receivables) less non-interest-bearing liabilities (trade payables and payments on account received). Average invested capital is derived from the balance at the beginning and the end of the reporting period. As the concept of value-based management only comprises our operating activities, assets relating to investments in subsidiaries and associates and the investment of cash funds are not included when calculating invested capital. Interest charged on these assets is reported in the financial result.

 onsiderations that Can Have Impact on Current and Future EVA/ C Economic Profit Performance The EVA model offers a structured format for “auditing” current activities and exploring future opportunities in a structured approach. Figures 7.5 and 7.6 uses the EVA calculation format to consider changes that may occur to existing activities and to pose questions concerning future activities. This approach can be particularly useful to the automotive industry where vehicle technology, manufacturing methods and inputs differ from current operations. Aerospace and Defence are also confronted with a similar future. It cannot be assumed that future activities will be confined to an existing industry and very different capability resource responses may be required. Therefore, an increased measure of risk may be involved. For evaluating long-term opportunities and planning purposes organisations can, and do, use a projection of future EVA returns using NPV (net present value) analysis. Forecasting future cash flows is a complex activity and difficulty can occur when attempting to assess discounting rates and the potential lifespan of projects, particularly for new technologies) as such, the model should be used as a guide for decision making; further discussion with specialists will provide reliable and usable estimates. See Fig. 7.7. We can use the Capital Asset Pricing Model to explore this issue. The CAPM assumes that investors are risk-averse and the greater the risk of variable return on an investment, the greater will be the actual return expected. This suggests there is a trade-off between risk and expected returns which must be reflected from the investment alternatives. The trade-off between risk and return is represented graphically as Fig. 7.8. The ‘trade-offline’ indicates the trade-off between expected return and market risk combinations. Therefore, activities A and B and C fall on the trade-­ offline and the expected return compensates for their risk as the NPV equals zero. Activities F and E offer good opportunity to create stakeholder value, while G and D, particularly G with high risk and low return should be avoided. The capital asset pricing model was developed to evaluate securities in the investment market. The diagram suggests how different industry activities might be perceived from an

● Efficacy and costs of current processes and systems ● Labour costs (trends, employee satisfaction, percentage of total costs) ● Wastages and reworking costs ● Scope for robotics/cobots and impact on capital requirements and operating efficiencies? ● Network partner efficiencies and process/activity developments? ● Network digitisation and connectivity – status and needs? ● Customer satisfaction trends Fit4Purpose (product-service specification) ? ● Logistics services?

Management Salaries

Labour Costs

Energy

Services

-

-

-

-

● Current Network and individual partner EVA performance (planned/ actual)? ● Industry EVA performance (planned/ actual)? ●Total (all) Industry EVA performance ● Network planned forecast performance (short/medium/long term)

NOPAT less Capital Charges (Annualised Weighted Average Cost of Capital) = Economic Profit

Fig. 7.5  Topics, changes and considerations that can have impact on current and future EVA/economic profit performance

● Capital structure relevance (capital intensity and intra-network asset leverage utilisation)? ● Alternative capital structure considerations (digitisation and connectivity)? ● Cost and availability of capital? ● Competitors’ activities?

● The implications of onshore/offshore component and services sourcing are important considerations, particularly for the long-term

-Invested Capital (Calculate Annualised Weighted Average Cost of Capital)

-= NOPAT

Income Taxes

● Industry (Y/Y and trends) ● Network (Y/Y and trends) ● Network partnership structure relevance for future? ● Competitive alternatives?

= Net Operating Income

-

● Stakeholder satisfaction? ● Investment market perspectives? ● Related important influences (Industry and Market Dynamics) ? ● Geopolitics? ● Geoeconomics?

● What relevant services exist and their costs and impact on operating efficiencies? ● Customer satisfaction trends Fit4Purpose (product-service specification) ? ● Logistics services? ● Internal (network partnership) and relevant external (other industries applications) alternative applications should be investigated?

● Current energy costs ● Emissions levels ● Industry trends ● EESG response times?● Impact of climate change on operations, NOPAT and EVA?

- Equity Income (or losses) - Other Investment Income

- Interest Income

● Do salaries match capability requirements?● Do the existing capabilities match industry competitive needs? ● Scope for robotics/cobots AI/algorithms etc?

Materials

-

● Review input materials (cost profiles, volumes, accessibilities , related labour costs ● Identify and evaluate alternative supply options in context of labour work input costs ● Monitor alternative processes and labour costs ● Track and estimate development trends – assess medium and long term implications ● Monitor competitive activities ● Consider the impact of new materials costs (Rare Earth categories) on new ventures – (automotive industry concerns over EV manufacturing?)

Operating Costs

● Review VCN Total Cost of Ownership ● Producibility time cycle ● Value added by partners ● Number of partners and (roles) ● Impact of increasing End-User discounts?

Discounts Allowed

-

● Current revenues ● End-User customers: ongoing and planned activity levels ● Anticipated changes in market (new competitive entrants – implications? ● (new customers - product-service response requirements? ● Incremental or major changes?

-

Revenues

Economic Profit: Economic Value Added and the Impact on Stakeholder Value… 145

Operating Costs

Materials

Management Salaries

Labour Costs

Energy

Services

-

-

-

-

-

-

Income Taxes

● Current Network and individual partner EVA performance (planned/ actual)? ● Industry EVA performance (planned/ actual)? ● Total (all) Industry EVA performance ● Network planned forecast performance (short/medium/long term)

● Capital structure relevance ( capital intensity and intra-network asset leverage utilisation? ● Alternative capital structure considerations (digitisation and connectivity? ● Cost and availability of capital? ● Competitors’ activities?

● The implications of onshore/offshore component and services sourcing are important considerations, particularly for the long-term

● Industry (Y/Y and trends) ● Network (Y/Y and trends) ● Network partnership structure relevance for future? ● Competitive alternatives?

● Stakeholder satisfaction? ● Investment market perspectives? ● Related important influences (Industry and Market Dynamics) ? ● Geopolitics? ● Geoeconomics?

● What relevant services exist and their costs and impact on operating efficiencies? ● Customer satisfaction trends Fit4Purpose (product-service specification) ? ● Logistics services? ●Internal (network partnership) and relevant external (other industries applications) alternative applications should be investigated?

● Current energy costs ● Emissions levels ● Industry trends ● EESG response times? ● Impact of climate change on operations, NOPAT and EVA?

● Efficacy and costs of current processes and systems ● Labour costs (trends, employee satisfaction, percentage of total costs) ● Wastages and reworking costs ● Scope for robotics/cobots and impact on capital requirements and operating efficiencies? ● Network partner efficiencies and process/activity developments? ● Network digitisation and connectivity – status and needs? ● Customer satisfaction trends Fit4Purpose (product-service specification) ? ● Logistics services?

● Do salaries match capability requirements? ● Do the existing capabilities match industry competitive needs? ● Scope for robotics/cobots AI/algorithms etc?

● Review input materials (cost profiles, volumes, accessibilities, related labour costs ● Identify and evaluate alternative supply options in context of labour work input costs ● Monitor alternative processes and labour costs ● Track and estimate development trends – assess medium and long term implications ● Monitor competitive activities ● Consider the impact of new materials costs (Rare Earth categories) on new ventures – (automotive industry concerns over EV manufacturing?)

● Review VCN Total Cost of Ownership ● Producibility time cycle ● Value added by partners ● Number of partners and (roles) ● Impact of increasing End-User discounts?

● Current revenues ● End-User customers ongoing and planned activity levels ● Anticipated changes in market (new competitive entrants – implications? ● (new customers - product-service response requirements? ● Incremental or major changes?

Fig. 7.6  Topics, changes and considerations that can have impact on current and future operating EVA/economic profit performance

NOPAT less Capital Charges (Annualised Weighted Average Cost of Capital) =Operating EVA/Economic Profit Value Contribution

-Invested Capital (Calculate Annualised Weighted Average Cost of Capital)

-= Operating NOPAT

-

= Net Operating Income

Discounts Allowed

-

Revenues

146 7  Profitability and Productivity

Economic Profit: Economic Value Added and the Impact on Stakeholder Value…

147

Revenue Profiles

EVA + ve

Revenues after Production Extension

Revenues

Taxation Profile Cost Profile NOPAT less AWACC

M

EVA t+ Time

RD&D Investment Implementation Investment

Cost Profile

EVA - ve

Plant Modification/Scale

Fig. 7.7  Using EVA projections to evaluate response options: Evaluating responses to long-term opportunities

Expected Return %

+ NPV •C •F

•E

•

Utilities • B

•

• A

•

Government Bonds S&P, FT 100,

NPV = 0 Security Market Line: (Trade-off Line) Electric Vehicle manufacturing and distribution

Property

•D

Food Distribution

Trade-off between risk and return •G

-- NPV

Market Risk ß Factor

Fig. 7.8  Risk/return relationship across industry sectors

investment perspective. Figure 7.8 illustrates this approach to forecasting risk and its impact on economic profitability. We suggest it is important to recognise risk; clearly levels of risk differ across industries, and this is reflected in the β (Beta) factors assigned by the “NPV = 0, Security Market Line, (Trade-off Line)” The β factor used should relate to the industry within which the opportunity resides, however, this may require some thought as shifts in value migration, together with changes in industry dynamics may well be occurring. This information is in the public domain, we have yet to see it combined to make realistic performance comparisons. Some oganisations use economic profit as a performance measure of an organisation’s progress (i.e., EVA = NOPAT less the weighted average of invested capital). Annual Economic profit/Annual Revenue recognizes the growth of revenues,

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margins (NOPAT)), the return on invested capital, (the annualised weighted average cost of capital). Economic profit as a metric has advantages, it is a holistic view of value. It acknowledges growth and size, and thereby avoids the “dynamic” changes in the Stock Market.

Productivity The concept of productivity needs to be reviewed by arguing that the product-­ service ‘product’ that current productivity is measured against is no longer the norm; for many economies the industry mix is dominated by “intangible service products”, and “tangible manufactured products” that are produced by networks of organisations that are both inter-organisational and inter-national in their nature. Bean (2016) suggested that governments look to develop a more realistic method for calculating productivity; to identify a methodology reflecting the twenty-first century, rather than the approaches taken since the mid-twentieth century, if not earlier. A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. We return to the Introduction of Part Two (Operational Excellence), they are essentially the same as profitability i.e., to identify specific interest and consideration suggested for performance management, and are suggested as, a positive operating NOPAT/EVA economic profit/positive value contribution, profitable revenue growth, data analytics and management, a valid value proposition, a collaborative network relationship management, productive use of resources, and stakeholder value management and evidence of pursuit of (E)ESG criteria/UNSDGS. EVA is a metric based upon the notion of economic profit (established elsewhere and earlier in this chapter). We see this as offering not only the facility to develop a more useful measure of productivity but also a possible contribution to a more useful competitive measure of GDP (gross domestic product). The ‘product’ that current productivity is measured against is no longer the norm; for many economies the industry mix is dominated by “intangible service products”, and “tangible manufactured products” that are produced by networks of organisations that are both inter-organisational and inter-national in their nature A Boston Consulting Group (BCG), (Rose et al., 2016) document “Productivity Now” offers an interesting approach to calculating the productivity of the organisation but this needs to be taken further to include productivity profiles of networked organisations. One important consideration concerns the treatment of intangible assets, another concerns the international and increasing complexity of manufacturing. The proposed alternative uses economic profit generated and calculated using the aggregate EVA (economic value added) contributed by the network component organisations. Clearly, productivity measurement has some serious problems. In many respects, these problems are accounted for by the methodology used to calculate productivity,

Productivity

149

and, possibly because of the variable nature of the locations used to make comparisons. An Economist report “The World Economy” (2014) commented; “The digital revolution has yet to fulfil its promise of higher productivity and better jobs … if there is a technological revolution in progress, rich economies could be forgiven for wishing it would go away”. The article referred to the lack of productivity growth from investment in technology. “The rich world is still trying to shake off the effects of the 2008 financial crisis. And now the digital economy, far from pushing up wages across the board in response to higher productivity, is keeping them flat for the mass of workers while extravagantly rewarding the most talented ones.” More recently, in a review for the UK Government of its economic statistics (with an emphasis on productivity reporting), Bean (2016) commented that the statistics were beginning to show their age having been designed some 50 years ago when the structure of UK industry and the economy was dominated by goods not services. Furthermore: The digital revolution and fast technological advancements of recent years, have changed the way many businesses operate (Amazon, Skype), given rise to new ways of exchanging and providing services (Airbnb, TaskRabbit), have muddied the waters between work and leisure, and made it far harder to measure accurately economic output. Many businesses also operate across national boundaries and depend on intangible assets, which adds to the complication of accurate measurement. The report suggests that if the digital economy was fully captured by official statistics, it could add between one-third and two-thirds of a percent to the growth rate of the UK economy. The Economist (2017) commented upon OECD research showing a productivity performance divergence among its membership. The divergence varied between sectors: in manufacturing, for example, top-tier firms (labelled “frontier firms”) saw their labour productivity increasing by 2.8% a year, against 0.6% a year for the rest. The gap was even bigger in services: 3.6% compared with 0.4%. The “frontier firms” appear to have certain things in common. Being ahead in technological application and making much more intensive use of patents. They are frequently part of multinational groups and constantly benchmark themselves against other frontier companies across the globe. International technological transfer spreads more rapidly across countries rather than intra-country transfer. It is argued that digital technology is creating a phenomenon of “winner-take-most” markets due to a combination of low marginal costs (encouraging first movers to expand quickly) and network effects. The OECD also noted that the information-technology industry is producing a class of super-frontier firms: the productivity of the top 2% of IT companies has risen relative to that of other elite firms. Other studies show that this is not because the top tier is investing more in technology but because they are investing more intelligently to enable their workers to do new things and to reinvent their business models. A second explanation is that frontier firms (the 5%) have identified their own unique “distinctive value competitive advantage.” Some have learned how to develop equally unique management techniques. Examples are given: 3G Capital, a Brazilian private-equity group, which takes over mature businesses and reduces costs that no one else can; Amazon mixes digital expertise with

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just-in-time logistics. Others have devised rare material inputs; BMW, the carmaker, is using a special carbon fibre, stronger and lighter than steel, for its i3 and i8 electric cars. A third reason is suggested; technological diffusion has stalled, cutting-edge ideas are not spreading through the economy in the way that they used to, leaving “productivity-improving ideas” with the frontier firms. This suggests diffusion may be harder in a knowledge-intensive economy because frontier firms can hire the most talented workers and cultivate relations with the best universities and consultancies. But it is also made worse by bad policy. The OECD notes that divergence in productivity is particularly marked in sectors which have been sheltered from competition and globalisation, most notably services. In a later contribution The Economist (2018) commented on the debate created by Allen (2009) who argued for a “high wage hypothesis”. Allen’s argument that the key to Britain’s industrialisation was due to the expansion of commerce and trade that preceded it. The expansion increased wages for British labour at a time when elsewhere in Europe pay rates were static. As the Industrial Revolution 1.0 ‘took-­ off’ in Britain, coal was cheap relative to labour wage rates thus making a strong argument for investment in “coal-fired technology” which enhanced labour output (an exercise in economies of scale); not until some years of mechanisation and innovation in Britain had demonstrated the efficiencies of the new equipment was it worth adopting the “new-technology” elsewhere in Europe. This argument reverses the traditional argument of a disruption based upon low wage rates and the application of technology to expand the efficiency of labour. The Economist comment suggests that to treat real wage growth as a function of technological growth, rather than an influence on it may not be helpful. The article suggests that innovation based upon the creativity of engineers, of which there is insufficient, leads to a “Partnerships” issue and the inadequacies and rigidity of the education system. A collaborative study by Boston Consulting Group and The National Association of Manufacturers undertook to investigate the impact on competitiveness of the recent downward trend in productivity in US manufacturing. The report concluded that what underlies the downward trend would appear to be reliance upon traditional, familiar productivity levers, rather than utilising cross-functional levers. The traditional levers they identified as; working capital reduction, lean manufacturing R&D efficiency, supply chain optimisation, procurement, and pricing and incentives; thereby confirming the views of Bean (2016) and others. BCG found respondents were less familiar with; design-to-value (producibility), organisational efficiency, complexity reduction, and Industrié 4.0. BCG recommended an alternative, new approach; the use of digital technology and big data and analytics as being essential to enhance the full set of productivity levers. They (BCG) identified Industrié 4.0 as the most underutilised (and less appreciated) lever and specifically cited four technologies that are revolutionising production; augmented reality, advanced robotics, additive manufacturing, and the Industrial Internet of Things (IIOT—advanced connectivity). BCG have developed an approach focusing upon measuring the value contribution from five procurement activities: part numbers and prices; supplier management and contracting; and orders and plant execution.

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151

There is, perhaps, another explanation, a focus on accounting profitability rather than economic profitability. Measuring “profitability” by deducting an annualised cost of capital reflects economic profitability/offers an understanding of decisionmaking realism and, it can be argued, or be “seen” as also having an impact on the “nation’s economic welfare”, the important stakeholder. Clearly, by utilising the benefits now available from Big Data & Analytics and Digital Technology and applying these to the ten productivity levers they identified, BCG suggest greater knowledge concerning productivity performance (and how it may be improved) is readily available. Clearly the approach requires structuring and in-company leadership for it to be successful; however, we suggest the issue should be approached from an inter-company perspective (the value chain network with which the “company” belongs) and suggest a model that explains the approach taken by successful organisations later in this chapter.

 perating Economic Value Added: As a Quantitative Measure O of Productivity It is suggested the notion (and use of) economic profit as a measure of productivity adds reality, consistency, and continuity. Boston Consulting Group (2016) suggested a corporate productivity metric based upon economic value added (EVA), data that is readily available from publicly available financial and available data. They define productivity growth as the percentage change in the ratio of two factors: Company value added, defined as the difference between revenue and the cost of direct and indirect materials and components. And. The sum of labour cost plus the annualised cost of capital employed; may be this should reflect intangible assets managed and include brand building costs, etc.? But maybe this is not enough, the impact of organisation’s, network’s and industry’s responses to the changing business environment should be incorporated? Including taxation, which helps in identifying increases/decreases in productivity by manufacturing in different locations (i.e., domestically, or offshore) where not only taxation rates may differ significantly, but labour rates may also be advantageous, by using economic profit (measured as economic value added) as a basic metric; the modified operating statement would comprise: Revenues Less Operang Costs Labour Materials Components Energy Services (required and offered) Taxaon

Net Operang Profit aer Tax (NOPAT

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A suggested approach, taking a lead from Volkswagen is to use Operating EVA performance as a measure of productivity. Given that EVA is calculated from ongoing activities (operating statement after tax and capital charges/NOPAT) it provides an initial report on the operating efficiency of current operations—and therefore, year on year comparisons can be made. Given the amount of data being made available by the “Convergence” (the Industrié 4.0/5.0, Value Chain 2.0/3.0 and Stakeholder Value-Led Management) it is now possible to forecast EVA performance on a project/product/process basis. However, we suggest that EVA alone does not provide for full comparisons to be made, and that some further measure of the efficiency (and the effectiveness) of the asset management within organisations and networked value chains should be incorporated in productivity analysis. This is suggested by aligning some relevant management performance ratios; the ratios identify aspects of current, and potentially long-term, asset management: clearly it is important to look beyond the traditional metrics and consider the impact of asset intensity and utilisation when analysing productivity importance. This is particularly important for organisations that are value chain network components; for example, without collaboration and connectivity it is quite feasible for there to be unnecessary investment in both fixed and working capital, process activities may become expensive in terms of excess capital and time2market. We suggest the inclusion of the relevant impact of both asset intensity and asset utilisation as quantitative measures. This information is in the public domain, we have yet to see it combined to make realistic performance comparisons. An approach following relationships is now available. Clearly a negative value indicates zero productivity. Management is interested in “relationships”; for example, productivity as a measure of efficiency, year-on-year changes in productivity trends, competitive comparisons (within and across industries), and increasingly, comparisons across business network alternatives. Productivity Efficiency can be expressed as an index:



$ Operating EVA $ Operating Costs + Capital Used + Taxation

(Local rates of taxation vary and the impact on the choice of “location” can influence manufacturing location decisions). It follows that production efficiency can be easily calculated by expressing $ EVA/$ Operating Costs + taxation paid on revenues less $ operating costs. Positive Productivity occurs when Operational Productivity>Net Operating Profit after Tax (NOPAT) and the annualised WACC. It can be argued that Bean’s (2016) suggestion that governments should be looking to develop a more realistic method for calculating productivity identifies a significant problem for industry, as well as government, and that economic profit generated over a reporting period is a more logical basis from which to start. We use Fig.  7.9. eight to pursue Bean’s (2016) suggestion. The upper half of figure eight identifies productivity topics, performance management, margin management, and timeline management, that are current components that can be included in productivity management performance. The addition of localised demand availability, “serviceability”, and value contribution can lead to improved decision making.

Fig. 7.9  An EVA approach to productivity

Less: Labour Materials Costs (Raw materials, Components, Services) Energy Taxes plus Capital Costs (Annualised WACC) Equals EVA

Company/Network Economic Value Added Value Contribution equals Revenues

Tax paid (30%) Operating Profit (after tax)

Operating Profit (before tax)

Procurement; Total-Cost of-Ownership, offshore sourcing, collaborative sourcing – Covisint

Direct Overhead

Industrié 4.0/5.0; Advanced technologies, Robots, Cobots, Additive manufacturing, Augmented & Virtual reality

Industry Dynamics; linking operations to opportunities offered by industry leadership in knowledge, technology, processes, relationships, regulatory controls, and geopolitics

Product-Service-Market Complexity Reduction; 80/20 range analysis, Product platform technology, Business Eco-Systems, Customer Value Analysis

Value Chain Network Optimisation; coordinating, value adding network activities to ensure value proposition delivery; eliminating value destroying activities.

Organisational Efficiency; Optimisation of management processes (digitisation), Shared services and infrastructure, reducing network operating cycle time and costs, Intra and inter-collaboration across the VCN

Producibility (design to delivery and value renewal); A collaborative ‘seamless’ integrated and coordinated, simultaneous, of process of: designmanufacturing/distribution operations-service-consumption-recycling and remanufacture

Contemporary Emerging Sources of Productivity Asset Management; Tangible And Intangible Assets And Working Capital

PLUS

Pricing and Incentives; Flexible pricing/demand-led. Life cycle costing (Added value delivered/Acquisition costs)

Supply Chain Response Coordination; Collaborative Procurement; Coordination of core of network purchases – direct and indirect purchasing

RD&D Efficiency; (strategic orientation future-led) Efficiency (operational focus – customer facing processes to deliver value proposition

Lean manufacturing eliminates waste. Demand-led production. Standard processes and monitoring

Reduce Working Capital; Inventory, Receivables, Payables. Reduces; cash2cash cycle, Inventory holding costs

Direct Administration

Selling & promotion

Materials Manufacturing

Less

The Traditional Operating Profit Statement Revenues

Productivity Management Drivers Responses: Optimise Resources Response Traditional Sources of Productivity

Value Contribution: Quantitative and qualitative added value and cost reduction to both customers and network partners

“Serviceability” when considered as - PRODUCTservice-market. and product-SERVICE-Markets / MARKETS are likely to have different productivity profiles (which may influence product-servicemarket portfolio decisions.

Localised Demand Availability PRODUCT-service/product-SERVICE, Service parts, serviceability, and technical service advice is available within the “timeline” expectations of customers (3D printing etc.)

PLUS

TimeLine Management (Time2Market, Time4Service Responses, Cash2Cash Cycle Operating Cycle, Order response time management

Margin Management (Cost/Service/Price) Processes, Labour, Resources, Energy, Inventory, Waste reduction and, serviceability

Performance Management (“Fit4Purpose”, Quality, “Service”, Fixed Assets, Working capital, Growth and Risk)

Delivering the Value Proposition: Maximise the value added to both customers and network partners by managing:

Productivity 153

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7  Profitability and Productivity

For evaluating long-term opportunities and planning purposes organizations can, and do, use a projection of future EVA returns using NPV (net present value) analysis. Forecasting future cash flows is a complex activity, for example, the developments in Industry Dynamics and potential developments in Value Builders; equally difficulties can occur when attempting to assess discounting rates and the potential lifespan of projects, (particularly for new technologies) as such the model should be used as a guide for decision making; further discussion with specialists will provide reliable and usable estimates). See Fig. 7.10. Such an approach identifies the sources and amounts of value added at the levels at which they occur and would identify productivity efficiencies. Figure 7.10 uses the EVA concept to develop productivity metrics applicable at the level of the individual organization, network structures, industries, and national GDP. At one time this would have proven to be a nightmare to plan, manage, and analyse the scant data captured. The data capture and analysis facilities of Industrié 4.0 now makes this possible. Predix (General Electric) and Teamcenter (Siemens) offer real-time data collection, analytics, and algorithm designs that make the real-time “rolling value proposition” a possibility. Both companies offer product-service performance analysis (data threads) and interpretation leading to a digital twin of the product-­ service that produces algorithms to enhance performance and to plan maintenance cycles. Productivity has a wider impact than currently perceived; Fig. 7.11 is suggesting an alternative perception of what comprises “productivity”. It is proposing a matrix approach within which individual organizations have dedicated response capabilities and assets that together with relevant operating costs are used to calculate an economic operating statement. Given the increasing availability of “data” a matrix approach offers an opportunity to identify and explore what could be described as “optimal productivity and the application of resources”, not only at the level of the individual organization but the network within which it predominantly works. Figure 7.11 expands the analysis. Given the current range of arguments concerning the causes, measurement, and therefore the usefulness of productivity as a useful metric. Figure 7.11 suggests a pathway through to a quasi-measure of productivity at a range of levels, from the individual organization, networked organizations, industry groups, and towards a quantitative value-added approach to measuring GDP. It is argued here that together Industrié 4.0/5.0, Value Chain 2.0/3.0, and the increasing focus on Stakeholder Value Management can facilitate the data collection, analysis, and interpretation required to provide a realistic measure of individual and aggregate business activity performance. Figure 7.11 considers productivity as added-value contribution to national productivity (GDP). Value contribution can be measured as both dollar value and percentage, and as a one-off value as well as year-on-year trend values. A suggested approach, taking a lead from Volkswagen, is to use Operating EVA performance as a measure of productivity. Given that EVA is calculated from ongoing activities (operating statement after tax and capital charges/NOPAT) it provides an initial report on the operating efficiency of current operations—and therefore, year on year comparisons can be made. Given the amount of data being made

Identify revenues less discounts Identify individual component costs; ● Labour costs ● Materials costs ● Components ● Energy costs ● Services ● Taxes payable ● The annualised cost of capital used to produce revenues ● Establish view on market positioning ● Identify each partners VCN positioning ● Identify ∑Individual partners EVA performance. ● Identify alternative structures, roles, tasks against the expectations of the Value Proposition. ● Identify optimal VCN structure

● Calculate/estimate total Industry EVA ● Calculate Network ∑EVA/Total ∑EVA Industry %

EVA & Asset Management Based Productivity

∑ EVA & Asset Management Based Productivity

∑∑EVA Asset Management Based Productivity of all competing VCNs in an industry

Individual Organisation

Network

Industry

● Identifies value added to “international products”

● Establish view on market positioning ● Identify each partners VCN positioning ∑Identify ∑Individual partners “productivity performance” ● Identify alternative structures, roles, tasks against the expectations of the Value Proposition

● Use MFP for analysis ● Rank order on impact basis ● Cross impact and trade-off analysis ● Compare offshore labour rates ● Explore robotic options Investigate alternative materials & components ● Alternative sources and/or locations

Process Provides a return on capital used

Fig. 7.10  Quantitative productivity has an impact on individual organisations, networks, and national productivity

Components NOPAT less WACC

Metric EVA & Asset Management Based Productivity

Level

● Identifies comparative performances across industries

● Identify current value adding profiles (and their costs) of network partners ● Calculate their EVA performances ● Compare ∑network added value output (quantitative and qualitative) with customer expectations and the value proposition ● Select optimal VCN – compare with competitive VCN structures

● Identify intra-cost trade-off potential ● Identify optimal cost structure that maximises ∑added value contribution to the network ● Uses “use of capital” and value created, or value destroyed as primary measure of the management of resources used performance

Value Contribution Positive EVA identifies Value creation; a negative EVA indicates value is being destroyed

Productivity 155

156

7  Profitability and Productivity Metric

Components

Process

Value Contribution

EVA & Asset Management Based Productivity

NOPAT less WACC

Provides a return on capital used

Industry

∑∑EVA Asset Management Based Productivity of all competing VCNs in an network or an industry

● Calculate/estimate total Industry EVA ● Calculate Network ∑EVA/Total ∑EVA Industry %

● Identifies value added to “international products”

Positive EVA identifies Value creation; a negative EVA indicates value is being destroyed ● Identifies comparative performances across industries

National GDP

Network and Industry EVA Asset Management Based Productivity Contributions to GDP

● GDP ≈ ∑EVA of ∑Industries (Current) ● GDP ≈ ∑EVA of ∑Industries Y/Y

● Calculates an economic-led approach to GDP

● Replaces traditional GDP method of calculation with one based upon the “use of capital” and value created, or value destroyed

Fig. 7.11  Quantitative productivity has an impact on individual organisations, networks, and national productivity

available by the “Convergence” (the Industrié 4.0/5.0, Value Chain 2.0 and Stakeholder Value-Led Management) it is now possible to forecast EVA performance on a project/product/process basis. However, we suggest that EVA alone does not provide for full comparisons to be made, and that some further measure of the efficiency (and the effectiveness) of the asset management within organisations and networked value chains should be incorporated in productivity analysis. This is suggested by aligning some relevant management performance ratios; the ratios identify aspects of current, and potentially long-term, asset management: clearly it is important to look beyond the traditional metrics and consider the impact of asset intensity and utilisation when analysing productivity importance. This is particularly important for organisations that are value chain network components; for example, without collaboration and connectivity it is quite feasible for there to be unnecessary investment in both fixed and working capital, process activities may become expensive in terms of excess capital and time2market. We suggest the inclusion of the relevant impact of both asset intensity and asset utilisation as quantitative measures. An approach following relationships is now available. (Return to Fig. 7.8). Clearly a negative value indicates zero productivity. Management is interested in “relationships”; for example, productivity as a measure of efficiency, year-on-year changes in productivity trends, competitive comparisons (within and across industries), and increasingly, comparisons across business network alternatives. Productivity Efficiency can be expressed as an index:

$ Operating EVA $ Operating Costs + Capital Used + Taxation

(Local rates of taxation vary and the impact on the choice of “location” can influence manufacturing location decisions). It follows that production efficiency can be easily calculated by expressing $ EVA/$ Operating Costs + taxation paid on revenues less $ operating costs. Positive Productivity occurs when Operational Productivity>Net Operating Profit after Tax (NOPAT) and the annualised WACC. Note: indices are helpful only if their content is consistent over time.

Productivity

157 Revenues (less discounts, less operating costs, less direct operational costs = Operating Cash Flow

Operating cash flow +/- short-term working capital requirements +/- capital costs for structure changes/additional expansion requirements/divestments = Cash Flow from Assets

Cash flow from assets +/-fixed assets (tangible & intangible) +/- long-term working capital requirements +/- entry/exit investment costs = Strategic Cash Flow

Transformational cash flow +/- changes in investment funding (changes in debt +/or equity) = Positive/Free Cash Flow

Fig. 7.12  The Determinants of free cash flow—the primary business objective

Expanding the Perspective of Productivity The approach identifies the sources and amounts of value added at the levels at which they occur and would identify productivity efficiencies. Figure 7.12 uses the EVA concept to develop productivity metrics applicable at the level of the individual organisation, network structures, industries, and national GDP. At one time this would have proven to be a nightmare to plan, manage, and analyse the scant data captured. The data capture and analysis facilities of Industrié 4.0 makes this possible.

Managing Cash Flow A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. For current purposes it is proposed that in quantitative terms value in a firm is best measured in terms of Positive/Free Cash Flow. This is illustrated in Fig. 7.12 and incorporates four elements: Operating Cash Flow, which is the traditional measure of cash flow starting with the firm’s earnings from which direct and indirect costs associated with performing its activities are deducted. Cash Flow from Assets, which considers the short-term working capital and capital structuring or investment costs, required to perform the organisation’s activities. Strategic Cash Flow, encompassing the cost of fixed assets, long-term working capital requirements and entry and exit costs associated with performing the process.



Transformational cash flow + / - changes in investment funding (changes in debt + / or equity = Anticipated Free Cash Flow

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7  Profitability and Productivity Cash Flow Deployment

Transformational Cash Flow Investment (equity or debt) is required to make changes to the long-term organisation by developing inter-organisational response capabilities that achieve L-T competitive advantage and growth through partnerships. Structural Change +/-

Strategic Cash Flow Changes in L-T Working Capital ● Inventory requirements ● Receivables (Credit allowed) ● Payables (Credit taken) Changes in L-T Fixed Assets ● Tangible assets ● Intangible assets Entry & Exit Costs ● Assets ● Knowledge IP, RD&D ● Processes ● Capabilities ● Capacities ● Technology ● Relationship building

Cash Flow from Assets Changes in S-T Working Capital ● Inventory requirements ● Receivables (Credit allowed) ● Payables (Credit taken) Changes in Asset Structure ● Tangible assets ● Intangible assets “One-off” Changes +/-

Changes in Long-Term Fixed Assets Effectiveness +/-

High

Operating Cash Flow Revenues from increases in: ● Volume increases ● Price increases less: ● Manufacturing costs ● Logistics costs Inventory costs Storage costs Transportation costs ● Service costs ● Capital maintenance ● Tax

RD&D, Manufacturing, Distribution, Serviceability and Remanufacturing ● Design around standard components ● RD&D Collaborative programs with S-SME suppliers on “product” and “production” processes ● Design for production assembly ● Pull vs Push marketing ● Current technology ● Design for customer value ● Deign for logistics costs ● Design for E-U assembly ● Design for value renewal ● Design for “serviceability” ● Design for commercial and environmental sustainability

Changes in Operational Efficiency

Risk

Low

Fig. 7.13  Planning strategy and operations to improve growth and free cash flow

Given however the limitation of profitability as an indication of real performance (and that it is vulnerable to management “opinion”) it is suggested that cash flow offers a more reliable metric. Furthermore, if a more managerial perspective is taken of cash flow than that taken from an accounting perspective not only can operational and strategic factors be considered but so too can structurally options. Figure 7.13 identifies how four components making up the generation of free cash—operating cash flow, cash flow from assets, strategic cash flow and transformational cash flow operate. At the asset cash flow level investment in data analysis and management technology systems to foster supply chain efficiencies is a good example of what was an important competitive advantage to some retailers, quickly becoming a competitive necessity. At the strategic cash flow level investment in product-service-markets, in branding and customer relationship programs are examples of factors that would commonly be deemed to be competitive necessities and often competitive advantages. Each of these cash flow components operate on different timescales and often require different decision timeframes that have significant implications for the timescales on which key success factors are derived, understood, and applied. For example, the growth of electric vehicles is accelerating and will require different asset acquisition decision-making processes and investment profiles apply that will impact the longevity of existing competitive positions. One important qualification needs to be added to any formulation of a firm’s anticipated free cash flow and that is taxation, which is not a constant and which varies from jurisdiction to jurisdiction not only in quantum, but also structurally in how it is levied, and how important aspects of management are. Close liaison between networked organisations leads to shorter operating cycles (networked partners share market forecasts—better still real time order data) and cash-to-cycles (inter-organisationally linked business rely upon their interdependence for smooth flow of payments to ensure network liquidity). Developing and maintaining a strong positive cash flow is an important feature of the current business model. Short-term cash flow is a combination of inflows, (revenues for goods

Productivity

159 Cash Flow Management and Deployment

Transformational Cash Flow New Activities-New Capabilities Example General Motors has announced plans to boost investment in electric and autonomous vehicle technology by $7 billion to $27 billion through 2025 General Motors announced the acquisition of SoftBank's $2.1 billion stake in its autonomous car venture Cruise. The Detroit firm has increased its investments in autonomous technology and its electric vehicle capacity as it looks to curb emissions and engage in a technology race with Tesla and other self-driving ventures Cruise has made self-driving cars a reality and is a leader on the pathway to commercial autonomous ridesharing and delivery, creating significant value for both GM shareholders and Cruise's minority shareholders," GM said in a statement

Strategic Cash Flow New Activities Existing Capabilities Examples British Airways acquired BMI (UK based airline – European routes) to expand its European routes coverage. BA and Iberia merged to expand each other’s access to routes and formed IAG International Airlines Group IKEA/Skanksa created Bloklok as a partner to manufacture and erect “flat-pack” housing and hotels Breville a global appliances organisation acquired Lelit Group an Italian manufacturer of “high-end” coffee machines that expand the range of coffee making equipment and are an “ideal strategic partner and expand opportunities in Europe for both organisations

Cash Flow from Assets Examples Airbus/EADs divested assembly sites and began the creation of a network of partners to allow Airbus to focus resources on core activities. Lego sold its majority holding in four theme parks – a move that provides cash to re-focus the company on its core activity; education with a J/V with MIT to develop ‘technological-leg’ Capital Intensive Organisations Have opted for product-SERVICE “product format” options in order to improve the asset management and cash flow for customers and themselves

Operating Cash Flow Examples Lego moved manufacturing to low wage centres in Eastern Europe; reduced colour options; rationalised low performing ‘secondary’ product ranges; and reduced the number of suppliers Dyson an innovative manufacturer of vacuum cleaners moved production to Asia to reduce manufacturing costs RD&D, Manufacturing, Distribution, Serviceability and Remanufacturing Ikea/Boklok BoKlok homes are assembled from panels that arrive on site in kit form. About 80% of the house is built indoors while on-site construction takes up to four weeks. standardised designs and large-volume manufacturing

GM bought Cruise Automation in 2017, which was spun out as a separate company in May 2018

High

Risk

Low

Fig. 7.14  Managing cash flow: Partnerships, alliances, mergers and acquisitions

and services sold and other income), and outflow (payments for inputs (materials, labour, and services and to cash for M&A opportunities)). Long-term cash flow requirements change as organisations buy and sell assets to reposition within new growth markets and possibly in new value chain positions. Strategic cash flow: changes in long-term working capital (inventory requirements, receivables, and payables); long-term fixed assets (tangible and intangible assets) entry & exit costs (processes, capabilities, technology, and relationship building. Transformational Cash Flow: investment (equity or debt) is required to make changes to the long–term organisation by developing inter-organisational response capabilities that achieve long-term competitive advantage and growth through partnerships. Figure 7.14 emphasises the role of cash flow management in creating and maintaining strategic direction. The diagram maps activities that both use and create cash flow, providing an example of how a large global organisation approaches the appraisal of growth opportunities and the required decisions. The organisation (that requested to remain anonymous) has a structured approach to future opportunities; it is interesting to note that they have taken a lead role in identifying opportunities to decreasing inventory levels throughout the value chain network. It describes a process in which the company explores all aspects of its strategic and operational processes for a product-service concept, through the design, manufacturing, and distribution processes, and finally an evaluation of the financial impact of the identified alternatives. As can be seen its focus is on the net present value of the generated anticipated cash flow. It is important to note that the model considers the detail of the processes required for the new product-service opportunity, the cash flow implications, and the organisational implications that adoption of the “opportunity” would require. As Fig. 7.14 suggests the organisational implications on the response may have far reaching implications. One of the implications concerns the role of partnership alternatives;

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7  Profitability and Productivity

Revenues less Operating costs less Tax less Cost of capital(AWACC) Equals Economic Profit (EVA)

Cash Flow from Operations, Asset Management, Strategic and Transformation Cash Flow Free Cash Flow Management

Profitable Revenue Growth % Y/Y Revenue Growth Growth % Industrial Growth Rate Short-and Long-term Strategy Portfolio Structure Mergers and Strategic Alliances Start-ups policies Uncertainty and risk and returns management

Growth % Market Growth Rate Growth % Competitive Growth Rate

% Growth “Organisation” Growth Rate

Economic Profit

Profitable Revenue Growth

Investment Model

Free Cash Flow Management

Operations Management onversion timeline/cycle Order management timeline/cycle TimeLine Management: Customer order management Effectiveness and Efficiency Operating assets cycle Inventory cycles Wastage/Returns Advanced Emerging Technologies Financial Management Data Fabric EROI, EROE, EROTA Cybersecurity Mesh Annual Economic Profit/Annual Revenues Privacy-Enhancing Computation Margins Cloud-Native Platforms Financial gearing Composable Applications Operational gearing Decision Intelligence Investment Hyperautomation Fixed Assets AI Engineering Tangible assets Distributed Enterprises Intangible assets Total Experience Current Assets Autonomic Systems Cash/near cash Generative AI Inventory Accounts receivable

Network Economic Profitability, Productivity and Cash Flow Optimisation Model Structural Alternatives

(E)ESG Criteria UN’s 17 Sustainable Development Goals SDGs

Sustainability

Differentiated Product-Service- Market Portfolio

CapEx vs OpEx vs OptmlEx? Revenues

Strategic and Operational Asset Management

Fixed assets Tangible/Intangible Assets Current assets Network leverage

Productivity Total Factor Labour Capital Value Contribution

PRODUCT-Service-Market product-SERVICE-Market Product-service-MARKET Platform Collaboration

Less Operating Costs

• • • • •

Taxation Capital Costs (Annualised (WACC))

Economic Profit EVA (Economic Value Added) Value Contribution

Production, Marketing Distribution Serviceability Remanufacturing

NOPAT/Economic Profit Revenues less Operating costs less Tax less Cost of capital(AWACC) Equals Economic Profit (EVA)

Value Contribution

Economic Cash Flow

Ongoing projects Marketable securities

Fig. 7.15  Economic profitability, productivity and cash flow performance network optimisation model Revenues (less discounts, less operating costs, less direct operational costs = Operating Cash Flow

Operating cash flow +/- short-term working capital requirements +/capital costs for structure changes/additional expansion requirements/divestments = Cash Flow from Assets

Business Operations Drivers • Positive Value Contribution/NOPAT/Economic Profit • Investment Model • Collaborative Network Relationship Management • Profitable Revenue Growth • Stakeholder Value Management & (E)ESG Criteria/UNSDG • Differentiated Product-Service-Market Portfolio Transformational cash flow • Positive Value Proposition Delivery Responses Design Effectiveness +/- changes in investment funding • TimeLine Management: Effectiveness & Efficiency = Free Cash Flow • Resilience Creativity • Capability Response Fit • Fit4Purpose • Data Analytics and Analysis Management • Collaborative programs with S-SME suppliers • Strategic and Operational Asset Management • Time2Market • Design4Total Value Delivery Current Positioning Strategy • Customisation/Personalisation Options •Positioning Management: • Product-Service-Market Continuity • Strategic positioning • Standard Components • Market positioning • Simplified Assembly • Value Chain Network Positioning •Standardised “Serviceability • Current Value Proposition • Shared Product Platforms • Quality/Reliability/Robust “Warranty” Effective Investment and • End2End/Producibility Financial Management Current Network Positioning Role(s) iValue chain positioning? • Integrator/coordinator? • Specialist provider? • Contract provider? iBrand strengths/weaknesses? iPositioning options?

Strategic cash flow +/- capital required to make changes to structural organisation to accommodate partnership opportunities = Transformational Cash Flow

• Identify the ideal business model and ownership structure options CapEx vs OpEx vs OptmlEx • Financial gearing • Risk • Cost of Capital • Review fixed and variable cost implications of “End2/End/Producibility” assets, activities processes, activities capabilities • Monitor interest rates Monitor exchange rates • Identify tax efficient locations and structures • Monitor labour rates and materials costs in current and potential markets

Effective Manufacturing Policy • Time2Customer response • Identify the ideal business /manufacturing/model and ownership structure options - liaise with finance and marketing CapEx vs OpEx vs OptmlEx • Monitor the impact of changing product portfolio proposals for implications on current facilities , management and labour capabilities • Liaise with suppliers; collaborative RD&D, new/ substitute materials and components • Review changing manufacturing technologies for benefits for operations, quality and costs Profitability • NOPAT • Economic Profit (Value Contribution) •“Margins” • EROI, EROE, EROTA

Productivity Fixed Assets •Tangible assets • Intangible assets Current Assets • Cash/near cash • Inventory • Accounts receivable

Cash flow from assets +/-fixed assets (tangible & intangible) +/- long-term working capital requirements +/- entry/exit investment costs = Strategic Cash Flow

Fig. 7.16  The determinants of free cash flow—the primary business objective

in recent years the attraction of working with partners in “distributed resources” structures has been to improve asset utilisation and to improve cash flows. This development has had a significant impact on emerging organisation structures; Fung et al. (2009). Figure 7.15 links these topics and places them in context making a point of the necessity of an integrated approach to strategic planning.

7  Profitability and Productivity

161

Figure 7.16 represents the processes of a major global organisation that undertakes strategic planning based around the implications that options have on free cash flow.

References Allen, R. (2009). The british industrial revolution in global perspective. Cambridge University Press. Bean, C. (2016, March). Independent review of UK economic statistics. https://www.gov.uk/ government/publications/independent-­review-­of-­uk-­economic-­statistics-­final-­report The Economist. (2014). The digital revolution has yet to fulfil its promise of higher productivity and better jobs. The Economist. The Economist. (2017, January 11) The curious case of missing global productivity growth. The Economist. Kay, J. (1993). Foundation of corporate success. OUP. Kimball, R.C. (1998, July/August). Economic profit and performance measurement in banking. New England Economic Review, 37. Li and Fung Limited. (2009). Li & Fung announces 2008 Annual Results. Rose, J., van Duijnhoven, H., Köpp, C., & Van Wyck, J. (2016, November/December) Productivity now a call for action for US manufacturers. Boston Consulting Group. Stern and Stewart. (1996). https://www.sternstewart.com. Walters, D. W., & Helman, D. A. (2020). Strategic capability response analysis–the convergence of industry 4.0, value chain network 2.0, and stakeholder value-led management. Springer. Walters, D. W., & Rainbird, M. (2007). Strategic operations management. Palgrave.

8

Producibility

Introduction Manufacturing and production engineering consider producibility to be primarily a systems engineering process concept specifically tailored to the building of the value production system. Manufacturability and producibility are the key attributes of a system that determine the ease of manufacturing and production. While manufacturability is the ease of manufacturing, producibility also encompasses other dimensions of the value production task, including physical distribution activities, serviceability, and value renewal (remanufacturing). Both these attributes can be improved by incorporating proper design decisions that consider the entire system life cycle (Blanchard & Fabrycky, 2010). Producibility is the process by which value is created, evaluated for equitable network remuneration, and captured by the network and industry infrastructure. Acting as a synchronous connected structure. It is a total design/production activity that includes all relevant activities within the value chain network and creates intra and inter-organisational partnerships to achieve stakeholder satisfaction. The Industrial Internet of things (IIOT) has enabled the perspective of producibility to expand and to become an inclusive overall network process (or perhaps a system of collaborative, linked processes that reach from a product-service-market concept to one in which remanufacturing returns much of the original “product” into a serviceable entity; it becomes a “member” of the circular value chain or circular economy. Producibility is becoming the value chain network organisations’ strategic and operational infrastructure a process whereby the product-service-design process is integrated with the design of manufacturing processes and the subsequent operational processes of physical distribution, service support management and, increasingly, remanufacturing. It is a ‘total management activity’ whereby the product-service-design process is integrated with the design of manufacturing processes and with the structuring of the operational processes of; physical distribution, response service support management, and product hardware recovery for © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_8

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re-­manufacturing/recommissioning, while meeting customer specified expectations and stakeholder performance requirements. However, the dynamism accompanying Industrié 4.0, value chain network 2.0, and the reinforcement of a stakeholder value management focus has brought about significant changes. Examples abound, healthcare providers are trialling knowledge-based AI (artificial intelligence) algorithm models (Murgia, 2017) to replace NHS (National Health Service) 111 call centres to improve urgency assessment and reduce costs, in the UK.  Medical practitioner/patient relationships are managed by email systems. Surgical processes are making operations safer and more efficient. In emerging markets, surgical processes have imported automotive production processes and have applied them to heart and eye surgical procedures. Real time physiological data is enabling new collaborative relationships between healthcare providers, pharmaceutical and consumer electronics companies, and patients. Digitisation and the application of sensors to capital equipment is changing the role of supplier customer relationships by suppliers becoming customer asset performance management companies. The technology of augmented reality has been applied to aerospace manufacturing, distribution (warehouse order management), and flying training programmes (simulation) resulting in increased operator efficiencies and reduced operating costs. Regulatory compliance management systems such as: smart city infrastructure management, online tax submissions, voting, and civic services are increasing—provide additional examples. Manufacturing and production engineering involve similar systems engineering processes specifically tailored to the building of the system. Manufacturability and producibility are the key attributes of a system that determine the ease of manufacturing and production. While manufacturability is simply the ease of manufacture, producibility also encompasses other dimensions of the production task, including packaging and shipping. Both these attributes can be improved by incorporating proper design decisions that take into account the entire system life cycle (Blanchard & Fabrycky, 2010).

What Exactly Is Producibility? Figure 8.1 illustrates the basics of the producibility approach. The diagram identifies a series of sequential linked activities, moving the overall process through from identifying market opportunities/value innovation to value capture. The principle concern is for the expectations of the targeted consumers is to deliver such that they are met closely but that the process is the result of a coordinated collaborate effort by network of partners better able to meet the fit4purpose criteria rather than by one vertically integrated organisation. As the diagram suggests the integration and coordination is managed by the effective use of data collection and analysis, network collaboration and the application of relevant combinations of “technology”. It is interesting to note that in the evolving value chain structure to deliver electric vehicles the provision of battery inputs, for example, lithium, there is evidence of the vehicle manufactures acquiring sourcing companies to ensure access to lithium, and

Strategic & Operational Infrastructure Decisions Identify Network Capability Resources and Management Requirements and availabilities

Value Production Value Delivery

Implementation - Operations Capability Response Management Delivering the Value Proposition Monitoring Value Delivery & Performance. & Customer Serviceability

Value Serviceability

Data Collection and Analysis - Network Collaboration – Applied Technology

Value Renewal EESG, UN’s 17 Sustainable Development Goals (SDGs), Sustainability Governance Indicators, (GRI )Global Reporting Initiative

Value Sustainability

Connectivity Interactions

Value Chain Network, Strategy: Structure and Producibility Response

Connectivity Interactions

Value Capture The process stage in which created value can be captured so that it brings new profit streams for the network . Dividing value captured equitably.

Value Capture

Connectivity Interactions

Connectivity

Data Analytics and Management -- Business Process Management – Productive Use of Resources -- TimeLine Management: Effectiveness & Efficiency -- Profitable Revenue-Growth Resilience -TCO Analysis - NOPAT/EVA Economic Profit/ Positive Value Contribution -- Stakeholder Value Management & (E)ESG Criteria/UNSDGs

Research Design and Development Creating the Value Proposition and structuring its Producibility

Value Engineering

Fig. 8.1  Producibility value production: A sequence of seamless, sequential and connected activities—an operating network

Identifying Market Opportunities Identifying developing industry opportunities and networks with relevant response capabilities or with the potential for their development

Value Innovation

Connectivity Interactions

Business Value Creativity Infrastructure: Network Strategy and Producibility Responses

What Exactly Is Producibility? 165

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further those major assemblers are expressing concern over other component inputs such as micro-processors/semiconductors and the lack of power infrastructure developments that are essential for vehicle range and for rapid recharging. There are arguments identifying both advantages and disadvantages of producibility as a strategic/operational management option. Figure 8.2 summarises both perspectives. The comments, both for and against the network model relate to the capabilities required to meet the basic end-user expectations of; effectiveness (a strategic perspective), efficiency (the operational perspective), Timeline considerations and the total-cost-of-ownership (TOC). Clearly some of the issues identified have more impact within specified network structures, the current (2022) problems within supply chain response activities.

 roducibility Enabling Characteristics of Successful P Network Organisations Effective producibility requires an understanding of some basic characteristics of successful network organisational management practice such as network organisational excellence, activities, efficient process management, an effective operating systems footprint, and activity-based management. Organisational excellence is an essential capability response. Five characteristics are important to overall success, these are detailed below: Network Organisational Excellence Comprises: Consistent Noteworthy Performance • A realistic, focused, achieved purpose • Financially secure • Achieved, planned growth Integration and Collaboration • • • •

Open, transparent relationships Digital and digitised, connected Clearly understood roles, tasks, and Interactivity Equitable share of dollar value added/value contribution

Socially Responsible • Corporate sustainability • Environmental sustainability • Race, gender, religious, equality Employee Satisfaction • Job satisfaction • Work/Pay/Value Equivalence • “Achiever” culture

Increased Value Management Effectiveness and Efficiency

Increased Value Management Effectiveness and Efficiency

Constrained Capability Responses In Emergencies: Risk (see above) can be quantified, uncertainty has operating problems. Scenario building can help. By identifying possible (“what ifs?) recovery measures may also be identifiable and response reactions costed

Quality Management Consistency: Quality management tolerances and control check frequencies require careful thought and experimentation. Of particular importance is the impact of design changes and materials substitution; none should be made arbitrarily overall impact and implications should be identified for impact on cost efficiency – Total Cost of Operations . Partner Disruption: Network stability is essential, partner capabilities should identified as congruent, financial stability of individual partners should also be checked

Management Time Application: Subsequent to initial setup and production flows the system should be managed digitally

Risk No/Slow Delivery of Inputs: Two sources of potential problems; the first concerns the timing of activities, it is essential that JIT and JISeq (just-in sequence) inventory/component flows are calculated accurately with sufficient flexibility such that overall delivery times to E-Us are made within an agreed time space

Equitable Profit: Capture and Sharing: Unless an acceptable sharing model for the Value Contribution (economic profit) is agreed it is unlikely that the network will be successful. Typically, a “strong” member forces others into unsatisfactory reward arrangements that eventually are abandoned and each member sets an individual solution; eventually the network is dissolved

Value Capture: Because inputs, labour, and time are optimised all Stakeholders‘ value expectations are delivered

Sustainability: Less waste because of reduced mining, lower use of fossil fuels, decreased use of water, more use of recycled materials instead of disposing of them

Serviceability: Less assembly-line inefficiency and down-time due to automatic adjustments and “predictive maintenance”. Product portfolio management has transformed PRODUCT-service-market products into product-SERVICEMARKET data driven solutions

TCO?

Timeline?

Efficiency? Increased Aggregate Network Value Contribution

Increased Aggregate Network Value Contribution

Effectiveness?

Timeline? TCO?

Efficiency?

Availability: Digital thread/Twinning offers real-time performance management resulting in ongoing product /process improvement. AI/Machine learning optimises supply chain response to ensure optimal order cycle times

Effectiveness?

Reliability: Increased precision monitoring has resulted in greater product dependability and optimum performance

Fig. 8.2  The advantages and disadvantages of producibility as an integrated strategic/operational management process option

Producibility and Partnerships

Negatives

Producibility and Partnerships

Positives

Productivity: IoT-connected sensors measure their costs and consumption on a real-time basis and then automatically adjust processes to optimize precision and eliminate waste. Less assembly-line inefficiency and down-time due to automatic adjustments and “predictive maintenance"

Profitability: Optimal: Capital Investment (Capabilities & Capacities, Focused S-SMEs, Optimal working capital) made possible by real-time data on processes’ status

Effective and Efficient Process Management Business Process Optimisation… 167

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Managed Resilience • Evaluates ‘change’ objectively and responds accordingly • ‘Calculated/attainable’ recovery solutions in difficult times/situations It is argued that unless each capability is addressed, specifically noteworthy performance and integration and collaboration, it is unlikely the network will function successfully. Sustainability characteristics relate to EESG, and the UN ESG guidelines are becoming essential and are reinforced by investor sentiment. It is also arguable that with a connected, interrelated value management system, corporate sustainability can be more cost effectively managed (strategically), and more cost efficiently managed (operationally) and thereby make a larger contribution to organisational excellence.

 ffective and Efficient Process Management Business Process E Optimisation: And Relationships as Processes A process is a series of connected steps or actions with a beginning and an end that can be replicated. Organizations are a hierarchy of processes that produce outputs of value to a customer, supported by functions such as research design and development, engineering, manufacturing, accounting, human resources, and marketing. Successful organizations implement both horizontal (process) perspectives, as well vertical (function) perspective. Network structures are based upon both processes and functions located within the network at points where their capabilities are both cost effective (pursuing strategic opportunities) and efficient (implementing strategic decisions). Process management is an approach to management that views the activities of an organization as a set of processes undertaken to advance organizational goals. Management using this technique attempt to design organizational processes that emphasize quality and performance. Process Management refers to aligning processes with an organization’s strategic goals, designing, and implementing process architectures, establishing process measurement systems that align with organizational goals, and educating and organizing managers so that they will manage processes effectively. Essential components in process management include: • A contemporary understanding process thinking, including process ownership • Identifying the customer and understanding the importance of customer facing processes to the success of the business • Identifying and satisfying customers’ expectations and requirements • Establishing process boundaries and performance criteria • Analysing and improving processes

Developing a Value Management Strategy

169

Processes exist to satisfy (exceed) customer value expectations. Therefore, it follows that process owners need to understand who their customers are, and how to deliver the value they require. The customers of a process are the people who require the products and services that are the result of the process or one phase of the process. Customers are external customers-end-users who ultimately use the product service-market outputs, and internal customers partnership employees who must wait for the delivery of a product or service before completing work. Both external and internal customers must be satisfied if network organizations are to be successful. Partnership teams must understand their roles as suppliers to internal and external customers if customer satisfaction is to be a reality. Value chain network relationships are both supplier/customer and customer/supplier oriented and are based upon price/value/equalisation criteria.

Processes and Activities A process is a set of interrelated or interacting activities that use inputs to deliver an intended result. The operations process consists of the core activities: planning, preparing, implementing, and evaluating. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed and effective in meeting customer requirements. Within the context of a value chain network specific processes are value identification, create the value, value production, value delivery, value “serviceability” support, and value renewal. Operating activities are the functions of a business directly related to providing its product-services to a market, market segment, or an individual customer These are the company’s core business activities, such as manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally provide most of a company’s cash flow and largely determine whether it is profitable. Some companies are very proficient in perhaps one or two functions and often find it helpful (and more profitable) to connect with organisations who have the expertise they lack. Typically, this is the early stages of collaborative networks.

What Are End2End Processes? End2End processes, value chains, and cross-functional processes are names that occur for the same concept—connecting process steps across functional boundaries that are focused on the same end objectives—Primary and Secondary Stakeholder satisfaction. They: • Encompass an entire value chain • Focus on customer value • Categorize processes based on their value to the organization

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Developing a Value Management Strategy A Producibility Value Strategy (aka End2End value contribution processes) is the collaborative process by which value is created and captured by the network partnership and industry infrastructure. Its objectives are based upon fit4purpose, cost (customers’ price/value/equalisation expectations) and time. Figure 8.3 identifies the basic principles of the concept. Producibility Value objectives (are established that contribute to value contribution activities) and presents the collaborative process by which value is created and captured by the network and industry infrastructure. Its objectives would typically include those based upon fit4purpose, cost (customers’ price/value/equality expectations) and delivery timeline. The end2end process of optimising stakeholder expectations (end-user customers and network facilitating partners) is mapped by identifying the value chain network processes with activities that are necessary to produce product-services. This approach is aimed at achieving an understanding of how the roles and tasks of network partners are to be aligned within the context of the value chain to produce customer value that creates customer purchasing and use satisfaction by understanding their reason for selecting the product-serve and its satisfaction when applied to their “purpose for purchase—its fit4purchase”, and subsequently confidence that leads to repurchasing. Figure 8.4 suggests the role of the value proposition and planning activities. Detail is added by Fig. 8.5. Of particular importance is the expanded detail for producibility/E2E: activity two, value production within which decisions are made that influence the remaining activities. For example, what will be the role of S-SME suppliers? Can S-SMEs participate in RD&D and what incentives do they require to become sole suppliers? And manufacturing process technology choices? What is available? At what cost? What are the connectivity problems and costs. And is the customer prepared for this (cost and operational capability)? The analysis continues into another topic, for analysis occurs with producibility/e2e: activity four value serviceability in which issues occur concerning performance management and predicted maintenance, both of which require connected real-time data management facilities. Figure 8.5 links the process to the Organisational Excellence Model criteria (detailed earlier in the Introduction to Part 2) where the process align each of the producibility activities with the relevant relationships management topic. The scope of Fig. 8.5 extends to creating links to the value proposition which has been validated (acceptable to the target customer group) and economically viable (the network partnership has accepted roles and tasks, cost structures, and margins and collective and individual value contributions/EVA). The model must be iterative to ensure both end-user customer satisfaction and supplier satisfaction as well as fulfilling the criteria of the demands of the organisational excellence model if it is to deliver value to all participants.

Design

Build

Value Delivery

Value Renewal

Value “Serviceability”

Performance Criteria • “Fit4Purpose” • Volume • Margins • Costs • EVA/Value Contribution

Capture

Business and Environmental Sustainability Review organisational and network relevance of corporate and environmental responsibility concerning: EESG, UN’s 17 Sustainable Development Goals (SDGs), Sustainability Governance indicators, GRI Global Reporting Initiative, environmental protection, stakeholder sustainability cost sensitivities, corporate and stakeholder sustainability and Impact on stakeholder value contribution? Network Value Capture Value capture is important for ongoing network partner survival because it allows for reinvestment in the business to create a stronger competitive advantage or fund R&D for new products. Low margins do not allow for any lapse in quality of execution, and certainly doesn’t enable any business to reinvest. Mindful of the Value Capture importance of continued customer confidence—and spend

“Serviceability”-Customised Service Solutions The continuity of a network customers revenue and profitability activities by ensuring the “serviceability” aspects of the value proposition respond responsibly. The important future features will include digital connectivity and mobility, performance data management, product service management and asset performance management/tracking management

Network Producibility Value Strategy Topics include:

Sustain

Focus on Customer Satisfaction • Consideration and application of Industry/Market Dynamics and Value Performance Drivers/Builders • Network structure effectiveness and efficiency • Relevant “Asset Infrastructure” • Appropriate Value Product-Service-Market Strategy (PRODUCT-strategy-market product-SERVICE-market, and product-service-MARKET) • Improved Asset management • Product and Process Modularisation • Lower “enterprise -risk management.“ • Equitable distribution of total value added • Mindful that customer satisfaction and continued customer confidence is a core element for success!

Maintain

Fig. 8.3  Value chain network producibility (aka end2end value delivery): Activities that build customer confidence—and spend

An understanding of “customer satisfaction” • Fit4Purpose Profile – Customer Expectations (Price/Value/Equality) • Specification fit percentage • Quality management/assurance • Reliability • Order/delivery time cycle • Serviceability response time and “quality” • Financial terms • Value contribution • Competitive comparisons • Mindful that customer satisfaction and continued customer confidence is a core element for success

Specification “Fit4Purpose” “Finished Goods” Activity-toActivity Zero/Minimum Rework

Deliver

Evaluate production options. Consider technical and commercial implications and outcome consequences. Develop network partner production specification for detailed production process design and structuring the subsequent operational processes (marketing and sales, physical distribution, service support and value renewal Value Delivery Delivery of the value proposition such that it enables a customer to fulfill their role within the value chain. This requires meeting each of the features/”promises” the value proposition seeks to fulfill for the customer

Research, Design and Development RD&D and network liaison to create and liaise a proposed value proposition. Determine feasibility (customer response) and viability (network partner response). Estimated “value advantage” in financial and marketing contexts. The value advantage can be expressed in quantitative terms (such as EVA value), or qualitatively (such as an intangible feature such as design aesthetics) Develop and maintain and maintain customer confidence Produce the Value

Value Engineering

Producibility Value Management Delivery Objectives include:

Value Innovation

Create

Identifying Market Opportunities Identifying developing market and industry opportunities comparing with networks current relevant response capabilities or with the potential for their development. Identify relative Importance to customer(s). Measure impact on Stakeholder ESG criteria

Identify

Developing a Value Management Strategy 171

Evaluate Performance (and Continue) or Make Required Changes to Match Capability Requirements Stakeholder Satisfaction Corporate Sustainability: • Commercial Responsibility • Social Responsibility • Environmental Sustainability

Network Value Capture

Producibility/E2E: Activity Six Value Chain Network, “Total Sustainability”

Plan For Circular Operations • Organisational issues • Investment requirements • Investment Cost & availability of capital • Risk & opportunity costs • Customer impact

• How and where and by whom will the product be “manufactured”? • Can the product-service-market manufacturing be manufactured offshore by licencees? • Inventory management options for current and strategic procurement identified: • Substitution, • Procurement “Futures” • Impact of product-portfolio shifts considered (3)

Equitable Stakeholder Value Management (Profitability & Productivity) ∑($ Value Added = Transfer price-less-Production Costs) Positive Free Cash Flow Customer Price/Value Equivalence

Producibility/E2E: Activity Five Value Renewal

Fig. 8.4  Value chain network producibility (aka end2end): Groundwork for the value proposition

Producibility/E2E: Activity Four Value ”Serviceability”

Establish Asset Management Programs • Create “Serviceability Installation and Training • Performance Management • Predicted Maintenance • and operational support • “Rolling” Value Proposition

• Capacity scheduling • Manufacturing process technology commenced choice review: • Internal and external capacity • Process specification decisions availability explored. Options identified identified and being evaluated. • New investment outsourcing • TQM tasks reviewed for costs collaborative options and reliability • New investment in digitalisation? •What will be the role of S-SME (Digital Thread/Twinning options) suppliers? (1) (2)

Producibility/E2E: Activity Three Value Delivery

Producibility/E2E: Activity Two Value Production

Producibility/E2E: Activity One Value Identification, Valuation and Creativity

•Detail Transactions Channel Profiles •Online transactions and deliveries •Payment systems •Returns etc •Detail Physical Distribution Channels Options •Dedicated •Outsourced services •Customer Communications •Marketing •Technical; installation and set-up •Operating activities: •Order management • Transactions management

• Profiled Target Customer Group(s) • Forecast Demand (Segments) • Product-Service-Market Activities • Delivery and Serviceability Customer Requirements Established and being “designed” into the prototype • Engineering Design • “Prototype” being built • Engineering Evaluation .

Profile Customer Expectations, Develop & Market Test, Develop & Validate Value Proposition, Resources Procurement, Manufacturing Operations, Marketing & Sales Operations, Distribution, Serviceability Operations, Sustainability

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Producibility/E2E: Activity One Value Identification, Evaluation and Innovation Value Proposition

Marketing and Sales and Operations

Fig. 8.5  Value chain network, strategy, structure and relationships management requirements

Business Model Considerations

Producibility Activity Based Management

Network Customer Relationships Management

Network Operational Capabilities Based Performance Value Drivers

Value Capture

Sustainability Operations “Value Renewal” Circular Operations Relationships Management “Serviceability” Operations Manufacturing Relationships Management Management Distribution Operations Employee Relationships Detailed Production Relationships Management Management Process Design Validate Distribution Relationships Distribution Relationships Value Proposition (Transactions) Management (Logistics) Management Marketing and Prototyping Producibility/E2E: Sales Operations Relationships Concept Activity Six Management Value Capture Development “Manufacturing” Operations Producibility/E2E: Activity Five Relationships Management Employee Relationships Supplier Relationships Management Value Renewal Management Producibility/E2E: Activity Four Customer Relationships Value ”Serviceability” Employee Relationships Management Management Producibility/E2E: Activity Three Value Delivery Producibility/E2E: Activity Two Value Engineering and Value Production

Distribution –Transactions And Physical Distribution

Sustainability Management Planning and Managing Installation and Serviceability Support

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I dentifying and Costing Activity Inputs: Activity Based Management The network interfaces with its customers and partners at several points throughout the value production process. At these points in the development of the model the extent and content of these contact points is identified, and each relationship activity and responsibility identified (Network Relationship Management). This activity provides input for identifying the roles, tasks, and likely costs of the Value Creation Activities, these will provide the basis of the Activity Based Cost model that provide management with planning and control data for decision making. Producibility/ End2End Interactive Relationships Management follow. For each activity we identify the impact of customer expectations that the network relationship management will require to meet the level of importance of each item of the customers’ expectations (activity-based management (ABM) is a procedure used by businesses to analyse the profitability of every customer relationship contact of the organisation with all partners enabling them to identify what drives partner value (their value drivers), what response is required, and what drives the response and its cost). An integral component of the analysis is to identify the viability of potential for partnership interaction and collaboration to deliver the value expectations to the end-user customer(s). This is a critical planning activity as it attempts to optimise the expectations of all stakeholders, primary and secondary. The requirements of a successful network operation (positive EV/value contribution and positive cash flow). To be effective it is conducted by referring to operating resources used this ensures economic profitability and productivity objectives are met and reviewed against customer expectations that often have changed. An important consideration, particularly in times of international inflation is value migration that can disturb the balance of the model; customer expectations and behaviour are often affected, and price/value/equalisation factors change, and accordingly, so too does the network value proposition.

 ctivities and Activity-Based Management (ABM) A and Activity-­Based Costing (ABC) Application to Producibility Decision Making Activity: the state of being/conducting a prescribed task or role with the purpose of achieving a specific outcome or effect. Activity-based management (ABM) is a procedure used by businesses to analyze the profitability of every segment of their company, enabling them to identify problem areas and areas of strength. Company is offering, (for example looking at marketing and production costs, sales, warranty claims, and any costs or repair time needed for returned or exchanged products an organisation. The demand for more accurate and relevant management accounting information has led to the development of activity-based costing and activity-based management. Activity-based costing improves the accuracy of assigning costs by first

Identifying and Costing Activity Inputs: Activity Based Management

175

tracing costs to activities and then to products or customers that consume these activities. Process value analysis, on the other hand, emphasizes activity analysis— trying to determine why activities are performed and how well they are performed. The objective is to find ways to perform necessary activities more efficiently and to eliminate those that do not create customer value. Activity-based management is a system- wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the resulting profit. Activity-­ based management emphasizes activity-based costing (ABC) and process value analysis. CIMA (The Chartered Institute of Management Accountants) published a Technical Briefing “Activity-based Management”—An Overview: 2001) identifying significant characteristics of Activity Based Costing. It has promised companies a new way to understand costs and a new way to limit these costs to the products and customers driving them. It has been heralded as the cost accounting model that would help management improve profitability. And it is fair to say that it does do that if: • Management gains a thorough understanding of its business processes and cost behaviour during the ABC analysis process; and, • Management applies the insights gained during ABC fact gathering and analysis to improve decision making at both operating and strategic levels. ABC prompts managers to ask the right questions. ABC becomes ABM (management) when it is used to: • Design products and services that meet or exceed customers’ expectations and can be produced and delivered at a profit • Signal where either continuous or discontinuous (re-engineering) improvements in quality, efficiency and speed are needed • Guide product mix and investment decisions; choose among alternative suppliers • Negotiate about price, product features, quality, delivery, and service with customers; employ efficient and effective distribution and service processes to target market and customer segments; improve the value of an organisation’s products and services. CIMA, Technical Briefing, Developing and Promoting Strategy, April 2001.

 pplying Activity Based Management, Activity-Based Costing A and Attribute Based Costing From the public domain we find the following definitions and distinctions: Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs, using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational

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decisions in an organization. Activity-based management can be applied to different types of companies, including manufacturers, service providers, non-profits, schools, and government agencies. ABM can provide cost information about any area of operations in a business. In addition to improving profitability and the overall financial strength of a company, the results of an ABM analysis can help that company produce more accurate budgets and long-term financial forecasts. ABM is defined in the public domain: Activity-based management (ABM) is a system for determining the profitability of every aspect of a business so that its strengths can be enhanced, and its weaknesses can either be improved or eliminated altogether. Activity-based management (ABM), which was first developed in the 1980s, seeks to highlight the areas where a business is losing money so that those activities can be eliminated or improved to increase profitability. ABM analyses the costs of employees, equipment, facilities, distribution, overhead, and other factors in business to determine and allocate activity costs. Activity-based management (ABM) is a procedure used by businesses to analyze the profitability of every segment of their company, enabling them to identify problem areas and areas of strength. Activity: the state of being/conducting a prescribed task or role with the purpose of achieving a specific outcome or effect. Activities create costs. Activity-based management (ABM) is a procedure used by businesses to analyze the profitability of every segment of their company, enabling them to identify problem areas and areas of strength the company is offering, by looking at marketing and production costs, sales, warranty claims, and any costs or repair time needed for returned or exchanged products. By looking at marketing and production costs, sales, warranty claims, and any costs or repair time needed for returned or exchanged products. If a company is reliant on a research and development department, ABM can be used to look at the costs of operating the department, the costs of testing out. The demand for more accurate and relevant management accounting information has led to the development of activity-based costing and activity-based management. Activity-based costing improves the accuracy of assigning costs by first tracing costs to activities and then to products or customers that consume these activities. Process value analysis, on the other hand, emphasizes activity analysis—trying to determine why activities are performed and how well they are performed. The objective is to find ways to perform necessary activities more efficiently and to eliminate those that do not create customer value. Activity-based management is a system-wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the resulting profit. Activity-­ based management emphasizes activity- based costing (ABC) and process value analysis. Cost pools and cost allocation bases are important (different) characteristics. See Fig. 8.6. There is then a fundamental difference between traditional costing and activity-­ based costing, traditional costing systems accumulate costs into facility wide/ departmental cost pools. The costs in each cost pool are heterogeneous (they are the costs of numerous processes) and typically not caused by a single factor. Activity

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Identifying and Costing Activity Inputs: Activity Based Management Technique

Description

VCN Management Application

Activity Based Costing

Focuses on all intra and inter-organisational activities involved in value delivery

Applied to decisions on processes and activities requiring accuracy concerning critical value drivers

Activity Based Management

Focuses on activities that create cost and applies the costs to improve value delivery

Performance measurement and cost/service improvement through process re-engineering

Attribute Costing

Uses customer requirements of a product-service to identify potential components in a produceservice designed to meet the customers requirements. It is these as a bundle of features that differentiate the products for which costs are determined

The technique can be interpreted as externally oriented because the attributes of services are determined according to customer requirements and may have no features that are common to existing product-services

Customer Profitability Analysis (CPA)

Process of allocating revenues and costs to market segments/customers to determine their profitability

Uses the extent of influence, cost efficiency, and customer response of identifying customer facing processes. Can identify alternatives

Direct Product Profitability (DPP)

Expresses product category contribution by subtracting attributable costs from gross margin

Identifies the effectiveness of merchandise strategies and their implementation

Economic Value Added

Uses a charge for capital to calculate economic profit as opposed to an accounting profit. EVA = NOPAT – (Capital Employed X WACC)

EVA offers the facility to translate nonfinancial performance into financial performance by linking customer value drivers and cost drivers

Fig. 8.6  Traditional vs VCN costing: Some considerations Characteristic Cost Pools

Allocation Bases

Traditional Costing Traditional costing systems accumulate costs into facility wide or departmental cost pools. The costs in each cost pool are heterogeneous – they are the costs of many major (and minor) processes, and, typically are not caused by single factor

ABC systems allocate costs to products, services and other cost objects from the activity cost pools using allocation bases corresponding to cost driver activities

ABC ABC systems accumulate costs into activity cost pools. These are designed to correspond to the major activities or business processes of the organisation/department or activities . By design, the costs in each cost pool are caused largely by a single factor – the cost driver.

Traditional systems allocate costs to products using a volume-based allocation bases; units, direct labour input, machine hours and revenue dollars

Fig. 8.7  Fundamental differences between traditional costing and activity-based costing

based cost systems accumulate costs into activity cost pools. These are designed to correspond to the major activities or business processes. Cost pools are designed to collect costs caused by a single factor, a cost driver. See Fig. 8.7. Traditional cost systems allocate costs to products using volume-based allocation bases, units, direct labour input, machine time, and revenues. “Activity” based systems allocate costs to product-service-markets and other activity cost pools using allocation bases that correspond to cost drivers of activity costs.

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Some terminology may help to clarify the differences between traditional and activity-based cost allocation: An activity describes the way in which resources are allocated/employed to achieve an organisation’s objectives. Activity based costing focuses on cost behaviour patterns which relate input cost with the changes of output volumes over a range of activity levels. Functions are aggregates of related activities that share a common purpose, such as procurement, manufacturing, etc. A business process/activity is a set of related and independent activities linked by the outputs they exchange. A cost driver is a factor that creates or influences cost. Cost driver analysis identifies the cause of a cost, e.g., the number of orders received in a specified period. A positive cost driver creates value. A negative cost driver destroys value by creating unnecessary work and reduces/destroys value. Activity cost driver rates are calculated by dividing activity expenses by the total quantity of the activity cost driver (e.g., machine set up expenses divided by the total number of machine set up hours). For example, direct labour hours worked, the number of customer contacts made, the number of engineering change orders issued, the number of machine hours used, and the number of product returns from customers are also examples. Attribute-based Costing first identifies customer expectations of a product-service-market by its attributes (components responses to customer expectations), the cost (to the organisation) of providing the combination of attributes is derived by using the techniques of activity-­based management (i.e., the effective use of the organisation’s activities). A cost pool is a grouping of costs caused by related cost drivers and activities. For example, order assembly may be designated as a cost pool for order picking. See

Fig. 8.8 Figure 8.9 shows the structure of an ABC/ABM process and lists the activities in order of their application. ABM/ABC both measures and adds visibility to costs. Both avoid the use of averaged cost allocations, but rather traces cost using cause-and-effect activity cost drivers. The resulting cost visibility informs manager about what things costs and more importantly why they have costs. ABM/ABC/AttributeC go beyond product costing to measure distribution channel and customer profitability and NPD (new product development) manufacturing costs. Ultimately cost data is simply a means-­ to-­ends where the ends are the decision-making of the organization. ABM/ABC offers management an opportunity to become proactive rather than being reactive managers. Information analysed and collected through activity-based costing (ABC), and value-chain analysis can be used to identify and implement processes that can improve the company’s operations and/or strategies. This divides ABM into two potential sub-categories: Strategic ABM

Producibility: As an Operating Infrasructure Network

179

Cost Pools and Cost Drivers Activity Cost Pools

Activity Cost Drivers

Production

Number of setups Number of electricity, water units consumed

Marketing

Number of sales contacts Number of sales orders (by media)

Research, Design & Development

Number of research projects Hours spent on projects Complexity index

Procurement

Number of suppliers Number of purchase orders raised

Customer Service

Number of service calls Number of products serviced Number of hours spent travelling to customer Number of hours spent servicing products

Fig. 8.8  Identifying cost pools and cost drivers Strategic ABM uses activity-based costing to analyse the profitability of an activity, such as the introduction of a new product-service market or entering a new market. It allows the company to obtain a strategic picture of which products and customers to develop and/or pursue to increase sales profitability. Operational ABM Operational ABM involves scrutinizing the cost of each activity and increasing operational efficiency by enhancing value-generating activities and eliminating unnecessary costs and non-value-generating activities. It allows managers to identify anomalies in the costing process and investigate accordingly. Activities that do not generate adequate value can be ceased, and resources can be allocated to other activities—leading to higher efficiency.

Kaplan and Anderson (2004) suggested modifications to the ABC model. The arguments made in 2004 have more impact in 2020+ as both product- and service-­ markets become more complex, many have become “service” products (organisations preferring to purchase asset’s output rather than the asset itself), they are able to be managed centrally (using digital thread connectivity) their service needs are predicted (digital threads and digital twins). Furthermore, “big” data and rapid data availability and analysis have had a huge impact on information needs and availability for performance management. Collaborative value chain networks undertake joint RD&D, manufacturing is sequential as SSMEs value-add at various stages thereby optimising the use of asset investment. Procurement consortia (Covisint and Elemica) use communications technology to achieve large-scale purchasing power and McKesson (distributing pharmaceuticals and providing health

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Customer Expectations

Customer Value Drivers

Suppliers’ Response Capabilities Analysis

Supplier Value Drivers

Activity Analysis

Suppler Cost Drivers

Cost Pools

Cost Drivers

Cost Driver Rates

Attribute considered necessary by a target group of customers

Responses considered necessary by target customers if they are to achieve and/or maintain profitability, productivity and positive cash flow in current and potential markets Identification and evaluation of response capability requirements for successful competition for customer business Resource capability attributes considered necessary by suppliers if they are to maintain profitability, productivity and positive cash flow given a customer validated value proposition

Identification of activities supporting the ‘production’ or ‘delivery’ processes. Activities may be described as product costs: many vary with changes in output, others vary with ‘product-development’ over time as customer expectations change and as supplier response capabilities change. The ‘activity’ may well be external to the organisation

Response activity costs considered necessary by suppliers if they are to achieve and/or maintain profitability, productivity and positive cash flow in current and potential markets

The aggregate costs of specific activities in the value creation, production, delivery, serviceability and renewal processes

Variables that determine the work volume or workload of the activity

The cost basis by which activity cost drivers may be allocated to productservices

Fig. 8.9  The activity/attribute based management process

information technology, medical supplies, and care management tools), the company delivers a third of all pharmaceuticals used in North America and employs over 78,000 employees. The authors suggest helpful and significant additions. Traditional ABC works well with modest product portfolios with adequate time to manage time and costs involved when the portfolios (and employee numbers) are expanding rapidly. Complex operations as well as the number products and product ranges require larger capacity analytical facilities. Their modifications include the estimation of employee time allocation by using reviews of past activity levels with the objective of being approximately correct within 5%/10% or the actual number. Similarly, the time taken to complete tasks. They also consider the importance of estimating and using practical capacity rather than actual capacity which, their research suggests, is rarely achieved. This distorts costs and can lead to implications for profitability.

Activity Based Management and the Value Proposition

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Activity Based Management and the Value Proposition Figure 8.10 identifies the role of ABM/ABC in developing the Value Proposition. Clearly customer expectations are an initial requirement and are considered as the basis for identifying the customers’ value drivers. It will be recalled that these are important to customers in the context of their relationship with their customers (industrial product markets) or managing established life-style characteristics (FMCG/consumer durables customers). This information and its importance to customers provides the vendor network with information that can be used immediately to ascertain the necessary capabilities for competitive participation and appraisal of the financial implications of deficiencies. At this juncture it is possible to consider alternatives for creating and delivering value as the implications of value engineering can be explored and any necessary strategy and/or structural changes of the value chain network be considered. A full analysis can be undertaken by applying an ABM/ABC analysis. By considering activity/process options management can also consider life cycle issues in the context of manufacturing life cycle as well as the product-service-lifecycle. This would introduce the possibility of using offshore market “products” to evaluate customer expectations and local resources supply, an exercise that might otherwise not occur.

Producibility: As an Operating Infrasructure Network Industrié 4.0 make possible the connection of industries, business networks, businesses, and business processes offering real-time data availability across the spectrum of business processes and activities. The increased trust among network Value Chain Network 2.0 partners has increased the levels of collaboration and transparency that facilitates data collection and analysis at relevant locations in the network that in turn increases the managerial efficiency of the network and its component organisations. An emphasis on Stakeholder Value Management provides a level of Strategic Management Strategic direction and objectives Structural options

Management accounting

Determine Response Resources Requirements ▲

Customer Value Expectations

Value Drivers

Value Proposition: Product and Service Attributes

Customer Analysis Marketing

Customer Facing Processes Operations Management

Assets, Processes, and Capabilities ▼ Internal and External Availabilities, Costs and Timing

Attribute Based Costing

Activity Analysis and Cost Drivers Analysis

Determine Value Chain Network Structure Alternatives

Value Delivery: Production Integration and Coordination

Operations

Fig. 8.10  Activity-based management and activity-based costing in the value chain network

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governance that ensures optimal and equitable financial relationships throughout the network. Consider the future possibility of managing a product-service-market through the value delivery cycle of a series of activities from product-service conception through to its retirement. For example, consider a consumer durable. Manufacturing capabilities are available such that these products can now be built to meet individual specifications at acceptable levels of cost. The end-user can use internet facilities to ‘discuss’ the product characteristics with designers to ensure a 100 per cent “fit4purose”. The design specification is comprehensive, detailing size, capacity, required features, materials, and production process specification; these data will prescribe the manufacturing route the product will follow. Here the principles of high value/low volume versus low value/high volume will be applied; customised durable products (likely to be ordered for inclusion in a new house or, possibly a restaurant), will be manufactured as high value/low volume products, and those with less differentiation will be produced using low value/high volume facilities. When ready for installation the consumer durable product will be collected by a specialist distribution/installation organisation that may well manage warranty and maintenance activities and these are very likely to include an ongoing arrangement to update the specification of the product; alternatively, specialist insurance organisations will offer the owner a comprehensive policy that, in some cases, may include a replacement product, should the owner’s product be beyond repair. The “connectivity” facility of Industrié 4.0 offers the facility of replenishing consumer durable products (refrigerators and freezers) inventory contents on a use by basis: on-line service is committed feature of the retail product-service mix and indications are that this will be extended; Waitrose in the UK (part of the John Lewis Partnership) are trialling an extension of the delivery service with an unpacking-­ putting-­away feature. As the consumer durable product becomes obsolescent (and then obsolete) it will be removed and dismantled for component recycling. It is very likely that the B2B customers will purchase an intangible product output rather than the tangible product (a product-SERVICE-market rather than a PRODUCT service-market), i.e., purchase the output of the consumer durable product rather than the consumer durable product, creating a serviceability activity. The automobile and aerospace industries are moving towards this concept. The automotive industry has moved towards mass customisation, offering selective customisation facilities with rapid delivery time, some offer a completely customised product! The industry is aware of changes towards vehicle ownership as indicated by the partnerships entered with mobility services by major manufacturers (Toyota/Uber, VW/Gett, and GM/Lyft) cited above. Aerospace offers a product-­ SERVICE activity; airlines no longer purchase hardware items, such as engines, rather they purchase the capability of the supplier to provide reliable engine performance (power output, maintenance, and ongoing performance monitoring and management). In the construction industry capital equipment (cranes, graders, back hoes, even hand tools) are “purchased” as serviceability” products. Producibility therefore can become the networked organisations’ strategic and operational infrastructure, a process whereby the product-service-design process is

References

183

integrated with the design of manufacturing processes and the subsequent operational processes of physical distribution, service support management and, increasingly, remanufacturing.

References Blanchard, B. S., & Fabrycky, W. J. (2010). Systems engineering and analysis. In Prentice-hall international series in industrial and systems engineering (5th ed.). Prentice-Hall. CIMA. (2001, April). Technical briefing: Activity-based management–an overview. The Chartered Institute of Management Accountants. Murgia, M. (2017, April 24). Babylon raises $60m to build AI doctor to diagnose illnesses. Financial Times. Kaplan, R., & Anderson, S. (2004, November). Time-driven activity-based costing. Harvard Business Review.

9

Collaborative Partnerships and People

Introduction Value chains are essentially collaborative partnerships: Collaborative partnerships are agreements and actions made by organizations that have interests in growth opportunities but neither have the complete set of capabilities necessary to respond to the opportunity to compete successfully and therefore agree to share their relevant resources operational performance value drivers and/or value builders (positional and/or executional)—relevant expertise, capacity, dedicated assets, to create an acceptable value proposition. They agree objectives, strategic direction and the scope of the alignment, and the activities for which each partner will be responsible. Typically, resources, include financial commitment, and specific “assets” (structural and executional) comprising knowledge, and people. Organizations in a collaborative partnership share common goals. The essential essence of collaborative partnership is for all parties to mutually benefit from working together. The relationships between collaborative partners can lead to long term partnerships that rely on each other. Barriers to collaboration exist. Strategic projects may require significant time and management effort before they generate value, resulting in proposals to prioritize simpler, faster initiatives, even if they often turn out to be worthless. Collaboration requires a change in mind-sets among buyers and suppliers, who may be used to different types of relationships. Additionally, most collaborative efforts need intensive, cross-functional commitment from both sides, an often-marked change to the normal working methods. Change from a cost-based to a value-based way of thinking requires a shift that is often difficult to accept and to implement. The actual value generated by collaborating organisational partnerships can also be difficult to quantify, especially when companies are also pursuing more conventional value chain improvement strategies with the same suppliers, or when they are simultaneously updating product designs and production processes. And even when companies have the will to pursue greater levels of supplier collaboration, leaders © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_9

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186

9  Collaborative Partnerships and People Coopetition - Using competitor’s manufacturing and distribution facilities to lower production costs and improve delivery performances of low volume products. Industry collaborative activities to resolve common problems and to pursue major opportunities Competitor Relationships (Resources and Demand Management) Capabilities

Cluster organisations are entities that support the collaboration, networking and learning in innovation clusters such as innovation and specialised manufacturing activities and customised services support especially to SMEs

Cluster Relationships clusters allow other organisations to be more productive and more innovative. The Industrial clusters develop unique knowledge and skills difficult to be replicated.

Investigate opportunities to share databases in order to enhance joint RD&D creativity/innovation, and that lead times between demand and supply responses can be reduced to improve customer service and reduce network inventory holding

Secondary Stakeholder Value Management Governance, and Compliance and Taxation

Value Added Potential

Customer Relationship (Demand Management) Customer Satisfaction Capabilities

Develop co-productivity processes with customers – IKEA. Offers pricing (lower purchasing costs) and quality benefits to customers and efficiency benefits to the company.

Performance, Asset Management , Profitability, Productivity, Connectivity and Risk Management, Value Add for Customer(s)

An Employee Value Proposition offers, compensation, work-life balance, stability, location, and respect. Task/hours related pay. Job satisfaction Skills . Development and opportunity to progress. 5G, Automated Systems, cooperation between robotics and human beings by combining their diverging strengths resulting in greater job satisfaction. Digital thread connectivity between employee and production processes. “Engaged employees” feel committed to an organization, they identify with the organisation, and are satisfied with their job and often make major contribution to both profitability and productivity

Employee Relationships (Expertise, Skills and Management) Capabilities to meet future demanding challenges

Supplier Relationship (Resources Management) Capabilities

Activities/processes that have high IP input and that are patent protected. They have high IP and market “value”. Replication would be considerably expensive and have an extended timeline for RD&D activity

Secondary Stakeholders (customers, suppliers, employees, investors, and, competitors ) provide advice and guidance concerning the ethics of value propositions and business models

Consortia Relationship Partnerships are based upon unique or exclusive expertise that is expensive to replicate

Increase in Network Value

Fig. 9.1  Leveraging partners capabilities to add to value to delivery and value contribution

often admit that they don’t have the capabilities to respond, and/or the internal structures they need to implement collaboration programs, and do not have staff capable of implementing them. Successful collaboration requires the long-term commitment of leaders and decision makers. Figure  9.1 below considers current value chain partnership relationships. It emphasises the benefits that lead to successful, long-term relationships. Before considering each of these partnership types we identify the topics in the operational excellence model that have influence over partnership decisions.

 eeking Operational Excellence: The Primary Benefits S of a Network Value-Led Operating Model— Collaborative Partnerships A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. We return to Figs. 5.6 and 5.7 in the Introduction of Part ll., to identify specific interests and considerations suggested for performance management, these are concerned with: Profitable Revenue Growth resulting in Business value (enterprise value, market value added), productive asset base, revenues of RD&D expenditure, Patents granted, licenced to and from competitive organisations. NOPAT/EVA Economic Profit/Positive Value Contribution: effective and efficient use of inputs, substitution, and sustainability activities ((E)ESG) competitiveness (comparative end-user price/value/equality assessments.

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Positive Cash Flow Management Performance: consistency and continuity, growth, successful applications (operational partnerships, strategic partnerships, transformation (strategic and operational objectives) Strategic and Operational Asset Management: The changing roles and importance of tangible and intangible assets. ‘Network leverage strategies. often requiring collaborative partnerships. Investment Model Risk and return criteria: rate of return—weighted average cost of capital, use of financial gearing (debt/equity//capital intensity) policy. Use of operational gearing fixed costs/variable costs relationship. Collaborative business model structure options. Differentiated Product-Service-Market Portfolio: an awareness that managing intangible assets is increasingly important to very large organisations making customer-centric decisions globally. Their focus is on developing brands, customer relationships and strong operations links in their markets, often collaborating with local organisations. The traditional PRODUCT-service-market has become a product-SERVICE-MARKET.  This releases capital that may be tied up in fixed tangible assets and affords a closer fit4purose with customer needs. Stakeholder Value Management: (E) ESG Criteria/UNSDG (United Nations organisation sustainability development goals); materials substitution and sustainability activities, and process development, ((E)ESG) acceptance and governance practice. The concept of the value chain is of strategic effectiveness and operational efficiency: product-service-­ management design, production, distribution, serviceabilty, and value renewal is based on competitive advantage as operational excellence in turn is based upon strategic effectiveness and operational efficiency in resources management. The network is seen as a collaborative platform-based business sustainability model. Positive Responses to its Value Proposition: from stakeholders; customers, suppliers, employees, investors, community interests, government, and other regulators. Often responses are increased when collaborative partnerships are formed. Positioning Strategy: The purpose of positioning (strategic, market, value chain organisation, and/or product-service-market) is to determine a targeted audience for an organisation and product to obtain the best response possible and create a loyal customer base. Collaborative network partnerships with distributors and serviceability agents can reinforce a position. Business Process Management: the use of various methods to discover, model, analyze, measure, improve, optimize, and automate business processes Collaborative Network Relationship Management: creating a network that develops interconnected, interactive, integrated, digitally connected, transparent, and cooperative relationships among its partners. Reputation Management: is the practice of influencing stakeholder perceptions and public perceptions and expectations about an organisation and its brands. It includes monitoring the perceptions and responding to reputation threats and proactively seizing opportunities to enhance reputation Reliability: is defined as the probability that a product, system, or service will perform its intended function (Fit4purpose) adequately (its value proposition/specification), or for a specified period, or will operate in a defined environment without failure.

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Focused outsourcing: allows a company to focus on its distinctive capabilities and to contract out more standard work to qualified third parties. In this way, the company can reduce timelines, spread costs, and maximize its responsiveness to changes in demand or capacity constraints.

Collaborative Partnerships It is becoming unusual to find an organisation that is not involved in working with another to some extent. We suggest seven types of organisational partnerships to be most typical, these being secondary stakeholders, customers, suppliers, employees, competitors, and consortia partners. In this chapter we review each of these. Figure 9.1 identifies each of these.

Collaborative Partnerships: Secondary Stakeholders as Partners Building partnerships with stakeholders requires the capability to build long-term or on-going relationships with an organisation and having an interest in what the organisation is doing. This type of relationship is often specific and is typically focused on the way the relationship is conducted. Clearly this requires mutual respect for and an understanding of the expectations of the stakeholder. The stakeholder concept assumes that value has a broader context, than being just a shareholder/investor and is one that links customers to supplier organisations, beyond the investor involved in “value” creation and delivery. Stakeholders can be classified as primary and secondary (external) stakeholders. Primary stakeholders are customers, employees, management, shareholders and investors, and partners suppliers and distributors. Secondary stakeholders comprise, competitors, the community, and government. As stakeholders they have agreed to contribute “resources” such as advice, endorsement of objectives etc., indicating approval of its activities within the context of the ((E)ESG) criteria and UN SDGs who, in line with their different priorities and concerns, may either exert an influence upon a partnership or be influenced by it. Secondary stakeholders may have a large influence on social enterprises compared to traditional businesses. Social matters are indeed particularly sensitive topics. Governments, local communities, or charitable foundations may influence, condition, or even block a social firm’s activities. Therefore, it becomes crucial for the organisation to identify and categorise its stakeholders, understand their argument and the position they are adopting and influence they can have on business’ activities. This approach simplifies the strategic options that are available.

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Collaborative Partnerships: Suppliers as Partners Partners actively contribute to a company’s business model, whereas stakeholders get affected by it. However, in the context of entrepreneurship things can be a little bit different. As the discussion that follows suggests, however, these categorisations are not always straightforward and often require further analysis. Business-to-business (B2B) partnerships are a long and well-established way for businesses to grow. Industries such as aerospace and healthcare equipment are notable for the collaboration between OEMs, S-SMEs, and End Users (and often financial services). The “Tempest” is a proposed sixth-generation jet fighter aircraft that is under development in the United Kingdom for the Royal Air Force by a consortium of BAE Systems; Rolls-­Royce; Saab AB; Leonardo S.p.A. and MBDA. The digitally connected world, consists of ongoing change and innovative responses. Value Migration is a given factor in planning activities. Changing customer needs and preferences, and competitive business models together with shareholder expectation of positive results, are creating a dynamic market with a varied range of customer-based opportunities. Many companies are realizing that the key to growth is not found in being all things to all people but in developing purposeful strategic network partnerships that can help fulfill needs. Long-term relationships between buyers and suppliers are characterised by collaboration, information transparency, and mutual confidence. The supplier is often considered to be an extension of the buyer’s organisation. The successful partnership is based on several commitments. The buyer provides long-term relationships and contracts and uses few, but trusted, suppliers. Prior to the impact of IIOT, the benefits of supplier collaboration proved difficult to access. But digitisation and connectivity have facilitated successful collaboration between OEMs (original equipment manufacturers) and S-SMEs (specialist small medium enterprises) many have struggled fully to integrate RD&D (research, design & development), prototyping, manufacturing planning, procurement and the network value chain management strategies and operations beyond the traditional quality assurance processes that minimised inspection processes and a priority system that guaranteed materials/ component availability ensuring production continuity. Typically, suppliers also help the buyer reduce costs and improve product and process designs. Digital threads and twinning now “automate” supplier/buyer relationships. Network buyers and suppliers work together to develop innovative new product-service-markets and processes, for example, increasing revenues and profits for both parties. They can take an integrated approach to supply-chain optimization, redesigning their processes together to reduce waste and redundant effort, or jointly purchasing raw materials. In addition, they also collaborate in identifying market opportunities, creating value propositions, forecasting, planning, and capacity management—thereby expanding and enhancing product portfolios, serviceability, mitigating risks, and strengthening the combined value chain. Prior to the impact of IIOT, the benefits of supplier/buyer collaboration proved difficult to access. Clearly there were examples of successful collaboration between OEMs and SSMEs, but many have struggled fully to integrate RD&D, prototyping,

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manufacturing planning, procurement and the network value chain management strategies and operations, and the relationships have been restructured. Boston Consulting Group (BCG) (2015) identified changing OEM/SSME trends in collaboration considerations. Some of these issues may well change the supplier/ buyer relationship structure as well as cost structures. For example, producibility/ end2end value management, is becoming a shared activity. Realtime performance monitoring and management (and predicted maintenance) is becoming a conjoint responsibility. In product-SERVICE-market structures ongoing performance of individual components as well as that of the end-user equipment requires monitoring activities if optimal serviceability is expected. Performance management and maintenance are “managed by AI, digital thread, and digital twin combinations”, it is also expected that a 24/7 onsite presence is available. Figure 9.2 illustrates structural issues that BCG considered that may be impacting supplier/buyer relationships. Maintaining margin management: SSME in industrial and consumer durables often establish direct access to “after-markets” in which replacement service parts are priced in excess of production prices agreed with OEM customers, where feasible improvements and modifications typically increase user efficiencies. S-SMEs in aerospace and defence equipment markets respond to OEMs and have delegated RD&D to S-SMEs. Technological Change: For Ansoff the demand life cycle was linear it is an ongoing need that has been addressed by several product approaches serviced by a series of demand technology life cycles. He argued that their effectiveness decreases as sequential life span replacement increases. OEMs have distanced themselves from RD&D and developing knowledge by relying upon S-SME suppliers for technological advancement. Development of critical systems and components will create shifts in competitive advantage sensitivity profiles. Global Activity: Local Suppliers and their Local Knowledge Inputs. As offshore suppliers become more capable and knowledge of product-service requirements of local end-user customer expectations are identified by them OEMs are collaborating with them and using their local manufacturing capabilities. Asset Management Trends: large OEMs, and their equally large customers, are favouring “serviceability” value propositions—customers are purchasing the outputs of capital goods. Customer preferences are for investment in intangible assets such as brands and customer relationships management. OEMs manage the serviceability of the “product-­ service-­market package”. Control of the Experience Curve; component and module suppliers (S-SMEs) develop cost-efficiencies over time and retain benefits from advances in RD&D and from the benefits of “scale”. Usually, second and third generation experience curves are more cost-efficient. Operational Complexity: IIOT/ Industrié 4.0 has involved networked organisations in increased investment and in fixed costs of integration and coordination of manufacturing systems increases with system complexity. Working capital requirement increases (inventory SKUs and item costs. Risk also increases with complexity—increasing “returns spread” expectations (EROI less WACC). Value chain management has evolved around the concept of “asset management leverage” to contain and focus investment. RD&D is becoming increasingly project based. Producibility/End2End Value Management:

OEM’s Value Proposition

Procurement, “Production” Process (es) Manufacturing and Service Support OEM’s Assembly Operations

End-User Expectations Delivery

Fig. 9.2  Trends ln supplier networks: OEMs/SMEs collaboration considerations

Essential/Potential Collaborative Partnerships

Asset Management Trends • Large OEMs and their equally large customers are favouring “serviceability” value propositions – customers are purchasing the outputs of capital goods. OEMs manage the serviceability of the “product-service-market package” • Customer preferences are for investment in intangible assets such as brands and customer relationships management

Operational Complexity • Fixed costs of integration and coordination of manufacturing systems increases with system complexity • Working capital increases (inventory SKUs and item costs’ • Delays occur in RD&D • Risk increases with complexity – increasing “returns spread” expectations (EROI less WACC)

Control of the Experience Curve • Component and Module suppliers (SSMEs) develop cost-efficiencies over time and retain benefits from advances in RD&D and from the benefits of “scale” • Usually 2nd and 3rd generation Experience Curves are more cost-efficient

S-SME Trends: Product & process RD&D, Components and Services, OEMs/SMEs Changing Relationships

Global Activity: Local Suppliers and their Local Knowledge Inputs • More detailed understanding of E-U customers • Knowledge of product-service requirements (task profile) and serviceability • Local manufacturing capabilities • Materials and components suppliers

Technological Change • Demand Technology Life Cycles’ effectiveness are decreasing as sequential life span replacement increases • OEMs have distanced themselves from RD&D and developing knowledge by relying upon SSME suppliers for technological advancement • Development of critical systems and components will create shifts in competitive advantage sensitivity profiles

Maintaining Margin Management • Value Captured in “after-markets” • OEMs have delegated/abdicated RD&D to S-SMEs • Hence long-term margins are decreasing • Issues of control

Producibility/End2End Value Management • A relevant collaborative strategic and operational infrastructure • The fusion of research design and development, of manufacturing and distribution, and of serviceability • Product-service –market renewal activities into a seamless and continuous process to contribute to a Network Value Advantage

End-User Expectations

Introduction 191

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Relevant collaborative strategic and operational infrastructure approaches are based upon the fusion of RD&D, of manufacturing and distribution, and of serviceability. Product-service-market renewal activities are increasingly becoming a seamless and continuous process to contribute to an optimal network value advantage system.

Customers as Partners Partnering with consumers, however, is less mature and less industrialized, even if the practice is widespread. Data analytics and analysis management comprises the processes, tools and techniques of data analysis and management, including the collection, organization, and storage of data. The chief aim of data analytics is to apply statistical analysis and technologies to data to find trends and solve problems. Data management technology has/is enhancing data analytics. Artificial Intelligence and Machine Learning have added speed and detail to aspects of customer identification, purchasing behaviour and likely intent. Most business managers who deal with consumer partners will identify partnerships with them in a more specific way, depending on how they create customer partnerships with them. Ryan Skinner (n.d.), Principal Analyst with Forrester the US research company suggests: • Social, digital, or content marketers will think of consumer partners as influencers. • Performance marketers will think of consumer partners as affiliates. • Loyalty marketers will think of consumer partners as their most engaged customers. • Other marketers may think of consumer partners as advocates, or ambassadors, or research panellists, etc. Ultimately, there are a lot of people working with these consumer partners but each in their own way. Coca-Cola’s approach is structured: Our next-generation customer partnership model allows us to generate powerful insights from customer data, which supports tailored execution plans implemented in collaboration with our partners. We start by commissioning an annual survey of more than 16,000 customers, comparing ourselves with other beverage suppliers. This survey allows us to understand the challenges and opportunities our customers are encountering, meaning we can identify how to become better partners and continue to exceed their expectations. This approach is helping us to develop stronger and more productive customer partnerships and provides a platform for us to continue building these relationships.

Most large FMCG organisations are turning towards extending customer experience (CX) models to include and structure the operating model around the value creation, production, communication, delivery, serviceabilty, and renewal activities. These

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experiences must respond to customers’ new, often unmet, and frequently changing needs and enable them to achieve their desired outcomes. This is the Business of Experience (BX). An evolution of CX, BX is a more holistic approach that allows organizations to become customer-obsessed and reignite growth. Whereas CX was limited to the chief marketing officer’s (CMO) or chief operating officer’s (COO) purview, BX is in the board room as a CEO priority because it ties back to every aspect of a company’s operations. In fact, 77% of CEOs said their company will fundamentally change the way it engages and interacts with its customers.

Collaborative Partnerships: Employees as Partners An employee value proposition (EVP) is a combination of rewards and benefits that employers offer to current and perspective employees in return for performing well at work. Gartner (n.d.) research found that for most people, the things that make up a compelling EVP include compensation, work-life balance, stability, location, and respect. Given the dynamics of both industry and market changes (the high turnover of labour being a significant and recent concern) a broader approach is taken. Furthermore, a value proposition should identify its “cost” as well as its “benefits”. In the public domain, a Wikipedia entry suggests the employee value proposition is essentially an aspect of employer branding, one of the ways companies attract the skills and employees they desire and keep them engaged. It is how they market their company to prospective talent, and, how they retain them in an increasingly competitive employment market (for employers) to both attract and to retain staff. It is meant to communicate the values and culture of the organization, as well as take the focus off remuneration as the sole reason for working there. We suggest the following five benefits are included in the employee value proposition from the organisation: compensation, work-life balance, stability, location, and respect. And its expectations (cost to the employee) are identified; as skills and expertise, commitment, length of engagement (employee life cycle, awareness and acceptance of organisational “culture” and its management style, (price/value/ equivalence, and value contribution. The benefits, when presented appropriately and delivered, result in a more committed, happier, and productive workforce at an affordable cost, which are the main goals of any employee-centred strategy. It may also have the additional benefit of improving the company’s perception in the eyes of consumer. Again, from the public domain of Wikipedia (2021) there are some helpful contributions mentioned: Minchington (2006), a set of associations and offerings provided by an organization in return for the skills, capabilities and experiences an employee brings to the organization…an employee-centred approach that is aligned to existing, integrated workforce planning strategies because it has been informed by existing employees and the external target audience. An EVP must be unique, relevant and compelling if it is to act as a key driver of talent attraction, engagement and retention.

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DiVanna (2002), the talent a company needs to exist to support the corporate value proposition. DiVanna (2003) …a portfolio of skills and experiences which can be considered as Assets and incorporated into a company's balance sheet. DiVanna and Rogers (2005) provides additional clarity … the value of the employee centres on the simple premise that an individual must be self-aware of their contribution to the firm under the present set of business conditions. … to keep the firm competitive, employees must also be cognizant of the firm's future directions and prepare to add value in new ways under a variety of emerging business conditions. Tandehill (2006), reinforces this link to employer branding and urges all organizations to develop a statement of why the total work experience at their organization is superior to that at other organizations. The value proposition should identify the unique people policies, processes and programs that demonstrate the organization's commitment to i.e., employee growth, management development, ongoing employee recognition, community service, etc. Contained within the value proposition are the central reasons that people will choose to commit themselves to an organization. The EVP should be actively communicated in all recruitment efforts, and in letters offering employment, the EVP should take the focus away from compensation as the primary "offer".

An organization benefits from a well-formed EVP because it attracts and retains key talent, helps prioritize Wikipedia. In a knowledge-based economy, skilled talent may be what most differentiates great companies from the rest of the pack. Skilled talent can help drive innovation and customer value, creates growth opportunities, and mitigates a growing river of risk. Deloitte make some interesting observations suggesting: Organizations that do an extraordinary job managing their talent have an opportunity to set themselves apart—in both the talent arena and in the broader marketplace. … But the next step … is to actively promote and brand those capabilities. In the past, it may have been possible for organizations to do this outside the influence of their external corporate brands. But those days are likely gone. In today’s hyperconnected world, your corporate brand and your talent brand are two sides of the same coin. Social media has erased whatever lines used to exist between the corporate brand and the talent brand. They’re two sides of the same coin. As organizations begin to rely on talent that resides outside their four walls, alignment of the talent brand and corporate brand are expected to become even more important. Creating strong bonds that help retain critical talent—and attract the future talent you’ll need—requires building leading talent practices and communicating them effectively and consistently. Get it right and the potential of brand convergence can work in your favour. Get it wrong and you may create more risk and confusion than you’ll know what to do with. Many leaders understand they should be stewards of their talent brands, just as they are stewards of their external brands, Deloitte (2013).

Networked organisations need to be aware of these issues, but also consider the requirements of the increasing practice of producibility/end2end value management, these being integration and collaboration for which communication and negotiation skills are essential, these are added to the regular benefits currently included in the employee value proposition from the organisation—as mentioned above: compensation, work-life balance, stability, location, and respect. But also, to include organisational expectations, the cost to the employee, identified; as skills

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and expertise, commitment, length of engagement (employee life cycle), awareness and acceptance of organisational “culture” and its management style, (price/value/ equivalence, and value contribution. The benefits, when presented appropriately and delivered, result in a more committed, happier, and productive workforce at an affordable cost, which are the main goals of any employee-centred strategy. It may also have the additional benefit of improving the company’s perception in the eyes of consumer.

 ollaborative Partnerships: Employees—Cobots and Humans: C Industry 5 Industrié 4.0—Digitisation, Digitalisation and Connectivity The introduction of connected devices, data analytics and artificial intelligence techniques to automate processes further. Industry Five—The fifth industrial revolution will be focussed on cooperation between man and Machine as human intelligence works in harmony with cognitive computing by putting humans back into industrial production with collaborative robot workers will be upskilled to provide value-added tasks in production, leading to mass customisation and personalisation for customers

Industrié 4.0 is the bringing together of robots, interconnected devices, and fast networks of data within a factory environment, basically to make the factory more productive and to execute the routine tasks that are best done by robots and not best done by humans. Industrié 4.0 moves towards Industry 5.0 when you allow customers to customise what they want. With Industrié 4.0, you can already design your own trainers online and the manufacturer you choose will have the right technology to deliver those trainers to your door. It means we can start to help B2B manufacturers get closer to, or even ahead of, personalisation in our marketing typically only seen in B2C.  Through manufacturers’ own innovations, seamless data between the field, the manufacturing process and design, means taking humans out of the manufacturing route, but they will be more involved in how the product is being used and how it can be designed because they have more information. Moving the aero and automotive industries from a fossil-fuel world to an electrical world, is going to be a significant design challenge and it will be much easier for humans to solve if the mundane tasks are being dealt with by AI techniques and robots. Although Industry 4.0 is still the foremost revolution on most manufacturers’ minds, it’s also important to keep an eye on the future. Technology is constantly advancing, and production must evolve with it to remain competitive. With the increase in demand for quality hands-on custom-made products, manufacturers will undoubtedly benefit from what Industry 5.0 has to offer, and perhaps it will reduce the inherent fear most production workers have concerning being replaced by

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automation. New skills are necessary, but the collaborative workplace will be beneficial for all in the long term. What is necessary is the need to do is keep an open mind.

Collaborative Partnerships: Competitors What Is Coopetition? Coopetition is the act of cooperation between competing companies; businesses that engage in both competition and cooperation are said to be in coopetition. Certain businesses gain an advantage by using a judicious mixture of cooperation with suppliers, customers, and firms producing complementary or related products. Coopetition is a type of strategic alliance that is particularly common between software and hardware firms. The difference being that often strategic alliances are created between organisations operating in different industries and see the strategic alliance as a means of machining a substantial competitive entry into another. What is meant by coopetition? Coopetition occurs when competing organisations, that are competitors in an industry agree to cooperate. Certain businesses gain an advantage by using a judicious mixture of cooperation with suppliers, customers, and organisations manufacturing or distributing complementary or related products. Coopetition is a form of strategic alliance that is particularly common between software and hardware firms. See Hayes (2022). Business ecosystems, share this identity., particularly one offering a “scale benefit” for example, “scale based-purchasing” as offered by Covisint to the automotive industry. See Brandenburger and Nalebuf (1997) for a thorough discussion on the topic. There are compelling reasons for coopetition to thrive: Customers begin to demand products and services from multiple companies that might otherwise compete, which forces those brands to work out how to work together. For example, customers often “package or bundle” in product-service-markets to meet their specific requirements; alert distributors identify opportunities to persuade their suppliers to work together (often a less expensive option). Industry consortia develop cooperative groups that combine collectively to develop a consolidated product-service-market value proposition that each member “services” in part rather than attempt to dominate the market. Large scale infrastructure projects require “specialist” expertise and make the relevant contributions

It follows that risk is shared. Capital investment requirements in new product-service markets is becoming large. An example is the development electric vehicles and the recharging facilities required for successful market penetration. Each of the large vehicle manufacturers have announced joint venture inter-industry projects for both vehicle batteries and the recharging infrastructure network. It is interesting to note that the existing petroleum retailers are showing awareness of industry developments and are acquiring or forming alliances with EV powering companies

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Trust is essential in any business alliances and perhaps more so in co-opetition/strategic alliances. Trust is built by operating consistently within the terms of agreement that have been mutually agreed to. See Watenpaugh (2019) for an expansive comment on Coopetition.

A Real-World Example of Coopetition On March 17, 2020, Pfizer Inc. (NYSE: PFE) and BioNTech SE (Nasdaq: BNTX) announced a collaboration to jointly develop a COVID-19 vaccine. The coopetition agreement between the two companies increased the manufacturing capacity to meet the global supply for the vaccine, such that the companies were able to produce millions of vaccine doses by the end of 2020 and hundreds of millions of additional doses in 2021. In June 2021, the companies announced another deal with the government to provide 500 million more doses of the vaccine to support some of the poorest countries. The agreement states that 60% of the doses to be purchased during the first half of 2022.2 BioNTech contributed the vaccine candidates, while Pfizer contributed the clinical research and development as well as the manufacturing and distribution capabilities of the company. BioNTech received an upfront payment from Pfizer of $185 million as well as an equity investment of nearly $113 million, with a potential of $748 million in total future payments when specific milestones were achieved.

Collaborative Partnerships Industry Consortia We can take an additional perspective, one based upon opportunity cost; consider an example from earlier in this chapter; The “Tempest” is a proposed sixth-generation jet fighter aircraft that is under development in the United Kingdom for the Royal Air Force by a consortium of BAE Systems; Rolls-­Royce; Saab AB; Leonardo S.p.A. and MBDA. The theory of the firm consists of a number of economic theories that explain and predict the nature of the organisation, such major economic theories such as Transaction Cost theory, Managerial Economics and the Behavioural theory of the firm allow for an in-depth analysis on various firm and management types. We are interested in considering transaction costs. According to theory, there are four main types of transaction costs namely, bargaining costs, opportunity costs, search costs, and policing/enforcement costs. Williamson (1979) defined transaction costs as the costs of running an economic system of companies. Decision-makers determine the strategies of companies by measuring transaction costs and production costs. Transaction costs are the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales. There are then four basic types of transactions costs, these include bargaining, opportunity costs, search, and policing/

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enforcement costs. Each covers a different aspect of transaction costs. Therefore, a transaction cost is, or can be, one of the most significant factors in business operation and management. It follows that partnership involvement and investment in large aerospace, defence and government initiated large investment projects should undertake strategic cost-benefit studies to identify the nature of the transaction costs (bargaining, opportunity, search, and policing/enforcement costs) involved in projects. Returning to the Tempest project. Clearly some interesting research and analysis has been undertaken concerning essential capabilities and those available in the UK concerning intra-organisation transaction costs of essential capabilities. Transaction cost theory Williamson (1979, 1998) argues that the optimum organizational structure is one that achieves economic efficiency by minimizing the costs of exchange. This clearly includes an analysis of organisational RD&D capabilities concerning current expertise, timeline, and analysis to match current capabilities with the essential requirements and the “costs” of managing the project “internally” or selecting and collaborating with potential partners. Back to the Tempest project. The UK Defence Ministry has signed a £250 million (U.S. $347 million) deal with Team Tempest, a group of companies working on the country’s future combat jet, to provide digital and physical infrastructure to develop the aircraft. The Ministry of Defence investment is to be more than £2 billion on the project, which will be spread out over the next 4 years. A contract signed between the government and BAE Systems for £250 million with one of the four founding members of Team Tempest that also includes Leonardo UK, Rolls-Royce and MBDA UK and the RAF FCAS (the Future Combat Air System), program has entered its concept and assessment phase. The UK government’s lead for future combat air capabilities, Richard Berthon, called the FCAS effort “hugely important in ensuring the U.K. and its partners have the skills and technology we need to give us the battle-winning edge for the future.” Italy and Sweden are also involved with the sixth-generation fighter jet program, having signed a memorandum of understanding with the U.K. in 2020, with plans to share the workload on developing the aircraft with Japan’s MBDA. Together, the UK and Japanese Defence Ministries will explore the feasibility of further sub-systems collaboration throughout 2022. In the UK, this work will be undertaken by the Team Tempest industry partners: BAE Systems, Leonardo UK, MBDA UK and Rolls-Royce. Transaction cost theory suggests the project explored economic efficiency by minimizing the costs of exchange of alternative business model structures (with emphasis on “defence delivery capabilities”) and concluded that the consortium that now forms Project Tempest to be the optimal solution. In terms of response capabilities and cost.

Collaborative Partnerships: Clusters Kearney (2014) published a futures-oriented paper concerning cluster development suggesting; “these emerging economic clusters have jump-started industries and accelerated economic development in mature and developing markets worldwide”.

Introduction Fig. 9.3 Emerging capability components of future collaborative partnerships

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Collaborative Partnerships: Future Essential Criteria Collaborative Strategic and Operational Alignment • Shared Objectives • Scope of Collaboration • Activities • TimeLine performance Digital, Digitalisation and Connectivity Capabilities • Product-Service Markets • Processes • Digitalisation • Intraorganisational • Interorganisational • International Communication and Confidentiality • Data Management, Analysis, Detail/TimeLine/Application • Mutual trust/Confidence/Security • Transparency • Accessibility Functional Engagement • Extent of Commitment to Partnership Organisations • Growth of Value Chain partnership members (Length of VCN chains) • Growth of industry VCN and Global VCN • “Quality” and “Fit4Purpose” Shared Value Creation • Innovative partnerships • Equity Share Holding • Equitable Collaboration • Equitable Rewards Governance • Acceptance and adherence to (E)ESG and UN SDGs • Economic profit /Value Contribution as measures extent of success • Value-Led Performance Management • A Coherent Sustainability Policy • Shared Performance Metrics Network Expansion of Value Chain Network Applications • Industry preference of the Value Chain Management Model • Increased strategic investment effectiveness • Enhanced customer connectivity and customer centricity • Increased operating efficiency • Increased Operational Excellence

Figure 9.3 focuses on the directions that have been identified. By creating expansive environments for business, academia, and innovation, these emerging economic clusters have jump-started industries and accelerated economic development in mature and developing markets worldwide. They suggest they have taken advantage of favourable business conditions and local market demand. However, to become “true incubators of economic development” many economic clusters (ECs) must clearly define their playing field and truly differentiate themselves. For example, they need to: Focus on sectors and parts of the value chain aligned with the long-term local or regional economic development age. Orchestrate the right ecosystem to enable sector and value chain growth. Create a sustainable link to the host country economy to extend the benefits of the EC permeate beyond the boundaries of the EC, that local talent and technology is developed, and that local small and medium-sized

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Kearney (2014) takes this further by suggesting Differentiating Criteria and Qualifying Criteria: Differentiating Criteria include: Promotion of SME (S-SME) and entrepreneurship Development of talent and technology Access to capital and financing Focused sector strategy

Qualifying Criteria include Robust facilities and infrastructure Favourable regulations and ease of doing business

Kearney (2014) concludes: Successful next-generation economic clusters will not only provide world-class infrastructure and real estate, one-stop shops, and incentives that attract businesses in the short term, but also truly differentiate themselves. They will focus on strategies for a choice sector and its value chain, driven by industry veterans who are experts in their fields; facilitate access to capital and financing for their citizens; partner with them to develop the talent and ­technology that will drive their competitiveness; and relentlessly incubate start-ups and promote the SME base.

Clearly government is involved in the development of this sector of industrial activity, the Australian Government announced a digital education cluster in December 2021. In December 2021, the Australian Government DSO (Digital Skills Organisation) announced the establishment of a new Industry Cluster model. A significant reform which places employers and industry at the heart of the training system, with the goal of ensuring Australia has people with the right skills for the workplace. The new Industry Clusters combine several functions into a single ‘end to end’ approach, focusing on employers and industry needs, identifying skills, and delivering the training development priorities for a dynamic workplace. The Industry Clusters will take responsibility for workforce and skills analysis, the development of training packages which address skills needs, the support for the education and training sector to deliver training, and for engaging widely with industry to ensure its needs are understood. The model proposes nine Industry Clusters, with one cluster bringing together the finance, technology, and business sectors. This suggests a serious attempt at recognising the future role (and needs) of cluster management, Patrick Kidd (2021), the DSO CEO said, “This partnership, (with Price Waterhouse vocational education and training group (and led by the DSO, is driven by the urgent need to have a national education and training system which provides people with

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the skills which employers need. Australia needs a system which is agile, relevant, data-­driven, and accessible to all.” In a Regional Development Australia (RDA) meeting in 2018 Professor Brian Roberts gave the meeting a session on “The Role of Industry Clusters in Driving Innovation and Competitiveness” during which “New Thinking on Industry Cluster Development and Innovation” identified as significant directions for the cluster sector emerged: Connectivity (integrated hard and soft infrastructure) City trading partnerships and networks Strong identifiable clusters of innovation within cities Collaborative regional industry clusters Economic trade development corridors Cross-Industry Cluster Development Value-adding to global supply chains

We suggest that the role of clusters, can offer pathways for S-SMEs to develop into essential providers in developing sector value chains.

 artnership Essentials Collaborative Partnerships: Future P Essential Criteria Given the dynamics of industry and market change brought about by the convergence of Industrié 4.0, Value Chain Network 2.0, and Stakeholder management, continuous change in business model response capabilities can be expected. Industry 5.0 is forecast to increase cobot/human interface and “collaboration “, and business organisations will also extend the current collaborative activities. Partnership selection and management will become more important. We suggest a profile for partnership collaboration as Fig. 9.4 and expand on the detail below.

Collaborative Strategic and Operational Alignment As business becomes more “collaborative”, particularly where investment requirements are large and specialist skills are required, clear statements of objectives and the aspects of collaborative agreements are necessary concerning capabilities and capacities, quality and reworking of components. This is an essential requirement if levels of profitability, productivity, and cash flow objectives are to be met, alongside requirements to meet price/value/equalisation expectations as they are critical to the overall success of any partnership. Objectives covering the scope of responsibilities

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Individual Organisation

Value Contribution

Value Creation EVA/Economic Profit

Networked Organisation

“Cluster” organisations are a geographic concentration of interconnected collaborative businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete successfully in national and global markets. Specialist “self-contained” small manufacturers with focused activities. Typically, patent protected suppliers of a proprietary product-service. Mittelstand organisations in Germany . Example: Coatinc Co., based in Siegen in the state of North Rhine-Westphalia. Germany’s oldest family firm, Coatinc started life as a blacksmith service in the year 1502. Today, as one of the world’s leading metal-surface finishers, it employs more than 2,000 people in Europe and Mexico and generates annual group sales of more than $360 million and Chuken Kigyo – in Japan (Example: Mabuchi Motor (Est 1954): Manufacture and sales of small electric motors 90 % of world’s micromotors used to power the adjustment of rear-view mirrors in automobiles). Quickstep Technologies an Australian company that provides a range of productservices to the aeronautical industry.

Individual Organisation

“Value chain networks” an increase in producibility, networks partners that collaborate with each other to develop “end2end” value creation/production/distribution/serviceabilty/remanufacturing activities – Typically, they focus expertise on single product-servicemarkets but connectivity technology will expand its capability to include multi product-service-markets. Specialist Clusters active in growth industries (aerospace, defence, healthcare, and EV automobiles) may take advantage of digitisation/digitalisation and connectivity and become significant in industry value chains Business eco-systems that offer individual businesses a range of service applications (search facilities, transactions management etc.) or access markets that have expensive entry costs. eBay, Amazon are examples. Covisint is a procurement organisation that offers its customers access to large industries and supplier organisations at relatively lower purchasing costs for “standard/commodity type components” than those obtainable to individual organisations e.g., automobile manufacturers. Typically these are functional items that do not offer competitive distinctiveness – just lower costs.

Agile demand response value networks initially offered “standard product-service” requests across a range of FMCG and durables but over time personalisation will become widely available - Industry 5.0 An increase In multi-brand value networks that create focussed collections of related product groups offering consumers a facility to combine individual products into themes that reflect individual customer life-styles and images

Time

Networked Organisations

Fig. 9.4  Developing partnership types

for activities and processes need clarification and timelines agreed for inter-­ partnership deliveries agreed and monitored. Realtime operating data should be available throughout the network to ensure cohesive operations.

Digital, Digitalisation, and Connectivity Capabilities Product-Service Markets should be agreed by all partners to ensure availability of the capability requirements necessary for success. It is/will be necessary for target product-service-markets profiles to be researched to ensure that customer expectations are identified and can be met. Process management analysis is another essential if digital and connectivity capabilities can be fully applied and value contribution is to be met. These are reflected in the achievement of intra-organisational, inter-­ organisational, and international timeLine performance. This is critical because the efficiency of materials flows, inventory management (and working capital management) are dependent upon the network members each meeting timeline commitments.

Communication and Confidentiality The key to success of the developing value chain network (and the platform) is data management. It is a structured program of identified relevant performance management, with open availability (transparency), constructive and enquiring analysis,

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information-based decisions concerning detail/timeline/application on current business decision based upon mutual trust, confidence, and network security. Accessibility to information and decision making will be essential to a value network’s success.

Functional Engagement The extent of commitment to partnership organisations is already strong (see S-SME/OEM relationships above) and equity interests are likely to be seen as OEMs seek to strengthen competitive positioning and acquire RD&D creativity. The growth of value chain partnership members (length of VCN chains and roles) can be expected with the increasing impact of digitisation, digitalisation, and connectivity. This is already well advanced in industrial markets but is beginning to appear in consumer durables (Breville, a kitchen appliance manufacturer is beginning to “connect” relevant products, and Smart refrigerators and cooking equipment is available). The growth of industry VCN and global VCN in terms of shared activities will be extended by development of “connectivity” in product-service-market applications (an increase in the application of digital thread and twinning technology—the application of “serviceability” (the management of customer product portfolio content “quality” and “fit4purpose”) is available through the adoption of producibility (aka end2end) industry network value chains.

Shared Value Creation Connectivity will increase innovative partnerships. OEMs, S-SMEs and component suppliers are working across international boundaries on “serviceability” topics, the extension of relationships to include RD&D creativity (based upon data exchanges— digital threads and twinning) are variable and are being encouraged by Siemens, Bosch and other data driven organisations. This may also extend into equity. Shareholding but will be financially influenced by equitable collaboration and equitable rewards.

Governance Acceptance and adherence to (E)ESG and UN SDGs is gaining acceptance and is gaining the interest of financial groups. Economic profit/value contribution as performance measures (see mention of Volkswagen in this text) as a measure of the economic extent of success is gaining ground. This is not to suggest it will replace conventional/traditional accounting but is being used to evaluate projects and as incentives in large organisations. The increase in technology and of “trust” has resulted in collaboration across processes involving both organisational and environmental sustainability (the use of palm oil and other inputs and processes is

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evidence). Coherent sustainability policy statements are forming part of the annual reporting, process by Coca-Cola and the B Corporations, and shared sustainability performance metrics across networks (B Corporations, Ellen Macarthur Foundation) are increasing.

Expansion of Value Chain Network Applications Industry preference for the value chain management model is being encouraged by investment requirements and unexpected events such as the Covid pandemic. The Typhoon example of increased programmed collaborative strategy to investment effectiveness is an example of international value chain investment and management. Marketing programs are being developed around enhanced customer connectivity and customer centricity and as a result are demonstrating increased operating efficiency and will increase operational excellence.

References Boston Consulting Group. (2015, February). Brandenburger, A. M., & Nalebuf, B. J. (1997). Co-opetition: Competitive and cooperative business strategies for the digital economy. Strategy & Leadership, 25(6), 28–33. https://doi. org/10.1108/eb054655 Deloitte (2013). Branding the workplace. https://www2.deloitte.com/az/en/pages/human-­capital/ articles/branding-­workplace.html DiVanna, J. A. (2002). Thinking beyond technology. Springer. DiVanna, J. A., & Rogers, J. (2005). People — The New Asset on the Balance Sheet. Palgrave. Gartner. (n.d.). Employee value proposition. Gartner. https://www.gartner.com/en/human-­ resources/glossary/employee-­value-­proposition#:~:text=The%20employee%20value%20 proposition%20is,through%20employment%20with%20the%20organization Hayes, A. (2022, September 28). The coopetition model, Investopedia. Retrieved 28 September 2022. Kearney (2014, April 15) Next-generation clusters. Kearney. https://www.kearney.com/ public-­sector/article/-­/insights/next-­generation-­economic-­clusters Kidd, P. (2021, December 16). Shaping the future of skills. Australian Government DSO. Minchington, B. (2006). Your employer brand – attract, engage, retain. Collective learning Australia. Roberts, B. (2018). The role of industry clusters in driving innovation and competitiveness. Regional Development Australia (RDA). Skinner, R. (n.d.). https://www.forrester.com/bold Tandehill. (2006). The employment value proposition. Tannehill human capital. Workspan magazine, 10(6). Watenpaugh, N. (2019, July 29). How to create a successful partnership with your competition. Forbes. Wikipedia (2021). Employee value proposition. https://en.wikipedia.org/wiki/ Employee_value_proposition Williamson, O. E. (1979). Transaction-cost economics: The governance of contractual relations. The Journal of Law and Economics., 22(2), 233–261. https://doi.org/10.1086/466942 Williamson, O. E. (1998). Transaction cost economics how it works and where it is heading. The Economist., 146, 23–58.

Platforms

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Introduction A network Business Model is very much dependent upon platform-based business models. Typically they share three elements that are influenced by platform configurations: positive value proposition delivery responses (where they offer a facility to make response to customer expectations without the reach of the organisation due to lack of a specific capability or excessive cost to meet customer delivery or serviceability expectation, but are available from a specialist service activity); a differentiated product-service-market portfolio (a product variant that sells in low volumes that are incompatible with the organisation’s production systems can be made available by using an organisation with appropriate cost/volume capabilities),– Magda International in the automotive industry and Li and Fung in apparel products; product, industry and global platforms (organisations such as eBay and Amazon have international supply chain response capabilities) and UPS has access to added manufacturing facilities, all of which operate internationally offering timely value delivery services). Each of these components of the model relate to platforms.

 eeking Operational Excellence: The Primary Benefits S of an Optimal Network Value Contribution-Led Operating Model A network performance management’s purpose is to create an environment where connected organisations can perform to the best of their abilities and produce the highest-quality product-service-management most effectively and efficiently. We return to the Introduction of Part ll., to identify specific interest and considerations suggested for performance management, they are suggested as:

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_10

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NOPAT/EVA Economic Profit/Positive Value Contribution: Clearly strong economic network performance across activities is an essential requirement for long-term viability. Working within a platform increases profitability. Profitable Revenue Growth: Current and future revenue growth are core drivers for network success. “Top-Line” Growth—Sale Efficiency Revenue and “Bottom Line” Growth— Efficiency of platform-based operations in generating revenues are indicators of growth patterns. Valid Value Proposition: A valid value proposition is one that is acceptable to customers, network partners and meets secondary stakeholder expectations and is economically viable. Selective platform activities can enhance customer delivered value. Collaborative Network Relationship Management: “leverage” of network/platform partners assets is the basis of network collaboration and of network economic profitability as each partner is responsible for specific input in the overall process of, value creation, production, delivery, serviceability, and renewal. Business Process Management: a management activity that uses various approaches to discover, model, analyse, measure, improve, optimise, and automate business processes and activities. This combination of methods used to manage a company's business processes is BPM. Digitisation and connectivity have extended BPM beyond the conventional boundaries of the intra-organisation to include inter-organisational, platform structured organisations, and international locations, hence standardising activities and increasing overall efficiency. TimeLine Management Effectiveness and Efficiency: comprises the identification of tasks to be undertaken and completed successfully, the determination of important dates of tasks (e.g., start date and due date), the duration of tasks, and assigns the employees responsible for managing task achievement. Platform based networks can increase TimeLine Management effectiveness. Data Analytics and Management: digital analytics refers to a broad range of analytics that are intended to give businesses greater insight into their data than they could ordinarily; these techniques include machine learning, data mining, predictive analytics, location analytics, big data analytics and location intelligence. Stakeholder Value Management and (E)ESG Criteria/UNSDGs: as a rapidly increasing expectation of overall business activity, platform structures, should reflect an increase in organisational effectiveness and efficiency. Product, Industry and Global Platforms: The application of platform capabilities facilitate both effective and efficient competitive capabilities for current and future operations.

Platform is a term used for both technology and business models. As a business model a platform creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers. Facebook, Uber, and Alibaba are businesses that do not directly respond to demand through a supply chain response that is supported by inventory and a range of customer support services. In a platform ecosystem, the value created by each member influences the value created by others. Because a robust and high-quality ecosystem of complements attracts more customers, complements need each other even though they might also

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be competing against each other. Customer focused product-service-market specific multi-organisational/brand websites are becoming successful in homewares and fashion markets. Figure  10.1 is based on work by Simon (2011) and provides a detailed matrix view of the development of platform characteristics across an applications (attributes) dimension and a TimeLine perspective. Of particular interest is the detailed examples of developments and applications. See Fig. 10.1.

Platforms and Ecosystems: A Typology Hagel et al. (2015) also provides a useful contribution outlining types and applications of platforms and ecosystems. A business ecosystem is a network of organizations—including suppliers, distributors, customers, competitors, government agencies, involved in the delivery of a specific product or service through both competition and cooperation. Platform businesses focus on facilitating interactions across many participants. These interactions could take the form of short-term transactions (connecting buyers and sellers), or they could involve formation of longer-term business activity relationships (collaborative RD&D, product-service-­ market development), to achieve a shared outcome or sustained efforts to accelerate market entry at an optimal cost. The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions at scale, to achieve (E)ESG and UN SDG objectives as well as mutually beneficial commercial outcomes. Ecosystems are dynamic and co-evolving communities of diverse actors who create new value through increasingly productive and sophisticated models of both collaboration and competition. Properly designed business platforms can help create and capture new economic value and scale the potential for learning across entire ecosystems. What we mean with a platform business is a business model (not a technology infrastructure) that focuses on helping to facilitate interactions across many participants. These interactions could take the form of short-term transactions like connecting buyers and sellers or they could involve formation of longer-term social relationships, longer-term collaboration to achieve a shared outcome or sustained efforts to accelerate performance improvement of participants by helping them to learn faster together. The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions at scale so that network effects can be unleashed. Whilst traditional linear business models create value through products or services by taking raw material components as inputs and creating products/services to push these to the market to sell to customers. The platform business model does not own the means of production, but rather creates and facilitates the means of connection. Platform businesses are becoming increasingly integral to business value creation. However, not all platforms are created equal, with some platforms having far more potential to trigger powerful forms of increasing returns that will ultimately marginalise other forms of platforms. It is important to understand not just the

Top down. Internal RD&D. Acquisition or M&A based; typically slow and often resulting in incremental performance increases rather new processes, activities and technological developments

Centralised – single company led and focused

Typically functionally focussed, activities operating with little reference to other activities within the organisation. AKA as silo-based operations

Innovation

Marketing

Operations

Limited. Restricted to a competitive “win” basis rather than a collaborative “win-win” outcome

Collaboration

Closely guarded IP. Patented. Licensed only when assured competitive advantage is secured

Stable activities with limited scope among producers, resellers, service organisations

Ecosystems

Technology

Business oriented product-services, customer groups

Target Market

Pre-Platform Era

Fig. 10.1  The development of platform characteristics

Value Chain Network Management

Attributes

Modularity-which allows people from all over the world to exchange files, modular design has helped to create the basis for platform businesses. Increased interconnectivity – The internet, physical logistics networks, and phone systems, Self-organization - for example group forming networks (many-to-many), where consumers organize themselves around their expectations, Low marginal cost of production, which makes the advent of two-sided markets more prevalent Infomediaries/Search facilities such as Google and Bing offer market access (advertising) at very low marginal cost to serve customers, they may be able to create another two-sided market in which maps/GPS in the car enables users to be directed towards their product-service of choice

Platform operations development is facilitating the creation and management of a process capable of building and managing a productservice optimisation infrastructure. Platform operations optimisation becomes necessary when an enterprise has multiple teams, each guiding its own applications and selecting its own traffic management, visibility, telemetry, security, and resiliency. In that regard platform operations optimisation is a necessary scaling function efficient platform operations management

Collaborative RD&D within the network structure. Becoming customer led, particularly across Hi-Tech interfaces

Collaborative approaches by groups of organisations that share end-user markets

Networked organisations work on an inter, intra, and often international basis. Integration collaboration, and transparency are essential characteristics

As value chains become more digital, they increasingly benefit from platforms–sets of common digital technology-powered processes, tools and approach allowing users to create value by adding products and services in mutually synergistic ways

Platforms create synergies in two ways. By providing users with standardised tools and processes and facilitating the joint creation of mutual synergy

Agile, transparent, networked structures Working on the basis of leveraged partnerships Open source and shared. Toolkits and API (application programming interface) based

Two types of platforms are emerging in future value chains – InformationalDemand Chain Platforms (Google) and Physical Response-Supply Chain Platforms (eBay)

Platform segmentation is extending beyond the broad categories of vertical and horizontal segmentation and to include specialist product and organisational applications.

Development Era

Dynamic, agile organisations often specialists. Specific interests and abilities that are timely

Customers, vendors, partners offering a support infrastructure; searching, transactions, serviceability

Platform Era

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Introduction

209

structure, but the dynamics, of different kinds of platforms. Hagel et al. (2015) has distinguished different categories of platforms that are becoming increasingly prominent in the business world (and elsewhere). Hagel et al. (2015) also considers the role platforms have for managerial decision making; the strategic choices they make are based on the four major kinds of benefits they expect to gain from platforms. Depending on the relative emphasis they place on performance improvement, leveraged growth, distributed innovation, and shaping strategies, they gravitate toward some platform opportunities more than others: Aggregation platforms bring together a broad array of relevant resources and help users to connect with the most appropriate resources. These platforms tend to be very transactionor task-focused: Express a need, get a response, do the deal, and move on. Marketplace and broker platforms like eBay and Etsy are well-known examples. Aggregation platforms tend to operate on a hub-and-spoke model, whereby the platform owner and organiser brokers all the transactions. Exchange platforms where value emphasis = filtering and matching. These enable buyers and sellers to meet. eBay and Amazon are good examples. The value that is provided by the platform is the bringing together of the parties, helping them find each other, establishing the ground rules of exchange. As well as convenience they offer specificity and save both expense and time. Transaction platforms where value emphasis = removing friction and de-risking. These are also exchanges but focus mainly on providing the processes for transactions (and providing credit facilities) to occur. Cash itself is a transaction platform; credit cards are perhaps a clearer example. Component and tool-rich platforms such as software platforms where value emphasis suggests faster and higher-quality product creation. They use standards to make sure everything fits together, and modular structures that can be used to quickly create a solution.

Hagel et al. (2015) also suggests there are basic business platform types: Performance improvement For some, the most attractive platform is one that allows its participants to focus on the activities that they do exceptionally well and leave other (lower margin activities) to others to whom they connect through the platform. Quickstep’s aerospace contribution fits this description Typically, the partners who pick up others’ non-core work have chosen to specialize in those activities and are likely to perform them better. The net result of every activity being handled by a player focused tightly on it is overall performance, provides improvement for all participants. Leveraged growth Collaborative partnerships allow participants to connect with the capabilities of others and make them available to their customers in ways that create significant value for the platform participants and the customers. Li & Fung has grown into a $20+ billion global company in the supply network business.

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Distributed innovation Distributed innovation is a system in which innovation emanates not only from the manufacturer of a product but from many sources including users and rivals (von Hippel, 1988), and has become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system (Baldwin, 2012). Shaping strategies and creating markets Hagel et  al. (2015) recalls the emergence of the credit card business when Dee Hock founded Visa. Major banks were persuaded to rely on a shared utility for the back-office processing of credit card transactions (a platform) he restructured the industry. For the banks, the platform helped turn a money-losing new product into a profitable business. Currently (2023) there is a huge number of software organisations expanding market options and alternatives and creating new markets.

 roduction Possibility Curves, Value Equivalence Applications, P Platforms and Mass Customisation Pine (1993) offered a logic for mass customisation. Unstable demand for specific products results in market fragmentation; product variety becomes an essential feature of customer satisfaction. Homogeneous markets become heterogeneous. Niches became important. Manufacturers undertook specific niches with a view to meeting specified and feasible customer requirements, typically through post-production methods. This was not profitable and production systems changed. Initially the requirements were for shorter production runs accompanied by expensive loss of production time and “set-ups”. However, niche customers accepted premium prices that compensate manufacturers. Experience eventually enabled production costs to be reduced and product variety is achieved at the same, or even lower, costs. Varying consumer demand requires a rapid time-to-market response with shorter product development cycles, which in turn results in shorter product life cycles. Demand is fragmented but individual producers find stability in their operations with selected niche segments. The following diagrams explore the application of product platforms. See Fig. 10.2. The production possibility curve, (See Chap. 14, Network Economics) below, Fig.  10.3 is the sum of all resources that enable an organisation to meet specific production value/cost requirements and is a useful approach if we wish to identify specific value-based opportunities, to identify effective responses and the possible constraints. An organisation is only operating efficiently if it is operating on the production possibility curve. Chopra and Meindl (2010) identify this as the cost-­ responsive efficient frontier suggesting the organisation has a choice between either focusing on price-led differentiation or on non-price-led differentiation, a customer PRICE/value/equality option or a price/VALUE/equality option thereby offering the organisation an opportunity to operate in more than one market segment i.e.,

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High

“Product A”

Low

“Product B” Low

High

Fig. 10.2  The economists production possibility curve EVA Net Revenues Less Operating expenses Labour Materials Services Energy Utilities Direct communications Direct physical distribution Equals: Operating profit before interest and tax Less Tax Less Capital charges Equals Economic Value Added (EVA), Economic Profit/ Value Contribution and “Resource Productivity”

High

price / VALUE / Equalisation

Low

PRICE / value / Equalisation Product-Service-Market Portfolio

Fig. 10.3  The business production possibility curve

across a range of customer price/value/equality value propositions. Price-led differentiation is based upon achieving a leading position on costs amongst its competitors and offering a very basic PRODUCT-service (where, typically, the service element barely covers the legal consumer protection requirements of the law) at a competitive low price. Non-price led differentiation seeks to compete on product-­ SERVICE characteristics that it has identified as being important to the target customer value drivers) and uses the Slywotzky and Morrison (1997) notion that to do so effectively will minimize (if not negate) the effect of price in price/value/

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equalisation in customer evaluation. Chopra and Meindl (2010) argue this to be the essence of “strategic fit”. They suggest the more relevant resources that can be applied, the more responsiveness the supply (value) response becomes and, equally in loyalty terms, the more responsive is the target customer group. Again, an organisation is only operating efficiently if it is operating on the production possibility curve; it is here where the concept of network structures becomes significant because it offers all members of the network to “leverage” the resources of other members and extend the boundaries of their existing businesses. We have added EVA to the vertical axis, this replaced a product-service option with a financial resources option—a realistic approach for business options. See Fig. 10.3. The ongoing “convergence” of Industrié 4.0/Industry 5.0  +  Value Chain Management 2.0 and 3.0  +  Stakeholder Value Management has introduced a resource capability response perspective. Figure 10.4 introduces this to the production possibility curve and considers the impact. Industrié 4.0 introduced digitisation, digitalisation and connectivity that coupled with a network approach to the response to customer expectations offers flexibility and reduced risk. See Fig. 10.4. The response is made possible by OEMs and S-SMEs collaboration on value innovation and production. When markets change and demonstrate increases in the number of segments the opportunity to expand the application of platforms becomes attractive, and the use of specific partners who can contribute expertise (and product-service components) can add the necessary differentiation. The management task becomes one of evaluating the costs of the alternatives: develop internal approaches to platforms, partnered platforms or to work with partners who support with either complementary products and/or services. Market expansion implies opportunities for platform (and network collaborative) approaches to emerging market segments. See Fig. 10.5. With markets that demonstrate few segment variations the opportunity to expand the application of a standard value production platform is possible. The use of specific partners who can contribute expertise adds the necessary differentiation, but the costs are contained at competitive levels because of the scale economies achieved with the initial design of the business model. This structure is typical of “generic” product-markets, such as pharmaceuticals, food, and drink, in which segment volumes vary. The difficulty is to maintain productivity in the filling processes. Often the solution is resolved by using specialist partners. In this instance the platforms are process based, having cost (and therefore price and competitiveness) implications. This is often the case for personal hygiene products; major manufacturers outsource the manufacturing of their smaller volume ranges to suppliers whose manufacturing scale matches these limited market volumes. Ideally an organization will prefer to pursue a limited number of product platforms. In this way cost economies will be maximized. But if they are pursued beyond a point at which any further exploitation is likely to meet with customer resistance because of the lack of customer expected differentiation the organization must adopt an alternative strategy. The solution is to identify the limit to which a “standard” production platform may be used and then seek partners with specialist expertise. The automotive industry is an example. Ford Motor Company had

Introduction

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Optimal EVA Net Revenues Less Operating expenses Equals: Operating profit before interest and tax Less Tax Less Capital charges Equals Economic Value Added (EVA) Value Contribution and “Resource Productivity”

“Economics 101 Perspective” (Land, Labour and Capital)

Resource Response 1

Product-Service Value Delivery Capability - Optimise Price/Value/Equivalence

price / VALUE / Equalisation

Resource Response 2

ProductService Revenues Value Delivery Capability $

Product-Service Economic Value Delivery Capability 3

Resource Response 3

Product-Service Economic Value Delivery Capability 2

Industrial Revolutions 1,2,and 3 (Land, Labour, Capital and “Technology”) Industrial Revolution 4.0/5.0 (Land, Labour Capital and “Technology” + Partnership Leverage - an ongoing Convergence of Industrié 4.0/Industry 5.0 + Value Chain Management 2.0 and 3.0 + Stakeholder Value Management)

Partners' Leveraged Franchises/Concessions/ Product-Services; typically, cost-efficient production processes across specific volume ranges

Product-Service Economic Value Delivery Capability 1

Note: The impact of digital technology has improved the value offered and delivered hence Price/Value Equalisation offers become larger, they continue to show customer pretences but offer better prices and greater value

Value Added/ EVA Production Possibility Curves

Product-Service Value Delivery PRICE / value / Equalisation Capability Price/Value/Equivalence Resource Response 1 Resource Response 2

Resource Response 3

Fig. 10.4  The business production possibility curve—the impact of convergence of industrié 4.0/ industry 5.0 + value chain management 2.0 and 3.0 + stakeholder value management Relative Cost of Product-Service Value Delivery Capability Price/Value/Equivalence

High

Cost Effectiveness Criteria EVA Net Revenues Less Operating expenses Equals: Operating profit before interest and tax Less Tax Less Capital charges Equals Economic Value Added (EVA) Value Contribution and “Resource Productivity”

Market Expansion implies opportunities for platform (and collaborative) approaches to emerging market segments Cost Effectiveness Criteria

Low

Standard Value Platform Cost Effectiveness Criteria High

Relative Cost of Resource Mix Response $

Cost Effectiveness Criteria

When markets change and demonstrate increases in the number of segments the opportunity to expand the application of platforms becomes attractive The use of specific partners who can contribute expertise can add the necessary differentiation. The management task is to evaluate the costs of the alternatives: develop internal approaches to platforms, partnered platforms or to work with partners who support with either complementary products and/or services

Partner Activity

Internal RD&D

Low

Fig. 10.5  Opportunities for cost effective organisational and network RD&D are created by market expansion using specialist partners

several major brands Jaguar, Land Rover, Volvo, Aston Martin as well as the existing Ford groups. It planned a platform strategy up to a point where customers began to perceive value similarities. Beyond this point it is no longer profitable or productive to extend the application of the platforms and seek a solution by adding partners to provide the differentiation important to customers. The price/value/ equalisation perspective demonstrates this very well. See Fig. 10.6. Product platforms offer a solution to the problems posed by mass customisation. Notable differences across market segments can occur and provided these can be identified such that the important features that appeal to customers can be used for product differentiation (competitive value advantage) it is possible to consider the “necessities” as base product platforms. For example, in the automotive industry the “customisation” features may include interior finish, in-car entertainment and optional accessories such as GPI equipment. The necessities are the engine, transmission, braking system and features not typically “seen” by the purchaser—they are assumed to be there but are not critical in the purchase decision. It also suggests that costs can be reduced by effective research into customer preferences and their “indifferences”. See Fig. 10.7.

214

10 Platforms “Customisation” Customisation price/VALUE/Equalisation

High

EVA Net Revenues Less Operating expenses Equals: Operating profit before interest and tax Less Tax Less Capital charges Equals Economic Value Added (EVA) Value Contribution and “Resource Productivity”

Selective exclusivity

?

Price/Value/Equalisation

?

Standard Platform

Low

?

Cost/price Commodity

High

Relative Cost of Resource Mix Response $

Specialists’ Standard Value Platforms

PRICE/value/Equalisation

Low

Fig. 10.6  Identifying the limits to market/customer response

“Customisation” Standard Value Platforms

High

EVA Net Revenues Less Operating expenses Equals: Operating profit before interest and tax Less Tax Less Capital charges Equals Economic Value Added (EVA) Value Contribution and “Resource Productivity”

price / VALUE / Equalisation

“Mass Customisation” Limited segment markets

Standard Value Platforms

Standard Value Platforms PRICE / value / Equalisation

Low High

Low Relative Cost of Resource Mix Response $

Fig. 10.7  Approaching the profitable use of standard platforms

Applications: Industry Platforms A product platform is a set of common components, modules, or parts from which a stream of derivative products can be efficiently created and launched. Included in the product platform definition are the subsystems and the interfaces between them. Market Applications identify the range of market segments and price points that define the scope of market opportunity. The notion of the product platform concept suggests that while it may not be economically feasible to pursue each cell in the market segment matrix at one time, by using an incremental and integrative approach it may become possible. Product Platforms as already established are the set of subsystems and interfaces that form a common structure for the cost-effective development of a stream of derivative products. Around the early 1970s Black and Decker was a major competitor in consumer power tools, controlling some 20% of the market. However, it detected problems for

Introduction

215

its future: offshore manufacturers were becoming competitive in the North American market, inflation and increasing costs were having an impact on margins and if margins were to maintain, one third of the labour cost would have to be reduced from product costs. The Company considered this to be a major problem due to the “non-standard” composition of the product range due to the past methods used to develop products as individual standalone categories, and product safety standards were being enforced. Management saw an opportunity in this latter problem; if they reacted rapidly and effectively the threat could become an opportunity. The need to adopt double insulation prompted a renewal of the power tool product-service portfolio. Five important objectives were established: • Development of a distinctive “family” appearance across the products • The use of standardised parts, interfaces, couplings, and connections • Reduce manufacturing costs through automation and new materials and introduce the double insulation at lower cost than the existing insulation • Use design to improve power tool performance and to add features • Manufacture global products Standardisation, modularisation, and automation became an essential feature of the program and as new products were developed much of the work in design and tooling was eliminated because motors bearings, switches, gears, cord sets, and fasteners had become standard items. Designers had only to concern themselves with understanding customer requirements and integrating modular subsystems and perfecting the incremental attachments. Black and Decker (Meyer & Lehnerd, 1997) had added a range of product applications to their “basic” product range simply by thinking through the range of applications that their end-user customers were likely to undertake. As a result, the base platforms were designed with product range development as a long-term objective. Meyer and Lehnerd (1997) argued that product success is built largely on creating product platforms rather than attempting to release single products in succession. When products are designed, evaluated, and implemented independently, there is a cost associated with budgeting, cost/benefit analysis, and stage/gate processes. The platform option uses common materials, shared components, and product teams working towards a common goal. Ideally, derivative products can be effectively planned and built from a common platform design and architecture. Black & Decker used three key strategies to successfully implement their product platform initiative: • Avoiding a piecemeal, single-product focus • Redesigning both the products and the process of creating them (manufacturing) • Taking a long-term view of product development The Black and Decker example has become dated (the company is now part of Stanley Tools), however, it is significant in that it identifies other issues that were

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confronted during the exercise. It should be remembered that the platform activities came about following the problem of product safety. More recently other organisations have adopted this approach; Airbus and Boeing “stretch” fuselage lengths to increase passenger and cargo capacity, the aircraft fuselage becomes a platform. The automotive industry uses platform approaches to reduce vehicle production costs. Platform sharing is a concept used in the automobile industry today. Although the term ‘platform’ traditionally referred to a chassis, today it’s a broad concept referring not only to chassis, suspension, and associated mechanicals, but also drivetrains, electrical, and infotainment systems within a range of different vehicles. Volkswagen refers to MQB (Modularer Querbaukasten) as a platform. Instead, it’s a ‘toolkit’ that can be assembled in a huge variety of ways. Volkswagen has had a reputation for producing over-­ engineered products. It is reportedly trying to reduce product complexity through the modular toolkit programme, or Modularer Querbaukasten (MQB,) this translates as Modular Transverse Matrix and was used in the new Audi A3 and the VW Golf model launched in April 2013. As well as reducing product complexity the aim is to cut unit manufacturing costs by 20%. This involves hefty upfront costs—one reason investment in the automotive division was projected to be €60bn between 2012 and 2016. All MQB cars have a transverse-mounted engine at the front, paired with front-wheel drive or front-biased all-wheel drive. MQB is currently Volkswagen’s most widely used technology platform. It forms the basis of a variety of models ranging from the small Polo to the large US SUV—the Atlas. Other vehicles sharing the chassis include Volkswagen Touran and Audi TT., Jeep Compass and Mitsubishi Lancer. Nissan Juke and Dacia Sandero, Volkswagen Phaeton and Bentley Continental GT, and the Cadillac ATS and Chevrolet Camaro. Industry platforms can be defined as products, services, or technologies that act as a foundation upon which external innovators, organized as an innovative business ecosystem, can develop their own complementary products, technologies, or services. At the most basic level, a platform is an asset or business that removes friction from a market, while an ecosystem is a group of firms linked through complementary business activities or expertise.

Platform Business Models A platform business model is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers. Platform business models focus on facilitating commercial interactions across many participants. They take the form of short-term transactions like connecting buyers and sellers as well as being involved in the formation of longer-term social/commercial relationships, involving long-term collaboration to achieve shared outcomes. The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions. Whereas the traditional business model creates value through converting raw material components into product-service-markets. The platform business model does not own

Introduction

217

physical production equipment, it creates and facilitates the means of connection. eBay is an obvious example. Platform businesses are becoming increasingly integral to business value creation. Hagel et al. (2015) has distinguished four different categories of platforms that are becoming increasingly prominent in the business world (and elsewhere). They include once again aggregation platforms and also: Aggregation platforms that bring together and connect relevant resources and help users to connect with the most appropriate resources. These platforms tend to be very transactionor task-focused: Express a need, get a response, do the deal, and move on. Marketplace and broker platforms like eBay and Etsy are well-known examples. Aggregation platforms tend to operate on a hub-and-spoke model, whereby the platform owner and organiser brokers all the transactions. Social platforms are similar in that they also aggregate a lot of people, Facebook and Twitter are leading examples, but they support engagement among people with common interests. They also tend to foster networks of relationships rather than hub-and-spoke interactions. They also indicate existing and emerging market segments. Mobilisation platforms move people to work together to accomplish something beyond the capabilities of any individual participant. They tend to foster longer-term relationships rather than focus on one-off short-term transactions or tasks. The most common form of these platforms brings together participants in extended business processes like supply networks or distribution operations. Examples extend in time from the suffragette movement in the early 20th century to the current equality of opportunity for women to be employed senior rolls in government and industry. Learning platforms facilitate learning by bringing participants together to share insights over time. They tend to foster deep, trust-based relationships, as participants can realise more potential by working together. Business leaders who understand this will likely increasingly seek out platforms that not only make work lighter for their participants, but also grow their knowledge, accelerate performance improvement, and hone their capabilities in the process. Learning platforms depend on the ability to build long-term relationships rather than simply focusing on short-term transactions or tasks. Unlike the other platforms, though, learning platforms do not view participants as “static resources.” On the contrary, they start with the presumption that all participants can draw out more and more of their potential by working together in a relevant and appropriate environment.

Industry Ecosystems Industrial ecosystems encompass all players operating in a value chain: from the smallest start-ups to the largest companies from academia to research service providers to suppliers. The notion of ecosystems captures the complex set of interlinkages and interdependencies among sectors and firms spreading across industries, markets, and countries. They utilise a bottom-up approach that considers the nature of the value chain network business models, with partnerships comprising S-SMEs and micro enterprises. The ecosystem approach is an analytical tool, not a legal definition or fixed nomenclature. Ecosystems factor in risk and resilience, different dynamics, complexities, and interlinkages, and encompasses all relevant players.

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Ecosystems all evolve against the background: of the integration of, and the collaboration between, RD&D, engineering, production, OEM assemblers, and serviceability and sustainability activities. (e.g., European Cluster Collaboration Platform., 2022). Industry ecosystems are becoming critical for success in digitally transformed, disrupted industries. The future of industry ecosystems goes beyond partnering with more companies and organizations; it is also about leveraging the sharing of data, applications, operations, and expertise, expanding upon the platform, sharing economy that was built over the past 5 years. The segments of sharing across an industry ecosystem encompass the following (Hagel et al., 2015): • Sharing data to ensure security, reduction of fraud, functional safety and security, or new, mission-critical innovations, as well as cross-ecosystem reporting such as for sustainability • Sharing new applications to enable data and insights, improved operational efficiency, or better customer experience • Sharing operations and expertise so that organizations can scale up and down their capability and capacity for new products and services to meet market, customer, and consumer needs The retail industry is undergoing massive change and disruption, and this has resulted in a transformational change to traditional supply chain response management. Li & Fung, well established as a manufacturing platform, are building a digital supply chain with innovative services and solutions to help customers and suppliers using digitisation and digitalisation in design, development, and production planning. A fully digital global supply chain will enable Li and Fung to make data-driven insights for faster, smarter business decisions by fully digitalizing each step of the supply chain enabling seamless data flows, providing end-to-end visibility for customers, suppliers, and other stakeholders. This enables staying ahead of the disruption at retail, capture and share data across the entire value chain to enable more effective decisions, ensuring business sustainability. Figures 10.8a and b illustrate Li and Fung’s platform approach.

 he Existing Automotive Value Chain Platform: A Composition T of Focused Specialist Platform Activities The ICE (internal combustion engine) powered automotive industry commenced as a vertically structured activity. Henry Ford developed a business model within which almost every activity and component was initiated by the Ford Company, his competitors adopted the model; some were successful many were not. Some became “brands” within General Motors but others vanished. Automotive bodies and tyres became early specialist platform activities but during the 1960s/1970s the technology of the automotive product, together with a market requirement for

Introduction Identify

219

Design

Build

Deliver

Maintain

Procurement iProcurement sourcing is an ongoing knowledge-based process which identifies expertise, cost profiles and capacity potential throughout the Li and Fung resource market iProcurement contracting is another important process for Li and Fung because it is closely associated with the product development process

Production hSupply Market resources database hSupplier relationship/performance database hNetwork design, control and coordination hSupplier performance continuity management hQuality Control hLow cost operations hFlexible hAgile

Production Process Design hInterpret client-customer product design into production specification brief hPrototype development is based upon the knowledge that quality and quantity at budgeted costs can be delivered hDevelop integrated multiple supply networks hOperational pathway network selected to meet customer product specification

Value Expectations

Sust ain

Logistics Services hInformation transfer between 400 customers and 12000 suppliers in over 40 countries hManage FGI to meet customer volume and cost targets hQuick Response logistics ensures finished product meets delivery objectives and locations hInventory management and location WIP hCoordinated Finished Goods deliveries

End User Customer Value Driver Criteria iBrand loyalty based upon past design, quality, price etc. iExpects (demands) ‘variety’ iLooks for current design/style iProducts should be available ‘when and where’ required iBasic “formulae” of: price/quality/style expectations iContinuity of basic formulae

Intermediary (Client) Customer Value Driver Criteria i’Service’ consistency and continuity iQuality/quantity/delivery/time requirements iRelevant suppliers: number and ability iConformity with international codes for SR and HR

Value Delivery

(a) Identify

Design

Build

Deliver

Fabric Production

Complex Production Processes

Maintain

Quality Production

Process Design Demand Chain Analysis: Customer and Partner Expectations: Value Drivers Customer Conducted

Sust ain

Volume Production

Value Engineering Concept Design & Customer Value Proposition

Li and Fung operate as an Integrator and Coordinator of an Apparel Production Service Operations Platform

Time Response

Specialist Finishes

Cumulative Value Adding

“Value Delivery”

Specialist Delivery Service

Production flow

(b) Fig. 10.8 (a) Li and Fung optimise market value added. (b) Process productivity: Li and Fung operate a production process that utilise some 12,000 partners across 30+ international borders

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differentiation led to specialist manufacturing and subsequently to platforms developing. The move towards specialist platforms continued, notable was the formation of COVISINT a procurement platform. Covisint enables automotive organizations to securely exchange information across the largest B2B marketplace in the world. The cloud-based Connected Supply Chain provides on-demand connectivity and communication to over 85,000 organizations and 500,000 users around the world. The Covisint platform secures this Automotive Exchange with single sign-on and delegated administration and facilitates information exchange with web content management and collaboration tools. From the Covisint portal, organizations and users can: • Manage the security of their organizations and their users with self-service tools and resources • Navigate to Automotive Portals—OEM and Tier 1 websites that are secure gateways to information and applications from around the world. (e.g., view automated update of changes to supplier code relationships) • Request access/get approval for access to secure information from these portals • Request access/get approval for access to Automotive Portal applications • Subscribe to important bulletins and alerts from each portal • Participate in secure web-based file collection Given the ongoing developments in the EV market with some major manufacturers announcing that only EV products will be manufactured after 2025 significant changes in the industry structure can be expected. See Fig. 10.9.

 merging Platform: EV Construction, Distribution E and Serviceability Figure 10.10 identifies the developing EV Automotive Industry as an interesting platform exercise. However, despite encouraging sales take up there are unresolved supply chain concerns. A report by the Coalition for a Prosperous America (CPA) highlights a serious challenge facing the United States, an EV battery crisis (Mayoral, 2022). There are several reasons for this, including weak investment in advanced technologies, limited access to critical minerals and a lack of federal policies to promote R&D and manufacturing, which an adequate supply chain for lithium-­ion batteries imply doesn’t exist. While some of America’s automotive companies are trying to build their own supply chain, others continue to rely on production-outsourcing and importing. The EV battery problem is now serious enough that Rivian CEO RJ Scaringe recently warned that 90% to 95% of the battery supply chain “does not exist.” And Tesla CEO Elon Musk cautions that prices for lithium have already “gone to insane levels.” China is the world’s leader in EV battery production—with over 12 times the output of the United States. Mayoral’s (2022) research found that both China and Europe will continue to outpace the

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Value Engineering Powertrain peripherals technology IC engines EV electrification design Driverless vehicles

Value Production

Value Communication

Searching, Transactions, Payment and Financing channels

Complete Vehicle Manufacturing

Data Transfer Collaboration

Creativity

Value Renewal

Design for Long-Term Uses Design for Materials Recovery Design for Serviceability Support Design for Remanufacturing and/or Repurposing

Complete vehicles, body exteriors and structures

Complete Vehicle Engineering

Magna International: Body exteriors & structures; seating systems & components; power train transmissions; AWD & 4WD systems; mechatronics, door modules, electronic door latching systems, hinges & handles, seating systems and components. Covisint: initially a procurement activity created in 2000 by a consortium of organizations, including General Motors, Ford, and DaimlerChrysler. The purpose was to reduce procurement costs across a range of “standard” components (braking systems, etc) Continental AG: Electronic & foundation brakes, stability management systems, 3 (49) 511-938-01; conti-online.com Hanover 30165, Germany CEO tires, chassis systems, safety system electronics, telematics, powertrain electronics, interior modules, instrumentation, technical elastomers

Serviceability as a product-SERVICE – vehicle leasing

Physical Distribution Activities

Communicate the Value

Bosch’s capabilities include; mobility solutions, injection technology and powertrain peripherals for internalcombustion engines, powertrain electrification, steering systems, safety and driver-assistance; Infotainment systems technology, as well as vehicle-tovehicle and vehicle-to-infrastructure communication

Service Agreements Warranties Maintenance

Inventory control Transportation and logistics Packaging and materials

Focused communications. Identification & Tracking

Manufacturing “Solutions”

Produce the Value

Magna’s capabilities include the design, engineering, testing and manufacture of exterior systems, seating systems, closure systems, vision systems, powertrain systems, electronic systems, roof systems, body & chassis systems, hybrid & electric vehicle systems, and vehicle engineering & contract assembly

Value Serviceability

“Core Service” Components Procurement

Specific working packages to Complete vehicle development

RD&D “Solutions”

Value Delivery

“Serviceability” Operations

Deliver the Value

Digital marketing platforms delivers real-time-across any device and channel. Specialist agencies focus on specific industry applications using advanced data management systems. GSM (US) Modern cars are packed with cellular connections, powerful processors and a growing suite of sensors, including cameras, radar and microphones turning them into the next information goldmine, rivalling the data-creating capabilities of smartphones .CES

Service the Value

Ocado Smart Platform: OSP) is a proprietary solution for operating online retail businesses. It combines our end-to-end software and technology systems with our physical fulfilment asset solution, both of which are proprietary and fully integrated. Ocado’s Customer Fulfilment Centres (CFCs): our highly automated warehouses, incorporating the latest automation, robotics and control systems. The efficient operation of Ocado CFCs is crucial to the success of Ocado and the delivery of hundreds of thousands of orders a week

In February 2000, DaimlerChrysler, Ford Motor Company and General Motors jointly formed a single business-to-business supplier exchange named Covisint to enable collaboration, visibility, and integration for the global automotive industry. Covisint enables automotive organizations to securely exchange information across the largest B2B marketplace in the world. Our cloud-based Connected Supply Chain provides on-demand connectivity and communication to over 85,000 organizations and 500,000 users around the world.

Performance management and predictive maintenance techniques use digital thread and digital twinning technology to determine the condition of in-service equipment in order to estimate when maintenance should be performed. Siemens’ TeamCenter and General Electrics’s Predix platform models provide this service facility

Value Renewal Operations

Renew the Value Remanufacturing is the process of recovering, disassembling, repairing for resale at “new product", or as service parts with warranted performance, quality and specifications. By remanufacturing products, components or parts, a company contributes to the circular economy by extending the lifetime of those elements and creating value. Renault has adapted an existing ecosystem from its remanufacturing operations rather than creating a new one

product-SERVICE format value propositions. Serviceability Rolls Royce Aero Engines Bosch: Repair-shop concepts, and technology and services for the automotive aftermarket

Fig. 10.9  The existing automotive value chain platform: A composition of focused specialist platform activities

Identify

Design

Concept Design and Value Proposition

Demand Chain Analysis: Customer and Partner Expectations: Value Drivers

Complete Vehicles

Manufacturing “Solutions” Providers

RD&D “Solutions” Providers

Developing EV Demand Management Platforms …. Concept Design and Value Proposition

Exteriors Modules/Components

Product-Service Engineering and Manufacturing Process Engineering Designers

VCN Integrator and Coordinator

Powertrain/Traction Traction motors Battery packs Traction battery Auxiliary battery Onboard charger Autonomous Driving Self driving technology technologies: private & public transportation. Freight vehicles Raw Materials-Mining

Deliver Interiors Seating & Fittings

Advanced Manufacturing Digital Connected

Current Platforms ….

Data Transfer Collaboration

Build

Creativity

Mobility Activity Options Access vs Ownership Car Subscription programs Ride-hailing services Vehicle sharing

Sustain

Service Parts Availabilities “Brand” Supply “OE” Component suppliers 3rd/4th Part Distribution companies

Service subscriptions

Physical Distribution Operations

“Serviceability” Operations

Focused communications. Identification & Tracking

Communicate The Value

Produce the Value

Transmission Systems Driveline design Drive location options Differentials, Axles

Searching, Transactions, Payment and Financing channels

Main tain

Marketing and Sales Services Direct and Indirect sales Multi-brand mix: omnichannel & cross-channel. AI focussed media

Serviceabilty Providers Software update for modifications Battery exchanges Predicted maintenance servicing Performance management (monitoring)

Deliver the Value

Service the Value

Connectivity-In-Car: Systems data management In-car entertainment Information Task Automation

Re-charging Facilitation Renewable energy COTA Charging-over-the-air “Home" based facilities Regular short” journeys “Infrequent long” journeys

A circular economy is an economic system aimed at eliminating waste and the continual use of resources.

Value Renewal Operations

Renew the Value

PlanetCare: Effective design management Circular Value Chain Recycling materials Component remanufacturing

Connectivity-External Car: Performance management Serviceability management In-Use management Specific route issues; congestion, accidents, bad weather, hazards

Fig. 10.10  The evolving automotive value chain platform the EV automotive industry: A composition of complex specialist capability-led platform activities

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U.S. in EV battery production. By 2025, China will account for 56% of global battery production; the U.S. will account for just 19%. Much of the U.S. auto industry relies on foreign-owned battery technology and focuses mainly on final assembly of batteries instead of the more complex challenge of designing and producing battery components. This contributes only a relatively small share of the value of overall battery manufacturing. Instead, America’s EV manufacturers need to jump into technical design, including innovation, intellectual property, and the materials science of battery component manufacturing, not just the assembly. Add to this problem the slow rollout of a charging infrastructure in both Europe and North América with the accompanying problems of the number of charging points, charging times and costs, and involvement of “governments” (in some form) the slow take-up of this as an investment opportunity is not surprising. Platforms help to make resources and participants more accessible to each other on an as needed basis. Properly designed, they can become powerful catalysts for rich ecosystems of resources and participants. A couple of key elements come together to support a well-functioning platform: • A governance structure, including a set of protocols that determines who can participate, what roles they might play, how they might interact, and how disputes get resolved • An additional set of protocols or standards is typically designed to facilitate connection, coordination, and collaboration. Platforms are increasingly supported by global digital technology infrastructures that help to scale participation and collaboration, but this is an enabler, rather than a prerequisite, for a platform. In the early development of Li & Fung’s platform for the apparel industry, for example, it relied on very limited technology, largely the telephone and fax machine, and instead focused on defining the protocols and standards that made it possible to deploy a loosely coupled, modular approach to business process design. IDC 2021 a premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications, and consumer technology markets, researched industry wide to determine how industry ecosystems were expected to develop. They commented: In the Future of Industry Ecosystems, an organization’s ability to generate value will increasingly be tied to its participation in a new digital economy. New business models will emerge, accompanied by new customer requirements and ways of operating, that will spur the creation of new, scaled up digital ecosystems that leverage software platforms to deliver scale and speed.

As mentioned above the future of industry ecosystems suggests leveraged shared data, applications, operations, capital expenditure and expertise. Each of these shared elements of the future of industry ecosystems complements and enhances the other, producing a “scaled” platform effect that results in improved innovation, intelligence, customer experience, and trust.

References

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EV vehicles are appearing in volume, particularly in countries offering financial subsides, but problems exist, the largest being recharging facilities that are not expanding at the rate of EV sales. Another characteristic concerning the EV concerns its battery. Batteries are the costliest part of an EV making them is lucrative, but because they contain materials such as lithium, cobalt, manganese and nickel, expensive inputs that are difficult to obtain. Supply chains are long and complex, and buyers’ risk being tarnished by their suppliers’ (or suppliers’ suppliers’) poor environmental and labour standards. Remanufacturing materials makes sound business sense. Gigafactories (battery manufacturers) are being designed with recycling/remanufacturing in mind. The Economist (2022 October 29) identifies recycling/remanufacturing as both a problem and an opportunity and reports on notable activities in the industry. Carmakers such as the Renault Group and Stellantis, owner of brands that include Fiat, Chrysler, and Peugeot, are both setting up circular-economy businesses. This is not just for batteries, but also for repairing and reconditioning parts and vehicles. Each of these operations will, it is hoped, have annual revenues of more than €2bn ($2bn) by the end of the decade, and be profitable. Renault reckons around 85% of a car is recyclable, but only 20–30% of the materials in new vehicles are recycled, often from other goods. Circular manufacturing would greatly increase that share (The Economist, 2022).

References Baldwin, C. (2012). Organization design for distributed innovation. Working Knowledge. Harvard Business School. Chopra, S., & Meindl, P. (2010). Supply chain management. Pearson. Economist. (2022). October 29. The circular economy. European Cluster Collaboration Platform. (2022). Definition of industrial ecosystems. European Cluster Collaboration Platform, EU. Hagel, J., Seely Brown, J., Sanoylova, T., & Lui, M. (2015). The power of platforms. Deloitte University Press. IDC Systems. (2021). The future of industry ecosystems. Global Survey. www.idc.com Mayoral, A. (2022). EV has a problem: 90% of the battery supply shain ‘does not exist’. Industry Week. Meyer, M., & Lehnerd, A. (1997). The power of product platforms: Building value and cost leadership. Free Press. Pine, B. (1993). Mass customisation. Harvard Business Review. Simon, P. (2011). The age of the platform. Motion Publishing. Slywotzky, A. J., & Morrison, D. J. (1997). The profit zone: How strategic business design will lead you to tomorrow's profits. Crown Business. von Hippel, E. (1988). The sources of innovation. Oxford University Press.

PlanetCare and Sustainability

11

Introduction Hahn (2022) is attempting to extend the view of corporate management and the scope of sustainability as a management discipline, taking the topic well beyond environmental issues into the selection of product-service-markets and the value proposition made to them. Figure 11.1 identifies the range of influence suggested by Hahn’s (2022) contribution to the topic. Future managers need to embrace, not ignore, the reality of the many actors involved to be able to improve their company’s sustainability performance. In my courses, therefore, I try to offer multiple perspectives of sustainability and sustainability management. I approach sustainability management from a stakeholder perspective, with a focus on companies’ relationships with the many actors that shape sustainable outcomes. How do companies interact as central and often powerful players in these dynamics? Hahn (2022).

Is the notion of EESG new? Clearly not as Hahn (2022) has shown with these early examples of climate change: in 1896 Svante Arrhenius discussed in a scientific article the influence of carbon acid in the air upon the temperature on the ground. And in 1912, Francis Molena even more vividly argued, again in a scientific article, that the carbon dioxide emitted when burning coal has a tendency to make the air a more effective blanket for the earth and to raise its temperature. The term ESG was popularly used first in a 2004 report titled “Who Cares Wins”, a joint initiative of financial institutions at the invitation of UN.  The report was subsequently endorsed by 20 prominent institutions. The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005. While ESG (environmental, societal and governance) is likely to evolve both in substance and name in the coming years, its underlying message and direction will have permanence. Here we discuss how companies can take a more systematic and rewarding approach to ESG.  Not all aspects of “E,” “S,” and “G,” however, are © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_11

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Equality Addresses recent global events have highlighted the need to include “equality” in the ESG topics. Multiple forms of inequality persist (Racial, gender, income, religious inequality). Access to : • Education • Adequate ongoing healthcare • Employment opportunities • Employee development programs

Environment Addresses the impact on the physical environment and the risks to an organisation and its suppliers, employees, and customers, and other stakeholder categories, in relation to: • Climate change and greenhouse gas emissions • Air pollution • Water and waste water management • Biodiversity and ecological systems • Geo-hydrology project initialisation and management

Social Addresses social impact and associated risk from societal activities, employees, customers and communities where it operates, in relation to: • Labour practices • Health and Safety • Community engagement; diversity and inclusion • Community relations, local economic contributions • Product-Service-Market attributes

Governance Assess time and quality of decision-making governance structures, the distribution of rights and responsibilities across different stakeholder groups (primarily internal stakeholders) in service of positive societal impact and risk mitigation, in relation to: • Business ethics, data accuracy and security • Governance structure and engagement incentives • Ensuring “Stakeholder Equity” • Policies; external disclosures; position and advocacy

Fig. 11.1  (E)ESG requires consistency between an organisation’s/network’s strategy and its operating business model

priorities for all companies, and it is unrealistic to expect that companies do not have to make hard trade-offs within and among ESG dimensions, or that they can lead on every topic. It is therefore instructive to observe companies that approach ESG in a rigorous, strategy-driven, socially attuned way. These organizations are labelled forward-looking companies. They make ESG intrinsic to their strategy by defining, implementing, and refining a carefully constructed portfolio of ESG initiatives that connect to the core of what they do. Forward-looking companies also contribute to a competitive landscape where good corporate citizenship is marshalled against existential challenges, not least- but not only—climate change. When a company determines the dimensions of ESG; where it wishes to be good and where it wishes to be excellent, it is making important decisions, with broader second and third-­order consequences. Forward-looking companies approach ESG decisions by seeking to gain a deep, evidence-based understanding of their own business and its broader potential effects. Since by now every major company has begun to embark on an ESG journey, and many have significant programs already under way, it is helpful to consider ESG progress in the context of a maturity curve. We argue that in fact “EESG” issues have impact on business. The first “E” in EESG is an addition by the authors. Recent events, particularly in North America, suggest that Equality is an important issue. Many listings of ESG objectives, include equality, some of which appear in the “S” category, but a broad review of the ESG literature suggests that opportunities in healthcare, education, employment and in the legal/judicial system that should be available to everyone regardless of race, age, gender, religion, and skin colour is given little or no priority. The second “E” concerns environmental criteria, and includes energy usage, pollution and from “production” activities, resources management and recycling/remanufacturing. “S” concerns societal relationships with employees, customers, suppliers, and the host communities the organisation interacts with. “G” (governance) is the internal system of practices, controls, and procedures an organisation adopts to implement

Sustainability in the Real World

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self-­governance in making effective decisions that comply with the law, and to meet the needs of external stakeholders. Not only should legally established organisations observe governance requirements but so too should “social” interest groups. Just as EESG is an inextricable part of how organisations ‘do business’, its individual elements are themselves interlocking and interacting (Henisz et al., 2019), and to be effective management will require an understanding of these nuances. Figure 11.1 identifies the salient features of EESG.

EESG and UN Sustainability and PlanetCare The United Nations (UN) organisation has published 17 development goals for worldwide “sustainability”, add emphasis to the EESG objectives, both being adopted increasingly by industrial organisations internationally. The UN goals add emphasis to the equality issues of the ESG (environmental, societal and governance) topics. From the UN website, they are: No Poverty Zero Hunger Good Health and Well Being Quality Education Gender Equality Clean Water and Sanitation Affordable and Clean Energy Decent Work and Economic Growth Industry Innovation and Infrastructure Reduced Inequality Sustainable Cities and Communities Responsible Consumption and Production Climate Action Life Below Water Life on Land Peace and Justice Strong Institutions Partnerships to achieve the Goals Linked together what is proposed by the UN and (E)ESG represents an effective and efficient operational approach to sustainability.

Sustainability in the Real World What sustainability is not is a public relations activity as implied by Whitley and Lee (2022): “And Qantas loves talking up its sustainability credentials but when you willingly fly aircraft that burn 25% more fuel per passenger than your competitors, your environmental credentials are all too easy to see through.”

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But just what really is it? Is it corporate profitability or corporate longevity? Is it environmental sustainability supported by the sensible use of raw materials, recycling, and remanufacturing (value renewal)—initiated by product-service design that identifies candidate components that may be designed to have multiple life cycles? Corporate sustainability is an “overlap” of socio economic, environmental, and commercial sustainabilities and is an essential “response to shift the emphasis”, an essential response to the shift in “corporate capability response emphasis” and competitiveness. This intention should be clear in a value proposition with positive responses to its stakeholders’ expectations. Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. Profitability and productivity are essential characteristics of the corporate sustainability model. See Fig. 11.2. Successful organizations are beginning to accept the fact that success is not just reflected in their operating statements, sound and secure balance sheets and positive free cash flow statements alone. They also require a balanced perspective of their relationships with the stakeholder interests that include the environment, socioeconomics, and organizational governance (that increasingly includes network partnership structures) and they must fully account for all costs associated with doing business by going beyond regulatory compliance. Certified B Corporations support the concept of the TBL, triple bottom line, Elkington (1994). The author advanced the goal of sustainability in business practices, in which companies look beyond profits to include social and environmental issues to measure the full cost of doing business. Triple-bottom-line theory says that companies should focus as much attention on social and environmental issues as they do on financial issues and that if organisations focus on finances only and not on examining (and considering) how they interact socially, the organization is not able to see the whole picture and therefore cannot account for the full cost of doing business. According to triple bottom line theory (Elkington, 1994), companies should be working simultaneously on these three bottom lines: • Profit: This is the traditional measure of corporate profit—the profit and loss account • People: Indicates how socially responsible an organization has been throughout its history • Planet: Measures how environmentally responsible a firm has been Elkington (1994) revisited his concept suggesting disappointment at the “acquisition” of the topic by mainstream accounting; “TBL’s stated goal from the outset was system change—pushing toward the transformation of capitalism. It was never supposed to be just an accounting system. It was originally intended as a genetic code, a triple helix of change for tomorrow’s capitalism, with a focus on breakthrough change, disruption, asymmetric growth (with unsustainable sectors actively sidelined), and the scaling of next-generation market solutions.” He added; “I see a bright ray of hope coming from the high-energy world of B Corporations. There’s a lot of momentum there; around 2,500 businesses worldwide are now certified as B

Commercial Sustainability

● Governance TBL/( (E)ESG)/UN 17 SDGs ● Data-analytics-led-decision making ● Understanding “customer-business-logic” ● Seamless digital operating infrastructure ● Procurement syndication ● Advanced manufacturing ● Invest in productivity-improvement-led projects ● Use economic profit to appraise investment and operations

Corporate Sustainability Triple Bottom Line, EESG Considerations and UN SDGs ● Environmental Sustainability (circular operations, positive attitude towards climate change) ● Socio-Economic Responsibility (balanced long-term investments supportive of “fair trade” ) ●“Equality” - healthcare, education, employment and in the legal/judicial system ● Governance/Commercial Sustainability (stakeholder-led profitability and productivity decisions) ● A value proposition with positive responses to its stakeholders’ expectations

Relevant Response Capabilities

Corporate Sustainability

Fig. 11.2  Identifying relevant response capabilities as components for corporate sustainability

● Adopt the Circular Value Chain ● Recycling and remanufacturing ● Develop a climate change policy ● Investing in environmentally sound projects ● Encourage collaborative actions within the value chain to pursue environmentally oriented projects and activities

Relevant Response Capabilities

Environmental Sustainability

Socio-Economic Sustainability

Relevant Business Networked Business Response Capabilities ● Social sustainability focuses on improving social equality and economic sustainability aims to improve the standard of living. In the context of business, it refers to the efficient use of assets to maintain company profitability and productivity over time ● Creating, affordable housing, physical & mental medical support, education training opportunities, ● To keep pace with the rapid changes, higher productivity through adapting and innovating interactive process of changing is required, which would lead to sustainable social and economic progress..

Sustainability in the Real World 229

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Corps. All are configured around the TBL—dedicated to “be” not just “best in the world,” but “best for the world.” Major companies like Brazil’s Natura and Danone’s North American operation are now B Corps, with other multinational corporations considering how to follow suit. B Corporations are a relatively new type of business, legally required to consider impacts on all stakeholders including employees, customers, suppliers, community, and the environment. Their mission is to become a community of leaders who drive a global movement of people using business as a force for good. Elkington is likely to be encouraged by recent developments. Enlightened CEOs are publicly mindful that they are answerable to more than just shareholders; their role is one of being answerable to a much broader group as pressure from customers, suppliers, employees, government and other regulators, environmental groups, as well as shareholders make them answerable to “everyone”—the outcome is they must deliver a balanced performance. On August 19, 2019, the Business Roundtable released a new "Statement on the Purpose of a Corporation." The group seeks to "move away from “shareholder primacy," a concept that had existed in the group's principles since 1997, and move to "include commitment to all stakeholders." It notes that "businesses play a vital role in the economy" because of jobs, fostering innovation and providing essential services. But it places shareholder interests on the same level as those of customers, employees, suppliers, and communities. "Each of our stakeholders is essential," the statement says. "We commit to deliver value to all of them, for the future success of our companies, our communities and our country.

Our Commitment—Statement on the Purpose of a Corporation, Business Roundtable. August 28, 2021. businessroundtable.org This suggests the future direction of the business response to change and major disruption and further suggests a shift away from the traditional business model towards the need for a model capable of considering the impact of other possible, expected, and unexpected, major economic, social, and economic impacts on the core business capabilities of the business model. Figure 11.3 represents the typical current business model design process. It is typically a linear process in which the value chain is a one-way linear flow of materials through industrial systems; raw materials are extracted (harvested etc.) from the environment and transformed into products and eventually disposed of. In the linear system such eco-efficient techniques that do exist seek only to minimise the volume, velocity and toxicity of the material flow system but are incapable of altering its linear progression. Figure four suggests an “ideal” corporate/network approach to a sustainable structure. It proposes “corporate sustainability” commences at the early stages of RD&D, this approach would ensure that profitability and productivity are designed into a product-service-market that is based upon value renewal and expects the collaboration of network partners. See Fig. 11.4 corporate sustainability suggests that organisations accept responsibility concerning socioeconomic and environmental issues but also consider they have responsibilities to investors, employees, suppliers, and clearly to customers; in fact, they have stakeholder responsibilities.

Fig. 11.3  Current “business model design process”

Operations Response Management • Delivering and Servicing the Value proposition. • Monitoring Value Delivery & Performance. • Implementing Changes to Achieve Customer Expectations

ICT Connectivity Interactions

Review of Current Market Value Strategy • Strategy Appraisal and Market Direction • Market & Customer Analysis • Stakeholder Expectations and Value Drivers •Defining/Revising the Value Strategy and the Value

Strategic Operations Decisions

Value Chain Network, Structure and Producibility Response

Operations Response Management

Review of Current Research Design Market Value and Development Strategy

Value Chain Network, Structure and Producibility Response

Strategic Operations Decisions • Identify Network Resource Requirements and Management • Implementing a Tangible/Realistic Value Proposition

ICT Connectivity Interactions

Research Design and Development • Creating the Value Proposition and structuring its “Producibility” • Using Value Engineering to identify strategic & operating Cost options

Sustainability in the Real World 231

Design for Serviceability Support

Design for Material Recovery

Value Chain Network, Structure

Design for Re-Use in Manufacturing

Design for LongTerm Use

Fig. 11.4  A sustainability-led “Business Model Design Process”

Design for Re-Use in Manufacturing Returning a product to its original performance specification. Service parts remanufactured to OEM standards and protected by the same warranty as new parts; savings are 40-50 per cent of new price. Remanufactured parts are upgraded to Incorporate latest technology

Collaboration and Connectivity

Design for Long-Term/Re-Use Cascaded use: Using a product for a lower value purpose, for example turning used clothes into pillow stuffing or redeploying computers within a business for less demanding applications Collaboration and Connectivity

Value Chain Network, Structure

Design for Serviceability Support Servitisation: A focus on asset management a product-SERVICE rather than a PRODUCT-service, number of applications, portability, connectivity; the use of remote diagnostics to ensure optimal serviceability

Collaboration and Connectivity

Design for Material Recovery Recycling: Extracting the raw materials and using them for new products; Recovery: Re-using materials & components for a low value purpose such as road base or combustion to produce heat.

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Applications of Sustainability

233

Responsible profitability and productivity are essential characteristics of the corporate sustainability model. RD&D is focused on customer value in use and value renewal.

Applications of Sustainability Some examples of ongoing recycling/remanufacturing activities demonstrate the commitments of well-known companies: Heineken is pursuing circular manufacturing practices across its entire value chain—thinking holistically, from water treatment to energy conservation, composting yeast, and recycling bottles. Philips introduced energy efficient technology (LED street lighting) by offering a product-­ SERVICE approach to enable municipal authorities to take advantage of energy savings without incurring up-front investment. Renault (Choisy-le-Roi) re-manufactures some 200,000 components. It suggests these to be 30-50% less expensive than new. Re-manufactured parts have the same warranty and QC (quality control) process. The plant uses: 80% less energy 88% less water 92% less chemical products 70% less wasted production No landfill services are used Parts are being designed with re-manufacturing in mind, disassembly, and recyclability. Product interchangeability is an objective. Caterpillar (CatReman) suggests re-manufacturing is not about using less and less material but rather creating components that can be remanufactured several times. With fixed costs at 35% and variable costs (materials) 65%, remanufacturing offers increased profits. For example, Caterpillar designs engine blocks with removable sleeves—reducing the time and cost of a reboring process. Apple (Liam) a manufacturing process application that identifies and extracts serviceable components from returned Apple products.

And Coca Cola Corporation make clear their corporate environmental policy:

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Environmental Policy July 2021 The Coca-Cola Company (TCCC) and its bottling partners understand the role our entire system plays to ensure a healthy and sustainable environment. This belief is part of our culture and is embedded in our purpose to refresh the world and make a difference. Vision Our vision is to craft the brands and choice of drinks that people love, to refresh them in body and spirit while doing this in a way that creates a more sustainable business and better shared future. We strive to achieve this ambition with the full commitment of system leaders and the active, global participation and engagement of our employees. Guiding Principles We will conduct our business in ways that will protect and preserve the environment while reducing our environmental footprint. This includes working with select suppliers and business partners that have a strong commitment to the running of sustainable operations and processes. To drive toward this ambition, we will adhere to applicable legal and TCCC requirements relating to the environment everywhere we do business. In addition, our environmental efforts include the following key areas, and are defined by our long-term aspirational goals: Water Stewardship: The Coca-Cola Company and its bottling partners work to:

• Increase water security where we operate, source ingredients and touch people’s lives • Be good stewards in the communities where we operate by continuing to improve the efficiency of water use in our operations, with a particular focus on high stress locations • Help address shared water challenges to create more sustainable watersheds • Support watersheds in which we operate, by fostering environmentally responsible operations through focusing on water efficiency, wastewater treatment and water stewardship principles Climate Protection: Even as we grow our business, The Coca-Cola Company and its bottling partners work to:

• Reduce carbon emissions across the supply chain in line with the goals of the Paris Agreement and the Science-Based absolute carbon emission reduction target • An aspiration of net zero carbon emissions by 2050

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• Meet our Science-Based target through initiatives that include but are not limited to renewable energy, improved energy efficiency, waste reduction, equipment innovation and supplier engagement Sustainable Packaging: We envision a world without waste where, through recycling and innovation, our packaging is seen as a valuable resource for future use, ideally as new ­packaging in a circular economy. In 2018, we launched the World Without Waste program, under which we work to:

• Drive recyclability and the collection of our packaging • Enhance the use of recycled content • Bring together people and partners to support a healthy, debris-free environment Sustainable Sourcing: The Coca-Cola Company is dedicated to working toward more ethical and sustainable sourcing of its agricultural ingredients. The Principles for Sustainable Agriculture (PSA) are the next iteration from the Sustainable Agriculture Guiding Principles (SAGP) and describe the company’s first principles for sustainable agriculture based on environmental, social and economic criteria. The progress of the above goals is reported annually through our Business & Environmental, Social and Governance Report, which reflects our continued journey toward driving sustainable business practices into our core strategy. More details can be found in the Sustainable Business section of our website. Each of the Company’s responses to the ESG is documented annually.

Capability Responses and Sustainability Sustainable performance of an organization refers to its ability to meet the needs and expectations of customers and other stakeholders and is achieved when the business and its partners are consistent concerning its purpose and values over time as it accommodates to the changing business and market dynamics in a proactive and relevant way. Skill is required to identify and adapt its capabilities to meet ongoing changing and challenging opportunities that become available. Analysis of the various factors which are significant for the evaluation of performance shows that these have been categorized into three dimensions by (Millar, 2020), who suggests three dimensions of performance that are referred to in terms of the “three pillars” and include, people, planet, and profitability. Given the nature of the triple bottom line (TBL) and its relationship to resource management we should add, performance, positioning productivity, partnerships and people, producibility, platforms and planetCare.

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Capability Responses and Sustainability: Micro Perspectives The macro analysis provides broad directions in which to link sustainability characteristics with capability responses. However, a consideration of more detailed aspects may prove to be helpful in creating sustainable competitive advantage with focused capability responses. Some examples follow.

Performance, Positioning and Sustainability Considerations Certified B Corporations as leaders in the global movement for an inclusive, equitable, and regenerative economy are an excellent example. Their performance is prescribed by B Corp Certification; a designation that a business is meeting high standards of verified performance, accountability, and transparency on factors from employee benefits and charitable giving to supply chain practices and input materials. B Corporations use positioning statements to present their positioning. For example: Patagonia is a well-known and favoured company for many reasons: its superior products and the environmental efforts that led to it being named a UN Champion of the Earth in 2019, the UN's top environmental award. Patagonia is the first company to sign up for B certification in 2012; imposing an earth tax on itself; and giving 100% of their profits from Black Friday in the past directly to grassroots not-for-profit organisations working to protect air, water, and soil quality for future generations. Since 1985, the company has donated over $89 million to environmental work. The company also revised its mission statement from "build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis " to the simpler, more urgent "we're in business to save our home planet." (Leighton & Saguin, 2020). Bose Corporation, established in 1964, is an American manufacturing company that predominantly sells audio equipment. “Bose are committed to achieving positive environmental, social and governance (ESG) impact, and we are continuously evolving year after year. 2022 has been a critical point in time on our journey towards improved efforts. Two years into this critical climate action decade, governments, industries, and individuals are focusing more than ever on ESG issues.” Bose, 2022 Annual Report. Founded by a group of former footwear industry executives in Rio de Janeiro, Brazil, Cariuma is a sneaker brand that focuses on sustainability. Unlike most sustainable sneaker brands that only use recycled plastic and minimalistic designs, Cariuma handmakes its sneakers using high-quality natural materials including organic fair-trade cotton, natural rubber, and leather from gold-rated tanneries using hides sourced from areas that weren't deforested for cattle farming. Cariuma’s sneakers typically feature a retro-inspired skate shoe look that's both classic and easy to style. Another way Cariuma practices sustainability is by shipping its shoes directly in the shoebox, eliminating the need for wasteful packaging. It also makes up for the carbon emissions associated with shipping products by purchasing carbon offsets, bringing its carbon footprint down to zero (Leighton & Saguin, 2020).

See Fig. 11.5.

Partnerships and People and Sustainability Considerations Network Positioning: matching process of identifying market opportunity(ies) with existing and required Response Capabilities. Market Positioning: decisions impact all aspects of how your “total market” perceives an organisation, Value Chain Positioning: indicates the roles and tasks of cost effective & cost efficient inter-industry network and international networks. Partner organisations that service recycling and remanufacturing exist in many large structures.

Sustainable Positioning and Performance

237 Performance: Define Value in the context of the Triple Bottom Line and optimise the “value added” by a network to its “stakeholders” by managing customer and other network partners operational performance drivers and their strategic value builders to create unique or exclusive “Value Advantage” for ALL Stakeholders by managing recycling and remanufacturing.

Fig. 11.5  The corporate sustainability overlap: Performance and positioning

 rofitability, Productivity, Cash Flow P and Sustainability Considerations The economic resources that make sustainability projects viable are dependent on companies’ productivity. Profits guarantee the sustainability of the operations by satisfying the expectations of shareholders. Earlier we introduced the concept of the Triple Bottom Line and commented on its shortcomings. Elkington (1994) suggested companies should focus as much attention on social and environmental issues as they do on financial issues and that if organisations focus on finance alone and fail to examine how they interact socially, the company is not able to see the whole picture, and therefore cannot account for the full cost of doing business. We suggested (above) that productivity be added. Pettersson (n.d.), (CEO of Stena Recycling) presents a simple (and irrefutable) argument: The math is simple, profit equals revenue minus cost. If you make the right sustainability investments, you can both reduce cost and increase the revenue. In other words, sustainability equals profitability. Sustainability investments can reduce costs. Sustainable solutions can be very cost-­ effective. For example, decreasing waste is a great approach to cut your disposal costs. Sustainability investment can increase revenue. Based on the increased demand for sustainability and the opportunity to take a leading position, there is an excellent chance of expanding market share by becoming a sustainable company. The Stena Vision is: “Together we create a sustainable tomorrow”.

Producibility and Sustainability Considerations Producibility (also known as End2End value management) requires traceability. Networks need to develop action plans and clarity on the purpose of enablement and use the available technology to manage product-service-market information flows through the value chain to ensure effective and efficient value management processes. Senior management should engage with stakeholders to create a sustainable value chain from external pressure. Producibility facilitates a circular value chain (aka circular economy) by moving from the traditional take-make-dispose linear value production cycle toward one that promotes product design emphasizing resource reduction, extended use, reuse, and recycling or composting and biodegradability while meeting performance, and health and safety requirements in the workplace See (Fig. 11.6).

238 An understanding of the profit expectations of ALL Stakeholders is essential for profitability targets to be met. Exploring the notion of valueadded sustainability tasks (e.g. reusable packaging) and how this can deliver enhanced stakeholder value from the network sustainability objectives

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Sustainable Profitability, Productivity and Cash Flow

The “utilisation” of relevant assets, capabilities, capacities, processes and relationships positioned in relevant locations commercially and geographically (e.g. recycling collection facilities in distributor outlets (e.g. Officeworks) achieve stakeholder performance expectations. based upon sustainability led processes

Positive cash flow is essential to the successful growth of the organisation, as an individual business or as part of a value chain network. Cash flow from revenues is necessary for continued growth and development

Fig. 11.6  The corporate sustainability overlap: Profitability and productivity

A circular value chain differs from the traditional linear value chain which typically is a one-way linear flow of materials through industrial systems: raw materials are extracted (harvested etc.) from the environment and transformed into products and eventually disposed of. In the linear system such eco-efficient techniques that do exist seek are only to minimise the volume, velocity and toxicity of the material flow system but are incapable of altering its linear progression. Some materials are recycled but often as an ‘add-on decision’; no decisions to accommodate this activity having been made at the design stage and often only as a response to regulatory decisions and mandates. This is in effect not recycling but down cycling as it results in a downgrade in its quality and limits its subsequent useability. The circular value chain seems smart from a social responsibility standpoint and certainly provides opportunities for a business to build upon its positive reputation, circularity solves business challenges like resource scarcity and cost increases, compliance challenges and customer demand for environmental transparency. The circular value chain network is one that is restorative and regenerative by design, and which aims to maintain products, components, and other inputs at their optimal value to end-users always, distinguishing between technological and biological cycles. See Fig. 11.7. The topic is also covered below.

Partnerships and People and Sustainability Considerations Collaboration between firms is important to stimulate the transition to a more sustainable society…collaboration is indeed one of the preferred forms of governance (EESG) to manage relations between firms in a sustainability context. Collaboration enhances sustainable benefits by creating legitimacy of sustainable technologies, reducing waste, and improving environmental and social performance of firms. The institutional environment, in particular environmental laws, and regulations, has a beneficial impact on collaboration and relationship management in sustainable supply chains. Eco-innovation (creative resources procurement) leads to sustainable benefits, such as lower emissions, Niesten et al. (2017).

Collaboration involves two or more businesses working together for mutual benefits related to sustainability goals. Often a corporate brand and a non-profit organisation from the same industry will collaborate as well as entities from multiple sectors, that get together and pool their resources. Collaborative efforts often result in the

Sustainable Producibility

Producibility facilitates a circular economy by moving from the traditional take-make-dispose linear value production cycle toward one that promotes product design emphasizing resource reduction, extended use, reuse and recycling or composting and biodegradability while meeting performance, safety and health requirements. Apple considering the sale of replacement parts to end-users. IKEA offering “trade-in” prices for products, reworking them, and reselling them in their outlets

Producibility/End2End value production differs from the traditional linear value chain which typically is a one-way linear flow of materials through industrial systems: raw materials are extracted (harvested etc.) from the environment and transformed into products and eventually disposed of. Producibility management activities are able to design products with remanufacturing capabilities

Fig. 11.7  The corporate sustainability overlap: Producibility (end2end value management)

A relevant strategic and operational infrastructure. The fusion of design and development, of manufacturing and distribution, and of serviceability and product-service renewal activities into a seamless and continuous process to contribute to effective and efficient resource management . The circular value chain is an example of structured use of “waste” materials. Recycling occurs constantly all around us. In the United States, the collection and processing of recyclable waste into materials that can be used in the manufacture of new products is now a common practice and spreading around the world. Recycling turns the old into the new – today’s newspaper might return next month with new headlines while your aluminum soda can, which is made from the most recyclable of all materials, could have a second life as a new beverage container. (National Waste and Recycling Association)

Producibility/End2End value management requires traceability. Networks need to develop action plans and clarity on the purpose of enabling and use the available technology to manage product-service-market information flows through the value chain to ensure effective and efficient resource management and value management processes (for example, Covisint)

Partnerships and People and Sustainability Considerations 239

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organisations understanding best practices from each other, identifying inefficiencies, and rectifying them, or perhaps discovering shared skillsets and more. See Fig. 11.8.

Partnership with Suppliers Knorr, a German soup brand owned by Unilever, adopted this approach by contacting its global suppliers. Growers designated a monetary amount for sustainable agriculture projects and Knorr contributed half the amount in addition to the grower’s contribution. This team effort enabled farmers to experiment with Earth-friendly practices that might otherwise be unaffordable. Knorr also gives priority to projects that investigate certain priorities such as biodiversity projects, efforts to reduce water, and the phasing out of pesticides. By understanding better, the farmers’ problems, Knorr shows commitment to progress in an actionable way, and the growers get much-needed funds. Furthermore, Knorr can differentiate its brand from others by promoting this initiative in its consumer communications, such as product packaging.

Partnerships with Specialists TerraCycle is an example of a sustainability service provider offering programs that allow consumers to recycle typically “hard to-recyclable products and packages.” Provision of local collectors with a place to drop off trash that will be recycled by TerraCycle, the company manages large amounts of scrap plastic or other trash to be recycled or offers a service to a business that simply needs a way to recycle smaller volumes of mixed waste that aren’t accepted in your property’s waste service. TerraCycle develops and manages custom supply chains for unique post-­ consumer materials and enables organisations to source authentic recycled content from the most polluted locations across the world.

Partnerships with Employees Typically, employees are unaware of the importance of sustainability practices. An example given by Triple Pundit (2018) relates how one organisation improved employee awareness. Microsoft teamed up with the Earthwatch Institute, an environmental charity. Microsoft employees were involved in a leadership training program in a forest adjacent to their workplace, led by Earthwatch Institute representatives. They spent the day collecting data about climate change and how it affects forests. They wanted information that would help them create a team-wide action plan for environmental sustainability at Microsoft and understand why energy-reduction strategies are crucial. A year before that happened, Microsoft assisted the Earthwatch Institute via a technology grant that allowed the charity to

Sustainable Partnerships and People

Fig. 11.8  The corporate sustainability overlap: Partnerships and people

A workable (cost effective and cost efficient network strategy and structure that meets balanced stakeholder expectations. Management and operations staff that possess relevant skills and experience to meet current and future capabilities requirements for growth opportunity requirements. Ethical employment policies

Supply chain organizations are making real progress to improve visibility and traceability and increase supplier audits to avoid their own “Boohoo moment.” Instituting supplier diversity and carbon offset programs, increasing commitments to all-electric delivery fleets, and making packaging environmentally friendly are top actions being taken by companies. University of Tennessee/SGS Maine: Point

For a company pursuing EESG, the net is cast broadly in determining who constitutes a relevant stakeholder/partner. Each company has, at a minimum, at least five impacted stakeholder groups: • customers • employees • suppliers • shareholders • affected communities. Governments and other regulatory bodies can also be added to this list

Value chains often ace challenges cross jurisdictional boundaries and require systemic changes beyond the capabilities of individual companies or even of an industry. In these cases, the best approach for business can be to partner up—with governments, investors, local communities, nongovernmental organizations (NGOs), and other companies. These partnerships are collaborative, distinctive and complicated joint ventures, and are often industry based with multiple parties

B Corp consultants enable organisations to outperform their competition with sustainable operating models that protect people, the planet and profit. From audit & assessment, to planning & implementation to growing ‘good’ business. Services include, research & insights, lean strategic planning, growth levers aid identification and activation, (objectives and key results), business strategy implementation and delivery, innovation strategy and delivery, board & corporate advisory, and retail & consumer goods growth strategy, programs that encourage employee involvement in sustainability

Recycling Partnerships (e.g., TerraCycle) programs that allow your consumers to recycle typically hard-to-recycle products and packages. Provision of local collectors with a place to drop off trash that will be recycled by TerraCycle, Large amounts of scrap plastic or other trash to be recycled. Or a business simply needs a way to recycle smaller volumes of mixed waste that aren’t accepted in your property’s waste service. Develop and manage custom supply chains for unique post-consumer materials. Enables organisations to source authentic recycled content from the most polluted locations across the world

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build a customized database and enhance its website user experience, and other requirements. This case study is a good example of how both the corporation and the not-for-profit combined their resources for the greater good and offered advantages that made projects possible.

Platforms and Sustainability Considerations Stakeholder Value Management extends to (E)ESG Criteria/UNSDG (united nations organisation sustainability development goals); materials substitution and sustainability activities, and process development, (E)ESG acceptance and governance practice. The concept of the value chain is of strategic effectiveness and operational efficiency: product-service-management design, production, distribution, serviceabilty, and value renewal is based on competitive advantage as operational excellence in turn is based upon strategic effectiveness and operational efficiency in resources management. The network is seen as a platform-based business sustainability model. The value of a business model is increasingly being created outside the company itself. Within the product economy, the value lies within the products produced by the company itself. Within the service economy, this value shifted to the interaction between user and company, in which the product was given a supporting role. Ultimately, the value of a platform is created entirely outside the company itself by the power of the network of producers and consumers. The value of a platform increases as the network grows. The circular economy is an example of applied sustainability management. A circular economy decouples economic activity from the consumption of finite resources. It is a resilient system that is good for business, people, and the environment. The circular economy is a systems solution framework that tackles global challenges like climate change, biodiversity loss, waste, and pollution. It is a systemic approach to economic development designed to benefit businesses, society, and the environment. In contrast to the ‘take-make-waste’ linear model, a circular economy is regenerative by design and aims to gradually decouple growth from the consumption of finite resources. After defining what an economy is, this learning path explores the nuances of the concept of a circular economy, including the difference between biological and technical materials, the different opportunities that exist to keep materials and products in use, and the history of the idea. Finally, the benefits of shifting from a linear to a circular economy are highlighted (www.ellenmacarthurfoundation.org). The component acridities within a circular economy (aka circular value chain) comprise; RD&D (deriving a product-service-concept tasked to design re-usability into the p-s-m), component manufacturer designing the high IP component to be robust and capable of being reworked and installed in “as new” items, product assembler designing the end-user product with the reuse components (where possible) easily accessible during recovery, recycling recovering the reusable component(s) and shipping them to the remanufacturing processor for reworking and reinstalling in “new” product hardware. A major interest of The Ellen MacArthur

Sustainable: Corporate Sustainability as a Component of Organisational Excellence

243

Foundation concerns the fashion industry in which considerable work has been undertaken in establishing the concept and the processes are understood, supported and viable. The examples given in Fig.  11.9 include this activity together with examples from procurement and recycling organisations. Examples of platforms that facilitate sustainability are ‘second-hand platforms’ such as Vinted and Marktplaats, which optimise the reuse of products and extend their lifespan. Other platforms focus on the re-use of unused office and/or parking capacity (such as Parksharing and Seat2Meet); something that currently may have become even more relevant, with a different perspective on office space and commuting. See Fig. 11.9.

 ustainable: Corporate Sustainability as a Component S of Organisational Excellence Commitment to all stakeholders. “Awareness that businesses play a vital role in the economy” because of jobs, fostering innovation and providing essential services. Shareholder interests are on the same level as those of customers, employees, suppliers, and communities. “Each of our stakeholders is essential” the Business Roundtable statement says. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country. This commitment made in 2019 describes Sustainable—Sustainability. For Sustainable— Sustainability to become live and real it is essential that all business organisations (single organisations and networked organisations) identify the components of the stakeholder management characteristics that are essential to their relationships with their primary and secondary stakeholders (for some organisations this may require that they identify them!) and overtime build these expectations into the value proposition. It may be recalled that Chap. 3 “managing value” identifies their expectations and recasts the value proposition in such a way that they are recognised. See Fig. 11.10.

The Circular Nature of Future Business Models Figure 11.11 identifies the considerations necessary of becoming a stakeholder-led business model and the full implications of such a decision. Based on the concept of the circular value chain network is one that is restorative and regenerative by design, and which aims to maintain products, components, and other inputs at their optimal value to end-users always distinguishing between technological and biological cycles. The main activities comprise design for long-term/re-use, design for material recovery, design for serviceability support, and design for re-use in manufacturing. The emphasis of the model is to optimise the use of resources by introducing the notion of the reuse of intellectual property and of input materials, not necessarily in the same context as the original vital properties of the material inputs that may have been consumed in their earlier use, but in a secondary role.

Leadership in Energy and Environmental Design (LEED) is a green building certification program used worldwide. Developed by the non-profit US Green Building Council (USGBC), it includes a set of rating systems for the design, construction, operation, and maintenance of green buildings, homes, and neighborhoods, which aims to help building owners and operators be environmentally responsible and use resources efficiently. By 2015, there were over 80,000 LEED-certified buildings and over 100,000 LEED-accredited professionals. Most LEED-certified buildings are located in major U.S. metropolises. LEED Canada has developed a separate rating system adapted to the Canadian climate and regulations

Fig. 11.9  The corporate sustainability overlap platforms and sustainability

Automotive Industry MEB: Product Platform Modular Electric Drive Matrix (MEB). Sustainable The MEB will enable competitive vehicles to be marketed in spite of small PlanetCare production volumes and is viable if based a common platform. This is an Sustainability and important prerequisite for making electric mobility affordable. The costPlatforms intensive production of e-autos becomes more favourable for all suppliers, because high quantities can be achieved with common and multiple use of the MEB. Therefore, in order to reduce the high costs for the development of electric cars, Volkswagen is offering its MEB technology platform to other car manufacturers. The shared MEB platform contributes to meeting the Paris climate change agreement, but this is only possible if between seven, to ten million cars are emission-free by then. The number of new registrations of electric cars would have to increase – dramatically Industry Consortia An industry consortium is a group that involves representatives from several different companies. Usually, consortia are composed of companies from within a single industry. Typically, their objectives are based upon achieving relatively non-competitive scale economies in such activities as R&D at a basic level, and procurement of standard items common to all members. Examples are; military equipment (NATO, aircraft, weapons), and health regulations. Specific companies include; Covisint - enables automotive organizations to securely exchange information across the largest B2B marketplace in the world a cloud-based connected supply chain provides on-demand connectivity and communication to over 85,000 organizations and 500,000 users around the world

FARFETCH Limited (NYSE: FTCH), the leading global platform for the luxury fashion industry, today publishes its second annual Conscious Luxury Trends Report looking at how luxury consumers are shopping more responsibly. This year’s Conscious Luxury Trends Report looks at data from luxury customers' interactions with conscious products (including pre-owned) and circular services on FARFETCH to provide a year-long snapshot of the attitudes and behaviours through the lens of sustainability. The report reveals that customers are continuing to shop more consciously and brands and boutiques on FARFETCH are responding to rising consumer demand by consolidating and increasing their commitments to improve their impact on people, planet and animals. FARFETCH uses a set of independently-backed criteria to qualify what classifies as Conscious products on the platform. For products to be Conscious they must adhere to one of the following criteria: be made of independently recognised or certified materials, have been created via a certified production process, be pre-owned or belong to a brand that scores at least a four (for large brands) or three (for smaller brands) out of five with ethical rating agency

Ellen MacArthur Foundation: A charity committed to creating a circular economy, which is designed to eliminate waste and pollution, circulate products and materials (at their highest value), and regenerate nature. It is an economic system that delivers better outcomes for people, and the environment. The Foundation brings together businesses, policymakers, innovators, universities, cities, philanthropic organisations and thought leaders to build and scale a circular economy. The Network comprises Members, Partners and Strategic Partners, as well as a wider community of more than a thousand organisations who are reached and engaged through specific projects and initiatives. Circular Fashion is an accompanying activity. The “Foundation” has created a vision for the fashion industry to redesign the way clothes are made and used. Our vision will require industry and government to work together. It will need significant investment, large-scale innovation, transparency, and traceability. But if we take these actions together and get started today, this new system can scale fast

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Sustainable - Sustainability: Awareness of Change and Focussed Response

Fig. 11.10  Sustainable—Sustainability: Awareness of change and focussed response

Social Addresses the social impact and associated risk from societal activities, employees, customers and communities where the organization operates: • Labour practices • Health and Safety • Community engagement; diversity and inclusion • Community relations, local economic contributions • Product-Service-Market attributes

Equality Recent global events have highlighted the need to include “equality” in the ESG topics: • Education • Adequate ongoing healthcare • Employment opportunities • Remuneration • Employee development programs • Racial and Religious preferences

Organizational and Network Sustainability; growth of revenues, profits and cash flows. Environmental Sustainability; optimal use of resources, optimizing producibility operating costs; process and component standardization, “zeroloss” . AND Economic Sustainability; business continuity, longevity, and contributions to GDP Social Sustainability; levels of employment, employee satisfaction, work/leisure balance, community commitment

Governance Addresses time and quality of decision making, governance structures, the distribution of rights and responsibilities across different stakeholder groups (primarily internal stakeholders) in the service of positive societal impact and risk mitigation: • Business ethics, data accuracy and security • Governance structure and engagement incentives • Ensuring “Stakeholder Equity” • Policies; external disclosures; position and advocacy

Environment Addresses the impact on the physical environment and the risks to an organisation and its suppliers, employees, and customers, and other stakeholder categories from: • Climate change and greenhouse gas emissions • Air pollution • Water and waste water management • Biodiversity and ecological systems • Geo-hydrology project initialisation and management

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Explore & Validate “Value Renewal” Circular Operations

Commercial Sustainability

Strategic/ Operational Cash flow

Organisational Excellence

Relevance – Opportunity Costs Are Reflected in the Choice of the Opportunity Selected and the Resource Mix Costs Applied ?

Impact Analysis

Strategic Profitability, Productivity and Producibility

Note: **Corporate Sustainability Commercial Sustainability ● Data-analytics-led-decision making ● Understanding “customer-business-logic” ● Seamless digital operating infrastructure Socio-Economic Sustainability Social sustainability focuses on improving social equality and economic sustainability aims to improve the standard of living. In the context of business, it refers to the efficient use of assets to maintain company profitability over time Environmental Sustainability ● Waste reduction ● Adopt the Circular Value Chain ● Recycling and remanufacturing ● Develop a climate change policy

Fig. 11.11  Corporate sustainability—restructuring capability responses to comply with a repositioned corporate sustainability response—organisational excellence

Impact Analysis

CapEx vs CapOpEx vs CapOptmnlEx Capital intensity Platform technology Asset ownership vs Partnership Leverage Digitisation & Connectivity

Business Model Options

Investment

Economic NOPAT Profitability Revenues less Operating costs less Tax less Cost of capital(AWACC) Equals Economic Profit (EVA)/Value Contribution

Stakeholder Priority Response Relationships

Impact Analysis

Design for: ● Long-Term/Re-Use ● Material Recovery ● Re-Use in Manufacturing ● Serviceability Support ●”Circulytics” – measures company’s entire circularity performance

Relevant Response Capabilities ● Waste reduction ● Adopt the Circular Value Chain ● Recycling and remanufacturing ● Develop a climate change policy ● Investing in environmentally sound projects ● Encourage collaborative actions within the value chain to pursue environmentally oriented projects and activities

Current Sustainability and Value Renewal

Environmental Sustainability

Impact Analysis

Impact Analysis

Impact Analysis

Corporate Sustainability**

Impact Analysis*

Socio Economic Sustainability

Creating Stakeholder Value and EESG Considerations and UNO SDIs Impact Analysis

Impact Analysis

Operational Profitability, Productivity and Producibility

*Impact Analysis: is a cost/benefit measure of the impact sustainability investment and operational costs profitability and stakeholder response– Organisational Excellence

Relevant Response Capabilities ● Data-analytics-led-decision making ● Understanding “customer-business-logic” ● Seamless digital operating infrastructure ● Procurement syndication ● Advanced manufacturing ● Invest in productivity-improvement-led projects ● Use economic profit to appraise investment and operations ● Creating stakeholder value

● Social sustainability focuses on improving social equality and economic sustainability aims to improve the standard of living. In the context of business, it refers to the efficient use of assets to maintain company profitability over time ● Creating, affordable housing, physical & mental medical support, education training opportunities ● Devising less wasteful systems: Innovating ways to reduce land use or make supply chains more efficient cuts down on the resources needed to produce a good or bring it to market. .

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Impact Analysis

247

Impact Analysis Impact Analysis is a process used to determine the criticality of business activities and associated resource requirements to ensure operational resilience and continuity of operations likely to occur during and after a “business disruption” (for example, stakeholder expectations based upon EESG and the UN SDGs). Impact Analysis quantifies the impact of conforming/responding on a specific value management activity (a producibility (end2end approach), RD&D, production, delivery and, serviceability and implementation on investment requirements and operating costs, and timeline objectives. These requirements are then used to develop strategies, solutions, and plans. Impact Analysis identifies the financial and operational impacts resulting from the disruption of business functions and processes. These impact characteristics typically include: • • • • • • • •

Lost or delayed revenue due to customer/market responses Potential revenue increases due to internal stakeholder responses Increased expenses Regulatory fines and legal fees for failure to comply to any legislated EESG/UN SDGs requirements Contractual penalties due to cancellation of supply contacts not complying with corporate sustainability specifications Brand and reputational enhancement or damage Customer churn or dissatisfaction Increase in customers attracted by compliance with EESG/UN SDGs requirements

Figure 11.11 proposes a method of applying impact analysis to sustainability options. It identifies the components of current sustainability and value renewal activities and compares these with market and stakeholder expectations of socio-­ economic sustainability, environmental sustainability, and commercial sustainability. Any significant differences should be explored using the “impacts” identified above. An important aspect of impact analysis is/are the financial, operational, and marketing implications of topics that are not currently considered and the customer and supplier relationships problems that may occur if changes are made. Impact Analysis: is a cost/benefit measure of the importance of sustainability investment and operational costs, profitability, and stakeholder response, contributing to Organizational Excellence.

References Business Roundtable. (2021, August 28). Our commitment–Statement on the purpose of a corporation. Business roundtable. businessroundtable.org Bose Corporation. (2022). Annual report. https://www.bose.com/en_us/about_bose/sustainability/ reports_and_resources.html

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Coca Cola. (2021). Environmental policy. https://www.coca-­colacompany.com/ policies-­and-­practices/environmental-­policy Ellen MacArthur Foundation. (n.d.). https://ellenmacarthurfoundation.org/ Elkington, J. (1994). Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review, 36, 90–100. https://doi. org/10.2307/41165746 Hahn, R. (2022, May 10). What I’ve learned about teaching sustainability management. Network for business sustainability. https://nbs.net/ what-­ive-­learned-­about-­teaching-­sustainability-­management/ Henisz, W., Koller, T., & Nuttall, R. (2019). 5 ways that ESG creates value. McKinsey Quarterly. Leighton, M., & Saguin, J. (2020). 19 B corps that make products we love while using their profits for good. Insider. Millar, K. (2020, December 08). The triple bottom line: What it is & why it’s important. Harvard Business School Online. Niesten, E., Jolink, A., de Sousa, L., Jabbou, A., Chappin, M., & Lozano, R. (2017). Sustainable collaboration: The impact of governance and institutions on sustainable performance. The Journal of Cleaner Production, 155(2), 1–6. Pettersson, F. (n.d.). Stena recycling. https://www.stenarecycling.com/ Whitley, A., & Lee, D. (2022). $33,000 fares put business class out of reach. Financial review. https://www.afr.com/companies/transport/33-­000-­fares-­put-­business-­class-­out-­of-­reach-­2022 0919-­p5bj6l.

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Introduction Business strategy and structure decisions are becoming increasingly holistic, the growth of collaborative networked organizations presents strong evidence of this trend. The principles and processes addressed are now being influenced by digital capability, B2B partnership and collaboration, and awareness of the importance of stakeholder influence is being identified and discussed at relevant points of the economy and the business environment, in the professional press, and among the prominent major consulting organizations. Part Two of this text explored categories of responsibility, establishing their importance individually and on an intra-­ organisational basis. Prior to doing so we considered three aspects of capability responses, the characteristics of capability responses, the details of their roles, capability response analysis and what is meant by capability response management; − how management identifies the relevant capabilities that will be required to undertake a successful response to a market opportunity and develops a plan to access the relevant responses not currently within the organisation. Core Capability Responses: The approach views the firm as a portfolio of capabilities that evolve in response to the (perceived) demands of the business environment. Response capabilities are characteristics that reflect an understanding of the marketplace, the expectations of its stakeholders and of the opportunities it offers and, therefore, the characteristics of the capabilities essential for successful engagement. The core business response capability model components are, performance (value engineering, value delivery, and the value proposition; stakeholder-­ performance expectations, fit4purpose, etc.), positioning (strategic, market and product positioning, and value chain network positioning), profitability (financial viability, sustainable economic profit, positive cash flow), productivity (total factor productivity, optimal utilization of capital, labour, materials, and service inputs, and EVA (economic value added)), producibility (the seamless intra and inter-­ organizational infrastructures of sequential processes and activities of value © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_12

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engineering and value delivery, that creates, produces, delivers and captures value), collaborative partnerships (expertise and skills of value generating employees, workplace cultures and management styles in all network partners) platforms and people (social, mobilization and learning platforms), and planetCare and sustainability (a socio-economic, responsible, use of environmental resources in creating stakeholder value, and the concerns of environmental and corporate sustainability and responsibility for employee livelihoods and investor returns). Capability Response Analysis: Is a management process that identifies the relevant capabilities that will be required to undertake a successful response to a market opportunity. The response capability approach can reinforce a market (and value chain) positioning, as well opening alternative market opportunities. The analysis is conducted and based on the expectations of potential customers in order that these are fully understood and can be used as input for planning a response. However, the vendor organization also has expectations based upon the same capability criteria (not the same characteristics), but they are determined by the expectations of the organizations’ stakeholders. Capability Response Management: Is the ability to structure, combine, and leverage internal and external resources for the purpose of creating a capability-led response to a market opportunity to create value for stakeholders by maximizing competitive value advantage. Organizational policy, not strategy, can establish prerequisites, or ground rules concerning response capability levels of response, such as a margin of the amount by which an EVA return should exceed the annualized weighted cost of capital (profitability), or perhaps the amount of incremental increase in capital intensity the organization is prepared to undertake as further investment in pursuit of an opportunity (producibility and productivity).

Revisiting Organisational Excellence Strategic Excellence goes beyond the classic approach to strategic planning, by driving effective execution of the strategy, by embedding collective ownership and organization-wide alignment into the entire process. Operational Excellence identifies and captures opportunities for organizations to grow, whether by reallocating resources to free up capital for investment, finding new sources of competitive advantage, or fully optimizing product-service portfolios. It is the thoughtful application of new technologies and capabilities that drives productivity throughout the organization and across the entire value chain, from product-service-market development and procurement to manufacturing and the supply chain to service operations to capital excellence.

Organisational Excellence Organizational Capability: An organizational capability is a company’s ability to manage resources, such as employees, effectively to gain an advantage over

Introduction

251

competitors. The company’s organizational capabilities must focus on the business’s ability to meet customer demand. Organisational Excellence is an indicator to stakeholder interests of how well strategic and operational operations are managed. Asq.org suggests this reflects the successful integration of technology, infrastructure, and personnel. This requires successful management of strategic and operational operations such as, information (metrics, measures, and decision support), structure (roles, responsibilities, and accountabilities of each functional area), people (total human capital within the organization), rewards (compensation and incentives), learning systems (knowledge and training), and work processes (interaction and linkage of workflows). Commitment to organizational change management is essential to communicate the changes in these to those employees and management affected when changes are required. Collaboration is critical, and the evidence of organizational excellence can be demonstrated across the organization with a balanced scorecard approach that covers, financial considerations, customer relationships, internal business processes, and learning and growth. This approach by ASQ (n.d.) suggests the importance of operational excellence. The successful integration of technology, infrastructure, and personnel adds a strategic aspect. See Fig. 12.1.

Organisational Excellence • Excellence led organisational culture • Leadership – a vision of excellence • Excellence focused Strategy • People employees and customers • Processes focused on excellence • Flexibility & agility • Results

Strategic Excellence • A customer centric approach • Development of capabilities • Focus on creativity and innovation • Visionary leadership • Developing system agility and flexibility to responses • Developing a Corporate Sustainability • Harnessing peoples’ talents • Consistency of outstanding achievements Strategic Operations • Assessing supply chain vulnerabilities and making recommendations for improvement • Creating and implementing operational plans for an organization’s activities, including making decisions about locations, budgets, staffing levels, and timelines • Identifying new opportunities for growth within an organization’s industry or market sector • Evaluating current operational procedures, identifying inefficiencies and making recommendations for improvement • Participating in strategic planning sessions with other members of management to discuss long-range goals and objectives • Evaluating employee performance and providing feedback to help employees improve their skills • Conducting analyses of operations data and making recommendations for improvement based on findings • Reviewing reports on supply chain activities to ensure that they meet company standards • Planning and implementing strategies for controlling costs, reducing risk exposure, improving efficiency, and ensuring regulatory compliance reducing risk exposure, improving efficiency, and ensuring regulatory compliance

Fig. 12.1  Probing aspects of excellence

Operational Excellence • Customer satisfaction • Manufacturing process design • Quality • Productivity • Efficiency • Resilience Operational Operations • RD&D Liaison • Project planning • Procurement • Manufacturing • Marketing and Sales Operations • Physical Distribution Management • Remanufacturing • Budget management

Stakeholder Management • Engagement • Communications • Consultation • Partnerships • Collaboration

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“The Future Operating Model” A dynamic business environment requires an agile response to dynamic consumers. Basili (2022) reported comments made in an Ernst and Young/MIT SMR Connections seminar featuring Parth Raval, Senior Vice President and Chief Growth Officer, PepsiCo Foods North America. Basili’s article suggested that operating models would need to move towards being: Integrated and networked organisations rather than functional silos. Future operating models should be built around integrated, collaborative interactions within companies and their external partners, rather than in functional silos. Multiple business models. Future-oriented operating models should enable organizations to explore, test, and scale a range of different business models simultaneously. The challenge organizations face is in rapidly adapting to a future that will keep changing at unprecedented rates while optimizing how they operate today. Dynamic internal and external relationships. The future operating model provides the right mix of deep expertise and cross-functional generalists. Depending upon where a company’s future value proposition lies, it may be better to outsource some skills that traditionally have been handled in-house. Adaptive and expandable scale. The future operating model will cede some control to move at the speed of the market. An approach that involves managing product life cycles from rapidly developing and launching new offerings tailored for specific markets all the way to the end of those products’ lives. A growth mindset. Today’s challenging and dynamic environment can create a culture of ‘safe’ incrementalism at best, and toxic risk-aversion at worst. A growth mindset is nurtured by creating a supportive environment where employees are encouraged to take thoughtful risks, make mistakes, and learn from them and is necessary to shift a company’s culture from a fixed ‘what-is’ to a ‘what’s-possible’ mindset. A truly agile organization is made up of individuals who are adept at thinking and behaving in agile ways. Agile innovation rather than waterfall innovation. Genuine innovation involves more than just product R&D; it also involves innovating business models, processes, ecosystem partnerships, and more. The future operating model allows the whole organism of the business to change, and to continue changing, so it can continually innovate at speed and scale.

 uilding a Capability/Organisational Excellent Based B Operating Model Capability responses would appear to be a primary concern. Given the operating model is being developed to meet identified opportunities it is essential that the strategic, market and value chain positioning requirements reflect that an understanding of the potential customers’ expectations are understood by the network organisation. For industrial markets customer profitability expectations should be identified, as should profitability expectations of the network partners, estimated market volume requirements, resources and labour time estimates will indicate

Introduction

253

network productivity, partnership and people roles and tasks can be assessed against current network capabilities and changes made if required, planetCare and sustainability expectations can be considered, platform facilities can assessed, producibility (end2end value management) can be explored, and performance options can be assessed. A capability review may identify opportunities or problems. If undertaken before expensive commitments are made alternative options to realise customer satisfaction are possible. See Fig. 12.2. Given the capability response review results with an economically feasible proposition the network coordination operations required for success are considered. In the dynamic environment posited by Basili (2022) this review is essential. Figure 12.3, network coordination operations, questions are raised such as—is the network capable of being agile and flexible, is the network connectivity capable of inter-partner data management and are the collective manufacturing facilities capable of meeting volume and timeline expectations that may be made of them. The review also questions the extent of the network’s customer centricity, of the experience and qualifications and abilities of senior management. The current product portfolio is questioned in terms of its age, its flexibility and ability to deliver the value proposition. See Fig. 12.3. Figure 12.4 asks questions concerning issues such as Integrated and networked structures rather than functional silos, and dynamic internal and external relationships. Dynamic markets may have short cycles and be populated by agile S-SMEs that operate in specialist component applications and that are not seen as long-term suppliers. Digitisation, digitalisation and connectivity needs are likely to match market needs requiring short-lead times and high levels of data accuracy. Process management is likely to vary by project and therefore, require modifications to meet product specifications. In aerospace and defence markets S-SMEs have undertaken creativity RD&D tasks for OEM customers and own the intellectual property of their product-service-markets, furthermore, some have entered aftermarket activities that have proven to be very profitable. These S-SMEs build strong relationships with OEM customers which could prove to be disruptive. This raises questions for both concerning strategic and operational asset planning and management. Network sustainability is an important consideration it concerns commercial sustainability (stakeholder longevity) as well as environmental sustainability (input resources Successful value chain positioning is dependent upon intra-network collaboration and coordination

Maximize the ‘value added’ by a network to its ‘stakeholders’ to create unique or exclusive ‘Value Advantage’ for ALL Stakeholders The fusion of design and development, of manufacturing and distribution, and of serviceability and product-service renewal activities into a seamless and continuous process to contribute to a Network Value Advantage (aka End2End production)

Positioning Performance Producibility

An understanding of the profit expectations of ALL Stakeholders is essential for profitability targets to be met

Profitability

Network Capability Response Components to Customer/Market Expectations Platform Development

The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions at scale, to achieve (E)ESG and UN SDG objectives as well as mutually beneficial commercial outcomes

Productivity

The ‘utilisation’ of relevant assets, capabilities, capacities, processes and relationships

Partnerships & People

A workable network strategy and structure that meets balanced stakeholder expectations. Staff that possess relevant skills and experience to meet current and future capabilities Organizational and Network Sustainability; growth of revenues, profits and cash flows. Environmental Sustainability; optimal use of resources, Economic Sustainability; business continuity, and longevity. Social Sustainability; levels of employment, employee satisfaction.

PlanetCare

Fig. 12.2  Building an organisational excellence-based response operating model: Identifying and developing customer/market competitive expectations

254

12  Capability Responses and Organisational Excellence • Relevant Organisation Structure • Strategic & Operational Performance • Creating Sustainable Value • Purpose, Vision & Strategy • Organisational Culture & Leadership • Leadership Performance • Employee Motivation • Engaging Stakeholders Leadership & Teamwork

Adaptable to Change

Competitive/ Market Leader: Customer Relationship Management

Network Coordination Operations

• Agility & Flexibility • Digitised & Connected • Organisational Cost Effectiveness (LT) • Organisational Cost Efficiency (ST)

• Customer Centric • Product-Service-Market Portfolio • Feasible & Deliverable Value Proposition Customer-Led Business Decisions • Driving Performance & Transformation • Match Value Proposition to Customer Product Portfolio Expectations - Fit4Purpose • Match Product–Service-Market offer to Customer Price/Value /Equality Profile

Fig. 12.3  Building an organisational excellence-based response operating model: Network coordination criteria process Cash Flow Managemen t

Investment Model

Operating NOPAT/EVA Economic Profit/ Positive Value Contribution

Network Operations Management Capabilities

Performance Management Creativity

Productive Use of Resources and Focussed Outsourcing CustomerDriven Excellence

Fig. 12.4 Network characteristics

Data Analytics & Analysis Management Positioning Strategy

Strategic & Operational Asset Planning and Management

Creative/Innovative Solutions

Profitable Revenue Growth

Collaborative Network Relationship Management

Digitisation, Digitalisation, & Connectivity

Stakeholder Value Management ((E)ESG Criteria/UNSDGs)

Business Process Excellence Management

Differentiated Product-Service-Market Portfolio Network Sustainability

Reliability: ‘Resilience Parameters’

operations

TimeLine Management: Effectiveness & Efficiency

management

Positive Value Proposition Delivery Responses

Strong Positive Reputation

capabilities: Activities

and

performance

management), and socioeconomic sustainability (EESG, UN SDGs and community welfare topics). Figure 12.5 puts the model to work. The outer oval identifies data topics and data generated. As the diagram indicates the model is interactive offering supportive information for each activity cell to ensure optimal decision making. Given the ‘reach’ of the data it can be both quantitative and qualitative. The data flexibility enables management at appropriate levels to question the efficacy of the activity (e.g., adaptable to change and the performance of the activity). See Fig.  12.5 for detail. Figures 12.6 and 12.7 illustrate current and developing detailed activity components. Figure 12.6 examples a current digitally able organisation and Fig. 12.7 is an

Customerdriven Excellence

Positioning Profitability

Leadership & Teamwork

PlanetCare

Supplier & Customer Risk Profiles Identified & Applied to Transactions

Partnerships & People

Productivity

• Primary Stakeholder Satisfaction • Secondary Stakeholder Satisfaction

• Market Position • VCN Position • Nearest Competitors

Differentiated Product-Service-Market • Fit4Purpose • Aggregate Product-Service-Market Portfolio • Return on Economic Investment • Competitive Pricing • Fit4Purpose)/Equalisation

Digital Connectivity

• Stakeholder Perceptions & Expectations • Customers Perceptions & Expectations • Public perceptions & Expectations

TimeLine Management: Effectiveness & Efficiency Positive “Price”/Time Elasticity • Time2Market • Producibility/End2End Value Activities (Creativity – Serviceability) Strong • Time4Serviceability Response Positive • Customer Oder Cycle Cash2Cash Cycle Reputation • Working Capital Cycle

Business Process Excellence Management

Stakeholder Value Management ((E)ESG Criteria/UNSDGs)

Positioning Strategy

• Customer Satisfaction • Employee Satisfaction • Secondary Stakeholder • Satisfaction

Positive Value Proposition Delivery Responses

Corporate Sustainability

Competitive/ Market Leader: Customer Relationship Management

Strong Positive Reputation • Stakeholder Perceptions & Expectations • Customers Perceptions & Expectations • Public perceptions & Expectations

Customer-Led Business Decisions

Platform Development

Data Analytics & Analysis Management

• Diagnostic Analysis • Predictive Analysis • Prescriptive Analysis

Digitisation, Digitalisation, & Connectivity

Cash Flow Management

• Planned Growth of Positive Free Cash Flow • EROI on New Projects

Organisational Excellence-Based Response Working Model

Reliability: “Risk/Resilience Parameters’

Producibility

Performance

Investment Model

• Capital Intensity • Economic Margins /NOPAT • Cost of Capital • Margin Spread • Impact on Suppliers • Impact on Customers • Impact on Investors • Value Contribution • Impact on Secondary Stakeholders

Performance Management

Profitable Revenue Growth

• Revenues • Gross Margins • NOPAT/EVA

Collaborative Network Relationship Management

• Customer perceptions • Customer retention • Customer churn

Creativity

Adaptable to Change

Strategic & Operational Asset Planning & Management

NOPAT/EVA Economic Profit/ Positive Value Contribution

Operating Margins • Procurement • Manufacturing • Marketing

Revenues NOPAT/EVA Enterprise Value MVA/

Fig. 12.5  Building an organisational excellence-based response operating model activity levels and detailed performance decisions processes

• Capabilities • Capacities • Time • Materials

Productive Use of Resources & Focused Outsourcing

Product, Industry & Global Platforms

Business Platforms • Consumer Platforms • Network Platforms • Global Platforms

Creative/Innovative

• RD&D Budget for remanufacturing/Total % • Remanufactured products/Total % • Employee satisfaction • Investor Satisfaction • Customer Satisfaction – Fit4Purpose • Aggregate Stakeholder Response

Optimal Business Model CapEx vs OpEx vs OptmnEx • Enterprise Value/MVA • NOPAT/EVA • Customer Response • Supplier Response • Reseller Response

• • • •

Introduction 255

Multiple Business Models Cyber Security Block Chain Adaptive & Expandable Scale

Sustainability Operations

Value Management Operating Model

Enterprise Resource Management Systems

“Growth-Led”

Rolling Value Proposition(s)

Organisational Excellence

Digitisation, Digitalisation & Connectivity

Advanced Analytics

Intelligent Process Automation

Primary Stakeholders Inputs

Finance & Investment Operations Activities Value Engineering & Value Delivery (Investment Effectiveness & Cost Effectiveness)

Human Resources Relationships, Strategy & Operations Activities Workplace/Technology Relationships Value Engineering & Value Delivery (Cost Effectiveness & Efficiency)

Manufacturing & Distribution Operations Activities Value Engineering & Value Delivery (Cost Efficiency)

Aspects of Organisational Excellence that are a balanced and coordinated performance of strategic and operational excellence

Strategy & Structure

Secondary Stakeholders Inputs

Sustainable Corporate Operations & Activities Socially Responsible, Environmentally Responsible & Commercially Responsible (Cost Effectiveness)

Agile/Lean Product/Process Design

Business Process Management (Outsourcing?

Network Optimisation Integrated Collaborative Network Management

Dynamic Agile Innovation

Strategic & Operations Activities: Value Proposition, Value Engineering Value Delivery & Value Renewal (Cost Effectiveness)

Fig. 12.6  An example of a current operating model. Developed from McKinsey: Based on: Bollard, A., Larrea, E., Singla, A., & Sood, R. (2017). The nextgeneration operating model for the digital world. McKinsey & Co. March 1

Cyber Security - customer & Supply Chain Security (Cost Effectiveness)

Sustainable Corporate Operations & Activities Socially Responsible, Environmentally Responsible and Commercially Responsible (Cost Effectiveness)

End2End Continuous Improvement

Governance

Serviceability Operations Activities Value Delivery & Value Renewal Options (Cost Efficiency)

Increasingly Important Activities

Marketing & Sales Operations Activities Value Proposition Value Delivery (Cost Efficiency)

Operating Model Components

256 12  Capability Responses and Organisational Excellence

Product Portfolio Management

Customer Relationship Management

Product Personalisation

Industry 5.0 People & Organisation Orientation

Value Management Operating Model

Digitisation, Digitalisation & Connectivity

Network Product-Service Portfolio Format Management

Augmented /Virtual Reality

Resilience Global Risk

Intelligent Process Automation

OEM/S-SME Relationships

Advanced Analytics

Organisational Agility/Lean: Strategy & Structure

Planned Network Revenue Growth Management

Network ‘Sustainability’ Management: Circular Value Chain

Real-Time Data Processing Performance management Network & customer operations Product-service modification & NPD GPS Physical Distribution Management Operations

‘Serviceability’ Analysis & Operations Management

Future Trend Scenarios ‘Scientific’ Organisational Change ‘New Logic’ Competition ‘Business Model Design’: The Impact of Technology ‘New Dimensional Diversity’ ‘Optimised’ ‘Social & Business Value’

Resources management Time management Capabilities management Capacity management Efficiency management

Sustainability Operations ‘Value Renewal’ Circular Operations Management

Operations Management Production Distribution Serviceability

Total Life Costs/Total Cost of Ownership Non-core processes AI , Machine Learning & Cost-efficiency improvements Diagnostic & Decision Specialist processes Making

Artificial Digital Thread & Intelligence/ Machine Digital Twinning Learning

Network Producibility End2End Value Management

Stakeholder Relationship Management

Stakeholder Governance Integrated Focused & Collaborative Platform Network Based Structures Scalability Networks Customer & Product, Process Organisation Cybersecurity Collaborative Application IP Blockchain

Smart Manufacturing Systems

Business Process Sourcing Management

ERP: Optimal Network Resources Flow Management

Marketing & Sales Operations Management

Metaverse

Human/Cobot Co-working

Network Collaborative RD&D

Ability to capture Customer requirements directly

Value Stream Mapping & Analysis

Customer Journey Modelling Search & Order Order management Transactions Product-service uses Loyalty

Fig. 12.7  The developing organisational operating model

Integration & Coordination: RD&D, procurement, operations & … Serviceabilty

Procurement and Resources Supplier availability Consortia procurement Computer based Negotiations & ordering Transactions management

Changing ‘Manufacturing’ Operations Management

Revenue Generation Management

Supplier Relationships Operations Management

Product-Service-Market Format Performance management Modification & NPD Maintenance Modification & NPD

Recent Operating Model Practice

Developing Operating Model

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example of a future operating model. Each of the models is interactive (as suggested by the overlaps) and is connected to each network partner. Ideally the model(s) will be transparent if the network is to be fully effective.

References ASQ. (n.d.). https://asq.org/quality-­resources/organizational-­excellence Basili, S. (2022, April 5). How operating models must evolve for the future. EY. MIT Sloan Management Review.

Part III The Changing Business Environment: Industrié 4.0 becomes Industry 5.0, Value Chain Management 2.0 becomes Value Chain 3.0 and Stakeholder Value Management 1.0 becomes Stakeholder Value Management 2.0

Introduction

13

Part lll, considers three important aspects of managing value adding processes that contribute via the operations model to optimising organisational excellence: the economics of network organisations, reimagining “business” cycles, and digital business model essentials. The network effect is typically defined as a product-service that when adopted by additional users reduces the total costs of the product. The cost reduction (or value added) may occur as a direct operating cost or as an investment, but it may also be responsible for adding convenience to such activities as “product-service searching and matching, ease of payment (transaction costs), or ease of production and of delivery (through digitisation, digitalisation, or connectivity). The influence of network organisations has shifted the emphasis to the economics of value added, a collective term for responding to customer expectations for adding value by the effective and efficient management of all the economics of production operations increasingly including corporate/network sustainability. This has a direct connection with network organisational excellence. Organizational economics is primarily concerned with the obstacles to coordination of activities inside and between organizations (firms, networks, alliances, institutions, and the “market” as an entity). Network organisational excellence is achieved when both customer and vendor objectives are met in an optimal solution. Chapter 14: Network Economics considers aspects of operations that create value for the initiator and other users of the initiators’ product-services. The influence of network organisations has shifted the emphasis to the economics of value added, a collective term for responding to customer expectations for adding value by the effective and efficient management of all the economics of production operations. Some of the examples in the chapter may not be immediately considered to create value added, however if we consider value delivery speed, accuracy, convenience (the use of time) and the value added they can deliver they are noteworthy. For example.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_13

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The economics of integration are in effect creating ecosystems of operational cost/investment effectiveness and cost efficiency, both are positive performance activities. The economics of coordination makes producibility/end2end value management feasible and viable. The economics of interaction offers opportunities to reduce capital intensity and, therefore, risk. The economics of transactions reduces “searching time” and facilitates making payments, which in turn enhances working capital productivity and cash flow. The economics of relationship management results from closer network connectivity resulting in faster end2end producibility and lower overall costs. The Economics of differentiation and specialisation offers product-service-market exclusivity from customisation and product personalization. The economics of complexity: the success of reverse innovation has identified the benefits of identifying the appropriate level of product-service sophistication on production costs and in market success.

The network structure has expanded the nature of organisational economics from a limited perspective, based upon economies of scale (within which the firm became volume-oriented striving to achieve its minimum cost/volume position on its long-­ run average cost curve (Chandler, 1962), to a ‘collective’ perspective based upon a notion of dispersed operations (i.e., the complete range of value creation, production, delivery, and service provision). It is no longer sufficient to be the lowest cost provider in a market but rather it is now essential to be the most effective and efficient solution provider. The Kim and Mauborgne (2004) model in which a Blue Ocean Strategy considers how to create uncontested market space and make competition irrelevant, makes the argument that value innovation is the basis of Blue Ocean Strategy. By contrast a Red Ocean Strategy is one in which an industry’s structure is such that firms are forced to be competitive with each other. We modified this approach by suggesting the attraction of low-risk projects pursued in partnership with organisations in an augmented network would appear more likely given the uncertainty of the business environment post the 2008/9 GFC, the Covid pandemic, and the 2022 inflation, a Golden Pond Strategy. This can be illustrated by the interest in the pharmaceutical industry in biosimilars; for example, Pfizer & Biocon (an Indian biotech) are working to produce ‘biosimilar’ insulin. Biocon will undertake the RD&D and Pfizer the manufacturing and marketing, an alliance that is an effective strategy and an efficient implementation of the strategy. We also consider white spaces (transforming existing markets). In Chap. 15: Reimagining “Business” Cycles, we see that the outcome of many business decisions are influenced by the Economic Cycle, a series of expansions and contractions in economic activity. This is a cycle of fluctuations in the gross domestic product GDP) around its long-term natural growth rate. It explains

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263

the expansion and contraction in economic activity that an economy experiences over time. Clearly the inclusion of the structure and changes of the economic cycle in planning and managing the cycle is important in managing the product-service-­ market activities of the value chain. It is an essential requirement because it has influence over the performance of a “product” throughout the life cycle span of the economy within which consumer spending on various “product” categories can be seen to vary. As a value chain network strategy, product life cycle management builds a coherent data structure by consolidating collaborative activities and processes, it also builds an enterprise strategy, the product engineering life cycle (PELC) operation enables networked organisations to work as a single collaborative team to design, produce, support, and retire products, while capturing best practices and lessons learned along the way. As network collaboration increases an attempt at managing the asset management life cycle becomes increasingly critical in order to optimise network costs, time and end user satisfaction by embracing End2End/Producibility network structures. All empower the individual and the network business to make unified, information-driven decisions at every stage in the combined life cycle. Structure Recession: follows the peak phase. The demand for goods and services starts declining rapidly and steadily in this phase. The traditional product life cycle is reviewed and is modified using work by Ansoff in the 1980s in which Ansoff introduced the impact of technology, and where consumer behaviour can be considered beyond the simplistic view that lecture rooms present. It is useful to consider the product engineering life cycle (operations) together with the product life cycle because it takes a realistic view of operational activities and their time spans. This considers “total performance” of the manufactured product-service-market to ensure that corporate sustainability objectives are achieved while meeting value capture objectives of the network partner stakeholders, both internal and external. Asset management has two inter-related objectives: increasing value while minimising risk. Clearly this is difficult, if not impossible. An organisational approach requires a balance between benefits (value added) and costs (the acceptable deprecation in the asset value). A key process within asset management is the understanding of asset life cycle. There are six key stages of the asset lifecycle: planning, acquisition, financing, operations and maintenance, recycling, repurposing, and reconfiguring. The Value Management Cycle Strategy. The Institute of Value Management defines the concept of value as based on the relationship between satisfying needs and objectives and the resources required to achieve them. The aim of Value Management is to reconcile all stakeholders’ views and to achieve the best balance between satisfied needs and resources. A value management cycle strategy is the networks response to a market opportunity. Any opportunity will require further analysis. In typical situations questions will be asked concerning its category, price timing, and competition, and the sales of existing organisation’s current products in the portfolio.

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In Chap. 16: Digital Business Model Essentials—despite the rapid expansion of technological applications, we see that customer centricity remains essential. Digital business models need to be aligned to people to provide solutions to their problems and needs. Solutions must be assessed as to how they impact customers, employees, business partners, society and other key interests that may be affected by digital business models. It is essential to put people (customers, employees, business partners), at the centre of the network’s technology strategy. Digital business models need to be aligned to potential solutions and how they impact. A people-­ centric approach should start with identifying and understanding key target constituencies and the journey they undertake to interact with or support your organization. Digital technologies increasingly are enabling new forms of interaction and therefore a creative approach is essential. The boundaries, methods and approaches to business are changing and demand new mindsets to innovate. Digital technologies enable new forms of interaction and therefore creative visioning, and thinking is essential. The boundaries, methods and approaches to business are changing and demand new mindsets to innovate. Response Management is of increasing concern to management when structuring a response to market-led opportunities and the business model structure that response requires. Digital business models bridge the traditional silos. Starting with a vision and industry strategy, the organization designs a value-maximizing strategy that explores the options. By leveraging business model innovation practices and realigning the value, and the service-expectations of customers, customer and partner based operating models evolve. Digital operations need to consider digitising and integrating processes vertically and horizontally across the entire network organisation, from product development and purchasing, through to manufacturing, logistics, service, and remanufacturing. There are ongoing questions an operating model needs to solve or answer. Digital business models should bridge the traditional silos. The model clearly should extend beyond customisation to include other core activities/processes that are added to the integrated and collaborative network (with the aim of developing end2end/producibility value management processes), enterprise resource management system(s) (to support the end2end value management process), and sustainability operations (to support (E)ESG and UN proposals as well as add conformance with emerging stakeholder expectations.

References Chandler, A. D. (1962). Strategy and structure. In Chapters in the history of American Enterprise. MIT Press. Kim, W.  C., & Mauborgne, R. (2004, October). Blue ocean strategy. Harvard Business Review., 76–84.

Network Economics

14

Introduction Chandler’s (1977) analysis of the development of industry in the USA identified the role of the vertically integrated business of the early twentieth century and the emphasis on economies of scale. However, Chandler did also suggest that it was the economies of speed that were more critical for manufacturing efficiency. The influence of network organisations has shifted the emphasis to the economics of value added, a collective term for responding to customer expectations for adding value by the effective and efficient management of all the economics of production operations: Economies of speed: The ability to coordinate the production sequences were more critical for manufacturing efficiency. Economies of scale: Create price advantages through ‘managed’ volume of production Note: Economies of scope involve cost savings from joint production whereas economies of scale involve efficiencies from the production of higher volumes of a given product. Collaboration curves Hagel III et al. (2010) hold the potential to mobilize larger and more diverse groups of participants to innovate and create new value. In so doing they may also reverse the diminishing returns dynamics of the experience curve and deliver increasing returns to performance instead, Hagel III et al. (2010). Economies of Scope: Exist when the cost of jointly producing a range of products (or managing a process) within one organisation is less than the cost of producing the products separately across independent organisations: tangible and intangible aspects (e.g., manufacturing & distribution and brands, RD&D and serviceability. They offer variety and choice through “product platform” design management The Economics of Learning (experience effect): The unit cost of value added to a standard product decline by a constant percentage each time cumulative output doubles. Economics of Collaboration: Collaboration curves hold the potential to mobilise larger and more diverse groups of participants to innovate and create new value over time. In so © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_14

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doing they may also reverse the diminishing returns dynamics of the experience curve and deliver increasing returns to performance instead. The collaboration curve has the potential to generate increasing returns to scale, accelerating growth for network partner organisations. Introduces the notion of design for scale effects. Hagel III et al. (2010). Economies of Integration: Cost-effective management of overhead through strategic partnering. The principle of business integration; linking isolated activities into a single, integrated system that is fast, responsive, flexible and relatively low cost, resulting in a situation in which unit costs decrease as output increases because the activities of the entire operation are either increased by optimising and “leveraging” the ownership, distribution and location of assets throughout a value creation system., or that aggregate, investment and operating costs are decreased, or that perhaps both can be realised. Economics of Coordination: Optimise the costs of transformation, transactions, and interactions throughout the value creation network (its fixed and variable cost structures) by establishing a strategy (and a structure) that ensures the tasks required for success are identified and planned, and that they are implemented and managed efficiently; coordination requires that the organisation “does the right things right”!! Economics of Interaction: The searching, coordinating, and monitoring undertaken by organisations for effective and efficient means to exchange products, services, and ideas. They occur on an intra-organisational basis as well as an inter-organisational basis. ICT developments continue to enhance the interactive capacity of industries and individual consumers such that it will create new ways to configure businesses, organisational structures and to service customers. Accordingly, it will have a major impact on the strategy, structure, and competitive dynamics of entire industries. Economics of Motivation (to commit to network membership and membership collaboration): Network structures the optimisation of resources management. Adam Smith suggested that markets are one very prominent mechanism for solving the problems that arise with the interdependencies of specialisation and division of labour. Smith was referring to end-user markets, but the comment is applicable to resource markets within networks; a well-functioning network leads to” internalisation” as interdependence implies that one organisation’s choices and actions have an impact on other network members but that it is end-user satisfaction that is the final arbiter, and this is a major influence in the price mechanism within the network structure The Economics of Transaction: Searching, coordinating, and monitoring for effective and efficient means/media to exchange products, services and ideas that maximise value added during developing specifications, searching/sourcing products & services, evaluating alternatives, negotiating with suppliers, coordinating performance commitments, monitoring performance, and supplier and customer relationship management The Economics of Relationships Management: Adding value by working with suppliers, intermediaries, and end-user customers to identify cost-efficient value delivery alternatives using collaboration through; co-productivity, co-opetition and prosumerism The Economics of Differentiation/Specialisation: Adding customer value by offering “product-service exclusivity” through customisation and “mass customisation” using a specialisation, process, and capability collaboration. Economies of Process Time Response: Product and service customisation through Deliver-­ To-­Order, Build-To-Order and Quick Response, and Cloud-Based Procurement that

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allows companies to streamline their procurement processes from supplier management to sourcing and invoicing. The economics of complexity: the success of reverse innovation has identified the benefits of identifying the appropriate level of product-service sophistication on production costs and in market success. Equally, as components in new product-service-markets become excessively complex OEMs are becoming increasingly involved with S-SMEs for ED&D and manufacturing relying on the S-SMEs’ advantageous cost structures.

The network structure has expanded the nature of organisational economics from a limited perspective, based upon economies of scale (within which the firm became volume-oriented striving to achieve its minimum cost/volume position on its long-­ run average cost curve (Chandler, 1962), to a ‘collective’ perspective based upon a notion of dispersed operations (I e, the complete range of value creation, production, delivery, and service provision). It is no longer sufficient to be the lowest cost provider in a market but rather it is now essential to be the most effective and efficient solution provider: end-user markets are product-service dominated. These may be PRODUCT-service markets, however in the New Economy many industrial markets are product-SERVICE markets: the customers are aware of product application performance but are often more influenced by service-maintenance availability rather low prices, hence the approach by major manufacturers of such products as aero-engines which are priced by the hour of serviceable use.

Golden Ponds The Kim and Mauborgne (2004) model was discussed earlier. They argued that the in “New Economy” (2000) competition becomes irrelevant. Blue Ocean Strategy considers how to create uncontested market space and make competition irrelevant. Their argument is that value innovation is the basis of Blue Ocean Strategy. By contrast a Red Ocean Strategy is one in which an industry’s structure is such that firms are forced to be competitive with each other. The authors suggest this is based firmly in the structuralist view of strategy; market structure shapes buyers’ conduct, which subsequently determines end performance. We modified this approach by suggesting the attraction of low-risk projects pursued in partnership with organisations in an augmented network would appear more likely given the uncertainty of the business environment post the 2008/9 GFC, the Covid pandemic, and the 2022 inflation This can be illustrated by the interest in the pharmaceutical industry in biosimilars; for example; Pfizer & Biocon (an Indian biotech) are working to produce ‘biosimilar ‘insulin Biocon will undertake the RD&D and Pfizer the manufacturing and marketing, an alliance that is an effective strategy and an efficient implementation of the strategy.

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White Spaces (Transforming Existing Markets) Johnson (2010) argued that every company has a discrete sphere of operation—the activities it performs well and meets customer expectations. These are its core resources—the assets, the processes, the capabilities and capacities and the creativity and over a period these become its core operating space; the activities focus the resources on specific customers and structures its relationships with its core customers. This in effect becomes its business model. As opportunities arise many fit within the model, others require a different approach with new resources and often different ways of coordinating and controlling the activities. Such changes require a review of the business model components if the opportunity is to be pursued. This is Johnson’s white space; “it is the range of potential activities not defined or addressed by the company’s current business model, that is, the opportunities outside its core and beyond its adjacencies (recent opportunities that ‘fit’ the existing business model) that require a different business model to exploit”. This is happening in PRODUCT-service markets in which the product becomes a commodity Johnson describes the problems of Hilti (handheld power tools) who in the late 1990s realised their market was being overtaken by competitive products. Hilti was a premium product in a market segment that did not identify ‘value’ as being a premium brand. Users viewed hand power tools as disposable and treated them as such; neglect decreased productivity and increased repair costs; and tool management became difficult and costly. Hilti revisited its value proposition and saw an opportunity to reposition their power hand tools as a product-SERVICE that could compete in markets on convenience. Hilti began to lease its products and the Company rather than customer maintained the product, always offering a high level of availability of reliable equipment. Johnson does not identify a partner role in this change of direction; however, it is likely that some involvement was required to finance the increased inventory and possibly a service organisation maintained the equipment. The program was very successful moving from a pilot program to being rolled out to most of Hilti’s international markets in 3 years. This example suggests that golden ponds can be as attractive as and less risky than a blue ocean strategy and requires less investment!

Network Alliances: Golden Ponds and White Spaces It is possible to draw a general framework in a digital economy context for exploring factors which are both competitive necessities and which drive competitive advantage, rather than simply relying on industry specific knowledge. This is built around management of resources and critical characteristics rather than a fascination with ownership and control. It requires more than a laundry list of short-lived attributes but recognises that critical success characteristics will change over time as value shifts. These key characteristics include the firm’s understanding of the importance and the influence of relationship management, of technology management, the creation and use of knowledge and a strategic view of process operations.

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Comments by Normann (2001) and Iansiti and Levien (2004) are suggesting that a partnership approach to opportunities that consider ways and means of adding value to a value proposition by applying an ‘outside the square’ approach may be a strategy that increases the longevity of competitive advantage and reduces the risks of innovation, of product-services and/or processes. The Nano (a small car designed and built by the Tata Group in India and priced around US$2000) is an example of a golden pond.. The Nano is a low cost/low price vehicle; Indian car sales increased by 38% in October but Nano sales were just 2% on a year-on-year basis. There were difficulties; and it was marketed nationwide, there were production problems (a dispute over where a manufacturing facility was to be built and the resultant delays once a site was agreed and in which it is planned to produce 100,000 vehicles per year) and there have been product problems (early models had problems with flames and smoke). Tata has been successful with Jaguar and Land Rover businesses, but Tata’s created a new team to approach the design, manufacturing, and distribution from an entirely new direction for the Nano. The result was a vehicle that had fewer components, fewer supplies and outsourced 90% of its components. The distribution strategy was designed around assemblers who would receive modular components and assemble the vehicles to meet end-user demand. Reports suggest this was not working as planned to suggest that the project required additional thought before implementation. Production ceased in 2018 due to poor sales and what appeared to be a lack of interest by the car purchasing public The project raises doubt concerning the efficacy of undertaking blue ocean strategies without partners who can supplement existing resource base effectively (as part of Tata strategy) and efficiently (as part of the implementation of the strategy). Increasingly business models are becoming flexible in their interpretation of the business environment. Figure one provides examples of recent collaborative developments among organisations to increase their responses to market opportunities. Much of the activity has been by companies acquiring specialists within their markets in order that they are able to offer a complete product-service range or to increase their competitiveness rapidly by acquisition rather than by organic growth (e g; Caterpillar/Bucyrus, McKersson/US Oncology, Oracle/Art Technology Group and Abbott Laboratories Piramal Healthcare). Others have achieved the same objective by consolidation through equity purchases or strategic alliances Collaboration between automotive companies has been hectic; especially in the development of EV (electric vehicle) products and infrastructure (Toyota/Tesla, BYD in China and collaboration continues in the conventional fossil fuel vehicles Renault-Nissan/Daimler).

References Chandler, A. D. (1962). Strategy and structure. In Chapters in the history of American Enterprise. MIT Press. Chandler, A.  D. (1977). The visible hand: The managerial revolution in American business. Harvard University Press. https://doi.org/10.2307/j.ctvjghwrj

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Hagel, J., III, Brown, J. S., & Jelinek, M. (2010). In S. Sitkin, L. Cardinal, & K. Bijlsma-Frankema (Eds.), Relational networks, strategic advantage: New challenges for collaborative control, in organizations: New directions in theory and research. Cambridge University Press. Iansiti, M., & Levien, R. (2004). The keystone advantage: What the new dynamics of business ecosystems mean for, for strategy, innovation and sustainability. Harvard Business School Press. Johnson, M. (2010). Seizing the white space. Harvard Business Press. Kim, W.  C., & Mauborgne. R. (2004, October). Blue Ocean strategy. Harvard Business Review. 76–84. Normann, R. (2001). Reframing business. Wiley.

Reimagining “Business” Cycles

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Introduction As a value chain network strategy, product life cycle management builds a coherent data structure by consolidating collaborative activities and processes. As an enterprise strategy, the product engineering life cycle (operations) PELC (operations) enables networked organisations to work as a single collaborative team to design, produce, support, and retire products, while capturing best practices and lessons learned along the way. Asset management becomes increasingly critical as network collaboration increases in an attempt to optimise network costs, time and End-User satisfaction by embracing End2End/Producibility network structures. All empower the individual and the network business to make unified, information-driven decisions at every stage in the combined life cycle. Figure 15.1, managing value—preserving and creating value, identifies the role of networked value organisations is to maintain the generation of economic profit by monitoring and responding to market changes such that cash flows are maintained and are sufficient to maintain total stakeholder expectations and are capable of funding new projects. Preserving value may require changes to the product portfolio (removing unprofitable value contributors, pricing adjustments that remain within customer price/value/equality acceptability, adjusting operational and financial gearing to lower risk, and reduce the number of suppliers to increase volume and reduce cost/price relationships. Creating value poses several different considerations. Researching white spaces and/or golden ponds that offer opportunities to increase profitability and productivity is an initial option. A review of performance expectations may lead to volume/ margin trade offs with suppliers, distributors and end-user customers, a review of price/value/equality acceptability in a new market (or segment) may reveal opportunities for changes in margin generation. Platform opportunities (such as those generated by Covisint and Elemica offer—procurement discounts on large volumes of

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_15

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15  Reimagining “Business” Cycles Cycle Management

Value Preservation

The Economic Cycle Operational Viability • Value Mapping /Audit • Remove inefficiencies and cost • Positive impact from Technology • Question VCN positioning

The Product Life Cycle (Marketing) The Product Life Cycle (Product Engineering) The Asset Management Life Cycle

Generating Liquidity and Cash • Reduce debt • Optimal working capital • Identify alternative (and efficient) sources of cash Financial Restructuring • Asset Management • Cap Ex/Op Ex/ Optml structure • Financial gearing • Operational gearing

Value Management:

Strategy/Structure Options • Strategic positioning • Market positioning • M&A • Operational restructuring • Product-Service-Market Portfolio strategy • VCN positioning “Multiple “ Influences • Stakeholder expectations/satisfaction • Corporate sustainability • (E)ESG and UN SDGs

Value Creation Strategic Repositioning • Strategic positioning • Market positioning • VCN positioning • Product-Service-Market Portfolio strategy Performance Management • Strategic effectiveness • Operational efficiency • Growth strategy & implementation program Asset Management • Monitor Cap Ex/Op Ex/ Optml structure • Supplier “serviceability” propositions • Capital intensity “productivity” • Working capital “productivity”

“Multiple “ Influences • Stakeholder expectations/satisfaction • Corporate sustainability • (E)ESG and UN SDGs

Ecosystems • Platform collaboration • Shared data • Joint ventures: • RD&D • Serviceability • Product-Service-Market Portfolio strategy • Opportunity/Threats analysis

Fig. 15.1  Managing value–Preserving and creating value

standard component inputs), and the repurposing of existing assets (such as GM for its initial low volume production of electric vehicles). Both preserving and creating value decisions are influenced by ongoing cyclic changes and given the constant changes occurring in the business environment considering cyclic positioning and changes has become an essential feature of value management.

The Economic/Business Cycle The outcome of many business decisions are influenced by the Economic Cycle, a series of expansion and contraction in economic activity. An Economic cycle is a cycle of fluctuations in the Gross Domestic Product GDP) around its long-term natural growth rate. It explains the expansion and contraction in economic activity that an economy experiences over time. Typically, it has six stages: Expansion; in this first stage in the economic cycle there is an increase in employment, income, output, wages, profits, demand, and supply of goods and services. Debtors are generally paying their debts on time, the velocity of the money supply is high, and investment is high. Peak: The economy then reaches a saturation point, the second stage of the Economic cycle. Maximum Growth is attained, economic indicators show no further growth, this stage marks the reversal point in the trend of economic growth. Often producers continue producing, creating a situation of excess supply in the market and prices tend to fall. With Contraction growth slows, employment falls, and prices stagnate. As demand begins to fall, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and exacerbating the downward movement in prices. Positive economic indicators such as income, output, wages, etc., consequently start to fall. Recession: follows,

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unemployment rises and the growth in the economy continues to decline, falling below a steady growth line. Trough: the economy’s growth rate becomes negative and there is further decline until the prices of material inputs, as well as the demand and supply of goods and services, contract reaching their lowest point. Individuals and businesses begin to reconfigure their finances in anticipation of a recovery. There is significant depletion of national income and expenditure. Recession: follows, the demand for goods and services starts declining rapidly and steadily in this phase. Recovery: after the trough, the economy moves to the stage of recovery. In this phase, there is a turnaround in the economy, and it begins to recover from the negative growth rate. Demand starts to pick up due to low prices and, consequently, supply begins to increase. The population develops a positive attitude towards investment and employment and production starts increasing. Individual Businesses are subject to the Business cycle to a greater or lesser extent; much depends on the industry in which they operate. Consumer “luxury” product-service-markets will usually react quicker and more actively than food production and distribution, however, the response reactions of all types of companies are influenced by the speed and extent of the recession and trough activities. Individual Businesses respond to the Economic/Business Cycle with decisions that are aimed at reducing its impact. They also experience cycles over which they have more control. Product Life Cycles (Marketing Management) influence decisions to invest in new products, expand single products into product portfolios, and expand investment in existing products and product groups. Cycles such as customer order cycles, inventory management cycles, cash2cash cycles, consumer fashion changes and procurement cycles. Operations Management is related to the marketing activity with RD&D, product prototyping, production options, serviceability support, and, increasingly with sustainability decisions. Asset Management is an area that is closely linked to both marketing and operations. Decisions on committing investment in both tangible and intangible assets are clearly related to both marketing and operations management areas. Asset Management decisions have been strongly influenced by marketing and operations forecast outcomes, capital resources and management capabilities. Clearly, a Business is more strategically effective and operationally efficient when it can synchronise decision making across its activities. This becomes more important for networked Business activities. The role of digitisation, digitalisation, and connectivity (major “components” in transforming manufacturing operations) has resulted in connected manufacturing by delivering real-time operating data to both the operating organisation, its partners, and the equipment supplier. This has enabled operators to respond rapidly to performance data and suppliers to offer corrective and preventive maintenance requirements. What appears to be emerging is another convergence, one in which the once individual product life cycle, the product engineering life cycle, and the asset management cycle are “converging” into a value management cycle. We continue by exploring the development activities in the product life cycle, the product engineering cycle, the asset management cycle, to produce the Value Management Cycle.

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The Changing Characteristics of the Product Life Cycle (PLC) The traditional product life cycle model was useful for considering alternative strategic (and operational) marketing opportunities and responses. Fig. 15.2 provides an interesting and understandable perspective of marketing’s role in an organisation. And of its relationship with the finance activity. Ansoff (1984) updated the PLC model, offering a more realistic view. See Fig. 15.3. Ansoff argued that demand for $ Revenue/Costs

Revenues

Costs Net Cash Flow

Saturation/Maturity Net Cash flow +

Growth Introduction

Decline

0 Time Net Cash flow

--

Fig. 15.2  The traditional view of the product life cycle

Sales Demand life cycle

Demand technology life cycles Frequency of development increases … … But their effectiveness is short-lived as technological developments accelerate

Time

Fig. 15.3  The demand life cycle and demand technology life cycles respond to ongoing technological development

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a product-service is ongoing—in other words end-user product needs remain unchanged—we continue to ‘count and calculate’, and many other activities; what has changed is the ways and means of achieving the outcomes. Ansoff argues that it is technology that had provided faster, more accurate means for conducting these tasks; calculating ‘technology’ has moved along from the 4000  BC “digital technology” of using fingers, to the abacus, and on to various mechanical applications, electronic dedicated equipment, to dedicated computer software applications. Technological development has accelerated, and Fig.  15.3 indicates this by the decreasing distances between the DTLC (demand technology life cycles). Fig. 15.4—adds to the Ansoff concept. Within each DTLC applications life cycles can be observed. The technology of the DTLC provides a basic, underlying technological capability that can be applied to a range of product-services; for example, mobile cell phones, audio-visual products, the miniaturisation of the processes introduced by the ‘application technology’ to expand its uses (the Sony Walkman and mobile entertainment) in the 1970s and 1980s. Another “application” has been the adaption of military technological hardware for consumer markets; ABS automobile braking systems and global positioning systems are two of the high-volume applications. Within each applications cycle, organisation cycles, identify opportunities within market segments using the application technology; the benefit that value chain networks offer is that to compete no single organisation necessarily needs to have the specific resources, these can be identified within other companies and successful partnerships forged. Minelab a subsidiary company of Codan an Australian technology-based organisation is an example of how the technology of metal

Sales

Demand life cycle Strategic Business Areas Demand Technology life cycles (Strategic Business Area)

Applications life cycle

Organisational Product-Service Life Cycles

Applications life cycle

Organisational Product-Service Life Cycles

Time

Fig. 15.4  Applications life cycles utilise the “technology” theme provided by the demand technology life cycle, organisations produce specific product-service-market applications

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15  Reimagining “Business” Cycles

Sales

Demand life cycle

Organisational Product-Service Life Cycles

Maturity Commoditisation Imitation

Innovation

Demand Technology life cycles (Strategic Business Areas)

Applications life cycle Organisational Product-Service Life Cycles Time

Fig. 15.5  Applications life cycles utilise the “technology” theme provided by the demand technology life cycle, organisations produce “differentiated” branded applications

detection can be converted into a viable product using the resources of partner organisations to manufacture the product. Figure 15.5 illustrates the innovator and imitator activities and influences. Innovators’ cycles are characterised by new product-service and/or process technologies. They expand applications, and the more innovative among them look at “reverse innovation” or “frugal or reverse innovation” opportunities to re-engineer their product-services to meet specific ‘local’ requirements. The examples of General Electric in healthcare and Panasonic in domestic consumer durables have been successful in this approach. Imitators can compete by developing genuine short-cuts (product-service process development), by reducing the ‘service content’, identifying a segment that will enable a low cost/high volume manufacturing model. Fig. 15.6 demonstrates that this is feasible in situations where innovators have created awareness of product-­ service applications (an 80/20 approach) and the imitators develop re-engineered low-cost versions that have less features and lower after-sales support. The innovators’ response is to enhance the offer by adding features (product enhancement— increase product capabilities/features) or increasing the service available (by repositioning using a product-SERVICE strategy) and or work with new distribution/service partners. Product-service commoditisation is an increasingly common characteristic in both B2B and B2C markets. For example, laptop/notebook computers have become commodities. There is fierce competition at low price ranges reflected in the fact that Walmart and other large retail multiples, (imitated by Aldi a German based focused FMCG, off-centre, retailer) are offering them in their non-food ranges. Figures. 15.7 and 15.8 illustrates the impact of commoditisation. Initial innovation positions the product as a PRODUCT-service as it offers new solutions to ongoing problems by improving productivity either by increasing performance (solution

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Sales

Applications Life Cycle

Demand life cycle

Demand Technology Life Cycle

Imitator individual product life cycles hProcess technology developments hProduct/process ‘copying’ hCost/volume operations hFeatures rationalisation (80/20)

Innovator product life cycles hNew ‘technologies’ hProduct & process innovation hNew product development hExpand applications hProcess innovation hReverse innovation

Response to Imitation

PRODUCT-service/product-SERVICE (alternative strategies) ● Product enhancement (increase product capabilities/features ● Reposition using a product-SERVICE strategy ● New distribution/service partners (to enhance service offer by adding advice, purchasing convenience e.g.,online procurement) Time

Fig. 15.6  Innovation responses to imitation in the product-service life cycle

Sales

Demand life cycle

Applications Life Cycle Maturity

Demand technology life cycle

Commoditisation

Imitation

Innovation

Organisational Product Life Cycles

Time

Fig. 15.7  Innovation decision and imitation and commoditisation responses in the product-­ service life cycle

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15  Reimagining “Business” Cycles The Strategic Business Area is being extended by adopng a new power train concept which may be an aempt to remain within the exisng SBA but events so far suggest a new SBA is emerging Strategic Business Area (1)

Growth

Demand Technology Cycles

Serviceability-led “Rolling Value Proposions” For example electric vehicle replacing internal combuson engine powered vehicles

Revenues and Costs

Innovators (2) Collaborave Innovaon

Revenues

product-SERVICE – Serviceability Innovaon Acvies

Costs Net Cash Flow

Applicaons Cycle (1)

Innovators (1) PRODUCT-service Product Innovaon Brand PLCs

Network Organisaon Partner Integraon Applicaons Cycles

Data-led Rolling Value Proposions product-SERVICE - Asset Management - Hil, Rolls Royce Aero Engines, Boeing product-SERVICE – Performance Management Siemens, GE, Bosch product-SERVICE – Soluon Provider Collaborave RD&D: S-SMEs & Assemblers) Applicaons Cycle (2)

Brand PLCs

Brand PLCs

Time

Fig. 15.8 Plotting competitive value strategy in a servitised product life cycle i.e. the product-SERVICE

accuracy, reduced processing time, adding application processes etc); or by reducing ownership/acquisition costs. Eventually these product and service features become competitive necessities and, furthermore, there are usually a number of ‘imitator’ versions available. The innovator response is to reposition the problem-solving characteristics and to emphasise the product-SERVICE aspect of the offer. The example of Hilti (a manufacturer of high-quality construction industry hand tools faced competition from imported low-cost competitors. Hilti changed its value proposition from a PRODUCT-service offer to a product-SERVICE offer, the value proposition became focused on the product output capability and a strong product support service) and for IBM as suggested by Fig.  15.8, commoditisation leads to competition from expanded uses, increased imitators, price-led differentiation, mass distribution and typically lower levels of service. Process innovation adds low cost/high volume competition and limited features. As suggested by Fig. 15.9 imitator competitors can (and do) offer credible ‘low-­ cost alternative products’—if not service; and this offer has appeal to a number of those customers for whom commoditisation suggests that products become disposable items of limited lifespan with no service requirements and (in B2B markets) are typically costed against the job. Innovators may find new applications for their product-services; for example, soft drinks/bottled water processors have expanded their markets by varying pack sizes and volumes, distribution innovation (vending machines), event promotions (sponsorship of sporting and other events). These opportunities should be identified by ongoing marketing research with existing and potential customers. Eventually the innovator response accepts that product-service applications reach maturity and focus on a product-SERVICE marketing strategy. Awareness of the inevitable change in market conditions offers advantages. Often the ‘SERVICE’ content of the offer is handled by network partners and successful organisations are aware of the

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279 PRODUCT-service De-commoditisation • Mineral water – pack size and location availability. Coca-Cola • FMCG internet shopping and home delivery. Major FMCG Retailers • Personalisation – Mass Customisation/ Customisation

PRODUCT-service - Value Migration PRODUCT-service - Reverse Innovation

Strategic Business Area(2) Demand Technology Cycles

PRODUCT-service - Commoditisation

Strategic Business Areas (1) Demand Technology Cycles

Growth

Revenues and Costs Innovators (2)

Applications Cycle (1) Applications Cycle (2)

Applications Cycle (1)

Innovators (1)

Imitators (1) Product Imitation

Innovator Response Commoditisation: Dell/Walmart Innovator Response Reverse innovation: GE, Panasonic Lifestyle Branding /Golden Ponds– Accor Hotels Innovator Response De-commoditisation. • Mineral water – pack size and location availability. Coca-Cola • FMCG internet shopping and home delivery. Major FMCG Retailers • Personalisation - Customisation

PRODUCT-service Product Innovation

Brand PLCs

Applications Cycle (1)

Brand PLCs

Brand PLCs

Time

Fig. 15.9  Plotting competitive strategy in a revised product life cycle

types of changes that will occur in their markets. Vendors that consider their customers’ value-in-use profiles are quick to seize upon the opportunity of adopting a product-SERVICE strategy, one in which there can be economies of scale and therefore shared cost benefits with major customers. This may result in a manufacturer developing a division (or subsidiary company) to offer a service facility to customers. Rolls Royce (Engines) and Boeing Aircraft have done this in both commercial and military aerospace markets. Its commercial value proposition offers users a global routine service facility; working with its airline customers it can position parts inventories in locations where aircraft service requirements become due, this may relieve the customer of planning both flight and servicing schedules so that they coincide. The defence service operates in a similar manner, and it can be argued they may have more significant needs and outcomes. As commoditisation becomes significant, a PRODUCT-service strategy based upon reverse (or frugal) innovation is pursued. General Electric reported success with its “15/50” reverse innovation strategy in healthcare equipment (Immelt et al. 2009). A cautionary note: traditionalists may be resistant to a 15/50 solution in some applications. While this may not be critical (to patient care as opposed to medical practitioners’ incomes) it may have an impact that is of healthcare relevance and as such should be an important consideration in market information building. Value migration reflects the need to respond to shifts in customer value expectations and to changes in Business model structure. Both influences are becoming “predictable” in the sense that the application to strategic network planning, industry value drivers (the integrated and coordinated management of knowledge, technology, relationship, and process developments), of complementors and enablers is becoming more commonplace and as such equip innovative management to be more aware of changes in their business environment and of the evaluation of opportunity. An example of a shift in customer value expectations was given by Grobart (2010) describing the rapid growth in cell phone applications, specifically the

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addition of camera applications. One of Grobart’s respondents suggests that since this occurred sale of ‘point-and-shoot’ cameras have stagnated. Smartphone sales in the United States continued to increase; unit sales of point-and-shoot cameras fell nearly 16% from 2008, according to the market research firm NPD Group. That corresponds to a decline of 24% in dollars, to $1.9 billion, from $2.4 billion. This is an example demand technology life cycles influencing customer value expectations with constant innovation within the demand technology life cycles and the applications cycle. The most notable changes in Business model structure are possibly from Dell computers whose direct selling model based upon platform technology and “build to order” permits mass customisation to deliver choice to end-user markets. Dell’s Business model changed to meet the challenge of commoditisation as large multiple retailers began to sell computers in their non-food merchandise ranges. Finally, we consider scalability and extendibility into the organisational brand product life cycle. Fig.  15.10 identifies a successful PRODUCT-service that has been extended in the market by monitoring value migration, in this instance the changing patterns of consumer behaviour, that is suggesting that continued success can be realised by making the product increasingly meeting specific customer needs. It is likely that at PLC 2 some success at scalability could be achieved by attracting customers using other brands to purchase what is positioned as faux specific. However, beyond PL2, it is unlikely that these customers will buy into the PL3 and PL4 offers because of their price/value/equalisation evaluation. Cost and cash flow profiles are suggested. It is essential that both are explored closely with accurate forecasts of each being used for decision making.

The Product Engineering Life Cycle Product Engineering Lifecycle Management (PELM) is the process of managing the entire lifecycle of a product from its inception through the engineering, design and manufacture, as well as the service and disposal of manufactured products.

$ Revenue

Investment to extend market attractiveness of PRODUCT-service value migration through scalability and extendibility of technology through Asset Performance Management

Revenues

Demand Technology Cycle

Fixed & Variable Operating Costs

Net Cash Flow

? PLC 4 Personalisation

Saturation/Maturity

Net Cash flow +

PLC 3 Customisation PLC 2 Mass Customisation

Strategic Business Area

Net Cash flow + PLC 1

Scalability: is the property of an operating system to handle a growing amount of work by adding resources to the system. In an economic context, a scalable business model implies that a company can increase sales given increased resources Extendibility: the operating system is capable of modifying a product-service to undertake further (related) tasks

Brand PLC Variants and Extensions: Product-service range of applications “serviceability” and franchise operations

Growth Introduction 0

Costs Fixed & Variable Operating Costs

Decline

Time Net Cash flow --

Fig. 15.10  Designing scalability and extendibility into the organisational brand product life cycle

Introduction

281

PLM integrates people, data, processes, and Business systems and provides a product information backbone for companies and their extended enterprise, Kurkin and Januška (2010), CIM Data (2012). Product lifecycle management or PLM is an all-encompassing approach for innovation, new product development and introduction (NPDI) and product information management from ideation to end of life. PLM Systems as an enabling technology for PLM integrate people, data, processes, and Business systems and provide a product information backbone for companies and their extended enterprise. Through their ability to integrate all product related data and processes and to eliminate boundaries in the value chain, PELM Systems can significantly reduce non-value-added activities and enable stakeholders to collaborate in real time using a consistent set of information throughout the entire product lifecycle. Product lifecycle management (PLM) should be distinguished from ‘product life-­cycle management (marketing)‘(PLCM). PLM describes the engineering aspect of a product, from managing descriptions and properties of a product through its development and useful life: whereas PLCM refers to the commercial management of the life of a product in the Business market with respect to costs and sales measures, Shete & Mishra (2017) (Introduction of PLM—IJESRT 2017). There are several life-cycle models in each industry to consider, most are rather similar. One possible life-cycle model; is described below while its emphasis is for hardware-oriented products, similar phases would describe any form of product or service, including non-technical or software-based products. The manufacturing cycle below is a typical example: Phase 1: Strategic Management Market Opportunity Considerations Strategic “Fit”? Evaluate the organisation’s capability(ies) to manufacture, market, distribute, “service”, and “renew” the proposed product-service-market. Specify, Review network strategic growth expectations Plan, innovate, implement. Phase 2: Initial RD&D Activity and Network Portfolio Fit and Production Cost/ Effectiveness Detailed review of existing customer fit. Explore potential customers and “closeness” of “fit”. Review marketing capabilities. Produce draft value proposition. Evaluate network partner and customer reactions. Phase 3 Production/Manufacturing Management Detailed evaluation of capability requirements “owned”, and accessible. Explore availabilities of capabilities not available within the organisational network. Assuming capabilities can be accessed, resolve applications issues. Design a cost-effective production, delivery, serviceability, value renewal. Confirm, develop, test, evaluate and analyse. Phase 4: Design Evaluate Prototype Describe, define, develop, test, analyse and validate, product and process prototypes. Evaluate, confirm product specification, evaluate production options, roles of S-SMEs. Phase 5 Realisation Manufacture, make, build, procure, produce, sell, and deliver, service. Evaluate feedback from end users, distributors, and serviceability organisation. Operate system, evaluate, change, confirm. Phase 6: Reliability and Seviceability Use, operate, maintain, support, sustain, phase-out, retire. Review performance, revise specification.

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Phase 7: Corporate Sustainability Recycle and remanufacture, disposal. “Value Renewal”, Circular Operations Relationships Management. Phase 8: Value Capture Network and partners Value Contribution objectives met. Customer satisfaction is positive. Value Delivery System successful.

Figure 15.11 details a modified version of the activities of a PELM. The headings of the eight phases are used to identify the connectivity (and the sequential interactivities) of individual process activities that combine to create a product-­service-­ market. It enables the increasing social and regulatory need to consider “total performance” of the manufactured product-service-market to ensure that corporate sustainability objectives are achieved while meeting value capture objectives of the network partner stakeholders, both internal and external. Figure 15.12 represents the objective of senior marketing and production management—a coordination of their separate activities into a response that creates “total” stakeholder satisfaction. Fig. 15.12 expands the detail in Fig. 15.11 to show the interconnectivity that is required from production and marketing management to meet the joint activity required.

Asset Life Cycle Management The Asset Management Council defines asset management as: The life cycle management of physical assets to achieve the stated outputs of the enterprise. This definition specifies a focus upon the delivery of a stated capability in which assets play a key role, and in which the Business must manage its physical assets commensurate with the Business need for that capability. Thus, the definition is concerned with short, medium, and long-term considerations from the conception of the asset’s need, through its complete operating life, all the way until its disposal phase. This definition also defines the boundaries of asset management and differentiates it from other key management processes (Asset Management Council). Asset management has two inter-related objectives: increasing value while minimising risk. Clearly this is difficult, if not impossible. An organisational approach requires a balance between benefits (value added) and costs (the acceptable deprecation in the asset value). For example, inventory availability is linked to customer service relationship management and the level of additional business this will attract, however, high fashion products and fresh food inventories are subject to rapid decline in dollar value very quickly and the balance between benefits and costs requires understanding and careful calculation. The benefits and costs of investment in new market ventures require careful due diligence. Asset Life Cycle Management is the process by which the optimization of profit generated by the assets is kept by the organization throughout its life cycle and should address all the stages of an asset’s life cycle regardless of their scope, opportunity, scale, or industry.

Fig. 15.11  The product engineering life cycle: identifying activities

• Network Collaboration • ESG Performance

• Distributor Services • Distributor (Margins, EVA) • Serviceability service

Market test and evaluate the prototype Make performance and/or cost modifications Test and evaluate – adjust? Confirm the design and the Value Proposition

Corporate Sustainability Value Capture

Total Stakeholder Satisfaction Realised

• “Circular Operations” : • Organisational issues • Investment requirements • Cost & availability of capital • Risk & opportunity costs. • Customer impact

Corporate Sustainability EESG criteria UN Sustainability goals

Manufacturer Expectations • Objectives achievement: • Market share/Customer Satisfaction • Operating costs • Financial returns ∑Network Value Contribution

• Product-Service format? Customer Performance Expectations • Remanufacture “IP” • Installation requirement? “Fit4Purpose” Specification core components? • Training? • Global operations • Location of plant? • Performance management • Product-Service applications Connectivity? • Reliability • Predictive maintenance? • Price/Value /Equality • Deployment? • Serviceability specifications • Accessibility? • Capabilities utilisation • Service Parts – Range availability? • Capacity utilisation Locations?

Reliability and Seviceability

Product-Service-Market Distribution & “Serviceability” Performance management • Predictive maintenance • Digital updating/modifications • Service parts availability • Capacity utilisation

• Consumer promotions on social media? • On-Line B2B Customer promotions and sales? • Search and Order? • Order management? • Payment programs and intermediaries ?

Procurement Production Operations Components – Modules – Assembly Review CapEx or OpEx structure options: •Time2build Network Response •Investment/Leasing costs • Partnership opportunities •Real speed2market •Competitor activities

•JIT, JIT2 and Just in Sequence? •VMI, Zero-inventory? •3D/4D Printing Services?

“Solutions”? •“Multi-modal plant flexible factories”? •Digital/Additive manufacturing? • Project/Job? •Batch? •Flexible manufacturing? •Agile manufacturing? •Production Line and Process Flow? •Scale? . Specialist SMEs?

• • • •

Realisation & Communication Marketing Communications and Sales Activities

The Product Engineering Life Cycle Identifying Activities

Initial RD D Activity Production/Manufacturing Management and Network Portfolio Fit Design Evaluate Prototype

Value Capture

“Sustainability”

“Serviceability”

Distribution

Production

Manufacturing Processes

Process Design

Prototyping

Detail Design

Concept Design Management

Strategic Management Market Opportunity Considerations

Introduction 283

Detailed Design

Prototyping

Production Process Design

Manufacturing Management

Physical Distribution Planning and Managing Management Installation and Serviceability Support

Sustainability Management Value Capture

Total Value Capture

Design for Remanufacturing - Repair-reuse-recyclability, remanufacturing, repurposing. Environmental, Social, and Corporate Governance (EESG)l Sustainability – “Total Stakeholder Value”, Design for Value Renewal. Design product-service portfolio for longterm uses. Design for materials recovery. Design for serviceability support. Design for remanufacturing and/or repurposing. Product-service retirement programming

“Serviceability” Agreements. Digitisation and Connectivity. Real time performance monitoring using digital thread and twinning. Predictive maintenance programs. Digital performance management modifications. Predictive Maintenance - using real-time performance management data. Digital – enabled product modifications

“Pull” oriented distribution systems. Digitisation and Connectivity AI initiated automated replenishment. RFID Inventory Management. JIT, JIT2 and JISequence Systems. VMI, Zero-inventory. Blockchain. 3D/4D Printing Services where cost-efficient. GPS - managed deliveries

Planning processes and specifying manufacturing facilities. Producibility –end2end product and process design. Digitisation and Connectivity. Integrated and Collaborative Network Structures. Business Process Outsourcing. Operational and Strategic Partnerships. Automated sourcing and procurement. Web portals. SRM & CRM integration. Collaborative sourcing and procurement processes. Agile/Lean Product/Process. Intelligent Process Automation. Design Component manufacturing - Tier 2, Module assembly – Tier 1. Integrated and Collaborative Network Structures. Augmented reality, Cobot and M2M and M2P. Robotic Process Assembly Automation

Customer Performance Value Drivers and Value Builders, Real-time data. Digital Threads and Digital Twinning. Customer Journey/Experience Modelling and Simulation. Additive Manufacturing. Network Partner Collaboration. Product-Service Portfolio Planning. Collaborative RD&D. Product-Service Portfolio Formats

Advanced Analytics. Digitisation and Connectivity. AI and Machine and Deep Learning. Connected Real-Time Access

Concept Development

Fig. 15.12  Combining the product life cycle with the product engineering life cycle (operations)

Value Capture

Sustainability Operations “Value Renewal” Circular Operations

Predicted Maintenance Programs

Performance Management

“Total Serviceability” Operations

Distribution and Installation Operations Activities

Manufacturing: Procurement and Production Operations: Components – Modules – Assembly - Services

Profile Customer Expectations/ Performance Criteria. Develop the Product-Service Format Profile, Value Proposition

Strategic Operations Product Life Cycle – Strategic Marketing

Opportunity Searching, Identification, Analysis, Evaluation and Decision Product Value Life Cycle –

Opportunity Searching, Identification, Analysis, Evaluation and Decisions

284 15  Reimagining “Business” Cycles

Introduction

285

A key process within asset management is the understanding of asset life cycle. There are six key stages of the asset lifecycle, which this section will classify and describe. The key stages of the asset lifecycle are: Planning: Planning is the first stage of the asset life cycle. This stage establishes and verifies asset requirements. Establishment of asset requirements is based on evaluation of the existing assets and their potential to meet service delivery needs. Identification of management strategies is required to include and analyze the need for an asset. Throughout all stages of planning, it is crucial to make sure that the ongoing development adds value to the organization. Managerial accounting techniques, measuring, analyzing, interpreting, may be helpful to senior management who, armed with marketing information are likely to take an overall view of the value on new investment versus repurposing in the pursuit of an organization’s goals. Acquisition: Taking the best decision on choosing the best option can only be made after defining the cost and the requirements. The choice will be the phase of further planning, the acquisition planning. The acquisition planning includes activities involved in purchasing an asset with the aim of ensuring cost effective acquisition. This covers activities such as designing and procuring an asset. Appropriate application of these activities guarantees that the asset is fit for use. Financing: The high-cost capital products became a major problem for organisations in capital intensive industries. Purchasers were experiencing increasingly competitive markets. Increased market competition requires increased expenditure in intangible assets. Aware of this problem major capital products developed a value proposition offering “payment of the product output, “power by the hour”. See GM example below. Operations and Maintenance: The operation and maintenance stage indicates the application and management of an asset, including maintenance, with the aim of delivering relevant product/services. The plan of asset management should have a high focus on asset maintenance issues. Throughout this time, the asset should be focused on appropriate maintenance, monitoring and potential improvement to overpass any adjustment in operational requirement. Recycle/Repurpose/Reconfigure: Networked organisations can reconfigure retired production units to become competitive when introducing new product concepts; for example. This can be a difficult decision as “new technology” (digital thread/ digital twinning) may have a significant impact on operating and maintenance and support costs, and production volumes may differ markedly. At certain times within the economic/business cycle recycle/repurpose/reconfigure becomes a significant option and it requires serious consideration. General Motors resurrected a “retired” manufacturing facility to produce an electric vehicle (the Bolt), other benefits were also realised and applied: GM can spread costs and revenue over a fleet of about 40 vehicles and four separate brands. It buys parts by the trainload and sourced parts and engineering solutions from across the

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company. The Bolt's gear-selector comes from Buick. The rear-view mirror, which is essentially a camera most of the time, is courtesy of Cadillac. GM didn't need to go on a building spree either. It's had an assembly plant outside Detroit since 1983, and it's been building Chevrolet Sonics there for five years. Batteries, meanwhile, are just another part that can be outsourced. GM was able to source its power-packs from LG Chem in Korea. See

Fig. 15.13. (AFR 20 December 2016) This automotive industry example suggests asset management repurposing is contributing to strategic issues by matching asset resource capabilities to current opportunities with long-term prospects: Disposal: When an asset reaches its end of a useful life, (i.e., no other purpose can be found) it can be treated as a surplus, or otherwise is considered as an underperforming asset. Disposal should be treated from the perspective of the effects of the decision on service delivery and any departmental responsibilities. The asset management cycle is described by

Figs. 15.14 and 15.15 describes the extended process required when serious consideration is given to a recycle/repurpose/reconfigure alternative. Whole-life cost analysis: is the total expense of owning an asset over its entire life, from purchase to disposal, as determined by financial analysis and management accounting analysis It is also known as the life-cycle cost, the lifetime cost. Whole-life cost includes purchase and installation, design and building costs, operating costs, maintenance, associated financing costs, interest, costs (cost of capital required in the calculation of EVA, value contribution), and disposal costs. Whole-life cost also considers certain costs that are usually overlooked, such as those related to environmental and social impact (for example EESG/UNSDGs) factors. Whereas several options may be portrayed as beneficial for the environment, a whole-life cost analysis allows a determination of whether one solution carries a lower or higher environmental cost than another. The data is useful in considering a recycle/repurpose/reconfigure alternative.

Economic Return Capital Required

“Bolt” Economies of Scale – EV vehicles

GM ∑ Plant Economies of Scale. Conventional IC vehicles

Repurposing Retired Assets/ Facilities Capacity $ thousands

Capacity $ millions

Fig. 15.13  Asset repurposing: GM’s bolt—using an existing a repurposed facility

Anticipated Economic Return/EVA Impact from Project

Financing

Operations

Low

Moderate

High

Recycle Investment Repurpose Risk Renew Profile New Purchase

Recycle/Repurpose /Renew New Life Whole Cost

Acquisition

Fig. 15.14  Asset life cycle management decisions

Network Asset Investment Concept Design

Planning

Low

Moderate

High

“Funding” Options and Economic Returns on Capital

Maintenance and Support

Whole Life Cost

“Funding” Option Selected

Network Economic Return EVA

Value Capture

Comprehensive asset portfolio management, rigorous project execution, and effective and efficient asset management practices help deliver desired outcomes

Asset Lifecycle Management (ALM) is the process of optimising the profit generated by assets throughout their lifecycle

Regenerate/Repurpose Costs? . Disposal of Obsolete Plant and Equipment Income?

Convert to a variable cost that requires payment for delivered performance

Network Leverage

Share Issue

Debt

Internal Retained Earnings Cash flow

Disposal

Not Met

Declining

Met

Introduction 287

Anticipated Economic Return/EVA Impact from Project

Financing

Low

Moderate

High

Investment Risk Profile Low

Moderate

High

“Funding” Options and Economic Returns on Capital “Funding” Option Selected

Disposal?

Regenerate/Repurpose Costs?

Convert to a variable cost that requires payment for delivered performance

Network Leverage

Share Issue

Debt

Internal Retained Earnings Cash flow

Enhanced Maintenance Support Funding for Repurposing

Disposal?

Or

Repurpose

Or

Payment for delivered performance an operating “service” cost

Or

Payment for Hardware. Budget Internal Maintenance Costs

Finance Proposal

Commission Contract/ Repurpose

/Finance Options Decision ? Revenues from Disposal ?

Whole Life Cost

Acquisition New Dedicated Plant/Repurpose?/

Fig. 15.15  Asset life cycle management decisions (repurposing plant and equipment)

Network Asset Investment Concept Design

Planning

Asset Lifecycle Management (ALM) is the process of optimising the profit generated by assets throughout their lifecycle. Comprehensive asset portfolio management, rigorous project execution, and effective and efficient asset management practices help deliver desired outcomes.

Network Economic Return EVA

Decision

Not Met

Declining

Met

Value Added

288 15  Reimagining “Business” Cycles

Introduction

289

The Transition of PRODUCT-service-market to Product-SERVICE-market: an asset management approach—procuring asset output as a variable cost Until the early 1900/2000’s expensive capital equipment was purchased from suppliers and supported by additional service agreements. This model required the equipment purchasers to commit to large and lengthy investment programs and to service support. Suppliers of high-cost capital products became aware of the problems customers were experiencing in increasingly competitive markets. Increased market competition requires increased expenditure in intangible assets such as brand building/reinforcement, and related customer-care services. The capital commitment in tangible assets (e.g., aircraft engines) and maintenance programs impacted profitability. Insightful organisations (e.g., Rolls Royce Aero Engines developed “TotalCare” programs that retained ownership of the engines (for Rolls Royce) and guaranteed continuity of serviceability by contracting to undertake maintenance. TotalCare relieves the equipment user of ownership and of managing equipment availability; it enabled them to invest in intangible assets closer related to building profitable Businesses and to have more control over the Asset Life Cycle. The PRODUCT-service becomes a product-SERVICE The changing behaviour of users’ application of product-services is a significant aspect of value migration. A “PRODUCT-service” is a predominantly tangible product that provides a “hardware” solution to a customer problem and is clearly applicable to both B2B and B2C market sectors. As competition intensifies, the service content of the package can become a critical factor in vendor/customer relationships and at a particular time (or situation) in the relationship the PRODUCT-service becomes a product-­ SERVICE. Johnson (2010) describes the problems of Hilti (handheld power tools) who in the late 1990s, realised their market was being overtaken by competitive products. Hilti was a premium product in a market segment whose customers did not identify ‘value’ as being a premium brand. Users began to view hand power tools as disposable and treated them as such; neglect decreased productivity and increased repair costs; and tool management became difficult and costly. Hilti revisited its value proposition and saw an opportunity to reposition their power hand tools as a product-SERVICE that could compete in markets on convenience. Hilti began to lease its products and the company rather than customer maintained the product, always offering a high level of availability of reliable equipment. Johnson (2010) does not identify a partner role in this change of direction; however, it is likely that some involvement was required to finance the increased inventory and possibly a service organisation maintained the equipment. The program was very successful moving from a pilot program to implementation in into most of Hilti’s international markets in 3 years. Vigilant market observation of value migration (which is precisely what the Hilti example is about) the shift in the value proposition from PRODUCT-service to product-SERVICE can be planned and, if required, provides time for partner organisations to be located and into the new value offer. Digitisation and connectivity applications such as digital threads digital twinning have enabled the serviceability concept to operate in real-time. Real-time performance management leads to increased productivity throughout the value chain.

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Furthermore, the application of real-time equipment performance data (within a digital twin model) results in digital adjustments to equipment and to ongoing performance management. Value chain network-based Business models permit collaborative asset management by reinforcing a focus on customer-centric aspects of customer service that is reflected in customer responses. The relationship between supplier and purchaser offers benefits of gaining greater flexibility in the value chain from increasing the proportion of intangible assets and collaborative network leveraging; increased brand investment can add emphasis to market positioning and value chain network positioning allowing focussed customer relationships developments from the increased financial flexibility gained. Product-SERVICE management also facilitates cash flow management by presenting the customer with a ‘financial management and accounting’ package in which future costs are hedged and serviceability is the responsibility of the equipment supplier. Aero-engine manufacturers (and many other capital equipment manufacturers) are now selling contracts for capital-intensive engines. The engine is offered at no charge and the manufacturer guarantees no down times and/or malfunctions within the usage period. In addition, service maintenance, replenishments, upgrades, continual training, and additional services are included. The customer commits to agreed payments and a payments cycle (e. g. paid on a basis of serviceable time usage) for the whole service package including the asset. Remote diagnostics systems permit an on-line diagnosis of technical failures, emergency non-routine servicing, and product-service upgrades to avoid any down times. In case of any failures the remote technical service team responds immediately regardless of the geographical location.

The Value Management Cycle Strategy The Institute of Value Management defines the concept of value as based on the relationship between satisfying needs and objectives and the resources required to achieve them, (see subclause 3.1 in BS EN12973:2020 and Fig. 2 therein). The aim of Value Management is to reconcile all stakeholders’ views and to achieve the best balance between satisfied needs and resources. The Institute expands this to: Value Management, is an underlining concept applied within existing management systems and approaches based on value and function-orientated thinking, behaviours, and methods, particularly dedicated to motivating people, developing skills, promoting synergies and innovation, with the aim of maximising the overall performance of an organisation. For this to be effective within a network context it requires coordination and collaboration that is recognised and accepted by the stakeholders. Furthermore, it will require multi-directional relationship management if, “dedication to motivating people, developing skills, promoting synergies and innovation, with the aim of maximising the overall performance of an organisation” is to be achieved, Value Chain Management is only effective when multi relationship management is present. With Multi–directional Business Relationship Management, relationships with the

References

291

stakeholders primary stakeholders, (partner managers, employees vendors, suppliers, distributors, employees) and secondary stakeholders (regulators, governments, communities, and competitors) can also benefit from relationship management. Business relationship management (BRM) promotes a positive and productive relationship between a company and its business partners. BRM seeks to build trust, solidify rules and expectations, and establish boundaries. It also can help with dispute resolutions, contract negotiations, etc. However, to do so requires a knowledge of the business environment in which they all participate and how they can manage change! Monitoring economic/business cycles and is a recommended method for overall analysis. While it is a given that its partners marketing activities will be will share the same focus, suppliers may have quite different perspectives of the macro cycles they operate in and the impact these may be having on their capabilities currently and what their futures appear to require.

Developing a “Value Management” Cycle Strategy A value management cycle strategy is the networks response to a market opportunity. See Fig. 15.16. Any opportunity will require further analysis. In typical situations questions will be asked concerning its category, price, timing, and competition, the sales of existing organisation’s current products in the portfolio. An addition to the portfolio could be questioned against a good position the economic business cycle (such as expansion or growth or, perhaps, if it has some unique or exceptional characteristics (time or energy saving) the economic/business cycle it is not a material issue. The product life cycle analysis may be more extensive, for example, a technological product will raise questions concerning product life span particularly if it is likely to experience competition from an organisation whose product-service is “next technology”, or another question could relate to strong competition from imported imitation products. Product Engineering Management may consider quality and quantity concerns, either will be questioned if there is no “fit” with current operations, the answers may well suggest external facilities for manufacturing. These are typical issues that create discussion. The structure of a value management cycle strategy should prevent the foregoing. The aware organisation is aware of changes occurring in the various economies in which the operate and will have prepared for changes be they positive or negative. It has firm ideas on the network’s market positioning. It will monitor sales and marketing activities to identify product-services that with modification, restyling etc., will return to profitability and Preserve Value, and will have discussed these with product engineering and finance—asset management—to validate a refurbishment exercise. New product-service proposals will be assessed against positioning, profitability, and productivity criteria to assess their value creating characteristics. Those that will do so will be Creating Value in the future. Value Chains change in an ongoing process, the roles and tasks will require to be developed and possibly relocated in the value chain network. Capturing Value for stakeholders is the ‘raison detre’ of the organisation and stakeholder expectations are known and recognised, Fig. 15.16 expands the issues.

Value Network Management Market Positioning Value Chain Positioning Creating Value

• Review repurposing potential • Consider value renewal as an ongoing activity • Monitor industry activities and processes for indication of future changes • Monitor customers’ use of current products • Identify and review the commercial value of product-service Intellectual Property • Build NPD programs around the life cycle of Intellectual property • Consider value renewal to be Network responsibility

Capturing Value

• “Customer Value” Increasing/ Decreasing • “Stakeholder” Value Management Increasing/ Decreasing • Capability Requirements? ● Managerial expertise and experience? • Value migration - Who? Where? • Network interactions strengthened by integration, collaboration, and transparency

Value Management Cycle

• Value Chain Positioning • Dominate a Vital Location in the Value Chain • Long-Term Vision: Organisational Funding (Capital intensity, financial, strategic, to capital. risk perspective) • Organisational relationships (‘Performance’, Time, and Cost Management) • Competitor profiles Transactions and PDM channels • Investment program (activities & funding) • Rewards equity and margin management • Technology Change and Ownership • Relationships management (SRM/CRM) • Information flows/transparency • VCN logistics: Effectiveness and efficiency

The Asset Management Cycle

The Product Engineering Life Cycle

Producing Distributing Servicing & Renewing Value Structure, Roles and Tasks

• Short and Long-Term Vision: Organisational Resources (Assets, capabilities, capacities, and processes) • Company/Network ‘Culture Fit’ • A relevant skilled/educated labour source • Developing resources and substitutes. • Synergy – improved amortisation from internal productivity increases and external M&A activities • Recycling existing assets

The Product Life Cycle (Marketing)

Preserving Value

Fig. 15.16  Preserving and creating value a coordinating process

• Market Positioning: Identify and pursue Niché Opportunities • Customer/Market Centricity/Personalisation • Relevant Value Proposition • Capabilities: Relevant and Current • Strategic IP Management (Networked and interlocking/layers of patents around a product to deter competition) • Patent ‘Leap Frogging’ (Developing competitors’ IP by licencing existing patents) • Consider International Business market needs • Develop a Long-Term Vision of the Industry (Sustainability of profitability and resources: a clear direction of value delivery strategy)

The Economic/Business Cycle

Identifying Value Opportunities

292 15  Reimagining “Business” Cycles

References

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References Ansoff, H. I. (1984). Implanting strategic management. Prentice Hall. CIM Data. (2012, February 25). Product lifecycle management. CIM data. https://www.cimdata. com/en/resources/about-­plm Grobart, S. (2010). In smartphone era, point-and-shoots stay home. New York Times. December 3. https://www.nytimes.com/2010/12/04/technology/04camera.html Immelt, J.  R., Govindarajan, V., & Trimbel, C. (2009). How GE Is disrupting itself. Harvard Business Review, 87. Johnson, M. (2010). Seizing the white space. Harvard Business Press. Kurkin, O., & Januška, M. (2010). Product life cycle in digital factory. knowledge management and innovation: A business competitive edge perspective. In Management Association (IBIMA): 1881–1886. International Business Information. ISBN 9780982148945. Shete, S., & Hredey Mishra, H. (2017) Introduction of PLM. http://www.ijesrt.com/issues%20 pdf%20file/Archive-­2017/October-­2017/35.pdf.

Digital Business Model Essentials

16

Introduction Some 50 plus years ago NASA built and maintained a physical twin of the spacecraft on the ground so that it could troubleshoot problems without risk to the mission. This proved crucial during the troubled Apollo 13 mission and helped NASA return the astronauts safely. This basic concept has now evolved into the use of digital twins, (Apte & Spanos, 2021). The concept has become cyber-physical. To be successful this requires two key parts to work in tandem: a digital model describing the behavior of a physical twin, and sensors that provide the real-time “coupling” to the model. Artificial intelligence (AI) and machine learning techniques now help model how a system functions and even predict how it might work in future scenarios. Coupling to real-time IIoT data anchors these models and transforms the digital twins into a powerful tool. Now it is possible to do more than just observe, it is possible to diagnose, control, and provide a prognosis for diverse physical systems (Apte & Spanos, 2021). Despite the rapid expansion of technological applications, customer centricity remains essential. Digital business models need to be aligned to people providing solutions to their problems and needs. Solutions that must be assessed as to how they impact customers, employees, business partners, society and other key interests that may be addressed by the business models. It is essential to put people (customers, employees, business partners), at the centre of the network’s technology strategy; digital business models need to be aligned to potential solutions and how they impact. A people-centric approach should start with identifying and understanding key target constituencies and the journey they undertake to interact with or support an organization. Digital technologies increasingly are enabling new forms of interaction and therefore a creative approach is essential. The boundaries, methods and approaches to business are changing and demand new mindsets to innovate. The changes that have occurred in this period are both impressive and extensive. The ‘intra-industry sociological’ changes such as the increase in collaboration, and © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_16

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coopetition, between business organisations, together with concerns that returns to shareholders should be augmented by returns to stakeholders, and an increasing concern of the impact of many years of uncontrolled industrial activity on the climate and the environment are resulting in a convergence of decision making inputs based upon equality, economic performance, the environment, social and community concerns, and corporate response, governance, EESG and the UN’s suggestion of seventeen sustainability goals. In a business model context, we have suggested that the convergence of Industrié 4.0/Industry 5.0/6.0, Value Chain Network Management 2.0/3.0, and Stakeholder Response Management is of increasing concern to management when structuring a response to market-led opportunities and the business model structure that response requires. Starting with a vision and industry strategy, the organization designs a value-maximizing strategy that explores the options. By leveraging business model innovation practices and realigning the value, and service expectations of customers, customer and partner based operating models evolve. Figure 16.1 reflects the current convergence characteristics influencing business activities. Furthermore, it suggests convergence implies intra-activity within primary topics and inter-activity between topics. For example, John Deere (agriculture equipment) has a product portfolio mix that offers equipment that is data driven. An Operations Centre is an online farm management system that enables access to farm information anywhere, anytime through any device. It enables farmers: to manage an operation more efficiently, do a better job on every pass, reduce costs, and improve profitability. In the autumn of 2022 (Northern Hemisphere) John Deere shipped its first fleet of fully self-driving machines to farmers. The tilling tractors equipped with six cameras use artificial intelligence to recognise obstacles and manoeuvre out of the way. Julian Sanchez, who manages the firm’s emerging-­ technology unit, estimates that about half the vehicles John Deere sells have some AI capabilities. This includes systems which use onboard cameras to detect weeds among the crops and then spray pesticides and combine harvesters which automatically alter their own setting to waste as little grain as possible, The Economist (2022.) Figure 16.1 also identifies: • The facility to capture design continuity by leveraging data from earlier activities to develop innovation capabilities. Improve creativity/design by sharing and/or re-using data across stages of the innovation process and the network organisation • The ability to Improve creativity/design by sharing and/or re-using data across stages of the innovation process • Ongoing validation of the Value Proposition continuously. What makes your product-service-market favoured over similar offerings? • How leverage and integration of product-service–market (serviceability) innovation and knowledge throughout the engineering and marketing operating product life cycles can provide end-to-end traceability • The ability to digitalise the processes of computer managed workflows and tasks for use in management of engineering changes and for establishing “serviceability” protocols for augmented reality applications

Creating a Digital Operating Model

Adopt digital innovation platforms to enable the use of data by any partner process application. Innovate with digital/ innovation platforms to extend manufacturing capabilities by integrating digital thread and twin capabilities (5)

Digitise processes of computer managed workflows and tasks (for use in management of engineering changes and for establishing “serviceability” protocols for augmented reality applications. (4)

Fig. 16.1  Exploring the opportunities presented by the convergence of industrié 5.0, value chain network 3.0 and total stakeholder value in creating a robust digital operating model

Validate the Value Proposition continuously. What makes your customers choose you over similar offerings? Use a Value Proposition Roadmap to adapt your organizations value proposition so it answers the why for your customers (6)

Stakeholder Value Management ● Primary “Internal Stakeholders” ● Secondary “External Stakeholders” ● Equitable distribution of rewards ● EESG, UN SDGs ● Corporate Sustainability

Corporate Sustainability ● Environmental sustainability (circular operations, positive attitude towards climate change ● Socio-Economic Responsibility (balanced longterm investments supportive of “fair trade” ) ●“Equality” - healthcare, education, employment and in the legal/judicial system ● Governance/Commercial Sustainability (stakeholder-led profitability and productivity decisions ● A value proposition with positive responses to its stakeholders’ expectations

Industry 4.0/5.0 ● 5G cloud-cased, distributed infrastructure for building and operating instantaneous data processing networks ●Digitalisation & Connectivity ● Real-time data availability (Digital Thread & Twinning) ● Artificial Intelligence, Machine Learning, Algorithms ● Cobot/Employee collaboration ● Increasing 3D/4Dprinting applications ● Sensors/Monitors/Analysis/Decisions ● Enable critical communications, such as the wireless control of machines and manufacturing robots ● Comprehensive collaboration creating “borderless boundaries” across intra and inter organisational structures

Capture design continuity by leveraging data from earlier activities to develop innovation capabilities. (1)

Improve creativity/design by sharing and/or re-using data across stages of the innovation process. (2)

Value Chain 2.0/3.0 ● Collaboration between partners ● Integration of partner roles ● Real time communications and data transfer ●”Total VCN Coordination” of all activities ● Agility ●Scalability ● Platforms/Business Ecosystems ● Profitability ● Productivity ● Producibility (End2End ) Value Management ● Value Contribution

Leverage and integrate the digital thread to structure product information and decision history to capture product-service –market innovation and knowledge throughout the engineering and marketing operating product life cycles to provide end-to-end traceability. (3)

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• The adoption of digital innovation platforms to enable the use of data by any partner process application. Innovate with digital/innovation platforms to extend manufacturing capabilities by integrating digital thread and digital twin capabilities • The ability to validate the Value Proposition continuously, thereby creating a “Rolling Value Proposition” Digital operations need to consider digitising and integrating processes vertically and horizontally across the entire network organisation, from product-service development, purchasing, through to manufacturing, logistics, service, and remanufacturing. There are ongoing questions an operating model needs to solve or answer: How does the network organisation work? How does it invest (for effective (strategic) or efficient (operational) activities? Is each member of the partnership in the network profitable? How does it/can it adapt to change and is the response sufficiently rapid enough? And can/will the next-generation operating model improve simplicity, speed, and convenience to the customers, employees, vendors, and partners, predominantly using digital channels, Alatovic et al. (2020). The Network Task—Building an Integrated Operating Model: Applying Digitalization and Connectivity that meets Response Capabilities Requirements Digital business models should bridge traditional silos. Starting with a vision and industry strategy, the network organization designs a value contribution-­maximizing roadmap that explores the identified options. The criteria required for evaluation includes, capital invested, revenues and economic profit produced, cost involved, process and distribution timelines, durability, and anticipation of servicing tasks, (as well as the identification of competent service organisations, the serviceability frequencies, and costs. Fig. 16.2 suggests that an alignment between the convergence topics (Industrié 4.0/Industry 5.0/6.0, Value Chain Network Management 2.0/3.0, and Stakeholder Response Management) and the activities and processes that work on Value Contribution Equalisation by fulfilling the Capability Response objectives. Clearly, this can be problematic in as much that the priorities will differ from customer-to-customer and from network-to-­ network. In some overall relationship situations, there will be problems concerning inability to meet some of the expectations (both customers’ and networks’) and should be considered as a question of “market fit”; can the “fit” be achieved by restructuring the network (by seeking new or additional partners) or simply shifting the opportunity scanning activity.

Views and Proposals It is useful to explore management consultants’ views and proposals for operating models as they (presumably) reflect client ideas in their “white papers” published for general reading. McKinsey’s models—“The next-generation operating world for the digital world” (Bollard et al., 2017) and “Next-generation operating models for the next normal” (Alatovic et al., 2020) provide direction. The McKinsey model

Producibility

Platforms

Value Chain Network 2.0/3.0

Compatibility Index

Partnerships

PlanetCare/ Sustainability

Market/nearest competitor

Market Value Added

NOPAT, EVA Value Contribution

Margins gross/operating/net

Value Chain network time/quality/cost

Input/Output trend relationship

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Customer Perceptions

Multifactor; labour/Materials/Energy/Asset/Capital

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Performance

Value Advantage

Investment : EROI

Asset Management

Industrié 4.0/5.0

Customer Price/Value Equalisation

Capabilities

Corporate Sustainability

Value Contribution

Stakeholder Value Management

Capabilities

Capability Responses

Fig. 16.2  An operating model needs focused responses to “respond” to customer, supplier, and “total” stakeholder expectations

Quality targets

Scheduling targets

Cost targets

Customer Centricity/ Digital Value Proposition

Are all Partners (Including Customers) Satisfied with “EROI*”?

Is the delivery time Optimal?

Is the cost optimal?

Can the design be simplified?

Ensuring “connections “ currency

Maintenance of platform systems

Development of Policy & Strategy

Environmental Sustainability

Social Responsibility

Stakeholder Liaison

UN SDGs

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argued for five essential digital approaches or capabilities (Bollard et  al., 2017); digitisation (transforms customer-facing journeys, reshapes timelines and can automate manual tasks), advanced analytics, (autonomous processing of data,uses sophisticated tools to discover insights and make recommendations), intelligent process automation (technologies that combine fundamental process redesign with robotic process automation and machine learning), business process outsourcing, (uses resources outside of the main business to complete specific tasks or functions), and lean process redesign (helps streamline processes, eliminate waste, and foster a culture of continuous improvement). Alatovic et al. (2020) suggested a behaviourally oriented model during the Covid problems. They suggest “Physical distancing, working remotely, travel barriers, and the psychological impact of isolation have changed the behaviours of stakeholders in every organization, creating unexpected challenges.” And these, they suggest, “Changes in internal and external stakeholder behaviours mean that companies may wish to reconsider how they operate and act now to emerge stronger after the pandemic. This may include starting to think about and plot their transition to a next-­ generation operating model” and that; “Customer, employee, vendor, and partner shifts have implications across the value chain, impacting product, sales and channels, and services and support. They also affect workforce models, office operations, and vendors and partnerships”. These include sales and channels shifting away from large POS, product simplification to facilitate digital sales, service and support moving to a remote digital service, a workforce shift from stable to flexible workforce models. Offices: may shift to digital remote office operations. Vendors and partnerships shift to collaborative lean partnerships, and therefore, management systems may/will take on new business model characteristics. Essentially the authors are visualising virtual management models with components that need a clear distinction between processes that will remain physical versus those that will move fully or partially into the virtual space cyber-physical processes. They suggest “Organizations can design remotely implemented productivity controls that perform a regular and thorough walk-through of digital sites. In addition, leaders can maintain management systems and side-by-side coaching with agile methods combined with collaboration software.” Alatovic et al. (2020). Ringel et al. 2015) suggest “successful digital transformation must rest on a foundation of smart digital strategy that is about making wise investment choices to maximize competitive advantage, growth, profit, and value—and then implementing with discipline”. They offer five “rules” for how to get the most from a digital strategy:

 ssess the Strategic Impact of Digital on the Organisation A and its Customers A good digital strategy starts with a rich understanding of the competitive environment and how it’s likely to change. Because new technologies can radically reshape business economics, it’s essential to think through the implications for the organization and the broader ecosystem of customers, suppliers, and partners. The impact and opportunities vary by industry and by function. Core business processes can be

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reinvented; for example, supply chains are being reconfigured thanks to Industry 4.0, making it possible to operate smaller, more flexible facilities closer to customers that can rapidly deliver new products tailored to local demand patterns.

 et Digital Ambition for High Achievement S Organizations that win at digital start by thinking expansively—whether seeking to strengthen existing advantages or to tap new ones. This is especially true because in so many digital domains, network effects create winner-takes-all situations. Digital strategies fail more often because of a lack of foresight and of ambition little ambition rather than too much. Kodak invented digital photography, and Blockbuster developed an online movie platform before Netflix did. But starved those opportunities for funding and organizational focus because they prioritized their legacy businesses. Renault set, and achieved, an explicit goal to drive a 25% increase in EBIT with its digital strategy running 15 pilots across all functions—from marketing through production—to understand where digital could give the greatest lift. Focus on Capex In general, focusing on the two or three most valuable use cases lends greater clarity and delivers the best results. It’s important to manage priority initiatives as a portfolio and roll out the ones with short-term impact first. Short-term wins (typically in areas like precision marketing, AI-driven pricing and promotion, and digitally driven cost reduction) will help fund the journey by freeing up capital and releasing resources needed for more strategic high-impact priorities down the road. A portfolio approach also makes it possible to demonstrate progress to key stakeholders: board members, investors, and the organization. Unilever has invested decisively in digital across its value chain, with a particular strategic focus on harnessing data as an enterprise-wide asset that supports precision marketing, manufacturing, distribution, and performance management. A customer-centric approach that focuses on both competitive advantage and value creation is critical. For example, John Deere, in its agricultural business, began with use cases anchored in the jobs farmers were trying to optimise like planting seeds, adding just the right amount of nutrients, and putting the minimum amount of chemicals on their crops to prevent pests and weeds. This led to significant innovations—for example, the “see and spray” technology, which allows individual weeds to be identified through a combination of optical sensors and machine learning algorithms, and then killed through highly engineered and individually controlled spraying nozzles.  uild New Strategic Expertise B A fully effective digital strategy inevitably calls for new expertise, capabilities, and cultural shifts. The organization needs to build new strategic abilities to complement its traditional strengths—and to ensure that new and old capability sets work together in an agile and coordinated way. Recruiting digital talent is critical, but just as important—and often underestimated—is redeploying existing talent and skills to the initiatives that can make the most of it. With both in place to think through

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what resources and capabilities can be shared across business units, this results in developing a workforce that does not adhere to fixed roles but evolves with the needs and pace of emerging digital initiatives. A multistage process that adapts based upon experience and digital maturity makes more sense. Establishing a “digital” culture is essential to a successful digital strategy. It helps attract talent, particularly people who are attracted by opportunities for autonomy and creativity.

Manage Transformation Actively Some issues will need attention, for example, such as the rate at which the critical underlying technologies for your industry are evolving, and thus how often they should be reviewed alongside the underlying strategy to refresh the transformation plan. Technological progress can be linear or discontinuous. In industries with slower-moving technologies, traditional top-down strategy development approaches work. But planning 3 years out can end in failure if changes in technologies and market dynamics shift more rapidly in these faster-moving, more unpredictable industries, you will need faster moving implementation capability response planning that balances strategic alignment from above with market insight from below. Bain and Company (Wald et al., 2019) suggest in the current (and future) business environment the challenge has become more complex as organizations must now be designed to support many more growth avenues, including new products, new roles for the value chain, new geographies, new customer segments and new channels. Some fail to evolve their organization quickly enough to match a shift in strategy. Others move ahead rapidly with a new organization design that does not match how the business will actually create value. Bain’s approach is to identify and publish principles for the design of the operating model, for example: • Establish leverage, scale, and pool capabilities for all elements of the organisation/ network • Improve internal network expertise, consistency, and collaboration in key areas such as RD&D, marketing, and sales • Align network response organisation in support of core customers • Leverage scale in important relationships e.g., suppliers of critical materials— lithium for EV battery manufacturers • Compare, review, and improve speed, flexibility, and accuracy of customer responsiveness • Eliminate duplication of processes and activities • Improve ability to influence positively “regulators” of all levels This is followed by creating design principles derived from strategic priorities and organisational assessment: • Identify the organisation’s/network’s organisational and cultural strengths and weaknesses • Focus on specific sources of value, e.g., high growth markets, building and maintaining relationships with core suppliers and distributors

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Positional-Led

Value Builders/ Drivers Growth Plans

Sources of Value Potential Customers?

Core Customers?

Current Core Capabilities

Network Strategic and Structural Context

Corporate Sustainability Operations

Value Management Operating Model

Cost Structures Critical Roles and Tasks

Asset Base Structure and Leverage Extent CapEx/OpEx %

Network Operating Context

Stakeholder Satisfaction

Current Business Scope and Boundaries Capability Strengths to be Secured

Stakeholder Satisfaction

Core Market Gaps for Business Success

Capability Weaknesses to be Addressed

Fig. 16.3  Operating model—Structure and governance

• Identify the important critical decisions and ensure the operating model capable of providing relevant, accurate, and timely data for making these decisions quickly and effectively • Define meaningful scope and business boundaries to ensure full utilisation of the operating model • Identify and make known network organisational strengths and weaknesses that require attention • Clarify the role of the “Centre” in leveraging the network’s scale and expertise. The network’s purpose is to create value for all stakeholders • As with any organizational transformation, maintaining a strong centre will be critical. Program management is useful for ensuring process standardization, data management, and talent acquisition. (See Wald et al., 2019) Figure 16.3 outlines the Bain approach.

Developing a Digital Network Based Operating Model Figure 16.4 extends the McKinsey model by adding a central focus of customer centricity making the point that the purpose of an operating model is to ensure customer satisfaction. Other core activities/processes added include an integrated and collaborative network (with the aim of developing end2end/producibility value management processes), enterprise resource management system(s) (to support the end2end value management process), and sustainability operations (to support EESG and UN proposals as well as add conformance with emerging stakeholder expectations are: An operating model can be both physical and digital representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself. Operating models connect a company’s strategy with its operations. Operations are how the company produces

ProductProduct-Service Service –Market –Market Portfolio Strategy Portfolio Strategy

Sustainability Operations

Advanced Analytics

Digitisation, Digitalisation &Connectivity

Intelligent Process Automation

Digital Value Proposition

Organisational Excellence

Value Management Operating Model

Enterprise Resource Management Systems

“Serviceability” Management Programs

Facilitators

Strategy, and Structure

Developed(ing) Platform Based Networks

Achieving recognized Organizational excellence is an indication that the organization is performing at outstanding levels in all its value management activities. It makes the organization to achieve and sustain outstanding levels of performance which meets or exceeds the expectations of all the stakeholders

Digitisation is the process of converting information from a physical format into a digital one. When this process is leveraged to improve business processes, it is called digitalisation. Digitisation is applicable to customer experiences and their impact on operations responses. Connectivity describes the extensive process of connecting various parts of a network to one another, and occurs between products and between organisations

Advanced Analytics give businesses greater insight into their data than they could ordinarily obtain these techniques include machine learning, data mining, predictive analytics, location analytics, big data analytics and location intelligence

Intelligent Process Automation uses current data from ongoing operations and by making it available in real-time provides more accurate and rapid decision making

Organizational and Network Sustainability; growth of revenues, profits and cash flows. Environmental Sustainability; optimal use of resources, optimizing producibility operating costs; process and component standardization, “zero-loss” . And Economic Sustainability; business continuity, longevity, and contributions to GDP. Social Sustainability; levels of employment, employee satisfaction, work/leisure balance, community commitment

Talent Management

Agile/Lean Product/Process Design

Business Process Management (Outsourcing?

Network Optimisation Integrated Collaborative Network Management

Management-Led Creativity and Innovation

Enterprise resource planning is a platform companies use to manage and integrate the essential parts of their businesses. They help them implement resource planning by integrating all the processes needed to run their companies with a single system. Such as an integrated planning, purchasing inventory, sales, marketing, finance, human resources, and asset management program

Fig. 16.4  Developing a digital—Led operating model key capabilities/responses

The ‘Value Operations Management Model’ is the assembly of activities that create and deliver value to the customers and different stakeholders of a business in the productservices-market that it delivers to customers and to employees, network partners and other stakeholders, each of whom have their own value models. Serviceability design is key to all of this and this starts with understanding customers’ Value Models and creating value proposition offers that meet customer, employee, network partners and he remaining stakeholders

Ensures cost-effectiveness (strategic product-service-market) development and cost efficient current production

Identifying and developing interna and external options for input supply: Internal, S-SMEs

Governance

Building RD&D activities around customer expectations. Building manufacturing systems and distribution facilities. Building serviceability networks

Key Capabilities/ Responses

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and distributes its product-service-market offer. Combining these in an operating model explains what the company does and how well it does it. This provides a guide for management to follow when turning strategic goals into operational abilities: Business Process Management Identifying the relevant “production system” to achieve optimal cost/control combinations. Evaluating value advantage/control/cost alternatives that support end2end transformation of network activities. Agile/Lean Product/Process Design Developing software to optimise efficiency and productivity, to find the ideal balance between the two—delivering fit4purpose product-services in the shortest time possible. Managing Value Engineering and Value Delivery. Advanced Analytics Provide data sets that facilitate product-service portfolio designs AND that provide supplier/customer real-time product-service management service. Applying Artificial Intelligence/Machine Learning to support (replace) repetitive decision making. Sustainability Operations Corporate Sustainability (Environmental Sustainability (circular operations, positive attitude towards climate change), Social Responsibility (balanced long-term investments supportive of “fair trade”) and Governance/Commercial Sustainability (stakeholder-led profitability and productivity decisions (Total PlanetCare). BCG offers a Sustainable Business Model Innovation approach that explores the scope of the Network’s activities. Integrated and Collaborative Network Structures Utilise Value Chain Network 1.0/2.0 collaborative culture to develop “producibility” (end2end seamless system productivity) by optimising the operating infrastructure to meet the customer defined value proposition and value contribution. Intelligent Process Automation Introduce robot/cobot IPA to increase overall efficiency. IPA is an emerging set of new technologies that combines fundamental process redesign with robotic process automation and machine learning. IPA can replace human effort in processes that involve aggregating data from multiple systems or taking a piece of information from a written document and entering it as a standardized data input. Enterprise Resource Management Systems Enterprise resource planning (ERP) is a platform companies use to manage and integrate the essential parts of their businesses. Many ERP software applications are critical to companies because they help them implement resource planning by integrating all the processes needed to run their companies with a single system. An ERP software system can also integrate planning, purchasing inventory, sales, marketing, finance, human resources, asset management and more. Digitisation Digitalisation and Connectivity Digitise supplier and customer relationship management operations to achieve optimal data/material flows in end2end systems.

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16  Digital Business Model Essentials Strategic and Operations Activities: Value Proposition, Value Engineering Value Delivery and Value Renewal (Cost Effectiveness) Serviceability Operations Activities Value Delivery & Value Renewal Options (Cost Efficiency)

Management-Led Creativity and Innovation

Governance

ProductProduct-Service Service –Market –Market Portfolio Strategy Portfolio Strategy

Marketing & Sales Operations Activities Value Proposition Value Delivery (Cost Efficiency)

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Network Optimisation Integrated Collaborative Network Management Business Process Management (Outsourcing?

Enterprise Resource Management Systems

Intelligent Process Automation

Value Management Operating Model

Agile/Lean Product/Process Design

Sustainability Operations

Talent Management

Manufacturing and Distribution Operations Activities Value Engineering and Value Delivery (Cost Efficiency)

Intra network Convergence Effectiveness

Developed(ing) Platform Based Networks

Advanced Analytics

Human Resources Relationships, Strategy and Operations Activities Workplace/Technology Relationships Value Engineering and Value Delivery (Cost Effectiveness and Efficiency)

Digitisation, Digitalisation &Connectivity

Organisational Excellence

Digital Value Proposition

Strategy, Strategy and Structure

Finance and Investment Operations Activities Value Engineering and Value Delivery (Investment Effectiveness and Cost Effectiveness)

Sustainable Corporate Operations and Activities Socially Responsible, Environmentally Responsible and Commercially Responsible (Cost Effectiveness)

Fig. 16.5  Building a digitally integrated operating model

Facilitators supplement the core activities/processes, and they are the notion of a digital value proposition (that focuses on intellectual property, exclusive technological applications, in support the product-service features of the traditional analogue value proposition). Talent management (adding emphasis to the technology driven management needs), product-service-market portfolio strategy to appeal to customers who seek to reduce or redistribute capital towards intangible assets), governance (to ensure that both stakeholder as well as shareholder interests are met), management-led creativity and innovation (as a component of talent management and directing the network towards digitisation, digitalisation, and connectivity) and serviceabilty asset management programs (to provide customer assistance in understanding the full extent of serviceability, capital expenditure and product-SERVICE aspect of the network’s portfolio strategy). Figure 16.5 (building a digitally integrated business model applies the model and identifies the matching and monitoring of processes, which were once a “macro” response to customer needs that were grouped to meet customer segment expectations and that have become “micro” considerations as digital technology has developed the capability to personalise customer facing process responses. Many of the technology developments are incorporated in the model, Artificial Intelligence powers Consumer personalisation and customisation, manages material use optimisation, Circultyics (circular value chain planning and performance), network structure effectiveness and efficiencies, and energy use optimisation in manufacturing operations. Digitisation, digitalisation, and connectivity provide real-time performance data and management. Digitalisation and connectivity aid product management and product-service-market development through digital twin connections. Figure 16.6 represents a current digitally based operating model illustrating the process of applying the model for short-term planning activities, using the value

Socio –Economic Sustainability

Commercial Sustainability

Platforms

Agility Collaboration

Performance Monitoring & Management & control

Integration

Producibility

Talent Management

Agile/Lean Product/Process Design

Partnerships

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Organisational Excellence

TimeLine Management “Communication”

Data Exchange/ Transparency

Productivity

Profitability

“Location Management”

Customer Facing Processes

“EVAEconomic Value Added”

“Economic Profit”

Value Advantage

“Resilience”/Risk

Facilitators

Positioning

Strategy, and Structure

Cooperation

Digitisation, Digitalisation &Connectivity

Advanced Analytics

Developed(ing) Platform Based Networks

Performance

Investment

Asset Management

“Serviceability and Asset Management Programs

Intelligent Process Automation

Customer Facing Processes

Sustainability Operations

Value Management Operating Model

Enterprise Resource Management Systems

Customer Facing Processes

Management-Led Creativity and Innovation

Network Optimisation Integrated Collaborative Network Management

Business Process Management (Outsourcing?

Governance

PlanetCare

ProductService –Market Portfolio Strategy

Partnership Profitability Equity

Time Efficient

Cost Effective & Efficient

“End2End” Fit

Platform Longevity

Platform Growth

Product, Data, and Cash Flows

Access & Connection

Environmental Sustainability

EESG/UN SDGs

Stakeholder Liaison

Fig. 16.6  A current digital-based operating model

iSustainability

iReal-time connectivity

i Digitalisation (Product-services & Processes)

iDigitisation (Information, Data Transfer)

iPrice/Value Equivalence

iProduct-Service Continuity

iDesign/Aesthetics

Customer Expectations Value Drivers

Key Capabilities/ Responses

iChoice options

iServiceability support

iFlexibility

i Quality

i ’Time’ availability

i Differentiation

i“Personalisation/Customisation”

Customer Expectations Value Drivers

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drivers developed in an earlier chapter (Chap. 4: Performance value drivers and builders). The interconnected and interactive convergence/merging/focusing/customising capabilities of the operating model facilitates successful network relationship management and fulfillment of stakeholder value delivery.

A “Future” Operating Model? Key Capabilities Responses Given the rate of change of technological and collaborative alliances and the rate of change occurring in the business environment, and the “appetite” of the major organisations for change it is unlikely that the current operating model can avoid major change and we would be negligent if we did not acknowledge this obvious fact. Based upon considerable comment from business organisations and consulting activities it is also useful to explore management consultants’ views and proposals for operating models as they can also reflect client ideas on developments as well as ongoing activities. Deloitte (2020) identifies certain common, critical aspects for developing a future operating model: • Aligning organisational leadership and stakeholders on a shared ambition: customer satisfaction; stakeholder satisfaction • Key elements of the operating model reimagined • Understanding the implications of “change” for the workforce • Understanding the implications for the workplace of new value management and new work practices that a reimagined future enables • Re-evaluating response capabilities at a functional or enterprise level to determine readiness for network (as well as individual organisations) for the change in working activities, as well as volume, to shape the road map to the future Based on Deloitte (2020).

A “Future” Operating Model The Customer “Value Management Model” and Primary Stakeholders The Value Management Model may become an extension of the current product-­ service-­market offer currently seen in consumer and industrial markets, but changes are likely. For example, unlike current ICE vehicles the EV will, in dollar value terms, have approximately one third of its purchase value required for interchangeable services (primarily the battery) many times in its use life cycle, an issue of when, how, and by who has yet to be resolved. Clearly this is an important concern as the EV market expands. Digitalisation and connectivity will facilitate end2end activity which will involve greater input by S-SMEs during manufacturing, operations, and serviceability activities. For example, S-SMEs will share AI output during the RD&D activity and will contribute to specifying to the serviceability process and the timelines. We can expect an expansion of online serviceability monitoring

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(and eventually) servicing. We can also expect online “product-service” availability; prospective vehicle purchasers will be able to make a selection of vehicles meeting their specification (possibly) nationwide and conduct transactions online. These developments, in turn, will provide recommendations for the structure and scope of the operating model.

Secondary (External) Stakeholders’ Value Management Model Secondary stakeholder interests and contributions are likely to expand. The electric vehicle value chain is already indicating significant changes from the existing ICE model. The recharging and other standardisation issues remain to be resolved. (E) ESG is gathering support and there can be little doubt that “issues” will become important concerning supply and distribution markets. Currently governments and manufacturers are positioning around “rare earth” inputs and their ownership. Countries with supplies of lithium, cobalt, etc. are not plentiful and strategic alliances are being formed to ensure there is control of “rare earth” inputs close to the existing ICE manufacturers.

Multiple Business Models An operating model capable of servicing a multi-segment target market within which variable customer key value drivers exist exhibited by the variations of price/ value/equalisation is feasible given online/real-time data availability. Distribution market structures are also changing with Mercedes looking to use the internet more in its direct sales approach. Given the likelihood of delays it is conceivable that automobile distributors will operate across the existing ICE market for both new and used vehicles and develop EV distribution with the greater involvement of current manufacturers and with the new brands emerging.

Integrated Networks (Consortia Activities) Broad scale development in ICT services such as cloud computing whereby shared resources, software, and information are provided to computers and other devices on demand has had a major impact across a number of industries resulting in large, shared productivity gains and are an example of Iansiti and Levien’s (2004) keystone concept. Cloud computing describes a recent development of a supplementary, consumption, and delivery model for IT services based on the Internet, and it typically involves over-the-Internet provision of dynamically scalable and often virtualised resources. Two organisations typify ‘cloud’ applications: Covisint and Elemica. Covisint is one of the most comprehensive online communication systems in the world. Originally developed as a supply chain management solution for the

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automotive industry, it has expanded in scope and now serves many other purposes for a variety of industries. Covisint has a similar mission now as it did when it began: connecting people, process, and technologies so customers can focus on building their businesses. Today, Covisint is available to a variety of industries through a large enterprise communication system. In the auto industry, Covisint is used to connect manufacturers or large Tier I suppliers with manufacturing plants, suppliers, dealerships, employees, and customers. Additionally, it provides dashboards with complete views into automotive operations so managers can monitor performance in a variety of ways. Convisint’s online communication system also includes unique federation capabilities that allow users to work in a secure environment through a single sign-on. Instead of remembering numerous user IDs and passwords for various software systems, users can focus on the tasks of building their businesses. Most importantly, they are encouraged to communicate with one another to build knowledge through the systems that are readily available through Covisint. Elemica was formed through the partnership of many chemical industry leaders and enjoys the strengths of their ongoing support as customers and as advisors. With more than 2500 companies connected through the Elemica network and more than $60 billion of transactions handled annually, the value to customers continues to multiply. Elemica is an independent, global chemicals and plastics industry network hub that facilitates the buying and selling of a broad range of products. By using a single point of contact for information sharing among Dow buyers and sellers, Dow can connect with numerous customers and suppliers in one standard format. Elemica’s ERP connectivity solutions and services help lower transaction costs for Dow and its trading partners. In turn, the industry benefits from the resulting savings, which are generated through increased visibility into the supply chain, greater data accuracy and reduced working capital and inventory levels.

Adaptive and Expandable Scale Data management and analysis has expanded operating model capabilities beyond organisational boundaries and timeline projections. Value builder analysis requires a more open approach than that required for value drivers. There are two considerations: the long-term strategic intentions of the customer organisation and those of supplier organisations. It is for these reasons that scenario analysis has an important role. While the customer and supplier organisations may have congruent interests in the short-term there may be reasons why these may diverge over time and require both to consider the longevity of the partnership. For example, the automotive industry is undergoing major changes concerning the design of future vehicles. Already we have seen the emergence of new alliances between vehicle manufacturers to share R&D development programs and costs to minimise time-to-market schedules; oil companies are diverting R&D expenditures into battery technology and into sourcing lithium for battery inputs. Customer and supplier organisations alike are both considering positional and executional capabilities characteristics

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required for competitive positioning in their future markets. Suppliers will also be reviewing the implications of potential changes on the performance metrics as well as their market and value chain network positioning. Major specialist suppliers in the automotive industry that have exclusive positioning in the value chain network are likely to face significant changes. Organisations such as Steyr engineers, develops, and assembles automobiles for other companies on a contractual basis. In 2002, it absorbed Daimler AG’s Eurostar vehicle assembly facility. The company’s vehicle assembly capacity reached 200,000 vehicles a year. It is the largest contract manufacturer for automobiles worldwide. Magna Steyr developed Mercedes-Benz’s “4Matic“four-­wheel drive (4wd) system, and assembles all E-­Class 4Matic models. The company also did substantial development on the BMW X3 and manufactures all X3s.

A “Growth” Mindset Rather than a Fixed Model An operating model can be both a physical and digital representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself. It follows that while digital twin models are identifying improvement features in current product-service offers they are accumulating and analysing data that extends their capabilities into developing new product-­ services. By applying a what if? approach to the data and asking questions concerning current market development trends and probable capacities a cyber future product-service can be explored. This technology is advanced such that it can build a manufacturing complex (Siemens) and manufacturing specifications. An additional benefit is that the cyber future product is capable of identifying potential problems and responding to them at the design stage.

Dynamic Agile Innovation that Responds to Opportunities Dynamic organizational agility—the ability to quickly reconfigure strategy, structure, processes, people, and technology toward value-creating and value-protecting opportunities, apply agile ways of working. McKinsey research (Dorner & Edelman, 2015), respondents most often identify activities that are closest to the customer: innovation, customer experience, sales and servicing, and product management. This is not too surprising, since customer centricity is cited most often, followed by productivity and employee engagement, as the objective of agile transformations. Companies are also focusing on internal end-to-end (producibility processes). At least four in ten respondents say their companies are applying agile ways of working in processes related to operations, strategy, and technology, while roughly one-­ third say they are doing so in supply-chain management and talent management. Dynamic practices enable companies to respond nimbly and quickly to new challenges and opportunities, while stable practices cultivate reliability and efficiency

Platforms

Producibility

Product-Service Integrated –Market Networks Portfolio Strategy

Governance

PlanetCare

Agile/Lean Product/Process Design

Business Business Process Process Management Management (Outsourcing? (Outsourcing?

Adaptive and Expandable Scale

Advanced Analytics

Partnerships

Rolling Value Proposition(s)

Digitisation, Digitalisation &Connectivity

Intelligent Process Automation

Primary Stakeholders

Productivity

Organisational Excellence

Value Management Operating Model

Enterprise Enterprise Resource Resource Management Management Systems Systems

“Growth-Led”

Sustainability Operations

Network Optimisation Integrated Collaborative Network Management

Dynamic Agile Innovation

Multiple Business Models

Fig. 16.7  A strategic digital—based operating model

• Stakeholder Value Satisfaction

• Recognition of (E)ESG and UN Development and Sustainability Expectations

• Planning Abilities: Strategic & Operational

• Integrate and Coordinate Network Interactions

• Market Entry Networks Management Networks

• Digitisation and Connectivity

Customer Strategic Performance Value Builders Expectations Executional –Action Led Characteristics • Innovation, Creativity, RD&D, Product-Service –Market and Process Research and Design

Key Capabilities/ Responses

Profitability

Strategy, and Structure

Secondary Stakeholders

Positioning

Performance

• Complementor/Facilitator Networks/Ecosystems (Externally Generated “Market Opportunities”)

• Access to Emerging Distribution and Transactions Channels

• Inter-organisational Production Facilities and Networks

•Integrated Procurement

• Planned Production Facilities and Networks Capacity Availability (Partner Owned: Exclusive Capabilities)

• Access to specialist Assets, Processes & Capabilities

• Access to Capital Sources

Customer Strategic Performance Value Builders Expectations Positional – Influence Led Characteristics • Access to Resource Markets

Facilitators

312 16  Digital Business Model Essentials

Introduction

313

by establishing a backbone of elements that don’t need to change frequently See Fig. 16.7.

The Rolling Value Proposition The introduction of digital thread/twinning technology has made the digital value proposition feasible. Real-time data availability enables “real-time responses”, and data analytics enables changes to product specifications; the value proposition can be modified and individualised and therefore we have the “rolling value proposition”. Digital value propositions offer speed and precision essential in some industries. They may also be focused on specific aspects of a product-service. Digital value propositions typically feature some form of developing technology that offers rapid time2market, order response or serviceability response, scale, and simplified use not available with an analogue value proposition. Analogue value propositions focus on “benefits” such as product-service-market features that are capable of interpretation into market advantage and revenues. Digital Value Propositions more often focus on intellectual property, exclusive technological applications, and platforms. Typically, they require customer “digital fluency and capability” if they are to be interpreted into market positioning and value positioning advantages.

Governance Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s primary and secondary stakeholders. Primary stakeholders include customers, suppliers, management and employees, and shareholders and other investors. Secondary stakeholders include governments (multinational networks are subject to local government legislation and controls), the community, and regulators. Governance provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Building and Implementing the Digital Operating Model The operating model of the future will require flexibility in order that it can meet changing customer needs within its ongoing purpose of ensuring cost efficient production of product-service-market needs. Building an integrated operating model: applying digital and connectivity that meets response capabilities requirement is suggested by developing a strategic digital based operating model using the existing components of the value management operating model but tuning the facilitators to provide a “futures-response”. The essential outputs requirements will remain much the same—response time, quality specification locational availability, and the

314

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serviceability specifications the differences will concern. The operating model may require additional topic areas (assuming changes in the business environment, technology), the other areas include an ongoing review and input of “industry and market dynamics”, and an upgraded perspective of “customer strategic performance value builders”. Olvé et al. (1997) proposed “The Network Enterprise” “Capability Response Balance Sheet”, see earlier references to this work, “assets” are considered as “market entry network facilitators”, “production facilities and networks” are considered to be value production and delivery facilitators”, and “market management networks considered to be marketing and distribution facilitators”. Some of the assets may be tangible and others intangible. “Liabilities” are identified as being “temporarily employed capabilities”, such as “enterprise owned capabilities”, and “individual partner owned exclusive capabilities”. The notion of “leveraged assets” is suggested by the individually owned liabilities within the network. The “balance sheet” identifies the organisational importance of response capabilities, and their location within the network, their cost being imputed as internal network costs. The emerging shape of the electric vehicle product-service-market, while in the formation stage already demonstrates significant differences in product concept, energy usage and replenishment processes, manufacturers, and distribution methodology. However, when the tasks of the value management operating model are reviewed in this “new market” context we remain with, integrated and collaborative network structures, enterprise resource management systems, intelligent process automation, digitisation, digitalisation and connectivity, advanced analytics, sustainability operations, agile/lean product/process design, and business process management—the foundation requirements of a value competitive organisation that produces value contribution.

References Alatovic, T., Kulagin, V., Savitskiy, S., Radchenko, A., & Wedrychowicz, S. (2020, July 20). Next-­ generation operating models for the next normal. McKinsey & Co. Apte, P.P. & Spanos, C.J. (2021, August 11). The-digital-twin-opportunity. MIT Sloan Management Review. Ringel, M., Taylor, A., & Zablit, H. (2015). Innovation in 2015. BCG. Bollard, A., Larrea, E., Singla, A., & Sood, R. (2017. March 1). The next-generation operating model for the digital world. McKinsey & Co. Economist. (2022, December 10). Artificial intelligence is permeating business at last: The age of “boring AI” will be anything but. The Economist. Deloitte. (2020). Reimagining operating models to thrive in the new normal. Deloitte Development. Dorner, K., & Edelman, D. (2015, July 1). What ‘digital’ really means. McKinsey & Company. Iansiti, M., & Levien, R. (2004). The keystone advantage-what the new dynamics of business ecosystems mean for strategy, innovation, and sustainability. Harvard Business School Press. Olvé, N., Roy, J., & Wetter, M. (1997). Performance drivers. Wiley. Wald, D., de Laubier, R., & Charanya, T. (2019, May 29). The five rules of digital strategy. Boston Consulting Group.

Part IV The Developing Value Chain

Introduction

17

This chapter does not look to canvas the broad scope of market and product strategies, but simply to make the point that when thinking about strategic change it is not just about the market and not just about the firm, but the whole value chain network context needs to be understood—there are critical network participants who are neither necessarily customers, competitors, or even direct suppliers. Chapter 18: Value Chain Analysis and Mapping—attempts to address— “how” value chain networks create value. The first step is to understand whether the value chain as a whole works and why; and how successful it is in achieving its objectives. The second step is “who” the network members are; and third how network members decide upon their relative strengths and weaknesses and the opportunities and threats that network membership offers. In other words, for a firm to make sensible decisions about how it participates in a market it needs to understand how the value chain it will be participating in works and how attractive it is, and then how the firm itself can contribute and extract some of that value for itself. Whether a Value Chain as a whole—that is the collection of member firms that all contribute to the end product-service-market acquired by the customer is successful is largely dependent on whether it delivers value to the customer and to network members—a supplier economic viability performance feasibility concern. In evaluating market opportunities or alternatives, it is suggested that there are three interlinked assessments that need to be made of how a value chain is positioned in the market. The first requirement is an assessment of served market attractiveness driven by characteristics such as size, segmentation, growth rate(s), buyer power, and customer loyalty. Strong buyer power and customer loyalty can for example prove difficult obstacles to new market entrants. Competitive intensity is another influence on the attractiveness of a market. This can be driven by multiple factors including the availability of “substitute” products. This can be legitimate, but in the luxury goods market the problem of counterfeit products and brands provides an illicit substitute which undermines value propositions. Intensity may also be regulated. Patent lifespans are of concern for several industries, where generic © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_17

317

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17 Introduction

product manufacturing of pharmaceutical products is beginning to become a specialist activity in India, threatening the post-patent sales of volume selling products, and Market access that is often strongly influenced by the extent to which customers are aware of product and or brand value characteristics. Successful value chain partners work together with other partners each of whom offer complimentary expertise—assets, processes capabilities, and capacities. What criteria then should be used to decide when and how to participate in a value chain network? This is particularly the case when the company is probably participating in multiple value chains at any time, each of which is dynamic. Key to this is an understanding of the role the firm intends to undertake and the dynamics this involves. The network integrator or organiser often implies a commitment or exclusivity to the network often as the brand owner, while the process specialist or complementor may be a contributor to several similar and competing networks. The integrator is essentially the visionary who can identify market gaps/opportunities and identify the resources required to compete successfully with incumbents or to establish a dominant position for the network rapidly. The integrator should also be capable of identifying specific roles and creating role specifications for the network organisation. Where the organisation is capable of positioning itself in a value chain network is largely a function of its operating model, as well as its business model. An understanding of the customer expectations of expected product-service benefits and acceptable product-service acquisition costs is important. Anderson et al. (2006) describes the activities of B2B companies as they develop a customer value proposition. Essentially, they are conducting an audit of customer value drivers that impact on customer performance. The evaluation of the network attractiveness can be supported by a specific review of competitive capability activities. Often local organisations identify opportunities and threats and move towards strategies and structures that close the gap. How does the firm evaluate business model decisions and relate them to participation in a value network? Perhaps the simplest answer is to assume a ‘start-up’ value chain network design exercise in which the value chain organiser facilitates the structural decisions and identifies ‘ideal’ profiles of network members. This suggests the overall network value creation processes can be disaggregated into separate but inter-related processes. A critical part of the decision is an estimate of operating costs, the $ value of the value added, the impact on cycle time and impact on the balance or risk throughout the network, and the generation of positive cash flow. Operating costs need to be kept at a level at which the customer value proposition can be delivered and that remaining stakeholders are satisfied. Adjustments (or changes to the structure of the network) can only be justified if the value that is eventually delivered is enhanced or if the total cost can be reduced. This may involve cost trade-off opportunities because of ‘value-overlap’ opportunities. Before a value chain network can be constructed a ‘scoping exercise’ is essential. The attraction and purpose of network organisations is the effective use of assets and efficient operations; it is unlikely these will occur unless opportunities are met by appropriate resources.

17 Introduction

319

Response capability analysis comprises seven separate coordinated steps. First, what is the customers’ expectation of value? Second is the role of demand and development activities. The third consideration concerns procurement and manufacturing. A fourth question concerns the role of marketing and sales operations. Not only do we require data detailing market volumes and locations but increasingly patterns of flow are necessary if customer availability and order cycle time requirements are to be met. The fifth decision concerns service operations management and the importance of service to the success of the value offer throughout its lifecycle should be ascertained in considerable detail. The sixth consideration concerns logistics and supply chain management. Inbound (expectations of suppliers) and outbound (customer expectations) are important considerations whether procurement and manufacturing are internal or external to the organisation; both have an impact on end-user service and their relationship to the network organisation. The seventh activity is to develop a network resource capability profile identifying the resources required (and their ownership) necessary to meet the customers’ expectations of value. The exercise should include identification of the most likely constraints and put in place counter measures. Slywotzky and Morrison (1999) argued that during the 1980/90 period “hundreds of billions of dollars of market value have migrated from old business designs to new”. The ‘high value’ businesses are not necessarily the largest organisations but are the innovative organisations with creative business models. Close attention to customer and market shifts that indicate changing customer behavior, and that indicate changes in their expectations, changes that are likely to become part of their choice criteria for a significant future and therefore should be read and understood and used to modify the value proposition and the business model design. The key question for any firm participating in a value network is whether it can extract value for its stakeholders. The answer to such a question can be found by mapping the value chain network with the objective of establishing not so much where value is being added, or where cost occurs, the time taken to deliver customer value, and at what risk—but whether the relevant value is being delivered and whether this is achieved efficiently. This requires an understanding of the fixed and variable costs involved on a process by, process basis and internally and externally. It is very likely that value-adding roles and tasks can be performed more effectively and/or efficiently, if relocated within the network resulting in improved fixed asset utilisation and reduced variable costs by increasing volume throughput and improving capacity utilisation. Four quantitative measures by which competitive performance can be measured are: total cost, value added, time taken to identify/deliver value, and the cash-to-cash cycle. Mapping also permits some ‘what if’ scenarios; co-opetition (working with competitors), co-productivity (using supplier and customer resources (primarily time and expertise), and co-creativity (using the ‘design skills’ of customers), to create, produce and deliver the value expectations. Chapter 19: Reimagining the Value Chain Network—is the final chapter and considers value management within the context and structures of organisational excellence and the structure of an operating model that enables its implementation and how it will impact the value chain network’s strategy and structure.

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One large and relevant business application, Smart Manufacturing, can fundamentally change how products are designed, manufactured, supplied, used, remanufactured, and eventually retired. Current smart manufacturing implementations are mostly at the plant level, and use information technology, sensor networks, computerized controls, and production management software to improve efficiency. An interesting apparent difference between industrié 4.0 and Industry 5.0 is the mention of technology/human interaction. “Industry 5.0 will deliver the recognition and acceptance that is needed to combine the speed and accuracy of technology with the creative and cognitive skills of people. This will promote a more robust and competitive environment”. Based on Industry 4.0, Japan raised the concept “Society 5.0” in 2016, which is a technology-based and human-centered society. According to the Japanese government, Society 5.0 represents the fifth form of society in our human history, chronologically following hunting, farming, industry, and information. Value Management is based on defining and adding measurable value, this is typically measured as economic profitably. It is a holistic process and operates on an intra and inter organisational basis. Value producing networks exist for as long as all stakeholder expectations continue to be met. Value management has four constituent components, value contribution and cash flow, organisational excellence, the operating model, and focused response capabilities. Value Management is concerned with the creation of sustainable value, for end-user customers and for networked organisations’ partners involved in the RD&D, production processes, delivery, serviceability, and value renewal process that comprise stakeholder satisfaction. Value Management is based on defining and adding measurable value, this is typically measured as economic profitably. It is a holistic process and operates on an intra and inter organisational network basis. Value producing networks exist for as long as all stakeholder expectations continue to be met. Value management has four constituent components, value contribution/EVA/economic profit, organisational excellence (comprising strategic organisational excellence, operational organisational excellence) and an operating model. Strategic Excellence requires a clear and sound mission, vision, and a “logical” strategy. Operational excellence is the process of optimising an organization’s business operations. It is a common phrase used by management to refer to the process of making a commercial company more successful. Organisational Excellence is about identifying and implementing processes that are consistent with the organization’s strategy and goals. The entire organization should benefit from the strategic and operational excellence of a single activity or process. Success results in positive value management. A model for operations management model: current operations has two components, short term (current operational decisions) and long term (strategic decisions). They comprise growth related issues such as: strategic and operational, asset planning and management, digitisation, digitalisation, and connectivity, business process excellence management, corporate/network sustainability, collaborative network relationship management, and performance management.

17 Introduction

321

An appropriate set of capabilities to respond to market opportunities is also an essential requirement. The rapid rate of change in both consumer expectations and the technology driving responses involved in managing the speed and accuracy of customer response requires organisations to be alert and to monitor customers and value delivery systems that vary frequently. Stakeholder relationship management, another important aspect of business management, also requires an alertness to capability response currency. Among the key diagrams in Chap. 19, Fig. 19.4 applies operational organisational excellence and capability responses, the approach views the firm as a portfolio of capabilities that evolve in response to the (perceived) demands of the business environment. It will be recalled that response capabilities are characteristics that reflect an understanding of the marketplace, the expectations of its stakeholders and of the opportunities it offers and, therefore, the characteristics of the capabilities essential for successful engagement, and Fig. 19.5 introduces, capabilities—network focussed growth performance management capabilities and identifies the necessary managerial capabilities required to build an operating model (both short-term and long-term). These are core features of an operating model. These are Strategic and Operational asset planning and management, digitisation, digitalisation, and connectivity, business process excellence management, corporate sustainability, collaborative network relationship management, creativity, performance management. Fig. 19.6, Network Coordination Operations, identifies and requires an approach that is—adaptable to change, leadership and teamwork, competitive/market leader: customer relationship, customer-led business decisions. Fig. 19.7: identifies the role of Value Contribution/EVA in an operational organisational excellence model, where Fig. 19.8 suggests managing operational cash flow a primary metric in any business model. Figure 19.9: Coordinated network activities and responses to customer expectations: presents the operating model combining Organisational Excellence, building an organisational excellence-based response operating model and detailing performance decisions process. Fig. 19.10: The value management operating model comprises a series of interacting technology processes supported by accessible support activities. Often these activities become increasingly effective and become permanent features, for example, digitisation, digitalisation and connectivity and advanced analytics have recently become essential components in the operating model. The current business environment suggest cyber security and block chain technologies will become permanent features and end2end value delivery is another as competitive advantage requires “technology needs” transfers. Essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders. The remainder of Chap. 19 uses these topics to develop a value model that extends the horizon of the value management model to consider a longer term, strategic, decision-making application. What are the implications for the Value Chain Network? Industry 5.0/6.0 connectivity will influence value chain network effectiveness, efficiency, human engagement and reimagining the value chain. The operating model with its core

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construct of customer-centricity, product-service-market (not project) thinking, integrated teams, a culture of experimentation and innovation, and value measurement enables the adoption of a framework to evolve to a future-ready operating model. While each component generates business benefits, true business agility requires an initial focus on customer journeys and product thinking before talent, platforms, and governance. Digitised (end2end/producibility) of collaborative relationship management in the value chain is becoming a viable structure for a network based operating model for maintaining organisational excellence (Fig. 19.21). Figure 19.22: component differentiation enhances selective purchasing appeal, and profitability using product platforms, and standard components (typically engine, transmission, and invisible body components). Chap. 19 identifies a few automobile manufacturers that have found this profitable. Fig. 19.23 (the existing automotive value chain platform: a composition of focused specialist platform activities) illustrates the existing automotive value chain platform (a composition of focused specialist platform activities) that has supported the industry in recent years. The evolving automotive value chain platform for the EV (electric vehicle) automotive industry (Fig. 19.24) comprises a sequence of complex specialist capability-­ led platform activities and suggests the eventual shape of the EV, changes (manufacturing, transmission, and recharging) are making impact. However, investment problems appear to be delaying a comprehensive range of charging points. Fig. 19.25—presents the development of specialist value-adding platforms capable of focused and agile responses to changing end-user expectations with an automotive market example. Digitisation, digitalization, and connectivity can make the customer a coordinating role player in the Customer/OEM/S-SME/OEM partnership interface and having strict specialisation criteria considerations within high technology markets/ industries will require an operating model to ensure high levels of organisational excellence are determined and maintained (Fig. 19.26). Applying process mapping to value chain network activities and data flow and capture digitisation and connectivity (Fig. 19.27) are becoming features of the digital value chain.

References Anderson, J., Narus, J., & van Rossum, W. (2006, March). Customer value propositions in business markets. Harvard Business Review. Slywotzky, A. J., & Morrison, D. J. (1999). The profit zone: How strategic business design will lead you to tomorrow’s profits. Wiley.

Value Chain Analysis and Mapping

18

Introduction Chapter 3 discussed the background to the development of value chain networks and presented a review of current developments. It was suggested that competitive pressures will see networked organisations as a significant feature in market structures for some significant period. It outlined the rationale for firms engaging in networked behaviour—improving profitability, productivity, reducing risk, leveraging market drivers, and adding value. That is the “why” of the value chain network.

Mapping and Auditing the Value Chain Network This chapter attempts to address the “how” value chain networks create value. The first step is to understand whether the value chain as a whole works and why; and how successful it is in achieving its objectives. The second step is “who” the network members are; and third how network members decide upon their relative strengths and weaknesses and the opportunities and threats that network membership offers. In other words, for a firm to make sensible decisions about how it participates in a market it needs to understand how the value chain it will be participating in works and how attractive it is, and then how the firm itself can contribute and extract some of that value for itself. This is a dynamic process, and it is sometimes difficult to distinguish between incrementalism and conscious strategic positioning. The evolution of personal computing over the last 20 years is a good example where there has been a constant change in product specifications with consistent increases in hardware processing capacity, storage and in software capability. Underlying this incremental improvement model by model, have been more fundamental shifts—from static desktops, to clunky “luggables”, to portable notebooks, to netbooks and now tablets. Each change has been accompanied by reconstitution of value chains. While this has © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_18

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often been portrayed as major events occurring at single points in time—Microsoft launching a new version of Windows or Apple presenting the iPad to the world—the reality is that these are really marketing events in a complex process of a value chain coalescing. The telecommunications industry is another example of an industry undergoing fundamental change—where consumers’ expectations are changing from simply sending voice messages by telephone to accessing much broader and complex “content”. This is reflected in the construction of broadband networks—the NBN in Australia being a good example—where the ultimate use of the network and its economic justification is applications “yet to be invented”. There are a few ways this market repositioning happens. Apple is often cited as a company that has been “reinventing” itself from a computer hardware company to essentially an entertainment company. This has been largely an internal organic process building on the development of a series of new products and services. Other companies reposition themselves by acquiring new skills or access to new markets. Dell—the classic example of a low-cost hardware manufacturer has sought to reposition itself in IT services markets by acquiring Perot Systems. Hewlett Packard similarly has sought to consolidate and diversify the services segment of its activities by acquiring EDS. This chapter does not look to canvas the broad scope of market and product strategies, but simply to make the point that when thinking about strategic change it is not just about the market and not just about the firm, but the whole value chain network context needs to be understood—there are critical network participants who are neither necessarily customers, competitors, or even direct suppliers.

 nderstanding how the Value Chain Works in the Market: Can U Price/Value/Equalisation Be Created? The first and obvious question is whether the value chain network, as a whole, is in a position potentially to create value for its participants. In this chapter we view this in terms of creating market and financial value in a commercial context—customer viability—‘fit for purpose’ concerns customers’ expectations relative to their perceptions pre-purchase. The same questions and same principles apply to not-for-­ profit and government enterprises—can this value chain deliver on its objectives—be that a charitable purpose or delivery of a social service. Whether a Value Chain as a whole—that is the collection of member firms that all contribute to the end product-service-market acquired by the customer is largely dependent on whether it delivers value to the customer and to network members—a supplier economic viability performance feasibility concern. Figure 18.1 applies the model to show there needs to be a match between the value proposition, the supplier network can create, delivering, servicing, and demonstrating corporate responsibility bearing in mind the resources it has available and can viably use, and the customer’s value expectations.

Customer Value Drivers?

Customer Expectations’ Characteristics • •

•

•

Market Attractiveness Marketing forces Competitive intensity Market access Substitutes Low

Fig. 18.1  Matching customer expectations and resources management

Suppliers’ Economic Viability?

Customer Response to Value Proposition – Customer Viability?

Value Proposition “Fit?”

Potential Business Responses Assuming “Fit”?

High

High

Required: Resources Advantage • Assets (Tangible and Intangible) • Processes ● Capabilities ● Capacities • Creativity (Product-Service/Value-Delivery) • Network Integration & Coordination (Effectiveness & Efficiency) • Performance (Profitability & Productivity) Constraints: • Market growth/saturation trends ● Patent lifespan • Increasing input prices ● Decreasing input availability • Resource substitutes ● Exchange rate movements • Climate led supply continuity disasters

Relevance of Current Resources Portfolio

Low

Strategic and Operational TimeLine Requirements

Introduction 325

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To evaluate this fit, and the extent of its longevity it is important to understand resource based competitive advantage characteristics. The model identifies the resources that exist or are available within (and/or accessible by) the value chain network and the time prescribed by the customers’ expectations. The significant component of the analysis is to match target customer value drivers with network resources. Put simply, there can be no viable value chain if it is not capable of creating the outputs in terms of goods or services. To do this requires an initial appraisal of the structure and strengths and weaknesses of all the resources in the network. The production of commercial aircraft is a good example of a complex value chain with a very large number of participants. The delays that occurred in the production of the Boeing 787 were suggested to be the result of incorrect assumptions by Boeing—as the value chain integrator—on the abilities of their suppliers to meet R&D challenges posed by the new materials being used in the production of the aircraft. In the context of Fig. 18.1 this was a resource failure. Similarly, it has been suggested that Toyota’s quality problems (2009/10) were caused by senior management’s shift of focus towards competing with GM for market size and away from the supply chain, again a resource failure. The 2011 earthquake/tsunami in Japan created component supply delays in Japan, as did the severe flooding in Queensland for the supply of fresh fruit and for coal and other minerals earlier in 2011. Simply having the appropriate resources does not mean that a viable value proposition will be created. There are other constraints such as market growth/saturation trends, increasing input prices, decreasing input availability, resources substitution, and exchange rate movements that are occurring in both sourcing and consumer markets. These are issues that impact upon market and value chain positioning. Figure 18.2 is based on the model in Fig. 18.1, and is in effect, asking the questions that need to be asked: can a value chain create value by ultimately eliciting a “customer revenue response”—in other words customer response to the value proposition and purchase, the end product-service-market customer viability—‘fit for purpose’—and the response is sufficient to meet supplier economic viability performance criteria—that is—it generates positive cash for the value chain participants over the planning cycle period.

How Is the Value Chain Positioned in the Market? Market positioning is the next key consideration as to whether a value chain is viable and can be defended against competitors. Fig. 18.3 sets out the key drivers of the market positioning alternatives that are possible. In evaluating these market opportunities or alternatives, it is suggested, drawing on Best (2004) that there are three interlinked assessments that need to be made of how a value chain is positioned in the market. The first requirement is an assessment of served market attractiveness driven by characteristics such as size, segmentation, growth rate(s), buyer power, and customer loyalty. Strong buyer power and customer loyalty can for example prove difficult obstacles to new market entrants.

Required Customers’ Revenue Responses

Customer(s) Value Drivers

Market/Customer Attractiveness

Assets Relative Resources Advantage

Value Chain Network Positioning Requirements (Response: Roles, Tasks and Members)

Customers’ Revenue Response?

Capabilities

Capacities

Processes

Network Partners

Suppliers’ Performance Expectations?

Value Driver Sensitivity Analysis

Supplier Economic Viability/Performance

Creativity

Supplier Viability

Required Resources Responses and Costs

“Ideal” Value Proposition?

Competitive Advantage?

Market Access

Fig. 18.2  Using value driver analysis to determine value driver response

Value Proposition

Feasibility

Customer Facing Processes?

Competitive Intensity

Market Forces

Introduction 327

Market Positioning Alternatives Strategic Market definition hHorizontal market alternatives hVertical market alternatives

Competitive Profiling hDirect and indirect competitive networks hDominant organisations/Shares hMarket coverage hMarket penetration hCompetitive characteristics hShare of ‘market added value’

Fig. 18.3  Assessing market attractiveness and exploring marketing response requirements and implications

Competitive Advantage Positioning hDifferentiation Product characteristics Service characteristics Brand strength Relative price hCost Management Rank Order Unit costs and Distribution service costs Weighting Marketing costs (channels) hMarket Advantage Market share/Brand awareness Share of ‘market added value’ Distribution options/penetration

Served Market Attractiveness hMarket Forces Market size, Growth rate, Buyer power, Customer loyalty hCompetitive Intensity Number of competitive VCN’s, Price rivalry, Ease of entry/exit, Patent life-spans and Substitutes hMarket Access hEntry/Exit costs Customer product/brand familiarity, Channels access, Company ‘fit’

328 18  Value Chain Analysis and Mapping

Introduction

329

Competitive intensity is another influence on the attractiveness of a market. This can be driven by multiple factors including the availability of “substitute” products. This can be legitimate, but in the luxury goods market the problem of counterfeit products and brands provides an illicit substitute which undermines value propositions. Intensity may also be regulated. Patent lifespans are of concern for several industries, where generic product manufacturing of pharmaceutical products is beginning to become a specialist activity in India, threatening the post-patent sales of volume selling products. Market access is often strongly influenced by the extent to which customers are aware of product and or brand value characteristics. Channel access may be difficult for a few reasons. For example, often value chain intermediaries are not available. Kia and Daewoo encountered great difficulties when introducing their vehicles into Europe some years ago against established dealer networks for other brands. They initially resorted to direct selling and the use of service agents. The publishing industry is another, where “self-publishing” options and on-line sales channels are significantly altering market access dynamics. The second assessment is one of understanding competitive profiles. Successful networks are a combination of a product-service that meets all the characteristics of the target customer groups’ expectations in ways that competitors do not. That competition can be indirect. Traditional bookstores are falling prey to on-line resellers and even to on-line content that is not even in book form. In the UK Ocado; an online FMCG/grocery retailing company is beginning to make its presence felt in the home-delivery market without the benefit of conventional retail outlets. In June 2011 Waitrose announced the end of an agreement with Ocado—Ocado had been selling Waitrose products and this was to end, and Waitrose was to expand their own online activity. The third assessment is how the network is positioned in terms of competitive advantage against other value chain networks. Best (2004) suggests a few key factors in evaluating network competitive advantage. First is the differentiation of product-service and brand strengths to create, or to enter, horizontal markets; and/ or to use specialist strengths to achieve success in vertical markets. In Australia Coca-Cola Amatil has successfully established itself in a range of horizontal drinks markets by developing value propositions within selected horizontal locations (POS retail outlets, sporting venues, and workplace locations (Neverfail a water delivery product-SERVICE); while Metcash (an FMCG wholesale organisation that successfully manages a voluntary group of retail outlets (IGA) has applied these skills to managing wholesale distribution in FMCG and hardware markets. The second factor is cost management. Unit, distribution, service, and marketing costs are all elements of the equation and lead themselves to effective and efficient management through selective partnership management. This chapter will discuss the successful application of operational, strategic, and transformational outsourcing to this aspect of competitive advantage. Finally, Market advantage can be created in innovative ways. Metcash is achieving this in the Australian FMCG retail markets with a creative acquisition policy whereby it is acquiring the chain of a relatively successful food retailer and selling

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the outlets to its IGA retail partners). This will avoid the negative interference of the ACCC (the Australian competition regulator) but will offer enhanced margins by expanding its procurement volumes. Each of these aspects of market positioning (understanding market attractiveness, competitive profiling, and competitive advantage), has an impact on the positioning alternatives/opportunities of value chain networks.

 nderstanding how Organisations Position themselves U in the Value Chain Successful value chain partners work together with other partners each of whom offer complimentary expertise—assets, processes capabilities, and capacities. What criteria then should be used to decide when and how to participate in a value chain network? This is particularly the case when it is probably participating in multiple value chains at any time, each of which is dynamic. Value chain network membership is only attractive to an organisation if an opportunity to increase its financial or marketing performance is available. Industries and customers have matured, original customer groups that were once profitable have become less so and new, smaller, segments have appeared. Customer expectations fragment and move in many new directions and the resources of organisations have also changed. Unless agreement is reached on performance and rewards within the network it is very unlikely that a stable network will result. Clearly no potential network member will agree to commit to the network unless some very basic expectations are realised. These are that revenues, profitability, and cash flow should be enhanced and productivity of fixed and working capital should increase such that the financial position of each member is improved. This is one of the tasks of the “network integrator”. This is not necessarily scale driven where bigger is necessarily better. Manufacturing in the Australian apparel industry has largely migrated to Asia in an attempt at meeting price competition, however for those companies who continue to manufacture in Australia there has been some success. This success has come from identifying niche markets within the overall textiles, clothing and footwear market and meeting the customers’ specific needs. Roberts (2010a, b) has identified fashion retailers who have markets within which customers are looking for style, quality, and frequent changes of styles and for such an offer are prepared to pay a ‘premium’ price. Roberts (2010a, b) discussed the choices open with CEOs of companies who accept the ‘price’ of succeeding in niche markets, one of which is to operate on lower-than-average industry margins. According to Roberts (2010a, b), Cue Clothing CEO, David Kesby, argued that Cue is not a “price-driven brand it is a style-driven brand”, and responds to its customers’ expectations by delivering a richer shopping experience, through delivery of 20 to 30 new designs to its 220 stand-alone stores and its department store concessions each week, 48 weeks of the year. Cue has managed a four-week product development cycle (product concept, testing, acceptance and into sale stock). Some of the organisations researched by

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Roberts (2010a, b) do use limited offshore manufacturing. One company, a specialist jeans manufacturer, plans to tackle the US market and is planning some Chinese manufacturing to cope with the very large volume requirements. Another approach is to source ‘accessories’ offshore together with ‘non-fashion’ items for which the style expectations are not as important and for which stringent control is not required. Clearly there is a model here that if used selectively identifies and matches production capabilities and capacities with customer needs to meet the different segment expectations. It explains the success of organisations such as Li and Fung whose large network of 12,000 partners can meet a range of value propositions. In many respects then this is a microcosm of the sort of analysis undertaken of the value chain network as a whole set out earlier in this chapter. This is shown in Fig. 18.4. Key to this is an understanding of the role a firm intends to undertake and the dynamics this involves. The network integrator or organiser often implies a commitment or exclusivity to the network often as the brand owner, while the process specialist or complementor may be a contributor to several similar and competing networks. The consumer electronics industry is a good example where value chain organisers such as Sony, muster together the same specialist partners in the form of contract manufacturers as their brand competitors. The integrator is essentially the visionary who can identify ‘market gaps/opportunities and identifying the resources required to compete successfully with incumbents or to establish a dominant position for the network rapidly. The integrator should also be capable of identifying specific roles and creating role specifications for the network organisation. This will include decisions such as the need to include ‘branded component’ suppliers if their credibility is seen as an essential contribution to establish credibility for the network. The network established by Dell Computers is an example of this with the input of Intel and other component suppliers; their collective reputations for quality and reliability can enhance the “brand image” of the network.

The Organisation’s Operating Model and its Place in the Network Where the organisation is capable of positioning itself in a value chain network is largely a function of its operating model, as well as its business model. This is addressed in Fig. 18.5. Typically, each business model criterion has a clear range of objectives that link with the overall market and financial objectives of the organisation. For example, a return on net assets will be reflected in a capital intensity objective (financial gearing) and lower operating costs will be reflected in an operational gearing objective. This business model capability can be tested. Since the advent of wider adoption of mass customisation and product platform technology, value chain network “associates” have been used to develop ‘experimental’ value propositions, aspects of which when proven are then introduced in larger volume market segments. This has been the case with the VW-Audi Group whose Skoda division was developed as an

Network Attractiveness hSize/segments and growth rate hVertical markets hHorizontal markets h“Fit” of product-service categories (scope for contribution) hRelevant brand/customer relationship(s) hOpportunity to add value h Access to market and/or resources hAvailability of partners hAcceptable Return/Risk profile

Competitive Capability Profiling hDirect and indirect competitive networks hDominant network organisations/shares hMarket coverage hGaps? hCompetitive capability characteristics hInvestment requirements hOperating costs hControl

Value Chain Network Positioning Alternatives/Opportunities h“Industry Visionary and Coordinator” hBrand Manager” h“Contract Manufacturer” h “Process Specialist” hComplementors

Fig. 18.4  Evaluating the value chain network for positioning opportunity

Competitive Advantage Positioning Implications ●Non-Price led Value ●Price-Led Value ●Current Resources “Fit”

Target Customers’ Value Expectations hProduct-Service benefits hProduct-service acquisition costs hCustomer value expectations/ value drivers hCustomer’s “Ideal Value Proposition”

332 18  Value Chain Analysis and Mapping

Value Chain Network Positioning?

• Decrease response time management - time-to-market (a strategic consideration and operationally, the order cycle and cash-to-cash cycle times)

• Managing both cash flow and profit - profitability is essential but positive cash flow indicates a sustainable business

• Reduce financial risk - defined as the variance between target and actual returns spread

• Reduce business risk - defined as fluctuations in planned market volume, value capture, and market share(s)

• Lower operating costs reflecting optimal economies of production and increased customer response (reducing customer acquisition costs and increased transaction values)

• Distributed operations - decisions on partnership profile and network positioning and member roles and tasks

• Optimising capital intensity - lower investment in fixed costs and working capital

Business Model Criteria • Adopting a customer-centricity approach - a focus on the customer’s customer thereby ensuring close attention to customer needs throughout the value chain network

Fig. 18.5  Using business model criteria to determine market and value chain positioning structure requirements

Non-complex Production • Long production processes • Standard (non-complicated) products • No differentiation • Non-fashion • Labour intensive • Unskilled labour

Management capabilities for: Complex Production • Short-product processes • Differentiated • ‘Fashion’ • Complex products • Quality • Skilled labour

Creating and managing market access facilities: • Product-Service-Market Profile(s) • Marketing and Sales Operations • Market Entry Network • Market Management Networks • Logistics Capabilities

Capabilities? Managerial capabilities for: • RD&D and Innovation • Re-purpose design and innovation • Product-service innovation • Process innovation • Core and Non-core capability contracting (e g, R&D, manufacturing)

Market Positioning?

Resource Capability Options? • Partnership and Alliances • Constraints (IP, Patents) • TimeLine to-Access TimeLine to-Build

Assets? Tangible • Procurement • Manufacturing • Distribution • Support Intangible • Brands • RD&D and Patents • Supplier and customer relationships • Industry experienced management

Capacities? Complex Production • Short- product facilities • Differentiated • ‘Fashion’ Non-complex Production • Long production facilities • Standard (non-complicated) products

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incubator for several developmental projects that were pioneered in minor brands and subsequently moved into the volume ranges. An understanding of the customer expectations of expected product-service benefits and acceptable product-service acquisition costs is important. A “brand” such as IKEA must be aware of the balance of customer expectations of benefits and their acceptance of acquisition costs and the precise nature of this trade-off if they are to design a network that offers profitability and productivity advantages to network members and of course to the company itself. Anderson et al. (2006) describe the activities B2B companies as they develop a customer value proposition. Essentially, they are conducting an audit of customer value drivers that impact on customer performance. An example given by the author is based on Rockwell Automation who identified the cost savings from reduced power usage that customers would gain from purchasing Rockwell’s pump solution rather than from competitive offers. The evaluation of the network attractiveness can be supported by a specific review of competitive capability activities. Often local organisations identify opportunities and threats and move towards strategies and structures that close the gap. Lloyd (2007) reported on a transformation in Australian manufacturing that is significant and relevant. Lloyd reports on a dramatic shift in the type of business now becoming successful in areas that were once dominated by “high volume—low value” manufacturing such as textiles (apparel and footwear) are now being replaced by food processing, advanced aero-space, pharmaceuticals, and medical devices. Lloyd (2007) quotes the Greater Western Sydney Economic Development Management who report significant statistics: “while manufacturing has fallen from 21% of the regional economy 2 years ago to 19% today, in value terms it has risen from $14.4 billion to $15.5 billion. This compares with the NSW total of $33 billion. This has implications for business models. The “high value—low volume” companies will require an emphasis on the confidential management of the transfer of information flows while the “high volume—low value” organisations will need to focus on the cost and time efficient management of materials flows and of transactions flows as cash management becomes increasingly important in industries in which margins are constantly under pressure. If the organisation is to identify with a role within the range of value chain processes, it is sound business sense to establish itself in that role and to monitor potential competition that may attempt to undermine its positioning. This requires rigorous self-analysis and takes a prospective view of product and process developments together with a similar long-term view of competitive activities. Often this suggests to an organisation that possibly due to value migration or perhaps an external shift in the industry characteristics due to changing technology or may be relationships structures, a company may consider it timely to shift its positioning within the value chain. Internal factors may also suggest this to the organisation’s management as the organisation develops new skills. How does the firm evaluate these business model decisions and relate them to participation in a value network? Perhaps the simplest answer is to assume a ‘start­up’ value chain network design exercise in which the value chain organiser facilitates the structural decisions and identifies ‘ideal’ profiles of network members.

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This shows the overall network value creation processes can be disaggregated into separate but inter-related processes: Market and customer profiling: Customer expectations are identified; value drivers are formulated, and a value proposition is developed and verified for customer response. Design and development: From which product-service and process specifications result. Operations management: Given the product-service and process specifications the optimal procurement, manufacturing and distribution processes that will meet end-user and value chain network partners are determined. Marketing: Selling and transactions channels, and sales and service operations; determine how value is delivered and serviced such that product-service continuity is maintained. Figure 18.6 identifies the inter-organisational nature of process coordination; customer relationship management and the leveraging of customer inputs (co-­ creativity), and the use of specialist RD&D organisations (co-productivity) to identify value expectations and value creation. Supplier relationship management is also managed along similar lines with many large organisations (e.g., Phillips Electrical and TomTom) not involved in the physical processes of manufacturing but choosing to ‘manage’ the outsourced processes. Customer relationship management also assumes the responsibility of sales operations, physical distribution, and Competitor Relationship Management Co-opetition Customer Relationship Management

Customer Relationship (Value Expectations) Management Co-creativity (Value Expectations)

Co-productivity Co-creativity

Co-productivity

Co-opetition Customer Relationship

Supplier Relationship Management

Management

(Value Production)Supplier Relationship Sales Operations & Physical Distribution Management (Value Delivery and Serviceability Management) Co-productivity(Value Production)

Co-productivity

Co-productivity Integration

Co-productivity

Integration

Coordination

Total Cost Customer and Stakeholder Value Expectations

%

Total Operating Cycle TimeLine

Delivered Value Performance Outcome(s)

Total $Value Added Network Added Value Total Added Value of Market

%

Fig. 18.6  Value chain network—Integrating and coordinating relationships and roles

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18  Value Chain Analysis and Mapping

service management (co-productivity). Increasingly competitor relationship management is assuming a role as organisations seek the benefits of leveraging jointly owned facilities to achieve greater utilisation of assets and all-round productivity. The diagram emphasises the dominant roles integrating and coordinating the processes that deliver customer centricity, collaboration, and the response to value migration. Figure 18.7 expands the previous diagram to consider the activities and the integration and coordination processes. Activities may well be performed individual businesses/SMEs (this will depend upon the extent to which a ‘specialist’ input is required for differentiating the product-service) or there may well be a role for an organisation to undertake two activities (this is suggested in Fig. 18.7 with the linking of procurement and manufacturing and may well involve a roles of industry suppliers such as Covisint and Elemica. A critical part of the decision is an estimate of operating costs, the $ value of the value added, the impact on cycle time and impact on the balance or risk throughout the network, and the generation of positive cash flow. Operating costs need to be kept at a level at which the customer value proposition can be delivered and that remaining stakeholders are satisfied. Adjustments (or changes to the structure of the network) can only be justified if the value that is eventually delivered is enhanced or if the total cost can be reduced. This may involve cost trade-off opportunities because of ‘value-overlap’ opportunities. Value added is an important metric as it is an indication of the ‘power’ that the network has by virtue of the tangible and intangible investment characteristics that create value contribution and competitive advantage(s). However, this said, the ‘value added’ should not only have a positive value, in dollar terms when compared to its cost, it should also demonstrate an acceptable level of process productivity (it is in effect an efficiency measure that indicates the successful implementation of the network strategy). Failure to do so will negate any perceived advantage it has assumed to bring to the network. Cycle timeline is another important consideration; cycle times impact upon working capital efficiency by impact on the cash-to-cash cycle. Cash flow management (cash2cash cycle) is an important metric as it has an impact on the level of funding required throughout the network. There is a connection here between cycle timeline and the financial aspects of risk management. The other aspect of risk, market risk, is also influenced by cycle timeline management (overall delivery time and delivery frequency and reliability and the competitive impact of these aspects of customer service). It is also influenced by the ability of the network to deliver the ‘brand/reliability’ expectations of customers concerning quality, serviceability, and availability. The total productivity of the network is an indication of the effectiveness of the network business strategy, structure, and interactions strategy.

Design and Development

Cycle Time Taken/Days

+/- $Value Added%*

Operating Cost %

Operaons: Manufacturing

Aspects of Relave Network Compeve Advantage: • Operang costs lowered • Relave share of total market value added/compeve networks • Time2market •Customer response me • Operang cycle meline • Cash-to-cash cycle • Operang margin/EVA Risk • Posive cash flow generaon

Cycle TimeLine Taken/Days

Cycle Timeline Taken/Days

Total Cost 100%

Serviceabilty

Total Cycle Timeline Taken/Days

Total $Value Added%*

Customer Relationship Management

Physical Distribution

Operating Cost %

Markeng and Channels Management

+/- $Value Added%*

Operaons: Distribuon

(Value Delivery)

Competor Relaonship Management Manufacturing Markeng & Sales Operaons Physical Distribuon Sales Operations, Distribution “Serviceability” and Service Management

+/- $Value Added%*

Operating Cost %

Supplier Relationship Management

Operaons: Procurement

(Value Production)

Production Operations Management

Fig. 18.7  Mapping VCN activities, value added contributions, and costs

Customer and Stakeholder Value Expectations the Value Proposition

Customer Relationship Management

(Value Expectations and Creation)

Market and Customer Profiling

Research, Design and Development

Integration and Coordination Processes

Activities that may be businesses

Delivered Value Performance Outcome

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Response Capability Scoping Before a value chain network can be constructed a ‘scoping exercise’ is essential. The attraction and purpose of network organisations is the effective use of assets and efficient operations; it is unlikely these will occur unless opportunities are met by appropriate resources. Developing a capability profile is shown as Fig.  18.8. Response capability analysis comprises seven separate coordinated steps. First, what is the customers’ expectation of value? A few questions are raised at this stage each aiming at determining the demand characteristics of the potential market and its segments. An important question concerns the complexity of the market and the influence this has upon customer expectations, their value drivers, and current competitive responses. Second is the role of demand and development activities. In a few product-markets (for example, pharmaceuticals and aerospace) R&D expertise is becoming specialist and is often the role of a partner organisation. The questions that should be addressed are to consider whether this activity should be in-house or outsourced; here concerns over time-to-market as well as investment in R&D become paramount. A decision to outsource the activity leads to further questions concerning who and how the task will be managed. The third consideration concerns procurement and manufacturing. Again, several questions are raised; customer expectations may require complex solutions as well as a product-service (hardware) solution and this may require a choice between these options (the problem IBM confronted), alternatively the requirement for choice may suggest that all (or part) of the procurement and manufacturing be outsourced. The requirement for differentiation may also raise the outsourcing question concerning the use of specialist component suppliers. It is interesting to recall that Phillips and TomTom are reported to use manufacturing outsourcing managers in this role. A fourth question concerns the role of marketing and sales operations. Not only do we require data detailing market volumes and locations but increasingly patterns of flow are necessary if customer availability and order cycle time requirements are to be met; identifying and responding to these is becoming a critical component of competitive advantage and providing this data is seen as a major role for marketing and sales operations. The fifth decision concerns service operations management and the importance of service to the success of the value offer throughout its lifecycle should be ascertained in considerable detail. Service support may be required as early as the ‘specification’ process and may extend throughout the life of the product—even to its retirement and replacement. The PRODUCT-service/product-­ SERVICE/product-service-MARKET characteristics of many B2B markets due to commoditisation should be considered at this stage rather than left to chance. The sixth consideration concerns logistics and supply chain management. Inbound (expectations of suppliers) and outbound (customer expectations) are important considerations whether procurement and manufacturing are internal or external to the organisation; both have an impact on end-user service and their relationship to the network organisation. All the supply response service characteristics identified will be important to a greater or lesser degree depending upon the product category

What is the Network’s Resource Capability Profile? Required & Availability Resources Advantage i Assets (Tangible and Intangible i Processes i Capabilities i Capacities i Network Integration & Coordination (Effectiveness & Efficiency requirements) i Performance (Profitability & Productivity) i External and Internal productivity characteristics Constraints i Market growth/saturation trends iIncreasing input prices ● Decreasing input availability ● Resource substitutes ● Exchange rate movements ● Regulatory authorities Seven

Value Chain Network Response Capability Scoping Profile

Fig. 18.8  Capabilities scoping: Identifying value chain network positioning options

Design and Development iWhat is the required R&D expertise? iWhat resources (assets, processes, capabilities and capacities are required for success? iWhat are the investment implications (capital, capacity, forecast utilisation?) iAre they already available? iWho owns them? iWhere are they? iWhich of them are “core” to the customer/market opportunity? iWhat are the competitive issues? iAre there enablers that can create a CA iWhat is the likely number of tasks the product will be expected to undertake? Two

What is the Customers’ Expectation of Value? iWhat is the customer value to be delivered: customer/market “value driver” characteristics? iMarket/segment volume? iWho are the end- users? iIs the product-service a candidate for imitation and commoditization? iWhat are the preferred product-service format alternatives? iWhat are the product-service production format alternatives? iHow active are competitors? iWho are they? iDo they have a presence in all market or specific segments? iWhat are the market constraints (if any)? One

Procurement and Manufacturing iProduct complexity iThe role of differentiation iMarket/production volumes iRange & variety iProduction process options; Project? Job? Flow Line? Continuous Process? iProcurement profile; Standard components (product, industry) Modular build? Exclusive/specific components? Industry purchasing group? Three

Logistics and SCM iSupply market L&SCM service requirements iCustomer L&SCM service expectations iOrder cycle management/lead time iInventory availability iDelivery frequency/reliability iOrder accuracy iAgility iProduct Returns iFlexibility iBack or er management iReverse logistics iInformation Six

Service Operations Management iWhere will the product operate? iWill service facilities be nearby? iWhat service skills are likely to be available? iWhat is the service parts availability profile? iWill product failure result in penalty payments? iCustomer expectations of “service”? iWill product user training be required? iExtent of technical service requirements? (Distributors and Customers) i Competitor service processes and performances? iAvailability of service intermediaries? iPRODUCT-service/product-SERVICE? issues Five

Marketing and Sales Operations iMarket/segment volumes? iMarket/segment locations iAvailability of demand information - the characteristics of customer expectations iHow is the product to be sold? iTechnical information requirements? iSelling staff skills and product knowledge requirements? iCompetitors and competitive products? iAvailability of distributors and their ‘quality’? Four

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being serviced. Reverse logistics, the ‘management of mistakes’ is often overlooked and should be addressed, and a ‘policy’ established and made known to customers. The seventh activity is to develop a network resource capability profile identifying the resources required (and their ownership) necessary to meet the Customers’ Expectations of Value. The scoping exercise will have identified the assets, processes, capabilities, and capacities required for success. It should also detail the extent of the integration (strategic effectiveness) and coordination (operating efficiencies) that will be required together with the performance expectations (contributions to profitability and productivity) of each activity. The exercise should include identification of the most likely constraints and put in place counter measures.

‘Auditing’: Monitoring the Response—Tracking Value Migration Slywotzky and Morrison (1997) suggest that during the 1980s and the 1990s many fundamental business characteristics changed resulting in very different ways that business is done and what determines business success. They argued during this period “hundreds of billions of dollars of market value have migrated from old business designs to new”. The ‘high value’ businesses are not necessarily the largest organisations but are the innovative organisations whose creative business models include: • High customer relevance • An internally consistent set of decisions about scope (market positioning, value propositions and value chain positioning activities they have chosen to perform) • An outstanding value capture methodology, or profit model • An exclusive means of differentiation and strategic effectiveness that creates investor confidence in future cash flows • An organisational structure that is designed to support the company’s business model design An additional and significant aspect is: Close attention to customer and market shifts that indicate changing customer behavior that indicate changes in their expectations, changes that are likely to become part of their choice criteria for a significant future, and therefore should be read and understood and used to modify the value proposition and the business model design.

The authors provide examples of organisations that identified changing patterns and created new business designs. They cite GE (and subsequently IBM) who moved away from the traditional product-led value proposition to a product-SERVICE offer that included finance, insurance, consulting, and management. More recently Hilti, became aware of the imitation and eventual commoditisation of their product, and repositioned their value proposition to offer a product-SERVICE. In computing

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the authors identified the “disintegration” of the value chain and the emergence of specialist component manufacturers and acceptance of standardisation of components. Coca-Cola “reintegrated” its value chain by acquiring bottlers and distributors. More recently GE has undertaken extensive merger, acquisition, and alliance arrangements to build a credible and powerful base in the renewable and clean energy industry. An example of a customer-led shift was identified by Passeriallo (2011) who reported on the decline of the hypermarket, a business model introduced by Carrefour some 50 years ago. The hypermarket model included food household disposables and consumer durables. Carrefour CEO, Lars Olofsson commented that customers were “either coming to us less often or shopping at supermarkets”. Passeriallo (2011) noted that this was commonplace amongst Western European hypermarkets as customers are now purchasing fewer durable products and when they do they prefer specialist stores. Furthermore, customers can often find lower food prices closer to home. Olofsson is repositioning the hypermarkets to reflect changing consumer expectations; non-food ranges are being reduced and food categories expanded. In-store merchandising has been re-designed with wider aisles, eye-level displays attractive cosmetics counters and colour coded shopping category areas. Passeriallo (2011) adds that post the financial problems of 2008/9, the increase in fuel (petrol) price, the slow but continuous demographic shift (aging populations), increased female employment, and smaller families have led consumers to favour the convenience of local supermarkets rather than the price-led offers of the hypermarkets. Specialist retailers such as Darty (electronics) and H&M (clothing) responded to the lower spending power of consumers with reduced prices; Carrefour made a loss on the non-food categories that occupied some 50% of selling area. Technology applications also can have a major impact on value migration. Spector and Trachtenberg (2011) report on the problems of Borders the book retailer. They commented; “The bookseller suffered a series of management gaffes, piled up unsustainable debts and failed to cultivate a meaningful presence on the internet or in increasingly popular digital e-readers.” Customers became accustomed to receiving book purchases mailed to their homes, or alternatively downloaded to electronic readers. They suggest one of Borders’ biggest mistakes was to outsource its internet operations to Amazon some 10 years ago, a share buyback program and an overseas expansion program that increased the company’s debt. They reported the comments of a management consultant (the CEO of Idea Logical, New York), who suggested; “I think that there will be a 50% reduction in bricks-­ and-­mortar shelf space for books within 5 years and, 90% in 10 years … Book stores are going away”. This prediction became reality. Figure 18.9 illustrates the effects for developing business models, changing consumer purchasing habits and expectations, and the application of technology on value migration. It is difficult to isolate the separate impact of each as it is likely that they are related with each other. For example, online shopping (a technology application) has emerged as a response to diminishing time budgets (changing consumer expectations) and these have been identified by manufacturers and retailers and have resulted in transformed business models.

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Technology Applications

Change in Value Delivery Business Model

Value Delivery

Value Migration

Value Migration

Value Migration

Change in Customers’ Value Expectations

Time

Fig. 18.9  Effects of value migration: changing consumer expectations, suppliers using efficiency to increase their value capture and the application of technology

Can the Firm Extract Value? The key question for any firm participating in a value network is whether it can extract value for its stakeholders. The answer to such a question can be found by mapping the value chain network with the objective of establishing not so much where value is being added, or where cost occurs, the time taken to deliver customer value, and at what risk—but whether the relevant value is being delivered and whether this is achieved efficiently.

Value Chain Network Mapping: Cost Structures Value chain mapping is a useful means of identifying the alternative uses of resources in value production and delivery. It identifies current network members and their roles and tasks in in the value chain network, however an important concern is “co-destiny” or “fit”. An ‘Audit’ should ensure that the essential features of the network are congruent with all current and potential members; they share the same perspectives on, strategic fit—effective direction, financial fit—a viable business model, relationship fit—an effective workable organisation structure, and operational fit—that is capable of efficient implementation. This requires an understanding of the fixed and variable costs involved on a process by, process basis. Fig. 18.10 identifies these items. The diagram identifies typical value chain process costs (fixed and variable items); as the diagram indicates these vary by process. An important feature of the diagram is the suggestion that

Customer Value Drivers

Value Proposition

h”Production” facilities planning & control systems hPlant & equipment, etc. hDedicated staff hMaterials management facilities & systems hCapital Costs

Value Delivery: Distribution

Value Delivery Considerations & Implications

Inter-Process Trade-Off

Variable Costs hOrder progress controls hInstallation visits hMaintenance visits

Variable Costs hPromotions hResearch projects hDistributor liaison hDiscounts given hSelling costs, travel etc.

Corporate Sustainability

Fixed Costs h”Distribution” facilities & systems: order processing order management storage & transportation customer liaison staff

Customer Services Management

Fixed Costs hMarket & customer database hBrand reinforcement hDedicated staff hCapital Costs

Customer Relationship Management

Fig. 18.10  Identifying fixed and variable costs and their planning and performance implications

Variable Costs hInteractions & hSet up costs sourcing and hScheduling control supplier liaison hQC checking hTransactions hStorage & handling hInbound materials management hPayables processing

Fixed Costs hSupply market databases hBuying organisation hDedicated staff Buildings Equipment

Competitor Relationship Management

Supplier Relationship Management

Marketing and Sales Operations

Managing Value Chain Network Planning & Performance

Target Customer/ Market

Procurement, Manufacturing and Inventory Management and “Production”,

Capital Intensity Decision

Variable Costs hDesign starts hPrototype builds hNumber of tests conducted

Fixed Costs hRD&D facilities hPrototype building & testing facilities hDedicated staff Research Support/legal etc. hTechnical database hMarket and Customer databases hCapital Costs

Product-service specification and design

Demand Chain Profile

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18  Value Chain Analysis and Mapping

these be considered on an intra and inter-process basis. The benefits offered relate to the flexibility the network approach offers at the initial stages of organizing a response. For example, if the customer expectations are price/cost-led, then the network structure will be designed to emphasise ‘low-capital-intensity’ thereby ensuring the effective use of fixed assets and the efficient use of inventories. Alternatively, a time-led expectation is likely to require an emphasis on service availability and this may result in higher resource allocation in production capacity, inventory allocations and service dedicated assets. Fig. 18.10 also suggests that trade-off possibilities are likely across the network. It is very likely that value-adding roles and tasks can be performed more effectively and/or efficiently if relocated within the network resulting in improved fixed asset utilisation and reduced variable costs by increasing volume throughput and improving capacity utilisation. It useful to revisit the chapter dealing with Network Economics at this point.

Value Chain Network Mapping: Roles, Tasks and Trade off Choices Figures 18.11 and 18.12 suggests four quantitative measures by which competitive performance can be measured; total cost, value added, time taken to identify/deliver value, and the cash2cash cycle. Mapping also permits some ‘what if’ scenarios; these are indicated in Figs. 18.11 and 18.12 by co-opetition (working with competitors), co-productivity (using supplier and customer resources (primarily time and expertise), and co-creativity (using the ‘design skills’ of customers), to create, produce and deliver the value expectations. While this has obvious cost and control benefits it may also create competitive advantage. One possibility is that co-­opetition (e.g., a competitor may manufacture a standard product) thereby releasing production capacity that can be used to manufacture a new product; another is to explore the possibilities for co-productivity to reduce investment costs (e.g., persuading suppliers to extend their involvement in producing inputs by adding processes to those already being undertaken); and a third is to work with customers’ RD&D facilities (co-creativity) jointly to produce product-service and process designs for specific needs. The alternatives can be resolved by comparing total cost, total addedvalue, and the cash2cash cycle to reach on optimal decision. The benefit offered by value chain networks is the facility to structure resources to meet specified customers’ value drivers; provided a ‘given’ set of requirements an appropriate mix of resources can be structured to meet the priorities the customer determines at an optimal cost. Network mapping can also indicate how well the system competes compared with competitor networks. See Figs. 18.11 and 18.12).

Transactions and Cash flow

Delivered Value Performance Outcome(s)

Supplier Relationship Management (Value Production)

Co-opetition

Co-creativity

Co-productivity

Strategic “Fit” Financial “Fit” Relationship “Fit” Operational “Fit”

Competitor Relationship Management Value Production & Delivery Customer Relationship Management (Value Delivery)

Co-opetition

Fig. 18.11  Value chain network management: Managing resources and activities—qualitative issues

Role and Task Trade-off Potential

Customer and Stakeholder Value Expectations

Customer Relationship Management (Value Expectations)

Co-productivity

Delivered Value Performance Outcome(s)

Total Cost Total $Value Added Total Cycle Timeline Taken (Operating Cycle) Cash2Cash Cycle

Can the Firm Extract Value? 345

Delivered Value Performance Outcome(s)

Customer Relationship Management (Value Expectations) Total Cost Total $Value Added Total Cycle Timeline Taken (Operating Cycle) Cash2Cash Cycle

Co-productivity Co-creativity

Supplier Relationship Management (Value Production)

Co-opetition

Co-opetition

Customer Relationship Management (Value Delivery)

Delivered Value Performance Outcome(s)

Fig. 18.12  Identifying value delivery options: Assessing capabilities requirements; resources and activities—quantitative issues

Role and Task Transactions and Trade-off Potential Cash flow

Customer and Stakeholder Value Expectations

Co-productivity

Competitor Relationship Management Value Production & Delivery

Total Cost Total $Value Added Total Cycle Timeline Taken (Operating Cycle) Cash2Cash Cycle

346 18  Value Chain Analysis and Mapping

References

347

References Anderson, J., Narus, J., & van Rossum, W. (2006, March). Customer value propositions in business markets. Harvard Business Review. Best, R. (2004). Market based management. Lloyd, G. (2007, June 9-10). Smart factories defy strong dollar, Chinese imports. The Australian. Passeriallo, C. (2011) Carrefour expects profits to fall. Wall Street Journal. July 4. Roberts, J. (2004). The modern firm. OUP. Roberts, P. (, April 19). Local factories are Holden their own. Australian Financial Review. Roberts, P. (2010a). Signs of life in textiles sector. The Australian Financial Review., (August 4). Roberts, P. (2010b, August 5). Car industry gets electric shock. The Australian Financial Review. Slywotzky, A. J., & Morrison, D. J. (1997). The profit zone: How strategic business design will lead you to tomorrow's profits. Crown Business. Spector, M., & Trachtenberg. J.A. (2011, February 12). Chapter 11 for borders, New chapter for books. Wall Street Journal. https://www.wsj.com/articles/ SB10001424052748704329104576138353865644420

Reimagining the Value Chain Network

19

Introduction The changing & challenging times are accelerating. Industry 4.0 has completely altered the workforce skill sets required at almost all hierarchical levels and has laid the foundation for an Industry 5.0, where robotic assistance and human labour work will together (Duggal et al., 2021). The concept of Industry 5.0 deals with personalization and synergy between human and machine labour. The era of Industry 6.0 will be one of renewable energy, total machine independence, interplanetary resource gathering and manufacturing, aerial manufacturing platforms, anatomical enhancements, and quantum control. Where Industry 4.0 introduced the usage of smart and connected technologies to reduce production manufacturing time. Satellite traffic will become a trend and orbital traffic could become a trend with more organisations attempting to push out their own modules into space with the objective of establishing their own networking beacons to assist seamless communication with their production pods. AI models in numerous applications will be applied to the adaptation of smart technologies with adaptive and viable business models revolving around the use of new technologies while creating equally new employment opportunities, (Skobelev & Borovik, 2017). One large and relevant application, Smart Manufacturing, can fundamentally change how products are designed, manufactured, supplied, used, remanufactured, and eventually retired. Current smart manufacturing implementations are mostly at the plant level, and use information technology, sensor networks, computerized controls, and production management software to improve efficiency. The focus of the program (NIST, 2018); Smart Manufacturing Systems Design and Analysis Program is the design and analysis of smart manufacturing systems (SMS) that will enable industries to implement activities at the enterprise level, implementing real-­ time control and data analytics throughout the extended enterprise. Applying predictive data analytics across the supply response network offers new opportunities © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_19

349

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for process optimization and emphasize prediction in the (plan, do, study, act) cycle. While industry is making progress in developing and implementing smart manufacturing technologies, the systemic cyber-physical infrastructure and measurement process and protocols needed to deliver and deploy a large-scale smart manufacturing environment remain to be developed. The cost of developing and implementing open software platforms and technologies based on common standards continue to remain high, creating a significant barrier to entry particularly for specialist-small and medium size enterprises (S-SMEs). In the context of manufacturing, “smart” systems are adaptive systems with differing levels of autonomy. Built upon advanced cyber physical systems and data analytics, smart manufacturing system will enable rapid realization of products, dynamic response to changing demand, and real-time performance optimization of production and supply chain networks, i.e., the value chain network model (NIST, 2018).

Where Have we Been and where Are we Going.? Figure 19.1: The Evolving Interactive Customer-Centric Value Chain Network 3.0 describes the recent past and current present. Activities one through six identify recent direction of value chain networks, creating industry platforms that are collaborative, integrated “techno-economic” systems within which OEMs and Specialist SMEs (S-SMEs) create Value-Added Advantage. Figure 19.2: considers the evolving interactive customer-centric value chain network 3.0 and the implications of Industry 5.0. and its potential development direction with emerging Industry 6.0. The answers to the following questions would be helpful: • Over what time period should we consider a viable economic future? A viable economic future is one in which the economic profit generated from investment in tangible and intangible assets and people can reach and maintain profitability acceptable to all stakeholder interests. For example, economic profit from revenues that meets network partners objectives over time and does so within the constraints set (E)ESG and the UN SDGs? • How is your future defined? Use cycle management to help, such as product life cycle management, product engineering cycle management, and asset management life cycles. • Is the value chain network liaising with customers with whom we want to interact in the future? • What problems we will be asked for solutions for in the future? What will be the required capabilities, assets, people talent, relevant to future customers and how can this be planned for effectiveness and efficiency? • What are examples of best practice organisational excellence (in any industry) in the world and what can be learnt from them?

Produce the Value

Communicate the Value

Distribute the Value

Supplier /Customer Relationship Management … Value Delivery

Production program agreed among network partners Product & process, design procurement planning; “serviceability” planning, remanufacturing program

Marketing, sales, Product-service distribution & serviceability remanufacturing & operations planning repurposing planning

… Data Analytics …

…. Value Delivery Data ….

Develop the ProductService Format Profile Value Proposition “Manufacturing” Operations Procurement, Components, Modules and Assembly Identify & Develop Marketing & Sales Operations Activities

Transaction & Physical Distribution Operations

Create “Serviceability” Operations

Explore & Validate “Value Renewal” Circular Operations

Current Activities

Current Platforms ….

Developing Demand Management Platforms ….

Six: Value Chain Networks are creating Industry Platforms that are collaborative, integrated “techno-economic” systems within which OEMs and Specialist SMEs (SSMEs) create Value-Added Advantage

Profile Customer Expectations/ Performance Criteria

Evaluate Performance & Continue or Make Required Changes to Match Capability Requirements

… Collaborative Decisions

Five: Industrié 4.0 is deepening the relationships between manufacturing, customers, and suppliers. Industrié 4.0 shifts manufacturing from isolated, optimized cells of business processes, systems, and resources to fully integrated data and product flows across corporate borders. SAP White Paper Industrié 4.0: What’s Next

Interactive & Co-creative RD&D

Four: Networks that are collaborative business systems that together apply digitisation, connectivity and data analytics management to create an Integrated-connected and coordinated business model to implement producibility with optimal profitability and resources productivity.

Customers’ needs & wants Viable Value Proposition expectations are identified Customer/Network product-service format options agreed agreement

Three: Producibility “strategic and operational Infrastructure”); The fusion of; research design and development, of manufacturing and distribution operations, “serviceability”, and of product-service renewal activities, into a seamless and continuous (end-to end process). Capex business models become Opex based models focussing on organisational intangible assets that contribute to Network Value Advantage

Value Engineering …

Service the Value

Fig. 19.1  The evolving interactive customer—centric value chain network 3.0 and the implications of Industry 5.0

Opportunity Searching, Identification, Analysis, Evaluation and Decision

Create the Value

Two: Collaborative Networks Provide Sequential Product-Services Data, Materials and “Services” Flow

Identify the Value

One: …a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability. McHugh et al. (1995)

Introduction 351

RD&D

Customer/Liaison Research

Producon Operaons Process Design

Markeng & Sales Operaons Planning

Producon/Manufacturing Operaons Management

Markeng & Sales Operaons Planning

Current Plaorms ….

Producon/Manufacturing Operaons Management

Current Ac vi es Plus …

Producon Operaons Process Design

Sales & Physical Distribuon Management Operaons

Sustainability Operaons “ Value Renewal”, &Circular Operaons Management

“Serviceability” Operaons Management

Sustainability Operaons “Value Renewal”. Circular Operaons Relaonships Management

Mul -Brand Focused Plaorms

“Serviceability” Operaons Management

Developing Demand Management Plaorms ….

Sales & Physical Distribuon Management Operaons

Total Stakeholder Sasfacon

Total Stakeholder Sasfacon

Developing Demand Management Plaorms …. Mass Personalisa on

Industry 5.0 links to Industry 4.0 applica ons and establishes a rela onship between humans and collabora ve robots (cobots).

“Smart manufacturing systems” will enable industries to implement real me control and data analy cs throughout the extended enterprise.

Regulatory Sustainability enforcing “ greener” solu ons. Industry-Led Circular Value Chains RD&D will work on Long-Term/Re-Use and for for material recovery

Increased Growth Rate of Renewable Energy

The aim should be to use technology to enable people to use their natural talents and capabili es to increase produc vity. But, in the future, successful manufacturing enterprises will implement technology that enables this human-machine network together with a high degree of collabora on. This will ensure more transparency, reliability and visibility across all plant func ons (Forbes, 2021)

Enhance the quality of the produc on by assigning repe

ve and monotonous tasks to the robots/machines and the tasks which need cri cal thinking to the humans. (5G)

RDM, Remote Diagnos c Management

Fig. 19.2  The evolving interactive customer-centric value chain network and its involvement with Industry 5.0

Eight: Industry 6.0 may well be one of renewable energy, robotic automation,-total machine independence, society and policies, intelligent manufacturing, and attempts using (Astro) space ….

Industry 5.0 will deliver the recogni on and acceptance that is needed to combine the speed and accuracy of technology with the crea ve and cogni ve skills of people. This will promote a more robust and compe

ve environment (Forbes, 2021)

The majority of the produc on process will be automated, as real- me data will be obtained from machines in combina on with highly equipped specialist employees

Industry 5.0 is primarily designed to enhance customer sa sfac on.

Industry 5.0 uses predic ve analy cs and opera ng intelligence to create models that aim at making more accurate and less unstable decisions

And industry 5.0

Current Ac vi es

Seven: Industry 5.0: Value Chain Networks will use the developing Industry 5.0 to create stronger collaboraon between human skills and the developing Cyber-Physical: Compable with its Value Management objecves …

RD&D

Six: Value Chain Networks are creang Industry Plaorms that are collaborave, integrated “techno -economic” systems within which OEMs and Specialist SMEs (SSMEs) create Value-Added Advantage …

Customer/Liaison Research

352 19  Reimagining the Value Chain Network

Introduction

353

• How can the network reimagine smarter ways to leverage value management delivery? What would the effort be in relation to the financial and competitive benefits? • Are the network searches wide enough to understand how future customers want to interact with suppliers in the future? • What response capabilities, assets and solutions are required to increase the network’s relevance to the future customer and how should they be deployed strategically to create effective industry/market leadership? • Where do we stand in relation to our present and future competitors? How much time do we have to improve our competitive position—or stay ahead? • How can radically “smarter” ways be used to leverage network resources? What would the effort be in relation to the financial and competitive benefits? • What is the lead timeline on successfully creating “Organisational Excellence”? How much time is required to improve competitive market and value chain network activities, to create, and maintain, Organisational Leadership? • How do we organize time, operating models, capital investments, and talent resourcing across the short term, the overlap period, and the long term?

The Future and Technology: Some Social Issues An interesting difference between industrié 4.0 and Industry 5.0 is the mention of technology/human interaction. “Industry 5.0 will deliver the recognition and acceptance that is needed to combine the speed and accuracy of technology with the creative and cognitive skills of people. This will promote a more robust and competitive environment.” Kraaijenbrink (2022). On the basis of Industry 4.0, Japan raised the concept ‘Society 5.0’ in 2016, which is a technology-based and human-centered society. According to the Japanese government, Society 5.0 represents the fifth form of society in our human history, chronologically following hunting, farming, industry, and information. The European Union has expressed a view. According to the European Union Industry 5.0, “…provides a vision of industry that aims beyond efficiency and productivity as the sole goals and reinforces the role and the contribution of industry to society.” and “It places the wellbeing of the worker at the centre of the production process and uses new technologies to provide prosperity beyond jobs and growth while respecting the production limits of the planet.” Eschbach (2021). The Japanese Government policy statement is: We aim at creating a society where we can resolve various social challenges by incorporating the innovations of the fourth industrial revolution (e.g., IoT, big data, artificial intelligence (AI), robot, and the sharing economy) into every industry and social life. By doing so the society of the future will be one in which new values and services are created continuously, making people ‘s lives more conformable and sustainable. This is Society 5.0, a super-smart society. Japan will take the lead to realize this ahead of the rest of the world, Japan (2022) (The Government of Japan n.d.).

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Creating Value Management Value Management is concerned with the creation of sustainable value, for end-user customers and for networked organisations involved in the RD&D, production processes, delivery, serviceability, and value renewal process that comprise stakeholder satisfaction. It is focused on developing, improving, and maintaining a balance between the expectations of stakeholders and the resources, labour, managerial, services and materials required to satisfy them. Stakeholder value expectations vary, and value management reconciles differing priorities to deliver optimum value for all stakeholders from a customer (primary stakeholder) perspective from Fit4Purpose, to ensuring secondary stakeholder concerns of people equality, environmental economic sustainability, concern for and involvement in social issues, and corporate governance. Value management is based on defining and adding measurable value, this is typically measured as economic profitably. It is a holistic process and operates on an intra and inter organisational basis. Value producing networks exist for as long as all stakeholder expectations continue to be met. Value management has four constituent components, see Fig. 19.3.

Value Management/Value Contribution/EVA/Economic Profit Some organisations use economic profit, as a performance measure of a firm’s progress. EVA  =  NOPAT less the annualised weighted average of invested capital. Economic profit recognizes the growth of revenues, margins (NOPAT), the return on invested capital, (the annualised weighted average cost of capital), and is a holistic view of value. It acknowledges growth and size, and thereby avoids the “dynamic” changes in the Stock Market. Cash flow management is an essential feature, and part Economic Profit NOPAT less AWAC (Capital Costs) (Value Contribuon) and Cash Flow Value Contribuon and Cash Flow

Strategic Excellence Operaonal Excellence

Organisaonal Excellence

“Value” Management

A Operang Model

Capability Responses Posioning

Profitability

Performance

Producvity

Producibility

PlanetCare

Pla„orm Development

Partnerships & People

Fig. 19.3  The components of value management

Current Organisaonal Excellence: Operang Model Future Organisaonal Excellence: Operang Model

Introduction

355

of the analysis. Without strong, positive, and expanding cash flow the network will be unable to grow and fulfil the promise of its value proposition. Organisational Excellence Comprises: Strategic Organisational Excellence: • Stakeholder orientation • Value-led strategic direction identifying a strategic portfolio of industries in which it engages • Framework of structured activities and processes • Collaborative network partnership strategies identified by their roles and tasks within the overall strategic direction and their contribution to creating competitive value advantage and a targeted value contribution • Resilience -risk is identified and quantified. • Network employees aware of strategic direction and are committed • Digitisation, digitalisation, and connectivity • Total transparency • Performance measured as Economic Profit/EVA/Revenue • Positive free cash flowOperational Organisational Excellence: • Performance management—maintaining and improving further performance through additional value creation/value contribution initiatives and performance management • Performance measured as Economic Profit/EVA/Revenue • Positive Free Cash Flow • Partnerships/people management—establishing an awareness of operational excellence amongst the entire value chain network by identifying the relevance of operational excellence for a centralised system for building capabilities, that implement value management • Process management—creating a digitised/digitalised value production system to capture, codify, and institutionalize standards for operations excellence across the organisation and the network partners utilising digital connectivity • Product portfolio management—maintaining product-service-market relevance by focusing on customer fixed asset management activities together with marketing strategy decisions and matching these with appropriate capability responses by an economically viable value proposition Organisational Excellence will change over time. Customer expectations change as does the “means” by which they are delivered. Given the rate of change technological capabilities, collaborative relationships corporate sustainability (E)ESG and stakeholder concern by organisations, operating models will change to meet new expectations that reflect on the maintenance of organisational excellence.

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An Operating Model Comprising: • Network Optimisation—a set of tools and techniques used to improve network performance and reliability • It is an ongoing process. Customer expectations require that management determine a certain level of performance, but time and budget limit what can be achieved. Network performance is optimized within constraints • Network performance is continuously monitored to ensure the desired level of performance is maintained. Customer expectations are monitored regularly to identify new needs • Network activities and process improvements are explored and incorporated if performance expectations (customer satisfaction) can be exceeded. Similarly, if costs can reduce and customer satisfaction can be maintained they will be incorporated. In both situations optimisation performance levels will be adjusted

 sing Network Organisational Excellence to Achieve U Value Management The basic criteria for Strategic Excellence are a clear and sound mission, vision, and a “logical” strategy. They must be consistent, communicated, applied, and implemented through an operational plan with key objectives cascaded across the organisation. Furthermore, they should be reviewed and updated over time; the frequency of the reviews and changes being dependent upon the dynamics of the change items and their impact. Operational excellence is the process of optimising an organization’s business operations. It is a common phrase used by management to refer to the process of making a commercial company more successful. Organisational Excellence is about identifying and implementing processes that are consistent with the organization’s strategy and goals. The entire organization should benefit from the strategic and operational excellence of a single activity or process. Success results in positive value management.

Operational Excellence and Operational Excellence Processes It will be recalled that earlier operational excellence was defined as: Operational Excellence (OpX) is a systematic approach for industrial organizations to attain best-in-class performance in productivity, quality, and delivery of services and/or products across the manufacturing value network. OpX spans product design and development; enterprise resource planning and control; supply chain management; manufacturing execution; and operational effectiveness of people, processes, and assets. However, rather than a destination or endpoint, OpX is an ongoing journey, Resnick (2017).

Introduction

357

These can be expressed as operational excellence processes and further developed to become metrics for a continuous process of identifying, measuring, and developing performance in network organisations by digitally connecting and linking each network partner organisations’ performance to the network’s agreed objectives and managing the roles and tasks of partners, that result in optimal economic profitability.

Strategic Excellence and Strategic Excellence Processes The requirements for strategic excellence are a clear and sound mission, vision, and a “logical” strategy. They must be consistent, communicated, applied, and implemented through an operational plan with key objectives cascaded across the organisation. Furthermore, they should be reviewed and updated over time; the frequency of the reviews and changes being dependent upon the dynamics of the change items and their impact. Strategic excellence processes can be derived from features from the 2022 European Foundation for Quality Management (EFQM), model in which direction, execution, and results are main primary process features of the model that reflect clear and sound purpose, vision, and strategy. They must be consistent reflecting, formulation, implementation, evaluation, and modification and are clearly communicated, applied, and implemented through an operational strategic plan, with key objectives cascaded across the organisation.

 Model for Network Operations Management: A Current Operations For ease of description and discussion we will separate the two components operational and strategic decisions. However, we will identify the strategic considerations to provide some understanding of strategic organisational excellence topics that will give the network organisation operations management an indication of overall strategic intent, the clear and sound mission, vision, and a ‘logical’ strategy. They should comprise growth related issues such as: Strategic and Operational Asset Planning and Management, Digitisation, Digitalisation, and Connectivity, Business Process Excellence Management, Corporate/Network Sustainability, Collaborative Network Relationship Management, and Performance Management. The following diagrams explore topics within the four components comprising, organisational excellence, an operating model, relevant capability responses and, the value management model, economic profit (EVA), value contribution. Figure 19.4 proposes a range of considerations that will reflect more detailed topics that relate to short term operational management concerns that require managing on an ongoing basis if the strategic intentions are to be met and a coherent message sent to stakeholders. These appeared in detail in the introduction to Part II and were developed in Chaps. 6 to 12.

Strategic Excellence

Fig. 19.4  Aspects of organisational excellence: An initial perspective

• Creating and implementing operational plans for an organization’s activities, including making decisions about locations, budgets, staffing levels, and timelines • Identifying new opportunities for growth within an organization’s industry or market sector • Evaluating current operational procedures, identifying inefficiencies and making recommendations for improvement • Assessing supply chain vulnerabilities and making recommendations for improvement • Participating in strategic planning sessions with other members of management to discuss long-range goals and objectives • Evaluating employee performance and providing feedback to help employees improve their skills • Conducting analyses of operations data and making recommendations for improvement based on findings • Reviewing reports on supply chain activities to ensure that they meet company standards • Planning and implementing strategies for controlling costs, reducing risk exposure, improving efficiency, and ensuring regulatory compliance

Strategic Operations

• A customer centric approach • Development of capabilities • Focus on creativity and innovation • Visionary leadership • Developing system agility and flexibility to responses • Developing a Corporate Sustainability • Harnessing peoples’ talents • Continuity of outstanding achievements

Organisational Excellence

• RD&D Liaison • Project planning • Procurement • Manufacturing • Marketing and Sales Operations • Physical Distribution Management • Remanufacturing • Budget management

Operational Operations

Operational Excellence • Customer satisfaction • Manufacturing process design • Customer price/value/equalisation • Productivity • Efficiency • Resilience

• Excellence led Organisational Culture • Leadership – a vision of excellence • Excellence focused Strategy • People customers employees and suppliers • Processes focussed on excellence • Successful Operating results • Resilience/Risk policy

Stakeholder Management • Engagement • Communications • Consultation • “Partnerships” • Collaboration

358 19  Reimagining the Value Chain Network

Introduction

359

A Model for Operations Management Model: Current Operations For ease of description and discussion we will separate the two components short term (current operational decisions) and long term (strategic decisions). We will identify both. They will comprise growth related issues such as: Strategic and Operational, Asset Planning and Management, Digitisation, Digitalisation, and Connectivity, Business Process Excellence Management, Corporate/Network Sustainability, Collaborative Network Relationship Management, and Performance Management. The following diagrams explore topics within the four components comprising, organisational excellence, an operating model, relevant capability responses and, the value management model, economic profit (EVA), value contribution.

Focused Capability Responses An appropriate set of capabilities to respond to market opportunities is an essential requirement. The rapid rate of change in both consumer expectations and the technology driving responses involved in managing the speed and accuracy of customer response requires organisations to be alert and to monitor customers and value delivery systems very frequently. Stakeholder relationship management, another important aspect of business management, also requires an alertness to capability response currency. Bollard et  al. (2017) proposed an operating model capable of handling the current and oncoming business environment, suggesting five areas of importance; Digitization is the process of using tools and technology to improve journeys that has the capacity to transform customer-facing journeys in powerful ways, often by creating the potential for self-service. Advanced analytics is the autonomous processing of data using sophisticated tools to discover insights and make recommendations. It provides intelligence to improve decision making and can especially enhance journeys where nonlinear thinking is required. Intelligent process automation (IPA) is an emerging set of new technologies that combines fundamental process redesign with robotic process automation and machine learning. IPA can replace human effort in processes that involve aggregating data from multiple systems and suggest IPA is to be the engine at the core of the next generation operating model. Business process outsourcing (BPO) that uses resources outside of the main business to complete specific tasks or functions, typically those requiring manual processes. Lean process redesign helps companies streamline processes, eliminate waste, and foster a culture of continuous improvement. This versatile methodology applies well to short-cycle as well as long-cycle processes. However, process technology and consumer product and service specifications are changing at an increasing pace, and we have added to their interesting model. For example, dynamic agile innovation considers the future business environment and its capability requirements, and the management of multiple business models in the same industry, multiple and interdependent, business models in the same

360

19  Reimagining the Value Chain Network

industry that have (substitute and complementary) interdependencies among business models (Harren et al., 2022). Chapter 12 introduced Capability Responses: the approach views the firm as a portfolio of capabilities that evolve in response to the (perceived) demands of the business environment. It will be recalled that response capabilities are characteristics that reflect an understanding of the marketplace, the expectations of its stakeholders and of the opportunities it offers and, therefore, the characteristics of the capabilities essential for successful engagement. The core detailed business response capability model components are, performance (value engineering, value delivery, and the value proposition; stakeholder-performance expectations, fit4purpose, etc.), positioning (strategic, market and product positioning, and value chain network positioning), profitability (financial viability, sustainable economic profit, positive cash flow), productivity (total factor productivity, optimal utilization of capital, labour, materials, and service inputs, and EVA (economic value added)), producibility (the seamless intra and inter-organizational infrastructures of sequential processes and activities of value engineering and value delivery, that creates, produces, delivers and captures value), collaborative partnerships (expertise and skills of value generating employees, workplace cultures and management styles in all network partners) platforms and people (social, mobilization and learning platforms), and planetCare and sustainability (a socio-economic, responsible, use of environmental resources in creating stakeholder value, and the concerns of environmental and corporate sustainability and responsibility for employee livelihoods and investor returns). See Fig. 19.5 Operational Organisational Excellence and Capability Response. Figure 19.6, Network Focused Growth Performance Management Capabilities identifies the necessary managerial capabilities required to build an operating model (both short-term and long-term). These are core features of an operating model. See Fig.  19.6. Network Operations Management, Capabilities, supports the very purpose of being in business by identifying aspects of growth that are essential for corporate sustainability. Each characteristic contributes a capability critical for success. The management of the network coordination capabilities are identified in Fig. 19.7; Network Coordination Operations, each of them is significant given the dynamics of customer expectations and the available response capabilities. Each interacts with the others in an attempt to maximise customer satisfaction and to do so by achieving efficiencies for both the customer and the network partners. Network coordination management ensures leadership and teamwork is applied to network value production, that the value proposition is customer-led and positive customer/ market leadership supports the value proposition. Adaptability to change ensures the network’s response is both effective and efficient, reflecting changes in value production that benefit both customer and network interests. See Fig. 19.7. The EVA accounting model can be used to identify economic profitability performance. (Figure 19.8: Value Contribution in an operational organisational excellence model), it also offers a valuable additional activity; Fig. 19.8 identifies direct operating costs as part of deriving the NOPAT metric. The efficacy of economic

PlanetCare

Profitability

Platform Development

Platform businesses focus on facilitating interactions across many participants. They are both short-term transactions and longer-term business activity relationships. The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions at scale, to achieve (E)ESG and UN SDG objectives as well as mutually beneficial commercial outcomes

A workable network strategy and structure that meets balanced stakeholder expectations. Management and operations staff that possess relevant skills and experience to meet current and future capabilities requirements for growth opportunity requirements. Ethical employment policies

Partnerships

Productivity

The “utilisation” of relevant assets, capabilities, capacities, processes and relationships positioned in relevant locations to achieve stakeholder performance expectations. Ownership or location of resources is no longer relevant

Strategic market positioning (a matching process of identifying market opportunity with existing and required response capabilities). Successful value chain positioning is dependent upon intra-network collaboration and coordination. Value Chain Positioning decisions require an understanding of the horizontal, vertical and support relationships that exist within the value chain network – the roles and tasks required and the capabilities and capacities of the network partners for efficient value delivery to occur

Positioning

Developing Organisational Excellence through Focused Capability Response

Fig. 19.5  Operational organisational excellence and capability response

Organizational and Network Sustainability; growth of revenues, profits and cash flows. Environmental Sustainability; optimal use of resources, optimizing producibility operating costs; process and component standardization, “zero-loss” manufacturing and substitution policies for “rare earth” inputs Economic Sustainability; business continuity, longevity, and contributions to GDP Social Sustainability; levels of employment, employee satisfaction, work/leisure balance, community commitment

A relevant strategic and operational infrastructure. The fusion of design and development, of manufacturing and distribution, and Producibility of serviceability and product-service renewal activities into a seamless and continuous process to contribute to a Network Value Advantage (aka End2End production)

Continue to maximize the “value added” by preserving the value created by the network provided there is demand and it is cost effective. Identify and research new opportunities for their potential to maintain a value-stream to Performance all “stakeholders”

An understanding of the profit expectations of ALL Stakeholders is essential for profitability targets to be met. Exploring the notion of added-value and how this can deliver enhanced stakeholder value

Introduction 361

• Identify efficiencies existing in Digitisation and Connectivity Installations • Review impact on Network Connectivity • Review Employee Current Skills - Identify Upgrade Requirements

Fig. 19.6  Network operations management capabilities

Strategic & Operational Digitisation, Asset Planning & • Review Existing Processes for Expansion of Volume Digitalisation, & Management Review Strategic Objectives and their Potential Connectivity Impact on Current Customers, Performance • If considered Appropriate Explore cost and TimeLine for Potential New Customers and Management Replacement Processes Network Operations Management Network Economic Profitability and Capabilities Requirements & an Business Process • Review Existing Operating Activities Productivity Excellence Management Appropriate Value Proposition • Review Efficiencies of Existing Employees Creativity • Review Research Requirements (Pure/Applied Corporate Collaborative Network Sustainability • Access to Capabilities for new research Relationship Management • Monitor RD&D Costs and TimeLine • Impact on Commercial Sustainability • Using AI to manage supplier & • Impact on Socio-economic Sustainability • Review Capabilities of Existing VCN Structure customer relationships • Impact on Environmental Sustainability • Consider Impact of changing volumes and activities • Identify Changes Required (if any) in Partnership Arrangements • Monitor Network Relationships (Existing Product-ServiceMarkets and Potential NPD Requirements

• Monitor Efficiencies of Capital Equipment and partner asset leverage arrangements • Check on Capital Recycling of Existing Assets • Check Impact on Partnership Leverage

362 19  Reimagining the Value Chain Network

Introduction

363

profit (Fig. 19.7) as a metric is proposed as a traditional financial accounting performance metric. Economic profit recognizes the growth of revenues, margins (NOPAT), the return on invested capital, the annualised weighted average cost of capital, and is a holistic view of value. It acknowledges growth and size, and thereby avoids the “dynamic” changes in the Stock Market. The costs also identify possible alternatives for each cost suggesting that an ongoing review of each of these costs (together with cross-impact analysis of potential alternatives) may offer overall leaner value manufacturing and delivery costs. This may also improve cash flow. See Fig. 19.8. Figure 19.9; Managing operational cash flow, identifies the sources and applications of cash that occur in the short-term. Revenues are an obvious source of cash but increasing working capital can be an increased source of cash by improved management of procurement and payments to suppliers, system inventory, and customer credit and payment terms. Digital connection of network operations (digital threads) improves inventory management and are accelerating payments. Serviceabilty activities improve short-term cash flow as predicted maintenance avoids loss of production from downtime and stabilises maintenance payments. Conversion from a PRODUCT-service operation to a product-SERVICE alternative has been seen to provide one-off sources of cash from the sale operations plant, equipment, and reduction in  location costs as well as the ownership of customer facing equipment as the organisation pays for “service(s)” used. See Fig. 19.9. In Fig. 19.10; Coordinated network activities and responses to customer expectations: The. operating model, the diagram assembles the individual components shown and discussed in Figs. 19.4, 19.5, 19.6, 19.7, 19.8 and 19.9 into an integrated and interrelated model. It provides topics that are typically used to define organisational excellence. The model includes some interesting topics; business process sourcing management (outsourcing activities were many and varied in the 1990’s and early 2000’s with a focus on cost reduction. In the 2010’s the S-SME became important particularly in aerospace and defence where they undertook development of functions not just components. Boeing were less than successful with the 787, a project in which they attempted to outsource activities for which their suppliers were not experienced in producing as well as not equipped, since that episode OEM organisations and S-SMEs have worked closely to ensure projects are clearly defined and each of the partners understand each other’s role); intelligent process automation (IPA) (an emerging set of new technologies that combines fundamental process redesign with robotic process automation and machine learning, it is a suite of business-­process improvements and next-generation tools that assists the knowledge worker by removing repetitive, replicable, and routine tasks. This can radically improve customer journeys by simplifying interactions and speeding up processes. IPA copies activities carried out by humans and, over time, learns to improve them. “Traditional levers of rule-based automation are augmented with decision-making capabilities thanks to advances in deep learning and cognitive technology. The promise of IPA is radically enhanced efficiency, increased worker performance, reduction of operational risks, and improved response times and customer journey

• Driving Performance & Transformation • Match Value Proposition to Customer Product Portfolio Expectations - Fit4Purpose • Match Product –Service-Market offer to Customer Price/Value /Equality Profile

Customer-Led Business Decisions

Network Coordination Management

• Customer Centric • Product-Service-Market Portfolio • Feasible & Deliverable Value Proposition

Competitive/ Market Leader: Customer Relationship Management

Fig. 19.7  Building an organisational excellence-based response operating model: Network—coordination criteria process

• Agility & Flexibility • Digitised & Connected • Organisational Cost Effectiveness (LT) • Organisational Cost Efficiency (ST) • “Technology Needs”: transfer

Adaptable to Change

Leadership & Teamwork

• Relevant Organisation Structure • Strategic & Operational Performance • Creating Sustainable Value • Purpose, Vision & Strategy • Organisational Culture and Leadership • Leadership Performance • Employee Motivation • Engaging Stakeholders

364 19  Reimagining the Value Chain Network

Stern Stewart Approach: Economic Value Adde d(EVA) Value Contribution

EVA = Net Operating profit (after tax) NOPAT less Cost of Capital = Value Contribution

• Maintain on going review of capital availability and costs Equals NOPAT Less Cost of capital Annualised Weighted Average Cost of Capital) %Equity X Interest Costs + %Debt X Interest Costs = WACC %

• Explore customer attitudes towards product-SERVICE rather than current PRODUCT-service offer

• Review cost and performance of PDM

• Review effectiveness of message and media

Fig. 19.8  Value contribution in an operational organisational excellence model

* There is the possibility of tradeoff decisions among labour production operations, and materials to reach an optimal cost

Future values of EVA may be developed using NVP projections

Annual EVA* Annual Revenue

Economic Profit/ Value Contribution Performance: EVA

Net Operating Profit (after tax)

Taxation

0perating Profit (before tax)

Direct Costs of Serviceability

Direct Costs of Distribution

Direct Costs of Promotion

Services (Consultancy etc.)

• Scale • Outsource component manufacturing

Manufacturing • Outsource non-core activities

• Improve quality • Substitutes • Increased availability

Materials

Operating Costs

Less

Revenues

Introduction 365

RD&D

Production/Manufacturing Operations Management

Capital Investment

Production Operations Process Design

Partner Funding from Collaboration

Fig. 19.9  Managing operational network cash flow

Product Portfolio Shifts Facilities Investment Manufacturing changes Employee training & recruitment

• Ensure PDM capabilities (Transport and Inventory • Storage requirements – avoiding short-term rentals

“Serviceability” Operations Management

Budget and Monitor Network Operating Expenses • Maintenance • Capital Expenditure and Plant Expansion and Write offs

• Agree a Value Delivery Program that meets production capabilities • Plan Advertising & Promotions that meet Network production, storage facilities • Monitor Industry Dealer Discounts

Product Portfolio Shifts • “Performance Management Contracts” • Predicted Maintenance Programs • PRODUCT-service product-SERVICE

Taxation Explore Offshore Marketing and Manufacturing Activities

Recycling and Remanufacturing •Investment Costs •Maintenance Costs

Total Stakeholder Satisfaction

Potential Reduction in Materials and Components Costs from Remanufacturing • Production Components • Service Parts

Sustainability Operations “Value Renewal” Circular Operations Relationships Management

Sale of Assets – Serviceability Programs

Sales and Physical Distribution Management Operations

Partner Funding from Collaboration

• Revenues/Profitability • Working Capital Productivity • Inventory Management and Credit/Payables Management • Prepaid Customised Orders

Marketing and Sales Operations Planning

• Network Resources Productivity Management • Network collaboration/End2End Management Model • Agree payments processes • Collaborative procurement

Tangibles Assets Intangible Assets Operational RD&D Product and Process Improvements Predicted Maintenance of Plant • Collaborative use of & Equipment Consultancy Services Collaborative RD&D • Scaling Up/Down where • Branding – maintain the possible Value Proposition • Network planned production • Customer Service Programming capacities • Access to Partner Facilities Leverage Budget and Monitor Network Operating Expenses • Materials • Managerial & Labour • Services • Energy • Outsourced Production

Applications of Cash

Customer/Liaison Research

• Revenues at acceptable Margin Rates • Consortia Procurement Discounts • Working Capital Efficiency (Payments Suppliers/Customers) • Retained Earnings • Sale /Reduction of Assets • Loans and Refinancing • Partner Joint Ventures Activities

Sources of Cash

366 19  Reimagining the Value Chain Network

Adaptable to Change

Reliability: “Resilience Parameters”

Creativity

Strategic and Operational Asset Planning and Management

Positioning

TimeLine Management: Effectiveness and Efficiency

Customer-Led Business Decisions

Collaborative Network Relationship Management

PlanetCare

Customerdriven Excellence

Positive Value Proposition Delivery Responses

Strong Positive Reputation

Differentiated Product-Service-Market Portfolio

Stakeholder Value Management ((E)ESG Criteria/UNSDGs)

Competitive/ Market Leader: Customer Relationship Management

Positioning Strategy

Business Process Excellence Management

Productivity

Corporate Sustainability

Partnerships & People

Profitability

Coordinated Network Activities and Responses to Customer Expectations: The Operating Model

Platform Development

Producibility

Performance

Data Analytics and Analysis Management

Digitisation, Digitalisation, and Connectivity

Cash Flow Management

Leadership and Teamwork

Performance Management

Investment Model

Fig. 19.10  Building an organisational excellence-based response operating model

Productive Use of Resources and Focused Outsourcing

Product, Industry and Global Platforms

Creative/Innovative

NOPAT/EVA Economic Profit/ Positive Value Contribution

Introduction 367

368

19  Reimagining the Value Chain Network

experiences”. (Berruti et al., 2017). The importance of IPA has been enhanced by the rapid development and application of artificial intelligence (AI), machine learning and deep learning together with digitisation. The expanding application of AI and machine learning includes agriculture, manufacturing robots, distribution, self-­ driving cars, smart assistants, healthcare management, automated financial investing, virtual travel booking, social media monitoring, and marketing chatbots and the list expands monthly. The operating model needs to accommodate value chain structural development. S-SMEs are becoming very specialist in both product-service-market-market technology and in process technology. For example, organisations such as Magna International have become specialist short-run manufacturing organisations offering that capability as an option for larger scale specialists, and as such become an integral component in the developing operating model. Magna has a history with automobile component development as well as a service of total production of specialist auto-products. The operating model initially responds to basic customer expectations (profitability, productivity, performance requirements etc. through its capability response model criteria), should there be a capability deficiency it will be addressed by the network operations management capabilities that operate to ensure the customer requirements response is met with a relevant value proposition. Customer interests are maintained in focus in this way. See Fig. 19.10. The value management operating model (Fig. 19.11) comprises a series of interacting technology processes supported by accessible support activities. Often these activities become increasingly effective and become permanent features. For example, digitisation, digitalisation and connectivity and advanced analytics have recently become essential components in the operating model. The current business environment suggest cyber security and block chain technologies will become permanent features and end2end value delivery is another as competitive advantage requires “technology needs” transfers. Essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders. See Fig. 19.11. Figure 19.2 considered the evolving interactive customer-centric value chain network 3.0 and the implications of Industry 5.0. and its potential development direction with emerging Industry 6.0. It offers a prescription for the future operating model. The change in timeline perspective will require a more prospective view of the components of organisational excellence. Fig. 19.12 identifies these. As the diagram suggests they are based upon conclusions concerning the future from past and ongoing data tracking of performance and an understanding of how the changing technology will influence existing (and potential new customers). It will also identify new technological applications available to management. See Fig. 19.12. Figure 19.13, Identifying and developing future responses to customer/market competitive expectations. Indicates that the value migration process will require an update of customer capability requirements responses. The diagram suggests generic possibilities. The automotive industry will need to complete this exercise as it moves towards the expected growth in the production and distribution of electric

Multiple Business Models Cyber Security Block Chain Adaptive & Expandable Scale

Sustainability Operations

Value Management Operating Model

Enterprise Resource Management Systems

“Growth-Led”

Rolling Value Proposition(s)

Organisational Excellence

Digitisation, Digitalisation & Connectivity

Advanced Analytics

Intelligent Process Automation

Primary Stakeholders Inputs

Finance & Investment Operations Activities Value Engineering & Value Delivery (Investment Effectiveness & Cost Effectiveness)

Fig. 19.11  A current/typical digital operational—operating model

Human Resources Relationships, Strategy & Operations Activities Workplace/Technology Relationships Value Engineering & Value Delivery (Cost Effectiveness & Efficiency)

Manufacturing & Distribution Operations Activities Value Engineering & Value Delivery (Cost Efficiency)

Aspects of Organisational Excellence that are a balanced and coordinated performance of strategic and operational excellence

Strategy & Structure

Secondary Stakeholders Inputs

Sustainable Corporate Operations & Activities Socially Responsible, Environmentally Responsible & Commercially Responsible (Cost Effectiveness)

Agile/Lean Product/Process Design

Business Process Management (Outsourcing?

Network Optimisation Integrated Collaborative Network Management

Dynamic Agile Innovation

Strategic & Operations Activities: Value Proposition, Value Engineering Value Delivery & Value Renewal (Cost Effectiveness)

Digital, Easily Accessed, Simple, Rapid Response, Convenient to use for Customers, Partners, Employees, Suppliers, and other Stakeholders

Cyber Security - customer & Supply Chain Security (Cost Effectiveness)

Sustainable Corporate Operations & Activities Socially Responsible, Environmentally Responsible and Commercially Responsible (Cost Effectiveness)

End2End Continuous Improvement

Governance

Serviceability Operations Activities Value Delivery & Value Renewal Options (Cost Efficiency)

Increasingly Important Activities

Marketing & Sales Operations Activities Value Proposition Value Delivery (Cost Efficiency)

Operating Model Components

Introduction 369

Fig. 19.12  Probing aspects of excellence: A longer term perspective

• Reviewing current ongoing performance • Monitoring operational cost effectiveness and efficiencies; making recommendations for improvement • Reviewing “technology” and assessing its impact on operations – making recommendations concerning acquisition if economically viable • Identifying and evaluating opportunities for growth of product-service-market portfolio • Continuous evaluation of the efficiency of current operational processes, identifying inefficiencies and making recommendations for improvement • Participating in strategic planning sessions with other members of management to discuss long-range goals and objectives and the impact on planned Organizational Excellence • Evaluating employee performance and providing feedback to help employees improve their skills • Reviewing reports on supply chain activities to ensure that they meet company standards for quality, quantity and timeline requirements • Monitoring costs, reducing risk exposure, improving efficiency, evaluating alternatives, and ensuring regulatory • Monitoring progress towards (E)ESG and UN SDGs

Strategic Operations

Strategic Excellence • Consider alternative technologies to improve customer centric approach • Development of capabilities, review competitive approaches. • Take a wider focus on creativity and innovation across industries • Visionary leadership – maintain focus on the future • Develop “future” system agility and flexibility to responses • Developing a Corporate Sustainability – the “Circular Economy” • Harnessing peoples’ talents - management& employee development • Continuity of outstanding achievements • RD&D liaison/collaborative activity • Project planning • Procurement • Manufacturing • Outsourcing where greater efficiencies can be accessed • Monitor supplier performance • Marketing and Sales Operations • Physical Distribution Management • Remanufacturing activities • Budget management

Operational Operations

Operational Excellence • Customer satisfaction. Update • Manufacturing process design. Review technology invest if it will be cost effective Review Customer expectations of; • Customer price/value/equalisation • Check for opportunities to improve Productivity and Efficiency • Review Resilience/Risk policy

• Excellence led Organisational Culture. Consider essential changes • Leadership – a vision of excellence . Consider essential changes • Excellence focused Strategy. Consider essential changes • Continue to focus on “people” employees and customers • Processes focussed on excellence. Review and modify • Modify expectations for continuity of successful results • Review Resilience/Risk policy Source: Farghaly (2023)

Organisational Excellence

Stakeholder Excellence Management • Engagement • Communications • Consultation • “Partnerships” • Collaboration

370 19  Reimagining the Value Chain Network

Profitability

Platform Development

Partnerships & People

Productivity

Will growth of revenues, profits and cash flows. Support Corporate Sustainability, Environmental Sustainability and Socioeconomic Sustainability; with adequate levels of employment, employee satisfaction?

PlanetCare

Strategic Network Operations Capability Response Components

Are current Platforms adequate to support the NPD project or will they increase in number and reduce current employment?

Producibility

Performance

Positioning

Will the Profit Expectations of ALL Stakeholders be met. What are the Economic Projected Profit Returns?

Fig. 19.13  Identifying and developing future responses to customer/market competitive expectations: Process

Will the fusion of design and development, of manufacturing and distribution, and of serviceability and product-service renewal activities increase in efficiency? Will the NPD project increase the seamless and continuous process to contribute to a Network Value Advantage (aka End2End )production and impact on current VCN employment opportunities?

Will The “Value Added” by a modified Network For Its “Stakeholders” Create Unique , Consistent And Exclusive “Value Advantage” Sufficient For ALL Stakeholders?

Will the Required Value Chain positioning be Dependent upon Current Intra-network Collaboration and Coordination. OR Will New Structures be Required?

Will a workable network strategy and structure that meets balanced stakeholder expectations result from the NPD project? Will existing staff possess relevant skills and experience to meet future capabilities requirements?

Can the “utilisation” of relevant assets, capabilities, capacities, processes and relationships be assured or will changes result from the new Product-Service-Markets? Can the existing “Serviceability” aftermarket be preserved , and can a new “Serviceability” opportunity be created?

Introduction 371

372

19  Reimagining the Value Chain Network

vehicles. The rapidly expanding literature on EV futures is suggesting considerable change in manufacturing (new market entrants and battery suppliers), and in serviceability (vehicle charging infrastructures and battery life span and replacement channel intermediaries). Current views suggest dual chain networks; existing manufacturers contemplating an end2end, producibility approach, collaborative activities among the existing vehicle manufacturers, battery manufacturers providing initial batteries to OEMs and building a battery replacement facility to owners. The recharging activity has some interesting developments by the petroleum majors and some innovative start-ups by new organisations, capital investment is an issue. Clearly capability responses will require consideration. See Fig. 19.13. Figure 19.14: Perspective of future/strategic organisational excellence network management characteristics, suggests, strategic network organisational excellence strategic considerations are the same as for the ongoing current model, however their content will differ. Likely changes in response capabilities to match customer expectations will be reflected. For example, strategic and operational network, asset planning and management will require closer (integrated) management of the Cap Ex/Op Ex/ business model, supplier “serviceability” propositions, capital intensity “productivity”, working capital “productivity”, network partner leveraged assets, investment opportunities and returns, and economic, and technological and social futures forecasting. See Fig. 19.14. Network operations management capabilities (Fig. 19.15). Creativity will be required to ensure research activities are planned to provide guidance on a focused program. Concerns will be based upon the existing product portfolio and the opportunities seen from “serviceability” (customer trends towards procuring asset outputs rather than ownership of assets). Strategic and operational network, asset planning and management has importance here as a trend towards “serviceability” (if pursued) would require considerable investment and could impact on corporate sustainability from all three aspects, commercial, socio-economic, and environmental. See Fig. 19.15. Network coordination operations (Fig. 19.16) will rely upon leadership and teamwork as any changes seen as major will have implications for the entire network and will likely impact on investment as well as changes to network strategy and network partner positioning. There may be implications for primary and secondary stakeholders. Each of the other characteristics will have significant changes to deal with. For example, an inability to accept change may result in missing an opportunity to enter new product-service-market(s) and/or to create /revise new market positioning, both damaging to profitable growth. See Fig. 19.16. The EVA/value contribution model reappears in Fig. 19.17: Optimising value contribution in a strategic organisational excellence operating model. In a long-­ term context, the NOPAT/AWACC/EVA model offers the network opportunities to ask “what if” questions concerning the whole value management process. It can answer questions concerning both revenue and cost impacts given changes in input materials, production processes, promotion and sales, distribution, serviceability costs, and taxation. See Fig. 19.17.

• Interactivity capability internally (processes, and activities • Interactivity with partners (data flows, materials, manufacturing processes, and serviceability data. performance management, predicted maintenance, and activity sequencing) • AI based supplier and customer relationship management

An Interactive, Intra/Interrelating Network Operating Model

Future Network Excellence: Strategic Network Strategic Focused Organisational Excellence Performance Management Strategic - Characteristics

Network Focussed Business Process Management

• Environmental sustainability • Socio-Economic sustainability • Commercial sustainability • Circular Value Chain Activities

Network Corporate Sustainability

Network Digitisation, Digitalisation, and Connectivity

• End2nd digitally connected operations • Supplier/Vendor data exchange • Vendor/Customer data exchange • Customer Product-Service Searching • Performance Management Data • Predicted Service Management

Fig. 19.14  Perspective of future/strategic organisational excellence network management characteristics

• Collaborative RD&D • End2End production • Operations data flows • Remanufacturing programs

Collaborative Network Relationship Management

• Revenue Growth • Economic Profit Growth Network Focussed • Productivity Growth Performance Management • Customer centricity • Stakeholder Satisfaction

Strategic and Operational Network Asset Planning and Management

Monitor Cap Ex/Op Ex/ • Supplier “serviceability” propositions • Capital intensity “productivity” • Working capital “productivity” • Network partner leveraged assets • Investment opportunities and returns • Economic, technological and social futures forecasting

• Value Mapping /Audit • Remove inefficiencies and cost • Positive impact from Technology • Question VCN positioning

Introduction 373

Performance Management

Network Operations Management Capabilities

Strategic and Operational Asset Planning and Management

Fig. 19.15  Network operations management capabilities

• Impact on Commercial Sustainability • Impact on Socio-economic Sustainability • Impact on Environmental Sustainability

• Review Existing Processes for Continuity Potential • Explore cost and TimeLine for Replacement Processes Business Process Excellence Management • Identify Implications for Existing Operating Activities • Explore Impact on Existing Employees Corporate Sustainability

Digitisation, Digitalisation, and Connectivity

• Identify Impact of NPD on existing Digitisation and Connectivity • Review impact of NPD on Network Connectivity • Review Employee Current Skill -Identify Upgrade Requirements

Creativity • Type of Research Required (Pure/Applied) Collaborative Network • Network collaboration Relationship Management • Product portfolio direction • “Serviceability” opportunities • Review Capabilities of Existing VCN Structure • RD&D Costs and TimeLine • Consider Impact of NPD Activities • Access to Capabilities • Identify Changes Required (if any) • Impact on Network Relationships (Existing Product-Service-Markets and Potential NPD Requirements

Review Strategic Objectives and their Impact on Potential New Customer and Network Economic Profitability and Productivity

• If New Capital Equipment is Required Consider NPV Profile(s) • Check on Capital Recycling of Existing Assets • Check Impact on Partnership Leverage

374 19  Reimagining the Value Chain Network

• Revisit Driving Performance and Transformation – Initiate Changes • Create New Value Proposition and Match to New Customer Product Portfolio Expectations - Fit4Purpose • Ensure Policy of Matching Product –Service-Market offer to Customer Price/Value /Equality Profile is Continued

Customer-Led Business Decisions

Network Coordination Operations

Fig. 19.16  Building an organisational strategic excellence-based response operating model

• Review Strategic Direction Adaptable to Change • Maintain Agility & Flexibility • Upgrade Digitisation and Connectivity • Ensure Organisational Cost Effectiveness (LT) Continuity • Generative AI/Machine Learning • Organisational Cost Efficiency (LT) Continuity • Enter new Product-Service-Market(s) • Create/Revise New Market Positioning • Restructure the Value Chain Network

Leadership and Teamwork

• Review & Revise Organisation Structure • Focus on Strategic Performance and Creating Sustainable Value • Review Purpose, Vision and Strategy • Review Organisational Culture and Leadership Requirements • Review Employee Expertise Requirements and Motivation • Review Programs for Engaging Stakeholders

• Customer Centric • Research and Develop Competitive Product-Service-Market Portfolio • Create New Feasible and Deliverable Value Proposition

Competitive/ Market Leader: Customer Relationship Management

Introduction 375

%

● What relevant services exist and their costs and impact on operating efficiencies? ● Impact on customer satisfaction trends Fit4Purpose (productservice specification) ? ● Internal (network partnership) and relevant external (other industries applications) alternative applications should be investigated? ● Current energy costs ● Alternative locations/sources ● Emissions levels ● Industry trends ● (E)ESG response ● Impact of climate change on operations, and energy usage

● Review input materials (cost profiles, volumes, accessibilities), related labour costs ● Identify and evaluate alternative supply options in context of labour work input costs ● Monitor alternative processes and labour costs ● Track and estimate development trends – assess medium and long term implications ● Monitor competitive activities ● Consider the impact of new materials costs (Rare Earth categories) on new ventures – (automotive industry concerns over EV manufacturing?)

● Use of outsourced production ● Alternative suppliers? ● Robotics/Cobotics ● Digitisation, Digitalisation and Connectivity - digital threads and twinning ● Producibility/End2End production?

● Efficacy and costs of current processes and systems ● Labour costs (trends percentage of total costs) ● Employee satisfaction, ●Wastages and reworking costs ● Scope for robotics/cobots and impact on capital requirements and operating efficiencies? ● Network partner efficiencies and process/activity developments? ● Network digitisation and connectivity – status and needs?

Equals Net Operating Profit ● Operating alternatives (offshore taxation ●Investigate taxation on finished goods/components ●Domestic regional tax incentives ● RD&D incentive Less: Taxation Equals Net Operating Profit after Tax – NOPAT NOPAT Less Annualised Weighted Average Cost of Capital – AWACC Equals Economic Value Added/Value Contribution

Energy

Services

Materials*

Production Operations*

Labour*

Management and Supervision ● Role & task matching ● Scope for robotics ● Scope for AI/Machine Learning

Operating Costs;

Fig. 19.17  Optimising value contribution in a strategic organisational excellence operating model

* There is the possibility of tradeoff decisions among labour production operations, and materials to reach an optimal cost

Future values of EVA may be developed using NVP projections

Annual EVA* Annual Revenue

Economic Profit/ Value Contribution Performance: EVA

Revenues

Less:

376 19  Reimagining the Value Chain Network

RD&D • • • •

Industry Promoons Adversing Promoons Dealer Discounts

• Procurement planning & iniaon

Operang Expenses • Managerial & Labour • Materials • Services • Energy • Outsourced Producon

Taxaon

Investment in Network Recycling and Remanufacturing Facilies • Investment Costs • Maintenance Costs

Sustainability Operaons “Value Renewal” Circular Operaons Relaonships Management

Operang Expenses Maintenance Capital Expenditure Plant Expansion/Write offs

Repurposing Network Assets

Physical Distribuon Management Network Owned/Leveraged •Transport • Inventory • Storage

“Serviceability” Operaons Management

Total Stakeholder Sasfacon

Deducon in Materials Costs - Components Producon Components Service Parts

Product Por’olio Strategy: Changes & Shi“s • “Performance Management Contracts” • Predicted Maintenance Programs • PRODUCT-service product- SERVICE

“Performance Management Contracts” Predicted Maintenance Programs

Sales & Physical Distribuon Management Operaons

Sale of Redundant Assets

Markeng and Sales Operaons Planning

Intangible • Consultancy Service • Brand development • Customer Service Programming • Producibility/End2End System Development

Plant & Equipment Investment • Employee recruitment • Employee training & development • Process development

Tangibles • Market development • Off-shore producon • Locaon development • Plant & Equipment

Capital Investment

Producon /Manufacturing Producon Operaons Operaons Management Process Design Investment in digisaon, digitalisaon and connecvity

Partner Collaborave Funding

Planned Markeng Revenues Network Resources Producvity Management Negoated Consora Procurement Discounts

Revenues/Profitability Working Capital Producvity: Inventory Management Credit/Payables Management Prepaid Customised Orders

Fig. 19.18  Managing long-term/strategic network cash flow in the value chain management and asset management activities life cycle

Product Prototyping Product Tesng Process tesng

Joint Funding of Pure Research Applied Research RD&D Market Viability Research

Investment by Partners

Applicaons of Cash

Customer/Liaison Research

Equity/Debt funding partnerships Retained Earnings Sale/Reducon of Assets Loans & Refinancing Partner Joint Ventures Acvies

Sources of Cash

Introduction 377

378

19  Reimagining the Value Chain Network

Long-term cash flow is an important consideration. Fig. 19.18; managing long-­ term /strategic network cash flow in the value chain management and asset management activities life cycle. Whereas in the short-term some constraints existed in constrained options that were available (such as raising large amounts of capital) these are relaxed, and the network partnership is able to explore alternative strategies and structures. Projects involving tangible asset investment, additional locations, plant and equipment, digitisation, digitalisation and connectivity of products and processes etc., and intangible assets, brand development, customer service enhancement etc. can be examined. Increases in revenues can be explored simulating market changes, new market entry with the capital and operating costs and the value management options. Together the EVA/value contribution model and the long-term cash flow model are essential to planning and evaluating long-term options. See Figs. 19.17 and 19.18. Figure 19.19: Building an organisational excellence-based response long-term operating model activity levels and detailed performance decisions processes. Whereas Fig. 19.10 (the short-term operating model delivered data reporting ongoing activities for management responses, the structure in figure eighteen has accumulated operations data that can be added to managerial expertise and market experience to explore and adopt (or reject) long-term decision options within the context of their projection of organisational excellence. See Fig. 19.19. In Fig. 19.20: A “Not too distant Future” Organisational Operating Model—the future operating model has the agility of a start-up; it is responsive to customer needs; is networked and connected; maintains a catalogue of ideas and innovations; finds competitive advantage through platforms; and uses extreme automation in everything it does. Operating models need to evolve significantly for enterprises to thrive in the digital future. The core construct is customer-centricity, product (not project) thinking, integrated teams, a culture of experimentation and innovation, and value measurement. Organizations should adopt a six-component framework to evolve to a future-ready operating model. While each component generates business benefits, true business agility requires an initial focus on customer journeys and product thinking before talent, platforms, and governance. InfoSys. Figure 19.20 adopts the six-core component proposed by Infosys and adds the “technologies” and management processes that can deliver customer-centricity, product (not project) thinking, integrated teams, a culture of experimentation and innovation, and value management. We suggest this to be generic in its proposition, clearly specialist organisations and networks are likely to add to processes. What is likely to be a “common denominator” is platform technology which may develop into specialist formats within industries and within relationships as the Infosys document suggests; “Lack of alignment to customer needs, exacerbated by fragmented value chains and functional siloes, impedes operating model objectives like idea generation and collaboration. Further, business and technology are often not in the same room, limiting innovation.” InfoSys. Again, it’s essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders.

Creative/Innovative

Customerdriven Excellence

Positioning Profitability

Leadership & Teamwork

PlanetCare

Supplier & Customer Risk Profiles identified & applied to transactions

Partnerships & People

Productivity

• Primary Stakeholder Satisfaction • Secondary Stakeholder Satisfaction

• Market Position • VCN Position • Nearest Competitors

Differentiated Product-Service-Market • Fit4Purpose • Aggregate Product-Service-Market Portfolio • Return on Economic Investment • Competitive Pricing •Fit4Purpose)/Equalisation

Digital Connectivity

• Stakeholder Perceptions & Expectations • Customers Perceptions & Expectations • “Public perceptions & Expectations

TimeLine Management: Effectiveness & Efficiency Positive “Price”/Time Elasticity • Time2Market • Producibility/End2End Value Activities (Creativity – Serviceability) Strong • Time4Serviceability Response Positive • Customer Oder Cycle Cash2Cash Cycle Reputation • Working Capital Cycle

Business Process Excellence Management

Stakeholder Value Management ((E)ESG Criteria/UNSDGs)

Positioning Strategy

• Customer Satisfaction • Employee Satisfaction • Secondary Stakeholder • Satisfaction

Positive Value Proposition Delivery Responses

Corporate Sustainability

Competitive/ Market Leader: Customer Relationship Management

Strong Positive Reputation • Stakeholder Perceptions & Expectations • Customers Perceptions & Expectations • “Public perceptions & Expectations

Customer-Led Business Decisions

Platform Development

Data Analytics & Analysis Management

• Diagnostic Analysis • Predictive Analysis • Prescriptive Analysis

Digitisation, Digitalisation, & Connectivity

Cash Flow Management

• Planned Growth of Positive Free Cash Flow • EROI on New Projects

Organisational Excellence-Based Response Operating Model

Reliability: “Risk/Resilience Parameters”

Producibility

Performance

Collaborative Network Relationship Management

• Customer perceptions • Customer retention • Customer churn

Creativity

Adaptable to Change

Investment Model

• Capital Intensity •Economic Margins /NOPAT • Cost of Capital • Margin Spread • Impact on Suppliers • Impact on Customers • Impact on Investors • Value Contribution • Impact on Secondary Stakeholders

Performance Management

Profitable Revenue Growth

• Revenues • Gross Margins • NOPAT/EVA

Revenues NOPAT/EVA Enterprise Value MVA/

Fig. 19.19  Building an organisational excellence-based response long-term operating model: Activity levels and detailed performance decisions processes

• Capabilities • Capacities • Time • Materials

Productive Use of Resources and Focussed Outsourcing

Product, Industry and Global Platforms

Business Platforms • Consumer Platforms • Network Platforms • Global Platforms

Strategic & Operational Asset Planning & Management

Optimal Business Model CapEx vs OpEx vs OptmnEx Operating Margins • Enterprise Value/MVA • Procurement • NOPAT/EVA • Manufacturing • Customer Response • Marketing • Supplier Response • Reseller Response NOPAT/EVA Economic Profit/ Positive Value • RD&D Budget for remanufacturing/Total % Contribution • Remanufactured products/Total % • Employee satisfaction • Investor Satisfaction • Customer Satisfaction – Fit4Purpose • Aggregate Stakeholder Response

• • • •

Introduction 379

Customer Relationship Management

Core Driver

Network “Sustainability” Management: Circular Value Chain

Customer Centricity

Product Personalisation

Marketing & Sales Operations Management

Value Management Operating Model

Digitisation, Digitalisation & Connectivity

Network Product-Service Portfolio Format Management

Planned Network Revenue Growth Management

Organisational Agility/Lean: Strategy and Structure

Value Creation

Digital Thread & Digital Twinning

Physical Distribution Management Operations

Real-Time Data Processing Performance management Network & customer operations Product-service modification & NPD GPS

“Serviceability” Analysis & Operations Management

Future Trend Scenarios “Scientific” Organisational Change “New Logic” Competition “Business Model Design”: Value Chain Network Positioning the Impact of Technology “New Dimensional Diversity” “Optimised “Social & Business Value”

Resources management Time management Capabilities management Capacity management Efficiency management

Sustainability Operations “Value Renewal” Circular Operations Management

Integrated Operations Management Decision Making Production Teams Distribution Serviceability

Total Life Costs/Total Cost of Ownership Non-core processes Cost-efficiency improvements Specialist processes

Culture of Experimentation & Innovation

Resilience Global Risk

Intelligent Process Automation

Changing OEM/S-SME Relationships

Advanced, Advanced Analytics

Artificial Intelligence/ Machine Learning

Augmented /Virtual Reality

5G/6G Wireless

Network Producibility End2End Value Management

Stakeholder Governance Integrated Platform &Collaborative Based Network Platform Networked Structures Scalability Ecosystem Customer and Product, Process Organisation Cybersecurity Collaborative Application IP Blockchain Activities

Smart Manufacturing Systems

Industry 5.0/6.0 People & Organisation Orientation

Generative AI “Product “Quality Control

Metaverse Applications

Human/Cobot Co-working

Business Process Sourcing Management

ERP: Optimal Network Resources Flow Management

Ability to capture Customer requirements directly

Advanced Additive Manufacturing

Organizational Excellence

Stakeholder Relationship Management

Digital, Easily Accessed, Simple, Rapid Response, Convenient to use for Customers, Partners, Employees, Suppliers, and other Stakeholders

Product Portfolio Management

Integrated Teams

Value Stream Mapping & Analysis

Network Collaborative RD&D

ProductServiceMarket Orientation

Customer Journey Modelling Search & Order Order management Transactions Product-service uses Loyalty

Fig. 19.20  A “future” organisational operating model

Revenue Generation Management

Based Upon Ideas from Infosys Blog

Integration and Coordination: RD&D, procurement, operations and … Serviceabilty

Procurement and Resources Supplier availability Consortia procurement Negotiations & ordering Transactions management

Changing “Manufacturing” Operations Management

Product-Service-Market Format Performance management Modification & NPD Maintenance Modification &NPD

Supplier Relationships Operations Management

Recent Operating Model Practice

Developing Operating Model

380 19  Reimagining the Value Chain Network

Introduction

381

Reimagining the Value Chain The previous paragraphs raise the question; are the developing operating models and our view of the existing value chain compatible? Is the value chain network model becoming obsolescent? Will it soon become obsolete? Or will it become an agile flexible structure of partner organisations that is compatible with the notion (set out above) of being a structure of changing abilities that are customer-centric, product (not project) thinking, integrated teams, with a culture of experimentation and innovation, and value management, that have the flexibility to meet changing customer expectations with roles and tasks that broadly remain the same but have the agility to change to meet the dynamics of changing customer expectations, for example, responding to customer expectations by restructuring the value chain network see Chap. 6: Performance and Positioning. The increasing convergence of technological capabilities, network collaboration, and the increasing growth of (E)ESG and the acceptance of circular business models is already delivering an expanding business model. The rapid rate of change of technological application to value management, of network collaboration, and of customer expectations suggests that to respond to the expectations of all stakeholders its current efficacy for both efficiency and effectiveness is relevant to existing and future activities. It could be argued that overall impact of Industrié 4.0 has been to improve industrial efficiency, and it could equally be argued that it is a continuing process with both distance and time to go before it has completed the task. However, there are opinions suggesting that Industry 5.0 is present and is having impact. European industry is a key driver in the economic and societal transitions that we are currently undergoing. As cited above (p. 2) within the European Union Industry 5.0 “…provides a vision of industry that aims beyond efficiency and productivity as the sole goals and reinforces the role and the contribution of industry to society.” and “It places the wellbeing of the worker at the centre of the production process and uses new technologies to provide prosperity beyond jobs and growth while respecting the production limits of the planet.” It complements the Industrié 4.0 approach by “… specifically putting research and innovation at the service of the transition to a sustainable, human-centric, and resilient European industry. This approach provides a vison of industry that aims beyond efficiency and productivity as the sole goals and reinforces the role and the contribution of industry to society”. The author suggests the enabling technologies of Industry 5.0 are a set of complex systems that combine technologies, such as smart materials, with embedded, bio-­ inspired sensors. Therefore, each of the following categories can only unfold its potential when combined with others, as part of systems and technological frameworks: • • • •

Individualised human-machine-interaction Bio-inspired technologies and smart materials Digital twins and simulation Data transmission, storage, and analysis

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• Artificial intelligence • Technologies for energy efficiency, renewables, storage, and autonomy See Müller (2020) for more detail. There is an expected overlap between Industry 5.0 and 6.0 and it suggests a continuum initiated by Industrié 4.0 that is being expanded to include a social dimension (possibly overlooked by Industrié 4.0). Fig. 19.14, Industry 5.0 /6.0 connectivity influences value chain network effectiveness, efficiency and human engagement illustrates the ongoing transition of Industrié 4.0 into Industry 5.0/6.0. Fig. 19.14 summarises the characteristics of Industry 5.0/6.0. Comparing these items with forecasts that are being made by, for example, the European Union (Müller, 2020), Skobelev and Borovik (2017), Berruti et al. (2017), NIST (2018), Eschbach (2021), Kraaijenbrink (2022), it is difficult to determine any demarcation between Industrié 4.0/Industry 5.0, and Industry 6.0, rather, what appears more likely is that Industrié 4.0 has created a situation whereby specific technological items are being developed to meet specific needs of organisations and these are adapted and applied to meet similar solutions. Given that the business environment is becoming increasingly dynamic as social, economic, and political events occur together with the impact of Industrié 4.0/ Industry 5.0/Industry 6.0 technological developments we can expect both strategy and structure changing frequently as it preserves value and creates value. Preserving Value: GreenMed achieves this by utilising recovered material and redesigning it into new products developed specifically for use in healthcare and mitigating the need for further production and purchase of single use plastic products from fossil fuels. GreenMed’s aim is to minimise the growing amount of wasted clinical & hospital waste headed to landfill throughout Australia. Their program achieves this by utilising recovered material and redesigning it into new products developed specifically for use in healthcare and mitigating the need for further production and purchase of single use plastic products from fossil fuels. GreenMed suggests it is preserving value, redesigning waste. Some organisations see ‘preserving the brand’ as preserving value Campbell Soup Company is 146 years old and one for which ‘taste is king. Campbell’s core customer base is getting older and as a group, it is very different than the millennial shoppers the firm is trying to attract. It has maintained modest growth in its core product group and has introduced, through a subsidiary a range of snack products and a range of ‘fresh’ soups, maintaining its initial values of quality and choice. Creating Value: The value of products and services today is based more and more on creativity; the innovative ways that they take advantage of new materials, technologies, and processes. Value creation in the past was a function of economies of industrial scale: mass production and the high efficiency of repeatable tasks. Value creation in the future will be based on economies of creativity: Mass customization and the high value of bringing a new product or service improvement to market; the ability to find a solution to a vexing customer problem; or the way a new product or service is sold and delivered.

Introduction

383

Organizational structure will have to change to meet the new reality of creativity as a core component of value and continuous innovation as the mechanism to sustain it. The new organization will include structures that support innovation 24/7/365 and at increasing scale. They will be more like organisms than machines. They’ll be structurally fluid, bringing individuals together in creative networks designed to adapt to an ever-changing landscape of customer needs and desires, often at a moment’s notice. Management will be the job of those who oversee creative economies, ecosystems, and communities; it will be the job of managing innovation on a continuous basis where scale is used to create differentiated products and services to solve problems and meet needs on a customer-by-customer basis, all in real or near real time. The value chain will supplant the supply chain. Supply chain management is about taking out cost and making the process efficient, but, as we’ve said, this won’t be enough; value chain management is about how to create value; how to coordinate the continuous innovations of creative contributors and how to make that process efficient for the consumer and the contributor. Additionally, creative networks will bring the same scale to creativity that social networks do to our circles of friends. The network doesn’t just have value in the social sphere. What social networks do for our ability to stay in touch and satisfy our need to interact with others, creative networks will do for work, management, product, and service innovation and, ultimately, value creation beyond anything we have ever seen, Hughes (2013).

Positioning Where the firm can position itself in a value chain network is largely a function of its business model. Typically, each business model criterion has a clear range of objectives that link with the overall market and financial objectives of the organisation. For example, a return on net assets will be reflected in a capital intensity objective (financial gearing) and lower operating costs will be reflected in an operational gearing objective. This business model capability can be tested. Since the wider adoption of mass customisation and product platform technology value chain network ‘associates’ (or subsidiaries) have been used to develop ‘experimental’ value propositions, aspects of which when proven are then introduced in larger volume market segments. This has been the case with the VW-Audi Group whose Skoda division was developed as an incubator for several developmental projects that were pioneered in minor brands and subsequently moved into the volume ranges. An understanding of the customer expectations of expected product-service-­ market benefits and acceptable product-service-market acquisition costs is important. (i.e., the customers’ typical cost/value/equalisation formula). A brand such as IKEA must be aware of the balance of customer expectations of benefits and their acceptance of acquisition costs and the precise nature of this trade-off, if they are to design a network that offers profitability and productivity advantages to network members and of course to the Company itself. Anderson et al. (2006) describes the

384

19  Reimagining the Value Chain Network

activities of B2B companies as they develop a customer value proposition. Essentially, they are conducting an audit of customer price/value/equalisation drivers that impact on customer performance. An example given is based on Rockwell Automation who identified the cost savings from reduced power usage that customers would gain from purchasing Rockwell’s pump solution rather than from competitive offers. The evaluation of the network attractiveness can be supported by a specific review of competitive capability activities. Often local organisations identify opportunities and threats and move towards strategies and structures that close gap. Lloyd (2007) reports on a recent transformation in Australian manufacturing that is significant and relevant. The author describes a dramatic shift in the type of business now becoming successful in areas that were once dominated by ‘high volume—low value’ manufacturing such as textiles (apparel and footwear) that are now being replaced by food processing, advanced aero-space, pharmaceuticals, and medical devices. This has implications for business models. The ‘high value-low volume’ companies will require an emphasis on the confidential management of the transfer of information flows while the ‘high volume-low value’ organisations will need to focus on the cost and time efficient management of materials flows and of transactions flows as cash management becomes increasingly important in industries in which margins are constantly under pressure. If the organisation is to identify with a role within the range of value chain processes, it is sound business sense to establish itself in that role and to monitor potential competition that may attempt to undermine its positioning. This requires rigorous self-analysis and takes a prospective view of product and process developments together with a similar long-term view of competitive activities. Often this suggests to an organisation that possibly due to value migration or perhaps an external shift in the industry characteristics due to changing technology or may be relationships structures, a company may consider it timely to shift its positioning within the value chain. Internal factors may also suggest this to the organisation’s management as the organisation develops new skills. How does the firm evaluate these business model decisions and relate them to participation in a value network? Perhaps the simplest answer is to assume a ‘start­up’ value chain network design exercise in which the value chain organiser facilitates the structural decisions and identifies ‘ideal’ profiles of network members. This suggests the overall network value creation processes can be disaggregated into separate but inter-related value chain network processes: • Market and customer profiling, customer expectations are identified; value drivers are formulated, and a value proposition is developed and verified for customer response • Research design and development, from which product-service-market and process specifications result

Introduction

385

• Operations management, given the product-service-market and process specifications the optimal procurement, manufacturing and distribution processes that will meet end-user and value chain network partners are determined • Marketing (selling, transactions and physical distribution channels), and serviceability operation, determine how value is delivered serviced and renewed (remanufactured) such that product-service-market continuity is maintained An additional feature is the intellectual property link (IP) link for competitive advantage, The network, or possibly one specific member, may have developed a unique/exclusive component/process that has provided complete value advantage for which it holds a patent with a long period of exclusivity. The IP link is used to generate value in subsequent product-service-market activities. It is not unknown for competitors to purchase access to the licence and to develop an alternative ‘product’ that offers more efficiency, lower purchase price, or simpler installation, often very attractive to customers with mobile assets that require frequent and expensive servicing requirements offshore. From this position we turn towards the original concept of the value chain to track recent developments and ponder on its future. This is not to suggest all organisations have reached this state given the data being published by IP-led journals, but it represents the leading edge. There is evidence that end2end/producibility is being implemented, that information flow is connected and shared. The circular value chain has been recognised and becoming implemented with substantial remanufacturing activities. See reports from the Ellen MacArthur Foundation. This raises a question concern the development of value chain management in the foreseeable future. Given the rate of development and change that has occurred and the application (and investment cost) of “technology, specifically digitisation, digitalisation and connectivity and the forecast of additional and far-reaching supplementary technology, flexibility and agility are two capabilities that will bring value management leadership. Figure 19.21: Industry 5.0/6.0 connectivity influences value chain network effectiveness, and efficiency, and human engagement identifies the numerous technological and network collaborative changes that are either in place or can be expected in the future. Lund et al. (2019) argued that the costs and the risks of global operations are shifting. They identified some significant changes that appear to be continuing and therefore should be addressed: • Goods producing value chains have become less trade intensive; while both are increasing in volume the proportion of the total is service oriented and this group is increasing in importance. Furthermore, they generate more economic value • Less value chain business is based upon labour-cost arbitrage and this trend has been evident for some years • Global value chains are becoming more knowledge intensive and reliant on high skill labour

Design

the Value

Produce

the Value

Deliver

the Value

Maintain

the Value

Sustain

the Value

Re New

the Value

Fig. 19.21  Industry 5.0/6.0 connectivity influences value chain network effectiveness, efficiency and human engagement

Implications for the Value Chain Network?

The operating model core construct is customer-centricity, product-service-market (not project) thinking, integrated teams, a culture of experimentation and innovation, and value measurement. Organizations should adopt a framework to evolve to a future-ready operating model. While each component generates business benefits, true business agility requires an initial focus on customer journeys and product thinking before talent, platforms, and governance (InfoSys).

● EESG Criteria; Targets and Monitoring Environmental Criteria Carbon emissions, climate change, energy resources. Social Criteria Relationships, people and institutions in contact communities, consumers, employees, and suppliers Governance Internal practices, controls and procedures used for internal governance ● Legal compliance and meeting the needs of stakeholders

Total Stakeholder Value Delivery (TSV) ● Purpose, trust, engagement and cooperation, connected communications ● Connected systems ● Shared knowledge, learning and innovation ● Performance reporting, rewards and “value delivery”

Value Chain Network 3.0 /4.0 ● Producibility (End2End Total time cost of ownership (TTCO) ● Increased System Flexibility • Agility • Customisation •Product & Process quality Cost/Price competitiveness ● Integrated and coordinated Value Proposition (and “rolling value proposition”) delivery processes ● Prime contractor and Subcontractors in “more equal partnerships” ● ”Coopetition” – Interoperability, managing convergence between two similar programmes

● 5G enhanced connectivity, speed and content detail ● Connected Operations Management: Digital and Connected ● Coordinating resources availability & utilisation ● Augmented/Virtual reality ● Customised (project based) robotics ● Robotics used to undertake “dull, dirty and dangerous tasks” ● Software designs and verifies parts (reduces need for expensive prototyping) ● Automated manufacturing processes ● AI and Machine Learning ● Advanced analytics ● Generative Artificial Intelligence/Machine Learning ● Digital thread ● Digital Twinning ● Additive manufacturing ● Generative Design and Manufacturing ● Time2Market and Customer Response Management Times ● Real-Time driven “transparent” Interactions ● Real-time customer performance operations monitoring and management advice ● “Integration Roles” (Customer Engagement) ● Increased management and staff capabilities ● Product personalisation ● Dynamic supply chains ● Dynamic intra & inter connectivity across supply and customer organisations ● Seviceability dominant ● Green Sustainability

Future Strategic Operations Decision Convergence - 2.0 Organisational Excellence (Industry 5.0/6.0 Value Chain Network 3.0, Total Stakeholder Value Delivery (TSV) and Maintaining Organisational Excellence Industry 5.0/6.0

the Value

Identify

Transparent Digitised/Connected Interactions

Current Strategic Operations Decisions: Convergence - 1.0 ● Asset structure & management ● Management and staff capabilities ● Innovative Product/Process Development ● A focused “value-delivery” strategy ● Customer-centric product-service ● “Cycle” management (PLC marketing, PLC product engineering, Asset management

386 19  Reimagining the Value Chain Network

Introduction

387

• Across all value chain networks investment in intangible assets (R&D, brands, and intellectual property) has more than doubled as a share of revenue, from 5.5% to 13.1%, since 2000 • Goods producing value chain networks (automotive as well as computers and electronics) are becoming regionally concentrated, notably within Asia and Europe. This suggests higher incomes and expanding disposable incomes—as well as higher education standards. Local companies are increasingly engaged in production for local consumption. Lund et al. (2019) suggest three explanations for these changes: • Emerging markets’ share of global consumption has increased by approximately 50% and are consuming more of the production • Emerging economies are building more comprehensive domestic supply chains, thereby reducing reliance upon imported inputs (for example, sensors and microprocessors) now being manufactured “locally” in many markets • Global value chains are being reshaped by new technologies (digital platforms, IIOT, AI, and cross border data flows), however, these items could increase serviceability-­led “products” The authors comment on the future making a point that there are several complex unknowns, making flexibility and resilience critical. Add rising costs and with the risks of global operations shifting, many companies may need to make decisions on their value chain positioning. TimeLine management is becoming a critical competitive feature, and many companies are reassessing their size and their locations for better supply chain coordination, suggesting collaboration relationships with core suppliers, and customers, may be an effective strategy. Figure 19.21 identifies the many IIOT features that are impacting value chain network effectiveness, efficiency, human engagement, and therefore organisational excellence. These include; value chain customer centricity, increasing collaboration between partner members, the role of the value chain in creating value from “serviceability”, identifying response capabilities and building them into relevant operating capability driven operations models, flexibility and agility within the model, responding to customer decreasing timeline management, product personalisation as well as customisation to meet specific customer requirements, circular production and value renewal. See Fig. 19.21. The customer facing activities that create the bond between customers and the value chain are, agreeing processes for; the overall order taking process, technical discussions concerning specification performance required, product personalisation to meet performance specifications, agreeing production scheduling to meet customer installation programs and in-production timing, product-service testing, delivery, installation, employee training (if required), digital connectivity (thread) if required and performance monitoring, predictive maintenance development if required, delivery scheduling, and payment scheduling. The relative importance of customer facing processes and their delivery creates the framework of the vendor/

388

19  Reimagining the Value Chain Network

customer relationships upon which the success of the initial transaction and its impact on the future success of the relationship that develops between the network and its individual customers, rests.

Relationship Based Networks A Dynamic Business Environment requires a Dynamic Response—a flexible, sometimes agile response capability is a prerequisite for success. With Industrié 4.0 merging into Industry 5.0, and which appears to be already merging with Industry 6.0, it can be expected that Value Chain Networks will be able to format themselves using relevant technology, and organisational structures to meet the dynamic business environment with dynamic responses made possible by digitally driven operating models, digital platforms are technology-based business models. Their purpose is to connect interests and people and promote valuable interactions between those involved. Relationship management is a typical example of a digital platform and can involve suppliers and customers. Relationship management models can apply intra and inter organisationally and as such are ideal for developing value chain networks, the concept is shown as figure twenty-one, each “activity” is linked serially, however, data flows can be accessed at any location if required. See Fig. 19.22. The diagram’s linkages, the contact points between the relationships sets demonstrates data links. Organisational Excellence is managed by monitoring horizontal and vertical data flows. Again, it’s essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders.

Product Platforms and the Future Value Chain Product Platforms and Product Differentiation For some time, product platforms have been an important feature of product portfolio strategy. The key to this has been a combination of customer research and its interpretation by operations and marketing activities. The critical concern is understanding the variations of price/value/equalisation by product type. For example, component standardisation in automobiles is very different to fashion products. Real cost savings are available when components are produced in large volumes and typically, if they are not visible, the purchaser is indifferent. Wilson (2018) identified numerous examples of “platform sharing” in the automotive industry. At the time Ford owned Jaguar, Volvo, Aston Martin, and Land Rover, as well as the Ford brand portfolio and the operations plan was to manufacture a range of vehicles that shared a significant number of standard assemblies and components. Figs. 19.23 and 19.24 illustrate the principle of shared standard components,

Data Flow

Data Flow

Data Flow

Creativity – RD&D Relationships

Data Flow

“Manufacturing” Operations Relationships Management

“Manufacturing” Operations Relationships Management

Data Flow

Employee

Supplier Relationships Management

Value Proposition

Relationship Management

Data Flow

Distribution Operations Relationships Management

Data Flow

Data Flow

Data Flow Data Flow

Sustainability Operations Relationships Management “Value Renewal”

Sustainability Operations Relationships Management “Value Renewal”

“Serviceability”Operations Operations “Serviceability” RelationshipsManagement Management Relationships

Data Flow

“Serviceability” Operations Relationships Management

Distribution Operations Relationships Management

Distribution Operations Relationships Management

Marketing & Sales Operations Relationships Management

“Manufacturing” Operations Relationships Management

Data Flow

Fig. 19.22  Digitised collaborative relationship management in the value chain—Maintaining organisational excellence

Data Flow and Decisions

Primary Focus is on Managing Organisational Excellence By Managing Relationships

Data Flow

Maintaining Organisational Excellence

Data Flow

Data Flow

Data Flow

Customer Relationships Management

Data Flow

Data Flow

Data Flow Data Flow

Data Flow

Data Flow

Data Flow Data Flow

Data Flow Data Flow

Stakeholder Response Relationships

Data Flow

Data Flow

Product Platforms and the Future Value Chain 389

390

19  Reimagining the Value Chain Network PRICE/value Style/Equalisation

PRICE

/value Style Quality Exclusive/ Equalisation

Product Variants

Component Standardisation

PRICE/value Style/Equalisation

PRICE/value Style/Equalisation

Fig. 19.23  Component differentiation enhances selective purchasing appeal and profitability

Platforms/Ecosystems and Industry Specialisation A business ecosystem is the network of organizations—including suppliers, distributors, customers, employees, competitors, industry regulators, government agencies, and off-shore governments involved in the delivery of a product-service-­ market through both competition and cooperation. Each entity in an ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem. The concept is that each entity in an ecosystem influence and is influenced by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable to survive, as in a biological ecosystem. Ecosystems create strong barriers to entry for new competition as the ecosystem already consists of the players that allow it to function. As industries expand specialist activities become capital intensive and are often outsourced to specialist organisations. These include, RD&D, Manufacturing Solutions, Communications, Information and Related Services, Physical Distribution Management, Serviceability Operations, and Value Renewal Operations. Fig. 19.24 provides an example of this activity in the automobile industry. Again, it’s essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders. The EV (electric vehicle) development is beginning to take shape. The ICE (internal combustion engine) and the EV share very little automotive technology and the manufacturing, distribution, and serviceability activities are clearly significantly different. For example, batteries which account for a significant proportion of manufacturing cost are only recently beginning to demonstrate some organised

Produce

the Value

Deliver

the Value

Focused communications. Identification & Tracking

Searching, Transactions, Payment & Financing channels

Maintain

the Value

Physical Distribution Activities

Inventory control Transportation &logistics Packaging & materials

Sustain

the Value

“Serviceability” Operations

Serviceability as a product-SERVICE – vehicle leasing

Service Agreements Warranties Maintenance

In February 2000, DaimlerChrysler, Ford Motor Company &General Motors jointly formed a single business-to-business supplier exchange named Covisint to enable collaboration, visibility, and integration for the global automotive industry. Covisint enables automotive organizations to securely exchange information across the largest B2B marketplace in the world. Our cloud-based Connected Supply Chain provides on-demand connectivity &communication to over 85,000 organizations & 500,000 users around the world..

Modern cars are packed with cellular connections, powerful processors and a growing suite of sensors, including cameras, radar and microphones turning them into the next information goldmine, rivalling the data-creating capabilities of smartphones .CES

Ocado Smart Platform: (OSP) is a proprietary solution for operating online retail businesses. It combines our end-to-end software & technology systems with our physical fulfilment asset solution, both of which are proprietary & fully integrated. Ocado’s Customer Fulfilment Centres (CFCs): Our highly automated warehouses, incorporating the latest automation, robotics & control systems. The efficient operation of Ocado CFCs is crucial to the success of Ocado & the delivery of hundreds of thousands of orders a week

Bosch: Repair-shop concepts, & technology and services for the automotive aftermarket

Product-SERVICE format value propositions. Serviceability Rolls Royce Aero Engines

Performance management & predictive maintenance techniques use digital thread & digital twinning technology to determine the condition of in-service equipment in order to estimate when maintenance should be performed. Siemens’ TeamCenter & General Electrics’s Predix platform models provide this service facility

Fig. 19.24  The existing automotive value chain platform: a composition of focused specialist platform activities

Continental AG: Electronic & foundation brakes, stability management systems, 3 (49) 511-938-01; conti-online.com Hanover 30165, Germany CEO tires, chassis systems, safety system electronics, telematics, powertrain electronics, interior modules, instrumentation, technical elastomers

Magna International: Body exteriors & structures; seating systems & components; power train transmissions; AWD & 4WD systems; mechatronics, door modules, electronic door latching systems, hinges & handles, seating systems and components. Covisint: initially a procurement activity created in 2000 by a consortium of organizations, including General Motors, Ford, and DaimlerChrysler. The purpose was to reduce procurement costs across a range of “standard” components (braking systems, etc).

Digital marketing platforms delivers real-time -across any device and channel. Specialist agencies focus on specific industry applications using advanced data management systems. GSM (US)

Operating Model Digital, Easily Accessed, Simple, Rapid Response, Convenient to use for Customers, Partners, Employees, Suppliers, and other Stakeholders

Manufacturing “Solutions”

Complete Vehicle Manufacturing

Complete vehicles, body exteriors and structures

“Core Service” Components Procurement

Covisint Purchasing for Automotive Industry

Bosch’s capabilities include; mobility solutions, injection technology & powertrain peripherals for internalcombustion engines, powertrain electrification, steering systems, safety & driver-assistance; Infotainment systems technology, as well as vehicle-tovehicle & vehicle-to-infrastructure communication

Design

the Value

Magna’s capabilities include the design, engineering, testing and manufacture of exterior systems, seating systems, closure systems, vision systems, powertrain systems, electronic systems, roof systems, body & chassis systems, hybrid & electric vehicle systems, & vehicle engineering & contract assembly

the Value

Identify

RD&D “Solutions”

Complete Vehicle Engineering

Specific working packages to Complete vehicle development

Powertrain peripherals technology IC engines EV electrification design Driverless vehicles

Remanufacturing is the process of recovering, disassembling, repairing for resale at “new product", or as service parts with warranted performance, quality & specifications. By remanufacturing products, components or parts, a company contributes to the circular economy by extending the lifetime of those elements and creating value. Renault has adapted an existing ecosystem from its remanufacturing operations rather than creating a new one

Re New

the Value

Value Renewal Operations

Design for Long-Term Uses Design for Materials Recovery Design for Serviceability Support Design for Remanufacturing and/or Repurposing

Product Platforms and the Future Value Chain 391

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19  Reimagining the Value Chain Network

structure. A recharging structure for the vehicles is well behind the increasing rate of sales, enlightened petroleum multiples (notably Shell and BP) are restructuring their organisations to meet the challenge but governments (who should be taking a lead) are lacking in an approach. Fig. 19.25 is an attempt at identifying future specialist activities that are likely to comprise value chain positions as vehicle sales (undoubtedly will) develop. Again, it’s essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders.

A Flexible/Agile Value Chain Network Two of the most significant topics in a dynamic environment is the ability to meet customer demand for decreasing timeline management and at the same time maintain accuracy and “product freshness”. This suggests it is essential the value chain has flexibility and agility as leading characteristics. Fig. 19.26 proposes a structure where this is possible. Two of the technology components of the operating model in Fig. 19.20; the ability to capture customer requirements directly and product personalisation, provide a base upon which, in those industries where the product may be a “one off” and have extremely high precision specification, the customer can be included in product production planning (value chain coordination) providing an experience input. Fig.  19.26 flow charts this process identifying how customer expectations and the capability responses of the S-SME and the OEM can be identified (and supplemented) if this is found necessary. It also proposes that the entire process is assessed against the Organisational Excellence criteria of each of the customer organisation (its end product), the S-SME who will have criteria developed over time, and the OEM whose interests and criteria are similar. The end user is likely to be the coordinator. Again, it’s essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders. See Fig. 19.26. Figure 19.27; Value coordination is managed by the three involved in the developing a workable product processing specification using data flows from previous similar items (i.e., the customer, the S-SME, and the OEM). The model can be used for performance management and planning and managing predicted maintenance. Again, essential features are that the operating model is digital, easily accessed, simple, rapid response, convenient to use for customers, partners, employees, suppliers, and other stakeholders. Figure 19.28; applying process mapping to the value chain network … activities and data flow and capture, digitisation, and connectivity, has been assembled from grounded research and observation. It considers the argument made earlier that the value coordination is managed by the those involved in developing a workable product processing specification using data flows from previous similar items. The model can be used for performance management and planning and managing predicted maintenance. See Fig. 19.28.

Identify

the Value

Transmission Systems Driveline design Drive location options Differentials, Axles

Serviceabilty Providers Software update for modifications Battery exchanges Predicted maintenance servicing Performance management (monitoring)

Marketing & Sales Services Direct & Indirect sales Multi-brand mix: omnichannel & cross-channel. AI focussed media

Maintain

Re-charging Facilitation Renewable energy COTA Charging-over-the-air “Home" based facilities Regular short” journeys' “Infrequent long” journeys

Connectivity-In-Car: Systems data management In-car entertainment Information Task Automation

Sustain

the Value

“Serviceability” Operations

Physical Distribution Operations

the Value

Service subscriptions

Service Parts Availabilities “Brand” Supply “OE” Component suppliers 3rd/4th Part Distribution companies

Operating Model Digital, Easily Accessed, Simple, Rapid Response, Convenient to use for Customers, Partners, Employees, Suppliers, and other Stakeholders

Autonomous Driving Self driving technology technologies: Private & public transportation. Freight vehicles Raw Materials-Mining

Deliver

the Value

Focused communications. Identification & Tracking

Searching, Transactions, Payment & Financing channels

Maintaining Organisational Excellence Mobility Activity Options Access vs Ownership Car Subscription programs Ride-hailing services Vehicle sharing

Produce

the Value

Manufacturing “Solutions” Providers

Complete Vehicles

Exteriors Modules/Components

Interiors Seating & Fittings

Connectivity-External Car: Performance management Serviceability management In-Use management Specific route issues; congestion, accidents, bad weather, hazards

PlanetCare: Effective design management Circular Value Chain Recycling materials Component remanufacturing

Re New

the Value

Value Renewal Operations

A circular economy is an economic system aimed at eliminating waste and the continual use of resources.

Fig. 19.25  The evolving automotive value chain platform in the EV automotive industry: A composition of complex specialist capability-led platform activities

Concept Design & Value Proposition

Design

the Value

RD&D “Solutions” Providers

Product-Service Engineering & Manufacturing Process Engineering Designers

Advanced Manufacturing Digital Connected

Powertrain/Traction Traction motors Battery packs Traction battery Auxiliary battery Onboard charger

Concept Design & Value Proposition

Developing EV Demand Management Platforms ….

Demand Chain Analysis: Customer & Partner Expectations: Value Drivers

Data Transfer Collaboration

Current ICE Platforms ….

Product Platforms and the Future Value Chain 393

Global Marketing & Sales Networks Vehicles, Services

Alternative Energy Sources

RD&D “Solutions”

Product/ Service Design

Power Train Alternatives

Manufacturing “Solutions”

Ownership Facilitators

Current Platforms

Marketing & Sales Operations

Deliver

Physical Distribution Operations

Connectivity Internal External

Serviceability Operations Management

Maintain

Autonomous Driving/ Powertrain/ Traction

Transmission Systems

Marketing & Sales Operations

Serviceabilty Provider Networks

Operating Model Digital, Easily Accessed, Simple, Rapid Response, Convenient to use for Customers, Partners, Employees, Suppliers, and other Stakeholders

Mobility Alternatives

Existing Energy Sources

Build

Shared Uses

Re-Charging Facilities

PlanetCare

Renew the Value

Remanufacturing &/or Repurposing

Global Circular Economy/ PlanetCare

Value Delivery

Sustain

Fig. 19.26  The development of specialist value-adding platforms capable of focused and agile responses to changing end-user expectations: Automotive market example

Developing Platforms

Global Marketing & Sales Networks

Design

Demand Chain Analysis: Customer & Partner Expectations: Value Drivers

Prototype Production

Identify

394 19  Reimagining the Value Chain Network

Organisational Excellence

OEM Manufacturing Model, Assembly and Service Support

End-User Customer Value Renewal or Repurposing

Delivering Increasing Customer Productivity/Efficiency by Reducing Network Acquisition and Operating costs and Improving Network Cash Flow

Assembly

Delivering “Differentiation-Value Added” Complexity-by Adding Specialist Technical Expertise and creating Competitive Value Advantage. Serviceability

Partner Benefits Sought: • Economic Profitability and Productivity • Reduced operating costs • Improved lead times •Flexibility to changes in demand • Risk reduction •Resilience • Product/assembly – quality/value •”Continuity”

S-SME Component Suppliers

Maintaining Organisational Excellence

Network Partner Performance Criteria • Equitable Stakeholder Value Management( Profitability & Productivity), • Economic profit/Value Contribution • Positive Free Cash Flow • Customer Price/Value/ Equivalence • Fit4Purpose

Value Chain Coordination

Performance Management • “Product/Assembly Quality” • Service Quality • “Process Accuracy” • Product-Service Availability

Fig. 19.27  The customer/OEM/S-SME/OEM partnership interface: Considerations—and criteria—maintaining organisational excellence

• Strategy & Structure • Customer Centricity • Supplier Relationships • Processes • Technology • Capital • Collaboration • Performance

Operating Model

Identify End-User Customer Segment Expectations: • Fit4Purpose specification • Price/value/equalisation • Typical TimeLine expectations • Total Cost of Ownership (TCO) • P-S-M Continuity • Seviceability • Experience Led Growth • Value Preservation • Value Creation

• Identify Value • Create Value • Produce Value • Deliver Value • Service Value • Renew Value

Scope for Collaborative Operational Activities RD&D Identify: end-user expectations, activities and opportunities, and the opportunities they present and initial product-servicemarket directions. Identify key competitors and resources suppliers

TimeLine Management • On-Time Delivery • Order Cycle Time • Order-Lead Time

Cost Management • Low Inventory Holding Costs • Minimal Waste Reduction • Lower operating costs

Requirements: • Size •Location • Response TimeLine • Skill set and Experience • Ownership & financial stability

Product Platforms and the Future Value Chain 395

Continuous Improvement of Output

Quality Control

Performance Management

Component Manufacturers (1)

Shared Data Output

Accommodating Design Changes

Preservin Preserving Value g Value Shared Data Output

Performance Management

Serviceabilty

New Markets

Creating Value?

Product -Service Development PRODUCT-service product-SERVICE

PRODUCT-service-market product-SERVICE-market product-service-MARKET

• Assessment • Life-cycle assessment • Benefit-cost analysis • Ecosystem-services valuation • Integrated assessment models • Sustainable impact assessment • Environmental justice

● Labour ● Materials ● Services ● Energy

Sustainability Analysis

Sustainability

Explore and Validate “Value Renewal” Operations

Create “Serviceability” Operations • Manage customer experience data • Real Time Performance Management • Predicted service Management • Optimise production operations • Asset management advice: productservice-market procurement activity

● Labour ● Materials ● Services ● Energy

Changing & New Customer Solutions New Customers Value Creation Task/Value Proposition

Equipment in Use Hardware

Component Manufacturers (2)

Create “Serviceability” Operations

Collaborative RD&D Managing Current Performance Planning Future Performance Optimal Production Operations Design Manufacturing Commercialisation Network Competitive Value Advantage

Equipment Digital Twin Software

Product Management and Development

Serviceability Management Customer Experiences Data

Artificial Intelligence/Machine Learning

Generative AI

ProductService Planning and Control Data

Network Resources Requirements • Capabilities • Capacities • Constraints

Product -Service Development Product-SERVICE

Product–Service Sustainability Analysis Development

Operating Model Digital, Easily Accessed, Simple, Rapid Response, Convenient to use for Customers, Partners, Employees, Suppliers, and other Stakeholders

In Use Performance Data

Predicted Service Management

Customer Experiences Data

Original Equipment Manufacturer

Installation

Customer Performance Data

Customer Experiences Data

Equipment in Use Hardware

Network Resources Requirements • Capabilities • Capacities • Constraints

Product-Service Development PRODUCT-service Product-SERVICE

Fig. 19.28  Applying process mapping to the value chain network activities, data flow and capture, digitisation and connectivity

● Labour ● Materials ● Services ● Energy

Customer Solutions Value Creation Task/Value Proposition

End User Customer Product-Service Expectations

396 19  Reimagining the Value Chain Network

References

397

References Anderson, J., Narus, J., & van Rossum, W. (2006, March). Customer value propositions in business markets. Harvard Business Review. Duggal, A.S., Malik, P.K., Gehlot, A., Singh, R., Gaba, G.S., Masud, M., & Al-Amr, J.F. (2021, October 7). A sequential roadmap to industry 6.0: Exploring future manufacturing trends. IET Communications (Research Paper), (1). Berruti, F., Nixon, G., Taglioni, G. & Whiteman, R. (2017, March 14). Intelligent process automation: The engine at the core of the next-generation operating model. McKinsey Digital. Bollard, A., Larrea, E., A Singla, & Sood, R. (2017, March 1). The next-generation operating model for the digital world, McKinsey & Co. Eschbach, A. (2021, July 13). How industry 5.0 will transform process management as we know it. Forbes. Harren, H., Knyphausen-Aufseß, Z. D., & Markides, C. C. (2022). Managing multiple business models: The role of interdependencies. Schmalenbach Journal of Business Research, 74, 235–263. https://doi.org/10.1007/s41471-­022-­00134-­y Hughes, J. (2013, May 17). What value creation will look like in the future. Harvard Business Review. Infosys. (n.d.). https://www.infosys.com/iki/perspectives/future-­operating-­model. html#:~:text=The%20future%20operating%20model%20has,automation%20in%20 everything%20it%20does Kraaijenbrink, J. (2022, May 24). What is industry 5.0 and how it will radically change your business strategy? Forbes. Lloyd. (2007). Lund, S., Manyika, J., Behgin, J., Seong, J., & Muir, M. (2019, February 16). Globalization in transition: The future of trade and value chains. McKinsey Global Institute. Müller, J. (2020). Enabling technologies for industry 5.0. European Commission https://www.4bt. us/wp-­content/uploads/2021/04/INDUSTRY-­5.0.pdf NIST (2018). Smart manufacturing systems design and analysis program. NIST, US Government. Resnick, C. (2017, June 17). Operational excellence (OpX) achieved by companies that ARE operationally resilient. ARC. Skobelev, P. O., & Borovik, S. Y. (2017). On the way from industry 4.0 to industry 5.0: From digital manufacturing to digital society. International Science Journal, 2(6). The Government of Japan. (n.d.). Realizing society 5.0. https://www.japan.go.jp/ abenomics/_userdata/abenomics/pdf/society_5.0.pdf Wilson, C. (2018). Industry of tomorrow. Forbes, (November 13).

Part V Concepts and Cases

Concepts and Cases

20

Value Chain Network Management is now emerging and is becoming as familiar to managers as is supply chain management. This text has made the case for the value chain to become useful as a planning and control activity. It tracks the development of the value chain from the early days of vertical integration, through the sales era, into marketing and subsequently into the early days of the Porter Value Chain. The topic of value is dealt with in some depth with examples of how pricing and purchasers’ perceptions of price and value are dealt with in the marketplace and in what is important in increasing value for both customers, and their suppliers and increasingly important to stakeholders as well as shareholders. The importance of stakeholder satisfaction is an increasingly important concern to individual organisations and the networks they work with. The topics of capability responses and organisational excellence are introduced. A section of the text identifies basic capability responses; performance, positioning, profitability, and productivity, producibility (aka end2end value production and management), collaborative partnerships, platforms, and people, planetcare and sustainability, all of which are contributors to meeting stakeholder expectations as well as those of customers. The text considers network economics as an important factor in manufacturing decisions and a range of topics are concerned with the increasing number of alternative solutions in production and distribution decisions from the well-known, scale and scope, and experience curves to collaboration curves. Business cycles are re-­ imagined and the usefulness of product life cycle engineering, asset management and value management cycles are discussed, and their uses explored. We recognize the growth of the digital applications occurring in the business environment and review its application to business models. Finally, we revisit the developing value chain and discuss value chain analysis and mapping as a necessary and essential activities prior to considering the value chain as a connected and collaborative operating system.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 D. W. Walters, D. A. Helman, The Value Chain Network, Future of Business and Finance, https://doi.org/10.1007/978-3-031-38000-6_20

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Concepts The chapter begins with a list of key concepts and definitions—this may assist the reader in thinking through the case studies and is a useful summary of the key ideas that are examined in this publication.

Case Studies The case studies have been constructed such that they identify activities that are decision points concerning response capabilities. The chapters dealing with the response capabilities, both existing and new concepts, have been introduced and explored, some of the concepts may not have been encountered in previous business school programs, or were, but not in the approach taken here. We have presented a wide range of topics and would argue that all are relevant and should be used when thinking thorough an overall response to an opportunity. It can be expected that future market opportunities are likely to present themselves in a manner that suggests numerous solutions. The benefit of the response capability approach is that it opens up these alternatives. This suggests that response capabilities, are not only useful for creating new innovative solutions but can also be used to search for alternatives around a specific capability. Case studies do not represent superior ways of resolving issues, nor do they represent inferior practice; they reflect ongoing or recent situations that have occurred. They present the reader with an opportunity of exploring the situation by asking: if they knew then what they know now what could the end result be?

What Is a B Corporation? The ‘B’ in B Corp stands for “beneficial”, acknowledging businesses and networks that benefit more stakeholders than just shareholders such as customers, employees, suppliers and sub-suppliers, communities, and its physical environment. B Corps status is awarded by global non-profit organization, B Lab, after a rigorous and on-going assessment against a range of stringent performance standards. B Lab was founded in 2006 by former Stanford roommates, Andrew Kassoy, Bart Houlahan, and Jay Coen Gilbert, who shared a belief that a: different kind of economy was not only possible, but necessary and that business could lead the way towards a new, stakeholder-driven model.

EV Battery Supply Chain Developments EV sales should grow to reach 29.5% of all new car sales in 2030, up from an estimated 3.4% in 2021. Based on a sales increase to 4.7 million from a little more than 500,000 in 2021. European car manufacturers and potential battery suppliers have

Concepts and Definitions

403

strong economic and strategic incentives to ensure local battery production. The battery is the single most costly part of an EV, currently making up between 35 to 45% of total cost (and is forecast to be lower as material costs decline, and scale economies increase in output terms, a decrease in price from $US 1.100 KWh to US$ 60 KWh suggests that the total price of EVs will be less than ICE vehicles by 2030). It is also expected to be the most difficult in supply response as EV production and supply chains expand in the future. Batteries being a major component to OEMs is critical and carries significant supply-chain risks. For European manufacturers, there is the risk that decreasing production of ICE vehicles and expanding EV production without secure local battery capacity is likely to make the European automotive industry less competitive.

 alue Chains as Strategic Partnerships: McKesson— V Venture Partners In the traditional healthcare payment model, a patient visits a provider who then bills for the specific services rendered. Each additional service—perhaps another checkup, scan, or infusion—generates another itemized bill. While this fee-for-­ service model might seem logical enough, it may result in more tests and other billable services with limited value instead of emphasizing what matters most: providing patients with the best possible care. This is where value-based care comes in. Six years ago, 14 practices in the McKesson Network began participating in the Oncology Care Model (OCM), a Centers for Medicare & Medicaid Innovation pilot supporting higher quality, more coordinated care for the same or lower cost. Through OCM, these practices modified protocols and roles, provided 24/7 access to care, expanded patient navigation tools, followed nationally recognized treatment guidelines, and integrated mental health, nutrition counselling, and other services into their offices. Ultimately, this value-based approach has proven valuable in both patient care and financial savings.

Concepts and Definitions This glossary is intended to provide brief descriptions of the key concepts and terms used throughout the text. Sources for these definitions have come from the public domain and from our earlier publication: Walters, D.W. & Helman, D.A. (2020) Strategic Capability Response Analysis—The Convergence of Industry 4.0, Value Chain Network 2.0, and Stakeholder Value-led Management. Switzerland: Springer. Advanced Analytics refers to a broad range of analytics that are intended to give businesses greater insight into their data than they could ordinarily; these techniques include machine learning, data mining, predictive analytics, location analytics, big data analytics and location intelligence.

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Application Programming Interface (API): An API is a software intermediary that allows two applications to talk to each other. An API is the messenger that delivers a request to the provider that it is being requested from and then delivers the response back to the originator. AI Reduce inventory holding costs, improve cash flow and supply chain visibility, and increase the productivity of inventory analysts. C3 AI Inventory Optimization applies advanced machine learning to analyse variability in demand, supplier delivery times, quality issues, and product-line disruptions to build real-time recommendations and monitoring, so users can set optimization by confidence level and receive real-time notifications and root-cause analysis. Global manufacturers using C3 AI Inventory Optimization have decreased inventory levels by 35%. Artificial Intelligence is the ability of a computer program or a machine to think and learn by aggregating data and developing algorithms of activities and behaviours. It is also a field of study which tries to make computers “smart”. As machines become increasingly capable, cognitive facilities once thought to require intelligence are now removed from the definition. Examples: process automation (QC) and sales and market forecasting. Artificial Intelligence: Artificial intelligence is intelligence demonstrated by machines, as opposed to the natural intelligence displayed by human. Asset management refers to a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings or equipment) and to intangible assets (such as human capital, intellectual property, goodwill or financial assets). Asset management is a systematic process of developing, operating, maintaining, upgrading, and disposing of assets in the most cost-effective manner (including all costs, risks, and performance attributes). Augmented Intelligence: creates a human-centered partnership of people and real-time situational intelligence that combines to enhance information processing and decision outcomes. Augmented intelligence works with AI to improve cognitive performance in areas such as learning, decision-making and encountering new experiences. Applying the augmented intelligence ‘superpower’ analogy to manufacturing, its value becomes increasingly evident in the areas of safety, productivity, and efficiency. Augmented Reality adds digital elements to a “live” view of a situation Virtual Reality presents a complete “immersion” experience. Behavioural marketing: is the method by which companies target audiences based on their behaviour, interests, intentions, geolocation, and other metrics using web analytics, cookies, search history, and other insights. Business impact analysis (BIA) is a systematic process to determine and evaluate the potential effects of an interruption to critical business operations as a result of a disaster, accident or emergency. Impact Urgency Matrix—as with any Incident management process definition is an important cornerstone that ultimately determines an incidents priority which drives the response and resolution time. This concept should be applied to the manner you define your impact and urgency matrix.

Concepts and Definitions

405

Business Process Management: (BPM) is a discipline in operations management in which people use various methods to discover, model, analyse, measure, improve, optimise, and automate business processes. BPM focuses on improving corporate performance by managing business processes. Closed-loop Control System: also known as a feedback control system is a control system which uses the concept of an open loop system as its forward path but has one or more feedback loops (hence its name) or paths between its output and its input. Collaborative network innovation refers to development projects in which multiple partners collaborate and contribute their expertise towards the development of a shared product-service that typically reduces time and cost and offers greater value to the end-user. Collaborative platforms: software or groupware is application software designed to help people involved in a common task to achieve their goals. One of the earliest definitions of collaborative software is—intentional group processes plus software to support them. Constrained Optimisation: Designing a range of product-services with the greatest possible value to stakeholders given the constraints imposed by their (stakeholders) characteristics, provider organisational characteristics, budgets, and so forth relies heavily on the design of structures and processes. Such problems are complex and require a rigorous and systematic approach to identify the best solution. Generative design and manufacturing are an example of constrained optimisation. Cost Engineering: A cost-focused methodology that supports the design and implementation of specifications at the lowest total cost of ownership, across the end-to-end lifecycle. A customer-led company focuses on needs and not products. The central idea of marketing is that customers want to meet a need or solve a problem and not to buy a product. Value-in-use is the primary concern in the customer price/value equivalence evaluation process. Cybersecurity is the protection of internet-connected systems, including hardware, software, and data, from cyberattacks. In a computing context, this is used by enterprises to protect against unauthorized access to data centres and other computerised systems. Deep Learning is an artificial intelligence function that imitates the workings of the human brain in processing data and creating patterns for use in decision making. This is also known as deep neural learning or deep neural networks. Demand Driven Materials Requirement Planning (DDMRP): is a planning practice that helps to mitigate disruptions in production when there is an unexpected spike in demand. However, during the coronavirus crisis, unexpected shortages from suppliers became the main cause of disruption. This method of resource planning sees stock not as waste, but as strategic inventory buffers so automakers can plan for uncertain events and increase supply chain and production agility. To successfully transfer to a DDMRP supply model, or even a hybrid approach combined with just-in-time delivery on some parts, automakers need to deploy a capable ERP

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solution that can use daily inventory metrics and external demand indicators to predict unexpected demand spikes or supplier shortages. This will ensure that disruptions to the supply chain, as automakers experienced during the pandemic, do not have a detrimental impact on production. Digital Thread: the flow of data that runs through all the organizations and contexts with which a product/service interacts. A digital twin is basically a virtual version of a physical entity, whether product, factory, or some other type of asset or system. The digital twin unites business, contextual and sensor data to represent the physical object. Digital Twins: The digital twin concept started to gain recognition in the early 2000’s, most notably through the work of Michael Grieves at the University of Michigan. Grieves proposed that a digital twin model has three main parts: a) physical products in Real Space, b) virtual products in Virtual Space, and c) the connections of data and information that ties the virtual and real products together. The definition of the digital twin has evolved over time, but the basic idea remains the same: a dynamic, virtual software-generated representation of corresponding physical assets and processes. There are many applications and use cases of digital twin, and the list is constantly growing. Some general uses of digital twin include validating system models with real world data, providing decision support and alerts to users, predicting changes in physical systems over time, and discovering new application opportunities and revenue streams. Digital twins can be used for a wide range of purposes, including design adjustments and diagnostics. Additionally, because they are accurate representations of physical assets, they can also be utilized to streamline and optimize the commissioning phase. Instead of commissioning a new system or robot cell in the physical world, virtual commissioning involves creating a digital twin and then testing and verifying the model in a simulated virtual environment. This enables; code testing and debugging in a virtual environment, the simulation of equipment operation, identification of possible problems and the quick evaluation of alternative solutions, the simulation of robot cell operation, the development of operating procedures, the training of supervisors and equipment operators, and the simulation of the impact of new machinery on the existing operation to identify choke points and space constraints so they can be addressed before installation. Digitisation is the process of converting information from a physical format into a digital one. When this process is leveraged to improve business processes, it is called digitalisation. The results of this process are called digital transformation. Digital Value Proposition: Customers are involved either through active participation in designing and/or improving digital solutions. In addition to their role as consumers, customers become co-creators of digital solutions. EESG/UN Sustainable Development Goals or Global Goals are a collection of 17 interlinked global goals designed to be a “blueprint to achieve a better and more sustainable future for all”. The SDGs were set up in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030. Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

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Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights and the wider issues of stakeholder concerns. The authors have additional (E)ESG where (E) represent equality of ethnicity, skin colour, gender, “class”, religion. UN 17 Sustainable Goals (UNSG): (1) No Poverty, (2) Zero Hunger, (3) Good Health and Well-­being, (4) Quality Education, (5) Gender Equality, (6) Clean Water and Sanitation, (7) Affordable and Clean Energy, (8) Decent Work and Economic Growth, (9) Industry, Innovation and Infrastructure, (10) Reducing Inequality, (11) Sustainable Cities and Communities, (12) Responsible Consumption and Production, (13) Climate Action, (14) Life Below Water, (15) Life On Land, (16) Peace, Justice, and Strong Institutions, (17) Partnerships for the Goals. The year by which the target is meant to be achieved is usually between 2020 and 2030. For some of the targets, no end date is given. eKanban: a Japanese manufacturing system in which the supply of components is regulated through the use of an instruction card sent along the production line. eKanban uses the internet as a method of routing messages to external suppliers to provide real-time visibility into the entire response supply chain. Its benefits include lower VCN inventory, less transportation, and a reduction in working capital— liquidity is improved. EQMS, also referred to as eQMS (Electronic Quality Management System), is a category of software that documents and runs processes, procedures, and responsibilities for achieving quality goals and policies. EQMS can either be legacy-­ based or cloud-based. ERP: Enterprise resource planning (ERP) is a platform companies use to manage and integrate the essential parts of their businesses. Many ERP software applications are critical to companies because they help them implement resource planning by integrating all the processes needed to run their companies with a single system. An ERP software system can also integrate planning, purchasing inventory, sales, marketing, finance, human resources, asset management and other activities. Fiscal policy tax cuts and increased government spending. Both of these policies increase aggregate demand while contributing to deficits or drawing down of budget surpluses. They are typically employed during recessions or amid fears of one. Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rates and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth, and liquidity. Monetary policies are implemented through different tools, including the adjustment of interest rates, purchase, or sale of government securities, and changing the amount of cash circulating in the economy. The central bank or a similar regulatory organization is responsible for formulating monetary policies. Fifth-generation wireless (5G) is engineered to greatly increase the speed and responsiveness of wireless networks. 5G will enable a sharp increase in the amount

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of data transmitted over wireless systems due to more available bandwidth and advanced antenna technology. Gamification: the application of typical elements of game playing (e.g., point scoring, competition with others, rules of play) to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service. Grounded Theory: is a well-known methodology employed in many research studies. Grounded theory sets out to discover or construct theory from data, systematically obtained and analysed using comparative analysis. While grounded theory is inherently flexible, it is a complex methodology. Hybrid cloud is a solution that combines a private cloud with one or more public cloud services, with proprietary software enabling communication between each distinct service. A hybrid cloud strategy provides businesses with greater flexibility by moving workloads between cloud solutions as needs and costs fluctuate. Hybrid cloud refers to a mixed computing, storage, and services environment made up of on-premises infrastructure, private cloud services, and a public cloud—such as Amazon Web Services (AWS) or Microsoft Azure -with orchestration among the various platforms. Hybrid cloud technology offers; better support for a remote workforce, reduced costs, improved scalability and control, increased agility and innovation, business continuity, improved security and risk management, hardware costs, need to manage multiple vendors and platforms. Industry/Market Dynamics are generic business environmental “influencers”: knowledge, technology, relationships, processes, regulatory compliance, and geopolitics. Intelligent manufacturing (also known as smart manufacturing) is a broad concept of manufacturing with the purpose of optimizing production and product transactions by making full use of advanced information and manufacturing technologies. Smart factories or Intelligent manufacturing is the utilization of real-time data analysis, artificial intelligence (AI) and machine learning in the manufacturing process to accomplish the above optimizations. Using sensors on equipment to acquire and process real-time data, intelligent manufacturing allows manufacturers a virtual data-driven, integrated view of all operations—from suppliers and supply chains, through equipment, processes, and manufacturing practices, to final product testing and customer. Intelligent Process Automation uses current data from ongoing operations and by making it available in real-time provides more accurate and rapid decision making. Intelligent Manufacturing System (IMS) is a modern system of manufacturing that integrates the abilities of humans, machines, and processes to achieve the best possible manufacturing outcome. Manufacturing system refers to the entire process of gathering inputs, arranging, and transforming them into the desired output. IMS seeks to achieve optimal utilization of manufacturing resources, minimize wastage, and add value to the current business and to future activities. Machine Learning is an application of artificial intelligence (AI) that provides systems the ability to automatically learn and improve from experience without

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being explicitly programmed. Machine learning focuses on the development of computer programs that can access data and use it to learn for themselves. Examples: image recognition, medical diagnosis. Manufacturing Execution Systems (MES) are computerized systems used in manufacturing to track and document the transformation of raw materials to finished goods, they track and document the manufacturing life cycle. They monitor production, provide real-time insights, and can improve processes and boost efficiency. MES solutions should be flexible and customizable, and easily integrate with your ERP. MES (manufacturing execution system) solutions, this data can provide timely and relevant insights to help improve both the top and bottom lines of a business— improving customer service, shortening lead times, improving production performance and operations efficiency, all while avoiding costly mistakes. Digitization of manufacturing processes and data with MES. “Metaverse”: a sort of 3D sequel to today’s two-dimensional internet, in which users work, play, buy and sell inside immersive virtual worlds—has to become the latest Next Big Thing. Network Connectivity describes the extensive process of connecting various parts of a network to one another, for example, using routers, switches, and gateways, and how that process works. Connectivity occurs between products and between organisations. Connectivity technology means a technology service/feature provided in the device (laptop in this case) to be able to connect with other devices and systems. There are two types of connectivity features—wireless (WIFI, Bluetooth, NFC) and wired (USB, network cable, HDMI). Operational performance drivers maximise the “value added” by a network to its “stakeholders”—by managing and supporting customer and other network partners. Predictive Maintenance is the process of tracking the performance of crucial machine components, such as motors, to minimize downtime needed for repairs. Predictive maintenance enables users to more accurately anticipate when machine maintenance will be needed based on real-time data from the machines themselves. Because of this, predictive maintenance can help reduce machine downtime, increase mean time between failure (MTBF), and reduce costs of unnecessary machine maintenance and service parts inventory. Predictive Maintenance aggregate petabyte-scale data from sensors, devices, enterprise systems, and operational systems (e.g., SCADA, OMS, GIS) to generate accurate predictions of asset failure. C3 AI Predictive Maintenance provides planners and operators with comprehensive insight into asset risk, enabling them to maintain higher levels of asset availability, deliver services-based differentiation, and reduce maintenance costs. 3D printing (additive manufacturing) is defined as the process of joining materials to make objects from 3D model data, usually layer upon layer, as opposed to subtractive manufacturing methodologies. 4D printing has the potential to take customization a step further by enabling 3D-printed parts to transform their shape in response to external stimuli such as heat, light, pressure, and humidity. In practical terms, this means 4D-printed objects

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can theoretically react much more dynamically, rather than remaining as rigid, solid structures. In the future, it may be possible to envision a time when products created with 4D printing can adapt and adjust to their surroundings, in addition to being customized to fulfil user needs. Procure-to-Pay solution is one that enables a cross-functional workflow to streamline and improve the process from the act of purchasing to accounts payable. Source-to-Pay takes this a step further, expanding the scope to include the process of actually sourcing the products or services to be purchased. Producibility is based upon the notion that networks can use industrié 4.0 and VCN 3.0 to create “production infrastructures” that undertake the design and production of the product and downstream processes as an ongoing, simultaneous, holistic process, not a series of separate sequential activities to deliver stakeholder value. Radio Frequency Identification (RFID): is a technology that uses radio waves to passively identify a tagged object. It is used in several commercial and industrial applications, for tracking items along a supply chain. RPA: Robotic Process Automation with its ability to speed up tedious, time-­ consuming tasks, can help streamline numerous healthcare operations, allowing providers to dedicate more time to patients. RPA solutions also offer increased support to healthcare organizations, enabling them to mitigate the risk of employee burnout as frontline workers get pushed to their limits. Real-Time Digital Performance Management: Digital Performance Management is a process by which organizations can monitor the performance levels and productivity of digital transactions and applications. The traditional performance management system consisted of several subsystems which focused on only one aspect of the business. Real-Time economy can be described as an economic system from which the time-consuming intermediate steps between sales and reporting are eliminated. All the elements of business transaction, like sales, invoicing, accounting, tax payment and business reporting, will take place automatically, in a digital environment and in real time. For example, the real-time enterprise can be considered as a giant spreadsheet of sorts, in which new information, such as an order, is automatically processed and percolates through a firm’s computer systems and those of its suppliers. The core objective of the real-time economy is the reduction of latency between and within processes. Latency reduction will reduce capital occupancy costs by occupying assets (physical and labour) for less time. It aims at promoting new technologies that enable a more real-time economy, processes, and services. Real-time economy is an environment where all the transactions between business entities are in digital format, increasingly automatically generated, and completed in real-­time (as they occur) without store and forward processing, both from business and IT-processing perspectives. For networked organisations this means, for example, that (purchase) orders, order confirmations, invoices, and payments flow from system to system without delays. This makes it possible to move towards electronic archiving, electronic book-keeping, and automated accounting.

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Real-Time Predicted Maintenance uses machine learning analysis, and as many sensor data points as possible, such as vibration, temperatures, currents, and voltages. Some machine learning algorithms can accurately predict failure as far as 4 months or more in advance. Reverse Innovation: With reverse innovation RD&D activities are typically locally based. They are based upon local needs, manufacturing, distribution, and serviceability capabilities. GE Healthcare redesigned a locally unsuccessful range of healthcare diagnostics equipment to meet user requirements in Asia. Product-­ service management was also “localised” and the venture successful. Rolling value proposition using real-time data from “connected” installations of product-service hardware enables manufacturers to update equipment in service (often digitally) and achieve improved “value benefits” for existing and future customers. “Serviceability”: encompasses the activities and processes involved in identifying an opportunity, expectation or customer need to transform the characteristics of a product-service (i.e., transforming a PRODUCT-service (a predominantly “hardware product”) into a product-SERVICE (a predominantly “software product”, (i.e., anything as a service xaas)). In this context “transformation” includes RD&D application, installation, user training, performance monitoring, servicing, modifications, and renewal activities. Sustainability Management: Encompasses: Organizational and Network Sustainability; growth of revenues, profits, and cash flows. Environmental Sustainability; optimal use of resources, optimizing producibility operating costs; process and component standardization, “zero-loss”. AND Economic Sustainability; business continuity, longevity, and contributions to GDP Social Sustainability; levels of employment, employee satisfaction, work/leisure balance, community. Strategic performance value builders are long-term and may have no relationship with the current business model. They comprise Capability Characteristics (skill sets that will allow it to react to new opportunities) and Positional Characteristics features the organisation has (or is) investing in, that have a long-­ term pay-off. Total Cost of Ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. It is a management accounting concept that can be used in full or even ecological economics where it includes social costs. For manufacturing, as TCO is typically compared with doing business overseas, it goes beyond the initial manufacturing cycle time and cost to make parts. TCO includes a variety of cost of doing business items, for example, ship and re-ship, and opportunity costs, while it also considers incentives developed for an alternative approach. Incentives and other variables include tax credits, common language, expedited delivery, and customer-oriented supplier visits. Value based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of a product or service—price/value/equalisation. Value-­ based pricing is different than “cost-plus” pricing, which factors the costs of production into the pricing calculation. Companies that offer unique or highly

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valuable features or services are better positioned to take advantage of the value pricing model than companies which chiefly sell commoditized items. Value Capture once created by the network transactions the value must be shared equitably by the partners. The distribution of value to each partner is what we call value capture. Value capture is bounded by conditions: • Value Chain Network partners need to receive an equitable share of the total value realised related to the contribution made to the overall success of the network, otherwise they will migrate to other networks • A single partner should not receive more than its value added to the entire market, otherwise the other partners will work together without the individual • Maximum and value capture returns are required to be agreed • A range of value contribution returns detailing minimum and maximum for each network partner is to be evolved. The range should fulfill the competitive consistency (internal consistency and external coherence) condition of the value capture model. What the firms capture within this range will be determined by its ability to negotiate Value chain management is about making it possible for products, information, and finances to flow, optimising the processes in which they flow, and creating better value in the relationships between companies, as well as improving the overall efficiency of business. Value chain analysis reviews the processing steps that a business follows to deliver goods and services. The intent is to locate those processing steps at which value is added to the final product. In addition, the chain of activities is reviewed to see where costs are being incurred. Value chain network analysis (VCNA) is a methodology for understanding, using, visualizing, optimizing internal and external value networks and complex economic ecosystems. The methods include visualizing sets of relationships from a dynamic whole systems perspective. Robust network analysis approaches are used for understanding value conversion of financial and non-financial assets, such as intellectual capital, into other forms of value. The value conversion question is critical in both social exchange theory that considers the cost/benefit returns of informal exchanges and more classical views of exchange value where there is concern with conversion of value into financial value or price. Value Contribution an additional term for economic profit EVA. Value Proposition is a statement which identifies clear, measurable, and demonstrable benefits consumers get when buying a particular product or service. It should convince consumers that this product or service is better than others on the market. Value renewal systems add an additional stage to the value chain—remanufacturing. In the. Value chain 2.0 concept product design is oriented towards design that plans recovery and remanufacturing. A value stack is a segmentation methodology which is used in value-based pricing. You can construct the value stack of each buyer/user type by first identifying the

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attributes that drive their willingness-to-pay and then quantifying the value of the benefits that they receive from those attributes. Value Stream Mapping Management: A value stream is made up of the steps or processes required to turn raw material into a product of value to the customer. Mapping this value stream means drawing it as a single diagram. This gives valuable insight and can be used to identify the effectiveness (and efficiency) of value adding activities and processes and the removal non-value adding operations. Value-stream management is a process that is responsible for increasing the ratio of value-to-non-value and eliminating waste in the overall value chain from end-to-end. Virtual Commissioning: The design and implementation of a new production solution is often a time-consuming and costly process. Once the design is finalized and the equipment is installed, one more phase to complete before production handover is necessary—commissioning. This is where controls are integrated, problems identified and fixed, procedures are written, and operators are trained on new equipment, new processes, or revised procedures. This phase is challenging to plan and overruns frequently, which delays production and can result in late shipments -and even lost business. Virtual commissioning allows engineers and operators to test new installations, as well as any adjustments—in both the start-up and the maintenance phases— before implementing them in the physical world. The result is a smoother, more streamlined installation and integration, fewer cost overruns and minimal chances of downtime that could impact production. Instead of commissioning a new system or robot cell in the physical world, virtual commissioning involves creating a digital twin and then testing and verifying the model in a simulated virtual environment.

Case Study: KMD Brands and b Corporation Memberships In 2019, Kathmandu, the outdoors clothing business, was one of the first apparel companies in Australia and New Zealand to achieve B Corps status. It was re-­ assessed and recertified in March 2023 along with Rip Curl and (US hiking shoe brand) Oboz. All three companies are owned by KMD Brands, an international outdoor and sports brand, listed on both Australian and New Zealand exchanges.

What Is a B Corporation? The ‘B’ in B Corp stands for “beneficial”, acknowledging businesses and networks that benefit more stakeholders than just shareholders such as customers, employees, suppliers and sub-suppliers, communities, and its physical environment. B Corps status is awarded by global non-profit organization, B Lab, after a rigorous and on-going assessment against a range of stringent performance standards. B Lab was founded in 2006 by former Stanford roommates, Andrew Kassoy, Bart Houlahan, and Jay Coen Gilbert, who shared a belief that a “different kind of

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economy was not only possible, but necessary—and that business could lead the way towards a new, stakeholder-driven model.” To achieve this, it has worked with a wide range of these stakeholders in both public and private sectors: among these are local, national, and global businesses, academics, NGOs, policy makers, and other certification bodies. The purpose of these collaborations has been to identify and inspire best social, environmental, and ethical practice amongst businesses as well; to encourage shared policy goals, to raise public awareness and change consumer behavior. B Lab is building the B Corp movement to change the economic system. It believes this fundamental shift can only come about by changing the rules of the game. To this end, it creates “standards, policies, tools, and programs that shift the behaviour, culture, and structural underpinnings of capitalism. We mobilise the B Corp community towards collective action to address society’s most critical challenges.” In its view, B Corporations will be leaders in a changing global business culture which will be more accountable on issues such as global warming, social justice, inequalities (gender, racial, economic), ongoing public health and economic fallout of the COVID-19 pandemic, and the importance of stakeholder values and needs (as well as shareholder ones) in driving decision-making. B Corps envision a better economic system where businesses can benefit people, communities, and the planet. They choose long-term investments over quick wins, and measure their success based on the positive impact they create. B Lab publishes a list of B Corporations on its website; according to this, there are 6000 Certified B Corporations across the world, spanning more than 150 industries and employing nearly 400,000.

How to Become a B Corporation More than 500 of these B Corporations are based in Australia and Aotearoa/New Zealand. It has taken KMD Brands more than 3 years to achieve full B Corp certification for all three of its brands. It had to meet B Lab’s exacting standards across a comprehensive range of criteria grouped into five categories: governance, workers, community, environment, and customers. These criteria are the basis for B Lab’s principal measurement mechanism, the B Impact Assessment. By documenting outcomes achieved against these standards, KMD would have been evaluated on its overall impact on all stakeholders. Some sample questions include: • Governance—what portion of your management is evaluated in writing on their performance with regard to corporate, social, and environmental targets? • Workers—what % of the company is owned by full-time workers (excluding founders/executives)? • Community—what % of management is from underrepresented populations? (This includes women, minority/previously excluded populations, people with disabilities, and/or people living in low-income communities.)

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• Environment—does your company monitor and record its universal waste production? • Customers—how do you verify that your product improves the impact of your client organizations? Companies must currently achieve a verified score of at least 80 on the B Impact Assessment, although this may change as B Lab is re-evaluating its standards to produce new performance requirements. It is hoped, after consultation and testing, that these updated requirements for B Corps status will be introduced in 2024. Companies seeking the B Corp tick of approval must also undergo a risk review to identify negative impacts; here lies the ability to improve its customers positive perceptions. Additionally, it had to show and document that it had a governance structure that is accountable to all stakeholders (not just shareholders) and prove its transparency credentials by allowing information on its B Corps Certification to be published on B Lab Global’s website.

Why Become a B Corporation A Harvard Business Review article in 2016 discusses the rise of B Corporations in the context of an increased emphasis on non-shareholder values, particularly social and environmental concerns, a trend in corporate governance that has led to an increase in “triple-bottom line” thinking. According to its research, the increasing number of B Corporations and companies seeking B Corp status is linked to three particular (often industry-specific) conditions: the type of leadership within a company; the number of more traditional (and aggressive) profit-driven players in a particular industry; and the move by large corporate organisations within an industry towards perceived green credentials. Their research, qualitative and quantitative, suggests that the number of B Corporations increase as major players in their industry increase their corporate social responsibility efforts. Small businesses, that have long been committed to a more social and environmental approach to decision-making, want to distinguish themselves further and prove that they are more the “real thing”, genuine advocates of a wider stakeholder approach. They see B Corp status as a means to stand out among the multitude of marketing efforts in the greenwash space and to help consumers find and choose businesses and products that are really socially and environmentally responsible. Research into applications made by companies seeking to become a B Corporation show that these companies want to be part of a network that is seeking to establish a new economy that has a new set of rules—a movement wishing to redefine the way “success” is perceived. Its research showed a positive correlation between the number of traditional and aggressive shareholder-focused organisations there are in a particular industry and the number of B Corporations emerging. According to Reuters Events, B Corporations by themselves will not create a stakeholder economy. Rather, it will be one of other like-minded groups and

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organisations, networks, and movements, that come together to change the nature of capitalism. It points out that “what makes the B Corp certification stand out is the obligation that it places on companies to amend their articles of association to clearly and unambiguously reflect the company’s embrace of stakeholder capitalism.” This has not been easy in the USA, for example, as state laws often insisted on purely shareholder-driven responsibilities in corporate governance. Legislation had to be changed to widen this narrow opinion before the importance of other stakeholders could be encompassed.

KMD and ESG Credentials According to its vision, KMD Brands’ purpose is “to inspire people to explore and love the outdoors…to be the leading family of global outdoor brands—designed for purpose, driven by innovation, best for people and planet. Through this purpose and vision, we commit to having an overall positive impact on society and the environment, while delivering returns to our shareholders.” In an interview with the Australian Financial Review in March 2023, CEO of KMD, Michael Daly, stated that the company wanted to be “a clear leader in the ESG [Environmental, social, and governance] space, particularly across Australia and New Zealand.” He believes that B Corps status will help the Group to measure its success in achieving this by being examined against externally generated standards. It should also help it to “do better for the environment”, something he feels that investors, shareholders, lenders, staff, and suppliers expect of the company. Assessment by B Lab every 3 years will ensure improvement and help continually monitor its progress. As proof of progress towards its ESG leadership goals, he offered not just the Group’s recent B Corp attainment but also the recognition afforded by its recent Deloitte New Zealand Top 200 Sustainable Business Leadership award. On 22 March 2023, less than 3 weeks after announcing its accreditation as a B Corps business, KMD reported its half-yearly financial results: • Revenue of NZ $547,924 for the 6 months to 31 January 2023, a 34.5% increase on the same period in 2022 • Underlying EBITDA of $45.3 million with group underlying EBITDA margin improving on a rolling 12-month basis • Balance sheet remains strong, with expectation of inventory unwind to underpin strong cashflow generation in the second half • Interim dividend of 3 cents per share declared (fully franked for Australian shareholders) Daly stated how pleased the business was to have made significant progress on ESG initiatives:

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• Rip Curl’s manufacturing facility in Thailand offset 100% of its operational emissions in 2021 and 2022. In addition, about 130 tonnes of offcuts were used to make carpet underlay rather than ending in landfill • It operates a recycling option for old wetsuits which are turned into soft foam for playgrounds • For very shoe sold, Oboz plants a tree, over five million so far • It had submitted science-based targets to SBTi, with 2030 emission reduction goals aligned to the Paris Climate agreement Daly emphasised again, in the report, the Group’s commitment to setting high standards of social and environmental impact, accountability, and transparency. “With a healthy balance sheet, and expectations for strong cash flow generation in the second half, we are in an excellent position to execute on our growth strategy through expanding our global footprint, investing in digital platforms, leveraging operational excellence, and leading the industry through sustainability and innovation.” Sources LaFrenz, Carrie: “Rip Curl, Kathmandu gain B Corp status in ESG push.” Australian Financial Review, March 6, 2023 KMD Brands Limited: https://www.kmdbrands.com/results-­reports B Lab website: https://bcorporation.com.au/what-bcorps/.com.au Balch, Oliver: “The Disruptors: How B Corps founders took purposeful business to the next level”. Reuters Events, Dec 14, 2018. Kim Suntai, Kerlesky Matthew J, Myers Christopher G, Schifeling Todd: “Why Companies Are Becoming B Corporations”. Harvard Business Review, June 17, 2016.

Case Study: EV Battery Supply Chain Developments EV (Electric Vehicle) sales should grow to reach 29.5% of all new car sales in 2030 from an expected roughly 3.4% in 2021. This would also see sales increase to 4.7 million from a little more than 500,000 in 2021. European car manufacturers and potential battery suppliers have strong economic and strategic incentives to ensure local battery production. The battery is the single most costly part of an EV, currently making up between 35 to 45% of total cost (and is forecast to be lower as material costs decline, and scale economies increase in output terms, a decrease in price from $US 1.100 KWh to US$ 60 KWh suggests that by then the total price of EVs will be less than ICE vehicles). It is also expected to be the most difficult in supply response as EV production and supply chains expand in the future. Batteries being a major component to OEMs (original equipment manufacturers) is critical and carries significant supply-chain risks. For European manufacturers, there is the risk that decreasing production of ICE vehicles and expanding EV production

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without secure local battery capacity is likely to make the European automotive industry less competitive. This market represents a substantial opportunity for European battery makers and carmakers, as well as for the European economy in general. Currently, the EV-battery market is dominated by players from only three countries, China, Japan, and Korea. In 2018, less than 3% of the total global demand for EV batteries was supplied by companies outside these three countries, and only approximately 1% was supplied by European companies, “Other” producers saw a rise to 8% in 2022. Growing battery demand has already put pressure on a scarce materials supply, raising supply risks. The price of lithium has tripled since 2015, and global cobalt production in 2025 will likely need to be double that of 2016 production to satisfy global EV demand. To minimize this risk, EV manufacturers may be well advised to integrate more closely with cell manufacturers that have strong control over their own supply chains. Currently, a handful of Chinese, Japanese, and Korean cell manufacturers dominate the market and much of the value chain, with control extending, in some cases, as far as the mines that extract lithium and other key metals. Moreover, sourcing from nearby battery manufacturers allows OEMs to eliminate supply-chain risks, including transport concerns for dangerous goods and working-capital issues, while enabling co-development and troubleshooting of battery cells, packs, and EVs, it is suggested that this can more than offset the potentially lower costs of a more distant plant, such as ones in countries that pay high up-front capital-expenditure subsidies, while allowing for greater flexibility and mitigating the risks associated with sourcing all batteries from one region. The forecasted growth of EVs (2023, 8,151,000 units to almost 400,000,000 by 2030, a CAGR (compound annual growth rate) of an estimated 21.7%) suggests cell components and their supply will also have to expand by the same amount. Additional investment is needed in the short-term, particularly in mining, where lead times are much longer than for other parts of the supply chain—in some cases requiring more than a decade from initial feasibility studies to production, and then several more years to reach nominal production capacity, but the supply of some minerals such as lithium would need to rise by up to one-third by 2030 to satisfy the pledges and announcements for EV batteries. For example, demand for lithium— the commodity with the largest projected demand-supply gap—is projected to increase sixfold to 500 kilotonnes by 2030, requiring the equivalent of 50 new average-­sized mines. Add to this the time for manufacturing facilities to be built and to reach capacity. Tesla has attracted more startups in recent years and driven the active transformation of traditional automakers and the rapid growth of the market. The battery is the key component of EV. As new and traditional car makers are moving into the EV business, it has become an important strategy for EV makers to establish a deep cooperative relationship with battery manufacturers, and invest in factories together, to meet the needs of their own designs and development of EV, as well as the high proportion of the cost of batteries in EV. As a result, it is expected that there will be more and more EV OEMs internalize the value activities of manufacturing to control costs, or perhaps establish strategic alliances and/or joint ventures. Although, currently, there is a diversity of development, there is still a pattern

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which can be roughly divided into three groups: American automakers have active ties with Japanese and South Korean battery manufacturers; European car makers plan to cultivate local battery supply systems; and Chinese, Japanese, and South Korean automakers cooperate closely with their local battery manufacturers. What needs further explanation is that most of the models produced locally in China by the US and European car makers are in cooperation with Chinese battery manufacturers. For example, the battery supplier of Tesla Model 3 is CATL, while GM Wuling are Great Power (main supplier) and CALB (new entrant). It is worth noting that Tesla’s recent strategy of adopting LFP (lithium iron phosphate) battery in its entry-level models globally will certainly drive other car makers to establish LFP battery partnerships with Chinese battery manufacturers. European car makers, VW Group, BMW Group and Volvo strategically built plants with Northvolt, while Stellantis and Daimler cooperated with Automotive Cells Company (ACC). This clearly shows that European automakers want to establish a local battery supply system and use it as the main force for future supply. In contrast, there are two kinds of cooperation between European car makers and other non-European (especially Chinese) battery manufacturers: one is outside Europe, for example, the joint venture factory of VW and Guoxuan High-tech mainly responds to the demand of the Chinese market. The second is the initiative of Chinese battery manufacturers, for example, China’s Envision AESC cooperated with Renault of R-N-M Alliance (Renault also has a cooperation plan with Verkor of France) to set up a joint venture plant in Europe, and China’s SVOLT established a battery factory in Germany to win orders from EV OEMs such as Stellantis. Chinese, Japanese and South Korean car makers in Asia, with close cooperation with battery manufacturers can be said to be the national teams led by automakers, for example, close partnerships between SAIC and CATL in China, Toyota and Panasonic in Japan, and Hyundai and LGES in South Korea. Under the influence of national policies and corporate culture, there are looming barriers for these countries to protect local companies, which have become the best tool for automakers and battery manufacturers to work together. Therefore, the car makers of these three countries choose their own country’s battery manufacturers as the main strategic partners, rather than cooperate with those of other countries. Even if they go to markets outside their home countries, they still cooperate with battery manufacturers of the same nationality. This is one of the biggest differences between the EV industry in China, Japan, and South Korea and that in Europe and the US. With rapidly improving economics of EVs and a regulatory push across different European countries, it is anticipated that by 2040 about 70% of all vehicles sold in Europe across different segments (passenger cars, vans, trucks, and buses) will be electric. Falling battery costs make it likely that the total cost of ownership for a passenger EV will reach parity with internal-combustion-engine (ICE) cars by the mid-2020s. In the meantime, tightening efficiency targets will push car manufacturers to electrify a larger share of their produced fleets, while the sharing economy, autonomous driving, and transport as a service provide further incentives for electrification by fleet operators. In addition, many European governments have announced they intend to ban the sales of ICE vehicles by 2030 or 2040. Therefore,

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the global electric car stock is likely to expand to almost 350/400 million vehicles by 2030, but future growth will hinge on efforts to diversify battery manufacturing and critical mineral supplies to reduce the risks of supply bottlenecks and higher prices.

Improvements in the Supply Chain Overreliance on individual suppliers can disrupt a company’s ability to provide products to customers. Business ecosystems, by default, reduce the dependence on a small group of critical suppliers by providing an open platform with a broad network of retailers, partners, suppliers, and distributors. This makes it relatively easy to adapt sourcing as the business environment changes. Ecosystems are often thought of as partners or at least indirect competitors joining together on a platform, there has been some evidence that the ecosystem model can be used to help balance capacity, even for companies that are not collaborating. An example is the Germany-based Catena-X Automotive Network, which is creating a data ecosystem that links global auto companies, including large and small OEMs, parts and components manufacturers, recyclers, and others. The objective is to develop a transparent information marketplace that can be tapped to immediately open new and alternative supply lines when a segment of the supply chain is suddenly unable to meet supply requirements. There will probably be many more imaginative solutions that rely on ecosystems to simplify what is for many companies one of the most complex aspects of doing business. It is possible, for instance, that as new, less cumbersome means of production become more mainstream, such as 3D printing, leading manufacturers could participate in ecosystems composed of innovative suppliers, posting orders for bespoke parts to be filled instantly by the network. Regardless of the tremendous growth in the EV market, it is only limited to a part of the world. As the race to full electrification continues, China, Europe, and the U.S. account for about 95% of the global electric vehicle sales, whereas the rest of the world seems to struggle with catching up. In addition to government subsidies just getting introduced or still being non-existent, the top reasons cited for the slow progress experienced in those parts of the world include the lack of public charging infrastructure and the premium prices of electric vehicles in these regions. It is safe to assume that battery-powered vehicles are taking over the automobile market. The growth of the EV market has been significant despite the COVID-19 pandemic and the resulting supply chain bottlenecks. Despite these recent challenges and rising production costs, and because of increasing raw material prices, EV sales are still going up at a fast rate. If this continues, they are set to surpass the sales of conventionally propelled vehicles (i.e., vehicles with internal combustion engines). Compared to 2020, sales of new electric vehicles more than doubled in 2021 with an increase of 51.8%. This brought EV sales to about 5% of global passenger car sales in 2021.

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China conveniently topped the global sales charts in 2021 with more electric vehicles sold than the rest of the world combined and almost five times more than Germany, which was in second place. Factors responsible for the Chinese market’s exponential growth include, but are not limited to, the Chinese government’s electric vehicle subsidies, an increasing range of mini electric vehicles, and more affordable brands coming onto the market. Overall, Europe recorded an increase between 2020 and 2021, reaching about 66%, with the plug-in hybrid share of all electric vehicle sales being the biggest in the world. Driven by the availability of more models, as well as the market expansion and purchase incentives, the European market is expected to continue along this trend as countries within the EU adopt stricter CO2 emission standards and move toward zero-emissions vehicle mandates. For America’s two largest carmakers this may be the most momentous challenge in a century. It is the race to electrify their fleets, and especially pickups, the biggest source of profits for both companies. GM plans to build four battery factories by 2025 with its partner, LG Chem, a South Korean battery-maker. And Ford and its battery partner, SK Innovation (South Korean) announced an investment of $11bn in three battery factories and an assembly plant for electric F-Series pickups.

European Manufacturers Left behind? European car manufacturers, until recently, did not seem particularly eager to get involved in battery-cell manufacturing themselves. First, it is difficult to find the right chemistry, set up the production process, and get other components in place to produce battery cells. This kind of knowledge does not reflect the core competencies of a car OEM. Instead, car OEMs typically see value in building a complete battery into the vehicle. Second, producing batteries in house or switching to a wider base of suppliers often presents risks such as individual suppliers not securing sufficient raw materials at low-enough prices to support the required production, thereby adding to a single supply chain a high risk “supplier”. Volkswagen set up a separate business called PowerCo to run battery factories and to buy stakes in lithium miners. It has signalled that PowerCo would take direct stakes in the sort of lithium and nickel mines that are flourishing around the world. Volkswagen’s dedicated unit is the latest example of a trend that has been running hard over the 6 years since the Chinese automaker Great Wall surprised the Australian investment community by taking a 3.5% stake in ASX-listed lithium exporter Pilbara Minerals. The CEO of A$11 billion lithium group Pilbara Minerals, suggested carmakers were among a “diverse group” of OEMs who are trying to shore up their supply chain. Ford has an offtake and lending arrangement with Liontown Resources, (the company currently in the spotlight as it fends off a takeover bid from the world’s largest publicly traded lithium producer, Albemarle). Carmakers are pushing hard to become more vertically integrated, wary of being caught short in the rush to secure lithium supplies. German giant VW recently announced plans for its first battery plant outside Europe, to be in Ontario in Canada. VW intends selling batteries to

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outside customers. Both VW and Stellantis, that owns brands including Alfa Romeo, Fiat, Jeep, Maserati, Dodge, Chrysler and Citroen, have agreements with the German-­Australian lithium group Vulcan. Volkswagen set up its separate entity PowerCo last year and aims to have revenues of around €20 billion ($32.5 billion) by 2030, part of the strategy involves making direct investments in mines to bring down the cost of batteries for electric vehicles. PowerCo has three EV battery-making plants on the drawing board for Europe, Germany, Sweden, and Spain. It has set a goal of eventually supplying half of its own requirements for lithium and other minerals. Mercedes-Benz has made the fundamental decision that if a “deep sourcing” opportunity appeared (right down to a lithium mine) it was ready to divert capital to it. Mercedes-Benz in October 2022 signed a supply agreement with Rock Tech Lithium to receive on average 10,000 tonnes of battery-grade lithium hydroxide per year from 2026. The deal is part of push to accelerate production of fully electric vehicles. It has also made a commitment that by 2039 all of its steel for the vehicles will come from “green steel” producers. Stellantis in mid-2022 signed an agreement with Controlled Thermal Resources for the supply of lithium hydroxide for its US electric vehicle manufacturing operations. Ford signed an off-take agreement with ASX-listed Lake Resources in 2022. European Lithium (an Australian company) has signed an agreement with BMW to supply lithium hydroxide from the Wolfsberg Lithium Project in Austria. An associated problem is that of vehicle charging, again, Europe is behind. VW is planning to make its fast-chargers available for all EV drivers (unlike Tesla, which has so far kept its supercharging network just for Tesla drivers, except for a pilot program in the Netherlands). Volkswagen’s objective is an open, non-­discriminatory charging network and will develop services to make the offer more comfortable and simpler. Volkswagen says its open-for-all approach means buyers of its EVs can charge at more than 250,000 existing public charging points across Europe—from various providers with various charging speeds. The problem is charging protocols and payment methods can vary across vendors, potentially turning the act of refuelling an EV into a time-consuming and messy undertaking. However, from the first quarter of 2022, Volkswagen plans to offer “Plug & Charge” technology in Europe to make the process smoother. The car will store the owner’s payment details and make a contactless payment when the charging plug is attached to the EV at refuelling stations set up for the service. EV battery supply chains appear to have developed at differing rates depending upon government funding of battery manufacturing plants, funding purchasing incentives and their intentions to reach clean air objectives. China has demonstrated the access to rare earths and scale economics as being essential to building presence in a rapidly growing market. An interesting question is how and when competitors become competitive. Australia, one of the largest sources of lithium has announced plans to manufacture part or all of EV batteries. Resources Minister Madeleine King has argued that the Australian manufacturing sector should aim to assemble batteries here rather than settling for exporting raw materials and components, rather than export lithium

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and other “rare earth” materials, the preference of the mining companies. Both strategies are designed to break China’s stranglehold on the critical minerals and energy storage sector, and look set to result in more taxpayer funds being spent incentivising new mines, domestic processing hubs for critical minerals and manufacturing facilities to turn them into batteries. The Albanese government has set adding value to Australia’s critical minerals by fostering more onshore processing and manufacturing of modern applications such as batteries, as one of its top priorities. Sources Evans S and P Ker (2023), “Car Makers Buy into Lithium Miners in Drive to Survive”. Australian Financial Review, 5 April Ker P (2023), “Australia aims high by pursuing ‘full battery manufacturing’ capability”, Australian Financial Review, 13 April Economist (2021), The switch to battery power is the latest showdown between Detroit’s heavyweights (Ford and General Motors fight it out to electrify, 28 September Sanderson H (2019), “The battle for control of world's battery supply chain”, Benchmark Mineral Intelligence, 23 May https://www.statista.com https://www.psmarketresearch.com https://www.marketsandmarkets.com

 ase Study: Value Chains as Strategic Partnerships: C MCKESSON: Venture Partners In the traditional healthcare payment model, a patient visits a provider who then bills for the specific services rendered. Each additional service—perhaps another checkup, scan, or infusion—generates another itemized bill. While this fee-for-­ service model might seem logical enough, it may result in more tests and other billable services with limited value instead of emphasizing what matters most: providing patients with the best possible care. That’s where value-based care comes in. Six years ago, 14 practices in The Network began participating in the Oncology Care Model (OCM), a Centers for Medicare & Medicaid Innovation pilot supporting higher quality, more coordinated care for the same or lower cost. Through OCM, these practices modified protocols and roles, provided 24/7 access to care, expanded patient navigation tools, followed nationally recognized treatment guidelines, and integrated mental health, nutrition counseling, and other services into their offices. Ultimately, this value-based approach has proven valuable in both patient care and financial savings.

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A strategic partnership is created when one company or business collaborates and shares resources with another business with the purpose of achieving mutual success and business growth. The partnerships are agreements and actions made by organizations that have interests in growth opportunities typically neither have the complete set of capabilities necessary to respond to the opportunity to compete successfully and therefore agree to share their relevant resources operational performance value drivers and/or value builders (positional and/or executional)—relevant expertise, capacity, dedicated assets, to create an acceptable value proposition. They agree objectives, strategic direction and the scope of the alignment, and the activities for which each partner will be responsible. Typically, resources, include financial commitment, and specific “assets” (structural and executional) comprising knowledge, and people. Organizations in a collaborative partnership share common goals. The essential essence collaborative partnership is for all parties to mutually benefit from working together. The relationships between partners can lead to long term partnerships that rely on each other. Barriers to collaboration exist. Strategic projects may require significant time and management effort before they generate value, resulting in proposals to prioritize simpler, faster initiatives, even if they often turn out to be worthless. Collaboration requires a change in mind-sets among buyers and suppliers, who may be used to different types of relationships. And most collaborative efforts need intensive, cross-­ functional commitment from both sides, an often-marked change to the normal working methods. Change from a cost-based to a value-based way of thinking requires a shift that is often difficult to accept and to implement. McKesson Corporation is an American company distributing pharmaceuticals and providing health information technology, medical supplies, and care management tools. The company delivers a third of all pharmaceuticals used in North America and employs over 78,000 employees. McKesson had revenues of $238.2 billion in its fiscal year ending March 31, 2021. McKesson is based in Irving, Texas, and distributes health care systems, medical supplies and pharmaceutical products. Additionally, McKesson provides extensive network infrastructure for the healthcare industry; also, it was an early adopter of technologies like bar-code scanning for distribution, pharmacy robotics, and RFID tags. Since the mid-twentieth century, McKesson has derived an increasing proportion of its income from medical technology, rather than pharmaceuticals. This culminated in its purchase of medical information systems firm HBO & Company (HBOC) in 1999; the combined firm was briefly known as McKessonHBOC.

McKesson Ventures Partners Program McKesson Ventures, help visionary entrepreneurs build and scale businesses that tackle some of the toughest challenges in healthcare. McKesson seeks healthcare technology and service companies already in the market generating meaningful revenue that need the expertise, connections, and capital to scale their businesses to the next level. McKesson are financially minded, first and foremost, investing in big

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markets, talented teams, and great products. But they also bring the insights and connections that come with being part of McKesson, one of the country’s (US) leading healthcare organizations. They help their portfolio of companies access McKesson, as well as tap into our relationships with key stakeholders throughout the healthcare ecosystem including pharmacies, payors, providers, and manufacturers. A useful theoretical basis for understanding the McKesson Ventures Partners approach was offered by Ronald Coase in his paper from 1937 entitled “The nature of the firm”. Its thesis suggests, “stay small and you forgo the efficiencies of scale. Grow too big and an enterprise becomes difficult to manage”. Most commerce happens in between those extremes. Coase (1937), argued that firms’ boundaries, what to do and what to outsource, are determined by how transaction and information costs differ within firms and between them. Some things are done most efficiently in-house. The market takes care of the rest. Coase won a Nobel Prize for his work in this topic area (Economist, 2023). McKesson Ventures, uses its experience to advise its “partners” on the characteristics of the healthcare ecosystem that are attractive (and are relevant) and those that are unattractive (and should be avoided). The experience and knowledge accumulated by McKesson management had worked through the issues highlighted by Coase. Examples of current McKesson Venture Partners include: An organisation with a mission to power critical decisions in healthcare with data science-­ driven technology. The company delivers real-world evidence for life sciences companies, payers, at-risk providers, and regulators to assess the safety, effectiveness, and value of medications—what works best, for whom, and when. An organisation partnering with independent practices, health centers, and clinics to build and lead ACOs anchored in primary care. It offers a comprehensive range of capabilities at scale, including cutting-edge data analytics, guided workflows, unparalleled regulatory expertise, strong payer relationships, and local support. Another is a healthcare technology company that accelerates rare disease drug development, supporting patients and families as well as biopharma. The company’s platform empowers patients to securely participate in drug research online, access their medical records, and learn from the community, while simultaneously generating FDA-ready data for biopharma. An organisation that has a precision cancer detection and prevention platform that makes it easy for providers to gather patient data, map it to evidence-based guidelines, create personalized care plans, and integrate information across patients’ care teams. A global life science company that brings data, technology, and patient science together. Deep therapeutic-area expertise, coupled with Direct Data Capture, telehealth, neurocognitive testing, and digital biomarkers advancements, drives the industry standard for data precision and ushers in a new generation of clinical trials. A health measurement program for everyday life and enables anyone to participate in ground-breaking research and health programs. The company’s Achievement platform generates data with unprecedented speed and rigor and is trusted by leading organizations to better understand health and disease outside the clinic walls.

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An organisation that is reimagining the healthcare relationship between patients and doctors, pairing an exceptional clinical team with next-generation technology to empower the dialog that helps people live better, healthier lives. The company’s mission is to make healthcare more effective and affordable for all, including the underserved.

Ventures and the Value Chain The Venture program adds features not typically covered in the value chain network. Clearly in McKesson they are healthcare oriented and are also specific within it. For example; they include: Identifying needs that exist but have not been explored and formulated as solvable problems which, with focussed attention can result into deliverable value propositions. Develops new healthcare product-service-market activities that, with funding and additional research, succeed in becoming affordable solutions. Makes difficult options (healthcare solutions) available, accessible, and affordable. Support (financial and advisory) for innovative activities throughout a planned life cycle Creates pathways to “Total Healthcare” through complete “stakeholder” value management by identifying and finding solutions to needs that are not being met.

McKesson and Value Based Care McKesson is developing a value chain network solution to healthcare, which in its own words is—to reiterate: In the traditional healthcare payment model, a patient visits a provider who then bills for the specific services rendered. Each additional service—perhaps another check-up, scan, or infusion—generates another itemized bill. While this fee-for-service model might seem logical enough, it may result in more tests and other billable services with limited value instead of emphasizing what matters most: providing patients with the best possible care. “Value-based care is about aligning treatment with patient goals,” says Lalan Wilfong, MD, vice president of payer relations and practice transformation for The Network, “…which entails providing the best treatment for the patient at the lowest cost in terms of toxicity as well as price”. (ventures.mckesson.com)

Sources Business (2023), “The fuzzy corporation”, The Economist. 14 January https://ventures.mckesson.com/