Figure 1 Although the product (pancakes) may be the same, the means of production in each case is very different.
Only by looking at their inner workings, is it possible to understand why one organisation outperforms another one, and why one has ‘competitive advantage’ over the other (Porter, 1985). The organisation in which you are likely to have most interest – and the one you may think you know the best – is your own. But remember that an insider’s perspective is just one perspective. Being immersed in an organisational culture can mean you overlook certain features of that organisation (good, bad and neutral) that would immediately be apparent a newcomer. Your current impressions of your organisation (what it is, how it works, what it does well and poorly) will be heavily influenced by the particular position you hold in it, and the subjective experiences you’ve had. To be commercially aware, you must often break free from your organisation to consider it in a wider external context – but in this course you will look internally. We encourage you to fully recognise, and then break free from, your own position inside the organisation, then imagine yourself in other positions, to try to explore the organisation afresh.2 The value of identifying valueIn an important sense, an organisation is a machine for adding value. In its simplest form this means it takes an input at one value and, if successful, converts it to an output at a higher value.The concept is seen most clearly in manufacturing, where raw materials are worked on to produce finished goods that customers value and are prepared to pay a premium for. Whilst the raw materials or components already had worth, the process of manufacturing added more value.Figure 2 charts a chain within the production of bio-plastics, and shows different levels at which value is added. Read it from the bottom up, starting with the agricultural industry, which produces crops which are refined to obtain starch and sugars. Subsequent links in the chain convert these to plastics which are moulded to serve a vast array of consumer uses.
Figure 2 Bio-plastics production chain chart
This diagram shows a chain with the production of bio-plastics.There are eight stages arranged vertically.Reading from the bottom upwards these are agriculture, starch/sugar refinery, chemical/biotechnology industry, plastic manufacturing, plastic conversion, brand owner/OEM, retail and consumer.There are two feedback loops from consumer, recycling which links to plastic manufacturing, and organic recycling and recovering, which links back to agriculture.There are three further points about Figure 2 to note:In a chain like this there could be several different organisations collaborating – or one large organisation could own the different links in the chain – an arrangement known as ‘vertical integration’. Particular organisations may have a monopoly at certain levels, or there may be a range of organisations at the different levels competing for business.Between the levels of plastic conversion and retailer lies ‘Brand owner/OEM’. We will learn more about the value added at this stage in Activity 1. OEM stands for Original Equipment Manufacturer, and represents companies that make a component which is used in another company’s final output.Note the two recycling arrows to the right of Figure 2. These provide further routes through which value can be generated after the consumer has finished with the product. This is one example of cross-linkage within a value chain (or value network).These points indicate ways in which the systems of production are far more complicated than the simple metaphor of a ‘chain’ suggests.Value is added incrementally by various people, activities and procedures. Often their contribution is not easy to see as a simple sequence of events. Chains of value run through economies, industries and organisations from suppliers to customers, with numerous, often complicated, systems and processes. Many processes are not linear, nor are they straightforward to follow. There may be iterative or repeated procedures involved and cycles of feedback. The production process may require matrix teams (teams of people from diverse backgrounds) collaborating to produce or deliver something, making it difficult to see precisely how each individual involved contributes to the value that results.In understanding value and the way it is created through organisations, it is vital to bear in mind that organisations (and to an even greater extent, wider industries and economies) are complex systems. They involve a number of interacting components which together display nonlinear behaviour. A change to one aspect of the system can have disproportionate, far- and wide-ranging impacts on many other components. To put this in terms of your own work and commercial awareness: the value that you are able to add to a system of production or service delivery impacts on, and is impacted on by, the values added and costs incurred by others across the organisation. For this reason it is not just your specialist role, nor only your immediate neighbours in a value chain, that you need to be aware of. Commercial awareness requires a much more holistic approach to learning across and beyond the organisation. In the rest of this course we look in more depth at this organisational level.3 How do organisations add value?Activity 1: Adding valueAllow 20 minutesWatch Video 1 below, in which Evan Davis looks at the modern value chain, which he suggests has three stages.
Video 1 The modern value chain
MANWhen it comes to earning a good living for ourselves, we have to produce things that are valuable-- things people will pay for. Now, a lot of us assume that means manufacturing them. But that's naive. There are three major steps of value creation in the production process. And the first is about the magic of creativity. Yes, the first is coming up with a new product or process, like pilkington, built on the research of scientists and engineers. Only then comes part two, the manufacturing-- the machine in the middle that churns out the process. This is the tangible bit of the process. Now, this does add value. Of course it does. But less than you think. There's so many nations can do this well. Then there's the third step. The marketing, advertising, and branding. Teams of people coming up with innovative ideas to make products appealing. Now, in the modern value chain, it makes sense to us with our brained-up workforce to innovate in the first stage, coming up with the idea, and the third, selling it. That's where the biggest bucks can be made. I know it's not a very British example, but let's get a measure of this. One study broke down the cost of a $300 iPod. Now, most of the price goes to the retailer, and for the people who supply all the components that go inside. But on the back it says, "Designed by Apple, assembled in China." Well, for the design, Apple get about $80. For the assembly, China gets less than five. That is the value of creativity and branding. The clip is taken from the 2011 BBC television series Made in Britain in which Evan Davis asks how Britain can sustain itself in the global economy; and in particular if it is right for Britain to concentrate on excelling in the knowledge economy (commercial awareness is of course vital for nation states as well as for companies).The three stages mentioned in the video are:creativity: coming up with a new product or processmanufacturing: churning out the product (this is the tangible part of the chain but it adds less value than you might think)marketing, branding and advertising.Having watched the video, now consider your own position within your organisation.Does your work fit neatly and exclusively into one of these three stages?In terms of a value chain (such as those described in the video) are you closest to the ‘inputs’ or the ‘outputs’ of your organisation? (Roles close to the input end might be procurement, enquiries, goods received, etc., those nearer to the output end might be invoicing, delivery, after-sales services, etc.).We talk of a value ‘chain’ – but to what extent does a linear chain (receiving work and passing it on, with added value) represent your work situation? Are there loops of feedback or more complicated connections between what you do and how others in the organisation operate?In the video it is clear that value relates to being competitive, and being competitive means being able to do things differently or better than others. At the level of the organisation, this means being more efficient (e.g. doing more with less, being quicker or reducing the number of repetitions, reducing costs) or more effective (e.g. doing things that are more relevant, have greater priority or are more useful or desirable). When we understand what our objectives are in these terms, it makes it easier to suggest how to improve practices to eliminate waste, and enhance each individual’s contribution to the total value. Crucially, it allows us to compare the value added by techniques we apply to those used in other organisations.But how does this talk of value fit with our central concern: developing better commercial awareness? Why is identifying value valuable in that context? Why is it valuable to members across an organisation?Recognising the value you yourself bring and contribute to the organisation:helps to align your day-to-day activities, short-term and ‘local’ objectives (e.g. what you want your team to be achieving this week) with the longer-term, ‘global’ aims and objectives of the organisation (e.g. what it is your organisation is here to do; its mission and purpose)provides enhanced motivation as you see your own effort and achievement manifested in the total achievement of that organisationprovides enhanced motivation as you understand how your internal customers and other close colleagues perceive your worth and the array of benefits you bring to themcan assist in raising your profile through your organisation as you realise (and communicate) the value you add to those more distant colleagues in your organisation (including leadership teams)by widening your appreciation of your own capabilities (and potential capabilities), puts you in a stronger position to seize opportunities to develop yourself, your team and your organisation.Recognising the value others across the organisation contribute:widens horizons – it breaks you out of the dreaded ‘silo mentality’ which can cause teams and individuals to stagnateallows you to be more agile, responding to the needs of internal customers better and working smarter with those colleagues on whose work your own is dependentexpands your reach into diverse sources of potentially useful information and human resourceenables initiatives to be taken – having a better grasp of what others require and what situations demand, you are able to offer more and discover areas where you and your team can influence, serve and be recognised for taking the initiativemakes for a stronger sense of organisation and shared purpose, which in turn helps to harmonise working and also provides the basis for resilience and better resolution when there is conflict or discord between individuals or teams.4 Recognising valueCustomers select the product they think is a superior value (benefits minus price). Competitive advantage is delivering a superior value to enough customers at a low enough cost to generate wealth. So a business is a system for superior value delivery: choosing a superior value proposition, and echoing it through the business system by providing and communicating it.(Lanning and Michaels, 1988)Everyone knows what is meant by the 'price' of a product. But just as important for strategic purposes is a product’s value to the customer, something that is far less conspicuous because it often depends on the customer’s subjective assessments. A product’s value to customers is, simply, the greatest amount of money they would pay for it. In other words, a product will rarely be purchased when its price exceeds its value to the customer. Conversely, whenever the value of a product exceeds its price, customers can improve their lot by buying it.(Golub and Henry, 2000)The above quotes highlight the widespread sense of value as something that can be measured relative to the price paid by a consumer for a product or service. If the average consumer will pay a higher price for product A than product B, that is thought to be because the average consumer values A more highly than B. But this is not to say that higher-priced items are always those with the higher value.In the price–value model illustrated in Figure 4, the organisation behind Product B is managing to deliver a higher-value product than the producers of product A. Product B has a higher value than Product A, but a lower price. This gives producers of Product B a competitive advantage over the manufacturers of Product A.The products have been mapped against a reference product (with reference value 100, reference price 100). To gain an advantage over competitor products, manufacturers must aim for products that sit above the line of indifference. Customers offered a product with value 200 and price 200, i.e. a product that sits on the indifference line, are unlikely to switch from buying a reference product (value 200, price 200) with the same value–price ratio.
Figure 3 Price–value model
This model was specifically designed to aid strategic decision-making about which products to release onto a market. But you may like to consider how the thinking behind the model can be applied throughout an organisation, and in situations where there is not an obvious relationship between value and price.Why am I studying this? The reason for presenting this to you is that when you have identified value (through your commercial awareness), an obvious next step is to review and enhance the value being generated, or the costs and mechanisms by which that value is generated; a process which will require more insight gained through commercial awareness. Ultimately your actions, wherever you sit in an organisation, will have a bearing on how end users value the organisation’s outputs. A fraction of the value of an end product or service is (at least in principle) attributable to you. But to recognise the value you’ve added doesn’t always require you to analyse the final product offered by your organisation. The interim products or services that you deliver to internal customers, and those that are delivered to you by internal suppliers, might also be considered in terms of value–price or in terms of cost–value ratios, which will help deliver services in a more cost-effective way. Within this course and its treatment of value, where we have focused on prices (and costs), the discussion has assumed an intimate link between value and money; it has assumed the recipients of the outputs of organisations always want ‘value for money’. However it is important to note – although this theme will not be developed – that there are alternative assessments of value. The following extract gives a flavour of such an alternative and its importance in commercial environments.companies are more than instruments for generating money; they are also vehicles for accomplishing societal purposes and for providing meaningful livelihoods for those who work in them. According to this school of thought, the value that a company creates should be measured not just in terms of short-term profits or paychecks, but also in terms of how it sustains the conditions that allow it to flourish over time.(Moss Kanter, 2011)These sorts of values may be difficult to measure and quantify – they may even run counter to certain political or corporate agendas – but they are values none the less, and what is presented in this course is applicable to these too.5 Knowing your place‘I know my place’ is a phrase that can seem negative and defeatist; consider some of the things it might suggest: I know my place, it’s not my place to be doing anything other than this task. It’s more than my job is worth to step outside my role. I’ll leave it to the bosses to make decisions – I’m just going to do what I’m paid for, do as I’m told and keep my head down. I’m used to my place and it’s where I feel happiest. Why mess with what works for me now?This course seeks to rehabilitate the phrase ‘I know my place’ because knowing your current place in an organisation – knowing how you ‘fit’ with other individuals and teams – can be a very positive and enriching thing:I know my current place in the wider set of things our company strives to achieve. I know how what I do helps us to achieve our mission and deliver the things that keep us operating. I know that without someone like me fulfilling the role I do, a link in the organisational network would be broken – and the organisation would be weaker – it might well fail. But I also know that ‘my place’ isn’t the same as it was last month, or as it might be next month. The organisation, like the world around it, is dynamic – and for it to respond effectively, I need to too.Activity 2 Things that would stop without youAllow 20 minutesIn this activity, you are invited to take a sort of mental holiday and see how your organisation would get on without you – or someone like you – fulfilling your role. You may be familiar with the film It’s a Wonderful Life (Frank Capra, 1946) in which the lead character George Bailey is led to appreciate his achievements in life by being shown how things would have been had he never existed. That’s what this activity is getting at: give yourself an out-of-organisation experience by imagining the knock-on effects of your work not being done.What sort of requests for service or attention would come in to your workplace, in-tray or inbox, and not be addressed were you (or someone in a role like yours) not there to handle them and add in the value demanded or expected elsewhere?Who would be waiting on the work that is not getting done? What would not happen and why would that be of interest or concern to those you deal with? What about two or three steps further removed along the value chain; what further ramifications would there be affecting the ultimate delivery of goods and services? Your bosses’s feelings matter of course, they’re likely to be upset if you’re not at your post – but of more use on this course is thinking about the wider effects of your disappearance, in terms of drop in effectiveness, income, service level or any other measure by which the value of your organisation is assessed.Look at the gap in value – the you-shaped hole that has opened up between where your work comes in and where it goes out. Taking a view from the positions of your (internal or external) customers and your (internal or external) suppliers opens up a broader picture of what value you are adding.Why am I studying this? This may strike you as a round-about way of answering the question ‘What am I here at work for?’. The reason for taking this approach is to stress the dependency relationships that exist between you, the people from whom you receive work, those you pass it to and the wider network of stakeholders.6 Thinking in systemsThrough our discussion of value chains and interdependencies we’ve reached a good place to highlight an important distinction between ways of looking at and thinking about business. These ways are not mutually exclusive – indeed, it is strongly advised that to be commercially aware, managers should be adept at many different methods of analysis. To introduce the two broad approaches for contrast:Reductionist approaches: these reduce or break down issues into smaller chunks. In the process much of the real-world complexity of an issue can be lost. The benefit of this approach is that you can focus on a small scale, look at individual problems which are well-defined and (often) easier to deal with in isolation from the ‘mess’ of the rest of the organisation.Systems approaches: these refuse to strip down issues into something less complex. A much larger-scale, holistic system is considered in which there are multiple causes, with different aspects of the organisation interacting with other aspects in ways that are hard to pin down. Often the problems tackled in systems thinking remain ill-defined – but the level of analysis is wider and recognises the richness of interaction across an organisation.Within your organisation or industry you may be a skilled professional – someone experienced in a particular field or line of work. Your substantive role may be to apply specialist expertise for the benefit of the organisation and its clients or customers. There will be things which you can do much better than your colleagues – qualities that you are called on to display and make use of. In that respect we are, each of us, ‘experts’ – and to fulfil our specific roles it is inevitable that we often adopt a reductionist attitude to our own business.If you continuously and exclusively think in whole-system terms you may not get the low-level, well-defined portion of your workload completed. However, whilst your expertise may be vital to fulfilling your role – the very reason you are employed as you are – it is only part of the story when it comes to being commercially aware. Full commercial awareness requires far more systems thinking than you may have realised when training or studying for the profession you now find yourself in.Optional activity: Short introduction to systems thinkingAllow 5 minutesTo extend your understanding of this section of the course, you may wish to view an introductory video on systems thinking such as Video 2. Towards the end of the video is an example of how a systems approach might be adopted in car design.
Video 2 Systems thinking
NARRATORComplex adaptive systems are systems composed of multiple diverse elements that are capable of adaptation and thus can evolve over time to exhibit highly-complex behaviour. But let's start from the beginning by talking a bit about adaptation. Adaptation is a process or capability through which systems can change in response to some event within their environment. In order for this to happen, there needs to be some control or regulatory mechanism within the system. Cybernetics is the area that deals with a system's regulatory mechanisms through what are called feedback loops, whereby the actions of a system generates some change in its environment and that change in turn feeds back to affect the system itself. A classic example given of this is a thermostat that regulates the temperature of a house. The system consists of a central controller where the desired temperature is set, a heater that creates an action that changes the state of the environment, and a sensor to feed back the information about the environment to the controller. Wherever we have this basic degree of interaction and interdependence between elements, we can use the model of an adaptive system and feedback loops to describe these dynamics, and thus we can model economy, society, and ecosystems in this way. The different ways in which the interactions between a system and its environment affect each other generate different types of feedback loops. Primary among these are what are called positive and negative feedback. Firstly, positive feedback is an action that produces more of the same. For example, as global temperatures rise, Arctic sea ice melts. As this reflective sea ice disappears, the now exposed dark ocean waters absorb more heat, which in turn increases global temperature and so on. In contrast, negative feedback produces less of the same action. For example, the more the price of apples goes up, the less the demand for apples from consumers, which in turn feeds back to reduce the price of apples again. These different feedback patterns in turn give rise to different systems properties. For example, negative feedback is a form of self-regulation that typically generates very stable systems. Whereas positive feedback loops often have destabilising effects. An example of how this works may be seen in a grounded flock of birds, any of which is likely to fly away when it sees a neighbouring bird fly off. Every time another bird reacts and takes flight, it increases the likelihood of more birds flying away. Thus, the system could be said to be unstable due to these positive feedback loops that allow for small events to propagate through the system. This same dynamic can be seen in many other domains, such as financial systems, where a loss of confidence can cascade through the system generating a bank run. We've been talking about adaptation and feedback loops, but to get to complex adaptive systems requires multiple adaptive elements interacting. From these micro-level interactions, adaptive systems can self-organize, allowing for the emergence of some macro-level pattern. An example of this might be the formation of a culture where individuals in close proximity develop standardised methods for interaction and coordination through a common set of greetings, language, and rituals. Over time, these micro-interactions will develop into a formal cultural system. These emergent self-organized macro-structures, whether they are markets, social institutions, or cities, then in turn feed back to affect the actions of the individuals within the system, both constraining and enabling their future actions. Given this emergence of new levels of order as the system evolves, the elements' capacity for adaptation, and the complex interactions within the system, it is almost impossible to predict the future state of a complex adaptive system with any accuracy. The only viable method for modelling how these systems evolve over time is to simply let them develop and see what happens. Fortunately, we have computers that can simulate this process. This method of simulation is called agent-based modelling, where an element is given a simple set of rules that govern its behaviour and left to interact to see what macro-scale patterns emerge over time. This method has shown that even with very simple rules governing the agent's behaviour, complex and unpredictable phenomena can arise. Complex adaptive systems and its friend cybernetics are more than just the study of how birds flock or thermostats work. They're a whole new paradigm with which to understand and model the complex set of interconnected feedback loops that make up the natural, social, and technological world we live in. This activity has no feedback.The final two sections of this course are made up of two activities. Both activities should reinforce the notion of the organisation as a complex system.7 Networks of interactionThe following activity will help you reveal your own network of interaction that spreads throughout your organisation.Activity 3: Your network of interactionAllow 45 minutesPart AIn this activity, you are asked to investigate your existing network of interaction – to think about the colleagues and departments with whom you communicate or exchange with in a typical week or month. What is the strength of these connections? There are several (all imperfect) approaches to investigating connection strength listed below; which one you choose depends on the nature of your work and the ways you deal with others.Roughly how many bytes of data pass in email threads or other media transferred between you and other parties? Get a sense of this by looking at your inbox and sorting it by size of message – or by looking at the documents or data you’ve worked with this week or month.With whom do you exchange the most emails? Sort your outbox by ‘To’ and check over emails sent in the last week or month (you may wish to clear out your box for previous months first).How much time are you spending with different people in a given week or month? Do you have an appointment book, schedule, timesheet or time-tracking app that would indicate this?Which projects, tasks or workstreams take up most of your time? There may be clear ‘outputs’ you produce which allow you to (honestly and without prejudice) judge this for yourself. Again you could track messages or parts of the work which are collaborative – or you could even keep a diary for a week to find out.If you’re used to tracking your performance in terms of income generated from a range of clients, you may be in a position to judge strength of interaction in terms of money received over a given period.Other more appropriate ways may occur to you. Select one method.Whichever way you choose to do this activity, by applying the method consistently to all the different people/bodies you deal with, you should be able to build up a picture of your own network of interactions. Write down the names of 10–15 main stakeholders, in order of the strength of your connection. Part BTo complete the next part of this activity we invite you to use the interactive whiteboard tool, provided below. The tool will save whatever you draw here on this site, so you can return to it during your study. If you would rather perform this activity on a large piece of paper please do so, but keep it safe to refer to in future activities.Write ‘me!’ at the centre of the page/screen, and around the outside write down the 10–15 main stakeholders featured in your analysis of who you’re interacting with and how strongly. Draw connecting lines between yourself and each stakeholder. Thick lines where the relationships are strong (by whatever means you judge strength) and thinner lines where the relationships are weaker.If you’ve time, you might want to embellish your picture with some additional features:clustering or labelling stakeholders in terms of the nature of the relationshipdrawing arrows to represent the general flow of goods/services/information in to and out from yourselfconsidering which stakeholders have most influence over you and labelling thesenaming more stakeholders whom you know are connected to the ones you’re connected to, but who don’t generally interact with you – they may form another layer of interaction sitting behind your own.Click ‘View’ to access the interactive whiteboard tool. There are a number of shape tools available to choose from, as well as the ability to enter text. Once you have created an element of the map you can use the 'Select' option to drag and drop it, the Order ‘Up’ and ‘Down’ buttons to move it to the foreground or background, or the ‘Delete’ option to get rid of it entirely. After you have mapped the stakeholders you can save your final map here and also export a copy to print off.
Figure 4 Example diagram
This diagram illustrates a price-value model.The x or horizontal axis is labelled price and has a scale from 0 to 200 in increments of 20.The y or vertical axis is labelled value and has a scale from 0 to 200 in increments of 20.A diagonal line labelled indifference extends from the point of origin to the top right of the chart.A reference product is labelled at price 100, value 100.Product A is labelled below the indifference line at price 180, value 150 (competitive disadvantage)Product B is labelled above the indifference line at price 120, value 180 (competitive advantage).In light of the diagram you have produced, now ask yourself the following:Which parts of my organisation are not mapped out on this sketch? Do those unseen parts sit behind stakeholders I have included – or do they have no representation in my diagram at all? Why is it that I’m not better connected beyond the people/bodies included here? There may be good reasons for not being directly connected, but what am I ‘not seeing’ because I only have these channels of interaction?So far, you should have had an opportunity to identify your ‘blind spots’ within the organisation to which you belong. In the next section you will develop a more formalised and complete picture of your organisational situation.8 Mapping your organisation