1.2 Different value creation perspectives
It should be clear by now that organisational value is important. Yet knowing the significance of organisational value is only the first step. Just as crucial are the conceptual and practical problems of how to create value. All organisations want to transform how they do things and what they produce to enhance their value to customers and partners, for instance. How they can do so, though, is not always so obvious.
Over time, a number of different theories of value creation have emerged. Perhaps the most well-known is Michael Porter’s (1986) value chain model. It is called a chain as it is focused on the creation of processes that can turn specific organisational inputs into more valuable organisational outputs. In his view, these chains are influenced by ‘primary activities’ such as marketing and operations management, as well as ‘secondary activities’ including HR policies and technological development. Drawing on this model, scholars and policy makers have identified global value chains that cross national borders and can involve a wide range of organisations.
However, this is not the only theory of value creation. As discussed in the previous section, organisational values can strongly impact the pursuit of organisational value and vice versa. Similarly, these deeper values can guide how organisations perceive and undertake value creation. There are a growing number of perspectives for informing these efforts. Provided below is a table outlining some of the most important contemporary theories of value creation:
| Value Creation Theory | Description |
|---|---|
| Value Chains | Value creation comes from ensuring that you create processes so that everything you input into your organisation becomes a more valuable output. |
| Value Based Management | Value creation comes from having a clear organisational mission and set of values that guides all organisational members, processes, and functions. |
| Systems Thinking | Value creation comes from understanding how an organisation is a part of broader inter-dependant systems that it must work within and effectively respond to. |
| Real Options Theory | Value creation comes from understanding the various short- and long-term options an organisation can pursue and then forming flexible strategies to maximise these possibilities. |
| Bureaucratic Theory | Value creation comes from having clear top-down institutional structures where everyone knows their roles and responsibilities. |
Activity 3 Meet the OU value creators
Read each of the profiles below. Each individual has a different view of how the OU should seek to create and capture value. Following each profile, make some notes in the box about which model of value creation they represent and why. Here are the theories again:
- Value Chains
- Value Based Management
- Systems Thinking
- Real Options Theory
- Bureaucratic Theory
OU Value Creator 1: Jack
‘Hi everyone, my name is Jack and I appreciate the opportunity to help the OU create value. Now I might sound a bit old fashioned but I think what every organisation needs is some clear structures where everyone clearly knows their various roles and responsibilities. Providing the OU with a top down structure will allow leaders to make strong strategic decisions and permit those under them to carry them out efficiently and productively. There should be clear rules laying out who does what and why. We should redesign our processes so that each department specialises in what they do best, managers are given the authority they need to get the job done, the entire organisation has firm rules and regulations for guiding each member’s actions, everyone has the necessary technical competence for achieving organisational objectives, and finally we are run according to institutional norms not the whims of individual personalities. In a time when there is so much change happening in the sector, we must ensure the OU is as stable as possible. Authority, rules, and hierarchy – that is the ideal way to create value.’
What type of value creator is Jack?
Answer
Jack represents a bureaucratic theory of value creation. He emphasises the need for a hierarchical organisation, with binding and impersonal rules and regulation as well as authority. Value is created through institutional stability, specialisation, and clear knowledge of roles and responsibilities.
OU Value Creator 2: Jeanine
‘Hi everyone, my name is Jeanine, thank you for inviting me to help the Open University increase its value. It is absolutely critical that the University remains flexible enough to maximise its options over time. We must think in terms of the size of our overall project to grow, its timings, and how it will operate once we have begun. For instance, do we want to expand? If so then we need to ensure that we have extra capacity in case an opportunity to do so presents itself. By contrast, would we like to contract in size? Then we must be ready to reduce key parts of our operations and staff. Would we like to keep our options open? If so then we must put in place a flexible operating system that will allow us to grow bigger or smaller based on the conditions we will face in the short and long term. In order for us to succeed, we must give managers the power to continually make decisions linked to present circumstances. The future cannot be fully predicted but the capacity of organisational leaders to respond to them strategically should remain constant. The first step is to assess the full range of possible values for the Open University and then forecast its range of possible future values.’
What type of value creator is Jeanine?
Answer
Jeanine represents a real possible options perspective. She is assessing what the various options for the OU are and providing managers with the flexibility necessary to implement different options depending on current and future conditions.
OU Value Creator 3: Jamal
‘Hi everyone, my name is Jamal and I believe that for an organisation to succeed they need to have a strong, clear, and consistent corporate mission. Everything in the organisation from its governance to its strategy to its communication to its process must reflect its core values and purposes. If the OU wants to grow confidently into the future it must clearly define what its core values and purpose are so that it can transform all parts of its organisation accordingly. Only in doing so can the OU create, manage, and measure its value. I believe that the OU must, therefore, first understand what makes distance learning and open education so attractive in the first place. Then it must consider what its competitive advantage is within this marketplace. Once it has done so it can then set about (1) identifying organisational objectives (2) developing strategies and organisational designs (3) identify ‘value drivers’ (4) develop actions plans, select measures, and set clear targets and (5) evaluate the performance of each department and organisational members against these value frameworks.’
What type of value creator is Jamal?
Answer
Jamal represents a value based management perspective. He believes that identifying the core organisational mission will allow it to base all of its decisions on clear and achievable value creation plans and measures. Value based management judges each organisational process and member on how they are contributing to value.
OU Value Creator 4: Jordan
‘Hi everyone, my name is Jordan and I am so excited to be here to tell you how I believe the OU can add to its value! An organisation is more than its component parts. It is an interdependent system where all things impact one another. We therefore must understand how various factors impacting the OU are working together to shape its overall present and future value. In such a complex order, where do we even begin? The best place is to understand the overall function of the OU. We can then turn our attention to its governing structure – how is it organised and why? Next comes a deeper understanding of its processes, in particular how it operates over time and where it does so. Finally, we must assess its steering principles – what are its objectives and how can it internally respond to challenges in the external marketplace that may challenge these goals? Through taking such an integrated and systematic view I am sure that the OU will be a success both today and in the future.’
What type of value creator is Jordon?
Answer
Jordan represents systems thinking perspective to value creation. She highlights how any organisation works within a broader interdependent system. For this reason, it is important to understand the function, structures, processes, and steering principles that guide its decision-making and allow it to respond to systemic opportunities and challenges.
OU Value Creator 5: Daniel
‘Hi everyone, my name is Daniel and I believe I know how I can ensure the OU retains and expands its value. The organisation must ensure that it orients all its activities to create value for its customers. This means linking all of your processes and actions together so that the value created and captured is more than the cost of creating this value. We have to start with our primary activities: how we obtain, transform, deliver, sell, and maintain our products. We can then concentrate on our support activities, ranging from the buying of resources, to our HR policies, to the ways we research technological innovation for improving our primary activities. Then discover, within your primary and supporting activities, which actions directly create value and which ones indirectly do. Contacting students in order to recruit them onto our programmes directly increases our sales, while effectively managing the team who contacts these students is an important indirect activity. Ensuring that all of our direct and indirect activities connect up together to enhance our overall value is the key to our success.’
What type of value creator is Daniel?
Answer
Daniel represents the value chain perspective to value creation. It is about constructing a linear chain from your inbound logistics to your operations to your outbound logistics to your marketing and finally delivery of services so that you are constantly creating and maximising your value as an organisation. This means aligning your primary and support activities as well as the direct and indirect value creation activities within these categories.