How is value created?

Every business can be thought of as a “money machine.” On one end of this machine you have inputs; in between you have the value-added processes; and you have outputs on the other end. In the framework shown below, we have seven value-added processes – Design, Source, Make, Move, Store, Sell, and Service – which are the core processes that make up the “chain of value.” (This framework was developed by the Center for Intelligent Supply Networks at the University of Texas at Dallas.)

The seven core processes in the “money machine”

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What is the value triangle?

“Every business is the same inside” – Ram Charan

The concept of the value triangle was inspired by Ram Charan’s book, What The CEO Wants You To Know, in which he talks about the “universal language and laws that govern every business”, and how business acumen comes from understanding the fundamental “building blocks of money making.”

The value triangle is a visual metaphor for the three basic building blocks of any business system:

  • A customer who has a need (and the means to pay)
  • A product or service to fulfill that need.
  • A set of assets to perform the value-added or transformation

These three building blocks are universal across a variety of business models ranging from very simple (a lemonade stand) to complex (a multinational enterprise) to extremely complex systems (global economy.) What the value triangle shows is that they all have the same structure because the business system is based on these three fundamental or atomic elements. Continue reading

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Does business have a “shape”?

If we observe living systems all around us, we see that they come in all shapes and sizes. Nature’s rich variety is classified along kingdoms (animal, plant, fungus, etc.), where each species possesses a certain structure and often unique shape that is designed to serve a particular purpose within nature as well as ensure its survival and adaptation through the evolutionary process.

If business has structure, then why not shape?

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Explaining “structural changes” in the value chain

Today, economists frequently use the phrase “structural changes” to explain major aspects of the multifaceted impact of globalization. It is an umbrella term that captures the macroeconomic view but seldom gets into the details of the structure itself, i.e., the micro view. (And in defense of economists, their focus is the “forest” as opposed to the “trees” of the inner workings of the global supply network with its extreme complexity and processes intertwined among hundreds of businesses spread across multiple economic entities.)

To understand the structure of the network and how it evolved over time, we need to view the world through the “value chain” lens, and wind the clock back to the days of Henry Ford. Continue reading

Reconnecting the virtuous circle

In a recent article titled “Is US business abandoning the middle class?”, Chrystia Freeland of Reuters (and former US managing editor of the Financial Times) sums up the bedrock of American prosperity for the past century:

Twentieth-century American capitalism was built on what you might call the Henry Ford model — generously compensated workers (Ford paid double the existing rate) created a mass middle class that bought the products of the country’s entrepreneurs. That virtuous circle made the United States the world’s economic behemoth, and created a society and a political discourse defined by a proudly acquisitive middle class — the United States’ much admired and much maligned consumer culture.

When the chief of General Motors, Charles Wilson, told a Senate confirmation hearing in 1953 that he believed that what was good for the country was good for G.M. and vice versa, he took some flak for uttering such a self-serving line. But we all remember it because Mr. Wilson captured something axiomatic about the connection between the fortunes of U.S. business and the welfare of the country as a whole.”

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Managing on the Edge of Instability

In 2010, I put this storyboard together to help Invensys explain their “Enterprise Control” concept – i.e, what happens when the transactional world of ERP meets the real-time world of Automation Controls. The result is (the largely untapped opportunity) to enable real-time synchronization between Strategy and Execution – in other words, the ability to manage value in real-time: