iForce Consulting

The Golden Triangle of Value Generation

Whitepaper (May, 2002)

Paul Lim

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The New Economy started not with the Internet, but with the railroads. Business is still adjusting to that transition, the one that started 160 years ago; until we understand its imperatives, we won’t succeed in any economy.

Alfred D. Chandler

A PERSPECTIVE ON VALUE

iForce Consulting (“iForce”) has developed this paper to highlight to key executives the importance of key

value categories and provides a case on which to start focussing on the correct organisational initiatives and performance implementation.

To examine current business realities companies need to start clarifying where their zones of value reside. This must start with framework focussing on the primary value drivers of the firm. This paper is written concerning the question, “What are the essential components of value every business must have in place to

survive and prosper?” We discovered through many interactions and dialogues that companies need to focus on three universal areas of corporate value generation:

1. Customer management; 2. Cost management; 3. Cashflow management.

Each and every senior executive’s priorities will fall in one or more of these categories. For a company as a whole, real challenge is prioritise at any given moment the initiatives to excel and innovate in all the three

categories. Most enterprises will have unique approaches and weigh different priorities to these depending on business expectations, competition, and other realities. The model we are proposing has one simple premise: That successful companies must link market strategies to their cost base and cashflow to optimally

ensure long term growth and competitive advantage.

CUSTOMER MANAGEMENT

Customer acquisition and retention strategies are a function of the value proposition to a selected customer base(s). The link between the organisation and its customers is the point of wealth transfer and justifies organisational existence, planning, resources and investment. Therefore, customer management should be

a comprehensive and pervasive strategy rather than a particular solution to a sales object ive. The customer value proposition must be the initial justification for:

Organisational Design Core Capabilities Competitive Advantage

iForce has a distinct process for uncovering the corporate assumptions held about the unique value proposition. The value proposition is a key driver of corporate design and it must justify all functional roles,

processes and technology adopted.

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Value Generation Drivers

External Drivers Internal Drivers

Customer

Requirements

Value

Proposition

Organisational

Design, Strategy

& Systems

Competitive

Advantage

Creates

Establishes

Core

Capabilities

Supports

DeterminesFit

Segment 1

Segment N

Segment 2

Source: iForce Consulting

Competitive

Advantage

Core

Capabilities

Organisational

Design, Strategy

& Systems

Value

Proposition

Competition and substitutes

Maintains

Fit

EstablishesMaintains

Determines

Creates

Supports

Companies often find widening segment gaps between their product (or service) and actual customer needs. The lesson here is that customer segments do (and should be expected to) change for a variety of reasons.

From examining the diagram, a number of implications can be drawn:

Customer requirements (establishing the value proposition) should be a key driver of organisational

design; Companies must constantly ensure they are finetuning their value proposition to their customer

segments and thus how they prioritise their work processes.

Certain service dimensions may require significant investments to develop core capabilities and competitive advantage (for example an internet data-centre promising 99.9% high availability of bandwidth).

COST MANAGEMENT

Superior cost management is a driving competency for firms in highly mature product or service markets.

Cost structure and allocation need to be linked back to the organisational value proposition and be justified by corporate and functional objectives.

Costs should be allocated to the final deliverable and processes and should be segmented further into:

Fixed (long term investments)

Variable (as related to cost of goods) Ongoing (ongoing supportive costs)

Once a company understands its cost structure it then gains strategic benefits by being able to manage it profits better. It is now is a better position to compete with competitors and adopt new pricing strategies.

The environment and business confidence will have a strong bearing on the total allocation of these costs and will be reflected in how much is kept in-house or is outsourced as highlighted in the flowing diagram:

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External Drivers Internal Drivers

Customer

Requirements

Value

Proposition

Organisational

Design, Strategy

& Systems

Competitive

Advantage

Creates

Establishes

Core

Capabilities

Supports

Maintains

DeterminesFit

Segment 1

Segment N

Segment 2

Source: iForce Consulting

Investment/Cost Management

(degree of inhouse versus

outsourced or fixed/ongoing

versus variable)

Value Generation Drivers

CASHFLOW MANAGEMENT

Many successful companies (e.g. General Electric, Dell) have realised and proven that cashflow

management is often a stronger influence of corporate strategy than anything else. Cashflow is often linked to the optimal management ongoing internal costs, external payments and receivable from customers. The ideal sate for a business is to have positive cash to cash cycles. In today’s competitive environments, linking

cashflow management to corporate strategy is of vital importance. For example, costs categories can be defined as internal or external (suppliers or partners) and the

management of these will vary significantly. The below diagram highlights these two categories and the different colours represent the internal and external nature of incoming and outgoing cashflow.

External

payments

Company Customers

Ongoing

internal costs

positivenegative

Copyright: iForce Consulting, 2002

A key benefit of outsourcing non-core processes is that cashflow payments can more easily be timed with receivables (credit terms can be structured with the outsourcing partner). Cashflow management now becomes a comprehensive strategy that seeks to optimise both payments flexibility and profit margin. Two

dimensions that will affect corporate strategy are cashflow variability and the value offering (product or service) of the firm as highlighted in the Cashflow Management Strategy Matrix:

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(Invest)

Optimise costs

Build production

capability

(Outsource)

Collaborative

strategies

Demand management

(Extend)

Extend & build

complementary

services

(Associate)

Multiple revenue

sharing partnerships

Cashflow

Value Offering

Product

Service

stable unstable

Cashflow Management Strategy Matrix

Copyright: iForce Consulting, 2002

Stable Cashflow Strategies

Service firms experiencing relatively stable cashflow use strategies to extend their service offerings to include new yet complementary services. Traditional auditing firms are an example, having established longstanding auditing relationships many have successfully extended their services into management

consulting, information technology, executive search practices, etc. In situations where a company is producing a tangible product and there are no surprises in future cashflow

expectations (stable state cashflow) a company should invest in optimising costs and focus on building production capability to incrementally scale up. These are often products in mature markets with relatively well established supply chains. Process manufacturing is an associated model.

Unstable Cashflow Strategies Service firms with unstable states of cashflow develop strong associations with key partners that may be initiated wen deals arise. This is similar to generating multiple options and only gets exercised at will

(options increase in value the more volatility they experience). Project based industries often can fall in this category – often relying on multiple relationships to complete an assignment. The more affiliations a company has established (with vendors, partners and industry affiliations) the higher a strong possibility that

these firms that are project dependent. Customer relationships with these firms often only extend for the duration of their assignments.

For product firms this means joint strategies with key partners to develop market and to manage consumer demand variability. Collaborative vendor practices fit in this category. Long term investments into production capacity could be risky and outsourcing relationships sprout up to minimise risk. Discrete (batch) processes

are also often associated with this model.

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DESIGNING APPLICATIONS AND PERFORMANCE INTO THE GOLDEN TRIANGLE

Looking at the three categories from systems perspective it becomes clear that strategic applications can be reviewed around these value categories. The integration of these categories with each other ensures

applications work effectively and cross-functionally as a whole.

Cost

Management

Customer

Management

Cash

Management

Channel management

Financial monitoring & reporting

Inventory management

Sales and distribution planning

Collaborative supply systems

Enterprise application integration

Logistics management

Workflow optimisation

Customer profiling

Product life cycle analysis

Revenue optimisation

Sales force automation

Segmentational profiling

inte

gratio

n

integration

integration

Golden Triangle of Business Value Categories

Copyright: iForce Consulting, 2001

The framework can be used for initiating corporate wide performance systems and each category can be

considered a possible perspective in which to place key success factors and key performance indicators. The Golden Triangle focuses on core value categories and commonalities identified in multiple business

environments, all with the same underlying principles and challenges. Once there is an understanding of these drivers, innovation will happen through the creation of more effective processes, the delivery of better products and services and the optimal use of technology. The first step, and possibly the most challenging,

is to start looking at the true value drivers that have brought a business to where it is today and consequently create the competitive staying power needed for the future.