The Value-Driven Organization

Organization v3

The universal goal of every company is to grow profits by creating value for customers and getting paid for the effort.  The goal may be simple, but achieving it is a complex process involving hundreds of interconnected decisions across the company.

Each decision, if not made correctly, leaks away a small portion of future profits. For example, product managers reduce margins by building high-performing products that customers don’t value and won’t pay for. Marketing managers leak revenue by targeting segments in which the potential to create value or get paid is low. Sales people leak revenue and margin by failing to communicate the quantified worth of products and services. Although the business impact of a single leak is minimal, the combined effect of hundreds of leaks across functional areas is a massive drag on profitable growth.

Learn More About Building a Value-based Organization

  • Diagnose

    The first phase in transitioning to a value-driven organization is to diagnose the profit leaks in the commercial process. In many cases, the leaks can be closed with a simple fixes that improve profits substantially. In other cases, the leaks are more systemic and must be addressed by adopting value management tools and changing business processes. For example, companies that implement value-based pricing invariably decide to embed value selling to support the effort. Larger change efforts like this require developing a roadmap to define the desired end-state for the company and a change management plan to guide the transition.

  • Prove

    Having developed the roadmap for change, the next phase involves proving the Value Management approach and gaining support from skeptical and often resistant managers. A key step is to conduct demonstration projects to show the organization that a value-based approach improves business results. Many companies use a new product launch to demonstrate how value-based pricing and value selling can improve sales and margins. An added benefit of demonstration projects is they begin to create internal experts on the value management approach that can later serve as evangelists and mentors to others.

    The second step toward proving the Value Management approach is to seal the easier profit leaks in order to generate visible wins for the new approach. For example, basic scatterplot analyses used in the diagnostic phase invariably reveal unwarranted discounts that can reduce margins as much as 3-5 percentage points. The benefit of picking this low-hanging fruit is it builds the business case to support the longer-term changes.

    The last step involves building a customer value database containing a comprehensive set of customer value drivers and algorithms. The database is essential for the third phase of the transition in which we start to embed the value management tools and align the organization around the new approach. Many (but not all) of the tools require customer value data to guide decision-making and the data must be collected and stored in a way that makes it accessible to those that need it.

  • Embed

    Having created awareness and demand for the Value Management approach, the next phase involves installing the value management tools, adjusting business processes and aligning incentives. This phase requires the greatest amount of change and, not surprisingly, requires the most time. To illustrate this phase, consider some of the steps we might take to transition a product management group to a value-based approach.

    Process: incorporate “value gates” into the stage-gate process. Each value gate requires an increasingly rigorous demonstration of customer value before a product can be passed through to the next development stage. The value model developed in this process is used to form realistic price estimates and build a more robust business case to justify the product

    Tools: support the process changes by installing the value estimation, feature prioritization, version design and price setting tools

    Skills: train product managers on basic concepts of customer value, version design and value-based pricing. Train them on the proper use of the VM tools.

    Metrics: augment current metrics with value-based measures focused on incremental value-added for new product launches and percentage value captured for products in market.

    Combined, these steps will improve the hit rate for new products, reduce development costs and improve topline revenues by maximizing value captured with value-based pricing.

  • Scale

    The final phase of the transition process is to scale the Value Management approach across functional areas, divisions and geographies. Now that the major functional areas have adopted the value management tools, the next step is to create alignment between functional areas. For example, once the product managers are using value-based approach, it is necessary to ensure the Marketing Requirements Document (MRD) includes the value models and data so that marketing can use the value messaging and positioning tools to develop value-based marketing communications and sales collateral. Simple process steps such as this are essential to ensure consistent organization-wide execution of value-based growth initiatives.

    Finally, the adoption process must be replicated in other divisions and regions as resources permit. Fortunately, it is seldom necessary to repeat the entire transition process for each division or region. Although it is helpful to conduct a fast-cycle diagnostic exercise to identify major opportunities, many of the tools and processes can be implemented immediately to ensure that key strategy decisions are being made consistently across the global organization.