Daily Archives: September 1, 2008

Should Value-Cells Be A Part Of Your Center-Led Model?

A recent article in the McKinsey Quarterly on Organizing for Value noted that although the traditional practice of organizing large corporations along a few divisional lines has been an effective way to groom managers for top jobs and limit the number of direct reports to the CEO, the approach creates bulky divisions that obscure the performance of small units where value is often created in these lean economic times. This can lead to organizational blind sports when it comes to investments and decisions between long-term growth opportunities and short-term demands, which can, as you will surmise, lead to unfortunate results — as managers end up optimizing earnings goals at the expense of long-term growth and value creation.

In order to compensate for the blunt tools of traditional planning, that will often implement a uniform freeze across business units in tough times (including those units delivering 50% earnings growth that should be invested in heavily as only sagging units should get the axe), a business should take a finer-grained perspective on individual initiatives within large divisions. If you can identify and define small units around activities that create value by serving related customer needs, then you can better asses and manage performance by focusing on growth and value creation. These units, which the authors call “value cells”, provide you with a more detailed, more tangible, way of gauging business value and economic activity — and allow you to spend more time focussed on specific in-depth strategy discussions, instead of generic tactical plans that are never productive when blindly applied across large business units.

These value cells are often oriented around geographic or vertical markets and integrate their backbone functions, like production, operations, and distribution — and unlike the traditional org-unit structure of classic companies, they have stand-alone economics and are typically “homogenous” in regard to their target marketplace. They are governed off of P&L statements that are created as if the value cell were its own business. This allows a business to determine a market-price for the value cell, and judge the value it is creating relative to the funding it is receiving from the business. Then, it can invest in those value cells likely to create the most value in tough times, which will help the business ride out the storm.

Analyzing the definition of value-cell, one thing springs to my mind, and hopefully yours as well — supply management! What other part of a business is a business within itself? And what other part of a business can easily and naturally be broken down into units that are structured around geographic or vertical markets or product families? And what other part of the business might already be more-or-less broken down in this way? Only supply management really fits, and, specifically, center-led supply management. If you have a well-designed center-led operation, you have a supply management function that is broken down into a number of global business units. Moving to a “value cell” mindset is pretty simple, as the only major difference is that each “unit” is now treated as its own business, which would take advantage of the services of the COE value cell (which would, in turn, be jointly funded by each of the value cells, and be credited with a portion of the savings it helps each value cell generate).

These individual value cells will be able to offer improved reporting, with increased levels of detail in the data, to the center of excellence which will be able to use this data to make better decisions (and take advantage of new opportunities) for the long-term benefit of the company as a whole. The COE will be able to better identify where economies of scale truly exist, and where they do not, and better differentiate which purchases should be against global supply contracts, which purchases should be against regional supply contracts, and which purchases should be completely left up to the local value-cells to manage as they see fit.

Furthermore, as the article points out, even though one might initially think it would be more work to manage a larger number of value cells than a smaller number of positions, the ability to focus on a single value cell at a time, which is a highly targeted business in its own right, reduces operational complexity considerably. Managers can focus on the two or three metrics specific to the value cell that truly driver performance, as opposed to the twenty or thirty that would be required to define a whole division. You can quickly see what needs to be done, do it, and move on to the next value cell. It’s easier than trying to define a strategy that will more-or-less work well on the whole for a large division — much easier.

I think that this approach is probably right for many large companies — but do agree with the authors when they state that the approach will only work if a company has the courage to follow up on the right decision and the willingness to (occasionally) sacrifice short-term profits for long-term growth. Furthermore, the process must give managers of the value cells more freedom and more resources to bring innovative projects with a large commercialization potential to fruition. But I think that, done right, it would be worth it. Any other opinions?