By: Juan Carlos González
Current theories about value have not changed much since 1776, the year in which Adam Smith, in his book The Wealth of Nations, also known as The Bible of Economics, based his economic thesis on three central principles:
- Man has a natural impulse to profit;
- The world is ordered in such a way that the individual efforts of men combine to compose the social good;
- Given the two previous points, the best scheme is to let the economic process take its own course;
This article does not intend to go into detail on the accuracy and applicability of this thesis, nor on the number of arguments, political and economic, in favor or against letting the market operate freely,
However, and despite so many existing theories, what is an undeniable fact is how important it is to figure out how to put value creation theories into practice to close the execution gap. Daily routines, bureaucratic obligations and corporate pressures create behaviors and vices within companies that prevent action from what is already known, and therefore become agents that destroy value, or that stop its generation. And then what should be done? Ironically, the first step to creating value is to stop to think about and identify these unwanted behaviors and organizational dynamics.
According to Deloitte, there are eight actions that are very useful in organizations to help form the systematic habit of value creation:
1) Relate the company’s strategy to the business processes so that both are consistent and point in the same direction: this is not something that arises spontaneously; We at Synergos very often see companies where the strategy was defined but the operations and management models were not designed to converse with it;
2) Design concrete action plans to present a credible and convincing picture of where the organization is headed: if this is not done, the collaborators do not “buy” or “own” the strategy;
3) Align the portfolio of initiatives (expansion and investment plans) with the company’s strategy: as with the processes, the expansion and investment plans must be consistent with the strategy, because if we do not burn money on projects that do not they will generate the return we expect;
4) Prepare to face a range of possible futures, but on a day-to-day basis concentrate on what is needed for the scenario that is really unfolding: if not, the undesirable analysis paralysis arises;
5) Make sure that the words of the leaders inspire the desired actions to the rest of the organization: the four previous points must be communicated to the organization in an inspiring, selling way, but at the same time grounded;
6) Focus on strengthening connections and bridges of communication between people, both internally and with external stakeholders: Organizations don’t need islands of power or work in silos; they need strong communication bridges and agreed levels of care (SLAs); and the same also applies to other key stakeholders such as customers, suppliers and shareholders;
7) Make value creation the axis of personnel evaluation and management, as well as the way to reward their performance: not all the actions of an employee have an impact that can be traced to the bottom line of the company, since many of them have qualitative impact, but the objective must be that all the elements of an organization can be measured in some way by objective elements that point to value;
8) Placing a person in charge of aligning strategies, actions and performance evaluation: in order not to use different criteria, it is better to centralize this important activity and unify the criteria;
After having advised dozens of medium and large companies in several Latin American countries, at Synergos we believe that the generation (or creation) of value is not just a pretty phrase or wishful thinking, but rather that it is something absolutely achievable and that it can also be systematize and thus predict to some extent. It is closely linked to soft skills such as leadership, communication and teamwork, and it is a habit that is formed with perseverance and dedication, persevering.
In the business world, leaders have the obligation to reinforce the generation of value by inspiring all the company’s collaborators, making them feel an integral and important part of the successful execution of the business strategy. Methodologies such as PEV (Projected Earned Value, for its acronym in English), for example, allow companies to detect whether their operations are generating or destroying value, so that strategic or corrective actions can be implemented that gradually tip the balance towards generation of value, and more and more companies delegate this responsibility to a specific position (a Value Generation Department), so that there is a sufferer and an accountability that allows measuring the return on efforts through a conversion ratio of earned value, thus enhancing the productivity of investments in resources such as infrastructure, machinery and equipment, intellectual capital and people.
Managerial management based on the generation and measurement of value is, in short, a challenge but it is well worth the effort of its implementation.
Sources:
- The Wealth of Nations (Adam Smith, 1776)
- Practical guide to generate value (Deloitte 2014)
- SYNERGOS own cases