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What is system value?

System value recognises that the historical narrowing of roles has meant that many companies are optimising only piece parts of their operations and are ill-equipped to deal with today’s complex business challenges. Opportunities therefore exist to unlock new profits, reduce risks and create competitive advantage through system optimisation. A number of leading organisations have begun to demonstrate the magnitude of this system value.

Companies traditionally break work down into smaller units, including divisions, business units departments, teams and ultimately roles. This has created specialism of professions, where individuals within corporations focus on doing their best to optimise one part of a big complex network.

Over the last 20 years there has also been a thinning of middle management in the interests of cost reduction. This has eliminated the management layers with a deep understanding of how many of the component parts work and the skills to optimise across them. Further, those middle managers who remain are so busy overseeing the specialists that they have little time to consider and act on broader optimisation opportunities.

In parallel, the challenges of modern business have become more complex and impact most aspects of how a business operates: resource constraints are causing price rises and increasing business risk, externalities are increasingly being priced into the economy, uncertainty and volatility are at all-time highs, corporate social responsibility expectations are escalating, customer demands are increasing, and new technologies are rapidly emerging.

To quote Michael Porter, inventor of Porter’s Five Forces and the father of Competitive Advantage:

“Companies … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their long-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?” – Harvard Business Review, Jan/Feb 2011

This evolution of the modern corporation presents value creation opportunities through optimising systems rather than piece parts. We call these opportunities ‘System Value’.

Types of system value include:

  • Supply chain partnering including supply community development
  • Waste minimisation and recycling
  • Closed loop manufacturing
  • Site energy and heat management
  • New technology investment, adoption, and commercialisation
  • Transport and logistics optimisation (including across modes)
  • Customer partnering/collaboration

Unlocking this value requires both a new approach and a range of skills. The new approach requires collaboration – ideally internally and externally (ideally including through open innovation). It is not about ‘management’ (involving a narrow focus on the activities of juniors) so much as ‘optimisation’ (involving broad coordination across an organisation at all levels). Perhaps we should acknowledge this by referring to the appropriately skilled class of executives as ‘optimisers’ rather than ‘managers’.

Regarding capabilities, most business schools, corporate education programs, and on-the-job training do not teach system optimisation. Often we have found the best trained on the subject sit within a company’s sustainability team whose systems understanding was often gained studying natural ecosystems.

It is important to note that the necessary skills do not just relate to understanding systems. To unlock system value, capabilities are also needed to quantify the value, design actions to secure it, build support for the actions across different stakeholder groups, create a business case for senior support/funding, and successfully implement the actions. This requires the collaboration of a variety of professionals.

For those who can unlock this system value, the rewards are substantial – and many companies are beginning to recognise this. From private equity firm KKR to manufacturers such as Interface Carpets and Xerox, the corporate world is beginning to capture system value.

KKR (Kohlberg Kravis Roberts), one of the world’s biggest private equity firms is thinking about system value through a sustainability lens to unlock profit opportunities within their acquired companies. This started in 2008 when KKR worked with environmentalists to reduce the planned emissions of their acquisition target TXU, the energy company, enabling a profitable buyout. Since then KKR have been working with the Environmental Defence Fund to reduce the environmental impacts – and costs – of a number of their acquisitions. These savings are significant: in 2010, KKR reported $160M in operating cost savings in the previous two years.

There has been plenty written about the system-wide transformation of Interface Carpets towards is vision of zero environmental impact. What is less known is the substantial system value that they have created – including cost savings (over $440M), staff productivity gains, and market share gains.

Fuji Xerox was facing closure in Australia – a market too small for them to economically compete given the cost of importing parts from Japan compared to lower cost Asian manufacturers. Instead, Fuji Xerox changed their business model to remanufacture components recovered from their installed base of copiers. This not only allowed the business to return to profitability, but also was adopted internationally by Xerox and has won global environmental awards.

2 Comments

  1. On System Value . . .
    OK, we have “cleared out” functional units to the point where the MO is basically firefighting yet there is a growing need for medium term operational planning. We have tried getting IT to do overarching (if you want it they can build it but don’t expect them to do business analysis/process improvement. BI units sometimes succeed, but often they get too ivory tower.

    The obvious solution is to set up an infrastructure where processes can span silos, where IT can do the bridging, so two things are needed

    a) process champions in functional units who can think ‘process’ and

    b) software that does across the organization resource allocation, leveling and balancing so that things do not fall between the cracks.

    The software much be such that ordinary functional units can own and manage their own processes.

    IT has to bridge across silos and across systems that otherwise would not be able to talk to each other.

    This will reduce the need for firefighting and maybe, just maybe, the residual middle management staff will now be able to set their horizons a touch wider.

  2. I couldn’t agree more, Karl. Of course, I have seen IT groups that do the same thing as the silos they serve – picking favourites from the existing architecture, rather than building bridges. Where is the impetus to be a leader of change? IT can sometimes be a conservative force.

    The idea of solving these problems at the business model level has some distinct advantages. It diverts attention from the safety of the current architecture towards alternatives that might deliver more value. As managers start to think in terms of an alternative model, they may find it easier to accept the systems thinking approaches that don’t appear to work in their existing infrastructure. The “it won’t work here” argument become irrelevant if the discussion is about alternatives models in the first place.