I sometimes take the organisation value chain a stage further and represent the whole business strategy map focusing on the organisation value chain rather than the other three chains.  This is shown here.

I’ve dived down deeper into the learning and growth perspective which now becomes the organisation value chain

I’ve grouped the rest of the business strategy map together into one perspective which I call business impacts.  This doesn’t mean that operations, customers and financial results are unimportant but is simply a consequence of the fact that we don’t impact them directly and therefore don’t need to focus on them quite so much.  And I call the perspective business impacts rather than business results as our results are really the final step in the organisation value chain ie the human capital and other outcomes.  The business impacts are then the things the business can do as a result of our results - they’re not the direct results of the work we do on the organisation value chain.

Presenting the business / organisation strategy map in this way has a number of benefits:

• As opposed to the organisation value chain, it doesn’t show outcomes / organisational capabilities being created in isolation.  Again, these only have value if they do in fact lead on to business results.
• As opposed to the normal business strategy map, it doesn’t lump everything to do with HR together in one perspective.  
  

The business strategy map is a really useful model for a business because it provide a business with a balanced range of perspective (i.e a business should have approximately equal numbers of objectives for its financial, customer, processes and learning & growth perspectives) and therefore the ability to track the flow of objectives through these perspectives i.e the ability to identify lead and lag indicators of particular strategies.

Using the business strategy map is also useful for HR as it helps integrate HR into the rest of the business i.e. every time the business executive meet to talk about the business using the strategy map, they’ll be talking about learning and growth, i.e HR, as well.

However the business strategy map is otherwise a less useful model for HR, since all of our objectives are in learning & growth we don’t have the benefits of balance or of flow.  Representing the business strategy map as the organisation strategy map gives HR these benefits, i.e HR can now track the flow between the objectives within these four perspectives, and set lead indicators for inputs and activities and lag indicators for outcomes and business impacts.

Ie HR can now track the flow between the objectives within these four perspectives, and set lead indicators for inputs and activities and lag indicators for outcomes and business impacts.

The Strategic Importance of Agility

The high rate of change which has led to the new S curve and has triggered the shift in focus from competitive positioning to core competencies, and now core competencies to organisational capabilities, is having one further impact on the nature of competitive strategy.

This additional change is to the choice of organisational capabilities itself and it is to add the capability of agility to the small number of other capabilities that a business might want to use.  Of course, not all businesses will want or need an agility capability, but most will. And in a sense, it’s not really a capability at all but is simply an ability to develop new capabilities, or an approach to double loop learning – i.e its main benefit is the impact it has on other capabilities, rather than its direct contribution to the business.

There are also other ways to develop agility than to have capability in this.  It can be about more traditional individual capabilities (abilities in individual employees), leadership behaviours or business processes.  However, developing an organisational capability in agility is probably the easiest way to achieve a more agile business.

I think some recent research from I4CP reinforces this point.  They suggest that agility is largely dependent on a culture which is strongly based on the organisation’s values, and that the most beneficial values are innovation, transparency, creativity, diversity and collaboration, i.e, once again, success is about people and culture.

I particularly like Ed Lawler’s suggestions around developing an agility capability in his book ‘Built to Change’ including simple things like using role profiles rather than job descriptions – which can have a profound effect on the way an organisation runs.  There were also some decent ideas in the recent hackathon into HR and adaptability which was run by the CIPD and Gary Hamel’s MIX.

Then we come to the top of my arrow diagram with the most modern, most transformational and most sustainable form of competitive advantage - organisational capabilities.

This concept was first introduced by Igor Ansoff.  Whilst best known for his product-market, his contingency model also refers to firm level capabilities which includes organisational values, managerial competencies, organisational structure, processes and technology.    

So the idea basically relates to the value of an organisation’s people and culture, and although there may be some overlap with core competencies there is a clear bias towards the organisation value chain whereas core competencies focus much more on the business excellence value chain. 

More recently, most of the thinking around capabilities has take place in HR.

Dave Ulrich writes about things an organisation knows how to do well, suggesting that for any organisation to compete successfully in today’s market, it must focus on building not only from the outside but from the inside as well.  Some of his earliest common examples of capabilities include those on the slide.

The idea is that businesses can compete on any of these, or other, capabilities.  For example, take accountability.  Diageo competes mainly on an organisational capability of accountability.  Rather than asking people to agree to performance objectives or goals it asks people to make a performance promise, supported by a culture of commitment to deliver (“promises made, promises kept.”)  This has given it a much greater ability to develop a strategy and know it will be able to execute this that most other companies - providing a huge competitive advantage (although I’ve heard recently that the culture has become so strong that employees are becoming reluctant to promise anything substantial.)

Ulrich also stresses that the key need is to focus on two or three of these - if a business tries to do everything it won’t become exceptional in any of them. 

Business academics, consultants and commentators are increasingly interested in this form of competition too.  In particular, though he doesn’t use the term, Gary Hamel has clearly moved on from core competencies to focus on capabilities - see his book, the Future of Management, his site, the Management Innovation Exchange (MIX) and my earlier notes on the new S curve and the changing nature of engagement.

I’m also going to post shortly on McKinsey’s recent interest in this approach as well - so it’s no longer (if it ever was) just an HR idea.

And the reason that both business and HR people are increasingly interested in capabilities is the based on the same logic that Hamel and Prahalad used to support the move to core competencies - that things are just changing too quickly and that competitive positioning is no longer sustainable - that competitors will copy any differentiated position you can find.  Well this now applies to core competencies as well - competitors can also copy your businesses processes, technologies and intellectual capital e.g. with patent lifespans generally declining around the world.

But if you develop a differentiated set of organisational capabilities these are much more sustainable - we all know that no business can copy another’s culture even if it would ever make sense to try.

Just as with the Financial and Customer perspectives in the strategy map, there’s a value chain in the Operations perspective as well.  And just like the business and customer value chains, which focus on undertaking activities in order to create outcomes (financial results, customer loyalty), the operations value chain has a set of activities and a particular outcome.

The activities are about improving the way the business works, and in particular the quality, alignment and effectiveness of business processes.  It’s not about executing these - that’s part of the business value chain, it’s about improving them in advance of their execution.

The outcome is a fit for purpose business model, often described as achieving business excellence.

Good tools relating to this value chain are the Malcolm Baldridge (particularly the Operations focus) and EFQM Excellence Model (particularly the Processes perspective.)

Once again HR can contribute value to the business it works within by supporting improvements in the business excellence value chain, but its contribution is much greater when it focuses on its own value chain which I’ll describe next.

I’m going to go on to explain why I think HR can find the greatest possible benefit within its own value chain.  However there is value in working on the others, and particularly the customer value chain too.  Customers are the main basis (if not the very most important focus) for all companies and we can have a lot of impact by developing the capability of our Sales, Customer Service and Marketing colleagues and ensuring that all employees have a customer / marketing perspective.

We can also offer value to Marketing itself.  HR has always had a hard time within corporations because it is so different to the rest of business, focusing on people and relationships and the complexity which results from these.  Marketing also deal with people but these people are outside the system rather than on the inside like us, so they're impacted by the complexity of our organisations rather than being part of the complexity.  This is changing now however - particularly as a result of social media, the walls between customers and organisations are coming down and our Marketing colleagues are being increasingly immersed in the same sort of complexity which we have always had to deal with.  This means we can offer them our experience and advice around relationship management, qualitative and subjective measurement, personalisation of services, etc, etc.

There are also some key integration points where we can work together.  Probably the main opportunities are:

• The employee customer value chain - developing and aligning the attitudes and behaviours of employees to support customers.  It’s a bit old but I like the analysis and conclusions in Gallup’s Human Sigma study - that companies benefit from engaging customers and engaging employees but the greatest benefits come from engaging both, in an aligned way.
  

• Aligning the employer brand and customer brand, particularly in a B2C customers where many employees and candidates will also be customers.  There are interesting similarities and challenges in both customer and employer branding too - e.g. the use of social technology, the move from push to pull, and the idea that increasingly companies are losing control of their brands and are becoming customer, employee and candidate branded (see the United breaks guitars and many other similar case examples).
  

• Measuring the results of this effort.  I’ve already referenced the Net Promotor Score as one popular basis for measuring customer engagement and if this is going to be used by Marketing it makes perfect sense to use a similar measure of engagement within HR (whist recognising that concerns around the crude nature of NPS for customers are even greater and more significant when it comes to employees.)
  

Finally, as well as offering value to Marketing, and working together on these areas of integration, we can learn from our marketing colleagues, particularly around areas such as branding, segmentation, value propositions and messaging.

And we can learn from customers.  I don’t agree with Dave Ulrich’s Outside In perspective but I do agree that all HR people should find ways to go and talk to the relevant customers to help get ideas about how the workforce can be developed to provide value to them.

Don’t expect too much from this - I think most of the best ideas about supporting customers usually come from employees, particularly employees who work with customers, rather than the customers themselves, but it’s still an essential conversation to have.

If a business competes based on differentiated market positioning then it needs to focus on the customer perspective in the business strategy map, ie on the customer value chain.

Francis Buttle proposes this consists of customer portfolio analysis; customer intimacy; network development; value proposition development and managing the customer lifecycle.  Basically this is about attracting and retaining customers and building more business from their custom.

You can see why this is important through a profitability analysis – a business can increase profits by increasing prices (or reducing fixed and/or variable costs  - in blue), or by increasing turnover (i.e by shifting the calculation point – in green – over to the right.)  It can do this either by increasing the number of its customers, or by increasing loyalty and encouraging each customer to spend more.

This makes good sense given that Frederick Reichheld’s analysis suggests a 10% increase in customer retention can count for a 125% increase in customer value.

So as well as the products and services / financial value chain we also need to think about the customer value chain and to ensure that we're creating customer loyalty and retention as an outcome of this - also often expressed as relationship capital or brand capital etc.

Before I go on to explore core competencies it probably makes sense to finish my discussion on value chains.  As I explained, Porter’s value chain is a tool to describe the competitive basis for a business.  But it’s not the only value chain around.

The best evidence, or at least the best thinking, behind this is probably Kaplan and Norton’s strategy map, based on their business scorecard.  This suggests businesses benefit from setting objectives within their planning that relate to each of four perspectives – learning and growth, business processes, customer and financial.

Each of the four sections of Kaplan and Norton’s business strategy map is actually a value chain in its own right:

• The primary activities in Porter’s value chain provide the objectives in the financial perspective of K&N’s strategy map

• There is then a customer value chain which is all about creating loyalty and retention of customers (but not sales, which would go in the financial perspective)

• Which is followed by an operations or processes value chain which is all about creating business excellence

• Finally, there is the learning and growth value chain.
  

Learning and growth is all about HR.  In fact it’s interesting to look at Kaplan and Norton’s original Harvard Business Review article on the balanced business scorecard in which they mentioned people within learning and growth but all of their examples were about technology.  These days, even though technology is even more important now than it was then, most organisations using the business strategy map and / or scorecard simply title learning and growth as people.  It’s yet another indication of the move to a new S curve, or from competitive positioning to organisational capabilities, which I’ll be coming back to again shortly.

Each of these value chains focuses on undertaking activities to create outcomes.  For example Porter’s financial value chain focuses on making and selling products or services to create financial outcomes ie revenues and profits.  We’ll have a look at the other value chains over the next few articles.

Porter offers a couple of useful tools to develop competitive positioning – e.g the value chain which is pictured here for a traditional, manufacturing type of business (you know this one as well, right?)

Basically this value chain suggests that businesses  buy things in, transform them in some way, send them out and deliver a bit of services for customers.  All sectors and each organisation, to a greater or lesser degree, have their own value chains.  You should know what yours looks like!

All of these activities, the primary activities of the business, are how the business develops its margin and profitability, the key need being to align them around its differentiation or cost leadership position.  This is how it develops and retains its competitive advantage.

But there are also a couple of secondary, or support, activities which don’t play a direct role in creating margin or competitive advantage, but support the primary activities to do this.

And, as you’ll know or will have noticed, one of these is HR.  i.e in a business competing via competitive positioning, HR is a support function – by definition.  So a lot of the stuff which is discussed in HR conferences and publications is just gumph because HR can’t be strategic in this model.

I think a lot of what we’re really talking about when we use the word strategic is just being proactive,  i.e we can either be proactive – at the metaphorical table when the big business issues are discussed, so that we can immediately start working on doing what we need to do in HR to support the business.  Or, we can be reactive – staying behind our locked rooms at the end of the long corridor in the basement until the FD remembers to tell us what was decided three months ago.  Being proactive is obviously a good thing, but it’s not the same as being strategic.  And in the example I’ve given here, the focus of the business is all about the business = nobody wants any neat ideas from HR thank you very much, because it’s not one of the primary activities.

So it’s a big disadvantage for a business trying to use competitive positioning that they can’t use the potential benefits of competing on people, via HR.  And it’s means that HR becomes a bit of a back water because we are, by definition, a support function.

The good news is that the alternative forms of business strategy are increasingly becoming more popular and these offer greater opportunities to contribute strategically to the business, and therefore to make working in HR a more valued activity too…

I’m going to be spending quite a bit of time explaining organisation capabilities but I wanted to review competitive positioning and core competencies a bit more first.

So – competitive positioning.  This is all about what firms do with their products and services in the marketplace, and why customers buy them.  As you’ll all know (with everyone being so focused on the business these days) the core thinking comes from Michael Porter at Harvard and his concept of generic strategies – that businesses can only compete in two or three ways:

·      Through differentiation (or niche focus) – adding something unique to the product and/or service meaning that not everyone will want to buy it but that enough people will, and when they do they will be prepared to pay a premium price to get this unique feature that they value.  This means the firm gains more margin, becomes more profitable, grows faster and can eventually become a monopoly and life will be rosy.

·      By cost leadership – producing the same goods or services as everyone else but doing so more cheaply so that everytime they make a sale they make more margin and so they get the same benefits as above.

This business strategy is probably still the most popular in use today (though it probably shouldn’t be) and has been repromoted recently in Kim and Mauborgne book, Blue Ocean Strategy.  This basically promotes the same idea as Porter’s Competitive Positioning, brought up to date and in less academic language etc.  Basically it says don’t compete in the choppy, turbulent red ocean where everyone else is competing but go and find some nice, calm blue ocean where you don’t have competition – i.e differentiation.

Photo credit: Sanchezn

It's that need to find this sweet spot, and the difficulty in doing it, which today puts HR at the centre of business competitive advantage.

There are a number of ways of describing this change - one is to simply refer back to CEOs' favourite adage that people are our most important asset.  Yes - but that has to have consequences too.  If people are the most important asset then we need to build our business and our processes around these assets, not just use them as resources (hence our people centric approach.)  It means our HR processes are our most important business processes, and our HR function are most important business function too.

It's why I sometimes get irritated by our tendency to try to disguise what we do - to get Finance to head up our new performance management approach to ensure it's sponsored by the business or to refer to our key deliverable as a business programme not an HR initiative etc.  This may be a good short-term fix, but at some point we've got to address the fundamental problem that our businesses often don't see HR as important as it is.

We should be able to hold our heads up high, explain that something is HR, and have everyone understand that means it's important.  Until we get to this point we're always going to be on our back foot.