Anjan Thakor: Mastering the Five Secrets of Great Value Creators
By Anjan V. Thakor
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International Portfolio Investment
Why do some companies perform beyond expectations year after year while others start out strong but quickly fizzle? It depends on their ability to create long-term value. Value creation occurs on two levels:
(1) Organizational: What does it mean for your organization to be successful at creating value? (2) Personal: How do you create value? Today’s companies need better value creators, individuals who understand both the organizational process and the organizational dynamics that ensure continuing profits.
We are all concerned about creating tangible value. On a personal level, becoming a better value creator enables you to make more money and get promoted faster. Value creation also fulfills each of us as individuals, because so much of our lives is our work. On an organizational level, companies must create value for their shareholders in order to succeed. If you are not creating shareholder value, you either die as an organization, are acquired by another company, the CEO gets fired or employees are laid off.
In order for you or your organization to become a better value creator, you must know how to improve your performance in ways that create value. Basically, there are four fundamental ways for individuals and organizations to create value, and all compete with each other:
- Control: Using internal processes, such as cost control, risk management and manufacturing cycle time, to make the operation better, cheaper and surer.
- Collaborate: Sustaining the organization through its culture and people.
- Compete: Competing more effectively and creating sustained shareholder value through externally focused activities, such as mergers and acquisitions and customer-satisfaction improvement.
- Create: Using innovation, forward thinking and other strategies to build future value in the organization.
Though everyone seeks to create value, different functional units within an organization often work at cross-purposes because they have different perspectives about how value is created. These four ways of creating value are essentially competing with each other for scarce resources, so there is always creative tension within the organization.
For example, as you move toward becoming more collaborative and building a culture within a company, you tend to move resources away from competing well externally. As you move toward being more creative, you start to weaken the control processes and expose the organization to more risk. In every organization you face tradeoffs. Likewise, if you are a manager, you must weigh the benefits of allocating your time and effort to building the right interpersonal relationships and creating the right culture versus finding ways to beat the competition.
Rather than make realistic tradeoffs, however, people tend to gravitate to extreme positions based on their value-creation viewpoints. Thus, a lot of energy is wasted and a lot of value destroyed because people do not understand the inherent tensions in value creation and are constantly engaged in "civil warfare." This occurs not only because employees are self-interested but also because a person focusing on value creation in a particular quadrant often sees a person focusing on value creating in another quadrant as a destroyer of value. I like to call this "the enemy lives diagonally across."
The creative tension is there, but the steps you take to resolve it are guided by knowing what your strategy should be and the key value-driver for your organization. Having the right strategy is only the starting point, however. Your course of action also depends upon other factors, such as where your organization is in its development and where the market opportunities lie.
One company that has dealt well with creative tension is EMC, a data-storage equipment maker. The company’s CEO solicits ideas from customers about new products and deliberately cannibalizes existing ones. This is an example of "creative destruction," a growth-oriented strategy.
At Bank of America, following its merger with Nations Bank, both organizations have grown rapidly and now need stability to digest everything. So they have a deliberate strategy focused upon execution, minimizing risk and integrating employees - resolving its creative tension through the control and collaborative quadrants.
The Five Secrets of Great Value Creators
- Clearly understand what value means to you and your organization: If your company is a publicly traded organization, it is related to financial performance at the end of the day. Non-for-profit organizations have a much harder time defining value because they lack the "shareholder value culture" that lends clearly to what value means to for-profit firms. If you are an individual within the organization, you must understand how you create value through your job.
- Understand the competing ways to create value: Every organization and job involves tensions along the four dimensions of value creation: control, collaborate, compete and create. It is important to recognize these competing forces and work to resolve them.
- Know your organization and personal strategy: Strategy is a road map for how to create value. It determines how you will allocate resources. If you are an organization, it dictates where the people and dollars are going. If you are an individual, it dictates what you are going to do.
- Develop the appropriate measures of success. Every organization has its own expectation of what you have to do to be successful. At the personal level, if you are going to be a great value creator, you must have a personal measure of success that typically exceeds the organization’s expectations.
- Become a master of speed without sacrificing quality: First, you must have an intense task focus. Second, you must undertake a pretty complex portfolio of activities and concentrate on one activity until you reach a dead spot or stopping point, then switch quickly to another activity and so forth. The key to becoming a master of speed is to understand you cannot allow the complexity of the portfolio to affect your focus on any given project.
Becoming a Better Value Creator by Anjan V. Thakor is part of the University of Michigan Business School Management Series.
Questions? Contact researchsupport@umich.edu or call 734-764-5278.