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What is a "Value Chain" first approach to company re-organization?

When I talk to companies about helping restructure their business, I often say we take a "value chain first" approach to restructuring.

What does a "value chain first" approach mean?

It means that we focus our efforts on safeguarding those steps within the company that create customer value first before doing anything else. These steps, when strung together, become the companies "value chain" and the foundation upon which the rest of the company’s organization stands.

Companies can have one value chain or multiple value chains depending on how many products or services it offers. In effect, the value chain is a company’s reason for being. Without it, companies wouldn’t have products or services and, by extension, wouldn’t have any customers.

As an example of how we would restructure a company, let’s look at Acme Widget Company, a manufacturer of quality widgets.

Value Chain Image

If we were to take a "value-chain first" approach, we would have a two phased approach to re-organizing the company:

In phase 1, we work with the company's front-line and operations team to identify those steps involved in creating the widgets that Acme sells to its customers. These steps would then be analyzed to see if they are ultimately value added or not. By “value added,” we mean something very specific: would a customer knowingly pay the cost, on a per unit basis, of having that step performed on Acme’s widgets?

If yes, then they are “value added” steps and are part of Acme’s value chain.

If no, then those steps are “non-value added” steps and are good candidates for removal.

There is also a third category of steps that this analysis uncovers: non-value added, but necessary steps.

Examples of these steps are usually owned by corporate HR, IT, legal or regulatory functions and are needed to operate a business in the United States or any other country in which Acme does business.

The analysis and work involved with right-sizing these functions around the value chain make up the second phase of a company reorganization.

We will tackle this second phase of the reorganization in our next blog post. Thanks for reading!

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