BUILDING UP VALUE 67
‘I come from an environment where if you see a snake, you kill it. At General Motors, if you
see a snake, the first thing you do is hire a consultant on snakes.’
H. ROSS PEROT
Building up value
At this point, take another break from writing. Sit back for a moment. Think about the
flow of activities that converts an idea into a product or service and then deliver it to a
customer. This might involve purchasing, delivery of raw materials, manufacturing, mar-
keting, sales, delivery, after-sales support and much more.
Figure 4.2 shows a simple example of the activities and costs associated with produc-
ing an electronic assembly, such as a programmable controller for an industrial machine.
Think of it as part of a computer. The total cost in this case is 1000 dollars or yen, or what-
ever you like. The height of each step (repeated on the right) indicates the value that
activity contributes to total output.
For want of a better name I call this a value ladder because if you start at the bottom,
you can see clearly how you are adding value as you build your product. We will carry the
ladder around with us because it has many uses. Right now we are looking at costs. Later
we will bring in selling prices and profits.
This example shows the big rungs only. In practice, you can divide each step into much
more detail, highlighting your activities and costs even more precisely. Don’t forget to
include taxes – included here within administrative costs.
It is well worthwhile sketching a value ladder for your business. Identify in as much
detail as you can the sequence of activities that you undertake as you add value to what
begins as a concept and ends up as money in the bank. Try to cost each activity as accu-
rately as possible.
A quick warning
If your plan is being written to raise additional finance, you must take great care
when presenting historical financial data. Your readers will probably consider this to
be one of the most important sections of the plan. Many investors will look first at
the balance sheet. They want to see if you have:
tangible value (assets with a genuine net worth);
a solid core business;
a reasonable financial situation.
This is covered in the chapters of this book that discuss your financials.
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68 CHAPTER 4 KNOW YOURSELF
You do not have to include the sketch in your business plan, although it is a useful
illustration and it shows that you understand your processes. Right now, you can use it to
focus your thinking on the activities that are critical to delivering your goods and services.
We will keep coming back to it during the planning process.
BUT IS IT CORRECT?
By the way, having made the effort to draw a value ladder, do not sit back and accept it.
Look for alternative steps. An obvious example would be where you buy things to make
intermediate components that in turn are part of the final product. Should you instead
make the things that you are buying – or go in the other direction and have someone else
build the intermediate components for you?
d -
-
-
1000
Admin
Marketing
& sales
Main-
tenance
Imple-
mentation
Delivery
Plant
Com-
ponents
Shipping
Design
150
100
75
75
75
100
275
50
100
R&D
Inward
logistics
Purch-
asing
Manu-
facturing
Outward
logistics
Instal-
lation
After
sales
Marketing
& sales
Admin-
istration
Total
Figure 4.2 A sample value ladder
The value ladder helps you identify your key activities, your optimal
organisation structure and your core competencies (discussed later in
this chapter, see page 78). It also helps you assess which activities can be
outsourced, whether you are giving customers what they want, whether you are
efficient and competitive – also known as benchmarking – and where you have
competitive advantages (see Chapter 5).
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BUILDING UP VALUE 69
Within each step, consider whether there are other approaches – for example, do
you want to buy or lease delivery vehicles, or maybe totally outsource physical distribu-
tion? Benchmarking – learning from the best – is touched on in Chapter 5. It is a useful
approach to reviewing and building a strong value ladder.
THE VALUE LADDER AND YOUR ORGANISATION
When you are reasonably happy with your value ladder, you can use it to check your
organisation chart. Do the functional areas correspond to the key steps in your business
activities?
Figure 4.3 shows a simple functional organisation structure that is found frequently
around the world. There are four operating divisions that have line-management respon-
sibilities. The other two divisions shown, quality and administration, are a bit special. They
have influence over the whole business but usually no direct power. Quality management
is shown out to one side to emphasise this company’s commitment to high standards.
Chief
Executive
Quality
R&D oductionPr
Customer
Service
Marketing
and Sales
Administration
Figure 4.3 A simple organisation chart
Vested interests
Always watch out for vested interests and empire building. Your lawyer is not going
to propose dispensing with his or her services and outsourcing all legal matters to
a big law firm. Your head of manufacturing is unlikely to suggest spending more
time with his or her family while you sub-contract production. The same applies all
the way through your business. You have to take a hard look at all your activities
– including those that you already outsource – and ask whether any (or perhaps
which ones) are being championed by vested interests (including your own).
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