Necessary but not sufficient: Control and value creation

Posted September 10th, 2017 by russfrazierwp and filed in Business and Economy
Comments Off on Necessary but not sufficient: Control and value creation

One of the most common errors in reasoning that managers in business make is that if they are in control of their business processes, then they are creating value.

If I control my business processes, I will create value.
I am controlling my business processes.
Therefore, I am creating value.

After all, it is arguably true that in order to create any sort of lasting or meaningful value, the organization must deliberately take in inputs and convert them somehow to create value.

However, merely controlling the processes may be insufficient if the business model is unworkable. For example, not being able to charge a high enough price for the product or service. Businesses will continue on, carrying out their carefully laid out plans right up to zero net income.

Workplace people

Workplace people

A situation like that becomes even more precarious if the business is small because they often just have the one model and limited resources to deal with changes such as a cash flow crisis. A larger business with several reasonably decoupled projects can cut a failed project before it causes further losses and reassign personnel and possibly capital.

It is often only by force of economic reality that the organization takes corrective action. Then, because of the business’s debt or equity structure (i.e. leverage, investors) the action is catastrophic, resulting in personnel terminations, loss of capital or very unsound decisions.

Part of the problem has to do with the desire for managers to maintain control on a personal level. The need for control overrides the rationale for focusing on creating value.

When people become so focused on the challenges of control, whether it be the technical minutia of software development, the complexities of raising adequate funds for continuation or dealing with people, they lose track of the fundamental determining fact of profitability contained in, or insufficiently represented in, the business model.

As an exacerbating effect on this tendency, I offer you fad organizational structures that increase the silo effect between departments and reduce transparency and communication between key decision makers.

Sunken ship

Sunken ship

When this happens business managers put their energies into control, and not into value creation. The result is animated and engaged managers busy with the current crisis while the organization sinks further into trouble.

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