Some organisations are healthier and more sustainably successful than others. What is it that causes this difference? The answer is rather simple.
By Paul Verdin
ELP co-founders Paul Verdin and Nick Van Heck and their colleagues at INSEAD, KU Leuven and Solvay Business School did a lot of research on this question. They discovered that more successful organisations all have in common that they are capable of finding and restoring the virtuous circle between value creation and value capturing. A majority of organisations is not capable of keeping value creation and value capturing in the virtuous circle required for the ongoing and satisfactory serving of customers and for the ongoing financial health required for continuation and renewal of the business.
Living in paradise
This finding is best illustrated by looking at the Value Creation/ Value Capturing Framework (VC2) below, which visualises the virtuous circle between value creation and value capturing:
A truly successful organisation continuously operates in the top right of this framework. The company balances its strategising processes, operating model and operating culture in such a way that customers, stakeholders and society perceive the value creation by the company at the highest levels and shareholders and employees are very satisfied with the value captured.
Our research indicates that there is a ‘law of gravity’ at work in all organisations and that the more successful ones anticipate and react more timely and better than others to this tendency to ‘fall from paradise’.
Starting to dream
Organisations tend to stick to old patterns of success too long, wrongly thinking they ‘own’ success, they are ‘the masters of their universe’ or simply are afraid of changing the way of doing things. This inevitably leads to underperformance, often satisfactory underperformance, because for a while the value capturing may be holding up at satisfactory levels. In our framework we label this the ‘dream’ situation: the organisation lives in an illusion that things still go well, but in reality the capacity to create relevant value for customers has been eroding dramatically.
Moving to 'hell'
If and when the decline in the bottom right is deep and long enough, the organisation moves to ‘hell’, experiencing bad financial results in a situation where value creation for customers is at low levels (compared with alternatives in the market). There is an urgent need to improve value creation and there is an urgent need to improve financial results.
Most of the times organisations in this quadrant only manage to move along the value capturing axes (through restructuring, dramatic cost cutting and lay offs, consolidation projects) and by doing so trying to postpone the inevitable: the need to change and improve the way they create value. Often this results in a horizontal game of just shrinking the company.
What is next?
Even if they truly create value for customers, a lot of companies don’t manage to monetise on the value they create. This can be caused by the fact that they’re developing services for the nearby or far future, which will make current short term solutions obsolete. It can be caused by having these services too early or too late or by not being capable of connecting the right business model, operating model or operating culture to balance the value capturing capabilities with the value creation capabilities.
Healthy organisations that manage to stay successful over longer periods of time are those that constantly, vigorously and energetically ask themselves the most fundamental leadership question: what is next? It’s the only way to be able to constantly adapt to the changes of these complex times. It’s what makes the difference between a sustainably successful company and an obsolete one. That makes ‘what is next?’ an important question you should keep in mind too. It’s the only way to avoid ending up in ‘hell’.