Thursday, January 03, 2013

There's too much confusion

… I can't get no relief

My goal seemed simple, in order to understand whether the strategies made sense then I needed to first map out the business landscape. Problem was, how do I do this? How do I map out an organisation and the competitive environment? What is an organisation anyway? How do organisations compete? How does this change?

No matter how much I read on the subject, more questions were raised. After six months of trying to find a known way of mapping a business landscape, I was now befuddled over the simplest terms. Everything was a mess, well certainly in my mind, everything was confusion.

I had to start untangling the mess by taking some very simple concepts and observations and building from there.

First, what is an organisation? An organisation consists of many things including sources of capital:-
  • financial e.g. money in the bank
  • physical e.g. buildings, stock, plant and equipment
  • human e.g. people, their skills, their networks
  • social e.g. goodwill, reputation, connections
  • knowledge e.g. information and capability

These sources of capital exist within that organisation for one purpose - to get stuff done - and it’s the act of getting stuff done (or not) which changes the reserves of capital that an organisation has i.e. we consume physical capital in the creation of things which we sell to others to increase our financial capital.

It’s the getting stuff done bit which helps distinguish groups of companies e.g. “We’re a building nuts & bolts company” vs “We’re a building light bulbs company”. We will call this the activities of the company as it represents what the company does.

Naturally, organisations don’t work in isolation and the output of one company’s activities maybe the inputs to another company’s activities. e.g. the nuts and bolts manufactured by one are inputs into the making of engines by another. 

Activities can also be broken down into discrete component activities (i.e. building a machine may requires components such as nuts and bolts, pipework etc) and the collection of components in effect creates a chain. We can therefore describe an organisation by these value chains, each consisting of many activities (things which are done) to create an output.

However, what we do isn’t enough to fully describe a company because you also need to consider the way in which we do it. For example, whilst the output of two companies manufacturing bolts maybe the same (e.g. a standard bolt) and the inputs of raw material may also be equivalent (e.g. metal ingots), the practices (i.e. the way) by which inputs (ingots) are converted to output (bolts) may vary. 

Hence our organisations consists of value chains which are built from activities and practices working in concert and it is the variation in these value chains which distinguishes one organisation from another (e.g. an insurance company from a pharmaceutical company). I've given a rough visual and highly simplistic summary of this in figure 1.

Figure 1 - Value Chain, Activities, Practices and Companies.

By examining organisations in context of their value chains, I now had a method of distinguishing companies and a way of examining competition in a very primitive sense. If two companies had the same value chains (e.g. their output was standardised bolts), then differences including operational efficiencies can be explored by examining the constituent activities of the value chain (the what is done) and the associated practices (how it is done). 

A company which had more efficient practices or used a specific activity may gain an operational or differential advantage over another when it came to the output e.g. a more consistent, reliable or standardised bolt. 

A historical example of this would be Maudslay’s screw cutting lathe in 1800. The lathe enabled production of more standardised and repeatable nuts and bolts which had previously been hand made for each other with interchangeable components being rare i.e. one nut fitted one bolt and no other.

The lathe allowed for new practices of mass manufacture (e.g. the Plymouth system of manufacturing which later became the Armory method) and hence whilst the output of two companies may have been nuts and bolts, those using screw cutting lathes and associated practices created them more reliably, more efficiently and in a more standardised and interchangeable manner.

Whether this was beneficial to end consumers of the nut and bolt is another question of competition, which I'll tackle later but it's enough to note that this made a difference.

But, that was in the 1800 and obviously industry has progressed since then. New activities and practices have appeared and become common. So whilst I had an early technique for examining a company and connections to the environment, it provided no concept of how the landscape was changing and what was beneficial. It was far from the map that I needed to determine whether any given strategy would work but it was at least a starting point.

What I now needed was a method of examining change.

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Part 3 of 200

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