What Management Is

Book Author - Joan Magretta and Nan Stone

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Why People Work Together and How contd...
At one level, the value provided by OnTimeAuditor.com can be measured in terms of the total value of such refunds obtained by the customer. This will depend on the number of packages the customer ships. Clearly, the value of the same service will be different for different customers. This value can computed in money terms.

However, the service also creates value in ways that are not always easily quantifiable, e.g., by improving customer relations. Thus, in addition to the tangibles, value also resides to a great extent in intangibles. And it is the customer who defines this value. Firms have taken the customer’s perspective of value creation into consideration only recently. Historically, value has been defined in terms of what the business made.

To increase value, firms looked to improving manufacturing efficiency. During the first half of the twentieth century, their religion was scientific management, and their prophet, Frederick Winslow Taylor.

While this single -minded focus on manufacturing efficiency was reasonable at a time when goods were scarce, it became increasingly inappropriate in the latter half of the twentieth century - when consumers had a large number of products to choose from (especially in the United States). It was left to Peter Drucker to recognize this change and redefine value. According to him, customers don't buy products, they buy the satisfaction of particular needs. To understand value, Drucker said, don't look inwards at what you produce, look at value through the customers' eyes. This perspective became known as the marketing mindset, as opposed to the earlier manufacturing mindset that focussed on efficiency.

By the 1970s, shareholders, the real owners of businesses, had become dissatisfied with the way many companies were being managed. They felt that managers were more concerned with empire building and maintaining lavish lifestyles, than looking after the interests of shareholders. This resulted in tussles for corporate control between owners and managements, and many managers found themselves booted out. Ultimately, managements were forced to become more responsive to the interests of the owners, and realize the importance of providing value to shareholders as well as customers.

How is value created in an organization? In 1980, Michael Porter, in his book Competitive Strategy, introduced the concept of the value chain , where the activities and information exchanges that a company and its supplier perform to produce, market and support its products incrementally add value for the customer.

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