Value Profit Chain

With their Value Profit Chain model, James Heskett, Earl Sasser and Leonard Schlesinger argue that organizations need to focus on providing what their employees, customers, investors, suppliers, and others value most. Focusing on value will bring about necessary organizational change, and tying an organization to the most valued needs of its customers will make it more responsive to its markets. In addition, giving employees what they appreciate in an organization will make them more productive and decrease the costs of employee turnover. The authors conclude that a value approach will result in greater organizational effectiveness and profitability. The Value Profit Chain model acknowledges the importance of the behaviors of a company’s three key constituents:

  1. Customers or clients,
  2. Employees, and
  3. Investors.

The framework stresses the importance of the interrelationship of these three groups. Their behaviors can each be broken down into three areas:

  • Retention,
  • Related sales, and
  • Referrals.

1. Customers

Basically, we all want our customers to come back to us. This is a behavior that we refer to as retention. Retention can be measured by calculating the revenue associated with keeping customers. Not only do we want our customers to stay with us, but we also want them to buy more from us. We want a higher share of their wallet in terms of the things they purchase. The third behavior that companies look for, involves referrals. We want that customers feel so good about us, that they will go out and recommend our products or services to other people. Thus, getting customers to stay with a company (retention), buy more (related sales), and tell others (referrals) are crucial behaviors. These behaviors cause long-term profitability and growth for the company.

2. Employees

But profit and growth cannot be expected merely by focusing on our customers. We also need to take a look at our employees. It is crucial for companies to look at the same behaviors that they evaluate for their customers and see how to apply them to their employees. Obviously, we want to retain our really good employees; we want them to care about the company. We want them to behave as if they were owners. We also want more of their mental energy, something we call ‘share of mind’. And we want them to feel so good about working for our organization, that they will go out and tell their family and friends that this is a great place to work.

3. Investors

There is a mirror effect between the behavior that companies want to see in their customers and in their employees. We want to retain our employees just as we want to retain our customers; we want a large share of our employees’ energy just as we want a large share of our customers’ wallets; and we want our employees to refer us to others just as we want our customers to refer us to others. If a company does this well, then the three behaviors will be repeated by investors. If we achieve the desired behaviors from our customers and our employees, our investors will stay with us. They will make our equities or ownership a bigger share of their portfolio, and they’ll go out and tell their families and friends that this is a great place to invest.

Performance trinity

  • Leadership and management
  • Culture and values
  • Vision and strategy

The five value chain virtues

  1. Leverage
  2. Focus
  3. Fit
  4. Trust
  5. Adaptability

Origin of the Value Profit Chain

  • Heskett – Service Quality, 1986
  • Heskett, Sasser and Hart – Service Breakthroughs: Changing the Rules of the Game, 1991
  • Kotter and Heskett – Corporate Culture and Performance, 1992
  • HBR, Putting the Service Profit Chain to Work, 1994
  • Heskett, Sasser and Schlesinger -The Service Profit Chain, 1997
  • Heskett, Sasser and Schlesinger – The Value Profit Chain, 2003

Usage of the Value Profit Chain

The spectrum of firms which benefit from the Value Profit Chain model is wide. It includes small and large organizations, public and private organizations, and profit and non-profit organizations.

Strengths of the Value Profit Chain

  • The thinking behind the Value Profit Chain can help us to organize the confusing array of ideas for managers that are existing today.
  • It can provide a basis for benchmarking an organization against best practice on various dimensions of the chain.

Limitations of the Value Profit Chain

The concept is fairly straightforward on paper, but can be very challenging in practice.

Assumptions of the Value Profit Chain

  • Employee value causes the satisfaction, loyalty and productivity that produces customer value.
  • Satisfied, loyal, trusting and committed customers are the primary drive of company growth and profitability, and determinants of investor value.

The Value Profit Chain (book review)

James Heskett, Earl Sasser, and Leonard Schlesinger reveal powerful new evidence that paying close attention to the employee-customer relationship will enable any organization to be a low-cost provider and achieve superior results — proving that you can have it all, a goal thought inadvisable just a few short years ago. At the heart of this bold assertion is the authors’ indisputable conclusion supported by thirty-one years of groundbreaking research: today’s employee satisfaction, loyalty, and commitment strongly influences tomorrow’s customer satisfaction, loyalty, and commitment and ultimately the organization’s profit and growth – a quantifiable set of associations the authors call the value profit chain.

Serving employees well and knowing when to “fire” a customer will boost a firm’s bottom line, according to this team of Harvard Business School professors. The authors of The Service Profit Chain here stress the creation of lifetime customers and detail the complex relationship between employee satisfaction, customer retention and profitability. They use examples from firms including Federal Express, Southwest Airlines and Wal-Mart. The highly successful Southwest Airlines, for example, couldn’t deliver its much-envied 25-minute aircraft turnaround, from arrival to departure from the gate, without a dedicated, team-oriented staff that’s vested in the company. That’s why all Southwest employees with more than six months of service hold ownership stakes in the firm. Perhaps more important is how Southwest manages customers that must be “targeted, selected, and `trained’ in the unusual ways of the airline-no assigned seats, no meals, no connections with other airlines.” By turning high-maintenance customers away, the firm stays profitable. These anecdotes aside, the book is laden with b-school sentences, e.g., “The value concept is achieved with maximum benefit for customers, employees, partners, and investors through an operating strategy that seeks to leverage results over costs by means of such factors as organization, policies, processes, practices, measures, controls, and incentives.” With text like this and numerous charts and diagrams, the book will appeal mainly to academics and business professionals. However, there are a few nuggets that will appeal to a broader audience, like the fact that the greeters near the entrance to Wal-Mart stores were originally put there to reduce shoplifting.

Business frameworks like Value Profit Chain are invaluable to evaluating and analyzing various business problems. You can download business frameworks developed by management consultants and other business professionals at Flevy here.

Receive our FREE Strategy Development Deck

This is a discussion deck template for a corporate strategy development session. In this discussion, we go through a 2-prong approach to growth and evaluate the merits of various growth drivers. This same document is available for purchase on Flevy here.
 
Have you used Value Profit Chain in your work? Please share your experiences and insights in the comments section below.

, , , ,

© 2018, Marketing Mix Hub