Derek and Lisa take a high-level view of how organizations create value for their customers.
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Welcome to Essential Dynamics Podcast. I'm Derek Hudson. Essential Dynamics is a framework I've been working on to help people work through their trickiest opportunities and challenges. In the podcast, we test the concepts of essential dynamics through deep conversations with really interesting people. Today, I'm really happy to welcome back Lisa Scheinkopf.
Derek:She was on our last episode, and we talked about people and all kinds of cool things. And Lisa, we we didn't we ran out of time. I knew we would. But but I do wanna pick it up a little bit right from where we left off, because you said something at the end, which I'm I'm really fascinated by. I've been I've been seeing in organizations that I help.
Derek:I've I I think I'm getting better at explaining it, but I'd really like for you to help us think about maybe two things. One is that highest level value chain of how an organization delivers value to a customer. And then the second concept, which you dropped in there at the end, was and if you understand that, then you can understand what the critical constraint of an organization is. And I think you're gonna tell us, after you explain that, why it's very valuable to understand what your critical or core constraint is. So talk let's start with start with value chain if you can, Lisa.
Lisa:So I'll start very simply, and then you tell me where there are holes that you want me to Sure. From the from the highest level of simplicity, every organization is here to deliver something to to somebody outside of it. Right? Whether it's another company, whether it's a consumer, whatever. Whether it's a a government agency, you know, delivering a service to a certain group of cert of constituents.
Lisa:We're We're here to deliver something. Sometimes, it's something as a product. Sometimes, it's something as a service. Whatever we're delivering, though, whoever we're delivering it to is gonna do something with that. In order to be able to deliver that, we're organizations because it takes more than one person to create what it is we're delivering.
Lisa:Right? There's there's gonna be, at its simplest form, steps in a process. It might be a three step process, but there's steps in a process to go from, nope. I don't have what we're delivering yet to, yes, we have what we're delivering. Very often, it's more than a few steps, and there's, you know, conversion points where, you know, we're putting things together, whether it's multiple ideas together, whether it's lots of pages in a book, whether it's an airplane.
Lisa:We're delivering, you know, from Boeing to to Delta Airlines, if you will. But, but there's always a process. So the process starts with with something usually. It might be an idea or it might be some kind of material that we're buying from somebody or something that grows in the ground. And the end thing is whatever it is the customer's buying from us.
Lisa:Anything else about that? That's
Derek:So it is the highest level.
Lisa:Yes.
Derek:And, it is very simple, but we, human beings, have a tremendous capacity to make those things so complex.
Lisa:For sure.
Derek:When I ask about an organization, I usually get as part of, you know, the initial information that someone might share, an organization chart that has a president and vice presidents and directors and all the all the different, departments or divisions in a company.
Lisa:Yeah. Which describes who people report to, but it doesn't tell you anything about what they do or how they deliver value.
Derek:Doesn't tell you anything about how the people deliver value and then how the organization comes together Yeah. To deliver value.
Lisa:Yeah. Exactly.
Derek:And, so many times when I'm, talking with with leaders and they wanna change the way or improve the way value is delivered, their canvas is the organization chart.
Lisa:Yeah. Let's rearrange all the deck chairs and yeah.
Derek:So let's move it around, and this person is not gonna report to that person. They're gonna combine this group with that group. And and and the process isn't even identified or talked about. Mhmm. So, that's a practice that that I have, undertaken really firmly over the last, actually, couple of years since I've been in this, consulting practice again is let's figure out what the big steps are.
Derek:The big steps. Mhmm. And and I kind of look at it as
Lisa:starting with hopefully, starting with what is it that our customers are buying from us?
Derek:Right. Right. And and, if you do it right, going deeper to say, what is the customer really after? What's the need that this fulfills, not what's the spec sheet of what goes in the box? Yep.
Derek:And then on the other side, as I like to think about it with my more financial mind, there's some stuff you can buy, you know, sort of preassembled. Mhmm. And then there's the value that the organization adds.
Lisa:Mhmm.
Derek:And so if you can order the parts, then there's no value add to generally, there's no value add to ordering the parts. The customer can order the parts. The value add is in the creative efforts of the people in the organization to turn whatever inputs you can write checks for into something that the customer can't get unless you do your work. Mhmm. That that has implications for how you could do account with with, an objective of making good decisions, not necessarily, you know, reporting to the bank because the inputs are not where the value is added.
Derek:It's what the work of the people in the organization. So I think we're on the same page on that. And Yep. If if you were to describe an organization's value chain, typically, about how many boxes would there be in there, you know, in your in your little flowchart?
Lisa:So it depends on what level of detail you need to go to.
Derek:Mhmm.
Lisa:Right? I mean, the Wait.
Derek:At the high at the highest level.
Lisa:At the highest level, the the level of detail is called by the vastly different types of things that yours that your customers are buying from you.
Derek:Right. So if you have different product lines, then you have to you can't match them up.
Lisa:Of those product lines may look very similar. Right? Because depending on how a company decides to divide and conquer. But I'll I'll give you an example. You're, you're an auto dealer.
Lisa:Right? If you're an auto dealer, the flow of of that starts with receiving new I'll start with new vehicles. Right? The flow of receiving from receiving new vehicles to now, what are you gonna do with those new new vehicles in order to get them ready to be able to sell to customers? And there's always something that that you've gotta go through before you put them on the lot, and then and then ultimately, customers buy.
Lisa:Right? That's that's one flow that's relatively simple. There's another flow that says, okay. If you're an auto dealer, you're probably not only selling new cars, you're also probably selling used cars. And the level of complexity that goes from acquiring a used vehicle to the point in time where a customer is actually buying that from you.
Lisa:Everything that goes on in the background, most of us have not been exposed to. So it's, you know, whether whether you're getting it from trade in or you're going out somewhere to buy, whatever. But now it's gotta go through a whole bunch of service in order for it to really be able to be sold by you to a new customer. Mhmm. So that's another whole flow that looks different.
Lisa:There's the finance. There's the all the service that's going on. Right? So you take your v you might take your vehicle to the same dealer for your oil changes. If you get into a car crash, you might take it to the same dealer for bodywork.
Lisa:And and so, depending on how you wanna look at it, looking at it from the perspective of what are customers buying from us, where does that start for us, and how do we get it there? First, at as high a level as possible, and then sometimes you need to go to a little more detail. So so there can be a few.
Derek:There there there can be, layers, but my my concern
Lisa:one thing that limits the organization Okay. From having more and more customers buy more and more vehicles and, you know, vehicle we'll stick with the car dealer, more and more vehicles and service from them.
Derek:And that one thing Mhmm. Is is the constraint.
Lisa:Is what we would call the constraint. Yes.
Derek:And why is it important to I don't know. I'll use manage that, identify it, and then do something about it.
Lisa:So so I'll start within its simplest terms. Probably the way you first heard this whole thing described was thinking about and we talked about this last time. We're all really interconnected. Right? We have an organization because it doesn't take just one person to get it done.
Lisa:So if everything goes from we're getting something from the outside, ultimately delivering it to somebody from the outside, and there's processes involved, and there's people doing processes, then that means we're all somehow interconnected. If we're somehow interconnected, I could think about an organization like a chain or even a network of interlinked chains. In the moment I remember that I'm thinking about a chain, the moment is the moment I know that there's only one thing that will tell me how strong a chain is, and that it's weak that's its weakest link. So if I can understand what's the one thing that if only we had more of that, we would be able to deliver more value to more customers, then I have a real cornerstone for focus. Everything.
Lisa:Everything else is in relation to our ability to utilize that. Whether the constraint is the number of customers that are coming into my business or whether the constraint is, you know, I'm a machine in a manufacturing operation or a programmer in a software company, it write a certain set of skills. If I can understand what that critical thing is that's scarce from the perspective of of how much of it we need to fulfill more and more demand, then then it gives me a way to to really to really have focus for everybody to come together and be a team together.
Derek:Absolutely. So, couple things
Lisa:And I know what better not be wasted, and I know what's okay to spend a little bit more time. Right? Right?
Derek:So if there's that one critical component that if you had more, you would get more production out.
Lisa:Mhmm.
Derek:You don't wanna waste their time. Right. You don't want rework after they that you don't want them to do stuff that is ultimately not gonna flow through, and you want to not start more than they can handle. And And
Lisa:you wanna make sure that they always have enough work to work on.
Derek:And in the end, they don't run dry yet. So they're all all of that is right there. Now what's the relationship between that, you know, critical constraint and something else you said, which I think was where where in the process do we really add the customer value? What's the what's the most difficult or expensive or unique part of the process? And do those map to the constraint always, or should they?
Lisa:Oh, that's a loaded question that can take us hours to to deal with. So so there's usually, it will map there, especially if we're smart about it. Right? If we're still in business, then, I I've seen some businesses that have allowed something very inexpensive, easy to get, to be the hold up of the whole business, which has been kinda silly. And when they realize that, they're like, oh my goodness.
Lisa:So, ultimately, it it's likely to to map back around there. My mind has so many things right now that it wants to say, so I'm trying to slow down a bit, Lisa. So ask me a question, and I'll see if I I can Okay.
Derek:Well, let let me let me Where
Lisa:do you wanna lead me?
Derek:Let me let me put it back to you. So if you can arrange it so that the limiting part of your process is also the most valuable or the most expensive, or is the most I
Lisa:would say the most scarce, right?
Derek:Most scarce. Yeah. Then you can really decide how much of that the world needs, how much you can afford. Mhmm. And, at some point, you might even not expand your capacity, and let's let the market come to you.
Derek:Yes. So the other thing that suggests to me, and I did I did wanna talk about this before.
Lisa:At least at some moment in time. Right? Right. Most businesses that I know of do want to continue to grow, but yes, at least at some moments in time.
Derek:You you know, so you could, I mean, let's just say, like, let's say you're building a dental practice. Mhmm. Multi chair, multi dentist, dental practice. The dentist does the expensive part. Yes.
Derek:And, so you can decide how many dentists you want to employ. And when you want to employ one more, then you can ratchet everything up to that level. Mhmm. But you never want to employ a bunch of dentists that you don't have patients for, or you don't have chairs for, or you don't have equipment for.
Lisa:Right. That you you you just reminded me of a student that I had in my, so I also am an adjunct professor for Washington State University. And I had a student in my class last year, who who was actually working for, an acupuncture doctor. Okay. Yeah.
Lisa:Yeah. And and it was clear that the doctor was the constraint. Right? The doctor's capabilities were the constraints. And and there was you know, the question was, should they add another doctor?
Lisa:What would that be? But the first question I always ask, right, especially early on is, well, are we making the best use that we can of that doctor's time? And so, and most of the time, whatever it is, we're making horrible use of whatever the constraint is because we think more about adding other costs. Right? So so this young guy went back to this to this doctor with some ideas about, well, maybe we can have an assistant with you taking your notes so you could dictate the notes so you don't have to worry about that.
Lisa:Maybe there's you know, there were different ways that they were able to think about booking appointments so that it wasn't too because they also needed to think about how long are you making our patients wait in the waiting room and things like that. And and so, you know, lo and behold, that doctor was able to take on many more patients before he even got tired.
Derek:That's right.
Lisa:Oh. Yeah. Yeah. Yeah.
Derek:Yeah. I was I was a
Lisa:So when you know what the one thing really is, and to your point, when you know what the one thing kinda should be in your particular business, there's not a good reason to have the person making the appointments being the thing that dictates how many patients say a practice can hold, for example. It makes sense that it would be in the physician himself or herself or themself. We can become a lot smarter about about how we utilize these all of our resources, actually.
Derek:Absolutely. So I I did wanna bounce off to another topic, which is, I think, related, which I also see, organizations miss potential on, under optimized in a big way. And that is if you really understand customer value, understand your process, understand the most scarce constrained or expensive part of your process, and, and are working to optimize that, really satisfying the customer, is it possible that you are still not reaching your potential because you don't understand customer value enough to charge the customer for it? I see so many organizations that price based on cost plus some some kind of some kind of margin factor. The cost isn't really the cost Mhmm.
Derek:Because there's, you know, accounting conventions and allocations in there, and maybe funny money between divisions. And so there's some some, like, locking mechanism in people's brains that say that number which is made up is the cost. Therefore, we this is the price. Yep. And I think that if we understood customer value and we understood the cost of our constraint and what flowed through our constraint Mhmm.
Derek:That we would be able to, in a lot of cases, raise prices, but not hurt our customers because as we understand their value better, we would get them we would be better at giving them what they need.
Lisa:Yep.
Derek:And I'll give you a
Lisa:a case in point. One that we're all familiar with, whether whether or not they're doing a great job today is another question, but one that we're all familiar with is FedEx. They, you know, they started out delivery overnight guaranteed, and they also have their three day service, their seven day service, and you pay a different price based on whether you're getting it overnight versus whether you'll wait three days or you'll wait seven days. The cost for them to process that, there's no difference. Right.
Lisa:There really is no difference in their cost to process a three day versus a seven day versus an overnight. The difference is in what do we need and what's that value to us. Sometimes sometimes I really we took that. Well, Ellie Goldratt took that, and and we deployed it around the world, that concept. Mhmm.
Lisa:Helping a bunch of manufacturing companies and then expanding to other types of of businesses. That concept gets so good in your operation that you can produce something pretty darn fast and always reliably. Right? You know, you you give yourself a good internal lead time and always and always complete it on time. Now you've got your main business, which you still have your other normal competitors, and you charge the normal price, but you can and and the good ones would also guarantee on time delivery, which made it super more valuable than their competitors because with the competitors, chances are they'd be late.
Lisa:So now you're paying the same price with the same promise lead time, but, no, you know, you're always gonna get it on time. Amazing deal. And but you also have the capability now to offer shortened lead times without shortening the lead time in your factory, without adding more people, without incurring more costs. But if you've got customers who do need something much faster, they're willing to pay it because they have the real need.
Derek:Right. And and so the the need is not the specs in the box. It's the full experience, including when they receive it, and how how soon after they ordered it, they received it.
Lisa:Yes.
Derek:And so if you're going with a cost plus mentality, your numbers calculated up aren't gonna give you a different price.
Lisa:Mhmm.
Derek:But the customer is willing to pay. And I it's it's definite I mean, I really appreciate your example because it's easy to see. But I work with companies who are in, you know, a more interactive service environment where it's it's hard to pick the price anyway.
Lisa:Mhmm.
Derek:And and what I tell them is if you're just going cost plus, then that's cop out. You're not trying to understand customer value. Right. You could be hurting your customer. Yep.
Derek:Because they don't know there's a choice. You haven't given them any information as to whether they can buy a or b. And so they pay what you charge, and you you're then basing what you give them on your assumptions, not on what what they're telling you.
Lisa:Yeah.
Derek:Yeah. So I think there's, there's a lot to be to putting those, you know, concepts together, and, we're not we're not done yet. But what I, what I really do appreciate is you start at the top and you get clarity and then you move down as, as far as you need to. Is that, I guess, the way you described it?
Lisa:That's, that's a good way to put it. Yes.
Derek:So we're out of time again.
Lisa:I know.
Derek:So, we'll we'll have to scheme about some, even deeper topics next time, if that's okay.
Lisa:I would love it.
Derek:Last last time we picked this topic. Now I'm not I don't even know where to go from here. So I but I I really appreciate, the conversation today. I think I've learned some stuff that's gonna be helpful to me in explaining things and actually in in, understanding things and doing the work as well. So, Lisa, just remind us how people can get a hold of you.
Lisa:You can email me to lisa@genrada.com, or you could just go to generata.com and click on click on send me info or click on set up a call.
Derek:And if you if you're on generata.com, you should really check out the change matrix course because that's pretty cool. I took that. And for me, Essential Dynamics podcast is brought to you by Unconstrained, my consultancy that helps leaders work through their trickiest opportunities, and we're at getunconstrained.com. So if if, you're interested in what we're doing, then please reach out and contact us and and share that this podcast out. So thanks, Lisa, and thanks, Bryn, for your work.
Derek:I'm Derek Hudson, and please remember, consider your questions.