Insights Blog

Differentiating Value in the Best and Worst Economic Conditions: Here’s How

By Premod Varghese and Elyse Matlin

Something critical for energy businesses, especially in the wake of the oil crash, is value differentiation. There is a great deal of pressure on the companies we work with to differentiate the value of the products and services they provide by either elevating quality or reducing costs. Yet too often, the conversations we hear on this important topic are theoretical or abstract.  Weathering the deepest downturn in decades will require a practical, no-nonsense approach to value generation that offers a competitive edge.

The simplest definition of the word value is relative worth or importance; differentiation is about contrast, or how something is distinct from something else. When businesses look at value differentiation, they tend to look at it in a couple of distinct ways. One way is to differentiate the value of their product or service in terms of quality, consistency, volume, speed to market, etc. Another is to look at purely financial metrics – leading or lagging indicators like return on total or invested capital, or profitability indicators like EBIT. Many companies use a variety of metrics to manage the strategic, operational, and financial risks.

However, all of these beg the question: How is value actually being generated?

The problem with focusing on differentiating the product itself – in this case, oil and gas – or focusing on measuring or monitoring value, is that it does not leave business leaders with a way to generate value in a sustainable way. That’s because these methods focus on the answer, and while we’re addicted to answers, value creation lives in the questions.

For instance, we worked with a senior executive of a multinational engineering firm who took on a region of the business that had been failing continuously for the past eight years. The firm was planning to shut down this part of the company if there wasn’t a turnaround in performance. When the executive took on the job and looked at numerous lagging indicators to get a sense of past performance, things did not look good. Although he did execute all the things a competent manager does such as restructuring the business to set up more efficient ways to deliver services, he first engaged his Management and Direct Reports in his commitment to building a hub of engineering excellence for that part of the world. Over the next two years, the organization saw an over 300% increase in revenue, going from eight straight years of losses to six years of 15% bottom-line year on year increases.

What’s the moral of the story here? Although this leader did address some of the “answers,” such as processes, structure, metrics, etc., his real focus was on creating a context that differentiated the value of the service that his organization provided to its customers. In essence, value differentiation is a context or a place to come from, a matter of leadership versus a sole focus on managing the delivery of products or services.

In the challenge of product value differentiation, we worked with the leadership of an energy plant that had been failing to deliver budgeted performance for several years. Production efficiency was in the 70-80th percentile, there were high levels of LTIs, and employee engagement was at an all-time low. When leadership discovered that the context for the people at their plant was “we’ll never get it right,” and “this is just business as usual,” they set about altering that context. They replaced it with a conversation about creating a sustainable future by providing fertilizer for people to grow produce for that region and for the world. When they got to see that they were working not just on some metrics, but on creating a sustainable future and enhancing people’s quality of life, the value they were contributing through their work completely altered.

That shift in context led to three consecutive years of 98th percentile production efficiency, no LTIs, and a 23% improvement in employee engagement. These metrics were all expressions of people being up to something bigger than themselves. Differentiating value is, in some ways, about calling forth the highest levels of performance and productivity in the people delivering a product or service; the metrics are simply indicators of that context or purpose being fulfilled.

If we can give up our addiction to having the answers for a moment, we can start to engage in the question of how to create a business, division, or team that continually generates value. At the end of the day, what enables value to be created, what creates that context, is conversation. The simple truth is, there’s no inherent worth or importance to anything, because value is relative. The source of that relativity is the interpretation or perception that people bring to the product or service.

We recently worked with an international energy business that had restructured, reduced costs, and increased efficiencies – yet still found itself dramatically underperforming financially. After a concerted, year-long effort to address alarmingly low levels of employee satisfaction through leadership development, the company was on track for delivering cost savings and benefits valued at $1.3 million. What had shifted within this company was the perception and approach that people brought to the table – and greater value was generated.

In and of themselves, value indicators like EBITDA, TRIF, ROTC, EVC, etc. are just numbers. What do they actually mean for the people who are engaged in and contributing to delivering value? Particularly when financial indicators show that value isn’t being met, leaders’ tendency is to stare harder at the scoreboard. Whether you’re a player or a fan, you know that staring at the scoreboard is not the way to make the score go up; it’s really easy to lose focus on the possibility of what you’re contributing to if all you’re looking at is the score. The only way to actually impact the score is to play the game, or put another way, to get your “eyes on the ball.” The ball, in the case of business, is the kind of conversation that you and your people generate. That conversation, that bigger context, is what really brings the “score” to life.

We’re not saying that you can’t have answers, ideas for technical solutions, etc. But are you willing to have those answers and solutions be a platform to ask questions to generate new possibilities? Can they be the start of a conversation, rather than the endpoint? Giving up knowing the answer, or even trying to find “the” answer, can be tough. The truth is, there really is no answer, because there’s nothing definitive about value. If you’re looking for more than just business as usual, or a better or different version of what you’ve seen before, you have to give up knowing what is possible and engage people in a conversation that allows something bigger to emerge. Whether in the best or worst of times, that is how to differentiate value, and ultimately generate step-changes in performance.

Elyse Maltin, PhD co-authored this article