LeveragePoint Value Management Blog

A Value Model for BP

Kenneth Brill's recent commentary in Forbes, The Real Cause of BP's Oil Spill, frames an interesting economic trade-off of "mostly working" solutions versus "never failing" solutions. The gist of his argument as I understand it is: a) often the cost of "never failing" solution are not economically justifiable; and b) although BP came to this conclusion with its Deepwater Horizon oil rig, they in fact made a horribly wrong decision because they overlooked the true potential costs.

Had BP the benefit of building a value model, it may have avoided its ugly fate. Here is what the value model would have looked like. 

It's based on the cost impacts of dealing with the aftermath of the explosion as reported in the news media and includes the efforts to stop the leak, clean-up, liability and fines.  We've also included other costs relevant to BP’s business model such as the lost market capitalization and lost oil revenue.

Within the value chart, the large green bars demonstrate that "never failing" solutions provide a tremendous amount of value by avoiding billions of dollars of cost. The small blue sliver at the bottom shows the estimated cost of BP's Current Spill System, i.e., the "mostly working" blow-out preventer (estimated at $500,000 from what was gleaned from the news).  Some experts claim that an additional investment of $500,000 for a remote control shut-off valve would have prevented the initial explosion, but BP declined because of its cost justification criteria.

I cannot judge whether the remote control device can be considered "never failing" or even what the full cost of a "never failing" solution really is. Regardless, this value model clearly indicates nearly $32 billion worth of value to be had in considering such a solution.  Makers of remote control shut-off valves and other oil rig safety equipment should definitely take note of this.

Value models are therefore useful to frame these types of strategic decisions. Of course, one can challenge the specific cost calculations. Yet directionally, the value model supports an obvious conclusion that none can deny - BP's decision making has cost them dearly. Too bad for them (and many others) that they didn’t see it before.

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Note: this is the first of a series of value models to illustrate current business topics using the LeveragePoint for Value Management solution. For more information, visit us at:  www.leveragepoint.com

“Pricing Leadership: Navigating through Tumultuous Times” by John Hogan

John Hogan, management consultant, author, and LeveragePoint advisor, recently delivered a keynote at the Professional Pricing Society’s annual conference in Orlando in October. The talk on “Pricing Leadership: Navigating through Tumultuous Times” is available on SlideShare, where you can also find his speaker’s notes.

In this talk, John brings into focus the double challenge facing marketing and pricing experts in today’s economy, and by extension the challenges to sales leadership.

The first challenge is that in a recession, pricing becomes the key concern of marketing leadership – they are worried about price erosion and global price competition from within their supply chains.

The more profound challenge is that the nature of the pricing function is changing as new business models emerge: pricing is about much more than setting a price in a single-sided market – it involves monetizing the value net and mining the long tail of the market through sophisticated value management.

At the same time, the global economy itself is transforming. Globalization is accelerating even as certain markets are shifting back to local designs and supply chains; climate change is making sustainability and green-business strategies a real opportunity to add new types of value; innovation sometimes causes more rapid commoditization (cloud computing and virtualization are commoditizing large swathes of the IT industry). Even the relationship between cost and price is changing. Where people were once happy to set prices with a mark-up over their costs, they must now use pricing to proactively manage their costs, using a combination of offer construction and pricing to direct customers to offers that are the most profitable while maximizing the value to the customer.

John’s presentation is full of insights, and uncovers many of the business challenges that we will all face over the years - more and more of us will need to be working on monetizing our value networks and on mining long-tail opportunities. We look forward to your reactions and contributions to the discussion around these important themes. With LeveragePoint for Value Management, we are developing the tools and frameworks needed for product innovation, marketing, pricing and sales to act in concert to address the challenges of pricing in tumultuous times.

John Hogan, Ph.D.
Advisor
LeveragePoint Innovations

Value Footprints and the Eye of the Beholder

Value communication involves telling an economic WIFM (what’s-in-it-for-me) story to a customer about your product. To be more precise, telling multiple versions of that WIFM depending on the specific stakeholder, because economic value, like beauty, is truly in the eye of the beholder. In a business-to-business (B2B) context value depends upon an individual's functional responsibilities and key performance indicators. So for example, a typical operation manager focuses on labor efficiency and materials waste, whereas a marketing manager is fixated on increasing market share or average revenue per customer. The Value Footprint is a good way to map these different value perceptions.

As you may recall from earlier blog posts, Economic Value Estimation (or EVE) is a great technique for demonstrating the overall economic value that an offer delivers to a customer. Revisiting our earlier case example of a chemical company demonstrating the value of its new additive for a steel mini-mill producer, an EVE analysis showed that the mini-mill would gain $18 of additional economic value for each ton of steel produced. However, this value estimate is at an aggregate, company-level. Very relevant perhaps for a C-Level executive, but increasingly less relevant the deeper you go into the organization.

Figure 1: Mini-Mill Value Model

This figure, and the other images of Economic Value Estimation and Value Footprints (see below) were generated using LeveragePoint for Value Management.

Let's look at how this $18 per ton of value is distributed amongst five different functional stakeholders at the mini-mill customer: Marketing Manager, R&D Manager, Melt Shop Mgr, Finish Mill Mgr and Procurement. Here we use the Value Footprint; it shows the relationship of value drivers to functional stakeholders. So look how this overall value story shifts as we look at the EVE through a functional lense; for instance:

Figure 2: Mini-Mill Value Footprint

• Only the Marketing Manager is excited about the value driver called "enables entry into new market segments" because this is a revenue driver, and a relatively large one at that, worth $15 of value per ton.

• The R&D and Melt Shop Managers find value in the reduction in scrap rate, worth $5 per ton. However, the Melt Shop Manager would likely push back on the additional process steps that the new additive requires, also estimated at $5 per ton - so bottom-line it's a wash for this stakeholder.

• The Finish Mill Mgr however is delighted that he can reduces his labor costs by 50% down to $3 per ton, meaning that he can potentially be a strong advocate for the chemical additive.

• Finally, this analysis reveals no particular "hot button" value driver for the Procurement Manager. This shouldn't be much of a surprise, since this manager is typically evaluated by negotiating costs with vendors. In far too many cases, the procurement is focused on costs and not the overall value to the organization. Yet think how many sales people would go no further than the Procurement Manager's door!

The take-away is that even with a strong understanding of overall value creation, executing upon it (i.e., the ability to close the sale/justify the price) requires a bit of sales planning and value communication. Using a value footprint, the chemical additives sales person can take a more strategic approach to this mini mill account.

For instance, the salesperson may choose to first gain support of the Marketing, R&D and Finish Mill managers before responding to the objections of the Melt Shop manager. By validating and refining this model through value conversations with each functional stakeholder, she builds a solid WIFM story.  Once accepted by stakeholders, she is in a much stronger position to close the sale with the mini-mill's CEO as well as better equiped to defend the chemical additive's pricing with the Procurement Manager.  

Ed Arnold

Director of Products