In the new economy the resources prevalent in production have changed in substance and structure as information and knowledge have been identified as key resources in the production process. The recognition of these new resources has effectively fuelled the shift from an industrial to a new knowledge based, information orientated economy in the last century. Information and knowledge has also redefined the way business is done today and how an organisation will have to approach their internal and external environments in the new economy. The utilisation and management of these resources from these environments is therefore the key to achieving sustainable competitive advantage in this economy. An organisation’s information and knowledge landscape and the identification and understanding of the various components of that landscape offer new insights to traditional theories of an organisation’s activities and the strategies that direct it.
Strategy in the New Economy
In the new economy the determining feature of the environment is the prominence of an interconnected system of relationships that link the flows and usage of information and knowledge throughout an organisation and its collective stakeholders. The new perspective of this information and knowledge system demands a revision of the understanding of a business system itself, from a sequential series of linear activities to an awareness of the complexity of the circular, simultaneous interactions between, among and through the various factors of the system (Kinghorn, 2002:317).
The Loyalty Effect
Frederick Reichheld’s theory on the economics of loyalty offers insight to a revision by deconstructing the business system in relation to the central role of the customer in the creation and flow of value. The value offered to and derived from the customer through the system of relationships between the three specific groups of stakeholders within a business system – customers, employees and investors (Reichheld, 2001:33). In Reichheld’s paradigm of loyalty, customer value is calculated as the amount of value that can be derived from a customer’s relationship with the organisation and its extended value chain (delineated as employees and investors) and vice versa. The Loyalty Effect, illustrated in figure 1 below, is the dynamic force that generates additional, progressive value and growth through a system of relationships between the three stakeholder groups. In Reichheld’s (2001:20) later work he placed further emphasis on a fourth stakeholder group being partners. Partners include those relationships with external entities such as vendors, suppliers or complementary organisations which add value to the business’ proposition to the customer.
The dynamism of the cycle of growth depicted in figure 1 above arises from the interaction of the stakeholders in the business system. These interactions, beyond purely transactional incidents, indicate a system of relationships where investors, partners, employees and customers contribute value to the system itself. Each stakeholder has a series of contributions to make, but the determination of what contributions will drive the appropriate value in the system for all stakeholders concerned needs to be understood and defined. Different types of businesses will require different types of contribution from their stakeholders. By defining the right contributions, the right relationships can be defined and encouraged and thereby the right stakeholders sought and retained, in the sense that right indicates a measure of ideal value.
This model is an illustration of the convergence of the flows of information between their sources, and the revolving value of relationships in the business system. It is a deconstruction of the business system in the context of a set of stakeholders, information and the paradigm of loyalty economics. In reference to a traditional value chain analysis, the inclusion of the customer and the value of the information generated through its management and application shows how the value chain becomes bi-directional and a cyclical system. We call this the Virtuous Value Chain – and the linear model is depicted below.
Figure 3 is a systemic illustration of the business system. Its shows the information and knowledge links between the four key stakeholders namely: the organisation, customer, partner and employee. In certain circumstances those links maybe indirect or may not exist at all depending on the circumstance hence the checked link between some of the stakeholders. The links indicate bi-directional flows of information, which bind the respective relationships in dialogue, with examples of resultant manifestation of value from such relationships detailed with the direction of the flow.
The Systemic Model of the Virtuous Value Chain, also takes into account the links, demands and value flow of investors with the organisation, as well as the relationship of competitors with a organisation’s customers (which in application is repeated with the competitor’s business should that customer be promiscuous or defect).
The other factors included denote important external influences that need to be considered in maximising the tenure and flow of value between the stakeholders in the system. In the prevailing global conditions of the 21st Century, environmental, regulatory and community interests are critical factors affecting an organisation, regardless of industry or market.
In theory and practice, the model(s) aim to provide an organisation with a referential structure for the creation of a strategic platform to integrate and manage the various factors found in a business system and in practice provide indicators to develop a programme to enhance and entrench stakeholder interest in remaining vested in the organisation and its sustainable success. By remaining aware and flexible to changes to the flows and sources of value, structured stakeholder relationship orientated initiatives can become credible, measurable platforms of value creation.
The model of the Virtuous Value Chain is an illustration of a value driven business system, a platform created on the premise of relationships and the power of information, where loyalty between its constituents becomes a mutually beneficial requirement to maximise the promise of increasing returns. Through the practice of successful applications of loyalty-orientated programmes founded on information and the analysis and application of learning outcomes from such information, organisations are offered a key to understanding their environments and their relative position in the market through the eyes of their direct stakeholders and their extended value chain. In so doing, organisations are able to redefine the way they do business by knowing how to meet the changing demands and needs of their customers, securing business survival and growth in the future.