Marketing Concept - The St. Gallen Management Approach

1.2 Value-creation processes, enterprises and management
1.2.1 Value-creation chains and processes

Generating benefit is the objective of every human effort. Benefit can be defined as “a good’s ability to satisfy a specific need of the consumer” (Suchanek, Lin-Hi & Piekenbrock, 2015). For example, one chops wood and lights a fire to satisfy the need for warmth. The economic value of an object is defined by the benefit expected to be obtained from it. Thus, “value” is defined as “the expression of a product’s importance for satisfying the subjective needs” (Suchanek, Lin-Hi & Piekenbrock, 2015). If someone chops more wood than he actually needs for his fire and makes a woodpile, he creates economic value. He can use the wood later for cooking or heating, or sell it.

[21] More complex products or services require more processing stages. Chocolate products, for example, require the production of cocoa, transport to a processing country, roasting/melting/conching as the actual chocolate production, finishing in the sense of converting it into the final shape (i.e. bar of chocolate), packaging, transport and sale. Those procedures are called the value-creation chain (or process) (cf. Gutenberg, 1971, 21 et seq., or Porter, 1986, 61 et seq.). Every element of a value-creation chain can be subdivided into individual sub-activities (e.g. in the case of cocoa production, soil cultivation, planting cocoa trees, harvesting). The earliest stage of a value-creation chain is defined by technical conditions: what can be done with the same technology (operation or machine) (e.g. fertilization or harvesting).

Fig. 1: Example of a value-creation chain

(source: own illustration)

Value-creation processes must be performed based on a division of labor and often are spread out geographically because of the required resources or competencies/know-how/raw materials, etc. Cocoa production requires a tropical climate, chocolate production requires milk and machinery, and sales require customer contacts in attractive markets.

A value-creation process based on a division of labor must be organized (cf. Weick, 1979: organization as a process of continuous organizing). It is necessary to bring together a system of enterprises and organizations, i.e. a “set of ordered elements with characteristics linked by relations” (Suchanek, Lin-Hi & Piekenbrock, 2015) (e.g. various cocoa producers, milk producers, means of transport, etc.), to perform a value-creation process.

[22] Fig. 2: Enterprise systems, value-creation networks, value-creation chains

(source: own illustration)

A value-creation system can be understood as those enterprises, organizations and entities with which the enterprise has a direct (e.g. supplier or customer) or indirect (e.g. knowledge exchange) relationship. Today, the term “ecosystems” is also used in various contexts. According to Moore’s original definition of a business ecosystem, participating organizations jointly develop new capabilities by working together both cooperatively and competitively to satisfy customer needs, develop new products and shape innovation (Moore, 1993, 76).

Business ecosystems are critical to the competitiveness of an enterprise. If an enterprise operates in direct and indirect contact with excellent suppliers, consultants, competent authorities, etc., it can continue to develop in an optimal manner (e.g. through better information, which allows approval procedures to be implemented quickly), and it can deliver better quality less expensively (e.g. through efficient suppliers or distribution partners with good know-how about the needs of customers).

[23] Management as the reflexive design of value creation (cf. Rüegg-Stürm, & Grand, 2015) has the task:

– to design productive relationships in the business ecosystem (e.g. through cooperation),

– to design concrete value-creation processes in the form of value-creation chains based on the division of labor.

There are interfaces, frequently technical transitions, between the individual value-creation stages within the value-creation chain. For example, different machines are necessary for chocolate production and packaging. Different people or organizations (e.g. suppliers) perform these activities — leading to the rise of transaction interfaces that incur costs. Transaction costs can be defined as costs that arise from using the market (cf. Williamson & Masten, 1995, 233 et seq.), concrete costs for the search for partners and the negotiation, conclusion and monitoring of contracts (cf. also Section 2.2.1).

How a value-creation chain is divided between organizations and how extensive the value creation of an enterprise is, or how much of the value-creation chain is covered, depends mostly on the relationship between transaction and organization costs (cf. Crew, 1975; Coase, 1937: Theory of the Firm). A Swiss chocolate producer could lower transaction costs if it also owned plantations, but organization costs, such as costs for managing and controlling business units with different production logic overseas, would increase.

Fig. 3: Value-creation chain, transaction interfaces and enterprise

(source: own illustration)

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1.2.2 Organizations, enterprises and management

Organizations as uniformly managed, legally independent units do not only exist in the economy, but also in administration (e.g. autonomous federal institutions), religion (parishes), politics (e.g. countries) or in socio-cultural areas (associations and clubs).

Organizations can also be represented as systems. Elements are individual persons (e.g. technical experts) and, at the next level, departments (finance, marketing) that must be integrated into the service processes. Modern organizations consistently align their organization with processes such as service processes (e.g. in an administration granting building permits) or customer processes (e.g. advising customers in asset matters) (cf. Osterloh & Frost, 1996). Enterprises can be defined accordingly as purpose-oriented, productive, social systems (cf. Ulrich, 1968).

As mentioned before, organizations and enterprises, but also entire value-creation chains, must be organized, meaning deliberately shaped. This is included in the general term “managing”. The traditional notion of “managing” is expressed in the management cycle defined by Fayol.

Fig. 4: Management cycle according to Fayol

(source: Fayol, 1929, 34 et seq.)

[25] “Preview and planning” is, as an analysis and determination of objectives, the foundation for organization, management and coordination, which are then followed by monitoring. By incorporating the results of the monitoring into the analysis and setting of objectives, a cycle is created. In order to achieve objectives or to overcome the “gap” between the current situation and objectives, measures are taken whose effect is then monitored, which can lead to new objectives. Behind this idea of management is a mechanistic understanding, e.g.:

– that a clear picture exists of the initial analysis. However, data allows only an approximate understanding of social phenomena like market acceptance of an enterprise. A positivistic approach (the belief that everything can be measured objectively, cf. Spoun, 2011, 61 et seq.) does not do justice to the complex reality of social systems like enterprises. Therefore, the prevalent paradigm or basic model in social sciences is constructivism. According to this, there is no objective world; instead, people “construct” their own perceptions (for example, via prejudices and rumors) together with other people in a process of communication (cf. Eberle, 1984).

– that there are clear objectives. Often, there are different objectives among departments and stakeholders in an enterprise that must be continuously addressed. Also, one often cannot set definite objectives, because the future is uncertain and can only be defined on the basis of ongoing experience/market feedback.

– that measures can be enforced easily. Often, measures must be negotiated and cannot be dictated, even in hierarchies, requiring internal processes of convincing.

That is why, even in the first generation of the St. Gallen Management Model, management was described as design, steering and development of social systems (Ulrich & Krieg, 1972). The fourth generation understands management as reflexive design praxis (cf. Rüegg-Stürm & Grand, 2015). It is necessary in such a social system, for example, to reach common understandings, to agree on objectives and achieve buyin about the necessity of measures.

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1.2.3 Enterprise and environment

An enterprise exists in a specific environment. This includes the economic context (supplier relations, demand, markets), the social-political context (local culture, political interests, legal framework resulting from it) and the natural context (natural resources, location, etc.). In the St. Gallen Management Model, environment is understood as “an organization’s existence-relevant space of opportunities” (cf. Rüegg-Stürm & Grand, 2015, 86). An enterprise must develop its organization-specific resource configuration from this. In a biotech enterprise, for example, this includes access to a regional university and a relationship with a supplier network that facilitates access to new technologies.

Since the environment is constantly changing, e.g. customer needs or new technologies, management has to solve a twofold problem: On the one hand, it must create a certain added value as well and cheaply as possible, i.e. effectively and efficiently, which requires standardization and routine. On the other, it must constantly react to changes in the environment and remake itself, which requires differentiation, destabilization and the disruption of routines (“unlearning”). This often generates conflict: A statically efficient enterprise that makes the best chocolate today can be dynamically inefficient if it is rigidly organized and therefore unable to react to trends in a flexible manner.

Cash flows and profits are often generated in enterprises through the use of optimized, standardized processes (e.g. in the retail trade with classic distribution via chain stores). At the same time, in order to secure their market share, enterprises need to build up new, often disruptive business models based on information technology (e.g. with new online business models). It can often be that these new business models do not generate necessary profit margins and certainly no profits at first. Nevertheless, they require a great deal of management attention (organization of new value-creation processes) and highly qualified, expensive specialist personnel. As a result, enterprise management is often confronted with a conflict of objectives: On the one hand, “old” business models need to be optimized; on the other hand, new, partly disruptive approaches need to be tested (cf. Franz, Bieger & Herrmann, 2017). Organizations see themselves in a dilemma between the exploitation of old certainties and the exploration of new possibilities (March, 1991). The simultaneous mastery of the two opposing abilities is called organizational ambidexterity (Tushman & O’Reilly, 1996).

[27] Environment also includes stakeholders. An enterprise can survive only if it is legitimized and considered attractive by all stakeholders, so that they continue to support it. If, for example, investors lose faith in an enterprise and withdraw their money, the enterprise may fail or be sold to a new owner. Enterprises that damage employee trust have trouble recruiting on the job market and may even face a strike. Obviously, an enterprise without customers cannot generate revenues.

As previously mentioned, an enterprise is always subject to new challenges through changes in its different environmental spheres and from stakeholders. Legal circumstances, for example, can alter the resources of an enterprise if a change in zoning means properties it owns can be developed and thus become more valuable. A societal change in values can lower demand for products or even label them as ethically questionable — something that is the case today with alcohol and tobacco, which were widely accepted not long ago. Or the globalization of markets leads to new competitors and an enterprise has to reposition itself.

Thus, enterprise management constantly faces new challenges and has to communicate, reflect, convince, stabilize, intervene and make decisions in a stream of events. The resource configuration with/in the environment must be optimized, and legitimacy must be achieved with the stakeholders. In the example above, Läderach is confronted with the consolidation and concentration processes of the customer market and specialty retailers and thus faces increased pressure on margins. Necessary decisions about strategic focus and markets, products and methods of manufacturing follow from this. To make these adjustments, stakeholders such as investors and employees must be convinced.

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1.3 Embedding of business processes in the St. Gallen Management Model

Management models are developed to organize these complex relationships, present them neatly and provide all actors involved in enterprise decision-making an orientation framework. Basically, a model can be thought of as a simplified image of a complex reality (Gomez, 1981, 87; Schwaninger, 2009, 53). A management model realizes management processes systematically and lets management become a “criticizable and optimizable reality” (Rüegg-Stürm & Grand, 2013, 4). It presents a frame of reference for reflexivity and is a basis for mutual conceptual discussion, for example in management teams.

Every model shows only one aspect of reality from a specific perspective. A model is like a map that can only be appreciated through simplification and abstraction, which provides an overview. A hiking map has different elements than an aeronautical chart. In this sense, the St. Gallen Management Model is a formal orientation model with the main objective of providing enterprise decision-makers an orientation in their work, a “Leerstellengerüst für Sinnvolles” (cf. Ulrich & Krieg, 1972). It thus promotes a “process of collective expectation building and understanding of the current situation and possible future development perspectives” (Rüegg-Stürm & Grand, 2013, 7; cf. also Ulrich, 1968; on the St. Gallen Management Model, Bleicher, 1991, 302 et seq.; Rüegg-Stürm, 2003; Rüegg-Stürm & Grand, 2013; Ulrich, 1968; on business models, Bartak, Little, Manzano & Sheahan, 2012, 121).

The challenges in management are always changing, driven particularly by socio-economic developments like deregulation and the opening of markets, but also by technological developments that enable new forms of the division of labor. Today, enterprises are becoming ever larger and are being integrated into ever more and increasingly complex value-creation networks. Value-creation processes develop further into cross-company business models (cf. Section 6.2).

The St. Gallen Management Model (SGMM) has been continuously developed over four generations since the 1970s in order to account for changing requirements and areas of attention in management. While [29] the first generation of SGMM focused on business functions and tasks (production, sales, human resources, finance) and their coordination (cf. Fig. 5), the newer generations focus on processes, especially business processes (cf. Fig. 7). The focus has always been on enterprise value creation. This is not without context but embedded in different environments and supported by different stakeholders.

The introduction to the market-oriented management of enterprises and organizations follows a further development of the third generation of the SGMM (cf. Rüegg-Stürm & Grand, 2019). In the following, the main key categories, which essentially run through all generations of the SGMM, are presented.

Fig. 5: First generation of the St. Gallen Management Model

(source: Ulrich & Krieg, 1972)

1.3.1 Stakeholders

An enterprise (as a purposeful, productive social system, cf. Ulrich, 1968) can only exist if all of the relevant stakeholders cooperate. They form a primary orientation framework for management and were therefore depicted in the outer circle in several generations of the St. Gallen [30] Management Model (cf. Bleicher, 1994; Rüegg-Stürm, 2003). In the fourth generation, stakeholders are understood as “organization-relevant representatives of different environmental spheres or discourses” (cf. Rüegg-Stürm & Grand, 2014, 56).

In an enterprise like Läderach, important stakeholders are mainly employees, who often have a long-standing relationship with the enterprise and who are integral to its core competency, suppliers such as cocoa producers, and customers, which, under the original strategy means catering businesses and specialty retailers. In addition, enterprises depend on investors, like third-party shareholders or banks. For the construction of new manufacturing plants, they need governmental approval, which is why relationships with government, as well as the media and non-governmental organizations (NGOs) such as environmental groups are important. Other enterprises may play a role as competitors and/or cooperation partners. Coopetition describes a situation where an enterprise cooperates with another even though they compete in other markets at the same time (cf. Padula & Dagnino, 2007, 36 et seq.). For example, it would be coopetition if Läderach cooperated with a manufacturer of semi-finished products in the chocolate industry by jointly influencing governmental regulation through an industry organization, while at the same time competing with that enterprise in the customer market.

As an enterprise’s core group, management has the responsibility to ensure the enterprise’s cohesion or the cooperation of the different stakeholders and their continuing participation in the enterprise (cf. Fig. 6; cf. Ulrich, 1986; Rüegg-Stürm, 2009, 70). In return for their continued participation in the enterprise, management can offer stakeholders the opportunity to share in:

– value creation (for example, wages for employees, interest for investors, membership fees in NGOs, dividends for shareholders, taxes for government)

– image and reputation (for example, if an enterprise as a brand contributes to the appeal of a location) or

– continued development and exchange of expertise (for example, if a joint research center for the industry is run with a competitor).

[31] Fig. 6: Stakeholders of an enterprise

As previously mentioned, stakeholders have different levels of relevance, depending on the context. In a growth phase, employees or the human-resource market have priority; in a startup phase, it is rather the customer market.

1.3.2 Environment

In the fourth generation of the St. Gallen Management Model, “environment” is understood as the “the existence-relevant space of opportunities for an organization” (cf. Rüegg-Stürm & Grand, 2015). The natural environment, the social environment and the economic environment are classic environmental spheres (cf. Bleicher, 1994; cf. also the three dimensions of sustainability, i.a. in the Brundtland report, Hauff, 1987; Littig & Griessler, 2004). Important subsets of those environmental spheres can be differentiated; for example, the areas of politics and law as part of the social environment. Due to its rapid development and increasing importance, technology is today regarded as an independent environmental sphere.

An enterprise, or any organization, has to exploit relevant organization-specific configurations of resources from the environment as a space of opportunities and deduce business possibilities and potentials [32] from it (cf. Rüegg-Stürm & Grand, 2015; 2014, 42; Teece, Pisano & Shuen, 1997; Shane, 2003; Conner & Prahalad, 1996). In the natural environment, a hotel’s panoramic location can be a resource that creates potential to attract sightseeing tourists from overseas. In the technological environment, new IT technologies developed in cooperation with universities can enable new and more efficient service processes.

An environmental analysis (cf. also opportunities/risks analysis, Section 2.4) is generally geared to identifying potential but also risks (e.g. emergence of a new competitor) in the different environmental spheres. The environments have varying relevance, according to context and the enterprise’s problem or objective. Market-oriented management is concerned primarily with the economic environment, especially demand-driven markets and supplier markets.

Fig. 7: St. Gallen Management Model, latest development of the third generation, business perspective on organizational value creation

(source: Rüegg-Stürm & Grand, 2019)

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