Value Chain Analysis

Raw Materials (cotton, wool, silk)

Yarns (petrochemicals, natural fibers)

Fabrics (weaving, knitting, finishing)

Garments (Design, cutting, sewing, packaging)

Retail (branding, marketing, servicing)

20%

100%

30-100%

The Core Competency

The Core Competency

Companies are abandoning the logic of the core competency.

The world is changing and business is always at the forefront of change.

Focus is on ecosystem and customer engagement.

A race for your attention and mind.

Is the core competency dead?!?!

Companies are abandoning the logic of the core competency.

The world is changing and business is always at the forefront of change.

Focus is on ecosystem and customer engagement.

A race for your attention and mind.

Service and brand extensions are essential for engagement.

Is the core competency dead?!?!

Nike“You can't have a barrier or restriction to that core competency. If we constrain ourselves by a circle of competency, we'll do ourselves a disservice. You need a willingness to punch through it.”Lead Engineer at Nike

Nike+ products introduction to digital• Originally partnered with Phillips for MP3 player in 2003• “Why the f’n-f are you now in the MP3 business? Why are you

doing this? It's not your core business!” Steve Jobs to Mark Parker • Created more partnerships with developers.• Fuel band is successful and a natural brand and service extension

Is the core competency dead?!?!

Netflix and …. Create • Core competency was content delivery• Spent $100M on House of Cards (probably knew that had

something)• CEO denies stepping out of core competency

“There's no creative risk for Netflix, this is a business risk.. A slight risk” VP of Corporate Communications

Apple Design is core competency

• Came to dominated music industry• Phone Industry• Car Industry? ! Display Industry? !

Is the core competency dead?!?!

Is the core competency dead?!?!

“Competitive strategy is the about being different. It means deliberately choosing a different set of activities to deliver a unique of value”Michael Porter

“The determination of long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of the resource necessary for carrying out these goals.”Alfred Chandler

“a patter in a stream of decisions”Henry Mintzberg

“if you don’t have a strategy you will be part of somebody else’s strategy”- Alvin Toffler

Strategy

What is competitive advantage?

Firms gain advantage on 2 levels

Cost Leader – provides the lowest/lower cost options Differentiated – provides a better product a premium price

Do we want to compete with everyone?

Strategy

What is competitive advantage?

Firms gain advantage on 2 levels

Cost Leader – provides the lowest/lower cost options Differentiated – provides a better product a premium price

Do we want to compete with everyone?

Probably not

Strategy

Strategy

Target Scope Cost DifferentiationBroad (Industry Wide) Cost Leadership DifferentiationNarrow (Market Wide) Focus Strategy

(Low Cost)Focus Strategy(Differentiation)

It is difficult to start with an industry wide scope, you may get eaten alive if you are successful or purchased.

What can you do? • Get funding• Seek an acquisition

Cost Leadership Strategy

• Aiming to become lower cost producer• Compete on price with every other

industries and earn higher profits• Targets a broad market• Competitive advantage is focused on driving

costs down• Success means unchallenged position as

lowest cost provider – very beneficial when customers are price sensitive.

Strategy

Success Factors • Heavy Capital Investment• Design skills for efficient manufacturing or operational

design.• High levels of expertise and talent• Efficient distribution channels – cannot waste money on

building channels.

Risks• Other firms will lower costs in parallel• Price wars • Technological disruption • Sustaining leadership – other firms may focus on a valuable

segment and attack your strategy.

Cost Leadership

Differentiation Strategy

• Development of a product or service that officers unique value.

• Perceived as better and different than rivals• Value added allows premium pricing and better margins• Could be based on

• Marketing• Durability• After sales service and warranty• Overall quality • Additional Features

Strategy

Success Factors • Leading on research and design• Highly skilled and talented team• Strong selling and marketing with ability to communicated

perceived value• Brand image and reputation

Risks• Higher costs and less market• Customer may no longer need your product• Imitation by competitors and change in taste • Can become uncool • Rivals attack your most valuable segments with greater

differentiation.

Differentiation

Variable Costs Increase with each additional unit of consumption

Fixed CostCost is consistent and you’re a obligated to pay it no matter what.

Step-Fixed CostsIncreases with next capacity unit

Step-Variable CostsIncreases with utilization units

Determine our operating costsDetermine our upfront investmentDetermine our profit margin transactionDetermine our Break Even PointHow to long to make upfront costs back

Business Models

Determine our upfront investmentDetermine our operating costsDetermine our profit margin transactionDetermine our Break Even Point (operating costs/profit margin per transaction)Operating cash flow = (profit margin per unit x units) – operating costsHow to long to make upfront costs back (upfront costs/operating cash flow)

Business Models

Focus Strategy

• Focus on a narrow segment and within attempts to create either a cost or differentiation advantage

• Segments are better served with laser focus• Promotes high levels of loyalty and pride• Less bargaining power and scale but may be able to

pass on higher costs

Strategy

Success Factors • Lower investment• Benefit from specialization – easier to know everything

about a segment than an entire market or industry• Be succesful in one segment then replicate in another

market

Risks• Smaller market, limited opportunities for growth • Eggs in one basket – decline of your segment• Pigeon holed• Risk of copycat imitation

Focus

Forming Strategy1. What is our current situation?2. Where do we want to go from here?3. How are we going to get there?

What is the goal4. How to outcompete rivals5. How to manage the functions and talent in the

business6. How to improve financial and market performance7. How to respond to economic and market conditions

Strategy

• Google

• Apple

• Netflix

• Amazon

Competitive Advantage

Matchmaker Model (C2C)Traditionally consignment stores and real estate brokersEBay and ExpediaCollaborative consumption – sharing of under utilized resourcesProfit from buyers and sellers

Deposit Model (B2B or B2C)Ask for payments upfrontUpfront fee to use service

Subscription (B2B or B2C)Re-occuring subscription for anything and everythingThe new magazines and tv channels

Business Models

Standardize and Re-sell (B2B)Get upfront payments from business to develop a custom solutionDevelop solution and then customize slightly and re-sell with large scale

Scarcity (B2C)Limited production requires less capitalCreate false sense of value – but this is real value, because why? Use margins to fund capital investment

Business Models

Business Models