Value Chain Models Version 2.1 (Last Updated - July 2010)

8/6/2019 Value Chain Models Version 2.1 (Last Updated - July 2010)

http://slidepdf.com/reader/full/value-chain-models-version-21-last-updated-july-2010 1/24

Industry and Competitor Analysis

of 24

Value Creationand Delivery

SequenceValue Chain

AnalysisCritical Success

Factors (CSF)

Skills and corecompetenciesBenchmarking

StrategicAlliances /

collaboration

The top management and the marketing function, in particular, start thinking about the marketing strategies

of their product(s) they intend to offer.



B u s i n e s s a n d C u s t o m e r Va l u e

PrefacePreface“Proving business and customer value” have always been a point of discussion among

scholars, business and technology students, and practicing managers. This topic is highlyregarded as the backbone of any business success; it is, therefore, included in diverse

range of subject modules in business and management studies e.g. Management

Information Systems, Marketing Management, Principles of Marketing, Customer

Relationship Management, Human Resource Management and Information Systems, etc.

While realizing the significance of the topic in today’s business world, the author made

an initial attempt to address some of its fundamental issues. These key notes and ideas are

compiled and edited from different resources. In addition, readers are also encouraged to

carry out their own research to facilitate their arguments.

Keywords:Keywords: The Value Delivery Process, Value Creation and Delivery Sequence,Importance of Competitor Analysis, Michael E. Porter’s Generic Value Chain,

Composite Value Chain, Critical Success Factors (CSF), Management InformationSystems (MIS), Benchmarking.

==============================================================================================

Sunday, August 01, 2010version 2.1

Compiled and edited by:S h a h n a w a z A d i lS h a h n a w a z A d i lAssistant Professor (Strategies & Management)Iqra University Gulshan Campus, Karachi.

of 24

Please note that your examination will include questions from thisliterature.



Initial idea: The task of any business is to deliver customer value at a profit.

Q. Why has it become more critical to the business

sustainability?1. Hypercompetitive economy;2. increasingly rational buyer; and3. abundant choices / assortment ( mean: variety with

competitive features )

What is Hypercompetition?What is Hypercompetition?

According to the new dogma (mean: view/belief/doctrine), rivalscan quickly copy any market position; and competitive

advantage is, at best, temporary.In any industries Hypercompetition is a self-inflicted wound, notthe inevitable outcome of a changing paradigm of competition.

Often a characteristic of new markets and industries,Hypercompetition occurs when technologies or (product and/orservice) offerings are so new that standards and rules are inrapid fluctuation, resulting in competitive advantages thatcannot be sustained.

In response, companies must constantly compete in price or

quality, or innovate in supply chain management, new valuecreation, or have enough financial capital to live longer than theircompetitors.

This phenomenon is described in Richard D'Aveni ’s book(pictured) of the same name.

of 24



The Value Delivery ProcessThe Value Delivery ProcessQ. What happens normally (i.e. Traditional View)?

The firm makes something and then sells it. In this view, Marketingtakes place in the second half of the process. The company knowswhat to make and the market will buy enough units to generate profits.

This view is acceptable when there are shortages of goods as well ascustomers are not fussy ( mean: choosy or selective ) about quality,features, or style.

You will agree that this traditional view of the business process will notwork in those economies where people face abundant choices. Itmeans that the “mass market” actually splinters into numerous micro-markets, each with its own wants, perceptions, preferences, andbuying criteria. The smart competitor must design and deliver offeringsfor well-defined target markets. This belief is the core of the new viewof business processes, which places Marketing at the beginning of theplanning.

Idea: Instead of emphasizing on making and selling, good companiessee themselves as part of the value delivery process.

Q. What should happen (i.e. Emergent View)? The business should adopt the following value creation and deliverysequence.

Value Creation and Delivery SequenceValue Creation and Delivery Sequence

The process consists of three phases:

Phase 1: Choosing the Value: represents the “homework”marketing must do BEFORE and product exists. The marketing staff must:

a. segment the market;b. select the appropriate market target; andc. develop the offering’s value positioning.

of 24

Dr. Richard D'Aveni Professor of Strategic Management at the Tuck School of Business at Dartmouth College, USA

(http://oracle-www.dartmouth.edu/dart/groucho/tuck_faculty_and_research.faculty_profile?p_id=A332QC)



Formula: “S egmentation, T argeting, and P ositioning (STP)” is theessence of Strategic Marketing.

Phase 2: Providing the Value: Once the business unit has chosen

the value, the second phase is providing the value. Marketing mustdetermine specific product features, prices, sourcing (making) anddistribution.

Phase 3: Communicating the Value: by utilizing the sales force,sales promotion, advertising and other communication tools toannounce and promote the product.

Idea: Each of these value phases has cost implications.

Q. What are the five Japanese concepts which as redefined this

emergent view of value creation and delivery sequence?

1. Zero Customer feedback time: Customer feedback should becollected continuously after purchase to learn how to improvethe product and its marketing.

2. Zero product improvement time: The company shouldevaluate its improvement ideas and introduced the most valuedand feasible improvements as soon as possible.

3. Zero purchasing time: The company should receive therequired parts and supplies continuously through Just-in-Time(JIT) or “zero inventory” arrangements with suppliers.

Idea: By lowering its inventories, the company can reduce its costs.

4. Zero setup time: The company should be able to manufactureany of its products as soon as they are ordered, without facinghigh setup time or costs.

5. Zero defects: The product should be of high quality and free of flaws.

Importance of Competitor AnalysisImp ortance of Competitor Analysis

In conducting and external analysis, one of the key areas for review isthe competition. Despite this, it often tends to be neglected orsubjected to less formal analysis than other elements of the market

of 24



appreciation. Following are the three major reasons due to whichcompanies usually condone ‘competitor analysis’:

Reason 1: Far too little emphasis has been given to competitoranalysis due to over-confidence about its importance;

Reason 2: confusion as to how to set about it; and/or

Reason 3: concern that such analysis might require companies to dosome thing unethical or illegal.

Following questions are usually suggested to ask:

1. Who is the competition now and who will it be in the future?2. What are the key competitor’s strategies, objectives, and goals?3. How important is a specific market to the competitors and are

they committed enough to continue to invest? 4. What unique strengths do the competitors have?5. Do they have any weaknesses that make them vulnerable?6. What changes are likely in the competitors’ future strategies?7. What are the implications of competitors’ strategies on the

market, industry and one’s own company?

Idea: A company may easily get answers of above questions by reviewing its competitors’ annual reports, own statements and financial analysts’ reports.

In the new competitive environment which emerged in the second half of the 20 th century, the Rediscovery of Marketing , the sources of competitive advantages which had characterized competition from thetime of the industrial revolution began to change. For instance, whiletechnological innovation in both process and product developmentremains a necessary condition for competitiveness, it is no longersufficient save in a few industries such as pharmaceuticals where it isstill possible to enforce intellectual property rights (IPR) .

Advantage based on technology is quickly eroded as firms benchmark their competitors and develop comparable products of their own. In

this climate, other sources of competitive advantage assume greaterimportance many of which depend on relationship with suppliers andcustomers and recognition of the fact that firms do not exist inisolation but are part of a network or a system represented by a Value Chain.

Q. What are the main key effects when a firm realizes theimportance of Value Chain?

of 24



Recognition of the existence of such a value chain focuses analysis onthe organizations that comprise them and the nature and strength of the relationships between them. In turn such analysis has led thefollowing attempts:

1. To establish and define critical success factors and the role of skills and competences as source of advantage.

2. To do so, benchmarking has become has both important andfashionable and

3. Led to recognition that success will often depend more oncollaboration than competition leading to the formation of

partnerships and strategic alliances .

Idea: It is these issues which lie at the heart of Competitor Analysis .

The Value Chain Analysis & CompetitiveAdvantage (CA)

Value chain analysis was developed first by McKinsey and Co. in thelate 1960s as a tool to evaluate competition based on the view thatbusiness is a system which links raw materials (supply) with customers(demand) and comprising six basic elements:

Raw materials Production Wholesale Distribution RetailDistribution Consumer or User After-sale service.

Idea: McKinsey termed it as Creative Marketing Strategy in 1960s.But it was Michael E. Porter (of Harvard Business School, USA) whofirmly established it as an important diagnostic technique to createmore value to the customers .

Porter (1985, p.33) states:The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs

and the existing and potential sources of differentiation. A firmgains CA by performing these strategically important activitiesmore cheaply and better than its competitors.

of 24



.

Key point to ponder:

Support activities work in parallel with all the five primary activities. On

the contrary, each primary activity takes place one after another.

Hence, the output of the first primary activity is the input for the

following next primary activity and so on. A firm can observe

competitive advantage (or margin) over its competitor(s) once both

secondary and primary activities possess a closed link and appropriatelevel of synchronization with each other.

For instance , suppose a senior manager from the Marketing function

(i.e. primary activity) leaves the organization at a critical point in time

during business growth ( due to any reason ); in this case the HR

function (i.e. support activity) should be capable enough to provide the

most suitable replacement as quickly as possible thus reducing the

setup time that could have been consumed in getting on the normal

routine procedures. The quicker the replacement is, the more chances

are to add values to the Marketing activities which, in turn, could lead

towards paying its contribution to gain competitive advantage.

of 24



Important: According to Porter (1985, p.36), “The most complete

descriptions of the business system concepts are Gluck (1980) and

Bauron (1981) . See also Bower (1973) ”.

1. Primary Activities Source: Porter (1985, p. 39 to 40)

1.1 INBOUND LOGISTICS: Activities associated with receiving, storing and disseminating inputs tothe product, such as material handling, warehousing, inventory control,vehicle scheduling and return to suppliers.

1.2 OPERATIONS:Activities associated with transforming inputs into the final productform, such as machining, packaging, assembly, equipmentmaintenance, testing, printing, and facility operations.

1.3 OUTBOUND LOGISTICS:Activities associated with collecting, storing and physically distributingthe product to buyers, such as finished goods, warehousing, materialhandling, delivery vehicle operation, order processing, and scheduling.

Key point to ponder: Buyers does not always mean customerand/or consumer. Resellers, distributors, and warehouseoperators, wholesalers etc. may constitute as buyers of anorganization.

Example 1: Approximately over 75% of steel (produced by a

steel mill) is bought by car manufacturing companies or car

assemblers. For instance, Toyota is one of the major buyers of a

steel firm. Toyota’s (manufacturing company) Corolla (product) is

made available to its showrooms (Toyota’s buyers, say Toyota

Eastern Motors, Karachi) for customers to purchase.

of 24

Car manufacturingcompanies

or car assemblers (a buyer of a steel mill)

A steelConsumer / Corporate

client

Car Showrooms(A buyer of a

car manufacturingcompany)

Pakistan Steel Mills(‘Steel’ as their finished

Toyota Indus Motors(‘Steel’ as the raw material tobe used in the manufacturingof Toyota Corolla 2009 model)

Toyota Eastern Motors You (as an individual) orICI Pakistan, KPMG buy Toyota Corolla 2009

models for their senior

Example:



Example 2: Boeing (manufacturing company 1) and Airbus

(manufacturing company 2) aircrafts (products) are purchasedby different airline companies (buyers of Boeing and Airbus) viz.Pakistan International (PIAC), American Airlines (AA), Lufthansa,Qatar Airways, British Airways (BA), KLM-Air France, etc. Nowyou, as a traveler or commuter, purchase a travel ticket fromairline companies.

1.4 MARKETING AND SALES:Activities associated with providing a means by which buyers canpurchase the product and inducing them to do so, such as advertising,promotion, sales force, quoting, channel selection, channel relations,

and pricing.

1.5 SERVICE:Activities associated with providing service to enhance or maintain thevalue of the product such as installation, repair, training, parts supply,and product adjustment.

2. Support Activities (specific to a given industry)Please refer Porter (1985, p. 41 to 61)

=======================================================================

Idea: As originally conceived the value chain is concerned primarilywith Value Creation and Value Delivery and some aspects of ValueImprovement. The Holistic Marketing Framework is designed toaddress three key management questions:

1. Value Exploration: How can a company identify new valueopportunities?

2. Value Creation: How can a company efficiently create morepromising new value offerings?

3. Value Delivery: How can a company use its capabilities andinfrastructure to deliver the new value offerings more efficiently?

Since 1985, a number of other influential contributions by writers haveelaborated further on value improving activities. These authorsinclude:

1. Hamel and Prahalad, 19942. Bartlett and Ghoshal, 1989

of 24



The additional insight proposed by these two authentic literatures andthen Senge’s (1990) work on Learning Organization led toNorman and Remirez (1993) to propose an expansion of theconcept of the value chain into one of value constellation ( mean:

collection or a group ). They conclude that

The ‘value constellation’ does not offer any breakthrough whichwarrants replacement of the value chain concept but it does lead them to the conclusion that the latter (i.e. the new model called Value Enhancement Activities ) is capable of further enrichment by taking into account those activities which involvethe entire organization for value improvement.

Value Enhancement Activities:Organizational entrepreneurship

Organizational learningCross-functional synergyCore competence buildingOrganizational creativity, innovation and imagination

Idea: Now we have the Composite Value Chain shown below:

Figure: Composite Value Chain ModelFigure: Composite Value Chain Model

of 24

•Organizationalentrepreneurship

• Organizationallearning

• Cross-functionalsynergy

• Corecompetencebuilding

• Organizationalcreativity,Value Enhancement Activities



Value Chain – an example

As discussed, Value Chain Analysis is a well known strategic concept which enables you toestablish how value is being added within a business. The whole enterprise is 'broken down' intokey 'Support' and 'Primary' activities which are then compared with competitive 'benchmarks'representing best practice.

Using the Value Chain example below, individual 'Support' and 'Primary Activities' can beconfigured for a company as appropriate. Using activity based cost analysis , the resourceconsumed by each value area in the production of a good or service is then determined.Deducting these monetary values, together with the cost of raw materials from the overall sellingprice gives an indication of the gross and net margins. The effect of changing the underlying data,for example increasing the cost of raw materials, or reducing production costs can then be seenon overall profitability. Comments about the competitiveness and colour coding can be added into highlight areas of strength and weakness.

of 24



of 24



Critical Success Factors (CSF)Critical Success Factors (CSF)Idea: There are few factors which are decisive for the success of thecompany, and that these factors can be ascertained .

It was first introduced by Daniel (1961) and later mainly elaborated byRockart (1979); Bullen and Rockart (1981) in the context of designing‘Management Information Systems (MIS)’.

The identification of the critical success factors was promoted by theobservation that many senior managers did not make use of formalMIS. In turn, this led to the conclusion that this was due to the fact thatthese systems were unnecessarily complex and should be structuredaround a smaller number of what they called critical successfactors .

… The limited number of areas in which satisfactorily results willensure successful competitive performance for the individual,department of organization. Critical success factors are the fewkey areas where “ things must go right ” for the business toflourish and for the managers’ goals to be attained.

Five sources of CSF:

1. The industry , e.g. demand characteristics, technologyemployed, product characteristics, and so on. These can alsoaffect all competitors within an industry, but their influence willvary according to the characteristics and sensitivity of individualindustry segments.

2. Competitive Strategy and Industry Position of the businessin question, which is determined by the history and thecompetitive positioning in the industry.

3. Environmental factors are the macro-economic influences thataffect all competitors within an industry, and over which thecompetitors have little, or no influence, e.g. demographics,economic and governmental legislative policies, and so on.

4. Temporal factors which are areas within a business causing atime limited distress to the implementation of a chosen strategy,e.g. lack of managerial expertise or skilled workers.

5. Managerial position that is the various functional managerialpositions in a business have each their generic set of SCF.

of 24



The above are the major factors which are often emphasized on thedevelopment of management information systems as only one of fourdifferent approaches to CSF, the others being:

1. As a unique characteristic of a company;

2. As a heuristic tool for managers to sharpen their thinking3. As a description of the major skills and resources required toperform successfully in a given market.

Based on these considerations, SCF can be defined as:

A skill or resource that a company can invest in, which, on themarket the company is operating on, explains a major part of theobservable differences in perceived value and/or costs.

BenchmarkingBenchmarking Traditionally, a benchmark was a survey mark or reference point usedto determine altitude. In a business context this has now come tomean as reference point for the measurement of quality or excellence.A firm benchmarks its competitors in order to gain a clearunderstanding which competitors possess some competitiveadvantage over the firm.

Benchmarking is all about organizational learning if it is carried out in asystematic and structured way. This is relatively same asenvironmental scanning, an activity most managers practice in aninformal and unstructured way on a continuing basis.

Four kinds of Benchmarking:

1. Internal Benchmarking using comparisons with successfulpractice within the organization

2. Competitive Benchmarking using comparisons with successfulpracticing firms with one is competing directly.

3. Functional Benchmarking using comparisons with firms in anyindustry which have developed particularly effective processesand / or procedures for given functions, e.g. order processing,inventory control.

4. Generic Benchmarking using comparisons with firms in anyindustry to try and understand how they have achieved superiorperformance.

Seven benefits of Benchmarking:

1. Improved understanding of the internal systems and businesspractices.

of 24



2. Establishment of the key success factors and true measure of productivity.

3. New ideas leading either to continuous improvement orbreakthrough change.

4. Improvement in understanding and meeting the needs of

customers.5. A view of external conditions leading to the establishments of more relevant goals.

6. Becoming more competitive in the marketplace.7. Becoming aware of and emulating industry best practices.

Summary

We looked at competitor analysis as an initial input to the development

of the competitive advantage. In achieving this, it was argued that it is

important to understand where one’s own organization lies within the

Value Chain that converts resources and skills into products and

resources that compete with one another in the marketplace. In turn,

such analysis should lead to the identification of Critical Success

Factors which are necessary conditions to be met if one is to compete

effectively.

While the critical success factors are necessary to compete effectively

they are rarely sufficient – to outperform the competition something

extra is required. In fact, it is the skills and competences which firms

possess that determine performance relative to their competitors. In

identifying both critical success factors and skills and competences,

the evaluation of one’s competitors using benchmarking techniques

has become a common practice. Seven major benefits and types

mentioned in the literature also facilitate the understanding and usageof benchmarking.

ReferencesReferences

Bartlett, C. A. and Ghoshal, S. (1989) Managing Across Borders: The

Transnational Solution . London: Hutchinson

of 24



Bauron (1981) <further details not available>

Bower, J. L.(1973) Simple economic tools for strategic analysis,

Harvard Business School Case Study, No. 9-373-094

Gluck, F. W. (1980), Strategic choice and resource allocation, TheMcKinsey Quarterly , pp.22-23

Hamel, G. and Prahalad, C.K. (1994) Competing for the Future .

Boston, MA: Harvard Business School Press

Kotler, P. and Keller, K.L (2006) Marketing Management , 12e Low

Price Edition, Pearson Prentice Hall.

Norman, R. and Remirez, R. (1993) From Value Chain to Value

Constellation: Designing Interactive Strategy, Harvard Business

Review .

Porter, M. E. (1985) Competitive Advantage: creating and sustaining

superior performance, New York: Free Press

Rockart, J.F. (1979) “Chief Executives define their own data needs”,

Harvard Business Review .

Senge, P. M. (1990) The Fifth Discipline: The Art and Practice of the

Learning Organization . New York: Doubleday/Currency.

Value Chain Models Version 2.1 (Last Updated - July 2010)

Documents

Transcript of Value Chain Models Version 2.1 (Last Updated - July 2010)