Value Creation

1

Driving Customer Value & Loyalty

Copyright Agitavi Research Corporation Limited 2002 - 2006 2

Objectives

At the completion of this session you should be able to:

• identify the inputs, processes and outputs that drive your firm

forward

• critically evaluate your firm using Porter’s Value Chain

• explain value and discuss the ways in which your firm can generate

value

• explain the importance of loyalty and its link to value creation

• discuss how the value chain framework can assist you in business

planning, and

• build a map of your value system as a primary strategic tool.


Value: What is it?

Value is a term often used and frequently

misunderstood.

In order to gain a better understanding you need to be

able to explicitly identify what your customers (end users

or intermediaries) value.

How?

To do that you need to know them and have developed

an understanding through close relationships, continual

interaction and knowledge generation, which is in part

supported by quality market research


In essence value creation can be characterised as a process that is dependent upon interaction and dialogue between buyers and sellers.

Through this process the seller can:

• develop intimate knowledge of buyer value chains and develop

value models

• identify what buyers perceive to be valuable, and

• create a value offer through the provision of benefits that

translate into a competitive advantage for the seller and, buyer

commitment.

Value: What is it? (continued)


Both sides of value

Value from both the seller’s and buyer’s perspective

needs to be recognised as being situation specific.

The buyer must come to an intimate understanding of

the seller’s value chain if long-term and value-laden

relationships are to be formed.

This is particularly important in a business-to-business

context.

Value: What is it? (continued)


• Building from your understanding of the environment

and how to analyse it and the basics of the value

concept, you also need to be able to visualise the

processes that drive your firm forward.

• This requires an understanding of the inputs,

processes and outputs relevant to your firm; an

understanding characteristic of systems thinking.

• To do that we are going to initially use Porter’s value

chain.

The Value Chain


The Value Chain (continued)


Primary Activities:

• Purchased Supplies & Inbound Logistics: activities, costs &

assets associated with inputs

• Operations: activities, costs & assets associated with converting

inputs into outputs

• Distribution & Outbound Logistics: activities, costs & assets

associated with physically distributing outputs to end users

• Sales & Marketing: activities, costs & assets associated with the

selling effort, advertising & promotion

• Service: activities, costs & assets associated with providing

customer assistance

Value Chain Analysis


Support Activities:

• Research, Technology & Systems Development: activities,

costs and assets associated with product & process R&D, process

design, plant & equipment, engineering, systems & procedures

• Human Resource Management: activities, costs & assets

associated with recruitment, hiring, training, compensation, team

development, core competencies, human relations

• General Administration: activities, costs & assets associated

with accounting & finance, legal affairs, regulatory affairs, safety,

MIS, strategic alliances

Value Chain Analysis (continued)


Key Success Factors (the key elements for success in a

particular industry):

• Technology-related KSFs

• Operations-related KSFs

• Distribution-related KSFs

• Marketing-related KSFs

• Skills-related KSFs

• Capability and competency-related KSFs

• Other related KSFs.

Value Chain Analysis (continued)


Porter developed the concept of the value chain to aid

analysis of a firm’s operations. It has two primary uses:

• Firstly, it is used to better understand the

activities of the firm and how it might develop a

competitive advantage.

• Secondly, it is used to position your firm in the

chain of upstream and downstream suppliers and

buyers called the channel or value system.

The Value Chain


Building on the concept of the value chain, you are now

introduced to the value system.

A value system is the network of firms that come

together to create value for end users.

Given that you have looked briefly at how value is

created and at the value chain concept as it pertains to

individual firms, you should be able to conceptualise how

your firm fits into the value system.

The Value System


The Value System: M-commerce

The figure demonstrates an example showing that you are a ‘cog in the wheel’. That

is, relationships with other channel members are critical if enhanced competitiveness

(and hence profitability) is to be achieved by you and your partners.


The Value System

One argument is that the best ISVs will become strategic business advisors to their market and supply chain partners as well as their customers and that they will do this by providing business solutions that enhance the competitiveness of their value system partners.

Note that you can add to their competitiveness by providing them with cost advantages, flexibility advantages, service advantages, image advantages and/or focus advantages.


The Value System (continued)Among these partners, customers are one group with whom you

must work closely.

Interactive relationships with customers help you overcome issues

associated with shrinking product life-cycles and the need for

continued product innovation.

In your industry the emergence of online customer networks needs

to be harnessed by ISVs as a key tool for achieving a competitive

advantage via feedback loops.

For example, in its initial years, Netscape used its online user

community extensively to garner ideas for new product features as

well as to test new products and thereby accelerated the

introductions of new versions of their flagship browser product.


The Value Chain/System and Me

Understanding the value chain aids a manager in two

ways:

Firstly, undertaking a critical analysis of the firm’s

operations, using the value chain as a guide, provides a

good picture of how the firm is doing. It:

• allows you to identify key processes and core competencies

• provides a view of the firm’s strengths and weaknesses

• highlights that many of the primary and/or secondary

activities relevant to your firm are handled by partners or

contractors, a reality that can complicate the management of

the process.


Secondly, it provides the basis for consideration of

whether the functions and processes you currently have

truly create value, which again, can only be measured by

your customers.

If they don’t add value, you must question why they are

there and whether they should be changed or discarded.


(continued)



(continued)

• Thirdly, knowing how to create value, through the

value chain and value system, is a critical component

to business success.

• Notably, one significant reason for this is that

customers (again incorporating intermediaries) are

much more likely to be loyal if you provide value.


In short, customer loyalty:

• improves profitability (the cost of getting repeat business should be

less than the cost of getting new business)

• allows the focus to be on building a client base rather than just

maintaining it

• results in clients being prepared to adopt new products offered by

the firm more readily than other buyer groups, and

• means there is more likelihood that clients will recommend the firm

to friends and associates (loyalty implies satisfaction) and satisfied

clients are more likely to offer positive word-of-mouth.

The Value Chain and Loyalty


Further Reading

As an extension to the associated activity, you will be

provided with a reading that examines the differences

between service and product companies. This reading

will help you analyse your value chain and system in

more detail, allowing you to identify and consider the

differences and what these differences mean to your

organisation.

Thank you

Loredana Niculae

Country Director - Romania

Agitavi Research Corporation

e: [email protected]

mob/sms: +4 0724 567 473

w: http://www.agitavi.com


mailto:[email protected]

http://www.agitavi.com/

Value Creation

Business

Transcript of Value Creation