Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:
(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and
(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").
Linking Value Chain Analysis to Competitive Advantage
What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.
Primary Activities
Primary value chain activities include:
Primary Activity
Inbound logistics: All those activities concerned with receiving and storing externally sourced materials.
Operations: The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)
Outbound logistics: All those activities associated with getting finished goods and services to buyers
Marketing and sales: Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)
Service" All those activities associated with maintaining product performance after the product has been sold.
Support Activities
Support activities include:
Secondary Activities
Procurement: This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers)
Human Resource Management: Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business.
Technology Development: Activities concerned with managing information processing and the development and protection of "knowledge" in a business .
Infrastructure: Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management .
Steps in Value Chain Analysis
Value chain analysis can be broken down into a three sequential steps:
(1) Break down a market/organisation into its key activities under each of the major headings in the model;
(2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;
(3) Determine strategies built around focusing on activities where competitive advantage can be sustained
Wednesday, August 10, 2011
Business Strategy: Mc Kinsey Growth Pyramid
Introduction
This model is similar in some respects to the well-established Ansoff Model. However, it looks at growth strategy from a slightly different perspective.
The McKinsey model argues that businesses should develop their growth strategies based on:
• Operational skills
• Privileged assets
• Growth skills
• Special relationships
Growth can be achieved by looking at business opportunities along several dimensions, summarised in the diagram below:
• Operational skills are the “core competences” that a business has which can provide the foundation for a growth strategy. For example, the business may have strong competencies in customer service; distribution, technology.
• Privileged assets are those assets held by the business that are hard to replicate by competitors. For example, in a direct marketing-based business these assets might include a particularly large customer database, or a well-established brand.
• Growth skills are the skills that businesses need if they are to successfully “manage” a growth strategy. These include the skills of new product development, or negotiating and integrating acquisitions.
• Special relationships are those that can open up new options. For example, the business may have specially string relationships with trade bodies in the industry that can make the process of growing in export markets easier than for the competition.
The model outlines seven ways of achieving growth, which are summarised below:
Existing products to existing customers
The lowest-risk option; try to increase sales to the existing customer base; this is about increasing the frequency of purchase and maintaining customer loyalty
Existing products to new customers
Taking the existing customer base, the objective is to find entirely new products that these customers might buy, or start to provide products that existing customers currently buy from competitors
New products and services
A combination of Ansoff’s market development & diversification strategy – taking a risk by developing and marketing new products. Some of these can be sold to existing customers – who may trust the business (and its brands) to deliver; entirely new customers may need more persuasion
New delivery approaches
This option focuses on the use of distribution channels as a possible source of growth. Are there ways in which existing products and services can be sold via new or emerging channels which might boost sales?
New geographies
With this method, businesses are encouraged to consider new geographic areas into which to sell their products. Geographical expansion is one of the most powerful options for growth – but also one of the most difficult.
New industry structure
This option considers the possibility of acquiring troubled competitors or consolidating the industry through a general acquisition programme
New competitive arenas
This option requires a business to think about opportunities to integrate vertically or consider whether the skills of the business could be used in other industries.
This model is similar in some respects to the well-established Ansoff Model. However, it looks at growth strategy from a slightly different perspective.
The McKinsey model argues that businesses should develop their growth strategies based on:
• Operational skills
• Privileged assets
• Growth skills
• Special relationships
Growth can be achieved by looking at business opportunities along several dimensions, summarised in the diagram below:
• Operational skills are the “core competences” that a business has which can provide the foundation for a growth strategy. For example, the business may have strong competencies in customer service; distribution, technology.
• Privileged assets are those assets held by the business that are hard to replicate by competitors. For example, in a direct marketing-based business these assets might include a particularly large customer database, or a well-established brand.
• Growth skills are the skills that businesses need if they are to successfully “manage” a growth strategy. These include the skills of new product development, or negotiating and integrating acquisitions.
• Special relationships are those that can open up new options. For example, the business may have specially string relationships with trade bodies in the industry that can make the process of growing in export markets easier than for the competition.
The model outlines seven ways of achieving growth, which are summarised below:
Existing products to existing customers
The lowest-risk option; try to increase sales to the existing customer base; this is about increasing the frequency of purchase and maintaining customer loyalty
Existing products to new customers
Taking the existing customer base, the objective is to find entirely new products that these customers might buy, or start to provide products that existing customers currently buy from competitors
New products and services
A combination of Ansoff’s market development & diversification strategy – taking a risk by developing and marketing new products. Some of these can be sold to existing customers – who may trust the business (and its brands) to deliver; entirely new customers may need more persuasion
New delivery approaches
This option focuses on the use of distribution channels as a possible source of growth. Are there ways in which existing products and services can be sold via new or emerging channels which might boost sales?
New geographies
With this method, businesses are encouraged to consider new geographic areas into which to sell their products. Geographical expansion is one of the most powerful options for growth – but also one of the most difficult.
New industry structure
This option considers the possibility of acquiring troubled competitors or consolidating the industry through a general acquisition programme
New competitive arenas
This option requires a business to think about opportunities to integrate vertically or consider whether the skills of the business could be used in other industries.
Thursday, August 4, 2011
Game Theory as Strategic Management Tool
Game Theory
Game theory is a reasoned attempt to predict behavior. It applies in situations where an individual's success in making choices depends on the choices of others.
Imagine if you can predict or anticipate what your competitors are going to do, you probably be in a competitive position to outdo your rivals by implementing better moves to conquer the market. This is the essence of Game Theory.
Game theory studies competitive and cooperative behavior in strategic environments, where the fortunes of several players are intertwined. It provides methods for identifying optimal strategies and predicting the outcomes of strategic interactions.
The field of game theory began around 1900 when mathematicians began asking whether there are optimal strategies for parlor games such as chess and poker, and, if so, what these strategies might look like. The first comprehensive formulation of the subject came in 1944 with the publication of the book Theory of Games and Economic Behavior by famous mathematician John von Neumann and eminent economist Oskar Morgenstern. As its title indicates, this book also marked the beginning of the application of game theory to economics.
Since then, game theory has been applied to many other fields, including political science, military strategy, law,
computer science, and biology, among other areas.
Game Theory Strategy
The idea of business as a game, in the sense that a move by one player sparks off moves by others, runs through much strategic thinking. It is borrowed from a branch of economics (game theory) in which no economic agent (individual or corporate) is an island, living and acting independently of others.
In sectors where firms compete fiercely for market share and customer loyalty, this stylised progression of moves closely parallels actual behaviour.
Seeing business life as a never-ending series of games, each of which has a winner and a loser, can be a handicap. In business negotiations, for example, with external suppliers or customers, or with trade unions or colleagues, it can be unhelpful if participants see it only in terms of a victory or a loss. For that way one party has to walk away feeling bad about the outcome. In some non-western cultures the aim is different. The negotiation process is steered towards a win-win outcome, one with which both parties can be reasonably content.
Game theory is a reasoned attempt to predict behavior. It applies in situations where an individual's success in making choices depends on the choices of others.
Imagine if you can predict or anticipate what your competitors are going to do, you probably be in a competitive position to outdo your rivals by implementing better moves to conquer the market. This is the essence of Game Theory.
Game theory studies competitive and cooperative behavior in strategic environments, where the fortunes of several players are intertwined. It provides methods for identifying optimal strategies and predicting the outcomes of strategic interactions.
The field of game theory began around 1900 when mathematicians began asking whether there are optimal strategies for parlor games such as chess and poker, and, if so, what these strategies might look like. The first comprehensive formulation of the subject came in 1944 with the publication of the book Theory of Games and Economic Behavior by famous mathematician John von Neumann and eminent economist Oskar Morgenstern. As its title indicates, this book also marked the beginning of the application of game theory to economics.
Since then, game theory has been applied to many other fields, including political science, military strategy, law,
computer science, and biology, among other areas.
Game Theory Strategy
The idea of business as a game, in the sense that a move by one player sparks off moves by others, runs through much strategic thinking. It is borrowed from a branch of economics (game theory) in which no economic agent (individual or corporate) is an island, living and acting independently of others.
In sectors where firms compete fiercely for market share and customer loyalty, this stylised progression of moves closely parallels actual behaviour.
Seeing business life as a never-ending series of games, each of which has a winner and a loser, can be a handicap. In business negotiations, for example, with external suppliers or customers, or with trade unions or colleagues, it can be unhelpful if participants see it only in terms of a victory or a loss. For that way one party has to walk away feeling bad about the outcome. In some non-western cultures the aim is different. The negotiation process is steered towards a win-win outcome, one with which both parties can be reasonably content.
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