The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985). The value chain analysis describes the activities the organization performs and links them to the organizations competitive position.
Value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of the organization. Therefore, it evaluates which value each particular
activity adds to the organizations products or services. This idea was built upon the insight that an organization is more than a random compilation of machinery, equipment, people and money.
Only if these things are arranged into systems and systematic activates it will become possible to produce something for which customers are willing to pay a price. Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage.
Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to support activities which help to improve their effectiveness or efficiency.
There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.).
The term 'Margin' implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organization is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.
The linkages are flows of information, goods and services, as well as systems and processes for adjusting activities. Their importance is best illustrated with some simple examples:
Only if the Marketing & Sales function delivers sales forecasts for the next period to all other departments in time and in reliable accuracy, procurement will be able to order the necessary material for the
correct date. And only if procurement does a good job and forwards order information to inbound logistics, only than operations will be able to schedule production in a way that guarantees the delivery of products in a timely and effective manner – as pre-determined by marketing.
In the result, the linkages are about seamless cooperation and information flow between the value chain activities.
In most industries, it is rather unusual that a single company performs all activities from product design, production of components, and final assembly to delivery to the final user by itself. Most often, organizations are elements of a value system or supply chain. Hence, value chain analysis should cover the whole value system in which the organization operates.
Within the whole value system, there is only a certain value of profit margin available. This is the difference of the final price the customer pays and the sum of all costs incurred with the production and delivery of the product/service (e.g. raw material, energy etc.). It depends on the structure of the value system, how this margin spreads across the suppliers, producers, distributors, customers, and other
elements of the value system. Each member of the system will use its market position and negotiating power to get a higher proportion of this margin. Nevertheless, members of a value system can cooperate to improve their efficiency and to reduce their costs in order to achieve a higher total margin to the benefit of all of them (e.g. by reducing stocks in a Just-In-Time system).
A typical value chain analysis can be performed in the following steps:
1. Analysis of own value chain – which costs are related to every single activity
2. Analysis of customers value chains – how does our product fit into their value chain
3. Identification of potential cost advantages in comparison with competitors
4. Identification of potential value added for the customer – how can our product add value to the customers value chain (e.g. lower costs or higher performance) – where does the customer see such potential Organizations Value.
Showing posts with label Strategy. Show all posts
Showing posts with label Strategy. Show all posts
Sunday, April 15, 2012
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.
Saturday, July 30, 2011
Core Competencies Strategy
Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage.
The main ideas about Core Competencies were developed by C K Prahalad and G Hamel. The central idea of core competency was that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth.
The core areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products.
Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment which is constantly changing. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change.
Identifying Core Competencies
Prahalad and Hamel suggest three factors to help identify core competencies in any business:
a. Provides potential access to a wide variety of markets: -
The key core competencies here are those that enable the creation of new products and services.
b. Makes a significant contribution to the perceived customer benefits of the end product: - Core competencies are the skills that enable a business to deliver a fundamental customer benefit.
c. Difficult for competitors to imitate: - A core competence should be "competitively unique" where the product is difficult to imitate.
Resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals.
The main ideas about Core Competencies were developed by C K Prahalad and G Hamel. The central idea of core competency was that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company's long term growth.
The core areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products.
Core Competencies are not seen as being fixed. Core Competencies should change in response to changes in the company's environment which is constantly changing. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, so its Core Competencies will have to adapt and change.
Identifying Core Competencies
Prahalad and Hamel suggest three factors to help identify core competencies in any business:
a. Provides potential access to a wide variety of markets: -
The key core competencies here are those that enable the creation of new products and services.
b. Makes a significant contribution to the perceived customer benefits of the end product: - Core competencies are the skills that enable a business to deliver a fundamental customer benefit.
c. Difficult for competitors to imitate: - A core competence should be "competitively unique" where the product is difficult to imitate.
Resources that are standardised or easily available will not enable a business to achieve a competitive advantage over rivals.
Monday, July 18, 2011
Six Principles of Blue Ocean Strategy
There are six main principles that guide companies through the formulation and execution of their Blue Ocean Strategy in a systematic risk minimizing and opportunity maximizing manner.
The first four principles address Blue Ocean Strategy formulation:
1. Reconstruct market boundaries. This principle identifies the paths by which managers can systematically create uncontested market space across diverse industry domains, hence attenuating search risk. It teaches companies how to make the competition irrelevant by looking across the six conventional boundaries of competition to open up commercially important blue oceans. The six paths focus on looking across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time.
2. Focus on the big picture, not the numbers. Illustrates how to design a company's strategic planning process to go beyond incremental improvements to create value innovations. It presents an alternative to the existing strategic planning process, which is often criticized as a number-crunching exercise that keeps companies locked into making incremental improvements. This principle tackles planning risk. Using a visualizing approach that drives managers to focus on the big picture rather than to be submerged in numbers and jargon, this principle proposes a four-step planning process whereby you can build a strategy that creates and captures blue ocean opportunities.
3. Reach beyond existing demand. To create the greatest market of new demand, managers must challenge the conventional practice of aiming for finer segmentation to better meet existing customer preferences. This practice often results in increasingly small target markets. Instead, this principle shows how to aggregate demand, not by focusing on the differences that separate customers but by building on the powerful commonalities across noncustomers to maximize the size of the blue ocean being created and new demand being unlocked, hence minimizing scale risk.
4. Get the strategic sequence right. This principle describes a sequence which companies should follow to ensure that the business model they build will be able to produce and maintain profitable growth. When companies meet the sequence of utility, price, cost and adoption requirements, they address the business model risk and the blue ocean idea they created will be a commercially viable one.
The remaining two principles address the execution risks of Blue Ocean Strategy.
5. Overcome key organizational hurdles. Tipping point leadership shows managers how to mobilize an organization to overcome the key organizational hurdles that block the implementation of a blue ocean strategy. This principle deals with organizational risk. It lays out how leaders and managers alike can surmount the cognitive, resource, motivational, and political hurdles in spite of limited time and resources in executing blue ocean strategy.
6. Build execution into strategy. By integrating execution into strategy making, people are motivated to act on and execute a blue ocean strategy in a sustained way deep in an organization. This principle introduces, what Kim & Mauborgne call, fair process. Because a blue ocean strategy perforce represents a departure from the status quo, fair process is required to facilitate both strategy making and execution by mobilizing people for the voluntary cooperation needed to execute blue ocean strategy. It deals with management risk associated with people's attitudes and behaviors.
Article Source: www.blueoceanstrategy.com
Picture Source: http://www.ecomaxmc.com/blog/?p=10
The first four principles address Blue Ocean Strategy formulation:
1. Reconstruct market boundaries. This principle identifies the paths by which managers can systematically create uncontested market space across diverse industry domains, hence attenuating search risk. It teaches companies how to make the competition irrelevant by looking across the six conventional boundaries of competition to open up commercially important blue oceans. The six paths focus on looking across alternative industries, across strategic groups, across buyer groups, across complementary product and service offerings, across the functional-emotional orientation of an industry, and even across time.
2. Focus on the big picture, not the numbers. Illustrates how to design a company's strategic planning process to go beyond incremental improvements to create value innovations. It presents an alternative to the existing strategic planning process, which is often criticized as a number-crunching exercise that keeps companies locked into making incremental improvements. This principle tackles planning risk. Using a visualizing approach that drives managers to focus on the big picture rather than to be submerged in numbers and jargon, this principle proposes a four-step planning process whereby you can build a strategy that creates and captures blue ocean opportunities.
3. Reach beyond existing demand. To create the greatest market of new demand, managers must challenge the conventional practice of aiming for finer segmentation to better meet existing customer preferences. This practice often results in increasingly small target markets. Instead, this principle shows how to aggregate demand, not by focusing on the differences that separate customers but by building on the powerful commonalities across noncustomers to maximize the size of the blue ocean being created and new demand being unlocked, hence minimizing scale risk.
4. Get the strategic sequence right. This principle describes a sequence which companies should follow to ensure that the business model they build will be able to produce and maintain profitable growth. When companies meet the sequence of utility, price, cost and adoption requirements, they address the business model risk and the blue ocean idea they created will be a commercially viable one.
The remaining two principles address the execution risks of Blue Ocean Strategy.
5. Overcome key organizational hurdles. Tipping point leadership shows managers how to mobilize an organization to overcome the key organizational hurdles that block the implementation of a blue ocean strategy. This principle deals with organizational risk. It lays out how leaders and managers alike can surmount the cognitive, resource, motivational, and political hurdles in spite of limited time and resources in executing blue ocean strategy.
6. Build execution into strategy. By integrating execution into strategy making, people are motivated to act on and execute a blue ocean strategy in a sustained way deep in an organization. This principle introduces, what Kim & Mauborgne call, fair process. Because a blue ocean strategy perforce represents a departure from the status quo, fair process is required to facilitate both strategy making and execution by mobilizing people for the voluntary cooperation needed to execute blue ocean strategy. It deals with management risk associated with people's attitudes and behaviors.
Article Source: www.blueoceanstrategy.com
Picture Source: http://www.ecomaxmc.com/blog/?p=10
Sunday, June 20, 2010
Ansoff Matrix - Tool for Analyzing Growth Strategy
The Ansoff Matrix was first published in the Harvard Business Review in 1957, and has strategic planning tool for a quick and simple way to develop a strategic approach to growth.
Ansoff Matrix is also known as Product/Market Expansion Grid, as it shows four growth options for business formed by matching up existing and new products and services with existing and new markets.
The Matrix essentially shows the risk that a particular strategy will expose you to, the idea being that each time you move into a new quadrant (horizontally or vertically) you increase risk (See Figure 1).
Market Development Quadrant
Here, you’re targeting new markets, or new areas of the market. You’re trying to sell more of the same things to different people. Below are the possible actions:
- Target different geographical markets at home or abroad
- Use different sales channels, such as online or direct sales if you are currently selling through the trade
- Target different groups of people, perhaps different age groups, genders or demographic profiles from your normal customers.
Diversification Quadrant
This strategy is risky: There’s often little scope for using existing expertise or achieving economies of scale, because you are trying to sell completely different products or services to different customers
Its main advantage is that, should one business suffer from adverse circumstances, the other is unlikely to be affected.
Market Penetration Quadrant
With this approach, you’re trying to sell more of the same things to the same people. Below are possible actions:
- Advertise, to encourage more people within your existing market to choose your product, or to use more of it.
- Introduce a loyalty scheme.
- Launch price or other special offer promotions.
- Increase your sales force activities, or
- Buy a competitor company (particularly in mature markets)
Product Development Quadrant
Here, you’re selling more things to the same people. Below are possible actions:
- Extend your product by producing different variants, or packaging existing products it in new ways.
- Develop related products or services.
- In a service industry, increase your time to market, customer service levels, or quality.
Application of the Ansoff Matrix
Corporate Ansoff Matrix
Viewing from a business perspective, staying with existing product in your existing market is a low risk option: You know the product works, and the market still accepts the product.
However, you expose yourself to a whole new level of risk either moving into a new market with an existing product, or developing a new product for an existing market. The market may turn out to have radically different needs and dynamics than you thought, or the new product may just not work or sell.
And by moving two quadrants and targeting a new market with a new product, you increase your risk to yet another level.
Personal Ansoff
Looking at it from a personal perspective, just staying where you are is a low risk option.
Switching to a new role in the same company, or changing to a similar job with a company in the same industry is a higher risk option. And switching to a new role in a new industry has an even higher level of risk.(See Figure 2)
Manage risk appropriately and if you're switching from one quadrant to another, prepare and practice the following: -
- Research/study the move carefully;
- Has built the capabilities needed to succeed in the new quadrant;
- Have sufficient resources to cover transition period while you're developing and learning how to sell the new product, or are learning what makes the new market tick; and
- Have firstly thought through what you have to do if things don't work out, and that failure won't "break" you.
Saturday, June 19, 2010
Boston Matrix and Investment Strategy
The Boston Matrix was developed in the 1970s by The Boston Consulting Group as a way of helping companies to decide on an appropriate investment strategy for their future.
The diagram shows how different products or parts of a company can be compared in terms of market growth and market share.
Cash Cow Section (High Market Share but Low Growth)
If a product or business unit is a cash cow then it has a large share of a market that is no longer growing. It produces a lot of revenue but most of this can be invested in other areas of the company as further investment in the cash cow would produce little or no extra profit.
Star Section (High Market Share and High Growth)
A star also has a large share of the market but, unlike the cash cow, it is growing quickly. In order to grow further, it requires more investment which it is often able to pay for from its own profits. When it stops growing, a star may become a cash cow.
Problem Child Section (Low Market Share but High Growth)
A problem child or question mark has a small share of a growing market; it needs considerable investment if it is to grow.
Dog Section (Low Market Share and Low Growth)
A dog has a small share of a market that is not growing. A dog is of little value to most companies and a decision must be taken whether to continue investing in it.
Understanding the Market Share and Relation to Market Growth Using Boston Matrix
Market share is the percentage of the total market that is being serviced by company, measured either in revenue unit volume terms. The higher your market share, the higher proportion of the market you control.
The Boston Matrix assumes that if you enjoy a high market share you will normally be making money (this assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).
The question of whether the company need to use the available resources to invest in the profitable product is highly depends on the product life cycle stage, competition and forces of environment.
This is where market growth comes into play. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market is expanding, which should provide the opportunity for businesses to make more money, even if their market share remains stable.
By contrast, competition in low growth markets is often bitter, and while you might have high market share now, what will the situation look like in a few months or a few years? This makes low growth markets less attractive.
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