Description
explains meaning of value chain, characteristics of value of chain analysis. It also explains objectives of benchmarking and building blocks of competitive advantage.
Value Creation,
Competitive Advantage and
Benchmarking
Are the Company’s Prices and Costs Competitive?
?
Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis Key analytical tools
? Value
?
chain analysis
? Benchmarking
How profitable a company becomes depends on three basic factors:
1.
VALUE or UTILITY the customer gets from owning the product PRICE that a company charges for its products COSTS of creating those products consumer captures beyond the price paid.
2. 3.
? Consumer surplus is the “excess” utility a
Basic Principle: the more utility that consumers get from a company’s products or services, the more pricing options the company has.
Value Creation per Unit
Value Creation and Pricing Options
There is a dynamic relationship among utility, pricing, demand, and costs.
Comparing Toyota and General Motors
Superior value creation requires that the gap between perceived utility (U) and costs of production (C) be greater than that obtained by competitors.
The Value Chain
A company is a chain of activities for transforming inputs into outputs that customers value – including the primary and support activities.
Value Chain Analysis
?
Identifies clusters of activities providing particular benefit to customers Highlights activities which are less efficient and which might be de-emphasised or outsourced Requires managers to think about the role of such activities
?
?
?
Can be used to identify the cost and value of activities
Characteristics of Value Chain Analysis
?
Combined costs of all activities in a company’s value chain define the company’s internal cost structure Compares a firm’s costs activity by activity against costs of key rivals
?
?
From raw materials purchase to Price paid by ultimate customer
?
Pinpoints which internal activities are a source of cost advantage or disadvantage
The Value Network
Representative Value Chain for an entire Industry
Example: Value Chain Activities
Home Appliance Industry
Parts and components manufacture Assembly Wholesale distribution Retail sales
Example: Value Chain Activities
Soft Drink Industry
Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution
Advertising
Retailing
The Value Chain System for an Entire Industry
?
Assessing a company’s cost competitiveness involves comparing costs all along the industry’s value chain
?
Suppliers’ value chains are relevant because
?
Costs, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance
?
Forward channel allies’ value chains are relevant because
?
Costs and margins are part of price paid by ultimate end-user
Activities performed affect end-user satisfaction
?
What Determines if a Company Is Cost Competitive?
?
Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains When costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains
?
The Value Network – Key Questions
?
Where are cost and value created?
?
Which activities are vital to an organisation?
? ?
Retain direct control of core capabilities
Outsource less important activities
?
Where are the profit pools?
?
Potential profits at different parts of the value network
Availability of competences to compete in these areas
?
The Value Network – Key Questions
?
Make or buy?
? ?
Outsourcing Develop competence in influencing performance of other organisations
?
Who are the best partners?
?
What kind of relationships are required?
Why Do Value Chains of Rivals Differ?
?
Several factors can cause differences in value chains of rival companies
? ? ?
Internal operations Strategy Approaches used in execution of the strategy
?
?
Underlying economics of the activities
Differences complicate task of assessing rivals’ relative cost positions
Activity-Based Costing: A Key Tool in Analyzing Costs
?
Determining whether a company’s costs are in line with those of rivals requires
?
Measuring how a company’s costs compare with those of rivals activity-by-activity
?
Requires having accounting data to measure cost of each value chain activity Activity-based costing entails
?
?
Defining expense categories according to specific activities performed and Assigning costs to the activity responsible for creating the cost
?
Options to Correct Internal Cost Disadvantages
? ? ? ? ? ?
Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Innovate around troublesome cost components
?
?
Simplify product design Make up difference by achieving savings in backward or forward portions of value chain system
Objectives of Benchmarking
?
?
Identify best practices in performing an activity
Understand the best practices in performing an activity – learn what is the “best” way to do a particular activity from those demonstrating they are “best-in-world” Learn how other firms achieve lower costs Take action to improve company’s cost competitiveness
? ?
Benchmarking Costs of Key Value Chain Activities
?
Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities
? ? ? ? ?
Purchase of materials Payment of suppliers
Management of inventories
Getting new products to market Performance of quality control
?
? ?
Filling and shipping of customer orders
Training of employees Processing of payrolls
Competitive Advantage: The Value Creation Cycle
Building Blocks of Competitive Advantage
The Generic Distinctive Competencies allow a company to: •Differentiate product offering or offer more utility to customer •Lower the cost structure regardless of the industry, its products, or its services
?
?
?
?
? Efficiency
?
Measured by the quantity of inputs it takes to produce a given output:
Efficiency = Outputs / Inputs
?
Productivity leads to greater efficiency and lower costs:
?
?
Employee productivity
Capital productivity
Superior efficiency helps a company attain a competitive advantage through a lower cost structure.
? Quality
Quality products are goods and services that are:
? ?
Reliable and Differentiated by attributes that customers perceive to have higher value High-quality products differentiate and increase the value of the products in customers’ eyes. Greater efficiency and lower unit costs are associated with reliable products.
? The impact of quality on competitive advantage:
?
?
Superior quality = customer perception of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design
? Innovation
Innovation is the act of creating new products or new processes
?
Product innovation
• Creates products that customers perceive as more valuable and
• Increases the company’s pricing options
?
Process innovation • Creates value by lowering production costs
Successful innovation can be a major source of competitive advantage – by giving a company something unique, something its competitors lack.
? Responsiveness to Customers
Identifying and satisfying customers’ needs – better than the competitors
?
Superior quality and innovation are integral to superior responsiveness to customers.
Customizing goods and services to the unique demands of individual customers or customer groups. Enhanced customer responsiveness Customer response time, design, service, after-sales service and support
?
?
Superior responsiveness to customers differentiates a company’s products and services and leads to brand loyalty and premium pricing.
The Durability of Competitive Advantage
1.
Barriers to Imitation Making it difficult to copy a company’s distinctive competencies ? Imitating Resources ? Imitating Capabilities Capability of Competitors ? Strategic commitment Commitment to a particular way of doing business ? Absorptive capacity Ability to identify, value, assimilate, and use knowledge Industry Dynamism Ability of an industry to change rapidly
2.
3.
Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.
Why Companies Fail
?
Inertia
?
Companies find it difficult to change their strategies and structures Limit a company’s ability to imitate and cause competitive disadvantage A company can become so specialized and inner directed based on past success that it loses sight of market realities
?
Prior Strategic Commitments
?
?
The Icarus Paradox
?
? It loses the ability to attract and generate resources. ? Profit margins and invested capital shrink rapidly.
When a company loses its competitive advantage, its profitability falls below that of the industry.
Sustaining Competitive Advantage
1.
Focus on the Building Blocks of Competitive Advantage Develop distinctive competencies and superior performance in: ? Efficiency ? Innovation ? Quality ? Responsiveness to Customers
2.
Institute Continuous Improvement and Learning Recognize the importance of continuous learning within the organization
3.
Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global competitors
4.
Overcome Inertia
Overcome the internal forces that are barriers to change
Luck may play a role in success, so always exploit a lucky break - but remember:
“The harder I work, the luckier I seem to get.” P Morgan J
doc_969211034.pptx
explains meaning of value chain, characteristics of value of chain analysis. It also explains objectives of benchmarking and building blocks of competitive advantage.
Value Creation,
Competitive Advantage and
Benchmarking
Are the Company’s Prices and Costs Competitive?
?
Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis Key analytical tools
? Value
?
chain analysis
? Benchmarking
How profitable a company becomes depends on three basic factors:
1.
VALUE or UTILITY the customer gets from owning the product PRICE that a company charges for its products COSTS of creating those products consumer captures beyond the price paid.
2. 3.
? Consumer surplus is the “excess” utility a
Basic Principle: the more utility that consumers get from a company’s products or services, the more pricing options the company has.
Value Creation per Unit
Value Creation and Pricing Options
There is a dynamic relationship among utility, pricing, demand, and costs.
Comparing Toyota and General Motors
Superior value creation requires that the gap between perceived utility (U) and costs of production (C) be greater than that obtained by competitors.
The Value Chain
A company is a chain of activities for transforming inputs into outputs that customers value – including the primary and support activities.
Value Chain Analysis
?
Identifies clusters of activities providing particular benefit to customers Highlights activities which are less efficient and which might be de-emphasised or outsourced Requires managers to think about the role of such activities
?
?
?
Can be used to identify the cost and value of activities
Characteristics of Value Chain Analysis
?
Combined costs of all activities in a company’s value chain define the company’s internal cost structure Compares a firm’s costs activity by activity against costs of key rivals
?
?
From raw materials purchase to Price paid by ultimate customer
?
Pinpoints which internal activities are a source of cost advantage or disadvantage
The Value Network
Representative Value Chain for an entire Industry
Example: Value Chain Activities
Home Appliance Industry
Parts and components manufacture Assembly Wholesale distribution Retail sales
Example: Value Chain Activities
Soft Drink Industry
Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution
Advertising
Retailing
The Value Chain System for an Entire Industry
?
Assessing a company’s cost competitiveness involves comparing costs all along the industry’s value chain
?
Suppliers’ value chains are relevant because
?
Costs, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance
?
Forward channel allies’ value chains are relevant because
?
Costs and margins are part of price paid by ultimate end-user
Activities performed affect end-user satisfaction
?
What Determines if a Company Is Cost Competitive?
?
Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains When costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains
?
The Value Network – Key Questions
?
Where are cost and value created?
?
Which activities are vital to an organisation?
? ?
Retain direct control of core capabilities
Outsource less important activities
?
Where are the profit pools?
?
Potential profits at different parts of the value network
Availability of competences to compete in these areas
?
The Value Network – Key Questions
?
Make or buy?
? ?
Outsourcing Develop competence in influencing performance of other organisations
?
Who are the best partners?
?
What kind of relationships are required?
Why Do Value Chains of Rivals Differ?
?
Several factors can cause differences in value chains of rival companies
? ? ?
Internal operations Strategy Approaches used in execution of the strategy
?
?
Underlying economics of the activities
Differences complicate task of assessing rivals’ relative cost positions
Activity-Based Costing: A Key Tool in Analyzing Costs
?
Determining whether a company’s costs are in line with those of rivals requires
?
Measuring how a company’s costs compare with those of rivals activity-by-activity
?
Requires having accounting data to measure cost of each value chain activity Activity-based costing entails
?
?
Defining expense categories according to specific activities performed and Assigning costs to the activity responsible for creating the cost
?
Options to Correct Internal Cost Disadvantages
? ? ? ? ? ?
Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Innovate around troublesome cost components
?
?
Simplify product design Make up difference by achieving savings in backward or forward portions of value chain system
Objectives of Benchmarking
?
?
Identify best practices in performing an activity
Understand the best practices in performing an activity – learn what is the “best” way to do a particular activity from those demonstrating they are “best-in-world” Learn how other firms achieve lower costs Take action to improve company’s cost competitiveness
? ?
Benchmarking Costs of Key Value Chain Activities
?
Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities
? ? ? ? ?
Purchase of materials Payment of suppliers
Management of inventories
Getting new products to market Performance of quality control
?
? ?
Filling and shipping of customer orders
Training of employees Processing of payrolls
Competitive Advantage: The Value Creation Cycle
Building Blocks of Competitive Advantage
The Generic Distinctive Competencies allow a company to: •Differentiate product offering or offer more utility to customer •Lower the cost structure regardless of the industry, its products, or its services
?
?
?
?
? Efficiency
?
Measured by the quantity of inputs it takes to produce a given output:
Efficiency = Outputs / Inputs
?
Productivity leads to greater efficiency and lower costs:
?
?
Employee productivity
Capital productivity
Superior efficiency helps a company attain a competitive advantage through a lower cost structure.
? Quality
Quality products are goods and services that are:
? ?
Reliable and Differentiated by attributes that customers perceive to have higher value High-quality products differentiate and increase the value of the products in customers’ eyes. Greater efficiency and lower unit costs are associated with reliable products.
? The impact of quality on competitive advantage:
?
?
Superior quality = customer perception of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design
? Innovation
Innovation is the act of creating new products or new processes
?
Product innovation
• Creates products that customers perceive as more valuable and
• Increases the company’s pricing options
?
Process innovation • Creates value by lowering production costs
Successful innovation can be a major source of competitive advantage – by giving a company something unique, something its competitors lack.
? Responsiveness to Customers
Identifying and satisfying customers’ needs – better than the competitors
?
Superior quality and innovation are integral to superior responsiveness to customers.
Customizing goods and services to the unique demands of individual customers or customer groups. Enhanced customer responsiveness Customer response time, design, service, after-sales service and support
?
?
Superior responsiveness to customers differentiates a company’s products and services and leads to brand loyalty and premium pricing.
The Durability of Competitive Advantage
1.
Barriers to Imitation Making it difficult to copy a company’s distinctive competencies ? Imitating Resources ? Imitating Capabilities Capability of Competitors ? Strategic commitment Commitment to a particular way of doing business ? Absorptive capacity Ability to identify, value, assimilate, and use knowledge Industry Dynamism Ability of an industry to change rapidly
2.
3.
Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.
Why Companies Fail
?
Inertia
?
Companies find it difficult to change their strategies and structures Limit a company’s ability to imitate and cause competitive disadvantage A company can become so specialized and inner directed based on past success that it loses sight of market realities
?
Prior Strategic Commitments
?
?
The Icarus Paradox
?
? It loses the ability to attract and generate resources. ? Profit margins and invested capital shrink rapidly.
When a company loses its competitive advantage, its profitability falls below that of the industry.
Sustaining Competitive Advantage
1.
Focus on the Building Blocks of Competitive Advantage Develop distinctive competencies and superior performance in: ? Efficiency ? Innovation ? Quality ? Responsiveness to Customers
2.
Institute Continuous Improvement and Learning Recognize the importance of continuous learning within the organization
3.
Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global competitors
4.
Overcome Inertia
Overcome the internal forces that are barriers to change
Luck may play a role in success, so always exploit a lucky break - but remember:
“The harder I work, the luckier I seem to get.” P Morgan J
doc_969211034.pptx