Understanding value
Now that you have looked at the various forces,
strengths, weaknesses and others…How will a
company differentiate from others??
Value Chain Analysis
Value Chain analysis was first suggested by Michael Porter
(1995) as a way of presenting the construction of value
as related to end customer.
It can:
 Increase your competitiveness
 Reduce your costs
 Improve your market share
Bottom Line - improve
overall profitability!
Discovering Core Competencies
Core
Competencies
Discovering
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Criteria of
Sustainable
Advantages
Value
Chain
Analysis
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Primary Activities
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Human Resource Management
Human Resource Management
Firms often purchase a portion of
Technological Development
Inbound
Logistics
Operations
Outbound
Logistics
Primary Activities
Marketing
& Sales
Service
Operations
Procurement
Marketing
& Sales
Procurement
their value-creating activities
Development
from specialty external suppliers
who can perform these functions
more efficiently
Outbound
Logistics
Technological
Inbound
Logistics
Support
Activities
Service
Competitive
Advantage
Discovering Core
Competencies
Gained through
Core Competencies
Strategic
Competitiveness
Core
Competencies
Discovering
Core
Competencies
Above-Average
Returns
Sources of
Competitive
Advantage
Capabilities
Criteria of
Sustainable
Advantages
Teams of
Resources
Value
Chain
Analysis
Resources
* Tangible
* Intangible
*
*
*
*
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Portfolio Analysis
• BCG
• GE
BCG
Limitations of BCG Matrix
• The BCG Matrix produces a framework for allocating resources among
different business units and makes it possible to compare many business
units at a glance. But BCG Matrix is not free from limitations, such as• BCG matrix classifies businesses as low and high, but generally businesses
can be medium also. Thus, the true nature of business may not be
reflected.
• Market is not clearly defined in this model.
• High market share does not always leads to high profits. There are high
costs also involved with high market share.
• Growth rate and relative market share are not the only indicators of
profitability. This model ignores and overlooks other indicators of
profitability.
• At times, dogs may help other businesses in gaining competitive
advantage. They can earn even more than cash cows sometimes.
• This four-celled approach is considered as to be too simplistic.
General Electric’s Business Screen(GE)
C
Winners
A
High
Winners
B
Question
Marks
D
Winners
E
Medium
Average
Businesses
F
Losers
Losers
G
Low
Profit
Producers
Strong
H
Losers
Average
Weak
Source: Adapted from Strategic
Management in GE, Corporate Planning
and Development, General Electric
Corporation.
Business Strength/Competitive Position
26
Source: Marketing Management, 7th Edition – Philip Kotler
MARKET or OPPORTUNITY
ATTRACTIVENESS
Portfolio Strategies
High
Medium
Low
PROTECT POSITION
 Invest to grow at maximum
digestible rate
 Concentrate effort on
maintaining strength
INVEST TO BUILD
 Challenge for leadership
 Build selectively on strengths
 Reinforce vulnerable areas
BUILD SELECTIVELY
 Specialize around limited
strengths
 Seeks ways to overcome
weaknesses
 Withdraw if indications of
sustainable growth are lacking
BUILD SELECTIVELY
 Invest heavily in most attractive
segments
 Build up ability to counter
competition
 Emphasize profitability by raising
productivity
SELECTIVITY/MANAGE FOR
EARNINGS
 Protect existing program
 Concentrate investments in
segments where profitability is
good and risk is relatively low
LIMITED EXPANSION OR HARVEST
 Look for ways to expand without
risk; otherwise, minimize
investment and rationalize
operations
PROTECT AND REFOCUS
 Manage for current earnings
 Concentrate on attractive
segments
 Defend strengths
MANAGE FOR EARNINGS
 Protect position in most
profitable segments
Upgrade product line
 Minimize investment
DIVEST
 Sell at time that will maximize
cash value
Cut fixed costs and avoid
investment meanwhile
Strong
Medium
Weak
COMPETITIVE POSITION
Harvest/Divest
Selectivity/Earnings
Invest/Grow
The Book and the Authors
© JOHN ABBOTT
Prof Chan Kim
© JOHN ABBOTT
Prof Renee
Mauborgne
28
What is the Blue Ocean?
• High profit growth at low risk
• Industries not in existence today
• Untapped market demand
• Unknown market space
29
Example: A highly competitive Industry
The American Wine
Industry
30
What the industry offers
Premium Wines
Budget Wines
Polarised Strategic
Groups
Massive Choice
31
American Wine Industry
• 3rd largest in world: worth $20 billion
• Californian makes 66% - the rest is from Italy, France,
Spain, Chile, Argentina, Australia
• Exploding number of new wines – new vineyards in
Oregon, Washington, New York
 Customer base stagnant
 31st in the world in per capita consumption!
32
American Wine Industry
• Top 8 producers had 75% of the market; 1600 had the
remaining 25%
• $ millions spent in marketing - Titanic battles –
intense competition
• Sever price pressure
• The dominant growth strategy was towards premium
wines – more complexity, better image, more
prestigious vineyards, number of medals won at wine
festivals.
33
Case Study: [yellowtail]
• Yellow tail created a wine that broke out of
the red ocean by creating a wine that:
– Appealed to beer and spirits drinkers by being fun
and unpretentious as well as to wine drinkers
– Had a less complex, sweeter and smooth taste
– Was easy to select as it did not focus on prestige,
aging, etc.
– They eliminated all factors that the wine industry
had long competed on
3 Characteristics of
a Good Strategy
• It is focused; it is not diffused across all
potential aspects of the market
• The shape of the value curve diverges from
any potential competitors
• It has a compelling tagline
What people said …
• “It is too confusing and complex”
– Wine descriptions and terminology
– The shopping experience
– The lack of clear guidance on what to buy and drink
• Thus, massively intimidating for ‘noncustomers’
(the large majority of the US population who were
not wine drinkers)
36
Yellow Tail created a Blue Ocean
Premium
Creating
a Blue Ocean
Budget
37
Yellow Tail
• Only 2 types initially – Chardonnay and Shiraz
• Fruity, soft on palette, sweet-ish – great for those who had not
drunk wine before
• Same bottle for red and white – low logistics costs
• Simple vibrant packaging – lower case letters/kangaroo
• Un-intimidating
• They were selling “The essence of a great land … Australia” – ie
they were not selling the wine
• Australian clothing for the retail staff – they enthusiastically
promoted a wine they could understand.
38
Yellow Tail Strategy
• Eliminated: Oenological terminology and distinctions, Aging
qualities, Above the line marketing
• Reduced: Wine complexity, Wine range, Vineyard prestige
• Raised: Price versus Budget Wines, Simplicity of retail store
environment, Enthusiasm of Sales People
• Created: Easy drinking, Ease of selection, Sense of fun and
adventure
39
Yellow Tail Value Curve
“The Essence of a Great Land”
Very high
High
Three Tests of a
Blue Ocean Strategy:
Normal
Low
Very low
Nonexistent
40
1) Focussed
2) Divergent
3) Compelling Tagline
Results
• No 1 imported wine (outsells France and Italy)
• Fastest growing imported wine in the history of the USA
industry
– New consumers of wine
– Jug drinkers trade up
– Premium wine drinkers trade down
• Industry criticizes them mercilessly at first
 Now wine press blurb gives it a “best buy” for value; winning
wine awards.
41
Summary
Conventional Logic
Blue Ocean Logic
Industry
Assumption
Industry conditions are given
Industry condition can be shaped.
Strategic
Focus
Build competitive advantages to
beat the competition.
Create a quantum leap in buyer
value to dominate the market.
Customers
Retain and expand the customer
base through further segmentation
and customization.
Think in terms of embracing
customer differences.
Go for the mass of buyers and
willingly let some existing
customers go. Think in terms of
embracing key customer value
commonalities.
42
Summary
Conventional Logic
Blue Ocean Logic
Assets &
Capabilities
Think in terms of a company’s
existing assets and capabilities.
Build on what it has.
Think free from a company’s
existing assets and capabilities.
Ask, what if we start anew?
Product/
Service
offerings
Think in terms of
products/services offered by the
industry. Seek to maximize the
value of these offerings.
Think in terms of buyers’ solution
even if that transcends the industry.
Seek to solve buyers’ major
bottlenecks/chief compromises in
using the products/services of the
industry.
43
Four Actions to create a Blue Ocean
Raise
What factors should
be raised well beyond
the industry
standard?
Eliminate
Create
What factors should
be eliminated that
the industry has taken
for granted?
What factors should be
created that the
industry has never
offered?
Reduce
What factors should
be reduced well
below the industry
standard?
44
Four Actions:
Eliminate/Reduce/Raise/Create
• Which of the factors that the industry takes
for granted should be eliminated?
• Which should be reduced?
• Which should be raised well above standard?
• Which factors should be created that have not
existed before?
Case study: Cirque du Soleil
Other circuses focused on:
• Benchmarking the competition
• High-profile “stars”, which increased costs but
who were largely unknown to the general
public
• Traditional venue
• Traditional audiences
Case study: Cirque du Soleil
Cirque du Soleil focused on:
 Creation of a hybrid between the circus and the
theatre
 Retention of the symbolic and glamorous aspects of
circus, such as the tent and the more breathtaking
aspects, such as acrobats
 Incorporation of more comfort, sophistication,
elegance and theatrical plots; this brought not only
the richness of theatre but a whole new
demographic of customers
 It looked across market boundaries and created new
ones.
Balanced Scorecard and
strategy implementation
Implementation of Strategy
• Many companies have introduced a Balanced
Scorecard to manage the implementation of
their strategies
PRE READ: Balanced Scorecard (Kaplan and
Norton)
The Balanced Scorecard
• The balanced scorecard translates an
organization’s mission and strategy into a set
of performance measures that provides the
framework for implementing its strategy
• It is called the balanced scorecard because it
balances the use of financial and nonfinancial
performance measures to evaluate
performance
Balanced Scorecard Perspectives
1.
2.
3.
4.
Financial
Customer
Internal Business Perspective
Learning and Growth
The Financial Perspective
• Evaluates the profitability of the strategy
• Uses the most objective measures in the
scorecard
• The other three perspectives eventually feed
back into this dimension
The Customer Perspective
• Identifies targeted customer and market
segments and measures the company’s
success in these segments
The Internal Business Prospective
•
•
Focuses on internal operations that create
value for customers that, in turn, furthers
the financial perspective by increasing
shareholder value
Includes three sub processes:
1. Innovation
2. Operations
3. Post-sales service
The Learning & Growth Perspective
• Identifies the capabilities the organization
must excel at to achieve superior internal
processes that create value for customers and
shareholders
The Balanced Scorecard Flowchart
Financial
Customer
Internal
Business
Process
Learning
&
Growth
Balanced
Scorecard
Illustrated
Strategy
and the
Balanced
Scorecard,
Illustrated
Common Balanced Scorecard
Measures
Balanced Scorecard Implementation
• Must have commitment and leadership from
top management
• Must be communicated to all employees
Features of a Good
Balanced Scorecard
• Tells the story of a firms strategy, articulating a
sequence of cause-and-effect relationships: the links
among the various perspectives that describe how
strategy will be implemented
• Helps communicate the strategy to all members of the
organization by translating the strategy into a coherent
and linked set of understandable and measurable
operational targets
Features of a Good
Balanced Scorecard
• Must motivate managers to take actions that
eventually result in improvements in financial
performance
– Predominately applies to for-profit entities, but has some
application to not-for-profit entities as well
• Limits the number of measures, identifying only the
most critical ones
• Highlights less-than-optimal tradeoffs that managers
may make when they fail to consider operational and
financial measures together
Balanced Scorecard Implementation Pitfalls
• Managers should not assume the cause-andeffect linkages are precise: they are merely
hypotheses
• Managers should not seek improvements
across all of the measures all of the time
• Managers should not use only objective
measures: subjective measures are important
as well
Balanced Scorecard Implementation Pitfalls
• Managers must include both costs and
benefits of initiatives placed in the balanced
scorecard: costs are often overlooked
• Managers should not ignore nonfinancial
measures when evaluating employees
• Managers should not use too many measures
THANK YOU