Department of Management Studies, NIT Durgapur Strategic Management

sukantamaji@gmail.com Class Notes/PPM/B.Tech

Value Chain

The value chain helps an organization identify how it creates value for customers and locate
where its sources of competitive advantage lie.

Value chain models can be created in both qualitative and quantitative forms.

Many organizations do not consciously make decisions to optimize the sources of advantage
resident in their value chain and in so doing, risk losing competitive advantage.

Main Thoughts:

Most mangers know that their organization‘s value chain represents the sequence of activities
necessary to create a product or service, produce or deliver it, market and sell it to customers,
distribute or provide it to those customers while ensuring necessary post sales service is
completed. They also know that internal firm infrastructure activities such as human capital
development or procurement support the main stages in the value chain. What managers
sometimes aren‘t as knowledgeable of is the fact that the value chain within a firm or industry
is actually comprised of a very specific model of performance that depicts the discrete stages of
organizational value creation. Further, they don‘t always use the model to compare and
contract activities across firms for the purpose of determining where competitive advantages
lie.

Developed in the early 1980s by Harvard Business School Professor Michael Porter in his book
Competitive Advantage, the value chain consists of two main components: primary activities
and secondary activities. A generic, firm specific value chain is shown in figure 1.

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 Support Activities: These consist of activities that do not directly produce goods or services.
Infrastructure activities such as administration, human resource management, information
technology management, purchasing and procurement, and research and development are
included in the support area of the model.

Primary Activities: These activities are the direct, value creating activities of the firm.
Bringing raw materials into an organization, manufacturing a product or service, distributing it
as well as marketing, selling and servicing the product are considered primary activities. The
model can and should be reconfigured to account for activities specific to the industry in which
the firm competes. For example, in a service industry—such as professional services— inbound
logistics might be replaced with methodology development or client acquisition. Regardless of
industry however, the value chain is a powerful framework for analyzing both industry and
firm specific activities.

Ansoff Matrix

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused
on the firm's present and potential products and markets (customers). By considering ways to
grow via existing products and new products, and in existing markets and new markets, there
are four possible product-market combinations. Ansoff's matrix is shown below:

Ansoff's matrix provides four different growth strategies:

Market Penetration - the firm seeks to achieve growth with existing products in their
current market segments, aiming to increase its market share.
Market Development - the firm seeks growth by targeting its existing products to new
market segments.
Product Development - the firms develops new products targeted to its existing market
segments.
Diversification - the firm grows by diversifying into new businesses by developing new
products for new markets.

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 Existing Products New Products

Existing
Market Penetration Product Development
Markets

New
Market Development Diversification
Markets

Selecting a Product-Market Growth Strategy

The market penetration strategy is the least risky since it leverages many of the firm's existing
resources and capabilities. In a growing market, simply maintaining market share will result in
growth, and there may exist opportunities to increase market share if competitors reach
capacity limits. However, market penetration has limits, and once the market approaches
saturation another strategy must be pursued if the firm is to continue to grow.

Market development options include the pursuit of additional market segments or

geographical regions. The development of new markets for the product may be a good strategy
if the firm's core competencies are related more to the specific product than to its experience
with a specific market segment. Because the firm is expanding into a new market, a market
development strategy typically has more risk than a market penetration strategy.

A product development strategy may be appropriate if the firm's strengths are related to its
specific customers rather than to the specific product itself. In this situation, it can leverage its
strengths by developing a new product targeted to its existing customers. Similar to the case of
new market development, new product development carries more risk than simply attempting
to increase market share.

Diversification is the most risky of the four growth strategies since it requires both product
and market development and may be outside the core competencies of the firm. In fact, this
quadrant of the matrix has been referred to by some as the "suicide cell". However,
diversification may be a reasonable choice if the high risk is compensated by the chance of a
high rate of return. Other advantages of diversification include the potential to gain a foothold
in an attractive industry and the reduction of overall business portfolio risk.

Business portfolio is the right mix of businesses that company operates and products that
offers to customers. Portfolio analysis is the process by which company analyze its products
and businesses.

Company develops their business portfolio in two steps

a. Analyze the existing business portfolio and decide which business should receive more, less
or no investment.
b. Developing the new business portfolio for future to meet growth opportunities and
eliminating the unprofitable portfolios.

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 Strategic business unit:
The unit of the company that has separate mission and objectives and that can be planned
independently from other businesses.

Characteristics of SBU.
1. It may be brand, or a product line or separate division of the company.
2. It is having distinct mission and objectives.
3. It is managed by separate executive team.

BCG growth-share matrix

Companies that are large enough to be organized into strategic business units face the
challenge of allocating resources among those units. In the early 1970's the Boston Consulting
Group developed a model for managing a portfolio of different business units (or major product
lines). The BCG growth-share matrix displays the various business units on a graph of the
market growth rate vs. market share relative to competitors:

This technique is particularly useful for multi-divisional or multiproduct companies. The

divisions or products compromise the organizations ―business portfolio‖. The composition of
the portfolio can be critical to the growth and success of the company. The BCG matrix
considers two variables, namely.

1. MARKET GROWTH RATE 2. RELATIVE MARKET SHARE

The market growth rate is shown on the vertical (y) axis and is expressed as a %. The range is
set somewhat arbitrarily. The overhead shows a range of 0 to 20% with division between low
And high growth at 10% (the original work by B Headley ―Strategy and the business portfolio‖,
Long Range Planning, Feb 1977 used these criteria). Inflation and/or Gross National Product
have some impact on the range and thus the vertical axis can be modified to represent an
index where the dividing line between low and high growth is at 1.0. Industries expanding
faster than inflation or GNP would show above the line and those growing at less than inflation
or GNP would be classed as low growth and show below the line. The horizontal (x) axis shows
relative market share. The share is calculated by reference to the largest competitor in the
market. Again the range and division between high and low shares is arbitrary. The original
work used a scale of 0.1, i.e. market leadership occurs when the relative market share exceeds
1.0. The BCG growth/share matrix is divided into four cells or quadrants, each of which
represents a particular type of business. Divisions or products are represented by circles. The
size of the circle reflects the relative significance of the division/product to group sales. A
development of the matrix is to reflect the relative profit contribution of each division and this
is shown as a pie-segment within the circle.

Question Marks
Question marks are products that grow rapidly and as a result consume large amounts of
cash, but because they have low market shares they don‘t generate much cash. The result is a
large net cash consumption. A question mark has the potential to gain market share and
become a star, and eventually a cash cow when the market growth slows. If it doesn‘t become a
market leader it will become a dog when market growth declines. Question marks need to be
analyzed carefully to determine if they are worth the investment required to grow market share.

Stars
Stars generate large sums of cash because of their strong relative market share, but also
consume large amounts of cash because of their high growth rate. So the cash being spent and
brought in approximately nets out. If a star can maintain its large market share it will become
a cash cow when the market growth rate declines.

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 Cash Cows
As leaders in a mature market, cash cows exhibit a return on assets that is greater than the
market growth rate – so they generate more cash than they consume. These units should be
‗milked‘ extracting the profits and investing as little as possible. They provide the cash required
to turn question marks into market leaders.

Dogs
Dogs have a low market share and a low growth rate and neither generates nor consumes a
large amount of cash. However, dogs are cash traps because of the money tied up in a business
that has little potential. Such businesses are candidates for divestiture.

Successful products may well move from question mark though star to Cash Cow and finally to
Dog. Less successful products that never gain market position will move straight from question
mark to Dog.

Companies will frequently search for a balanced portfolio, since.

Too many stars may lead to a cash crisis

Too many Cash Cows puts future profitability at risk
And too many question marks may affect current profitability.

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 The BCG matrix provides a framework for allocating resources among different business units
and allows one to compare many business units at a glance. However, the approach has
received some negative criticism for the following reasons:

The link between market share and profitability is questionable since increasing market
share can be very expensive.
The approach may overemphasize high growth, since it ignores the potential of declining
markets.
The model considers market growth rate to be a given. In practice the firm may be able
to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate
to be only one of many factors that make an industry attractive, and which considers relative
market share to be only one of many factors describing the competitive strength of the
business unit.

Product life Cycle:

All products and services have certain life cycles. The life cycle refers to the period from the
product‘s first launch into the market until its final withdrawal and it is split up in phases.
During this period significant changes are made in the way that the product is behaving into
the market i.e. its reflection in respect of sales to the company that introduced it into the
market. Since an increase in profits is the major goal of a company that introduces a product
into a market, the product‘s life cycle management is very important. Some companies use
strategic planning and others follow the basic rules of the different life cycle phase that are
analyzed later. The understanding of a product‘s life cycle, can help a company to understand
and realize when it is time to introduce and withdraw a product from a market, its position in
the market compared to competitors, and the product‘s success or failure. For a company to
fully understand the above and successfully manage a product‘s life cycle, needs to develop
strategies and methodologies, some of which are discussed later on.

The product‘s life cycle - period usually consists of five major steps or phases: Product
development, Product introduction, Product growth, Product maturity and finally Product
decline. These phases exist and are applicable to all products or services from a certain make
of automobile to a multimillion-dollar lithography tool to a one-cent capacitor. These phases
can be split up into smaller ones depending on the product and must be considered when a
new product is to be introduced into a market since they dictate the product‘s sales
performance.

1. PRODUCT DEVELOPMENT PHASE

Product development phase begins when a company finds and develops a new product idea.
This involves translating various pieces of information and incorporating them into a new
product. A product is usually undergoing several changes involving a lot of money and time
during development, before it is exposed to target customers via test markets. Those products
that survive the test market are then introduced into a real marketplace and the introduction
phase of the product begins. During the product development phase, sales are zero and
revenues are negative. It is the time of spending with absolute no return.

2. INTRODUCTION PHASE

The introduction phase of a product includes the product launch with its requirements to
getting it launch in such a way so that it will have maximum impact at the moment of sale. A
good example of such a launch is the launch of ―Windows XP‖ by Microsoft Corporation. This
period can be described as a money sinkhole compared to the maturity phase of a product.
Large expenditure on promotion and advertising is common, and quick but costly service

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 requirements are introduced. A company must be prepared to spent a lot of money and get
only a small proportion of that back. In this phase distribution arrangements are introduced.
Having the product in every counter is very important and is regarded as an impossible
challenge. Some companies avoid this stress by hiring external contractors or outsourcing the
entire distribution arrangement. This has the benefit of testing an important marketing tool
such as outsourcing. Pricing is something else for a company to consider during this phase.
Product pricing usually follows one or two well structured strategies. Early customers will pay
a lot for something new and this will help a bit to minimize that sinkhole that was mentioned
earlier. Later the pricing policy should be more aggressive so that the product can become
competitive. Another strategy is that of a pre-set price believed to be the right one to maximize
sales. This however demands a very good knowledge of the market and of what a customer is
willing to pay for a newly introduced product. A successful product introduction phase may
also result from actions taken by the company prior to the introduction of the product to the
market. These actions are included in the formulation of the marketing strategy. This is
accomplished during product development by the use of market research. Customer
requirements on design, pricing, servicing and packaging are invaluable to the formation of a
product design. A customer can tell a company what features of the product are appealing and
what are the characteristics that should not appear on the product. He will describe the

ways of how the product will become handy and useful. So in this way a company will know
before its product is introduced to a market what to expect from the customers and
competitors. A marketing mix may also help in terms of defining the targeted audience during
promotion and advertising of the product in the introduction phase.

3. GROWTH PHASE

The growth phase offers the satisfaction of seeing the product take-off in the marketplace. This
is the appropriate timing to focus on increasing the market share. If the product has been
introduced first into the market, (introduction into a ―virgin‖ market or into an existing market)
then it is in a position to gain market share relatively easily. A new growing market alerts the
competition‘s attention. The company must show all the products offerings and try to
differentiate them from the competitors ones. A frequent modification process of the product is
an effective policy to discourage competitors from gaining market share by copying or offering
similar products. Other barriers are licenses and copyrights, product complexity and low

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 availability of product components. Promotion and advertising continues, but not in the extent
that was in the introductory phase and it is oriented to the task of market leadership and not
in raising product awareness. A good practice is the use of external promotional contractors.
This period is the time to develop efficiencies and improve product availability and service. Cost
efficiency and time-to-market and pricing and discount policy are major factors in gaining
customer confidence. Good coverage in all marketplaces is worthwhile goal throughout the
growth phase. Managing the growth stage is essential. Companies sometimes are consuming
much more effort into the production process, overestimating their market position. Accurate
estimations in forecasting customer needs will provide essential input into production planning
process. It is pointless to increase customer expectations and product demand without having
arranged for relative production capacity. A company must not make the mistake of over
committing. This will result into losing customers not finding the product ―on the self‖.

4. MATURITY PHASE

When the market becomes saturated with variations of the basic product, and all competitors
are represented in terms of an alternative product, the maturity phase arrives. In this phase
market share growth is at the expense of someone else‘s business, rather than the growth of
the market itself. This period is the period of the highest returns from the product. A company
that has achieved its market share goal enjoys the most profitable period, while a company
that falls behind its market share goal, must reconsider its marketing positioning into the
marketplace. During this period new brands are introduced even when they compete with the
company‘s existing product and model changes are more frequent (product, brand, model).
This is the time to extend the product‘s life. Pricing and discount policies are often changed in
relation to the competition policies i.e. pricing moves up and down accordingly with the
competitors one and sales and coupons are introduced in the case of consumer products.
Promotion and advertising relocates from the scope of getting new customers, to the scope of
product differentiation in terms of quality and reliability. The battle of distribution continues
using multi distribution channels2. A successful product maturity phase is extended beyond
anyone‘s timely expectations. A good example of this is ―Tide‖ washing powder, which has
grown old, and it is still growing.

5. DECLINE PHASE

The decision for withdrawing a product seems to be a complex task and there a lot of issues to
be resolved before with decide to move it out of the market. Dilemmas such as maintenance,
spare part availability, service competitions reaction in filling the market gap are some issues
that increase the complexity of the decision process to withdraw a product from the market.
Often companies retain a high price policy for the declining products that increase the profit
margin and gradually discourage the ―few‖ loyal remaining customers from buying it. Such an
example is telegraph submission over facsimile or email. Dr. M. Avlonitis from the Economic
University of Athens has developed a methodology, rather complex one that takes under
consideration all the attributes and the subsequences of product withdrawal process.
Sometimes it is difficult for a company to conceptualize the decline signals of a product.
Usually a product decline is accompanied with a decline of market sales. Its recognition is
sometimes hard to be realized, since marketing departments are usually too optimistic due to
big product success coming from the maturity phase. This is the time to start withdrawing
variations of the product from the market that are weak in their market position. This must be
done carefully since it is not often apparent which product variation brings in the revenues.
The prices must be kept competitive and promotion should be pulled back at a level that will
make the product presence visible and at the same time retain the ―loyal‖ customer.
Distribution is narrowed. The basic channel is should be kept efficient but alternative channels
should be abandoned. For an example, a 0800 telephone line with shipment by a reliable
delivery company, paid by the customer is worth keeping.