Competitive Strategy

5. Value Creation

By John Sanders
School of Management & Languages
Heriot-Watt University
Lecture Format
 Introduction
 Value Chain Model – firm configuration of resources &
capabilities
 Value Chain Analysis
 Strategy and Value Chain Analysis
 Example: Hugo Boss AG
 Conclusions
Learning Style Survey

Kinesthetic/tactile Visual
30% 41%

Auditory
29%
Introduction
A firm manages many different activities to
achieve its outcomes
Introduction

Value Chain
Value Creation
Analysis

Porter’s Five
Industry Structure
Forces

Competitive Strategic Group

Conditions Analysis

Strategy Statements Test desired focus

SBU Earnings/Growth
Introduction
 Investigating whether the building blocks of
our firm, i.e. people, resources & skills are
configured to achieve its purpose
A B
Introduction

UPSTREAM DOWNSTREAM
The terms '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 organization competitive position.
The value chain analysis describes the activities within and around the organization, and relates them to an analysis of the competitive
strength of the organization. The idea was built upon the insight that an organisation is more than a

Introduction random compilation of machinery, equipment, people and money. Only if

these things are arranged into systems and systematic activities, it will
become possible to produce something for which the customers are willing to
pay a price.

 Value chain analysis views the organisation

as a sequential process of value-creating
activities, and attempts to understand how
a business creates customer value by
examining the contributions of different
activities within the business to that value.
The term value chain describes a way of looking at
a business as a chain of activities that transform
.inputs into outputs that customers value
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 5 main areas. Each of these primary activities is linked to support activities which help to
improve their effectiveness or efficiency. There are 4 main areas of support activities.

Value Chain Model

The intent of value chain is to increase the value of a product or service

(directly involved in the production of the product)

Porter, M.E. (1985). Competitive Advantage. New York: Free Press

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.
Value Chain Model
How How can I
should outperform
I run my
business?
the
competition?

Cost leader –
Differentiated product Focus on niche
Undifferentiated
or service
product or service
 Value Chain Analysis
Key steps
1.Start by laying out the industry value chain
What are the key value-creating activities at each step
in the chain?

Upstream Downstream

How far upstream or downstream do the industry’s

activities extend?
 Value Chain Analysis
Clothing Industries

The supply chain management (SCM) is the process between producing and
distributing the product, dealing with the suppliers abd logistics of getting the
product to maket; management of all parties involved in fulfilling a customer request.
Value chain management (VCM) is a set of interrelated activities performed by chain
UPSTREAM of participants a company uses to create and maximise its competitive advantage DOWNSTREAM
A single organisation rarely undertakes all of the value activities in-house from design through to the delivery of the
final product or service to the final consumer. There is usually specialisation of role so any one organisation is part of
a wider value network.

Value Chain Analysis

The Value Network 4 key issues: The ''make or buy'" decision (outsourcing decision); Partnership;
"Profit Pools" within the network; Central activities to the organisation

Supplier value chains Organisation's value chain Channel Customer

value chains value chains
Upstream A Company’s Own Downstream
Value Chains Value Chain Value Chains

Activities,
Internally Costs, &
Activities, Performed Margins of
Activities, Buyer/User
Costs, & Forward
Costs, & Value
Margins of Channel
Margins Chains
Suppliers Allies &
Strategic
Partners

The Value Network - any one organisation is part of a wider value network. It is the set of inter-
organizational links and relationships that are necessary to create a product or service. It is therefore
important that managers understand the bases of their organization's capabilities in relation to the
wider value network
Value Chain Analysis
2. Next compare your value chain to the
industry’s.

Spanish
retail clothing
company

Swedish
clothing
company

British online
fashion &
Cosmetic
retailer
Value Chain Analysis
Focus attention on

3. Zero in on price/uniqueness drivers, those

activities that have a high current or
potential impact on differentiation.
4. Zero in on cost drivers, paying special
attention to activities that represent a large
or growing percentage of costs.
Fives Forces and Value Chain Analysis

Potential
Entrants

Competitors
Supplier Competitors Buyer
Value Chain Value Chain

Firm
Supplier Buyer
Value Chain
Value Chain Value Chain

Substitutes Adapted from Porter (1980 and 85)

Example: Estée Lauder
 Application
Horizontal integration is the acquisation of additional business activities that are at the same level of
the value chain in similar or different industries. This can be by internal expansion through a reinvest-
ment of operating profits or external expansion through a merger or acquisitation. Buying Competition.
Full Vertical Integration

Customers

Vertical integration is a strategy where a co. expands its business operations into different steps on
the same production path, such as when a manufacturer owns its supplier and/or distributor
Vertical integration help cos to reduce costs and improve efficiencies by decreasing transportation
expenses and reducing turnaround time among other advantages.
Sometimes it is more effective for a co. to rely on the established expertise and economies of scale
of other vendors rather than trying to become vertically integrated
 Application
refers to a mix of vertical integration and market exchange.
Firms are taper integrated when they are
backward or forward integrated but rely on Taper Integration For example, upstream, a producer might manufacture some
of the input itself and buy the remaining portion from other
outsiders for a propotion of their suppliers independent firms.
or distribution. Taper integration represents a useful compromise between
desires to control adjacent businesses and needs to contol strategic
flexibility.

Customers

relies on relies on
DOWNSTREAM
UPSTREAM
 Golf, Audi A3, Skoda & Octavia share the same vehicle platforms, engines.
and many of the same parts. However, the ascetics, styling and performance
are altered to help differentiate each of these offerings. This allowed

Application Volkswagen Group to attain some of the best profit margins in the car
industry for its products.

Golf A3
Leverage - the condition of having a relatively small amount of cost yield a relatively high level of returns
Use to a max
Benefits of advantage
Resource Resource
sharing
resources to Base Base Leveraging
obtain greter (Stock of (Stock of resources
leverage from assets) assets)
suppliers

Primary activities can be shared or integrated across the large organisation

Adoption of a
single system or
approach that Activity Activity
functions
across System System Integrating
business units (Value (Value activities
such as a chain) chain)
common logistics
and shipping
system
Application
 This diagram illustrates some of the common ways in which
Primary activities can be shared or integrated across

Application
large organisations

Opportunity to share ....

Input activities Production activities Warehousing and Sales and marketing Dealer support and
•Common purchasing •Common product distribution •Common advertising service
•Common inventory components •Common product delivery efforts •Common service network
control system •Common product system •Common promotional •Common guarantees and
•Common warehousing components •Common warehousing activities warranties
facilities manufacturing facilities •Cross-selling of products •Common accounts
•Common inventory •Common assembly •Common pricing systems receivable management
delivery system facilities •Common marketing systems
•Common quality •Common quality control departments •Common dealer training
assurance system •Common distribution •Common dealer support
•Common input •Common maintenance channels services
requirements system operation •Common sales force
•Common suppliers •Common inventory •Common sales offices
control system
•Common order
processing services

Inventory control system is a system that encompasses all aspects of managing a co's inventories - purchasing. shipping, tracking, warehousing, storage....
This diagram illustrates how value chain analysis cain aid firms interested in umdertaking mergers and acquisitions
(M&As) that determine the strengths and weaknesses of a target company. Philip Morris acquired Miller Brewing

Application
Philip Morris - a highly diversified multinational corporation
Tobacco Industry

Research and Marketing and Customer

Production
Development sales service

competency
Transfer of
Brewing Industry

Research and Marketing and Customer

Production
Development sales service

Miller Bewing
Prior to the acquisition, Miller Bewing had been performing poorly.
Philip Morris had no background in brewing, but Miller's operations,
products, and management were regarded as being highly effective.
Philip Morris judged that Miller's marketing and sales activity was
harming its performance. They calculated that the introduction of its own excellent marketing team
would improve Miller's value system, which turned out tobe correct.
 Application
Firms having close working relationships with their suppliers can directly
link their value chains together to enhance cost advantages or
differentition benefits. The diagram illustrates that Wolkswagen and Wolkswagen
Bosch have a close working relationship that facilitates the sharing
of inventory information as well as extensive R&D cooperation
between both companies, engineers and technicians.

Bosch Turbocharging Technologies boosts engine performance

Example: Hugo Boss AG
 The company’s principal
activities are the manufacturer
and retailing of men’s and
women’s ready-to-wear
clothing, sports and leisure
wear, accessories and non-
textile products such as
eyewear, cosmetic, watches and
shoes.
 Global leader in the male and
female high fashion markets via
styling, creativity, tailoring,
workmanship and materials.
Example: Hugo Boss AG

What Customers? Which Needs?

• Sophisticated, aspiring and/or • Business apparel

high status professional men • Sportswear
and women from around the • Glamorous styles for
world special events
• Contemporary, modern ready- • Active lifestyle
to-wear elegance
• Supported by a premium
assortment of accessories
What Relative Price?

• Premium
 UK’s High Fashion Retail Clothing Industry

Simplified strategic group map

Dior, Chanel, YSL and
Givenchy
Differentiation

Versace, Armani, Hugo Boss,

Perceived

Prada, Burberry, Ralph

Lauren, Calvin Klein, Zara,
Gucci

George Davies, Jasper

Conran, Clements Ribiero

Up and coming local

designers

Perceived Quality (as excellence)

 Example: Hugo Boss AG
Boss's Value Network Channels Value Chains
Suppliers
value Chains Hugo Boss’s value system
Customer
Value Chain
Hugo Boss's Value Chain

DOWNSTREAM
Boss is an element of a value system or supply chain. Hence, value chain analysis should cover JIT inventory system is mana-
the whole value system in which Hugo Boss operates. Within the whole value system there is only gement strategy that aligns
a certain value of profit margin available. This is is the difference of the final price the customer pays raw materials orders from sup-
and the sum of of all costs incurred with the production and delivery of the product/service. It depends on the structure of the pliers directly with production
value system, how this margin spreads across the suppliers, producers (manufacturers), distributors, customers and other schedules. JIT manufacturintg;
UPSTREAM elements of the value system. Each member of the system will use its market position and bargening power to get a higher
propotion of the this margin. Nevertheless, members of a value system can cooperate to improve their efficiency and to
JIT production; Toyota Product-
ion System.
reduce their cost to achieve a higher total margin to the benefit of all of them (ex. reducing stocks in a Just-In-Time system).
Example: Hugo Boss AG

Inbound
Logistics
Superior handling of
Extensive use of subjective rather than
incoming raw materials
objective performance measures to
minimize damage and
improve the quality of
the final product
Example: Hugo Boss AG

Operations
Consistent
manufacturing of high
quality products

High proportion of in-

house production
Example: Hugo Boss AG

Outbound
Logistics
Accurate and
responsive order
processing
procedures
Strong capability in
basic research

Rapid and timely

product deliveries to
retail outlets
Example: Hugo Boss AG

Marketing &
Sales
Strong Coordination among
functions in design,
marketing and retail outlets

Promotion of a premium
image via its advertising and
appearance of outlets

Premium Pricing
 Example: Hugo Boss AG
Service
Travelling
technicians
Superior
Lab shop
personnel
Retailer events
training
Training
Manual

A model that tests the product/brand

in a real environment but requires
little investment. Brands need to
consolidate concepts, test their
acceptance and positioning in the
market before deciding to go ahead
with long-term commitment in a
shopping centre
Example: Hugo Boss AG
Example: Hugo Boss AG
Example: Hugo Boss AG
Example: Hugo Boss AG

Bruno Saelzer – Former CEO Claus-Dietrich Lahrs - CEO

Former
Daniel Grieder - CEO
Low Cost Value Chain
Differentiation Value Chain
Conclusions
 “You begin to see each activity not just as a cost,
but as a step that has to add some increment of
value to the finished product or service.”
 Helps identify critical activities (from customers
viewpoint)
 Useful for analysing competitors
 Consistency between activities reinforces a
company’s competitive stance.
 Optimisation of the total system (big picture)
Industry, Firm, and Other Effects Explaining Superior
Firm Performance

Other effects Industry effects

~35% - 50% ~20%
(Corporate parent, year
effects, unexplained
variances)

Firm effects
~30% - 45%
Assignment
 Critique requires you to consider the plan’s main strengths
and weaknesses.
 Okay to focus solely on its weaknesses.
 Here are some questions you might pose to determine the
strengths and weaknesses of the plan:
 Does the plan have a clear organizational focus?
 Does the plan provided sufficient environmental information
to understand whether the stated focus is obtainable?
 Does the plan give you a good idea of the resources the
company commands?
 Would the stated resources allow the company to achieve its
organisational focus within the environment identified?
Assignment
Suggested structure
 Introduction
 Might identify your task (i.e. critique WRSX Group’s business plan) and then
 Briefly outline your opinion on whether the plan was a good or a bad effort
 Identify the main reasons why you think the plan is either a good or a bad
effort.
 Main body
 Discuss / explain The next main strengths or weaknesses – probably mainly
its weaknesses.
 You might want to use headings for each of the main issues discussed.
 It would also be a good idea to support your explanations with references.
 Conclusion
 Provide a summary of your opinions and maybe some recommendations.