Value Creation
- 1. Driving Customer Value & Loyalty 1
- 2. Objectives At the completion of this session you should be able to: • identify the inputs, processes and outputs that drive your firm forward • critically evaluate your firm using Porter’s Value Chain • explain value and discuss the ways in which your firm can generate value • explain the importance of loyalty and its link to value creation • discuss how the value chain framework can assist you in business planning, and • build a map of your value system as a primary strategic tool. Copyright Agitavi Research Corporation Limited 2002 - 2006 2
- 3. Value: What is it? Value is a term often used and frequently misunderstood. In order to gain a better understanding you need to be able to explicitly identify what your customers (end users or intermediaries) value. How? To do that you need to know them and have developed an understanding through close relationships, continual interaction and knowledge generation, which is in part supported by quality market research Copyright Agitavi Research Corporation Limited 2002 - 2006 3
- 4. Value: What is it? (continued) In essence value creation can be characterised as a process that is dependent upon interaction and dialogue between buyers and sellers. Through this process the seller can: • develop intimate knowledge of buyer value chains and develop value models • identify what buyers perceive to be valuable, and • create a value offer through the provision of benefits that translate into a competitive advantage for the seller and, buyer commitment. Copyright Agitavi Research Corporation Limited 2002 - 2006 4
- 5. Value: What is it? (continued) Both sides of value Value from both the seller’s and buyer’s perspective needs to be recognised as being situation specific. The buyer must come to an intimate understanding of the seller’s value chain if long-term and value-laden relationships are to be formed. This is particularly important in a business-to-business context. Copyright Agitavi Research Corporation Limited 2002 - 2006 5
- 6. The Value Chain • Building from your understanding of the environment and how to analyse it and the basics of the value concept, you also need to be able to visualise the processes that drive your firm forward. • This requires an understanding of the inputs, processes and outputs relevant to your firm; an understanding characteristic of systems thinking. • To do that we are going to initially use Porter’s value chain. Copyright Agitavi Research Corporation Limited 2002 - 2006 6
- 7. The Value Chain (continued) Copyright Agitavi Research Corporation Limited 2002 - 2006 7
- 8. Value Chain Analysis Primary Activities: • Purchased Supplies & Inbound Logistics: activities, costs & assets associated with inputs • Operations: activities, costs & assets associated with converting inputs into outputs • Distribution & Outbound Logistics: activities, costs & assets associated with physically distributing outputs to end users • Sales & Marketing: activities, costs & assets associated with the selling effort, advertising & promotion • Service: activities, costs & assets associated with providing customer assistance Copyright Agitavi Research Corporation Limited 2002 - 2006 8
- 9. Value Chain Analysis (continued) Support Activities: • Research, Technology & Systems Development: activities, costs and assets associated with product & process R&D, process design, plant & equipment, engineering, systems & procedures • Human Resource Management: activities, costs & assets associated with recruitment, hiring, training, compensation, team development, core competencies, human relations • General Administration: activities, costs & assets associated with accounting & finance, legal affairs, regulatory affairs, safety, MIS, strategic alliances Copyright Agitavi Research Corporation Limited 2002 - 2006 9
- 10. Value Chain Analysis (continued) Key Success Factors (the key elements for success in a particular industry): • Technology-related KSFs • Operations-related KSFs • Distribution-related KSFs • Marketing-related KSFs • Skills-related KSFs • Capability and competency-related KSFs • Other related KSFs. Copyright Agitavi Research Corporation Limited 2002 - 2006 10
- 11. The Value Chain Porter developed the concept of the value chain to aid analysis of a firm’s operations. It has two primary uses: • Firstly, it is used to better understand the activities of the firm and how it might develop a competitive advantage. • Secondly, it is used to position your firm in the chain of upstream and downstream suppliers and buyers called the channel or value system. Copyright Agitavi Research Corporation Limited 2002 - 2006 11
- 12. The Value System Building on the concept of the value chain, you are now introduced to the value system. A value system is the network of firms that come together to create value for end users. Given that you have looked briefly at how value is created and at the value chain concept as it pertains to individual firms, you should be able to conceptualise how your firm fits into the value system. Copyright Agitavi Research Corporation Limited 2002 - 2006 12
- 13. The Value System: M-commerce The figure demonstrates an example showing that you are a ‘cog in the wheel’. That is, relationships with other channel members are critical if enhanced competitiveness (and hence profitability) is to be achieved by you and your partners. Copyright Agitavi Research Corporation Limited 2002 - 2006 13
- 14. The Value System One argument is that the best ISVs will become strategic business advisors to their market and supply chain partners as well as their customers and that they will do this by providing business solutions that enhance the competitiveness of their value system partners. Note that you can add to their competitiveness by providing them with cost advantages, flexibility advantages, service advantages, image advantages and/or focus advantages. Copyright Agitavi Research Corporation Limited 2002 - 2006 14
- 15. The Value System (continued) Among these partners, customers are one group with whom you must work closely. Interactive relationships with customers help you overcome issues associated with shrinking product life-cycles and the need for continued product innovation. In your industry the emergence of online customer networks needs to be harnessed by ISVs as a key tool for achieving a competitive advantage via feedback loops. For example, in its initial years, Netscape used its online user community extensively to garner ideas for new product features as well as to test new products and thereby accelerated the introductions of new versions of their flagship browser product. Copyright Agitavi Research Corporation Limited 2002 - 2006 15
- 16. The Value Chain/System and Me Understanding the value chain aids a manager in two ways: Firstly, undertaking a critical analysis of the firm’s operations, using the value chain as a guide, provides a good picture of how the firm is doing. It: • allows you to identify key processes and core competencies • provides a view of the firm’s strengths and weaknesses • highlights that many of the primary and/or secondary activities relevant to your firm are handled by partners or contractors, a reality that can complicate the management of the process. Copyright Agitavi Research Corporation Limited 2002 - 2006 16
- 17. The Value Chain/System and Me (continued) Secondly, it provides the basis for consideration of whether the functions and processes you currently have truly create value, which again, can only be measured by your customers. If they don’t add value, you must question why they are there and whether they should be changed or discarded. Copyright Agitavi Research Corporation Limited 2002 - 2006 17
- 18. The Value Chain/System and Me (continued) • Thirdly, knowing how to create value, through the value chain and value system, is a critical component to business success. • Notably, one significant reason for this is that customers (again incorporating intermediaries) are much more likely to be loyal if you provide value. Copyright Agitavi Research Corporation Limited 2002 - 2006 18
- 19. The Value Chain and Loyalty In short, customer loyalty: • improves profitability (the cost of getting repeat business should be less than the cost of getting new business) • allows the focus to be on building a client base rather than just maintaining it • results in clients being prepared to adopt new products offered by the firm more readily than other buyer groups, and • means there is more likelihood that clients will recommend the firm to friends and associates (loyalty implies satisfaction) and satisfied clients are more likely to offer positive word-of-mouth. Copyright Agitavi Research Corporation Limited 2002 - 2006 19
- 20. Further Reading As an extension to the associated activity, you will be provided with a reading that examines the differences between service and product companies. This reading will help you analyse your value chain and system in more detail, allowing you to identify and consider the differences and what these differences mean to your organisation. Copyright Agitavi Research Corporation Limited 2002 - 2006 20
- 21. Thank you Loredana Niculae Country Director - Romania Agitavi Research Corporation e: loredana.niculae@agitavi.net mob/sms: +4 0724 567 473 w: http://www.agitavi.com Copyright Agitavi Research Corporation Limited 2002 - 2006 21