Market Definition & Value Chain Analysis

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Management Consulting Training
Market Definition & Value Chain
Analysis
Sales &
Marketing
Procurement Manufacturing Distribution
Customer
Service
IT
HR
Finance & Accounting
Legal, Audit, Compliance
Other Head Office Functions

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Contents
Market Analysis Overview
Value Chain Analysis
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This presentation discusses market analysis and an important framework
for market analysis, Value Chain Analysis
Presentation Overview
Whereas “market” and “industry” are often used interchangeably, there are
actually distinct terms with different meanings. An industry is comprised of a
series of markets. This presentation is focused on market analysis.
This deck also explains a very popular business framework for market analysis
called Value Chain Analysis and includes several illustrative examples.

“Branch of trade, manufacture or service,
these as a whole.”
“Place or class where there is an
opportunity for buying and selling.”
The first step in performing a market analysis is to clarify what we are
analyzing
The terms market and industry are often used interchangeably, however, they do have different
meanings.
INDUSTRY MARKETVS
• An industry is generally made up of a series
of markets:
− Multiple products.
− Multiple geographies.
− Multiple customer types/group.
• Generally a market is part of an industry:
− Defined by product (type, feature, function or
technology).
− Defined by geography.
− Defined by customer type or group.
• A “market” can be an entire industry
• Telecoms
• Banking
• Retailing
• Drinks
• Mobile Networks
• Private Banking
• Grocery Retailers
• Wine and Beer
VS

Accurate industry/market definition is key to scope the analysis effectively
How to Scope Analysis
Solicit client input
– (i.e. “How do you define your industry / market?”, “What business are you in?”)
Constructively question a client’s paradigm about the business
Refine client definition of industry / market
– Use analytical frameworks to identify the boundaries of the market and all the relevant players
– Identify all potential buyers for client’s product or service
– Identify potential substitutes by looking for products or services that deliver a similar value
and/or functionality to the customer
Defining the business and segments may take several stages and you may
have to refine your definition in the light of further analysis.

Contents
Value Chain Analysis

The Value Chain Analysis provides an excellent framework to use when
tying down the boundaries of the market
Example of a Generic Value Chain
The value chain helps you immerse yourself in the industry and illustrates what the business
does. Helps develop the underlying economics, profit/cost drivers.
Sales &
Marketing
Procurement Manufacturing Distribution
Customer
Service
IT
HR
Finance & Accounting
Legal, Audit, Compliance
Other Head Office Functions

The Value Chain analysis describes the key activities across a company or
an industry
Value Chain – The Basics
A description of the key activities performed either across an industry or
across a company
– Usually shown as a linear flow of activities
– Developed by Michael Porter in 1985
The original purpose of the value chain analysis is to show where value is
being created within an industry or company
– Should be quantitative, not qualitative
– Should show the value of costs and revenues at each stage in the value chain
– Helps identifying the activities that generate competitive advantage
Source: Michael Porter, Competitive Advantage, 1985

Building a Value Chain requires separating out the value activities in the
industry
Value Chain – Value Activities
Identify individual value activities:
– The appropriate degree of disaggregation depends on the economics of the activities and the
purposes for which the value chain is being analysed.
– Generally, a value activity should be separated out if:
• There is (or could be) an external market for the product or outcome of that activity
• The activity represents a significant percentage of operating costs
• The cost behaviour of the activity or the cost drivers is different
• The activity is performed by competitors in different ways
• The activity has a high potential for creating differentiation
– Distinguish between primary and support activities.
Assign the value activities to the categories (or functions) that best represent
their contribution to a firm’s competitive advantage.
Don't reinvent the wheel—see if our consulting firm has done any work in this market before—
a value chain must exist.

Relevant metrics can then be assigned to each stage of the Value Chain
Value Activities – Metrics
Order the activities, broadly following the process flow:
– Determine the links between activities.
Once the activities are detailed in the value chain, map costs, returns and
industry players across the value chain where applicable
The metrics and the level of analytical detail required depend on the strategic
hypothesis being considered
The analyst should be careful to control scope at this point in the analysis.

15 minute brainteaser: what is our firm’s consultancy value chain?
Hypothesized Consultancy Value Chain
And where do the revenues and costs lie?

Brainteaser: hypothesized consultancy value chain
Hypothesized Consultancy Value Chain
Market
Development
Initial
Engagement
Longer
Delivery
Projects
Outsourcing
Support Services
(e.g. IT Support, Information Services)

To establish the boundaries of the market, the analysis should identify all
the competitors along the value chain
Example: Paper Products Industry Value Chain
Source: Shank and Govindarajan,1993
The client will probably face different competitors at each stage of the value
chain
End-Use Customer
Silvaculture and
Timber Farming
Paper Manufacturing
Logging and Chipping
Converting Operations
Pump Manufacturing
Distribution
Value
Activities
Competitor A
Competitor B
Competitor C
Competitor D
Competitor E
Competitor F

This analysis helps to develop a map of the industry and to generate initial
insight on the dynamics of the market
Example: Fund Management Competitive Map along the Value Chain
a. Also buys in from 3rd party.
b. Institutional operations customers only–no retail investors.
c. Not relationship managed.
The strategy followed by these competitors determines where they need to focus.
Sell to
Investors
Make
Products
Manage
Funds
Administer
Accounts
Serve
Customers
Merrill Lynch a a
West LB
Virgin
Bank of New York b
Fidelity c
Strategic
Positioning
HNWI Focus
Affluent Focus
Mass Market
Focus
Institutional
Focus
Product Focus

However, Value Chain Analysis has multiple uses...
Value Chain – Uses
Uses of Value Chain Analytics:
Define the industry boundaries
Understand industry dynamics
Understand value creation across competitors
Understand activity focus according to strategic positioning
Understand and benchmark cost buckets
Understand possibilities for, and competencies required for, movement
along the value chain
The analyst should be careful to control scope at this point in the analysis.

… and can help frame a series of insights beyond just market definition
Value chain analysis identifies areas of competitive advantage or disadvantage
along two lines:
– The firm may be able to control its cost drivers better than competitors (“internally focused --
cost containment)
– The firm may be able to reconfigure the value chain to capitalize on its strengths (“externally”
focused -- revenue enhancement)
Value chain analysis drives strategic hypotheses to answer several questions:
– Where are we, and our competitors, earning money? Why?
– Do competitors’ financials differ according to how they are structured and where they play
along the value chain?
– Should we forward or backward integrate?
– Should we outsource or spin-off value activities (i.e. business processes)?
– What are the industry critical success factors?
– What are our managerial action plans to control costs, improve service and increase delivered
value?

As an example, a value chain can be used to benchmark industry costs and
look for “opportunity buckets”
Illustration of Telecommunications Value Chain with Cost Distribution
Assess customer
needs and
requirements
£638M
14.5%
14% 16% 20%
Network
planning,
engineering and
construction
Market
and sell
products
and
services
Provide service Repair service
IT and R+D
Head Office Support and Administration
Provide operator services
15%
7%
3%
3%
18%
Bill
customers
and collect
payment
3%

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1
Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
• Media/PR
press@flevy.com
• Billing
billing@flevy.com

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