Capturing Value across the Value System
Entrepreneur Success Series
Resource Note # 14
In last edition of SATTVA we discussed the frameworks and process of constructing the value system. While construction of value system involves analysis, implementation is all about action. With an understanding of how a Value System is constructed, the entrepreneur can now strategize how Value can be realised through the Value System. A brief initial understanding of Generic Strategies will help in understanding Value realisation.
1. Generic Strategies
Michael Porter had stated that the Generic Value Proposition offered by any Value Chain is based on the Generic Strategies of Low Cost or Differentiation. He also stated that these propositions could be offered either in a mass market or a small (niche) market.
Low Cost is normally associated with standard, functional products while Differentiation is seen as Innovative products, achieved and sustained through continuous Innovation. The Value System that operates on low cost is called a Functional or Efficient System Value System offering differentiation as a proposition is called an Innovative or Responsive System
2. Functional (Efficient) System
These chains deliver low Cost, achieved through efficiencies in the processes of the chain by eliminating waste. The final value offered is standard and non-differentiated. Hence the only competitive weapon is least cost.
The Japanese have classified all activities into three major heads
Efficient Chains focus on eliminating wasteful activities, minimizing non-value adding activities and maximizing value adding activities – all through continuous improvements. The credo is ‘add Value, reduce costs and eliminate waste’. The practice of Kaizen is very powerful for this purpose. Lower segment, mass produced cars are example of cost efficient systems.
3. Responsive (Innovative) System
Responsive Systems are oriented to offering differentiated value. This means they offer something above the basic function and hope to attract a premium for the same. Unlike cost, which is a standard value, differentiation can be myriad. They can meet the customers need for variety, or even induce a new need in the customer. In order to sustain the differentiation they constantly look to innovate and give new offerings to the customer – be it changes in product features or service. These chains do not focus so much on cost-oriented efficiencies, but on effectiveness to service the customer needs. The IT industry is replete with examples of Responsive systems. Features and software are constantly being upgraded. Higher end automobiles also play the responsive game.
Table 1 compares Efficient and Responsive Chains
|Head||Physically Efficient Process||Market-Responsive Process|
|Primary purpose||supply predictable demand efficiently at the lowest possible cost||respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory|
|Manufacturing focus||maintain high average utilization rate||deploy excess buffer capacity|
|Inventory strategy||generate high turns and minimize inventory throughout the chain||deploy significant buffer stocks of parts or finished goods|
|Lead-time focus||shorten lead time as long as it doesn’t increase cost||invest aggressively in ways to reduce lead time|
|Approach to choosing||select primarily for cost and quality||select primarily for speed, flexibility, and quality|
|Product-design strategy||maximize performance and minimize cost||use modular design in order to post pone product differentiation as long as possible.|
Table 1: Physically Efficient versus Market-Responsive Chains
Source: Harvard Business Review on Managing the Value Chain, page 136
Figure 2 shows how Efficient and Responsive Chains are related. As seen, lower costs are often associated with longer response times, and vice versa. The ideal direction of improvement is for achieving shorter response times but with lower costs.
Fig 2: Relation between Efficiency and Responsiveness
Source: Combating Supply Chain Disruptions: Lessons Learned from Japan
4. Creating a Competitive Value System
While the above understanding enriches the decision options for an entrepreneur, they are primarily interested in competitive systems superior to the competition. Hence there is a need to understand how Competitive Value Systems are constructed
Michael Porter put it aptly when he said “Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation”. These insights help when building a competitive Value System. Competitive advantage of the Value System as a whole is derived from the competitive advantage that stems from each organization in the chain. Thus each organization in the chain must provide competitive advantage as compared to its competitors who may be members of other competing Value Systems (as the saying goes – competition is no longer between organisations, but between Value Systems). It would be necessary for each organization to do a Strength-Weakness analysis to arrive at what competitive advantage it offers. This would have its impact on the whole competitive advantage of the Value System. It is said that “A chain is only as strong as its weakest link”. Likewise, a Value System is only as competitive as its weakest organization.
5. Strength and Weakness Analysis of an Organisation in the Value System Chain
- The Industry Value Curve is made of a number of product segments.
- An organization in a Value System occupies one (or more, if it is integrated) product segment
- This organization has a number of other competing organisations seeking to occupy its place in the Value System (Note – only at the end is there a competition for retail customers. At all other points the competition is for a position in the Value System). The position in the Value System can only be secured by offering superior performance as compared to competitors
- The organization therefore needs to build competitive advantage, particularly on the order winning CSFs demanded by its downstream organization. (At the end of the Value System, the CSFs will be of the ultimate customer).
- Through the technique of Strategic Group analysis the organization can identify its immediate competitors.
- The organization identifies the required resources – processes, systems, human, financial, etc – on which the competition is based
- Resources are classified as available/ accessible resources and competitive resources. Available resources are the ones the organization can command, and competitive resources are the ones it can deploy towards order winning strategies. Strengths and Weaknesses have to be arrived at on Competitive resources.
- Competitive strength is one where the resource is better deployed as compared to immediate competitors, and it yields desired results. Conversely, a competitive weakness is where the competitors are better able to deploy a resource.
- To derive competitive advantage, the necessary condition is that the organization possesses, and deploys, competitive strengths in the activities that result in order winning CSFs
6. Capturing Value Across the Value System
From the above it is clear that no single organization can give the Value, as desired by the ultimate customer, exclusively by itself. It has to come from the partner pool that makes up the Value System. To ensure that the best Value is captured in the System, the ultimate customer CSFs should permeate upstream to all the organisations that provide the Value. If cost is the dominant value, this must be adopted by all the suppliers as well as the logistics activities. This is implemented by each downstream organization insisting on cost efficiency from its upstream supplier. Likewise, if innovation is offered as an order winning Value, every organisation in the Chain must be oriented to innovation
Value Systems are rarely configured by any one dominant player. Rather they come together by the competitive jostling of each organization in the product segment to belong to the Value System. This process leads to Value capture across the Value System
7. Continuous refinement and enhancement of Value Creation Capability
Competitive advantage can be sustained only by continuously refining and enhancing value creation capability. ‘Refinement’ refers to making a process more productive through incremental improvements and minimal costs. The practice of Kaizen reflects this mode of improvement. ‘Enhancement’ refers to increasing the value offered, with investments if required, for a step increase in productivity. The extreme example of enhancement is Business Process Reengineering.
Refinement can come by providing the same value through far more efficient processes. This may happen due to technological advancements, process improvements, design simplification and so on. As an example, introduction of ERP reduces communication uncertainties, thereby reducing inventories internally, as well as facilitating more accurate order processing. The internal efficiencies are improved and made efficient for the same value delivery
Enhancement happens through creating a newer value to be offered to the customer. This is seen in the classic trend to move away from providing just products or services, to providing total solutions. Capabilities have to be revised to embrace an overall, integrated systems thinking rather than just the required product or service. Rapid adaptation to keep abreast of fashion trends can be said to represent Enhancement
Hence capturing value in the System is not only a matter of having competitive advantage for each of the member organisations, but also the ability for continuous refinement and enhancement by each organization in its product segment. This will make for a genuinely healthy Value System
8. In Summarisation
Following is a ready-reckoner for the entrepreneur to capture the concepts covered in the Value Chain articles
|1||Value||What an Organisation offers its customer in exchange for a return monetary return Value. Value is classified as order-winning (CSF) and market-entry, depending on the customer segment|
|2||Value Chain||The activities within an organization through which it delivers Value|
|3||Supply Chain||A series of organisations in different product segments usually requiring different activities that combine to produce the final assembled product or service|
|4||Demand Chain||A series of organisations in different logistics segments with different activities that combine to move the final assembled product or service to the ultimate consumer|
|5||Value System||A combination of the Supply Chain and Demand Chain to meet the requirements of the ultimate consumer|
|6||Operating the Value System||Flow of material, information, knowledge and money which is the operationalizing of the Value System|
|7||Organization Value Curve||Profile of Value offered by an organization to its customers showing which Values are offered as superior (CSFs) and which are offered as adequate (market-entry)|
|8||Industry Value Curve||Profile of profitability of the product segments of the in an industry|
|9||Network Structures||The configuration of the linking together or organisations in the Value System that defines how interactions and responsibilities flow in the System|
|10||Constructing the Value System||Identifying the Customer segment and the Value Curve, using the Industry Value Curve to determine the product segment, positioning in the Value System according to one’s own Value Chain|
|11||Generic Strategies||Porter’s Generic Strategies of Low Cost and Differentiation, in a mass or niche market|
|12||Functional (Efficient) System Chain||Value System working on Low Cost Strategy|
|13||Innovative (Responsive) System Chain||Value System working on Differentiation and Responsiveness|
|14||Linking Generic Strategies and the Value System Chain||Indication of how the Generic Strategies can simultaneously be present in a Value System|
|15||Creating a Competitive Value System||Principles of competitiveness in a Value System that has multiple linked organisations|
|16||Strengths and Weaknesses of an Organization (Value Chain)||Strengths and Weaknesses of the building blocks of a Value System, the organization, and its impact on the Value System competitiveness|
|17||Capturing Value across the Value System||Operationalising Value delivering processes in the System|
|18||Continuous Refinement and Enhancement of Value Creation Capability||Sustaining competitiveness|
Combating Supply Chain Disruptions: Lessons Learned from Japan (2011), Think Executive Nov,
Patnaik, Rajnandan (2007), The Value Chain Revolution,The Icfai University Press
Porter, Michael E (1985), The Value Chain and Competitive Advantage, in Competitive Advantage,Free press.
www.forbes.com/forbes/1999/0906/6405118a.html(‘Stitches in Time’)
The Impact of Disintermediation in Retail Supply Chains,Scott E Sampson and Stanley E Fawcett, POM 2001 Meeting – Orlando, Florida, 2001