In this brief article I will enumerate a mental approach and technique for evaluating strategic positioning and for understanding the strategic challenges, having wide application across business entities and diversified industries. I would label it as Strategic Value Analytics and is correlated on the established value creation chain conceptual parameters of strategic management perspective. What differentiates about Strategic Value Analysis is its critical focus on numerical quantitative value – synergy and analytical measured insights. Such analytically focused approach allows much richer and more distinct awareness of the fundamental economic centered business shaping choices.
Comparative based competitive leverage in the marketplace ultimately derives from providing better customer value for comparable cost (differentiation) or equivalent customer value for a lower cost (low cost). Sporadically, but not that often, a company achieves both by providing better value at a lower cost. What-ever the focus for a company, value chain analysis is paramount to identify exactly where in the chain customer value can be enhanced or costs adjusted? A concepts based on one of the business modeling tools of Blue Ocean Strategy (BOS – ERRC). It could be a very costly mistake to overlook linkages between upstream company as and downstream.
This value chain framework is a methodology for breaking down for a given value of a company’s from basic raw materials to end-user customers (Marketing perspective) into strategically relevant activities in order to understand the behavior of costs and the value enablers of value differentiation. We know that most successfully managed firms are those which that span the entire value chain in which they operate.
To recapitulate, a company is typically only a part of the larger set of activities in the value delivery system in which it participates. Since no two companies of which we are aware, even in the same industry, compete in exactly the same set of markets with the same set of suppliers, but the positioning within the overall value chain for each company is distinct which makes it better competitive than others.
Suppliers are not merely are the producers and distributors but also a valuable source of feeding and delivering inputs used in a firms value-enhancing activities, and hence impact the company’s cost – differentiation ratio and market place positioning.
Understanding gaining and maintaining a competitive edge necessitates that a firm must understands its entire value delivery nomenclature, and not just the part of subsets of the value chain in which it functions. The relationship of suppliers and suppliers and customers and suppliers’ suppliers – customers’ have economic and financial margins which vital are in identifying and understanding a company’s cost – differentiation positioning matrix and space it operates – since the end-use customers ultimately pay for all the profit margins along the entire value chain.
In brief, fixating only on a company’s “value addition” (revenues – purchases) rather of its value chain incorporates two pivotal weaknesses’. It kicks offs too late and stops far too soon.
Although Strategic Value Analysis (SVA) can be a beneficial tool for describing the Comparable position of companies in an given industrial sector, by far its greatest value is in helping to rudder a plan for managerial actions. In its specificity, SVA points to an broad structure, – markets and assets as well as the “boxes and lines” of detailing relationships, most likely to succeed in a defined slice of an industry. These testimonies can be exercised either in the view of a minor niche player or for operating blocks of a multi divisional corporation.
Is SVA Well Suited for my organization?
There can be four fundamental tests that can be applicative to establish if SVA could be supportive strategic tool for any firm/entity.
- IF – there new/added or emergent players in my industrial sector (indoors of any fragment of the value chain) that might be more successful than prevalent market players?
- These firms placed and located in the value chain differently from present players?
- Market prices emerging transverse segments/ block of the value chain? Do these markets adequately deep enough to mirror ‘remote’ trading?
- If I utilized and availed these market prices as (transferred)- dispatched prices in my company, if it fundamentally alter the pattern that my major operating unit’s behavior?
In the answer to these inquires is “yes,” SVA is most plausible to be an insight triggering tool.
These new players generally were not considered by the majors as “competitors.” Outside companies purchasing assets were often viewed as bottom feeders of secondary importance. Branded distributors were viewed as still part of the team since they carried the company brand upon sale (at least for a fixed period of time). The majors generally preferred to compare themselves only with other majors; they saw no reason to compare their integrated downstream structure with that of a distributor.
SVA Test No. 1 provides a clue here: New companies were entering a mature industry with poor returns. What were they up to?
Question 2: Do these companies utilize a different structure occupying a single value-chain segment or running multiple segments in a non-integrated fashion?
These new companies were almost always structured in a dramatically different way from the industry’s incumbents. They generally chose to focus on a narrow section, or even one segment of the value chain.
To re-emphasizes, SVA supports to grasp not only the evidence that new emerging players are knocking at the door, but also how their companies are dissimilar from those of key players.
Question 3: If new market prices evolving across blocks of the value chain that previously have been integrated? Are these markets suffice deep to admit entry by new market players?
Test 3, of SVA can define how this (decoupled) panorama of the business evolved to become an industry standard when numerically calculated. The emergent landscape of these multiple distant markets suggests that the new players were viable in the marketplace.
Question 4: Can answer (If calculated) if I utilized these market prices as the basis for my firm’s transfer prices, how far it ‘centrally’ change the position that I desire to annex in the value chain? Would it change or alter and (what degree) the way that my major operating units will shape up.
What it explains and derives with ( SVA) is a clearer, more serviceable view of competitive advantage, roots of profitability and areas for enhancement at all steps and phases of the value chain. This phase-specific realization and understanding is most crucial in all multiplex industries, because any given changes in one stage or leg almost & always influence businesses all along the chain in continuity.
Thus, we need to believe and expect that competition not as a goal, but as part of the business multilayered landscape — a vital factor of the substance in which a company pursues to create value. Then it transforms’ into critical view – are the substitute responses to competitiveness initiated by other firms, some of which are more probable to flourish than others, depending upon the nature of the business environment in varied aspects and nature?
As a general rule of thumb, one must remember and learn to apply –
- Foremost, is to conceptualize about creating the greater value, then fancy about seizing that part of that value as ROI and profitability.
- Real value creation and strategic growth and profitability sustenance can only occurs when firms continuously develop streams of products and services that can have and tend to offer distinct and gripping rewards and benefits in shape of (more delight and lesser pain) to a selected and preferential set of consumers and customers. What it means that to preserve and mange industry leadership, for which a company must implant a sustainable process of value creation through innovation, improvisation and optimization
Farooq Omar – Corporate and Business Strategist & Consultant.