Lecture Three: Outline

1. Lecture Three: Outline • Value Creation • Value Migration • The Transitional Stages of Competitiveness • Profit Zones / Profit Pools

2. Value Creation • Walters (2002) suggests that the organisation’s value chain become merged with those of other value chain members. An important feature is the role of information management that provides a coordinating activity.

3. Value Creation (cont’d) • Norman and Ramirez (1993) suggest “strategy is the art of creating value…the way a company defines its business and links together with only two resources that really matter in today’s economy: knowledge and relationships on an organisation’s competencies and customers”.

4. Value Creation (cont’d) • Norman and Ramirez (1993) continue: “…strategy is primarily the art of positioning a company in the right place on the right value chain – the right business, the right products and market segments, the right value-adding activities”.

5. Value Creation (cont’d) • Norman and Ramirez (1993) continue: “Their focus of strategic analysis is not the company or even the industry, but the value creating system itself, within which different economic actors – suppliers, business partners, allies, customers – work together to co-produce value.

6. Value Creation (cont’d) • Their key strategic task is the reconfiguration of actors in order to mobilise the creation of value in new forms and by new players…their underlying strategic goal is to create an ever improving fit between competencies and customers”.

7. Value Creation (cont’d) • Walters (2002) suggests the questions to be asked are:

8. Value Creation (cont’d) • What is the combination of value drivers required by the target customer group?

9. Value Creation (cont’d) • What are the implications of different decisions?

10. Value Creation (cont’d) • What are the implications for costs: do economies of scale or scope exist?

11. Value Creation (cont’d) • Are there opportunities for trade-offs to occur between the value creation system partners?

12. Value Creation (cont’d) • Walters (2002) also suggests “it has been suggested that many arguments about creating value are only about customer satisfaction and assume profit may be taken for granted. However, companies need to think about their comparative advantages in the value chain even before they start thinking about how to reconfigure it for their customers. If they did not, they are not making strategy; they are simply engaging in business process re-engineering”.

13. Value Migration • Walters (2002) suggests value migration occurs as both economic and shareholder value flows away from obsolescent (and obsolete) business models

14. Value Migration (cont’d) • Slywotzky (1996) cited in Walters (2002) argue that new models offer the same benefits to customers but at lower cost by changing the model structure. This change often results in a restructuring of profit sharing throughout the business model

15. Value Migration (cont’d) • Uren (2001) quotes Shremp (CEO, Daimler Chrysler) who expresses the view: “…within 10 years the price of a car will represent only a quarter of the total value provided to a customer with the balance consumed in maintenance, finance and other services”.

16. The Transitional Stages of Competitiveness Source: Walters (2002)

17. Profit Zones / Profit Pools • Gadiesh and Gilbert (1998) offer the concept of a ‘Profit Pool’. Based upon the notion that “Successful companies understand that profit share is more important than market share”, a profit pool is defined as the total profits earned in an industry at all points along the industry’s value chain

18. Profit Zones / Profit Pools (cont’d) • The pool may be ‘deeper’ in some segments of the value chain than in others and variations may be due to the customer, product and distribution channel differences, or perhaps there may be geographical reasons.

19. Profit Zones / Profit Pools (cont’d) Source: Adapted from Walters (2002), Gadiesh and Gilbert (1998) and Slywotzky and Morrison (1997)

20. Profit Zones / Profit Pools (cont’d) • Slywotzky et al (1997) echoes this rationale by designing a profit-centric business.

21. Profit Zones / Profit Pools (cont’d) • Companies should be asking questions such as:

22. Profit Zones / Profit Pools (cont’d) • “Where will I be allowed to make a profit in this industry?; and,

23. Profit Zones / Profit Pools (cont’d) • How should I design my business model so that it will be profitable?”

24. Profit Zones / Profit Pools (cont’d) • Gadiesh and Gilbert (1998) define the following approach to identifying and mapping profit pools:

25. Profit Zones / Profit Pools (cont’d) • Define the pool: determine which value chain activities influence the organisation’s ability to generate profits, now and in the future.

26. Profit Zones / Profit Pools (cont’d) • Determine the size of the pool: develop a baseline estimate of the cumulative profits generated by all profit pool activities.

27. Profit Zones / Profit Pools (cont’d) • Reconcile the estimates: compare the outputs of steps one and two and reconcile where necessary.

28. Discussion Questions • Why are value shifts/ value migration such a critical issue for managers to understand? Use examples in your answer. • How can companies take advantage of profit pools without loosing touch with customers? • Using Gadiesh and Gilberts’ method, plot industry profit pools for the industry you work in.