Welcome to Class 6

1. Welcome to Class 6 Creating Value Chapter 3

2. Creating Value & the Satisfaction Chain • Value creationis the process of producing or providing a product, service, or condition that is rewarding to both the value producer and the members of the satisfaction chain. • The Satisfaction chainconsists of a group of individuals who have a vested interest in the decisions, actions, and successes of an organization. • The three groups in the satisfaction chain: (1) Customers (2) Employees (3) Investors (Shareholders & Creditors)

3. Satisfaction Chain

4. Satisfaction Chain Customers – want desirable, dependable products and services at fair prices Employees – want good working environments, satisfying work, and fair wages Investors – want investment risks minimized. Shareholders want investment returns maximized and Creditors want debt obligations liquidated as scheduled.

5. Value Creation

6. Value creation requires:  Careful and extensive environmental analyses  Critical thinking  Creativity and innovation  A knowledgeable, energetic, and motivated workforce  Effective and efficient systems and procedures  Competent leadership

7. Value Creation & Core Structures

8. Core Structures Businesses are built on one of two basic levels. 1st – Business-Level 2nd – Conglomerate-Level These levels are the core structures of the firm and within each there is a range of competitive strategies from which to choose as a framework for value creating activities.

9. Creating Value … First-level businesses (business-level structure) select a strategic framework that enables them to create value by providing products and/or services to customers. Second-level businesses (conglomerate-level structure)select a framework that enables them to create value by leveraging or synergizing the competencies of multiple subsidiary businesses.

10. Common Financial Objective Business-levelandConglomerate-level Firms craft their strategies To achieve recurrent above average returns • The objective is achieved by: • leveraging competencies • targeting resources

11. Business-Level Structures

13. Strategies for Creating Value at the Business-level

14. Strategies for creating value at the Business-level Business-level TMTs strive to satisfy the needs and desires of customers while earning an attractive return (profit) from operating activities. Firms must develop a unique set of competitive competencies (Basic, Core, and Distinctive) as they employ specific value-creating strategies. Three commonly utilized strategies are: 1. Low-Cost leadership (least expensive or best value provider); 2. Differentiation (unique product or service); and, 3. Niche Market (catering to an underserved segment of the market).

15. 1. Low-Cost leadership– • Low-cost strategies are generally aimed at the mass market. • Products are standardized rather than customized. • Standardization enables cost reductions. • Low-cost strategies mean the management team must continuouslylocate and leverage every possibility for cost advantage.

16. Creating a cost-based advantage is essential to a sustainable low-cost leadership strategy. Conditions that may provide cost advantages include:  Economies of Scale  Experience Effects  Vertical Integration – (serve as the firm's own supplier or customer)  Facilities Location – (locate closer to supplier or to customer)

17. 2. Differentiation (Uniqueness) – The differentiation strategy is based on providing the customer with a unique product or service. The product or service is distinctive in its characteristics or properties.

18. Differentiation can be achieved through:  High Quality  Technical Superiority  Superb Customer Service/Support  Snob-appeal  Membership Experience  Making the product/service or customer seem special in some other fashion

19. 3. Niche Market – (Narrow market catering or focus strategy) A niche strategy means focusing on a narrow element of a broader market. The firm identifies an underserved small niche in the market and concentrates on serving it completely. The niche could be a particular group of buyers, a small piece of a product line, or a geographical or regional market. It could also involve targeting a specific group of people with unique tastes or preferences.

20. Value is created when – products and/or services offered by the niche competing firm:  Have sufficient and sustainable demand  Offer potential for profitability growth  Cannot be easily matched by competitors pursuing other operating strategies

22. Conglomerate-Level Structures

24. Strategies for creating value at the Conglomerate-level

25. Strategies for creating value at the Conglomerate-level Creating value at the conglomerate-level is accomplished by capitalizing on synergistic opportunities between its portfolio of companies. Conglomerate TMTs will identify unique skills, systems, or other competencies within each of its subsidiaries that can be leveraged and extended. Conglomerate level strategies can involve acquisitions or divestitures as well as collaborative activities such as strategic alliances (licensing agreements, joint ventures, and cross-holdings).

26. Acquisitions may be: 1. Contiguous (same type of business currently in the portfolio), 2. Related Diversifications (those that are not the same but closely related to companies currently in the portfolio); and, 3. Unrelated Diversifications (those that are significantly different from previously owned subsidiaries).

28. Life-Cycles

29. Creating Value & Industry Life-Cycles Most products and therefore industries built around those products will have a life cycle. Services can also have a life-cycle. Consider the effect of wash-and-wear clothes on the dry cleaning businesses. Personal care specialists are experiencing diminishing markets as more home care kits become easier to use and have satisfactory results. Accounting and bookkeeping services are being replaced by home computer software. Legal services such as writing wills or crafting estate planning are being replaced by inexpensive software packages.

30. Life-cycles are generally described in terms of stages such as: • Introduction • Growth • Maturity • Declining stage Each stage influences customer demand and affects the intensity of competition. Each stage dictates a different strategy.

31. Introduction Stage – The introduction stage is the awkward stage. Current customers are not completely familiar with the product or service and potential customers may have only vague familiarity. The features or extent of the product or services are not completely defined. Competition is usually limited due to the newness of the market.

32. Introduction Stage – (Cont) The producers or providers of the product or service must educate the consumer as to:  What the product or service will do for them  How it is beneficial Advertising in the introduction stage focuses on  Promoting unique features  Demonstrating its utility  Attempting to differentiate from any similar introductory stage products or services

34. Growth Stage – The growth stage of the life-cycle is perhaps the most exciting and comfortable period for suppliers. If the rising tide lifts all ships, the growth stage is the potential to benefit all competitors of a particular product or service. Both ultimate consumers and middle-businesses become increasing interested in the product and demand increases rapidly. Strategies should be integrated that attempt to make the company brand standout as somehow uniquely and beneficially different.

36. Maturity Stage – Demand slows Multiple competitors but fewer new customers Competitors are more aggressive Advertising expenditures increase Peak profit point in the life-cycle Advertising tends to focus on attracting competitor’s customers (switching campaign) New features likely to be added Principal emphasis is likely to be on maintaining market share and extending the product life-cycle

38. Decline Stage – The declining stage in the life-cycle is the antithesis of the growth stage. In the growth stage the rising tide has the capacity of lifting all ships and in the declining stage the falling tide has the potential of lowering all ships. Industry sales fall, profits are compromised, and strategies become increasing reactive rather than proactive. The market is saturated with supply or suppliers and the product may become technologically obsolete or the service may be in less demand due to more suitable alternatives. Brand loyalty may delay the inevitable but eventually the particular product or service will cease to exist.

40. End “Creating Value” Read Chapter Four: Corporate Boards of Directors Creating Value makes me smile. 