Value Creation

Driving Customer Value & Loyalty

1

Objectives

At the completion of this session you should be able to:
• identify the inputs, processes and outputs that drive your firm
forward
• critically evaluate your firm using Porter’s Value Chain
• explain value and discuss the ways in which your firm can generate
value
• explain the importance of loyalty and its link to value creation
• discuss how the value chain framework can assist you in business
planning, and
• build a map of your value system as a primary strategic tool.

Copyright Agitavi Research Corporation Limited 2002 - 2006 2

Value: What is it?

Value is a term often used and frequently
misunderstood.
In order to gain a better understanding you need to be
able to explicitly identify what your customers (end users
or intermediaries) value.

How?
To do that you need to know them and have developed
an understanding through close relationships, continual
interaction and knowledge generation, which is in part
supported by quality market research


Value: What is it? (continued)

In essence value creation can be characterised as a
process that is dependent upon interaction and dialogue
between buyers and sellers.

Through this process the seller can:
• develop intimate knowledge of buyer value chains and develop
value models
• identify what buyers perceive to be valuable, and
• create a value offer through the provision of benefits that
translate into a competitive advantage for the seller and, buyer
commitment.


Value: What is it? (continued)

Both sides of value

Value from both the seller’s and buyer’s perspective
needs to be recognised as being situation specific.

The buyer must come to an intimate understanding of
the seller’s value chain if long-term and value-laden
relationships are to be formed.

This is particularly important in a business-to-business
context.


The Value Chain

• Building from your understanding of the environment
and how to analyse it and the basics of the value
concept, you also need to be able to visualise the
processes that drive your firm forward.

• This requires an understanding of the inputs,
processes and outputs relevant to your firm; an
understanding characteristic of systems thinking.

• To do that we are going to initially use Porter’s value
chain.


The Value Chain (continued)


Value Chain Analysis
Primary Activities:
• Purchased Supplies & Inbound Logistics: activities, costs &
assets associated with inputs
• Operations: activities, costs & assets associated with converting
inputs into outputs
• Distribution & Outbound Logistics: activities, costs & assets
associated with physically distributing outputs to end users
• Sales & Marketing: activities, costs & assets associated with the
selling effort, advertising & promotion
• Service: activities, costs & assets associated with providing
customer assistance


Value Chain Analysis (continued)

Support Activities:
• Research, Technology & Systems Development: activities,
costs and assets associated with product & process R&D, process
design, plant & equipment, engineering, systems & procedures
• Human Resource Management: activities, costs & assets
associated with recruitment, hiring, training, compensation, team
development, core competencies, human relations
• General Administration: activities, costs & assets associated
with accounting & finance, legal affairs, regulatory affairs, safety,
MIS, strategic alliances


Value Chain Analysis (continued)

Key Success Factors (the key elements for success in a
particular industry):

• Technology-related KSFs
• Operations-related KSFs
• Distribution-related KSFs
• Marketing-related KSFs
• Skills-related KSFs
• Capability and competency-related KSFs
• Other related KSFs.


The Value Chain

Porter developed the concept of the value chain to aid
analysis of a firm’s operations. It has two primary uses:

• Firstly, it is used to better understand the
activities of the firm and how it might develop a
competitive advantage.

• Secondly, it is used to position your firm in the
chain of upstream and downstream suppliers and
buyers called the channel or value system.


The Value System

Building on the concept of the value chain, you are now
introduced to the value system.

A value system is the network of firms that come
together to create value for end users.

Given that you have looked briefly at how value is
created and at the value chain concept as it pertains to
individual firms, you should be able to conceptualise how
your firm fits into the value system.


The Value System: M-commerce
The figure demonstrates an example showing that you are a ‘cog in the wheel’. That
is, relationships with other channel members are critical if enhanced competitiveness
(and hence profitability) is to be achieved by you and your partners.


The Value System

One argument is that the best ISVs will become
strategic business advisors to their market and supply
chain partners as well as their customers and that they
will do this by providing business solutions that enhance
the competitiveness of their value system partners.

Note that you can add to their competitiveness by
providing them with cost advantages, flexibility
advantages, service advantages, image advantages
and/or focus advantages.


The Value System (continued)
Among these partners, customers are one group with whom you
must work closely.

Interactive relationships with customers help you overcome issues
associated with shrinking product life-cycles and the need for
continued product innovation.

In your industry the emergence of online customer networks needs
to be harnessed by ISVs as a key tool for achieving a competitive
advantage via feedback loops.

For example, in its initial years, Netscape used its online user
community extensively to garner ideas for new product features as
well as to test new products and thereby accelerated the
introductions of new versions of their flagship browser product.


The Value Chain/System and Me

Understanding the value chain aids a manager in two
ways:

Firstly, undertaking a critical analysis of the firm’s
operations, using the value chain as a guide, provides a
good picture of how the firm is doing. It:
• allows you to identify key processes and core competencies
• provides a view of the firm’s strengths and weaknesses
• highlights that many of the primary and/or secondary
activities relevant to your firm are handled by partners or
contractors, a reality that can complicate the management of
the process.


(continued)

Secondly, it provides the basis for consideration of
whether the functions and processes you currently have
truly create value, which again, can only be measured by
your customers.

If they don’t add value, you must question why they are
there and whether they should be changed or discarded.


(continued)

• Thirdly, knowing how to create value, through the
value chain and value system, is a critical component
to business success.

• Notably, one significant reason for this is that
customers (again incorporating intermediaries) are
much more likely to be loyal if you provide value.


The Value Chain and Loyalty

In short, customer loyalty:

• improves profitability (the cost of getting repeat business should be
less than the cost of getting new business)
• allows the focus to be on building a client base rather than just
maintaining it
• results in clients being prepared to adopt new products offered by
the firm more readily than other buyer groups, and
• means there is more likelihood that clients will recommend the firm
to friends and associates (loyalty implies satisfaction) and satisfied
clients are more likely to offer positive word-of-mouth.


Further Reading

As an extension to the associated activity, you will be
provided with a reading that examines the differences
between service and product companies. This reading
will help you analyse your value chain and system in
more detail, allowing you to identify and consider the
differences and what these differences mean to your
organisation.


Thank you

Loredana Niculae
Country Director - Romania
Agitavi Research Corporation
e: loredana.niculae@agitavi.net
mob/sms: +4 0724 567 473
w: http://www.agitavi.com


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