Welcome to Class 6Welcome to Class 6

Creating ValueCreating Value

Chapter 3Chapter 3

Creating Value & Creating Value & the Satisfaction Chainthe Satisfaction Chain

Value creationValue creation is the process of producing or providing a product, service, or condition that is valuable to bothboth the:

Producerand

Members of the satisfaction chainsatisfaction chain.

The Satisfaction chainSatisfaction chain consists of three group of individuals: (1) Customers (2) Employees (3) Investors (Shareholders & Creditors)

Satisfaction ChainSatisfaction Chain

Satisfaction ChainSatisfaction Chain Customers Customers – want:Desirable, dependable products & services at fair prices

EmployeesEmployees – want:Good working environments, satisfying work, & fair wages

InvestorsInvestors – (Shareholders plus Creditors)(Shareholders plus Creditors) 1. Shareholders – want: Investment risks minimized & investment returns maximized 2. Creditors – want: Debt obligations liquidated & loan risks reduced

Value creation requires:Value creation requires: Careful & Extensive environmental analyses

Critical thinking

Creativity & Innovation

A knowledgeable, energetic, & motivated workforce

EffectiveEffective and EfficientEfficient systems & procedures

Competent leadership

Value Creation & Core StructuresValue Creation & Core Structures

Each level has a unique range of competitive strategiesfrom which to choose for value creating activities.

Creating Value … Creating Value …

First-level businesses First-level businesses ((business-level structurebusiness-level structure)) AA strategic framework that focuses on creating value by providing products and/or services to customers.

Second-level businesses Second-level businesses ((conglomerate-level structureconglomerate-level structure)) AA strategic framework that focuses on creating value by leveraging or synergizing the competencies of multiple subsidiary businesses.

Common Financial ObjectiveCommon Financial Objective

Business-level and Conglomerate-level Firms craft their strategies

To achieve recurrent above average returns

By:1. leveraging competencies1. leveraging competencies

2. targeting resources 2. targeting resources

Business-Level StructuresBusiness-Level Structures

Strategies for Creating Value Strategies for Creating Value at the Business-levelat the Business-level

Strategies for creating value at the Strategies for creating value at the Business-levelBusiness-level

Firms must develop a unique set of competitive competencies

Three commonly utilized strategies are: Three commonly utilized strategies are:

1. Low-Cost leadership Low-Cost leadership (least expensive or best value provider)

2. Differentiation Differentiation (unique product or service)

3. Niche Market Niche Market (an underserved segment of the market)

1. Low-Cost leadership1. 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 continuouslycontinuously locate and leverage every possibility for cost advantage.

Creating a cost-based advantage is essential Creating a cost-based advantage is essential to a sustainable low-cost leadership to a sustainable low-cost leadership strategy. strategy.

Conditions that may provide cost advantages Conditions that may provide cost advantages include:include:

Economies of Scale Experience Effects Vertical Integration Facilities Location

2. Differentiation (Uniqueness) – 2. Differentiation (Uniqueness) – This strategy is based on providing the customer with

a unique product or service.

The product or service is distinctive in its characteristics or properties.

Examples include:Examples include: High Quality Technical Superiority Superb Customer Service/Support Snob-appeal Membership Experience Making the product/service or customer seem special in some

other fashion

3. Niche Market – 3. Niche Market – (Narrow market catering or focus strategy(Narrow market catering or focus strategy))

Focus on a narrow element of a broader market

Identify an underserved small niche in the market and concentrates on serving it completely

Niche could be:1. A unique group of buyers with specific tastes or

preferences2. A small piece of a product line3. A geographical or regional market

Value is created when – Value is created when – niche products and/or services:niche products and/or services:

Have sufficient and sustainable demand

Offer potential for profitability growth

Cannot be easily matched by competitors pursuing other operating strategies

Conglomerate-Level Conglomerate-Level StructuresStructures

Strategies for creating value Strategies for creating value at the Conglomerate-levelat the Conglomerate-level

Strategies for creating value at the Strategies for creating value at the Conglomerate-levelConglomerate-level

Acquisitions can be:

1. Contiguous (same type of business currently in the portfolio)(same type of business currently in the portfolio)

2. Related Diversifications ((closely related to firms currently in portfolioclosely related to firms currently in portfolio))

3. Unrelated Diversifications ((significantly different from other subsidiariessignificantly different from other subsidiaries). ).

Life-CyclesLife-Cycles

Creating Value & Creating Value & Industry Life-CyclesIndustry Life-Cycles

Products and industries built around those products have life cycle.

Services can also have a life-cycle. Consider the effect of wash-and-wear clothes on the dry cleaners Consider the effect of wash-and-wear clothes on the dry cleaners

Personal carePersonal care specialists are experiencing diminishing markets as more home care kits become easier to use and have satisfactory results.

Accounting and bookkeepingAccounting and bookkeeping services are being replaced by home computer software.

Legal servicesLegal services such as writing wills or crafting estate planning are being replaced by inexpensive software packages.

Life-cycles are generally described in terms of stages such as:

1.1. IntroductionIntroduction

2.2. GrowthGrowth

3.3. MaturityMaturity

4.4. Declining stageDeclining stage

Each stage influences customer demand and affects Each stage influences customer demand and affects the intensity of competition. the intensity of competition.

Each stage dictates a different strategy.Each stage dictates a different strategy.

Introduction Stage – Introduction Stage –

The introduction stage is the awkward stage.

Potential customers may have only vague familiarity product or service

Features or extent of the product or services are not completely defined

Little Competition due to the newness of the market

Introduction Stage – Introduction Stage – (Cont) (Cont)

Producers / providers of the product / service must educate the consumer: 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 Differentiating from similar introductory stage

products or services

Growth Stage – Growth Stage –

The growth stage of the life-cycle is the most exciting and comfortable period for suppliers.

Like the rising tide that lifts all ships, the growth stage is can benefit multiple competitors.

Customers become increasingly interested in the product – demand increases rapidly.

Strategies attempt to make the company brand standout as uniquely and beneficially different.

Maturity Stage –Maturity Stage –Demand slows Demand slows

Multiple competitors but fewer new customersMultiple competitors but fewer new customers

Competitors are more aggressiveCompetitors are more aggressive

Advertising expenditures increaseAdvertising expenditures increase

Peak profit point in the life-cycle Peak profit point in the life-cycle

Advertising tends to focus on attracting competitor’s Advertising tends to focus on attracting competitor’s customers (switching campaign)customers (switching campaign)

New features likely to be addedNew features likely to be added

Principal emphasis is likely to be on maintaining market share Principal emphasis is likely to be on maintaining market share and extending the product life-cycle and extending the product life-cycle

Decline Stage –Decline Stage –The declining stage in the life-cycle is the antithesis of the growth

stage.

This is the opposite of the growth stage wherein the rising tide lifts all ships, in this stage the falling tide lowers 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.

End “Creating Value”End “Creating Value”

Read Chapter Four: Corporate Boards of Directors

Creating

Value makes me

smile.