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COMMIntroduction to Value CreationPrimary Activities Effective management of parts and equipment inventory. Support ActivitiesProvide support necessary for primary activities to take place and support other support activities.Procurement: Purchasing inputs (input materials and fixed assets) used to...

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COMM1180 Introduction to Value Creation

Primary Activities

Support Activities

Procurement – what the company does to acquire resources to operate. Finding vendors and negotiating prices. HR management – how well a company recruits, trains, motivates and rewards employees. Technological development – activities that relate to managing and processing information. Infrastructure – a company’s support systems, and the functions that allow it to maintain operations. E.g., accounting, legal, administrative and general management.

The Value Chain framework Value chain – a string of collaborative players who work together to satisfy market demand for specific products or services. The intent is to increase the value of a product or service. Primary activities Activities involved in the creation and delivery of products or services, including any after sales support. Inbound logistics:  

Associated with receiving, storing and distributing raw materials or inputs of the product. - E.g., Apple – distribution if iPhones from warehouse to apple stores. Evaluation of value creating potential: - How efficient are the inbound activities? - Proximity of distribution facilities to minimise shipping times. - Warehouse layout to ensure distribution efficiency.

Operations: 



Associated with transforming inputs into the final product form. - E.g., Apple – managing Apple online – provide one-stop shop for all Apple products and access to specialist assistance. Evaluation of value creating potential: - Efficiency of operations to minimise costs. - Do operations activities increase quality of products/services?

Outbound Logistics:  

Associated with collecting, storing, and distributing the product or service to customers. - E.g., Apple – shipping iPhones to customers Evaluation of value creating potential: - Efficiency of shipping processes to minimise transportation costs. - Effectiveness of delivery processes to customers.

Marketing and Sales: 



Associated with promoting the sales of products and services to end users and inducing users to make purchases. - E.g., Apple – designing iPhone advertisements. Evaluation of value creating potential: - Innovative approaches to promotion and advertising. - Selection of most appropriate distribution channels. - Proper identification of customer segments and needs.

Service: 



Associated with providing after sales services to enhance or maintain the value of products and services provided to customers. - E.g., Apple – providing AppleCare – technical support, hardware service and software support. Evaluation of value creating potential: - Efficiency of response to customer help requests.

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Effective management of parts and equipment inventory.

Support Activities Provide support necessary for primary activities to take place and support other support activities. Procurement:  

Purchasing inputs (input materials and fixed assets) used to create value. - E.g., Apple – managing iPhone manufacturing outsource partners. Evaluation of value creating potential: - Selecting suppliers - Procurement of quality input materials. - Development of relationships with suppliers.

Technological Development: 



Activities associated with the development of new knowledge that enables product and process innovation. - E.g., Apple – inhouse development of wireless Bluetooth chips for Airpods. Evaluation of value creating potential: - Effective R&D activities for product and process innovation initiatives. - Ensuring positive collaborative relationships between R&D and other departments.

HR Management: 



Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel. - E.g., Apple – recruitment of Bluetooth technology developers. Evaluation of value creating potential: - Effective recruiting, development and retention of employees. - Quality work environment to maximise overall employee performance and minimise absenteeism. - Rewards and incentives to motivate employees.

General Administration/Infrastructure : 



Activities that support the coordination of the entire value chain and not individual activities. - E.g., Apple – planning and managing a multi-channel platform that integrates contents (software, media and apps) and hardware (MacBooks, iPhones and iPads). Evaluation of value creating potential: - Effective planning systems to attain overall goals and objectives. - Manage relationships with diverse stakeholders. - Effective integration of value-creating activities.

Managing Value-Chain activities within and across organisations

Value from Marketing Opportunities Marketing – the process by which marketing organisations engage customers, build strong relationships and create customer value in order to capture value from customers in return. Behind marketing is a massive network of people, technologies and activities competing for the attention of the customer. 

Marketing is  A social and managerial process  By which individuals and organisations obtain what they need and want  Through creating and exchanging value with others

Marketing is the activity, set of institutions, and processes for creating, communicating, delivering and exchanging offerings that have value for customers, clients, partners and society at large. Marketing is finding out what our customers need, then giving it to them, in a way that is valuable for us. “What the customer buys and considers value is never a product. It is always utility, that is, what a product or service does for him.” – Peter Drucker Value is a strategic concept that defines the benefits and costs that participants receive from the market exchange. Therefore, optimizing value for target customers, collaborators, and the company is the key principle that steers managerial decision making and is the foundation for all marketing activities.

What types of value can be created?    

Functional / instrumental value – product has desired characteristics, is useful, or performs a desired function. Experiential / hedonic value – the extent to which a product creates appropriate experiences, feelings, and emotions for the customer. Symbolic / expressive value - the extent to which customers attach or associate psychological meaning to a product. Cost / sacrifice value – minimising transaction costs. E.g., operating costs

Role of Marketing in an Organisation Traditionally a business function   

Now, a set of values and processes that all functions participate in implementing. Link between organisation and its stakeholders. The revenue generator.

What is a market? The set of current and potential customers for an organisation. Types of markets:   

B2C – Business to consumer – retail shops etc. B2B – Business to business – supply chain C2C – Consumer to consumer – ebay, gumtree etc.

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B2G – Business to government – Boeing building defence systems for national defence

Market opportunities are a set of circumstances where an organisation can gain value.

Creating value for stakeholders Organisations can capture value when they create value for their stakeholders.

Creating value for customers To create value for a customer requires understanding the customer, their needs / wants and behaviours. We create value by segmentation, targeting and positioning strategies. Also, we must identify the value proposition.

Understanding the customers Who are our customers? 

Current and potential

What are their needs? We need to explore:    

Demographics – age, gender, etc. Geographic locations Behavioural factors – e.g., hobbies , purchase patterns Psychographics

Drivers of marketing – needs and wants

Segmentation, targeting and Positioning (STP) Segmentation  

Based on groups of customers with different needs. Which needs can our organisation fulfil?

Targeting 

 

Targeting is the selection of the priority market segments for your firm. It is based on:  Market attractiveness  Company fit Which segment is priority for the marketer? Greatest value creation potential

Positioning  

The positioning strategy is how to develop a positive image. The imaging of our brand in the customers eyes.

Identifying the value proposition The set of benefits or values the organisation promises to deliver to consumers to satisfy their needs. It allows the organisation to differentiate itself in the marketplace. Competitive advantage – what makes an entity’s goods or services superior to all of a customer’s other choices.

New and existing refers to the markets and products.

Value from production / service design Design is the fundamental determinant of both the speed and cost with which new and improved products are brought to market and the quality and performance of those products. Design excellence leads to increased profitability and competitiveness if customers perceive value in the design.

Design-to-Value The challenge – designing what customers value the most.   

‘Creeping elegance’ – product designers implement complex and costly features that are not necessarily being paid for by customers. Rising commodity prices, consolidating supply markets, and persisting economic pressures are making it difficult for companies to maintain margins. Reducing product cost is crucial and up to 80% of product costs are set during the design stage.

“Value engineering looks at the capital cost of a project and determines whether the function and quality of the results is equal to the perceived value.”

Creating shared value (CSV) CSV involves pursuing financial success in a way that also yields societal benefits. It looks beyond the immediate needs of the customer and company. Is the product good for customers and stakeholders?

Communicating about value Customers cannot purchase a product they do not know about. Marketers communicate about their brand and product:   

Solution to a customer need Superior benefits than competitors Value to stakeholders

Two-way communication channels need to be established between companies and customers.

Delivering value “A business is a value delivery system.” Ensuring that customers receive the benefits they seek from your brand, focus on:   

Quality control – consistency Clear communication – expectations vs reality Appropriate pricing

Sustaining value

Capturing value for the organisation Organisations can capture value when they create value for their stakeholders. The most obvious value capture is price. Other forms of value are:       

Reputation

Acquisition and retention of customers – customer equity Partnerships/affiliation Brand value Acquisition and retention of human capital

Technology and marketing value Value for customers      

Increased choice and accessibility to products and services. Downward price pressure. Greater control of customer experience. Convenience via mobile. Greater information power. Automation is time-saving and consistent.

Value for businesses      

Automation for efficiency and consistency. Greater information power. Greater interactivity for relationship building. Omnichannel marketing for seamless customer experience. Improve competitiveness. Improve return on marketing investment.

Value Proposition

Finding you customers:

The “jobs” that need to be identified can be:

Porters five forces – industry analysis

Rivalry among competitors – how many competitors? Product differentiation, switching costs. 

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 

Threats of entrants - New competitors - Barriers to entry – economies of scale, product differentiation, cost of entry, switching cost Bargaining power of suppliers - Can the company buy from any other supplier? Reliance on supply not good for the business. Threats of substitutes - Can customers buy other goods that can perform the same activity. Bargaining power of buyers - Is the target market niche? The range of customers.

Value creation from Information Technology

Information technology (IT) It refers to products, methods, inventions and standards used for the purpose of managing and processing information. Information systems (IS) is an assembly of hardware, software, data, procedures and people that collect, process, store, and distribute information to support decision-making and control in an organisation.

IT components = hardware + software + data IS = IT + procedures + people

A Stakeholder perspective of value creation The value of IT is best understood as being embedded in the business process to support different functional areas of an organisation in interacting with different stakeholders. Why IT?  

Potential impact on business performance (e.g., reducing costs, improving productivity, generating growth) It has the potential to transform the business.

Competitive Advantage Competitive advantage is a product or service that an organisation’s customers place a greater value on than similar offerings from a competitor. You develop a competitive advantage by:   

Three Generic Strategies Porter’s Five Forces Model Value Chain Model

Three Generic Strategies Cost leadership – involves achieving the lowest cost of production of a product or service (e.g., Toyota’s Lean Toyota Production System) Differentiation – involves making your products or services different from and more attractive than those of your competitors (e.g., Apple) Focus – involves focusing on a narrow, defined segment of the market, also called a niche market (e.g., Porsche)

Using IT to gain a competitive advantage:

Porter’s Five Forces Model A framework for industry analysis. It can be used to help understand how competitive an industry is and to analyse its strengths and weaknesses. It consists of five elements, each of which plays a role in determining the average profitability of an industry: Competitive forces  

Competition from vendors who manufacture substitutes. Competition from new competitors.

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Competition from existing competitors.

Bargaining power forces  

Bargaining power of suppliers. Bargaining power from customers.

Impact of IT on Five Forces

The value Chain Model It views an organisation as a series of processes, each of which adds value to the product or service for customers. It differentiates between primary and support value adding activities. A useful tool for evaluating activities that add value to product and service. IT adding value to primary activities

IT adding value to support activities

Principles of Competitive Advantages created by IT/IS Product implementations 1. Create new product or service 2. Enhance product or service 3. Differentiate product or service Process Implementations 4. 5. 6. 7. 8.

Lock in customers and buyers Lock in suppliers Raise barriers to market entry Establish alliances Reduce costs

Shipping company example

In this example, what competitive advantages (values) did IT/IS create for the shipping company?

The application of IS for achieving competitive advantage – Business Process Management System Electronic data interchange (EDI) EDI can be thought of as the computer-to-computer exchange of business documents in a standard electronic format between business partners. By integrating suppliers and distributors via EDI, a company can vastly reduce the resources required to manage the relevant information. Instead of manually ordering supplies, the company can simply place an order via the computer and the next time the order process is run, it is ordered.

Collaborative Systems

Decision support systems A decision support system (DSS) is an information system built to help an organisation make a specific decision or set of decisions. Decision support systems work best when the decision-makers are making semi-constructed decisions. A semi-constructed decision is one in which most of the factors needed for making the

decision are known but human experience and other outside factors may still play a role. E.g., diagnosing a medical condition.

Challenges in capturing IT value:     

Hard to measure with quantitative indicators (e.g., competitive position, product and service innovation) IT-based value manifests itself in many ways. Ambiguity and fuzziness of the ‘IS business value’ construct. Neglected disaggregation of IS investments. IS business value creation process as grey box.

How value is measured from the IT perspective:   

Process performance measures – labour productivity Market performance indicators – total shareholder returns (TRS), consumer welfare. Accounting performance measures – ROA, ROE

Sustain Competitive Advantage

Time value of money Future and Present value – revision

Discounting (given future value)

Required interest rate:

Nominal vs real interest rates

Effective annual rate

An example:

APR – Annual percentage rate

M=months

Discounted cash flow valuation

Special cases of multi-period cash flows Finance is all about instruments with regular payment streams, which tends to make the math easier:    

Annuities Savings plans and super Amortized loans and mortgages Perpetuities

Annuity Annuity – a series of regular payments for a specific period. Retirees create an income stream for their expected life by paying a lump sum to an insurance company to fund an annuity. Lifetime annuity until death – mortality calculations. Term certain annuity – guaranteed payments (regardless of death) up to a fixed horizon.

Cash flows of an ordinary annuity

Every period for the next n periods (years, quarters, or months etc), a payment (C) is made. In an ordinary annuity, each payment happens at the of the period.

Receiving an annuity

Example: Cost of 10 years of internet service.

Saving for retirement You are depositing money every period into super. You are most interested in the future value.

An example – saving for retirement

Loans A loan is a bilateral contract where one party borrows money from another party (bank) and promises to pay back the money plus interest.

Receiver of funds – debtor/borrower Provider of funds – creditor/lender Types of loans:

Amortizing a loan/mortgage

Calculating annuity payments and loan instalments Given the present value (size of the loan / lump sum of annuity), what is the per-period payment (loan instalment). The formula assumes an ordinary annuity:

Example - Slow-speed amortization

Annuity due

Deferred annuity

Perpetuity

Equity Valuation Models Bonds Bonds are debt securities issued by sovereign entities or corporations to raise money now, in return for repayment in the future. They are also fixed income securities because they pay a regular, fixed coupon. There are exceptions:  

Zero-coupon bonds pay no coupons. Floating rate notes (FRN) – the coupon payment resets periodically to refle...