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January 5 - January 7, 2023
Activities are discrete economic functions or processes, such as managing a supply chain, operating a sales force, developing products, or delivering them to the customer. An activity is usually a mix of people, technology, fixed assets, sometimes working capital, and various types of information.
The sequence of activities your company performs to design, produce, sell, deliver, and support its products is called the value chain. In turn, your value chain is part of a larger value system.
it’s important to see how your activities have points of connection with those of your suppliers, channels, and customers. The way they perform activities affects your cost or your price, and vice versa.
The value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs (or, if your organization is a nonprofit, the activities that result in higher value for those you serve or lower costs in serving them).
1. Start by laying out the industry value chain.
2. Next, compare your value chain to the industry’s.
3. Zero in on price drivers, those activities that have a high current or potential impact on differentiation.
Do you or could you create superior value for your customers by performing activities in a distinctive way or by performing activities that competitors don’t perform? Can you create that value without incurring commensurate costs?
4. Zero in on cost drivers, paying special attention to activities that represent a large or growing percentage of costs.
How does the long-term profitability in each of your businesses stack up against other companies in the economy?
Are the returns for your business better or worse? If better, something is working in your favor.
Now compare your performance to the average return in your industry, and do so over the last five to ten years.
The distinction between these two sources of profitability is crucial because the factors that affect industry structure and those that determine relative position are
very different.
Disaggregate your relative performance into its two components: relative price and relative cost. Relative price and cost are essential for understanding
strategy and performance.
On the price side, it may be possible to trace the overall price premium (or discount) to differences in particular product lines, in customers or geographic areas, or in list price versus discounts off list. On the cost side, it is often revealing to disaggregate the cost advantage (or disadvantage) into that part due to operating cost (income statement) and that part due to the utilization of capital (balance sheet).
Consider the enormous consequences of value chain thinking. The first is that you begin to see each activity not just as a cost, but as a step that has to add some increment of value to the finished product or service.
what happens when you start thinking about that business as a collection of value-creating activities?
The value chain focuses managers on the specific activities that generate cost and create value for buyers.
We now have a complete definition of competitive advantage: a difference in relative price or relative costs that arises because of differences in the activities being performed
A company can be better at performing the same configuration of activities, or it can choose a different configuration of activities.
Competitive advantage arises from the activities in a company’s value chain
Porter uses the phrase operational effectiveness (OE) to refer to a company’s ability to perform similar activities better than rivals.
The important thing is not to confuse OE with strategy.
betting that you can achieve competitive advantage—a sustainable difference in price or cost—by performing the same activities as your rivals is a bet you will probably
lose.
Competitive rivalry, at its core, is a process working against the ability of a company to maintain differences in relative price and relative cost. Competition to be the best is the great leveler.
The goal of strategy is
earn superior returns on the resources you deploy, and that is best measured by return on invested capital.
Competitive advantage is not about beating rivals; it’s about creating superior value and about driving a wider wedge than r...
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Competitive advantage means you will be able to sustain higher relative prices or lower relative costs, or both, than your rivals in an industry. If you have a compe...
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Differences in relative prices and relative costs can ultimately be traced to the activities that companies perform.
A company’s value chain is the collection of all its value-creating and cost-generating activities. The activities, and the overall value chain in which activities are embedded, are the basic units of competitive advantage.
competitive advantage means you have created value for customers and you are able to capture value for yourself because the positioning you have chosen in your industry effectively shelters you from the profit-eroding impact of the five forces.
More simply put, you have found a way to perform better by being different.
five tests every good strategy must pass: A distinctive value proposition A tailored value chain Trade-offs different from rivals Fit across value chain Continuity over time
A value proposition that can be effectively delivered without a tailored value chain will not produce a sustainable competitive advantage.
Strategy means deliberately choosing a different set of activities to deliver a unique mix of value.
the value proposition as the answer to three fundamental questions (see figure 4-1): Which customers are you going to serve? Which needs are you going to meet? What relative price will provide acceptable value for customers and acceptable profitability
for the company?
The value proposition answers three questions
The value proposition is the element of strategy that looks outward at customers, at the demand side of the business. The value chain focuses internally on operations.
Typically, value propositions based on needs appeal to a mix of customers who might defy traditional demographic segmentation.
It is only “best” at meeting a particular kind of need at a particular relative price.
The first test of a strategy is whether your value proposition is different from your rivals. If you are trying to serve the same
customers and meet the same needs and sell at the same relative price, then by Porter’s definition, you don’t have a strategy.
The first test of a strategy is whether your value proposition is different from your rivals. If you are trying to serve the same customers and meet the same needs and sell at the same relative price, then by Porter’s definition, you don’t have a strategy.
The essence of strategy and competitive advantage lies in the activities, in
choosing to perform activities differently or to perform different activities from those of rivals.
