MM - 1901
MM - 1901
MM - 1901
Porter’s Five Forces framework was developed by Harvard's Michael Porter using
concepts from industrial organization economics to analyze five interacting factors critical
for an industry to become and remain competitive: industry competition, threat of new
entrants, threat of substitutes, bargaining power of buyers and bargaining power of
suppliers
This chart identifies Porter's 5 Forces for assessing the profitability of a value chain: threat
of substitutes, threat of new entrants, bargaining power of buyers, bargaining power of
suppliers, and rivalry among existing competitors.
• The bargaining power of buyers: buyer volume , buyer switching costs relative
to firm switching costs, buyer information availability, availability of existing
substitute products, buyer price sensitivity, price of total purchase, consumer
protection laws.
Successful businesses create value with each transaction—for their customers in the
form of satisfaction and for themselves and their shareholders in the form of profit.
Companies that generate greater value with each sale are better positioned to profit than
those that produce less value.
The term value chain refers to the various business activities and processes involved in
creating a product or performing a service. A value chain can consist of multiple stages
of a product or service’s lifecycle, including research and development, sales, and
everything in between. The concept was conceived by Harvard Business School
Professor Michael Porter in his book The Competitive Advantage: Creating and
Sustaining Superior Performance.
Taking stock of the processes that comprise the company’s value chain can help to gain
insight into what goes into each of its transactions. By maximizing the value created at
each point in the chain, the company can be better positioned to share more value with
customers while capturing a greater share for itself. Similarly, knowing how the firm
creates value can enable to develop a greater understanding of its competitive
advantage.
COMPONENTS OF A VALUE CHAIN
According to Porter’s definition, all of the activities that make up a firm's value chain can
be split into two categories that contribute to its margin: primary activities and support
activities.
Primary activities are those that go directly into the creation of a product or the execution
of a service, including:
Value chain analysis is a means of evaluating each of the activities in a company’s value
chain to understand where opportunities for improvement lie.
Conducting a value chain analysis prompts to consider how each step adds or subtracts
value from the final product or service. This, in turn, can help realize some form of
competitive advantage, such as:
• Cost reduction, by making each activity in the value chain more efficient and, therefore,
less expensive
• Product differentiation, by investing more time and resources into activities like
research and development, design, or marketing that can help the product stand out
Typically, increasing the performance of one of the four secondary activities can benefit
at least one of the primary activities.
The first step in conducting a value chain analysis is to understand all of the primary and
secondary activities that go into your product or service’s creation. If the company sells
multiple products or services, it’s important to perform this process for each one.
2. Determine Activities' Values and Costs
Once the primary and secondary activities have been identified, the next step is to
determine the value that each business activity adds to the process, along with the costs
involved.
When thinking about the value created by activities, ask: How does each increase the
end user’s satisfaction or enjoyment? How does it create value for the firm? For example,
does constructing the product out of certain materials make it more durable or luxurious
for the user? Does including a certain feature make it more likely to benefit from network
effects and increased business?
Similarly, it’s important to understand the costs associated with each step in the process.
Depending on the situation, it may find that lowering expenses is an easy way to improve
the value each transaction provides.
Once value chain is compiled and it needs to understand the cost and value associated
with each step. One can analyze it through the lens of whatever competitive advantage
is being tried to achieve.
For example, if the primary goal is to reduce the firm’s costs, one should evaluate each
piece of the value chain through the lens of reducing expenses. Which steps could be
more efficient? Are there any that don’t create significant value and could be outsourced
or eliminated to substantially reduce costs?
Similarly, if the primary goal is to achieve product differentiation, which parts of the value
chain offer the best opportunity to realize that goal? Would the value created justify the
investment of additional resources?
Strategic Business Unit (SBU)
An SBU operates in the marketplace as an independent entity with its own vision, mission,
competitors, business model, and profit-and-loss responsibility. However, it remains part
of a larger corporation and, as such, must align its strategy with the corporate-level
strategy.
1. Situational Analysis: This involves understanding the current state of the SBU,
including its strengths, weaknesses, opportunities, and threats (SWOT analysis). This
step might also include analyzing the competitive landscape, understanding customer
needs and behaviors, and evaluating the SBU’s current performance.
2. Setting Objectives: The SBU sets strategic objectives based on situational
analysis. These objectives should be aligned with the overall corporate strategy and
should be Specific, Measurable, Achievable, Relevant, and Time-bound (SMART).
3. Developing Strategies: Once objectives are set, the SBU develops strategies to
achieve them. This might involve choosing target markets, deciding on a competitive
position, developing a value proposition, etc. Strategy development should consider
both internal capabilities and external market conditions.
4. Implementing the Strategy: This involves translating the strategy into action. It
might involve developing new products, launching marketing campaigns, changing
operational processes, hiring new staff, etc.
5. Monitoring and Control: Once the strategy is implemented, the SBU must track its
performance against its objectives. This involves collecting data on key performance
indicators (KPIs), reviewing progress, and making necessary adjustments.
6. Evaluation and Adjustments: The SBU evaluates its strategy based on the
monitoring. If the strategy is not working as expected, the SBU may need to adjust its
objectives, strategies, or implementation plans.
Remember that strategic planning is not a one-time event but an ongoing process
requiring regular review and adjustment. The goal is to ensure that the SBU continues to
adapt to changing market conditions and aligns with the overall corporate strategy.
P&G, a multinational consumer goods corporation, has several SBUs, each focusing on
a different category of products. For instance, they have an SBU for Beauty, one for
Grooming, one for Health Care, one for Fabric & Home Care, and one for Baby, Feminine
& Family Care.
Each SBU operates like its own company, with its own brand management, product
development, marketing resources, and more. However, these units are all part of the
larger P&G corporation and contribute to the overall corporate strategy.
This structure allows each SBU to focus deeply on its own market segment and set of
competitors while still benefitting from the resources and capabilities of the larger
organization. It also helps P&G manage the complexity and diversity of its product
portfolio.
Business unit strategy decisions are critical for the success and growth of a company.
These decisions involve determining how a specific business unit within a larger
organization will achieve its objectives and contribute to the overall success of the
company. Here are some key elements and considerations when making business unit
strategy decisions: