Comparing and Contrasting the Value Chain of Multiple Industries


1A) Every occupation, business or trade is occupied with some sort of conversion process. It requires certain inputs which are then transformed into a range of outputs that are needed and used by society. The job of business is to take inputs (land, labor, capital) and turn them into outputs that may be physical goods or services or even a combination of both. The objective of businesses is to add value to the transformation process, and create output value that is far greater than that of the inputs. In purely financial terms, the margin of difference in the values of output and the input is measured as the profit.

The transformation, or process adding value to inputs varies greatly from business to business. It may have to do with manufacturing goods or providing services, it could be capital intensive or labor intensive, it could also be based at a single location or span multiple locations. Successful businesses are constantly looking to add to their profit value, either by providing products and benefits that customers want in increasing numbers, or by deploying more effective utilization of thereby reducing costs.

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To achieve effective utilization of resources, and thereby bring down input costs, organizations use a number of practices. Some of these are Just-in-time production, Lean manufacturing and quick response manufacturing.

Founded by Jack Cohen in 1919, Tesco today is UK's largest general merchandising retailer, and the second largest in the world after Walmart. It has operations in over fourteen countries across the world, spanning Asian, European and North American markets. It started out as a retail grocery chain and today it has ventured into areas as diverse as clothing, financial services, health, insurance, internet retailing and software.

The recession of 2009-10 had a severe impact on the retail industry, and UK's retail sector was perhaps one of the most affected. The economic crisis necessitated agile strategizing, and the firms that were quick in cutting down cost base to meet the changes in the market were seen as having the strongest chance of survival. The retail industry saw major upheavals in the way the sector operates, and the following were some of the key changes that were noticed:

A consolidation of retailers and suppliers

The recession resulted in increased consolidation of bases by big players, as small chains with lesser resources sold out to bigger players exited the market.

A fundamental shift in supply chain

At a time when everybody was looking to cut corners and bring down costs, there was a fundamental need to reassess the way the supply chain operated. Companies looked to save operational costs of the supply chain through optimisation of chain structure, rationalizing supplier base and keeping sources closely aligned to markets

Lowering of prices

Since Low prices were the hot word during the crisis, most retailers took to offering huge discounts and sales to encourage people to buy their products. Discount stores and low cost chains grabbed a large share of business.

Shifting base to mid and low value ranges.

Products that were priced premium had few takers in the economic crisis, and hence most retailers took to stocking up on midrange and low-end products that got off the shelves quickly.

Environment is the term used to refer to the situation in which the organization operates, and interacts (Worthington and Britton, 2005). Organizational environment can be seen as the product of four interdependent systems namely economic, political, physical and social system. (Figure 8.1). Or in other words, organizational environment comprises of complex network of activities and relationships between the organisation and other agencies that interact with it..

The competitive structure of the industry

The competitive structure of the industry determines the comparative power of competitors to dictate issues like pricing policy.

The relative power of buyers and sellers highlights the important position that customers and suppliers play in markets.

Basis of competition describes the main products or services sold and also the basis on which businesses compete in the economic environment.

Government legislations in the environment also has a significant impact on the competitiveness of certain industries.

State of technological deployment. Technology today is an essential component of growth and survival in certain sectors.

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Industry growth determines whether the industry is growing, dwindling or is being stable. This is a reflection of the state of regulation, competition and demand in a particular market.

Every business takes a certain competitive position, and is affected by these various determinants of the environment, and the manner in which it can get ahead of its competitors are determined in effect by the structure of the environment in which it operates.

The theory of industry structure and competitive advantage put forth by Porter is based on the idea of value: The industry structure dictates who keeps what proportion of the value of a product. This value can be passed down to the customers in the form of lower prices and greater discounts.

Porter's five forces model (pp172-182 essentially deals with the competition within a sector as a starting point to an organization positioning itself in the market and developing a competitive advantage.

The basic idea of this model is that it is not just direct competitors who have the ability to affect industry profitability, but also other competitive elements like buyers, substitute products, suppliers, and new entrants.

The notion of competition is thus expanded when we seek to identify the attractiveness of a industry for a particular player, and also whether it could diversify into other areas.

Direct comparisons can be made across competitors in terms of variables like market share, shelf space, product range, number of stores, store formats as well as other financial analysis. This could give us some insight as to why one firm performs better than another. Strategic group analysis will help identify the key bases of Tesco's direct competitors and the possible threats of players from different areas becoming direct competitors.

2) Other key issues for businesses include: ensuring customer satisfaction and loyalty; creating and retaining employee base with the right skill sets in a rapidly changing environment; Effective adaptations to new routines and technology.

Ensuring customer satisfaction and loyalty: Increased competition along with better informed, discerning customers have forced organizations to look at customer satisfaction with new eyes.

Determining customer satisfaction these days goes beyond mere service, monitoring complaints, haing occasional interactions and market surveys. Ensuring customer satisfaction calls for a culture that values customers every level and where customer retention becomes part of every employee's job.

This also requires dedicated understanding of changing lifestyles and requirements and adapting to those changes.

Marks & Spencer and Sainsbury failed where BHS / Arcadia and Tesco succeeded because of their ability to adapt to the changing needs of customers.

Tesco has successfully reinvented itself three times in the last twenty years adapting to changing market needs. Tesco has always used technology as a part of its core strategy, and has had presence on the internet since 1994, when the potential of internet retailing was yet to be explored. It has long followed the policy of entering into joint ventures with local partners in foreign countries, ensuring that it is in sync with the local culture of the places it is setting up operations in.

It has also created an organizational climate that is capable of deploying orderly change, the reason why it is now a dominant player, setting new benchmarks for others to follow. The secret of BHS / Arcadia's success is perhaps best defined by its motto: "product, product and product". Creating products that meet the expectations of its target customers and ensuring that the customer gets value for his money has been the hallmark of Arcadia, enabling them to attract and retain customer loyalty, which is a huge competitive advantage. What is interesting to not is that Tesco is run by a business graduate professional and BHS / Arcadia by a high school graduate.

Creating the correct skill set and enhancing flexibility for employees are aspects of the same issue, and perhaps a direct consequence of an unstable business environment that necessitates frequent re-inventions and a continuous search for better ways of doing things.

The attainment of the correct balance through significant personnel change is risky and costly business. To answer this challenge, organizations have to develop a contingent workforce that can perform a range of tasks and move fluidly from one function to another, depending on requirements. This is a better option than making massive changes to existing employee base, because, for this there is no need for a fundamental cultural change. A well developed training program can skill your contingent workforce and render them capable of performing the tasks required by you, that too at a much lower cost.

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Management in itself is not free from the need for flexibility as frequent realignment between functions are likely to become the norm in the coming years.

Personal competence too plays a major role in enabling managers to perform their tasks. Key skills and competencies include the ability to work with superiors and subordinates, customers and the public. The ability to lead and motivate staff and teams, decision making and time management skills etc.,

While Porter's value chain is concerned with internal processes, the supply chain and customer chain models extend the scope to a wider environment. An economic system consists of a multifarious network of chains like these which together are known as the wider value network.

Figure 7.6. demonstrates the supply chain for a typical business. Th broad arrows stand for the flow of goods and services between companies. It differentiates between direct suppliers who are a step removed in the supply chain, and the indirect suppliers who are two or more steps removed.

The intermediaries who handle the indirect suppliers are also referred to as channel organisations. For example, warehousing companies, retailers, independent wholesalers and distributors.

The customer chain can be described as the demand chain of the market. In a global market place, a customer chain can be differentiated into local customers and export customers. Channel agencies like distributors and retailers provide links to both customer chains.

It is clear that the value network the supply and customer chains included, is different for different industries. While the supply chain and customer chain form the immediate external environment of a business or organisation, they also overlap with another value chain which is the community chain. The community chain is founded on the social relationship and individual networks and its ability to generate social capital is its value. A high level of interpersonal trust in a social network is an indicator of high social capital.