01.

Introduction to business value creation

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In business, value is a measure of the worth of something.

 A business organisation obtains the use of resources, such as money, employees, materials,
equipment and other assets. These have a value.
The organisation then makes products or provides services that have more value than the
resources it has used.
Business activities should 'add value'. If business activity fails to add value, it is not worthwhile
and should not be undertaken.

 Value is created from the way in which a business makes use of its resources, and the activities
that it carries out.
The value-creating activities within an organisation are known as its value chain.
The value chain is a term for the activities within an organisation that add value to purchased
inputs of materials.

 The value network joins an organisation's value chain to those of its suppliers and customers.
A value network extends from the producers of basic raw materials to the distributors and sellers
of an end consumer product.
Value should be created at every stage in the value network, although more value may be created
in some parts of the network than in others.

 The stakeholders of a business organisation are the people and groups who have an interest in
what the organisation does.
In some cases, stakeholders are able to influence the organisation and what its management
decide to do.
Different stakeholders have different expectations about what the organisation should do to
provide value.
The interests of different stakeholders may conflict with each other.

 Competitive advantage is an advantage that a business organisation has over its rivals, improving
it prospects of selling its products or services to customers and creating value.
One important source of competitive advantage is the resources that the organisation has at its
disposal.

 The resource-based view (RBV) of business strategy is that the resources that an organisation
has in its possession or under its control give it the ability to compete in its industry and markets.

 Resources must be sufficient to enable an organisation to compete successfully (threshold

resources) but unique resources create competitive advantage.
Resources are used in a way that creates competence in what the organization does.
A business organisation must have a threshold level of competence, so that it can compete.
Core competences, however, create competitive advantage.

 In the value chain, the finance and accounting function is a part of the firm infrastructure.
The role of the accountant is to provide information for management, to assist with decision
making.
The quality of decision making by management depends on the quality of the information they
use.
Traditionally, accountants have provided management with information from sources within the
organisation.
Now, particularly at a strategic level, accountants also provide information from sources external
to the organisation.

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02. Role of supply chain in value creation (supply chain management)

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The supply chain is the network of organisations involved in the different processes and activities
that transform raw materials into finished goods and services, in order to produce value for the end
consumer.

 Supply chain management is concerned with managing those parts of the supply chain over which
an organisation has influence or control.

 Value is created by efficient warehousing management.

 Efficient warehousing management involves establishing and operating a system for holding
inventories of goods and keeping them secure and in good condition until required; and also an
efficient and economical system for receiving goods into store and retrieving them when required.

 A warehouse management system (WMS) is an IT system for controlling the movement and
storage of goods (normally finished goods) within a warehouse and processing associated
transactions such as receiving goods, putting them away, picking goods for shipment and shipping
them. A WMS monitors the progress of products through the warehouse.

 Although value is created by efficient warehousing management, a balance needs to be found

between holding large inventories in order to meet customer demand promptly every time
(creating customer satisfaction) and the high costs of holding inventory.

 Efficient inventory management involves monitoring inventory levels, to try to ensure that there is
a fast response to demands for inventory, but that inventory levels are not excessive.

 Digital products, such as music and film, can be delivered to customers over the internet, via a
mobile phone network or another satellite system.
Physical products, however, must be delivered physically to customers.
Logistics systems are concerned with delivery of physical products to the customer.

 Customers may value low cost, speed or convenience of delivery, or a combination of these things.

 Various applications of information technology can be used to improve the supply chain process.
They are used mainly to reduce costs and improve efficiency.

 A warehouse management system (WMS) is an IT system for controlling the movement and
storage of goods (normally finished goods) within a warehouse and processing associated
transactions such as receiving goods, putting them away, picking goods for shipment and shipping
them.
A WMS monitors the progress of products through the warehouse.

 Management should monitor and control the supply chain. To do this, they need information about
the performance of different aspects of the supply chain.
This information can be provided by a supply chain performance management system.

03. Creating value through operations

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Operations are a key area where a manufacturing business creates value, converting raw materials
into products for selling to customers. It is also a value activity where an organisation may be able to
create competitive advantage, through a unique resource or a core competence.

 Value is created by new products, because when they have been developed and when they are
marketed, they add to sales revenue and profit margin.

 Innovation can be a major source of competitive advantage. Companies that develop new products
can, for a time, offer something to customers that competitors cannot offer.

 However, new product development can also be risky, because new product ideas may not be
successful in the market.
So to avoid unnecessary spending, there should be a programme of assessment for new product
ideas.

 The production methods used by a company to manufacture their products may also be important
for creating value.
The most appropriate production method depends on what customers want and so what creates
value most effectively.

 Quality is a feature in products or services that provides value for customers. Quality in
manufacturing is concerned with standards of production, and trying to ensure that the costs of
poor quality are minimised.

 Quality costs are the total of the costs of preventing errors in production, the costs of inspecting
output for faults, the costs of correcting faults that are discovered and the costs of dealing with
complaints from customers about defective items that are produced and sold.

 In the context of total quality management (TQM), quality means getting it right first time and
improving continuously.
TQM is the process of applying a zero defects philosophy to the management of all resources and
relationships within an organisation as a means of developing and sustaining a culture of
continuous improvement that focuses on meeting customers' expectations.

 Six Sigma is an approach to eliminating defects from products and operations, and achieving near
perfection.
It was originally applied to manufacturing operations and defects in products, but it can also be
applied to any product, process or transaction.
There is a focus on the customer, and achieving levels of performance that are acceptable to the
customer.

 Projects are a common feature of operations management.

They have a limited duration and are established to achieve a specific purpose, such as to develop
and introduce a new IT system, a Six Sigma project to improve an existing process, or a project to
design and develop a new product.

 Efficient project management can create value, by ensuring that the project's objectives are
achieved, within the budgeted amount allowed for cost and within the timescale for completion
that has been set.
In other words, project management can add value by ensuring that projects are completed to
specification, within cost and on time.

 A project manager may use several different methods or techniques to help with the task of
completing the project within the budgeted expenditure limit and by the final target date for
completion.

 The location of operations is another aspect of operations where value can be created.
In particular, there may be a competitive advantage in locating operations close to a key supplier
or close to target customers.

 Some global companies have chosen to locate production operations 'offshore' in countries with
low labour costs, in order to benefit from low production costs.

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04. Value creation through marketing
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 Companies sell their products or services in markets they have chosen for targeting. In order to
sell their products and persuade customers to buy them, companies must undertake marketing
activities.

 Marketing strategies are plans developed by companies for selecting target markets and marketing
their products or services to potential customers in the target market.

 Marketing creates value by creating interest in a product or service, and persuading customers in
the target market to buy it.

 Marketing strategies for a company's product are based on the concepts of segmentation, selecting
a target market and positioning the product within the target market.

 All markets can be analysed and divided into segments.

 A market segment is a group of customers or potential customers within a total market who have
similar needs and interests, and who can therefore be targeted by the same marketing activities (a
marketing mix).

 In most markets, especially consumer markets, it is unusual for companies to plan their marketing
activities so that they try to appeal to every potential customer in the entire market.
Marketing activities generally focus on one or more market segments.

 The purpose of market segmentation by companies is to identify the segment or segments that will
be targeted with marketing activities.

 Having identified target market segments, a company must then decide what position in the
market segment it should try to achieve for its product.

 The marketing mix is basically the combination of factors that marketing managers put together,
to make products that meet the needs of different customers, price them, inform potential
customers about them and deliver them to customers who want to buy.

 An essential requirement for successful marketing is to develop products that meet the needs of
customers in the target market.
Products and brands must be managed to ensure that they are developed to meet the identified
needs of customers in the target market, and they should be altered over time to meet the
changing needs of those customers.

 Price is another element of the marketing mix.

Pricing strategy is concerned with deciding the price level at which a company should try to sell its
products.

 Place is concerned with the selection of distribution channels used to deliver goods to the
consumer.
The 'place' element of the marketing mix is really concerned with the processes by which the
product reaches the consumer in a convenient way.
Other terms for 'place' include distribution, delivery systems or channels.

 Promotion covers all marketing activities that are focused on letting customers know about a
product or service and persuading them to buy it.

05. Value creation through marketing

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CHAPTER ROUNDUP

 The product life cycle is a concept that products have a life cycle, and that products demonstrate
different characteristics of profit and investment at each stage in their life cycle.
The life cycle concept is a model, not a prediction. (Not all products pass through each stage of the
life cycle.)

 The model can be used by a company to examine its portfolio of products and services as a whole.
It can also be used to develop different marketing strategies and a different marketing mix,
according to the stage in its life cycle that the product has reached.

 Portfolio planning aims to create a balanced portfolio of products, with a spread of different
products at different stages in their life cycle.
A balanced portfolio of products helps a company to remain competitive in its markets.

 The original marketing mix had just four elements: product, price, place and promotion – these
were sufficient for planning the marketing of products.
As marketing of services developed, it was recognised that the original 4 Ps did not cover all the
issues that should be considered for marketing.

 So, for services, the marketing mix was extended to 7 Ps by adding three more Ps to the original
four: people, process and physical evidence.
Some texts refer to the 7 Ps as the 'extended marketing mix'.

 Customer relationship marketing means using marketing resources to retain, rather than simply
attract, customers.
It focuses on establishing loyalty among the existing customers.

 Relationship marketing is the use of marketing resources to maintain and exploit a firm's existing
customers, rather than using marketing resources solely to attract new customers.

 Firms can implement their relationship marketing strategy through effective customer
relationship management.

 A key requirement with CRM is to gather information about the customer, their needs and how
they make their buying decisions.
This information can be used to strengthen the relationship with customers, strengthen customer
loyalty and succeed with customer retention.

 Database systems enable companies to acquire, accumulate and store information about a
customer and their buying history.

06. People aspects of value creation

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 The success of most organisations depends on the skills, experience and effort of the people
working for it.
Although many operations are automated, people are active in all parts of the value chain, and
contribute to the creation of value.

 People can be a unique resource (because of their knowledge and ability) and they can help the
organisation to create a core competence (such as highly talented management).
They can help the organisation to create other unique resources, such as intellectual property.

 The success of employees in creating value for an organisation depends largely on the success of
HR management in attracting, developing and motivating them.

 The people within organisations, especially large organisations, change continually.

People are recruited; others leave; others move to different jobs within the organisation, possibly
through promotion.
An organisation may need more employees with certain skills, but fewer employees with skills
that are no longer required as much.

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 HR managers need to plan future requirements for numbers and skills.

(a) The employees of organisation are valuable assets. Without them, an organisation would not
exist and could not operate. The efficiency and effectiveness of an organisation depend on their
skills and abilities.

(b) HR management is responsible for the recruitment and selection process. The aim should be to
encourage suitable individuals to apply for job vacancies and to select the best candidates from
among those who apply.

 Organisations need to attract and retain talented individuals who will, immediately or at some
time in the future, contribute significantly to creating competitive advantage and adding value for
the organisation. The first stage in this process is to recruit suitable individuals.

 Selection is the process of choosing the preferred individual or individuals for a job from among
those who apply. Typically, selection follows an interview process; however, the selection and
interview process may be brief for filling junior roles in the organisation.

 The selection process is most important for selecting talented individuals to join the organisation.

 Socialisation is a process of getting a new employee to become more familiar with the
organisation, and to 'feel at home'.

 The ability of employees to add value for an organisation depends on their performance in their
job. Motivation is concerned with the view that employees can be motivated to perform better.

 However, there are differing views about what motivates individuals at work and how
management may improve performance of their staff by trying to provide motivation.

 There is a widely-held view in most organisations that pay is an important motivator. If employees
consider their pay to be insufficient they will be dissatisfied.
On the other hand, they may be motivated to achieve or exceed performance targets by means of a
pay reward system.

 Performance management aims to get better results for the organisation via the measurement and
evaluation of individual performance.

 Performance appraisal is part of the system of performance management, including goal setting,
performance monitoring, feedback and improvement planning.

07. People aspects of value creation

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Human resource development is concerned with developing employees for future roles in the
organisation. For the most talented employees, it is the process of grooming individuals to be the
future leaders of the organisation. Training is a part of the process of development.

 Employee development creates value by giving employees the knowledge and experience to
perform more effectively, and in doing so create more value.
The HR department needs to check that the benefits or returns from spending on training and
development justify the cost.

 Training can be expensive. Employee development is more difficult to cost, but this too can be
expensive.
The HR department should be responsible for ensuring that training initiatives provide benefits
that justify the costs.

 This principle is at the core of attempts to measure the return on investment from training and
similar HR initiatives.

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 Knowledge can be defined as patterns of information that are strategically useful.
It comes from a combination of information, experience and sharing experiences with other
people.

 Knowledge management is a relatively new concept in business theory.

It is connected with the theory of the learning organisation and is based on the idea that
knowledge is a major source of competitive advantage in business.

 The aim of knowledge management is to capture, organise and make widely available all the
knowledge that the organisation possesses.
Knowledge is both explicit (in recorded form) and tacit (in people's heads).

 Organisational culture is the 'basic assumptions and beliefs that are shared by members of an
organisation, that operate unconsciously and define in a basic taken-for-granted fashion an
organisation's view of itself and its environment' (Handy).
Culture defines the character of the organisation.

 Organisational culture relates to ways of acting, talking, thinking and evaluating issues and
problems.
It can include shared values beliefs and assumptions.
Culture may also include a set of shared ethical believes about what is right and wrong, and how
people in the organisation ought to behave.

 All employees within an organisation may share the same cultural attitudes.
Alternatively, especially in large organisations, there may be different cultures among different
divisions or departments.

 Business organisations operate in a rapidly-changing environment and marketplace.

To remain successful, they must adapt by responding to the changes and taking advantages of any
strategic opportunities that may arise.

 However, when major changes are required, there will often by strong resistance from employees
and the existing culture of the organisation.
To overcome resistance to change may require skilled 'change managers' as well as effective
leadership from the top of the organisation.

 Organisations have leaders who determine the direction in which the organization will go.
Whereas management is concerned with operations, leadership is concerned with overall
strategy, and getting employees to follow where the leader wants to take them.

 Effective leadership is critically important for the success of an organisation and the creation of
value.

 But what makes a good leader? There are three basic schools of leadership theory that try to
answer this question: trait ('qualities') theories, style theories, and situational theories.

 Early theories suggested that there are certain personal qualities common to 'great men' or
successful leaders. In other words: 'leaders are born, not made'.

 Leadership styles are different forms of leadership behaviour, which are used in different ways in
different situations.
While there are many different classifications of style, they mainly relate to the extent to which the
leader is focused primarily on task/performance (directive behaviour) or relationships/ people
(supportive behaviour).

 Situational approaches to leadership theory propose that the most effective approach to
leadership depends on the work situation.
There is no one right way to lead that will fit all situations.
The ability of a manager to be an effective leader depends on the particular situation (which can
vary) and the leadership style that they use.

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08. Value creation through technology and innovation

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 The pace of technological change has been rapid, particularly in the areas of computerisation and
communications technology.
However, there are also major developments in microbiology, medicine, space technology, food
technology and other areas in which business is closely involved.

 In many different ways, technology contributes significantly to value creation.

 Information technology systems for many companies are a threshold resource, which is used to
establish a threshold competence.
Without IT systems, they could not compete successfully.
IT systems may possibly become a unique resource for some companies, and may be used to
create a core competence and competitive advantage.

 Companies may use different types of information technology infrastructure in different functional
areas of the business.

 Electronic business, or e-business, is the automation of business processes of all types through
electronic means.
This may be restricted to email or may extend to a fully-featured website or an e-marketplace.
E-business that includes a financial transaction is known as e-commerce.

 E-business has been defined by IBM as 'the transformation of key business processes through the
use of internet technologies'.

 E-commerce business models take different forms. Businesses that consider moving into e-
commerce need to consider the model that they will use, the market that they will target, the
potential for profit, and whether they have any competitive advantage that will enable them to
succeed.

 Companies also use the internet to communicate with other businesses.

Some B2B business takes the form of e-commerce, but there is also extensive sharing of
information, for example using electronic data interchange (EDI)or through extranet connections.
 E-procurement is a term for purchasing goods by businesses by electronic means, for example by
means of electronic data interchange with major suppliers or by purchasing through the internet.

 Research and development (R&D) can be an important source of innovation for companies.
Successful innovation – in products or processes – can create a competitive advantage and create
value for the company.

 However, many research projects take a long time to complete, and are expensive.
Many new product developments fail to reach the stage of market launch.
Some new products launched on to the market are commercial failures.

 R&D must therefore be managed carefully, to ensure that the additional profits obtained from
selling new products do not exceed their R&D costs.

 The pace of technological change is fast. All companies are affected by change, to a greater or lesser
extent.
To remain competitive, companies should respond to change and, where appropriate, innovate.
However, the importance of innovation differs between different industries and markets, because
the pace and nature of technological change affects different markets in different ways.

 Everett Rogers popularised a theory on the diffusion of innovations, and how innovations are
adopted.

09. Strategy for value creation

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 Business strategy is concerned with deciding the broad objectives for the business, and setting
specific targets or objectives for achievement within a planning period.
Strategic planning occurs at different levels within a business organisation: at the overall
corporate level, at divisional level within the organisation as a whole, and at functional or
operational level for each business division.

 Business strategy is formulated at the divisional level or SBU level within large organisations.
There is a rational process of business strategy formulation. This begins with a review of the
organisation's strategic position:
Where is it now?
Where does it want to be in the future?
Where will it get to if it makes no strategic initiatives?
What is the gap between where it expects to be and where it wants to be?

 The next stage is to consider a range of different strategies for filling this 'strategic gap'.
Different strategic choices should be considered, and a choice of preferred strategies should be
made.
Choices should be made at the business level first, and then at the operational or functional level.

 When strategic choices have been made, the next step is to put them into action.

 Vision and mission give an organisation the reason for its existence, and should guide the strategic
decisions that are taken by management.

 An organisation should also have core values, embedded in its corporate culture, about what it
considers important and how it should behave in pursuing its mission.
 Companies may or may not have a formal mission statement or vision statement.
Even so, senior management should understand the purpose of the organization and what it is
trying to achieve.

 Business strategy planning involves setting more specific goals or objectives that the organisation
should achieve.
For each identified objective, a strategy should also specify a specific target for achievement.

 In order to identify the strategic choices available, an organisation should begin by studying the
environment in which it operates.
There are two aspects to environmental scanning: looking at the general business environment
and looking at the specific industry or market environment in which the organisation operates.

 Scanning the broad business environment can be done using PESTEL analysis (also known as PEST
analysis).
The organisation's industry and markets can be studied using techniques such as competitor
analysis or Porter's five forces model.

 In addition to carrying out a study of the broad industry environment and the industry and
competition in the markets where the organisation operates, the next stage in strategic position
analysis is to assess the strengths and weaknesses of the organisation's resources and
competences, and the threats and opportunities that exist in the organisation's environment.
This approach to position analysis is called SWOT analysis.

 A formal strategic planning process involves setting objectives at SBU level and subsidiary
objectives at operational or functional level.
To achieve a strategic objective, there will be one or two factors critical to the success of the
strategy.
These are known as critical success factors or CSFs.

 Critical success factors (CSFs) are those actions that must be performed well in order for the goals
and objectives established by an organisation to be met successfully.

 The importance of the definition of KPI is that it links to the idea of performance.
If an organisation has identified the components of its strategy where it needs to outperform the
competition, it also needs some way of being able to measure its performance in those areas.

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 These key performance measures, known as key performance indicators (KPIs), are a key part of
the control system for reviewing how successfully a strategy has been implemented and how well
an organisation is performing.

 There should be a key performance indicator (or a small number of KPIs) for every CSF.

10. Strategy for value creation

CHAPTER ROUNDUP

 Once an organisation has identified the opportunities and threats in its external environment and
its internal strengths and weaknesses, it must make choices about what strategies to pursue in
order to achieve its targets and objectives.

 Strategy formulation at the level of the SBU (the business level) is concerned mainly with decisions
about products and markets, such as what products the division should be producing and selling,
and what market segments they should be targeting.

 Porter has suggested there are three generic business strategies:

cost leadership, differentiation and focus.
A company should select one of these three strategies as a way of competing in its markets.

 Porter's ideas about generic competitive strategies, and the idea that firms can successfully pursue
a number of strategies based on price and perceived added value, have been extended into the
concept of the strategy clock.

 A different approach to identifying competitive strategies was suggested by Kim and Mauborgne in
2005.
They made a distinction between two different types of strategy, which they called red ocean and
blue ocean strategies.

 A blue ocean strategy involves finding innovative ways to create value for customers while at the
same time reducing costs for the organisation.

 A red ocean strategy means competing in existing markets with existing products. In a highly
competitive market, little or no value is gained from this.

 An alternative method of selecting a business strategy entails deciding on strategic alternatives

based on the organization’s competitive position in the market place, ranging from market leader
to market nicher.
As the nature and intensity of competition mainly depends on market position, different
businesses may need separate competitive strategies to maintain their market positions

 A problem with selecting business strategies is that the reaction of competitors is either assumed
or ignored.
In reality, depending on which strategy a company selects, its competitors adopt a different
strategy of their own in response.

 Game theory can be used when making a choice between alternative strategies, to try to establish
what competitor responses might be, and so decide whether one of the strategies is preferable to
the others.

 When strategic choices have been identified and considered, a choice is made about which strategy
or strategies to select.
The strategic alternatives should be evaluated and the preferred choice recommended for
implementation.

 Proposed strategies can be assessed according to three factors: their suitability, acceptability and
feasibility. Suitability should be assessed first.

 When strategies have been selected and implemented, their progress and performance should be
monitored.
Management should check whether the organisation's strategies, taken both individually and
collectively, are achieving their intended objectives.

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 When strategic performance falls short of expectation, management should consider control
measures to rectify the situation.
These could include amending a strategy, or abandoning a strategy.

 Strategic control involves monitoring progress toward strategic objectives, and taking control
measures when actual performance indicates that strategic targets will not be met.

 Strategic control involves monitoring of both financial and non-financial performance.

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