 Good morning class, the last couple of sessions we saw about the concept of strategy and in the video that followed the session you would have also understood that a majority of those who undergo this course on strategy realize that the perception they had towards strategy was totally different. And after seeing the video they understand that strategy as a concept outside is misunderstood and after understanding also we should realize that it is not easy to formulate strategies because you understand what strategy is as a concept by itself. The reason I am making this statement is assume that you know what strategy is that you are not carried away by the popular misconception of what actually it is. Now that we know what strategy is in a nutshell we understand that we need to do things differently and gain a sustainable competitive advantage. And in a nutshell that is strategy and if we know that this is what strategy is all about we should not fall into that trap just because we know the theory behind strategy it is not that it is as easy to come out with a strategic plan as it was easy to understand it. But that does not mean that formulating strategy or coming out with a strategic plan is a difficult task. A number of practitioners management consultants adopt different models and the very endeavour of each of these models is to come out with a strategic plan after very clearly understanding that this is the strategy and different people use different models and as I told you in my initial classes that I would be attempting to come out with popularly followed models that does not mean that these are the only models that are available. Different practitioners come out with different models or they follow different models that are existing in their attempt to come out with a strategic plan for an organisation. And one such model which can also be used as a strategic input was the five forces Michael Porter's five forces that we used to analyse an industry to characterize an industry and how that characterization is a critical input to devise a strategic plan for an organisation. Likewise today we will be looking into a value chain analysis model a value chain analysis as another tool that would help us in formulating a strategy for an organisation. Now this value chain analysis the underlying assumption is that everybody needs to understand that there is something that is valuable, valuable to whom valuable to a number of stakeholders associated with the organisation. And this value chain analysis we are concerned about an important stakeholder in this case being the end user. Let me first begin by asking this question what is value can we define value and there are many views to the definition of value and you will find different people coming out with different definitions for it. But the common understanding is that there is a need for uniqueness in whatever be the value proposition that each organisation puts forward. And it is this uniqueness perceived to be unique from a critical stakeholder in this case the end user that is important for organisations to gain that sustainable competitive advantage. So we must understand that any product any service and as a result of which any organisation has something unique that it offers to the end user. And this perception of uniqueness in the product or the service that is been delivered can be understood as the value proposition. To make it simple we say that this is the value that this organisation through its product or service delivers to its customer. And not that the organisation thinks that this is the value it is the other way that the customer or the end user feels that this is the uniqueness that the end user gets out of using this product or availing the service. And if this uniqueness is able to provide a sustainable advantage a competitive advantage then we characterise that uniqueness with this term value. And I will just begin by a role play exercise. So that you will understand this better because many thing that value is an abstract concept. And this role play we will understand how that value is not abstract except that it is hidden in different forms. And the way we perceive the hidden uniqueness and the way we articulate and convey that this uniqueness is the value proposition of the product or service is what makes the difference between successful organisations, those organisations that have sustainable competitive advantage vis-a-vis others that who are not able to despite having some hidden values not forcefully able to bring that as a competitive advantage. And I will start this role play by using the cola products. So what I will try to do is I will have somebody volunteering and try some of the cola products and predominantly it is going to be the coke or the Pepsi. And let us see whether the volunteer is able to identify what these products are. So let us begin this role play. I will have this volunteer stand here facing the camera so that he does not see the product. And while I do this what I will do is I will just give him some samples of different cola varieties. I will make sure that he does not know what he is drinking. You do not know what I am giving you right because there is a mirror there so make sure you do not know what you are drinking. So I just give him the first sample. So can you tell me what product is this? Both are cola products. So he says this is a Pepsi okay so it is one on one. The next product is another cola product and by the way all of them are cola products. He says it is a coke okay Fanta okay Mirinda Pepsi looks to be looks to me that he is a big it is a connoisseur of cola drinks so it was Sprite this one Mirinda he has got six on it so far Sprite so this is the last attempt so Sprite okay so thank you you probably can have this and this while you get in. Now the exercise is I gave him different varieties of the various cola products. I had a Savinap, a Sprite, a Mirinda, a Fanta, coke Pepsi and in coke I had a regular coke as well as a Diet Coke. One of the ten samples that he tasted this score was six on ten and I must admit that this is a very high score because I have tried this experiment before I have not got results above a 40 percent hit rate but still the purpose of this role plays to ask this question what is it in the cola product that makes people or big fans of the cola product to identify the taste of such cola products or to identify the product itself with just one sip and in this case the hit rate was six when I ask him the question whether you used a taste some would say yes and very natural because this is something that we are drinking and we can identify it only because of taste but further if I probe and ask the question whether you drink a coke or a Pepsi because it tastes better one over the other and the response that I have got from different people is that a majority of them do not say it is because of the taste and look at this unique situation where something that we eat and invariably we assume that we eat something because it is good to taste and here is a product where majority of the consumers assume that let us say they take it because of the taste are not able to identify the product with its taste 50 percent 40 percent 30 percent in some cases all the samples have been identified wrongly and in some cases people do not admit that they have a cola they consume a cola product because of its taste they say it I mean I am brand conscious and I am always I have always been a coke fan why they have different reasons other than the taste which means they perceive that the value a coke gives to its consumer is different from the value that Pepsi would give to its consumer and mind you this magic I call the black sugar water of both the cola products be it Pepsi or coke a majority of them find that there is absolutely no difference and of course there would be a slight difference but very difficult to differentiate just based on taste unless you are as good as the volunteer who did it before it is very difficult so the question is the value proposition from the taste in the product it could be I am not saying no it could be for some the value proposition is the image of drinking a coke or the image of drinking a Pepsi and this value proposition is different from a value that is driven by the product itself another example you ask people especially those who are fond of bikes this Harley Davidson bike though it has unique product characteristics but the imagery of owning a Harley Davidson bike is to convey the message that the masculinity of the person riding the Harley bike is perceived to be more as against a person just driving an ordinary motorbike and that is the value proposition equivalent example you ask somebody in India how he feels to ride a bullet a bullet motorbike and the imagery that we get is riding a bullet motorbike is those that that macho image as against driving a TV Suzuki or a Hero Honda though it has unique product features of course that will also be one of the reasons but then it also delivers a different value proposition so we need to understand that the value that a product or a service delivers is unique and also provides not only a perception that has got to do with the intrinsic product features but also it tends to provide an imagery to the end user which itself can be the value proposition and we saw that in the cola example and examples like the bullet or the Harley Davidson are the ones that suggest that the image that an end user will have by availing a service as a product or using a product is also a value proposition so the next question is in that case is value tangible or intangible tangible if you are able to feel the value that gets delivered you go to a restaurant and you go to this restaurant because this particular dish tastes well and that is why you go to this restaurant then it is a tangible value proposition you buy a particular product you buy a particular textile because you feel that this textile gives you that element of comfort and if you are able to feel that tangibly then that is the value proposition there is also a different set of values which need not be really visible or felt tangibly that could be hidden in some intangible forms that is also a value proposition you go to a premium restaurant and though you have the same variety of food that you have in other places and assume that the quality is the same but then you still go to certain set of restaurants or you use certain niche products of course assuming that the quality is same then the value proposition is a little intangible which is not directly reflected in the product features or it could be a combination of both that could be a value proposition that has a tangible as well as an intangible component in it next question is then is there a need to create value and the quick and simple answer is yes because we are fundamentally making an assumption that creating value is a strategic imperative and is only if you are able to create a value that is perceived to be valuable by the end user then we can do something that is sustainable and not only sustainable it gives you that competitive advantage and whether that value has to be created within an organization or outside the organization is the next question whether the source of that value has to be within an organization or outside the organization or possibly both within and outside the organization and we will say examples of that also but the quick simple answer is values are within the organization as well as outside the organization or a combination of both if you need to really synergize the values within and outside the organization and the next question is is value subjective do we have a context to it at times yes for example if let us say we are we are going across a desert where the need to quench thirst often arises and at one point of time you run short you run out of water supply you do not have enough stocks the value that a source of water will give to somebody who is not having water supply especially when he is on this desert walk is phenomenally high and that is why if you are on such an expedition you would not really bother whether that water is served in a disposable glass whether it is served in as a bottled water or whether it it is given in a different form hot water or cold water whatever be the form in which it is served it becomes a little immaterial because at that point of time the value of water is so high and at times you will end up paying more than what you actually would otherwise pay so it has a context and at the same time it can also be subjective the same water for somebody who cleans the restaurant table has no value at all in fact more water on restaurant table is more work for the cleaner so there is an element of subjectivity in value and also we need to see the context behind which a particular product or service delivers the value now it is this understanding that is required before we move forward now we need to understand that each firm each organization can be split into different sets or different set of discrete activities each operation can be characterized to belong to a particular type of activity and you have different type of activities in any organization and each of the activity when it is carried has a particular cost to it remember when we were talking accounting in management accounting I very briefly touched about activity based costing also it means that any unique set of activities has a cost element in it so to perform an activity the organization incurs a cost and just as you have cost to any activity there is room to perform the same activity in a different way so every activity has to be viewed with a perspective that it can be performed differently from what you used to do before or from what competition is doing so there is scope for isolating cost of an activity and also there is scope for trying to see if we can do this activity in a different way and do and by doing differently we are able to deliver some additional benefit to the end user now it is this idea that forms the fundamental basis for a value chain analysis that we are able to disaggregate various activities of an organization and that we are able to individualize the cost and the differentiability of each of this activity and after doing all this either we try to reduce the cost or we are able to do a particular activity in a different way then we are at a position to even charge or price the product or a service more because a reduction in cost or the propensity to do it in a different way is enough reasons for increasing the price with the hope that the end user is willing to pay that extra price and if that end user is willing to pay that extra price then you have some value element in it see there is no point in doing the same thing and then expecting an incremental price for it because the end user will not be able to appreciate the difference or if you are able to reduce the cost of a particular activity then your margins will improve either way the profitability is increased so more value means there is an inherent benefit and from an organization point of view the benefit is the ability to price it price the product or the service more and I will explain this by just demonstrating this value stick and any organization will have a supplier or a vendor then the organization itself or the firm itself and then the end user and if you are able to split the value across these three stakeholders why is that a supplier is providing that input to the firm when there is an alternate opportunity he thinks that giving it to your firm is able to capture some value so you buy it from your supplier and that is your cost and to the supplier it is the value that he is able to capture by selling it to the firm and then what is the value that you are capturing you are able to do a lot of operations and you are selling it for a price and if there is a propensity to pay more then that is the value that is captured by the customer who thinks that given various choices the reason that I am choosing this firm's product is because I find that there is some incremental value and that value is captured by the difference between the price and the willingness to pay that extra price that the customer has so you will be able to understand that this value stick and as a result of which value per se is not just inherent to the firm and as we go I will explain that it can also be outside to the firm so the willingness to pay more and if that is quantifiable then that is the measure of the value proposition that the firm gives to its end user now there are different sources of value and I told you that it could be within the firm outside the firm it could be tangible or intangible but it has to emanate from a particular source and if it is as direct as a value that comes out of a product it means that the product is delivering something that is intrinsic and inherent to the product itself and that is the main source of supply of this value and a good example would be sugar free sugar how is it different from the regular sugar the value proposition that sugar free sugar delivers is from the product itself it is not unrelated to the product sugar free sugar is not purchased because it comes in a different packaging no likewise organic food organic food is not being purchased because it is being delivered it is home delivery no organic food is being purchased because the characterization of organic food is directly related to the product characterization and the value that I get is from its intrinsic it is internal to the product itself it comes from the product so the source of that value is very much within the product that is being delivered or you could have a value proposition that can come out from the service that is being offered which is a little peripheral to the product and if somebody says that I can deliver a particular order of a pizza within 30 minutes that is a service proposition and that and if you find that there is a value that you are prepared to pay more as long as my pizza arrives within 30 minutes from the time that I order it is got nothing to do with the flavor of the pizza the fact that the service level is different another example could be the airline industry the fact that the the in-crew service is excellent it has got nothing to do with the quality of the pilots or the quality of the aircraft it is something that is got to do with the service level and there is value in that service also the third one is the the wow factor where it is not just customer satisfaction that is important the end user must be delighted by using it and good examples could be if you go to a fast food joint or a food joints nowadays you would find some play areas separate for kids to play and it has got nothing to do with the menu that the food joint offers likewise Unilever's value chain has a lot of stress on the environmental impact that the product after its use creates so it has got nothing to do with the product it has got nothing to do with even the service value of the product it is after the product that is being used so it has got nothing to do with the product or the service and I will show you a small video that explains what I am trying to say but still I am able to feel that this is a unique value proposition despite the fact that it has got nothing to do with the product per se or the service with which this product is delivered but still I have something that tells me yes this is something that I perceive to be very valuable and that I call or Jim Clemmer calls it the wow value so if you look at the sources of value at the heart comes the product value another value proposition could come from the service level or something that is unrelated to the product or the service but definitely delivers some value proposition for which customers are willing to pay more so these are I am not saying these are the only three but these are predominantly the three sources of value now putting all this in proper perspective and provide a structure based on which every organization can create a value chain which they can use it internally to analyze or for consultants to look at the value chain of an organization to see where we can build values in which activities we can build values Michael Porter in 1995 formulated this value chain the structure was to present the firm as a construction of various values value activities which are more related to the end user because the fundamental assumption is any activity is non valuable if it is not able to synchronize itself with the needs of the end user or it is not able to really add value to the end user so if you find that there is an activity that is customer needs centric the reason that you are doing this this way is because a customer would feel the end user would feel that there is a benefit then that is a value activity some activities which has got nothing that can generate this uniqueness are non value activities and we are not concerned about those set of activities we are concerned about those activities that are end user centric and why should we be concerned about that because these are the activities that have the potential to increase the competitiveness of the product or the service that is been delivered or these are the activities that needs to be viewed if at all we think that we can reduce cost of particular activities we need to look at these activities and as a result of this as I said if you are able to do this if you are able to differentiate or reduce cost of such activities there is this benefit or the chance to price it more so it increases profitability and at times also it improves market share because of the competitiveness so you build your top line by market share or strengthen your bottom line by improving the profitability and whatever be the way at the end of the day it delivers by way of an increased profitability or an increased market share and we should be concentrating only on those activities which Michael Porter was identifying he identifies a set of activities that he thinks is very critical for any organization and why as I said before every organization needs to understand its own value chain so that it can compare its value chain with its competition to gain that cost advantage or it needs to understand its own value chain so that it is able to distinguish its product or service from its competition because it is able to do certain things in a different way and that is the uniqueness and that is the differentiating factor from competition or it should also be able to understand the entire value delivery system which is not just the value chain of the firm itself but the value chain right from the supplier to the end user so it can be as all pervasive as including a value chain of a supplier to the value chain of the end user because the end user ultimately pays for all the profit margins along the entire value chain because if a supplier is making profit it is not being reduced by the original equipment manufacturer that profit gets added on to the cost price of the OEM and the OEM's profit gets transferred to a dealer the dealer's profit gets transferred to the end user so at the end of the day it is the end user who ultimately pays for all the profit margins that lie across the entire value chain so it is not enough if we just understand the value chain of the firm it also makes sense to understand the value chain of the suppliers or the value chain of those who are involved after the firm delivers the product on service before it reaches to the end user a typical example could be the auto industry suppose I want to buy a car it is not that I just walk into the factory of a Tata Mota or a Ford engines by a car the entire ecosystem of the automobile industry has various stakeholders you will have raw materials suppliers auto components suppliers you will have the original equipment manufacturer in this case a car manufacturer you will have a dealership network and then finally at the dealers place you go on by a car but the understanding is that the end user pays for the profit margins for all all the stakeholders involved in this which includes the suppliers the firm the dealer and the value that is captured by the supplier or the firm or the dealer and assuming that the value is the willingness to pay is the one that is actually the price that the end user pays and if you are able to do something competitively across these value chains then you are delivering something that is unique and valuable to the end user so there is a linkage or within the firm the value delivered by one activity improves the performance of a sequential activity and hence linkages are also established so you should understand that value chains are linked within an organization and also outside the organization and to identify those set of activities Michael Porter identifies these activities under two broad categories the primary activities and the support activities the primary activities being inbound logistics operations outbound sales and marketing services and support support activities being human resources R&D or technology development procurement and firm infrastructure and by and large each of this value activity in some way or the other forms the building block of any firm and the assumption is each of them have something in it that can give some competitive advantage to the firm and how each of these activities are being performed determines the competitive advantage that an organization gets relative to its competition in next class we will just get into some of the finer details of each of these activities and I will give you an example for you to appreciate this concept better and a couple of videos for you to understand what this is all about so next class we will start with the analysis part of the value chain thank you