by Margaret Lawrence
Good strategic planning begins with customer focus. Knowing your market is critical, deciding which segments to pursue is a priority, but the process does not end there. To compete effectively, you need to create value for your customers in ways your competitors can’t. Look to your value chain to accomplish this.
What is the value chain? It’s all of the activities that add value to your product or service. As first defined by Professor Michael E. Porter, (1985) value chain analysis examines all of the resources such as raw materials, labor, capital equipment, etc. used to create your products or services. Supporting functions such as R&D, information systems, marketing, sales and service are included and evaluated in terms of where and how they also add value. This analysis can quickly reveal opportunities to produce better products and better serve your customer base.
To see how well it works, look at Zara, a “fast fashion” retailer that has become the largest clothing retailer in the world. The company’s strategy is to delight its customers with clothing that mimics the latest in fashion at a reasonable price. Unlike their competitors who offer new designs at seasonal intervals, Zara ships clothing to its retail stores in small batches delivered at frequent intervals. Designs change frequently. Zara’s loyal customers know that new items will appear regularly, but also disappear quickly. As a result, they visit the Zara stores more often and make more frequent purchases than typical shoppers, making parent company Inditex, one of the most profitable companies in its industry. Zara has been so successful because all of the elements in its value chain, from raw materials to finished products hanging in their retail stores, work in harmony to support Zara’s strategy.
How does Zara do it? Some highlights:
In this highly centralized company, things are done differently.
- High fashion items are produced at plants located at the company’s headquarters in Spain or nearby countries to guarantee faster response times and better quality control. Basic items that do not need to change quickly are manufactured in China at a lower cost.
- Zara owns or controls more than half its production facilities, considerably more than other clothing manufacturers. They have invested in high tech equipment and extra capacity that enable them to respond quickly to new fashion trends. They are able to absorb these higher manufacturing costs because their inventory turn is faster than industry norms, and less of their clothing is sold at a discount,
- Outbound logistics are centralized at headquarters. Finished garments are inspected, tagged and labeled at company headquarters, then delivered within forty eight hours.
- Product designers get constant feedback from buyers in the store. New trends are spotted quickly and designs change fast. Sales people are trained to get feedback directly from the customer to send to the designers on a regular basis.
- A sophisticated information system supports the smooth flow of information across all elements of the company’s value chain.
Value chain analysis is a four step process.
- Identify the activities that form the value chain;
- Look for the ones that add the greatest value to your customer, and focus your attention on these. What resources can you add to improve your competitive position in these activities? Are these activities aligned with your strategy?
- Look at costs. Where are you spending the most money? Where are your margins highest? Are you spending too much on activities that aren’t really adding value? How will you cut costs in non critical areas?
- Take a good look upstream and downstream, your suppliers and distributors, to look for ways to improve efficiency and add value.
Value chain analysis quickly identifies your competitive strengths and weaknesses. You will know where resources need to be applied either to improve the customer experience or boost margins by cutting costs.
To improve performance, optimize the value chain:
- Hire and motivate the right people with the right skills to support your strategy,
- Develop more efficient technologies and systems that support your objectives.
- Eliminate activities that don’t add value.
- Above all, focus on the elements of the value chain that create the most value for your customers.
Interested in more ways to improve your strategic planning process? Download our Strategic Planning Tune-up book by clicking on http://www.cssp.com/strategytips/?blog.