Using value-chain analysis to discover customers’ strategic needs
David W. Crain and Stan Abraham
David Crain, a marketing and strategy consultant, is visiting professor of marketing at Whittier College, CA, and former Director of Marketing at Fluor Corporation (firstname.lastname@example.org). Stan Abraham is professor of strategy and entrepreneurship at Cal Poly Pomona (scabraham@ csupomona.edu) and author of Strategic Planning: A Practical Guide for Competitive Success (Thomson South-Western, 2006). ere is a five-step method for discovering a customer’s particular strategic needs based on a unique application of value-chain analysis. Performing this analysis on important customers helps identify high-value new business opportunities. It also can strengthen relationships with customers by clarifying their strategic priorities, regardless of whether their needs are based on a differentiation or low-cost strategy or whether that strategy is implicit or explicit. Value-chain analysis is used for many purposes, but the process of examining customers’ value chains is relatively new. In our five-step process, Step 1 explains how internal and external value chains can be used separately and in related ways. Step 2 shows how to construct a customer’s value chain. Step 3 shows how to identify the customer’s business strategy by examining this value chain and using other kinds of information. Step 4 explains how to use additional information and intelligence to leverage that understanding into strategic needs and priorities. Finally, Step 5 explains how a firm’s marketing function can best use this method of value-chain analysis as a new strategic capability.
Step 1: An overview of value-chain analysis
Value chains may be defined in two ways: (1) within a company they describe the various value-added stages from purchasing materials to distributing, selling, and servicing the final product (Porter’s 1985 concept), and (2) they also delineate the value-added stages from raw material to end-user as a product is manufactured and distributed, with each stage representing an industry. For convenience, we will refer to these two definitions as ‘‘internal’’ and ‘‘external’’ value chains, respectively. The internal value chain is a key concept in the field of strategic management that has been thoroughly explored. In contrast, the external value chain has not been studied as extensively. The external value chain consists of the important upstream/supply and downstream/distribution processes. However, even though these processes occur outside the corporation, the strategic opportunities they reveal and areas of risk they highlight warrant careful study. Consider: B Outsourcing – involves transferring certain primary or support functions in the internal value chain to the external value chain. B Vertical integration – involves taking control of one or more additional stages of the external value chain and making them internal. B Horizontal expansion – involves new product lines or expanded channels of distribution, including geographic expansion. B Strategic alliances with suppliers – involves more closely managing external suppliers as if they were part of the company’s internal value chain, but without actually owning them (for example, Toyota’s Kaizen system, wherein key suppliers are located very near a factory and receive all kinds of help and training from Toyota to ensure smooth and efficient production). One of the most complex value chains today can be found in the oil industry (see Exhibit 1). This chain has nearly 30 significant elements, starting with the search for oil (at the upstream end) and including field production, transportation (pipelines and supertankers), refining and processing and, lastly, consumer gas stations (at the ‘‘downstream’’ end). Internally, the oil-industry value chain processes a broad range of products, including such major categories as oil/lubricants, gasoline, petrochemicals...
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