Lec 06 - Value Chain Analysis, Core Competence and Outsourcing

[Music] [Music] Hello friends so I welcome you all to the sixth lecture of uh course busines to business marketing so in the past we have been discussing about the you know various differences about the B2B b2c Market uh about the nature and the scope of this market right how business marketing is different from the consumer market and in the last lecture we also uh went through a small case SL to understand and uh get a feel of the subject so uh today I'll be talking about some few more Concepts right associated with the B2B market

for example example the three important Concepts like the value chain mechanism the core competency Theory given by prad and the concept of Outsourcing which is also largely known as the you know the make or buy decision decision right so uh these three things uh I'm going to elaborate and then finally I'll try to again give a small case slate so that for the clarity of everyone and uh you also participate in the cas late right so what is value chain analysis so if you can see it's a process of observing and identifying the deficiencies in

the various activities in an organization ranging from design to distribution now for example let's say any organization it has got several uh you know aspects of it so it could be like uh the design of the material the design of the different parts you know the getting the raw materials uh processing the raw materials and uh you know even uh making the final product and even you know Distributing the product so all these things to together right from ranging from design to distribution is a value chain analysis here we are trying to if you can

go by the word we are trying to generate value at each step of the value chain or the supply chain you can say at each step of the supply chain we are trying to add value or generate value so this concept is a very popular concept and it helps business managers to better identify useful and wasteful activities so if there are several activities which we all will see in the next slide so how you can identify the important ones and which are the less important or where the company is not doing well right where there

is an opportunity to grow or opportunity to create an higher efficiency productivity so these activities are identified and overall value chain analysis can be used to potentially identify value Improvement opportunities throughout various steps of a business cycle also adding to the improved margins of the company right so this is an simple example of the value chain now there are two things attached to the value chain one is the support activities right and the other is the primary activities now and all these things together add to the the green uh color if you can see here

the margin of the company right now what are the primary activities that a firm does now the primary activities are for example the inbound Logistics operations outbound Logistics marketing and sales and service okay so what do you have in inbound Logistics now inbound Logistics is something like when you are trying to get the raw material or anything any part from outside to the company right so from outside towards the company so it has got realtime inbound inventory data so inbound Logistics consists of you know how many uh trucks or Vehicles you have what kind of

material handling processes you adopt uh how what is your Warehouse uh where is your warehouse located what kind of Warehouse capacity you are having and uh what kind of inventories you are already having in your stores so all these are a part of the inbound Logistics right so once the raw material comes in so if you can understand that every point now how many vehicles you are using what kind of Material Handling devices you using or what kind of material handling techniques you are using and what kind of you know Warehouse policies you are having

all these things provide you an opportunity to add value so if you are not doing well some in some aspects then you can improve upon it right second when you come to operations so there are some standardized models where uh we try to adopt how to process basically what we do in this step is the processing right so processing so the processing of the product or the production of the product or something right so operations here there are different kind of techniques that can be adopted there can be change in Machinery there can be change

in the assembly line there can be change in different aspects right so how you can improve your operations right your operational efficiency how you can improve upon that so all these things are a part of the operations and the company looks for scope to improve its operational efficiency the third thing is once the product is done it it comes under the outbound Logistics when it goes for outside for you know for distribution or sales so here the order processing is done and the company tries to utilize the full capacity of the vehicles okay and here

the objective is to reduce as much as handling cost and the handling defects and breakages and all that can happen right so once you can understand outbound logic Logistics here also you find certain scope to improve then coming to the marketing and sales where the company tries to price the product optimally tries to communicate the product with the market promote it and try to maximize its sales for example right so this is a continuous step right which is already connected with the service with the design department so the company is continuously trying to improve upon

its you know marketing uh you know insights and try to bring in Real uh information from the market to the uh operations or to the company so that the design and the operation team can produce such a kind of product which the market actually is looking up for right so in the last lecture if you remember I had talked about trapping versus substance where I had said that B2B marketers generally fall into a trap of being the best producer or the best quality producer now that's a simple trap why because maybe there are you know

some some products which are very good but customers do not like it because it's very difficult to manage or difficult to handle they are not user friendly at all so this trap of trying to become a very top end technology producer is something that makes uh a B2B marketer uh lose out on lot of customers okay so marketing and sales actually tells you or keeps you grounded and it connects you with the actually what the customer wants and finally what kind of service because you know service becomes a very very critical component of the B2B

market right so entire differentiation in the B2B Market can be brought on by the help of service for example what is your delivery process how much of support you are providing to the customers during installation repair and maintenance so service all these different kind of uh you know uh support things the warranty the in-house maintenance everything comes into the you know different uh the the the the possibilities of the service right so service becomes as you have seen in the last lecture that the B2B marketers they give a large emphasis on the value of the

product rather than the price of the product because I told you that the price is not a list price in the B2B Market that is to be considered but we have to consider the total cost of ownership or the to cost that I will bear if I use product X or product y or product Zed right similarly in the support activities you have form infrastructure like management Finance legal planning Human Resource Management like employee relationships performance apprisal so there are the support activities they are not directly having an impact but they support activities technology uh

development for example integrated supply chain systems realtime sales information and procurement like for example realtime inventory communication with the suppliers nowadays you know Concepts like vendor managed inventory just in time so all these things are very important because there is very little capacity or very little scope for uh mistakes so nowadays uh your vendors are involved in the process of managing your inventory for a firm right so value chain analysis is one such uh concept or aspect which is very powerful and it can be utilized by all managers and the various firms to improve their

efficiency their you know profitability by plugging those weaknesses their bottlenecks which are actually not contributing much okay let's take this example of Piza Hut now Piza Hut many people will wonder why Pizza Hut so let's see how pisah Hut uh manages his value chain so in terms of inbound Logistics if you see this includes all of the sourcing activities to you know uh procure and standardize all the procedure ingredients and materials to bake pizzas fast consistently and delicious in house so what they do is they capitalize on the scale of economy and use massive Global

purchase orders to Source the best prices on the raw products now Pizza heart as you know these companies they're differentiating or they are adding value by providing very fast service right so they would like to offer you a very good product at a very fast because this is connected with something like hunger right so when people are hungry they don't want to spend time right so when you are hungry you don't look at your pocket rather look at how much hungry you are so Pizza heart in order to provide products at a fast pace they

standardize all the products and they try to manage their inventory in such a way that there is never a shortage of the items okay now in terms of operations by targeting areas where there is an affinity for let's say Italian food pisah heart operates in large number of countries so pisah today is a very popular brand across the world so I'm in India but people in India everybody would be knowing mostly people be knowing what is Piza Hut so this is the operations is managed Again by the franchise model and all and the company keeps

a control over the quality and all right finally outborn Logistics so there are two models that pizza heart capitalizes on in store dining and their home delivery service so piz tries to optimize on these two models so if people they are uh you know would like to visit their store and uh have their Pizza out there in their shop or they would like to deliver any pizza company follows this model only right then they spend a lot of money on the marketing and sales they make a lot of investment marketing to drive the sales so

you will find lot of advertisement promotions coupons all this and that to attract the customers right service service becomes a very important as a differentiator I have said the entire goal is to offer value to the customers in affordable and convenient uh way right so that people can enjoy their products now in support activities the company includes every other activity that is required to keep the stores in business such as Finance legal accounts Etc whatever right interesting L you know Pizza heart to keep their cost down they typically hire Junior and unskilled workers right and

for the technology development part the process they create is to have unskilled chefs cooking their Pizza in a big way right so what does it mean although they hire people who are not so skilled but the system that they have already developed is so convincing and so uh easy to operate that even a person who is not so skilled can perform efficiently right so they can get the same know taste and flavor of pizza again and again with a regular consistency right so that kind of a technology they have developed so these companies have invested

a lot into technology and finally when it comes to procurement the purchasing and activities required to produce the pizza the raw food and all of the buildings equipment needed to cook and deliver the pizzas so the company does a has a very Str policy of how they can support in the procurement process so today you see procurement is no more procurement today we talk about strategic sourcing right so most of these companies are involved in the Strategic sourcing right so I will explain sometimes what is strategic sourcing why it is different so strategic sourcing has

become a very key driver of the profitability of firms the next concept which I wanted to discuss is is core competency now what is core competency core competency is basically is the capability that the firm EMP emphasizes and performs especially well while pursuing its Vision now what is core competency in a simpler way in a simpler way it means that as a individual or a firm only be doing that what I am good at so I need to identify what is my core competency many of times identifying your core competencies is a challenge now why

is it a challenge I will not name but a very large uh you know uh Business Solution provider company initially had a made a mistake in identifying their core competency so they thought that you know Hardware is their core competency and uh software is something they are not good at what they did was this company just for a second you think it is XY Z this company sold sold their software part to some uh other company right so they outsourced their services from some outside company and they concentrated on the only on the hardware but

later on after six seven years they realized that they were not good at this Hardware right so what they did was they sold their completely HED up their completely Hardware division to another firm which was Chinese okay a Chinese firm what I'm talking about is a very large company I'm talking about but interestingly you see even such large companies that I'm talking about they also cannot sometimes understand their core competency so identifying a core competency is a very very difficult challenge Nike understood that it core competency was not production it core competency was marketing and

designing right similarly many firms they understand that their core competency is maybe faster service but they are not good at uh a very uh optimal product or efficient product product or something but a good service they have so identifying a core competency helps the firm achieve a competitive Advantage right and because this core competencies make you separate you from your competitors it acts as a differentiator right and core competencies enable a firm to complete activities you know active effectively right so what is saying is distinctive competences provide products to customers that are superior to those

Pro competitors that means core competency if one firm can identify it core competency it helps them to understand for example this is a very classic case that people think MacDonald's is the biggest firm because it produces the best hamburger or you know the best uh you know food item something but truth is McDonald's resources are actually its infrastructure its land they are one of the biggest real estate companies in the world right so now what I'm trying to say here is that you need to understand as a company what is your core competency your core

competency could be design let's say Your Design ability your core competency could be your Logistics right your inventory management your you know uh Finance Management right so it could be anything even your just marketing could be your core competency so what exactly is your core competency so what it says is resources create capabilities which are then help you to develop into core competencies let's see a few core competences so it says is a bundle of skills and technologies that enable a company to provide a particular benefit to the customer example Sony for a Walkman case

benefit is pocketability right so the core competency was in miniaturizations making small products right so if you have seen a Workman Workman was a a very small recorder which made life very easy and it is called to be it is known to be history's one of the most classic products uh marketing successes okay Federal Express the core competency it says is benefit is on timely delivery so Federal Express May charge you a bit more than the other service providers but what do they say that they say our core competence is timely delivery so we are

the best at uh you know if you have some urgency we are the best so we might charge a bit more but then we provide you the best service Motorola says untethered communication that is the core competence is wireless communication so our communication will never break and uh we will be always there right so what benefits do companies get through their core competencies first of all it says expertise in integrating multiple technology to create you know families of new products so core competency helps you to understand what you are good at it improves your Logistics

expertise it improves your uh you know uh database skills it helps you to innovate it helps you to you know even uh uh enter into new uh related areas in the market right so core competency saves lot of your human resources and tries to focus on only those areas where you are good at see the simple reason being no company in the world can C to all the requirements that it has right so it has to depend on certain uh you know uh products or services from outside right but it is necessary to understand that

since you cannot do everything what is the best thing that you are good at so as a person as a human being also as a student or as a working employee you also need to understand that what is your core competency is your core competency in let's say working very hard or you are a very good person in networking or you are a very good person in analytical skills what is your core competency and if you invest more in your core competency as a firm or as an individual it works in a better way okay

now core competency says to be considered core competence when a skill has to be considered as a core competency it must meet three tests what are they first is customer value now core competencies are the skills that enable a firm to deliver a fundamental customer benefit okay example Honda's ability to produce some of the world's best engines and power trains does provide customers with highly valued benefits of superior fuel economy right and zp acceleration less noise and vibration so that is Honda's core competency so what kind of value they are giving to the customers okay

so by creating the best engin in the world in terms of competitive differentiation if you see a capability must also be competitively unique it should create a differentiation in the market now example power trains is a core competency at Honda which has never been so at maybe other companies like Ford General Motors or Chrysler or anybody right so this makes Honda a different company from its competitors the third thing it is extend now what is extendability it says a core competitive is truly core when it f focuses on the basis for entry into new product

markets so as I was saying in this previous example if you can enter into new product markets right if your core competenc is helping you to extend into new related or unrelated markets largely related markets obviously then it's a it's a skill that can be considered to be a core competency right for you now example you see SKF if you have heard of SKF bearings one of the world's largest bearing producer in the you know globally the world's leading manufacturer of roller bearings has competencies in Precision Engineering and making perfectly sperical devices in order to

achieve extendability SKF has extended into chain and sprockets for two wheelers timing belts and steering and suspension systems for four-wheelers so these kind of skills help you to understand whether I would consider one of the you know maybe key drivers of my company as a core competency or not whether it is giving me value whether it's a differentiator whether can I extend it in the future if any of this is a no then you cannot consider that to be your core competency right now coming to the third concept is outsourcing now there's a very you

know Common line of thinking or generally people get confused that what is outsourcing and what is purchasing right is the are these two different even so when you're talking about Outsourcing yeah there's a small difference but we'll see how Outsourcing is defined first is a strategic use of outside resources to perform activities traditionally handled by the internal staff and resources so what you were doing earlier yourself now you are depending on some out side vendor let's say the question is why do you Outsource now provides it because it provides services that are scalable secure and

efficient while improving the overall service and reducing the costs okay so that's why we would go for outsourcing so the question is then we are doing some similar things in uh also in purchasing no we were not doing the similar things in purchasing because the key difference between Outsourcing and purchasing lies in the ability to manufacture or produce now when you are purchasing you do not have the ability and you depend on outside vendors here you have the ability but still for strategic reasons you are depending on the outside vendors so you don't want your

human resource to get involved or your Capital to get invested into those activities where you are not the best right or you are not gaining too many benefits so if somebody else is doing it well why not get it done from outside right so what it says is benefits of Outsourcing is it reduces and controls the cost of operation right usually this is the main reason improves the company's focus and it liberates the inner resources for new purposes so your people your Capital can be used for better purposes increase the efficiency for some time consuming

functions that the company May lack resources for right so the company feels it that that's not an important item we should get away with it use external resources as much as possible and sharing the risk with the partner firm so these are some of the benefits of Outsourcing but when do you Outsource what is the right time to Outsource or what is the which the right situation to Outsource so this is a PWC model price waterhous Coopers model which says that you should Outsource when the product is a non-competitive product and it falls also under

the non-strategic so neither it adds it's a non-strategic item so that means it it is not so important for you and it doesn't give you any benefit in the profitability right so it is not it's a sorry not benefit in the profit obviously profit would increase non-competitive in the nature in the sense that it doesn't add any significant value right so here if if it is a non-competitive and non- strategic product so you should definitely Outsource but if it is a competitive item right where you need to be best right and it is strategic in

nature also so you should never Outsource and this is an area where it says it's a gray area it's very difficult to say what you should do so you know it is left onto the manager's uh own thought process what he should be thinking about it and in this place if you look at this quadrant if it's a non-competitive product but it is strategic in nature then it is again better to produce inh house so price Bas scoper model tells you in which conditions a company should go for outsourcing and which condition they should not

go for outsourcing and the challenges with Outsourcing are also many for example you see there can be a loss of control now you have started Outsourcing from outside vendors and because of this after certain years of time you have lost your control you don't know how to make those items how to manage the inventory how to you know you don't know you you have lost expertise so there's an increased cash outflow cash is going out now because you are getting it done from some supplier confidentiality and security is a issue because you may lose out

because if suppose it is a strategic uh you know item as this one right so it's a strategic item then you may lose your confidentiality and security selection of the supplier is a challenge you may become too dependent on the service provider it's it may be time consuming and it has some other you know issues also so like for example you can see this right so the provider is slow to react to changes in St suppose the market market the demand in the market or the trend in the market changes tomorrow so in case you

want to do it you want to react to the markets uh need you want to increase your agility you would not be able to do it why because you are dependent on somebody else and here uh it is very difficult to uh now streamline the processes so please remember in the B2B Market switching cost switching cost is a very important factor switching time switching cost because it is not easy to make a change immediately in the B2B Market it takes a lot of time okay let's take a small case lit and we'll wind up the

lecture here today so this company is HK electroplating company which started the electr plating operations in a residential location in Bangalore in 1989 so it received a notice from the pollution control board to install the affluent treatment plant within 15 days failing which they would seal the plant so very serious issue right okay now the director of the company collected the information that it would cost about five uh you know lakh to buy an affluent treatment plant a machine required for that right and an area of 600 00 square foot would be required to install

over a period of 2 to 3 months the running cost about is about 20,000 per month and uh you will require materials like costic soda and others the fluent contained nickel cyanide chromium cadmium and zinc which were to be treed separately using different chemicals after you know the fen liquid liquid of about 800 l day was treated the sludge was to be dried packed stored and dumped in a government notified place so you can see the things the entire process would not only cost a substantial amount but also would need an additional area which I

have already mentioned about 600 to 700 ft the company gathered information that some of the competitors outsourc the affluent treatment of the government approved agencies who collected the fluent liquid from these chemical and electroplating factories and treated them right these agencies charged a 5 to 10 Rupees per liter right depending on the type of chemicals that were uh present in the affluent right the cost of Outsourcing was considered much higher compared to the in-house affluent treatment plant however HK electroplating company like many other chemical and electroplating factories did not have additional area for the installation

so area was a constraint to them so in this condition the director was aware the liquid waste from the factory would have harmful effects in the surrounding if they leave it to the surrounding resal areas he also could not violate the government regulation so he had very little time of about 2 weeks 15 days to decide and act now in such a condition what would the director do if you were in the place of the director let's say what would you do so take a pause and try to think about it what you would do

in this case okay so there are three questions is it a wise decision to Outsource affluent treatment plans one if you were the director of the company what would you do and why and do you think the Outsourcing vendors are B2B firms you may explain so please first answer these three questions take your time and then I have a tentative answer which I have made of my own we can uh you know compare it first question is it a wise decision to Outsource considering the urgency of the situation and seriousness of the issue I think

yes it is better to Outsource why because you have been given only a 15 days time and if you don't do the plant will be sealed right so nothing is better than saving the surviving first so the company in order to survive needs to come out of this issue first so I don't think there's any other way than Outsourcing okay maybe if they look at a long-term perspective after Outsourcing for a while maybe they can think of making arrangements to do it inh housee that is a separate thing but at the moment Outsourcing looks the

only way out right second if you were the director of the company what would you do and why you know I would have found an agency which would do it at the lowest cost possible and Outsource to stay out from legal issues so because we not only face legal issues we spoil our image in the market as a result of it right but yes I as a director I would surely have uh you know asked my team of people why they were not aware that such a thing was happening in the market and why we

were so late to react right this would have been one important point which I would have surely as a director of the company looked into why we were late to react so I would have tried to find the reason and so that we do not uh become late in some certain other conditions in the future right do you think these Outsourcing vendors are uh B2B firms yes yes they are the B2B firms because these firms which facilitate our production process they're actually providing B2B services so both it's a B2B case because the buying and the

supplying firm are also B2B firms because they are not individually dealing with customers but they are dealing with clients who are largely industrial houses okay so these are the three questions so these three questions if you just try to sit back uh in your free time and try to answer it will give you some better understanding and clarity about how B2B firms how work and how services are important to them okay so this is all I had for the day so we'll wind up here I I hope you had a good day and you learned

what I was trying to explain so thank you very much we'll meet in the next [Music] lecture [Music] a