CHAPTER TWO
2.4 Suitability
2.4.4 Internal Analysis
Every organization has to manage its internal resources, the external environment within which the organization operates and add value to what it does.
2.4.4.1 Value chain analysis
Refers to activities within and around an organization and relates them to an analysis of the competitive strength of the organization. Suitability of strategic developments may also be tested by the extent to which the strategy will reconfigure the value chain in a way which improves value for money and the competitive position of the organization (Johnson and Scholes, 1999).
The value chain is regarded as part of all the industry participants from raw material suppliers through to the final consumer. Marketers need to find ways of creating meaningful competitive advantages for their products.
Segments that should be targeted are those that can be can be served better than other providers.
Benchmarking the discovery and adoption of best practices, reengineering core business processes and total quality management programme all aim at improved efficiency, lower costs, better product quality and greater customer satisfaction. All these techniques are important tools for learning how to execute a strategy more proficiently (Internet, 8). The unique strength of value chain analysis is that it can be used as an analytical tool to help firms bridge the strategic gaps between the firm's capabilities and opportunities and threats in its competitive environment.
Fleisher (2002), Lynch (2000) and Thomson and Strickland (2003) all classify the value chain activities into two main categories which are:
Primary Activities
(1) Inbound logistics (inventory warehousing and handling) and Operations (transformation of inputs into the final product or service). The delivery of superior products and levels of service to customers must be preceded by a thorough analysis of their needs and expectations. A decision may be taken to redefine the target market or to create separately identifiable segments. Products from non-profitable segments may be withdrawn and put on more profitable groups of customers.
A product needs to be offered and designed in such a way so as to maximize the appeal to the segment they are trying to attract. The product needs to satisfy customer needs and forms a part of the firm's competitive strategy, especially product differentiation. This involves assessing the product's suitability for its stated purpose, its aesthetic factors, its durability, brand factors, packaging and associated services (ACCA Newsletter May, 2001).
Low productivity rates affected by low staff morale, a refusal to train workers and an inability to attract or select good workers are all likely to contribute to uncompetitive product costs. Quality problems caused by failing to get things right first time will lead to rework costs. And a failure to spot poor quality before it reaches the customer can be catastrophic, leading to image casualty and even lawsuits (ACCA Newsletter May, 2001).
(2) Outbound logistics (distribution) and Marketing and Sales (marketing communications, pricing and channel management, etc). Outbound logistics includes decisions regarding distribution channels, location of outlets and position of warehouses, stock levels, delivery frequency,
geographic market definition and sales territory organization (ACCA Newsletter December, 1999).
The use of inappropriate channels means that the target audience does not have access to products at the right time in the right place.
Marketers do not have total control over the price; as a result the cost impacts are always big.
However, a range of pricing strategies are available, some include:
• Penetration pricing - low prices for a product launch or to increase sales volume
• Skimming pricing - high prices used to maximize profits. Other aspects include discount structures for the trade, promotion, pricing, methods of purchase and alternatives to outright purchase.
A good knowledge of the price elasticity of demand for each product or service is essential.
Charging too much or too little could be equally damaging to revenues, gross margins and ultimately profits. A policy of price discrimination might be practiced in order to maximize revenue (ACCA Newsletter July, 2001).
(3) Services (post-sale-support)
The aim of promotion is to gain the potential customer's attention, generate interest, arouse desire and stimulate action to purchase.
Lovelock (2001) defines integrated service management to be 8 Ps as opposed to 4ps strategic elements. The 8 Ps required for success in any competitive service business are:
(1) Product elements: Managers must be attentive to all aspects of the service performance that have the potential to create value for customers.
(2) Place, cyber and time: delivering product elements to customers involves decisions on place and time of delivery, as well as, on the methods and channels employed (physical or electronic distribution channels).
(3) Process: Creating and delivering product elements to customers requires the design and implementation of effective processes that describe the method and sequence of Actions in which service operating systems work.
(4) Productivity and quality: Productivity relates to how inputs are transformed into outputs that are valued by customers whereas quality refers to the degree to which a service satisfies customers
by meeting their needs, wants and expectations. Improving productivity is essential to keep costs under control whilst service quality is essential for product differentiation and building customer loyalty.
(5) People: Customers often judge quality of the service they receive based on their assessment of the people providing that service.
(6) Promotion and education: In services marketing, much communication is educational in nature, especially, for new customers. Companies need to teach these customers about the benefits of the service, as well as, where and when to obtain it, and provide instructions on how to participate in service processes.
(7) Physical Evidence: Service firms need to manage physical evidence (visible cues) carefully by creating meaningful symbols, because it can have a profound impact on customers' impressions, for example, an umbrella may symbolize protection, a fortress and security.
(8) Price and other user costs: Besides limiting pricing tasks setting trade margins and establishing credit terms managers must seek to minimize burdens that customers may bear in purchasing and using a service, including time, mental and physical effort, and unpleasant sensory experiences.
Lovelock (2001) argues that there are potential shortfalls or gaps- within the service organization and they concern:
• Not knowing what customers expect
• Specifying service quality standards that do not reflect what management believes to be customers' expectations
• Failing to ensure that service performance matches specifications
• Not living up to the levels of service performance that are promised or implied by marketing communications.
Lovelock (2001) has, however, extended these gaps to be seven, namely:
• The knowledge gap: the difference between what service providers believe customers expect and customer's actual needs and expectations.
• The standards gap: the difference between management's perceptions of customer expectations and the quality standards established for service delivery.
• The delivery gap: the difference between specified delivery standards and the service provider's performance on these standards.
• The internal communications gap: the difference between what the company's advertising and sales personnel think are the product's features, performance, and service quality level and what the company is actually able to deliver.
• The perception gap: the difference between what is actually delivered and what customers perceive they have received (because they are unable to accurately evaluate service quality).
• The interpretation gap: the difference between what a service provider's communication efforts (in advance of service delivery) actually promise and what a customer thinks was promised by these communications.
• The service gap: the difference between what customers expect to receive and their perceptions of the service that is actually delivered.
These service gaps can be further illustrated in Figure 2.1:
Figure 2.1: Planning and M a n a g i n g Service Delivery
Customer needs and expectation
Gap 1: The knowledge gap