Editor's Note: Take a look at our featured best practice, Cost Reduction Opportunities (across Value Chain) (24-slide PowerPoint presentation). Though there are multiple levers to maximizing an organization's profitability, costs are the most directly controllable by any organization. Profitability is being challenged by increased costs, stagnated revenue growth, and increased capital costs in today's economic climate. Therefore, a [read more]
Value Grid Analysis
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A traditional Value Chain involves a linear sequence of activities—from conversion of raw materials into components which are assembled into products. The products are then distributed, marketed, sold, and serviced. Management plans and execute strategies and operations based on this sequence.
This set of activities worked well for organizations in the past. However, this linear progression does not encourage Innovation and provides little protection from the risk of being outperformed by rivals in today’s disruptive markets. Such a competitive environment calls for implementing more robust ways of managing Customer Demand and Value Creation.
An effective approach to deal with this challenge is the Value Grid Analysis Model. The Value Grid approach provides a perspective beyond traditional linear progression of activities, where organizations need to balance equilibrium between suppliers and manufacturers aside from concentrating only on reducing lead times. It outlines new opportunities and risks for organizations.
The Value Grid Analysis provides a number of routes to improve Performance and reduce risks. It encompasses the following 3 pathways—or dimensions:
- Vertical pathway – using traditional Value Chain, companies find opportunities upstream or downstream from adjacent tiers in the existing Value Chain.
- Horizontal pathway – companies look for opportunities from similar tiers in multiple (parallel) Value Chains.
- Diagonal pathway – explore opportunities to create value across multiple value chains and tiers.
The Value Grid Framework necessitates diverting leadership attention towards 3 key opportunity areas to create Competitive Advantage:
- Customer Demand
- Information Access
- Multi-tier Penetration
Let’s dive deeper into the 3 opportunity areas.
The first opportunity area to drive competitive advantage pertains to controlling internal and external customers’ demand. It warrants a company to manage customer demand upstream (suppliers and companies that supply to suppliers) as well as downstream (customers). By managing customer demand downstream, organizations control the decision makers responsible for the purchase decision. When companies are unable to control the decision makers, they look for levers across the Value Chain to influence decisions. These levers include direct advertisements to the end users, focusing on distributors, or incentivizing retailers to recommend a product. Organizations also try to influence upstream, e.g., their R&D units, to create products which can be used in conjunction with the existing product range to boost their efficacy and benefits for the end-users, ultimately influencing consumers’ decisions downstream.
The 2nd opportunity area involves linking information sharing to influence decision making. A few manufacturers prefer to partner with those suppliers who openly disclose the information (capabilities, flexibility, and pricing structures) of their 2nd-tier suppliers with them. This assist them in planning and helping the suppliers manage materials and prices better.
For instance, with increased tariff on imported steel and price of steel continuously going up, car manufacturers like Honda purchase steel in bulk and sell it to their suppliers at a reduced rate. This helps them keep the prices of their cars down and compete better.
Nonlinear thinking (Value Grid Model) enables the organizations to determine innovative solutions beyond the scope of traditional Value Chains. To manage excess demand organizations take on multiple Value Chain tiers to control demand and buyers’ power.
Leading manufacturers evaluate multiple value chain points for their participation in order to scale. They sell not only to Original Equipment Manufacturers but also in the aftermarket. Supplying to more than one Value Chain tier allows organizations to withstand pressure from OEMs to reduce costs, demand shifts, and offers attractive margins.
Interested in learning more about the 3 opportunity areas of the Value Grid Analysis Framework? You can download an editable PowerPoint on Value Grid Analysis here on the Flevy documents marketplace.
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About Mark BridgesMark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.
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