AI/IoT/Analytics

Big Data MBA Case Study: Changing The Industry Balance of Power

Bill Schmarzo By Bill Schmarzo April 24, 2012

In this the final series on the Big Data MBA, let’s use a case study to understand the power of combining Porter’s Value Chain Analysis with his Five Forces Analysis.  One of the noted deficiencies of Porter’s Value Chain Analysis (see Greg Satell’s article titled “The Semantic Economy”) is that it doesn’t give serious enough weight to the customer.  That’s where the combination of Porter’s Value Chain Analysis plus Porter’s Five Forces Analysis come into effect.

Let’s review the potential of a combined Value Chain and Five Forces Analysis around big data analytics by looking at the Walmart success story.  In the late 1980’s, retail Point-of-Sale (POS) scanner data emerged as a replacement to bi-monthly store audit data as a way to measure and monitor the retail and consumer packaged goods value chain.  Walmart was one of the first to adopt POS scanner data as a game-changer.  As highlighted in a recent Fortune article “The 12 Greatest Entrepreneurs of Our Time”:

“The cornerstone of his [Sam Walton’s] company’s success ultimately lay in selling goods at the lowest possible price, something he was able to do by pushing aside the middlemen and directly haggling with manufacturers to bring costs down. The idea to “buy it low, stack it high, and sell it cheap” became a sustainable business model largely because Walton, at the behest of David Glass, his eventual successor, heavily invested in software that could track consumer behavior in real time from the bar codes read at Wal-Mart’s checkout counters.

“He shared the real-time data with suppliers to create partnerships that allowed Wal-Mart to exert significant pressure on manufacturers to improve their productivity and become ever more efficient. As Wal-Mart’s influence grew, so did its power to nearly dictate the price, volume, delivery, packaging, and quality of many of its suppliers’ products. The upshot: Walton flipped the supplier-retailer relationship upside down.”

 

Value Creation to Change Industry Dynamics

As highlighted by the Walmart story, you need to contemplate how you can integrate outside market dynamics (as represented by the Five Forces Analytics) with your internal Value Chain process to create game-changing market dynamics.  If you think about Value Chain Analysis as a business valuation technique for your internal processes, then the Five Forces Analysis is really an “outside-in” business valuation technique of your organization’s key differentiators vis-a-vis its role and positioning within the larger market.  The chart below is a way to think about the two business valuation techniques used in combination, where the outside market forces of Buyers, Suppliers, New Market Entrants and Product/Technology drive impact on the organization’s internal value creation processes.

Let’s walk through a couple of examples of how the Five Forces could and are impacting an organization’s value creation processes.

 

Exploiting Buyers’ (Customers’) Insights Across Your Value Chain

Integrating the buyer back into your value chain is probably the most pervasive example of integrating Five Forces Analysis with Value Chain Analysis today.  If organizations aren’t actively looking for opportunities to drive customer insights back into the organization, then they are going to lose. But that’s been true for the past 10 years, 20 years, 100 years?  Nordstrom’s was the classic example.  Individual Nordstrom’s sales reps in the store would maintain notecards on each of their key customers (preferences, buying patterns, areas of interest) and would use that information to better serve their clientele.  When I lived in Portland in the 1990’s, there was a sales rep at the local Nordstrom who knew that I always bought a new suit at the Semi-Annual Men’s Sale right after Christmas.  About a week before the sale, he’d give me a call and have me come down to pick out the suit that I was going to buy at the sale (he’d hold it for me until the sale).  Not only did he show me some suits, but he would also couple each suit with some matching shirts and ties (think Garanimals for men).  He was my own personal recommendation engine!  And guess what, I’d buy the whole shebang.

Now this story is obviously before the days of on-line, mobile, and social media tracking, but the basic business differentiation and value creation process was the same — know your customers’ buying preferences and interests well enough to be proactive in recommending relevant and timely products and services.

 

Integrating Suppliers Into Your Value Creation Processes

In the same way that a superior understanding of your customers can drive your organization’s internal value creation process, a superior understanding of your suppliers and their manufacturing and delivery behaviors can also drive your value creation process.  Companies like Walmart (which we saw in the story above) and Qualcom figured this out over a decade ago.

And even now we’re seeing how Apple is combining a superior understanding of the market (their customers) with a tightly instrumented extended supply chain (through all of their suppliers, and their suppliers’ suppliers) to lock up key product and component supplies more quickly than their competitors.  The result is an optimized supply chain, and a key source of competitive advantage.

Having a superior understanding of your suppliers and their related performance characteristics allows organizations to optimize their internal value creation processes, mostly by driving out extraneous costs and creating a more agile, nimble supply chain that can quickly react to market opportunities, changes, and disruptions.

 

Summary

In the above cases, companies used the Five Forces analysis to extend their Value Chain Analysis and value creation processes.  They extended their value chain outside of their own four walls by integrating buyers and suppliers into their own value creation processes.

So what does that mean in the world of big data?  It means 1) organizations need to move quickly to integrate customer data, behaviors, and insights into their Value Chain processes, but 2) market leaders are already moving to integrate supplier data, behaviors, and insights in order to extend their value creation processes.

 

TDWI Conference in Chicago

Also, I want to let folks know that I will be speaking at the TDWI conference in Chicago on May 8th.  The title of my presentation is “Navigating the Road from Business Intelligence to Data Science” and I will be presenting from 11:00 to noon.  For folks who might be at the conference, please stop by and say hey!

 

 


Bill Schmarzo

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