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Archive for January, 2011

Performing Value Chain Analysis

Sunday, January 9th, 2011

Value chain analysis is an important tool for looking at organisational strategy and ascertaining the parts that create value and those that fail to create value. It’s not that difficult and once you work through this a few times it becomes second nature.

Primary and Support Activities

The basic idea is to break down the business into the parts that create value (rather than making assumptions based on a broad ill-defined monolith). Those parts can be separated into Primary and Support activities.

Primary activities range from product creation through to distribution and after sales service – Services, Marketing, Sales, Outbound Logistics, Operations and Inbound Logistics.

Support activities provide the underlying organisational support for primary activities to occur – Firm Infrastructure, Human Resource Management, Technical Development and Procurement.

Identifying the Value Chain

This simple explanation may be deceptive in that a value chain may or may not look as you had originally expected, but once you’ve identified this value chain you can compare to competitors, look at ways to adjust the value chain (ie. non-core parts of the business that might be outsourced) and under-performing parts can be identified.

The value chain allows you to identify the organisation’s capabilities and core competencies – in turn informing you of the business they are actually in… and it can provide opportunities and feed directly into strategy. The value chain provides insight into how the organisation can achieve sustainable competitive advantage.

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The Success of Ingvar Kamprad’s IKEA

Tuesday, January 4th, 2011

Note: This article was written as an exam essay (referencing removed) for the MBA unit BMA779 Strategic Management with Dr Dallas Hanson. It’s an interesting study of IKEA penned in a single day from secondary research as a portion of my strategic management exam answer in the Summer of 2009-2010.

Born in 1926 and raised on his parent’s farm in Pjätteryd, a Småland province in southern Sweden, Ingvar Kamprad began his entrepreneurial career at the age of five selling matchboxes and pens to local villagers. At 11 he went into the garden seed business and as a teenager operated his business from a bicycle. In tumultuous political times, he also experienced a controversial nine year friendship with pro-Nazi leader Per Engdahl – who attended Ingvar Kamprad’s first wedding in 1950. Much of the groundwork behind IKEA can be identified in those formative years.

Kamprad founded IKEA, now one of the largest global retailers of furniture and household goods, in 1943 at the age of 17. The name IKEA stood for his own initials, E for the family farm called Elmtaryd and A for the village of Agunnaryd where he was raised. The business operated as a simple organisational structure out of a commandeered 2 metre square shed supplying locals with matches, lighters, wallets, watches and nylon stockings. IKEA pursued a cost leadership business level strategy and within two years was piggybacking mail order delivery parcels to the local train station on trucks carrying milk churns.

In 1948 IKEA expanded its product offering to include furniture sourced from local suppliers and the consumer market responded well. The product line was further expanded and in 1951 IKEA continued expansion through their IKEA catalogue strategy (still their major advertising strategy in 2010). The first IKEA furniture show-room was opened in Älmhult, Sweden in 1953.

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Sunk Costs are Irrelevant to Financial Decisions

Sunday, January 2nd, 2011

A somewhat counter-intuitive business rule worth wrapping your head around is whenever making financial decisions the money already lost or spent that is nonredeemable up to that point in time (the sunk costs) are irrelevant. They need to be totally ignored in the decision making process.

A Quick Example of Sunk Costs

Hypothetically, in early 2009 you paid $20,000 for point-of-sale software that you were never quite happy with using… it failed to integrate into your workflow and had minor software issues, particularly with the user interface design.

Your choice is simple… Vendor A wants to sell you an upgrade to that software for $5,000… and Vendor B is offering you a better piece of software (that you have seen working in a friend’s business) for $10,000.

Problems with Sunk Costs

It should be an easy leap to realise the problem with sunk costs. You’ve already paid them… it’s money lost… it’s money that, regardless of the decision you take at that point forward, you will never be able to redeem. For that reason you should ignore all sunk costs when making financial decisions.

The saying “in for a penny, in for a pound” is the mentality that impels you to throw good money after bad.

The difficulty with ignoring sunk costs are that you have to deal with some pretty heavy decision biases and emotional justifications that were tied to your earlier decision to invest in the $20,000. You need to let go of that feeling of obligation. The only relevant decision is at this point in time what is your best option for moving forward?

Analysis of the Financial Decision

The temptation is to say… $20,000 PLUS $5,000 versus the loss of $20,000 PLUS $10,000.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark (aka nortypig) and I live in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a photographer making pictures with film. A web developer for money. A business consultant for fun. A journalist on paper. Dreams of owning the World. Idea champion. Paradox. Life partner to Megan.

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