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Porter's 5 Forces: John Lewis defends it supplier rebate demand

John Lewis' recent defense of its new policy of charging suppliers a 'rebate' for increased sales through its stores (see John Lewis defends supplier rebate demand) provides a great example of Porter's 5 Forces at work.

Suppliers are seeing big retail distributors like John Lewis and the large supermarkets becoming more and more powerful and able to dictate the terms of business. In Porter's terms, the Bargaining Power of Distributors is increasing. This ultimately makes it harder for the suppliers to turn a profit (a fact many bemoan) unless there are other compensating changes in any of the other 4 Forces.

For example, big retailers' control of the industry could reduce the Threat of New Entrants by imposing barriers to entry in the form of established relationships, supply chain integrations or other conditions of doing business. Similarly, if the suppliers own suppliers don't have a lot of bargaining power, the burden of the demands imposed by the big retailers could simply be passed down the chain.

Porter's 5 Forces also suggests that if the big retailers become too powerful and demanding, then the drive for suppliers to find alternative means of distribution will increase. In this way, the free market should ultimately limit the amount of power these distributors can acquire. The market will either stabilise with all parties in the value chain able to extract their fair share of the profit, or some innovation disrupting the existing value chain.

Using Porter's Five Forces model in this way is a valuable tool in helping each supplier decide how to respond to John Lewis's new policy.

photo credit: kenjonbro via photopin cc

How to use Porter's Value Chain Analysis

The value chain is a simple graphical method for

  • identifying and describing a firm's main functions,
  • understanding how they add value, and
  • pinpointing a firm's sources of competitive advantage and differentiation

The sample diagram below shows a generic value chain originally described by Porter:

Image of Porter's Value Chain

Of course, this value chain describes a typical business dealing in physical goods. For example, manufacturing or distribution. The value chain for a service organisation might look completely different. See, for example, An investment management Value Chain.

To get the most out of value chain analysis it is important to identify the processes that best describe each operation. Each business should be unique. Therefore, each value chain, even at this high level, could be different.

Once you've mapped out the core functions within the organisation, you can then consider each function in more detail. Consider factors, depending on your purpose, such as:

  • people,
  • processes,
  • technology,
  • costs,
  • strengths,
  • weaknesses, etc.

There are many uses for a Value Chain analysis, for example:

  1. Create a general yet holistic and shared level of awareness of the basic functions of a firm and how it creates and consumes value.

    This is a useful underpin for many other forms of strategic analysis. For example, you could create a matrix with the 7-Ss of the McKinsey 7S model along one axis and the processes from the Value Chain along the other axis. This will give you a more thorough and detailed analysis.

    This is also an important step when working with functional teams from within a business. People from different functional areas tend to have incomplete or skewed views of the organisation as a whole. For example, salespeople tend to have a sales-orientated view. They may underestimate the importance of inbound logistics. A value chain can help you to identify and correct this.

  2. Design a Target Operating Model (TOM).

    S
    ee also How to design a Target Operating Model (TOM).

    The Value Chain is a useful model for ensuring you've designed the Operating Model of an entire organisation. That is including both the core operating functions as well as the supporting functions.

  3. Do a gap analysis and design a strategy to close that gap.

    Using the same framework for describing both your existing operation (1 above) and your Target Operating Model (2 above) makes it easier to identify the gaps between the two. Then you can put plans in place to close those gaps. This alone can be sufficient to create a transformation strategy. However, I'd always advise also taking some external factors into consideration before getting too far down this track.

  4. Ensure complete coverage in major change programmes.

    A value chain model provides a useful checklist for major change programmes. This will ensure you've considered the impact and implications for all functions within the organisation. For increased consistency, you could create your project's work breakdown structure along the same lines as the value chain.

  5. Facilitate post-acquisition integration.

    A  post-acquisition integration is one kind of a major change programme. For an integration exercise, you'd first need to describe both organisations using the same value chain. This, in itself, could increase your understanding of the fit between the two organisations.

Use a Porter's Value Chain template

The diagram shown above was drawn with StratNavApp.com, the free online collaborative tool for strategists - try it now for free. It includes and integrates templates for the value chain and many other popular strategy models.

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