Understanding strategy through value
Understanding strategy will help you choose and run a franchise effectively. Tom Albrighton explains how the concept of value can help you ask and answer the right questions about a business
There are as many ideas about strategy as there are managers. None are right or wrong in themselves. The only 'right' strategy or idea is the one that helps you move forward in the direction you've chosen. Understanding strategy through the concept of value is likely to be useful to franchisees.
Consider the progress of a loaf of bread. The farmer harvests the wheat, the miller turns the wheat into flour, the baker bakes the flour into a loaf and the shopkeeper sells it. At each stage along this 'value chain' value is added to the product, and each person captures value through their involvement. The most obvious type of value involved is financial: the bread becomes more expensive in its journey from crop through commodity to consumer item, and each person is paid for their efforts.
However, 'value' doesn't just mean 'money'. There are many other kinds of value, and every value chain normally involves several. For example, the miller sources his wheat from several farmers and manages his stock so that he rarely runs out. This allows him to add value in the form of 'reliability', 'flexible capacity' and (as a result) 'peace of mind' to the baker. The baker might pay extra for this, or he might provide value in the form of 'loyalty' or 'word of mouth sales'. By staying open until 8pm, your local shopkeeper provides value to you in the form of 'convenience'. Adding value can even involve financial loss, for example when businesses add value to their customers in the form of 'affordability' by offering discounts.
Value allows us to understand relationships and transactions using a single concept, whether the value exchanged is tangible or not. Employees provide value through work, but also in commitment, new ideas and relationships.
In return they receive financial value, but also learning, a social circle and (perhaps) a sense of purpose. Every value chain has other value chains within it, and it usually extends further in both directions too. For example, our loaf of bread might be bought by a sandwich shop and have further value added before it is finally consumed.
Business strategy consists of value decisions. The purpose of any business can be expressed as answers to some fundamental questions. Who does it add value for? What kinds of value does it add? How does it add them? What kinds of value does it choose not to add? How does it capture value for itself? Obviously, some questions are answered as a result of the business area we choose, but many aren't.
Within retail, for example, there are a host of questions to be considered about the 'who' of target customers, the 'what' of products to be stocked, the 'how' of opening hours and shop layout and the 'how much' of pricing and discounts. We can call the sum total of these answers the shop's 'value proposition'. A firm's potential for success is a function of the fit between its value proposition and its target customers' needs.
'Value innovation' refers to radically new value propositions. Because value is multi-dimensional, we can see that 'innovation' needn't necessarily mean a totally new or technically complex product. McDonald's conquered the world with an existing product plus new ideas about business systems, reliability and service. Starbucks found success with a very simple value proposition that tapped into previously unmet needs for specific types of value. The story of Easyjet shows that getting rid of value that people don't want (in-flight meals, seat bookings) can be just as compelling as adding new value.
How does this concept of strategy help you as a franchisee? There are two dimensions. Firstly, by helping you to evaluate potential franchises, and secondly by helping you run your franchise more effectively.
Looking at a franchise, we see that many 'value questions' have already been answered. The type of value to be provided and a great deal of the practical 'how to' are likely to be predetermined by the franchisor. You will also know how much value (finance, time, commitment) you are expected to add in return for a chance to play the game. From this, you can determine how good the franchisor's value proposition really is. This means considering questions such as:
- How exactly does this franchise add value for its customers?
- Are there customers who need that value?
- Given that there are, does the franchise create value for them in the most effective way?
- If it's a new value proposition, what evidence is there that the need is there (or will be)?
- Will you realise enough of the value you want in return for the value you will have to invest?
Depending on the franchise you choose, you will have different levels of control over value transactions. Some questions you might consider to grow your franchise are:
- What new customer groups might need the value I can offer?
- What new types of value can I offer within the franchisor's business model?
- How can I add more value for customers while working with the principles on which the franchise is built?
- How can I add value to the franchisor by suggesting new ways for the franchise to add value?
Finally, here's a value motto: always add more value than is expected. It's the principle behind every fruitful business relationship - perhaps every positive relationship of any kind. Wherever you see a manager applying it effectively, you'll see a successful, growing enterpris