Marcos Fava Neves

Value capture trilogy: The costs

By Marcos Fava Neves (chinadaily.com.cn)
Updated: 2010-10-19 13:31

Value capture is one of the most important strategies for companies nowadays. Value capture means the complete understanding of the network of the analyzed company and the redesign of activities towards a temptative to increase margins and with this, have more value. I call this the "value capture trilogy", since in my understanding we have three major possibilities of doing this strategy. This is a trilogy...

The first of the possibilities of capturing value is in costs. Trying to reduce the cost (1) of the company to increase margins and value. Nice ideas and creativity are the focus here. The second possibility is via differentiation strategies (2), with activities that will try to increase our margins via prices, since the value given to us by our consumers increased due to an activity done by the company. Finally, the third bundle of activities relate to collective actions (3) that may be performed by the company. This first article of the value capture trilogy will deal with costs.

But how to do this cost reduction to capture more margins? Basically there are two major components of costs where there are possibilities of working to improve: internal costs and costs of inputs and services bought (supply chain costs). I will start with internal costs.

Here a company should look at all the activities performed and try to see how to improve. These activities are the ones relating to production. A company should explore core competence (a), or what they know how to do, to exhaustion, focusing. The second point is how to use better resources and assets (b) of the company, doing an analysis of which resources (assets) a company has and how could these assets be more used. It is a simple question. We have this asset, how to use it more and better?

Search for scale strategies (c) is a third analysis. What is the production level that will bring the scale economy? Quality and cost of materials (d) is another possibility of value capture, studying new materials and components which may offer better solutions. To have efficiency in labor (e) is also important, having the best possible use of human resources and taking care with overhead costs. Simplicity is the word here.

Using methods and a continuous redesign of operations (f) towards a "cellular" control of costs is another activity. Every activity, like a cell, must be seen and analyzed in terms of how could it be better done? Technology (research and development - g) and financial architecture (h), searching for cost of capital and some public funding sources with more competitive rates will complete our list of the internal factors of the company towards cost controls and value capture.

The second bundle of activities involved in the cost approach of our value capture trilogy (cost, differentiation and collective actions) are related to a focus at the supply chain of a company (buying processes and relationships with suppliers).

Here a company should try to reduce bargaining power of sellers (i), mostly working with strategies related to promoting competition within a group of reliable suppliers and to have a continuous trial of substitutes/alternative inputs (even imported). This would bring better negotiation power to the company, increasing margins. Another possibility is to know the best moments of buying (j), since a seller has some moments over the year when their demand is smaller, and a company with good capital structure can buy better at these moments.

Governance contracts/reduction of transaction costs (k), is also a strategy, since to buy and to negotiate there are some other costs involved (transaction costs) that have impact over time and other resources of the company. So to have good processes taking advantage of information systems, technology will help here.

In this article we listed 11 working points for a company that wants to capture more value in its products and services offered via reducing their costs. These 11 working points may be transformed in opportunity questions to be answered by companies. To complete our "value capture trilogy", our next article will explore differentiation strategies, and then, the last will explore collective actions possibilities towards value capture.

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org) and international speaker.