The Effects of Management Model and Value Chain Analysis - Coursework Example

Marketing] Value chain analysis is the process whereby companies identify the cost advantages and disadvantages that they have by breaking down their organizational activities and assigning them costs. This report aims to uncover the effects of this management model on an advertising agency with regard to one of the companies within the advertising industry: Saatchi & Saatchi. What is value chain analysis? Value chain analysis (VCA) is a theoretical management model which, due to the information it can give to management, has become an important part of the internal assessment of any firm. Michael Porter the Bishop William Lawrence University Professor at Harvard Business School has commented that any business and its standing at any point in time can best be evaluated through making it go through a value chain analysis. Best value can be defined as the difference between total revenues and total costs. The company that can maximize this difference is adding value. This difference can be enhanced in a better manner when the firm is aware of where its costs are high and where they are low (Schmitz, 2005). Thus, this model basically entails the breaking down of organizational activities into various small units and then assigning costs to each unit so as to determine the amount that it is costing the company. This calculation of costs is important because a company can then see where it can curtail costs and where a slight cost relaxation would not harm the value chain. Value chain activities take place in almost every organization. From buying the raw materials to the product design, from the product development stages to the distribution of the product, such activities are easy to identify. They have to be broken down into the smallest units possible, so that identification of those activities where cost curtailment would help can be carried out. From industry to industry, the activities will differ slightly (Miguel, 1996). For example, the hotel industry will have sub-activities within customer service such as room service and telephone services, whereas the advertising industry, which is the subject of discussion of this report, will have activities such as conducting research and creating advertising briefs. Through such a process of analysis, VCA helps companies in assessing their own strengths and weaknesses and then comparing them to the VCA of their competitors, as well as their own VCA trends seen over time. This comparison helps companies to decide upon their core competence and distinctive competence and to capitalize on those strengths, thereby leading them to gain a competitive advantage over their business rivals (Hitt, 2008). Moreover, companies also gain when they come to assign costs to the activities which are performed by the customers, suppliers, distributors or other stakeholders but will also affect a companys value chain. At times, a number of costs are incurred during such activities, and thus companies might want to know this piece of information so that they can carry out any necessary cutbacks. Negative aspects of VCA The VCA is a theoretical model, and thus when it is assessing the relationship between various business units, there is a problem with those relationships finding synergy in real life. This is because unanticipated problems and drawbacks can occur, which can negate the viability of the results of the VCA. For instance, before the actual relationship dynamics take place, the cost of the coordination, and the cost of all the practical aspects of the organizational systems and processes can be over or under stated. This should be tried to minimized by devising strategies, so that VCA can overcome its theoretical appeal and translate well into real practical organizational models. Relevant theory. One relevant theory to the concept of VCA is that of benchmarking. The concept involves choosing a company which is the best in the industry and then setting it as the ideal or the benchmark. Other companies in the industry will then aim to attain that ideal by using the techniques or methodologies that the benchmarked company or the industry leader uses in its own organizational activities. The most difficult part of the benchmarking process can be obtaining information about competitors value chains because they might not want to disclose their internal strengths and weaknesses (Hitt, 2008). The application of VCA to the advertising industry Advertising is a flourishing industry. Every year, billions of dollars are spent worldwide on advertising goods and services. The latest figures state that the global advertising spends worldwide was $445 billion US$ (Plunkett, 2007). This is a gigantic figure and reflects a great deal of effort simply to gain the attention of consumers, reposition and to remind customers of your brand. The advertising industry has various sub-industries working within it. From television to newspapers, from magazines to radio, from outdoor advert to mobile phones, the types of media are expanding and there is a paradigm shift as to the usage of various forms of media among consumers. A value chain analysis of the advertising industry would mean breaking down the work of a typical company belonging to this industry into its various organizational activities (Turow, 2008). This report will take Saatchi & Saatchi as an example. The application of VCA to Saatchi & Saatchi Saatchi & Saatchi is one of the most prestigious advertising agencies in the world. Located in New York, it has a global presence in 80 countries, with more than 6,500 employees working towards changing brands into lovemarks (Roberts, 2007). With clients such as Sony Ericsson, P&G, Cadbury, Emirates, Toyota and Novartis, Saatchi & Saatchi has touched the lives of millions of consumers through their effective advertising campaigns. However, such agencies need to keep a check and balance on their costs so as to maintain their position in the market. For instance, if we take Saatchi & Saatchi as one of the companies thriving in the advertising industry, its VCA would show us what kind of competitive advantages the organization holds to date. Saatchi & Saatchi is a creative agency which produces advertisements for the clients who approach them (Fendley, 1996). This requires first the receiving of the advertising brief from the client, then the creative director will make his own personal brief (called the creative brief) and the creative director’s team will then sit together to produce a storyline, a storyboard which will win the hearts of the target market. In terms of VCA, the various organizational activities are divided among the four roles that they have to perform: 1. Servicing the client 2. Account planning 3. Creation 4. Production of advertisements In these four main activities will be the various sub-activities which first have to be listed and to which costs are then assigned. For instance, under production of advertisements, the sub-activities could be hiring a director, hiring the models, the costs of the location, the costs of the make-up, clothes and hair styling for the models, and the equipment to be used for production (the advertising industry is divided between beta and 35 mm) (Petley, 2003). Such sub-activities simply increase as the budget increases and if the ideas are thought up by a creative agency like Saatchi & Saatchi will be numerous and expensive (Jefkins, 2000). Another application of VCA which would be specific to Saatchi & Saatchi is how they change brands into lovemarks. Lovemarks is a term invented by Saatchi & Saatchi which means that they aim to make the shift from brands to "lovemarks"; the latter is a solid example of a product which gains loyalty from the target market beyond any reason. The company achieves this through a five-step process which elevates a clients product into something which awes the consumers. The steps they use in making the transition from a brand into a lovemark are discovery, exploration, inspiration, attraction and evaluation (Fendley, 1996). Each step will bring with it certain costs. For instance, the discovery step would include the research needed to gain the consumer insights which would help them generate ideas specific to the target market of the clients product. This research includes costs such as hiring researchers, designing the research, collecting the data, moulding them into a presentable form and then analysing that information so that it becomes knowledge or consumer insights. Likewise, the evaluation stage would involve control management, where standards are set first, and performance is then measured against that standard and any corrective action taken. For an advertising agency, such an evaluation would mean calculating the effective reach, effective frequency, composition and affinity of the campaign designed, and then comparing these to the benchmarks set before the campaign was launched (Tungate, 2007). Competitive advantage of the organization to date The competitive advantage to an agency like Saatchi & Saatchi is that they have branded their own agency so well that it would attract any client. As far as costs are concerned, Saatchi & Saatchi is following the notion in VCA that if they provide an exceptional service to the customer, it might be expensive but this will also lead to increased revenues and thus reduce the costs of the returns. Saatchi & Saatchi believes in sustainable development through the concept of bringing "world changing ideas" [Fendley, A. (1996) Saatchi & Saatchi: the inside story. Arcade Publishing] to the platform and using them in the advertising of their clients (Saatchi & Saatchi were awarded the World Changing Ideas Award [22 FEB 2008]. This sub-activity can be traced back to the main activity of Creative, the team which conjures up the storylines for the advertisements (Roberts, 2007). Advice for future strategic development Future strategic development is hard to advise for a company which has already decided the future of brands by a concept known as lovemarks. However, strategic development for Saatchi & Saatchi would be further enhanced if they capitalized on their creative team and attempted to reduce the costs involved in generating ideas. Cutting down on costs would further increase the gap between revenues and costs, thus increasing value for this advertising agency. Conclusion In conclusion, it can be said that the financial aspect of a company is a vital part and should never be overlooked, because it can dictate which aspect of the company becomes its strength and will give it the competitive edge that it needs to outdo its rivals in the market. As far as the advertising industry is concerned, VCA helps advertising agencies in particular to assess where their costs are mostly in outflow and to work on them, so as to maximize the returns to their clients in the form of added recall of the product and accelerated sales. Bibliography Bullmore, J. (2003) Behind the scenes in advertising (mark III): brands, business and beyond. p121-123 World Advertising Research Centre. Fendley, A. (1996) Saatchi & Saatchi: the inside story. p209-211 Arcade Publishing Hitt, M. (2008) Strategic management: competitiveness and globalization: concepts and cases. Cengage Learning is the publisher of this book, and it was already quoted. Cengage Learning. Jefkins, F. (2000) Advertising. p300-302. Financial Times, Prentice Hall. Kleinman, P. (1989) Saatchi & Saatchi: the inside story. p173-176. NTC Business Books. Larsen, H. (1997) Cases in marketing. p18-20. Sage MacRury, I. (2009) Advertising. p159-163. Routledge. Miguel, J. (1996) Value chain analysis for assessing competitive advantage. Society of Management Accountants of Canada is the publisher of this book, and it was already quoted. Society of Management Accountants of Canada. Petley, J. (2003) Advertising. p24-26. Black Rabbit Books. Plunkett, J. (2007) Plunketts Advertising and Branding Industry Almanac 2007: Advertising. Plunkett Research, Ltd is the publisher of this book, and it was already quoted. Plunkett Research Ltd. Sandage, C. (1953) Advertising: Theory and Practice. P132-137 R. D. Irwin. Roberts, K. (2007) Lovemarks: The future beyond brands: Saatchi & Saatchi Designers Edition. P167-169 PowerHouse. Schmitz, H. (2005) Value chain analysis for policy-makers and practitioners. 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