BioCycle March 2009, Vol. 50, No. 3, p. 34
Understanding the elements of Value Chain Analysis will help the compost and mulch industry manage efficiently and develop effective ad campaigns and promotions.
Make no mistake about it, our economy has changed. Of course, it has been in a state of incremental and gradual change for most of our lives. Today, however, we are experiencing a sudden change, with a precipitous decline in most economic sectors. For those of us in organics recycling, our commercial viability may well depend on our ability to recognize and understand the impact of the changes on our industry and our customers, and our ability to adapt quickly.
For the most part, horticultural (ornamental agriculture) markets are our targeted industries, be it dealer/distributors, the prosumer market (professionals who buy your product and resell it, such as turf managers or landscape contractors) or the end-use customer. Lawn and garden activities are considered largely discretionary spending activities, making effective marketing of products in this segment ever more important. An effective way to rise above the current financial storm includes company introspection and analysis. Consider the following.
During this past holiday retail season, when spending was far below projected volumes, Amazon.com had the best seasonal sales day in its history. According to Venture Beat, a digital media tracking company, Amazon’s peak sales day in 2008 was 6.3 million items on December 14, up 17 percent from peak sales of 5.4 million orders on December 10, 2007. This 17 percent increase was in stark contrast to the overall sales decline of 4 percent for retail sales in general. Even eBay, Amazon’s closest competitor, faced a 16 percent drop in sales.
So what was the cause for Amazon’s record increase in sales during the declining economy? Simply, Amazon provided something to their customers, which was not readily available anywhere else: Value. The reason Amazon was able to outsell all of its competitors, even on the same product, is because of excellent use of a tool called Value Chain Analysis (see below). In Amazon’s particular case, it provided a combination of convenience, comparison shopping, confidence (that the customer will get what was ordered by the date promised) and 24-hour shopping, 7 days/week in the comfort of home. The two lessons we, as lawn and garden product manufacturers, should take away from this are:
First, Amazon and certain other companies grew and continue to grow their markets in a declining economy. It is a fatal mistake to think that people do not have money or that they will only spend it on absolute necessities. Ironically, a defeatist attitude becomes even more dangerous as markets decline.
Second, value and price are not the same thing. “Value” simply means something strongly associated with your product that is not an ingredient, and that customers want. Because they want this value-added offering, customers are willing to pay more for a similar or even identical item, on the basis that it provides greater value. Consider shopping at a warehouse store versus a convenience store. If all you wanted was an individual soda, you would most likely prefer to pay a higher price for it at the convenience store. Additionally, where there is no difference in price, customers will invariably select the item that provides greater value – as perceived by them.
VALUE CHAIN ANALYSIS
In his book, Competitive Advantage: Creating and Sustaining Superior Performance (1985), Michael Porter, of the Harvard School of Business, introduced the concept of Value Chain Analysis. This approach examines the activities that take place within a business, and based on the findings, uses them to determine the competitive strength of the business. Porter says that the activities of a business can be grouped under two headings: Primary Activities – those that are directly concerned with creating and delivering a product (e.g. component assembly); and Support Activities – while not directly involved in production, these activities may increase effectiveness or efficiency (e.g. human resource management).
Porter’s Model is shown in Figure 1. Support activities are shown on the top half and primary activities are on the bottom. Although we are mostly interested in the Primary Activities analysis in this discussion, it should be noted that, due to economic pressures, it is increasingly rare for a business to undertake all primary and support activities internally. As an overall, value-enhancing benefit, Value Chain Analysis is an effective way of identifying activities that are best undertaken internally by a business and those that are best provided by others (“out sourced”). It is also an effective tool for analyzing specific activities through which a firm can create competitive advantage and build shareholder value.
PRIMARY VALUE CHAIN ACTIVITIES
In the case of a compost, mulch or topsoil producer, segregated activities might look like the following:
Inbound logistics includes receiving, warehousing and inventory management of feedstocks and recipe amendments used for composting. It may also include materials necessary for packaging, contractual relationship with haulers and tipping area and/or free tipping for contracted customers. Aside from increasing efficiencies on materials when they come through the gate, a well thought-out layout, or upgrades to an existing layout, may expedite the inbound process. Examples of good layout include placing the truck scale (if a scale is used at the site) at least two or three truck lengths inside the gate. This prevents truck traffic from becoming congested and extending out onto roadways, which could create a potential safety hazard and neighbor annoyance. Automated weigh scales, where the driver can print his or her own weigh ticket, save time for the driver and free another employee to work on other projects.
A second example would be to have a separate ingress for inbound and egress for those outbound. Wherever possible, strive to design or reconfigure the site layout so pedestrian traffic never needs to cross the path of road traffic. Not only does this facilitate unencumbered vehicle traffic, it is also much safer and reduces potential liability. Well-organized delivery areas, where a truck can get in and out quickly, with minimal delays to other vehicles onsite, is very important to inbound efficiencies.
Operations are the value-creating activities that transform the inputs into the final product. In the organics industry, this area generally is the one where the most significant cost saving value can be realized. Efficiencies in materials handling, energy and fuel use optimization, judicious equipment maintenance and effective staffing are areas that can reduce operational costs. Operations also include support expenses such as insurance, benefits and employee awards. Analyzing value does not necessarily equate to directly cutting costs. In some cases, it may mean spending additional money, such as for creating value for the employee in his/her job situation – employee turnover is often a very costly, hidden expense.
The fastest way to realize cost savings and prevent unplanned downtime might be as simple as reviewing and refining planned maintenance schedules and practices. This helps equipment operate at peak efficiency, while also reducing unplanned work stoppages. Efficiency brings dollars to your bottom line, as well as brings value to the customer by helping to maintain consistent inventory levels, facilitating timely deliveries, etc. Other steps to consider include equipment upgrades or computerizing process control, record keeping, billing and reporting.
Outbound logistics are those activities required to get the finished product to the customer, including warehousing, inventory control, order fulfillment, distribution, meeting time commitment for deliveries and using cost-effective delivery channels. Cost effective delivery channels could be taking advantage of back haul opportunities, possibly outsourcing and contracting all product delivery, or bringing hauling in-house for purposes of maintaining quality control or managing time scheduled deliveries, etc.
Outbound logistics may gain value by incorporating internet-based services, such as online ordering and self-scheduling of deliveries. This provides ordering opportunity 24 hours/day, 7 days/week. Orders can be secured by credit card, or by fax.
Marketing & Sales consists of influencing customers favorably in their decision to purchase your product. For instance, determine which market segments or products are the profit centers for the company. There are innumerable possibilities for programs and promotions such as invoice dating programs, strategic partnering, buy one get one free (or X percent off, X percent free additional product), discount coupons, open houses, product education seminars, uniformed employees, branded apparel or products, trade or home and garden show representation, etc.
Effective advertising plays a major role in the overall promotion of a product. Prior to any advertising campaign, a marketing analysis should be conducted, which could include product mapping to determine market opportunities, unmet needs and wants, identifying competitors, targeted customers, etc. It is important to understand the cost benefits of each advertising medium, whether it be print, broadcast TV or radio, cable programming, etc. It is also highly important to develop an advertising budget prior to entering into a program. This budget should be analyzed and possibly adjusted during the course of the year, but should be adhered to in order to maintain cost-effectiveness. Examples of the types of advertising are best seen in the marketplace (see sidebar).
Service activities are those that maintain and enhance the product’s value, including customer support, repair services, etc. They include anything that makes your product have greater value to your customer than your competitors. This could be online ordering, “Just in Time” inventory, seminars, presentations, customer help/product support telephone lines, etc. It could also be excellent product use sheets and labeling, and after sales follow-up. Information learned during follow-up can be taken back to the other elements of the value chain, such as operations and sales & marketing. Testimonials are also a highly effective, and can be used as a sales and marketing tool. Whereas the other Primary Value Chain elements are activities that will draw the customer, service activities are those that will keep the customer.
The Value Chain is one cohesive, integrated instrument with multiple segments. A manipulation of one area of the value chain bears an influence on all the others. As an example, offering discounts to haulers (inbound activities) for cleaner, contamination-free material may provide quality improvements on the end product. It may also provide reduced costs in equipment repairs and maintenance.
Most often, just one of the above suggested activities will not make a dramatic change to the product or value a producer offers to a customer. However, several of these enhancements across multiple activities and in concert with one another may yield demonstrable value to your customer, providing strategic advantage to your company. Remember the deep woods (and Wall Street) aphorism that posits: “You don’t need to outrun the bear chasing you. You only need to outrun the guy running next to you.”
David Hill is founder of CycleLogic (www.mycyclelogic.com) in Bethesda, Maryland, an environmental marketing, consultation and business development firm that assists clients in matching recovered materials with reuse markets. Hill has more than 26 years of operations and marketing management in the composting and recycling industry. He can be contacted at firstname.lastname@example.org.
Sidebar p. 35
• Signage is a form of static advertising, and includes signs, banners, billboards, etc. Because it is static, and space is very limited for text and graphics, remember to keep it visually appealing and succinct: Less is more.
• Product Branding is very effective for brand awareness, product and shelf recognition, and brand loyalty. The type of branding used at trade shows is a type of barter agreement, wherein the individual or entity is happy to advertise your product in return for ownership and use of the advertising medium. This could be an article of clothing, or something else that ideally is related to your product.
• Co-Branding is a process wherein an alliance internally between brands or externally between two separate entities is formed, resulting in synergistic promotional achievement. Companies in the organics industry producing more than one product can offer incentives to buy multiple products. For instance, the offer could be, “Buy 5 bags of mulch and get 1 bag of compost for free.” External co-branding is between two separate, noncompeting companies, and is used to broaden, extend or increase penetration into targeted markets. A good example is a compost producer joining efforts with a seed manufacturer, and together offering a discount on one product when purchased in combination with the other.
• Push-Pull Advertising is used for products that customers do not buy directly from the manufacturer, but rather a dealer/distributor. These ads create customer demand for the product, e.g., regional campaigns on TV directed at the end customer, while product is sold to the dealer/distributor.
• Promotional, discount or rebate coupons are incentive programs, campaigns for jump-starting sales in brand introductions or reinforcing brand loyalty. These are highly effective, but very difficult to manage – especially when working with second or third party sales such as dealers and distributors who then sell strictly to retailers or professionals.
March 24, 2009 | General
Selling Organics In The New Economy
BioCycle March 2009, Vol. 50, No. 3, p. 34