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The Three Key Activities of Business

In order to engage in business, every company purchases inputs, transforms inputs into outputs, and sells outputs. Transformation, or internal operations, is the key to creating value – but surprisingly, of these three key activities, internal operational efficiency is often the least critical to capturing value. In a supply chain where even collaborative trading partners compete for margin, capturing value is the basis of profitability.

Many ‘core competence’ methodologies suggest that firms should focus on “what they do best” and ignore or outsource all other non-core activities. This simplistic view can result in the majority of a firm’s profit-generating and profit-preserving functions being conducted through business to business relationships which are sub-optimal.

Robertson Cox helps its clients capture value by improving the firm’s ability to buy and sell successfully, for both ‘core’ and ‘non-core’ functions. Our unique methodologies are based on a clear understanding of business power, which underlies every successful attempt to capture value from all trading partners.

Power-based improvements to buying and selling lead directly to greater profitability, independent of operational transformation. The relative simplicity of implementation and high value-add created through this process makes our projects very compelling on an ROI basis when compared to traditional business process re-engineering.

The QD and QV Methodologies: Business Power

Power is the ability to affect the actions of trading partners so as to maximise the company's ability to earn above normal returns, while limiting the ability of others to maximise their returns against the company's commercial interests.

Since value capture is based on buying low and selling high, in a relationship where one’s trading partners would prefer better prices and/or value for money, business power – the ability to drive prices or contract terms in directions favourable to you – is the key to business profitability.

Robertson Cox uses the QD and QV Methodologies, derived from Prof. Andrew Cox’s research, to help clients define, identify, and make use of every potential source of business power. This multi-stage process allows clients to reposition themselves in their markets and supply chains for maximum value capture and profitability.

The QD and QV Methodologies: Sources of Business Power

Power can be derived from many sources. In consulting engagements, Robertson Cox utilizes its own proprietary processes to produce comprehensive mappings of relative buyer and seller power. The QD methodology focuses on strategic and marketing and sales positioning, while the QV methodology assists clients with their operational supply chain and procurement positioning.

Some key categories from which business power is derived include:

• Property Rights
• Intellectual property
• Critical physical assets such as rare raw materials or unique production facilities
• Unique information which impacts the ability to trade
• Economies of scale leading to natural monopoly or oligopoly
• Trade secrets of production
• Brand and reputation
• Supplier search and switching costs

The Rationale behind the QD and QV Methodologies: The Business Power Matrix

Based on the relative power of two buying and selling trading partners, their dyadic relationship will naturally fall somewhere on the matrix below. Robertson Cox performs detailed analyses of a client’s upstream and downstream actual dyadic relationships with trading partners in order to determine cases when the client firm is under-utilising its own power, and the resultant trading relationship is sub-optimal.

Using Business Power to Capture Value and Improve Profitability

Targeted re-positioning of trading relationships can create a dramatic improvement in profitability. With a clear understanding of its current relationships, actual power positioning, and potential future relationships with trading partners, a client firm can reposition itself through four types of strategic actions:

• Re-negotiating buying and selling relationships and contracts with existing trading partners, and extracting maximum value from the new contractual and relationship terms
• Altering the set of customers and/or supplier with which the client does business
• Altering the type or range of products sold to customers
• Making critical make vs. buy outsourcing decisions, for the short or long term, based on an overall understanding of the impact of these decisions on current and future business power.

After each of our strategy project engagements, Robertson Cox provides actionable recommendations which enable our clients to capture additional business value from their supply chains and markets.

Applying the QD and QV Methodologies

The Service Offerings section of this site details how the QD and QV Methodologies can be applied to your business