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Step 4: Discovering the customer’s strategic needs Strategic activities are the activities a firm must implement in order to realize its strategy or strategies. Every strategy has such a set of activities. Insofar as a company finds doing any of these activities difficult, potential suppliers have been trained to see these as ‘‘needs.’’ But, suppliers need to differentiate between operations that are difficult and ones that are strategic. For example, an innovation strategy requires a system for generating ideas and picking the best ones, cost estimating, engineering, R&D, prototype construction and testing, and market-acceptance testing. The pharmaceutical industry relies on a great many B2B service providers to support its new-drug-development programs in the drug-formulation (R&D) stage and also B2B service providers that develop new systems to expedite regulatory approval. Value-chain analysis identifies both as key strategic functions. Michael Porter developed the concept of activity maps and famously applied it to companies like Southwest Airlines and IKEA.[9] Such maps highlight the salient activities of a company, with various activities linked to one another. Using Wal-Mart as an example,[10] the high-leverage tactics it employs – such as hard bargaining with suppliers, cross-docking, logistics management, shrinkage control, and the like – all seem to cluster around and support the larger strategic themes of Wal-Mart, which are to continuously reduce the cost of goods sold, squeeze the retail margin, and end up with a respectable net profit. Wal-Mart’s high-leverage activities and tactics are aligned with its low-cost-leadership strategy, one of the main reasons it is so successful. Three other examples – Nike, Mondavi and Chevron Corp – help explain how to identify a company’s strategic activities. Nike. The value chain as a strategic-analysis tool emerged when Nike set a precedent in the athletic-footwear industry by outsourcing the manufacturing and assembly of athletic shoes. In the 1980s, Nike learned that manufacturing had become a commodity that could be outsourced for less cost and better quality than Nike could achieve with its internal resources. Nike realized that its core competences were in product development and marketing, and so management grew the company around a strategy of designing innovative products that met evolving customer needs. The value chain in Exhibit 5 shows a simplified view of the athletic-shoe industry. Nike owns and controls just two elements: product development and its branded retail stores. Both serve Nike’s strategic purpose: by owning and operating its branded stores the firm obtains valuable feedback directly from customers, which drives new product development. For B2B service-providers seeking to do business with Nike, this suggests that some of the most lucrative opportunities are in supporting new-product development (shoe design and materials technologies), branded-store architecture, and choosing store locations. Mondavi. In the wine industry, some producers have made the aging of wine in oak barrels an important supply-chain ingredient (‘‘The Trademark of Mondavi’’).[11] The suppliers that offer the highest oak-barrel quality will be rewarded for helping firms like Mondavi that differentiate itself in this way to gain competitive advantage, while commodity oak-barrel suppliers will find lesser profits in supplying those wineries that differentiate their products somewhere else in the value chain. The wine-industry value chain, Exhibit 6, indicates that Mondavi makes its money in the strategic processes of aging wine and marketing it, especially through the customer education that occurs during wine tours. By encouraging connoisseurship through such marketing, Mondavi can charge $7 for a $3 bottle of wine, a margin far exceeding those of commodity competitors. Fluor and Chevron. Chevron is a 100% vertically integrated oil-industry client of Fluor, the engineering/construction business-services provider. In the B2B world, engineering/construction services have become commoditized. This is inherent in the nature of any industry where contracts are awarded through competitive bidding. This means that, all other things being equal, winners are selected on the basis of price. So engineering/construction-industry players need to seek ways to ‘‘de-commoditize’’ their industry. Clearly it’s in Fluor’s best interest to identify Chevron’s strategy and develop ways to support it. Today, there are only four such giant companies not owned or operated by a government: British Petroleum, Royal Dutch Shell, Exxon/Mobil, and Chevron. The appetite for production capacity and capital spending by the major oil companies is enormous. These four firms together report annual capital expenditures in excess of $56 billion. Projects are spread all over the world from the hot arid deserts of the Middle East, to frigid wind-swept plains east of the Canadian Rockies, to the jungles of Peru. Because of the number, scale, and complexity of their activities, distinguishing projects that are strategic to an oil company’s future from those that aren’t is difficult yet crucial to business-service providers like Fluor. Chevron Corporation, an important Fluor client, discloses considerable strategic information in its annual report. Specifically, Dave O’Reilly’s annual letter to shareholders (see Box) provides valuable insight into Chevron’s strategy. The issues that are high on O’Reilly’s mind are emphasized in the letter. These include crude oil and natural gas from offshore regions (especially deepwater projects where project risks are disproportionately large) in geographically dispersed locales. In the annual report the importance of these issues are designated by little Chevron logos (see Exhibits 7 and 8). What is also worth noting is what is not highlighted in O’Reilly’s letter. Companies as immense as Chevron have ongoing projects everywhere that don’t occupy the primary attention of senior leadership. One example is Chevron’s refinery operations in California, which continually require environmental upgrades. When engineering/construction providers pursue such projects, they are likely to find, that the margins are not as great as on projects that supply a strategic need.