By Tan Thiam Hock
The last time I had to study so much was 30 years ago. I had to squeeze my final year studies into two months of solid preparation for my final exam in university. Joining this management programme was supposed to be my sabbatical relaxing and learning at my own pace. A time to reflect on the past and ponder about the future. Nothing could be further from the truth.
The pace has been brutal. Daily reading of multiple case studies followed by group discussions into the night and then we're expected to contribute and to be part of a meaningful discussion in the lecture hall. Being the only Malaysian, I have to adopt a kiasu attitude amidst a very competitive environment. More so with many of our southern neighbours in the united nation mix.
Most of the participants work for major corporations in their own countries. So when I introduced myself as a lipstick salesman from Malaysia, you can imagine the incredulous look on their faces! Obviously, some Gweilows were not too impressed with my credentials and they must have felt that my presence was an admission mistake by this prestigious institution. Maybe, just maybe, they are right.
Anyway, big or small, all business organisations face the same problems. Always having the need to adapt to changes in a dynamic market place. That's what the professors tell us anyway, plus so many other things that I have tried to cram into my limited gigabyte memory. Sophisticated economic, financial and strategic issues that seem to get these big corporate leaders excited.
As for me, I have just this simple value-chain concept to share with you this week. And since the big corporates are so smart, I will share this little idea with the small entrepreneurs and the wannabes. Just so that you can see your position in your industry and analyse what kind of value/margins you can add or earn from.
As an example, if you are a wholesaler of cooking oil made from palm oil, we can trace the industry value chain. Starting from Point A IOI oil palm plantation, which sells the fruits at current market price to Point B Lam Soon, which processes this into Knife cooking oil and sell it to Point C LS Marketing who owns the brand and thus provides marketing and distribution services and sells to Point D the wholesaler who then sells to Point E the small mini markets or grocery shops who then sell to Point F consumers. Not forgetting Point C selling direct to Point G major supermarket chain stores thus bypassing you, the wholesaler.
So the whole value created from the plantation to the final consumer price is known as the value chain or the sum of all total value created by all the players from Point A to Point F. Currently, the most profitable player in this chain is the plantation owner, selling at RM3,000 a tonne vs a production cost of say RM1,500 a tonne.
If the consumer price cannot be raised substantially to cover the increase in the material cost from Point A, then there will be a margin or value squeeze between Point B and Point E/G. All the players will be fighting for the remaining smaller value.
As the wholesaler, you will be the least important member of this supply chain and you will be squeezed out in the scramble for margins. The situation will become critical if cooking oil is a price-control item and the consumer price cannot be increased.
So, the total value in any chain is determined by the final consumer price. It is dynamic. If there is a price war due to oversupply, then total value will drop and there will be less value/margins to be shared by all the players. Players with strong brands can protect their margins by increasing their consumer price.
The total value chain stretches up and down continuously in a dynamic market and the level of margins earned will also fluctuate between the players in the chain. Whoever is the stronger will grab more margins from the weaker player. Theoretically, hypermarkets like Tesco or Giant will take more margins from LS Marketing in the long run.
So if you intend to go into business, which position would you rather be in the value chain? If you are in business now, how can you value add to your role in the chain?
As the wholesaler, you can value add by being financially strong and being able to buy in bulk and in cash from LS Marketing thus getting additional margins via bulk and cash discounts and being efficient in distributing to the smaller shops.
For small entrepreneurs, you have to stay nimble and alert so that you have the speed to adapt to the constantly changing interplay in the value chain. Just make sure you understand your role in the chain and how you can value add to stay relevant and thus enjoy higher margins. Avoid going into a business that can be made redundant by other players in the value chain.
In any business, you have to continuously look out for additional value gap opportunities. Never shy away from higher margins. Enjoy the high moments before it flows to the other player. Unfortunately, to survive in the value chain, you have to be a kiasu player. My sympathies extended. I know how you feel.
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