Value Chain AnalysisInternal AnalysisLecture 8

Value Chain AnalysisPorter (1985) - The Value ChainThe fundamental objective of all organisations is to serve the needs of customers, better than their rivalsThey must do this by adding value.Thus, all processes that occur in organisations must operate to add value.

Value Chain AnalysisWhat is value?It is the perceived value that we as consumers get from the products and services that we choose to buy.Increasingly in consumer markets value is more than the components that make up a good.

Value Chain AnalysisWhat value does Mercedes Benz add to an E-Class that makes it sell for a price 50% or more higher than a Ford Mondeo, that in purely physical terms is the same sort of size, has the same sort of components, and does the job of moving people from A to B in much the same manner?

Value Chain AnalysisSome aspects of value will be in the quality and reliability of the components usedThe quality and reliability of the manufacturing processesThe design and aesthetics of the vehiclesThe marketplace perception of the MB brand

Value Chain AnalysisMichael Porter standardised this by looking at aspects of what he called The Value Chain.The basic diagram looks like this:

Value Chain AnalysisPrimary value adding activitiesSupportactivitiesFirm infrastructureHuman Resource ManagementTechnology DevelopmentProcurementInboundlogisticsOperationsOut-boundlogisticsSales&MarkgServiceTHE VALUE CHAINPorter (1985)

A companys business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service All these activities a company performs internally combine to form a value chain so-called because the underlying intent of a companys activities is to do things that ultimately create value for buyers The value chain contains two types of activitiesPrimary activities Where most of the value for customers is createdSupport activities Facilitate performance of primary activitiesConcept: Company Value Chain

Figure 4.3: A Representative Company Value Chain4-*

Value Chain AnalysisManaging the linkages in the value chain:Internally - ensuring that the resources of the organisation are focused in those areas that are critical to the value adding activity. This includes development of core competencies in these areas. Remember, for Mercedes Benz, these might be quality of materials used, quality and consistency of manufacturing and additional services provided, such as a worldwide recovery service for its car owners who break down

Example: Value Chain Activitiesfor a Bakery Goods MakerPrimary ActivitiesSupply chain managementRecipe development and testingMixing and bakingPackagingSales and marketingDistributionSupport ActivitiesQuality controlHuman resource managementAdministration4-*

Example: Value Chain Activitiesfor a Department Store RetailerPrimary ActivitiesMerchandise selection and purchasingStore layout and product displayAdvertisingCustomer serviceSupport ActivitiesSite selectionHiring and trainingStore maintenanceAdministrative activities

4-*

Several factors give rise to differences in value chains of rival companiesDifferent strategies Different operating practicesDifferent technologiesDifferent degrees of vertical integration Some companies may perform particular activities internally while others outsource themDifferences among the value chains of competing companies complicate the task of assessing rivals relative cost positions Why Do Value Chains of Rivals Differ?

Value Chain AnalysisManaging the linkages in the value chain:Externally - focusing on those activities that are critical to the value adding process and out sourcing those activities that are not. For Mercedes Benz this will involve managing the links to suppliers and distributors.

Value Chain AnalysisIssues arising:changes in the value drivers (from KSIs and KSFs) may leave the organisation exposed and lacking the core competencies required to compete in the future.concentration upstream, or downstream may shift power within the value system. competitors may establish strategic alliances in your value system.

Value Chain AnalysisThe Value System:refers to the upstream and downstream linkages that exist between one competitive arena and another.in general these linkages are between supplying firms and buying firms.

Value Chain AnalysisSupplier ASupplier BSupplier C

Distributor BDistributor ATHE VALUE SYSTEMUpstreamDownstreamFirmvalue chainDistributor C

Assessing a companys cost competitiveness involves comparing costs all along an industrys value chain Suppliers value chains are relevant becauseCosts, performance features, and quality of inputs provided by suppliers influence a firms own costs and product performanceValue chains of distributors and retailers are relevant because Their costs and profit margins represent value added and are part of the price paid by ultimate end-userActivities they perform affect end-user satisfaction The Value Chain Systemfor an Entire Industry

Representative Value Chain for an Entire Industry4-*

Example: Value Chain ActivitiesPulp & Paper Industry Timber farmingLoggingPulp millsPapermakingDistribution4-*

Value Chain AnalysisIssues to consider:most operating environments involve highly complex relations in the value system e.g. car manufacturers deal with hundreds of supplying firms in very different competitive arenas.How easy is it to compile such information, even for your own business, let alone that of rivals?

Value Chain AnalysisIssues to consider :a firms suppliers may be supplying other firms, some of which may be direct competitors while others are in different industries. How would you ever find out costs for them? firms would not willingly give out such detailed financial information!

Value Chain AnalysisIssues to consider :defining the competitive arena - firms may be regarded as being in the same competitive arena if they are trying to satisfy the same basic customer need.What need is an auto producer trying to satisfy? Transportation? Flaunting of wealth? Status? What would compete? A Patek Philippe watch? A luxury yacht? A private jet?

Value Chain AnalysisIssues to consider :What about segmentation? i.e.. an auto firm supplying a car for a low income family, or a very wealthy private individual - is this meeting the same need? i.e. Does Toyota really compete with Lamborghini?What about vertically integrated firms? Some may or may not supply competitors, i.e. BT and the physical telephone network.

Value Chain AnalysisIssues to consider :What about spatial and geographical factors?Does a small English wine producer compete at all with big, international French producers like Baron Rothschild or Australians like Wolf Blass?Should one include potential competitors? If so, when?When if ever - should Wolf Blass need to notice and start to worry about, the competition from an English producer like Three Choirs?

Value Chain AnalysisCompetitive Advantage:

An organisation will only achieve a competitive advantage (CA) over its rivals if it can add more value, or the same level of value at a lower cost.

Value Chain AnalysisCost ReductionDesignProprietaryExperienceEconomies of ScaleSuppliersSources of Cost Reduction

Value Chain AnalysisAdded ValueSuppliersDesignProprietaryExperienceSources of Added Value

Value Chain AnalysisIssues to consider:Uniqueness - can that CA be copied by rivals?Improvements in value added and cost reductions do not always improve profitability. Profitability is linked to market power - the dominant firm may be able to control the value system to improve their profitability - e.g. Supermarkets.

******