strategic marketing - 6

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Value Chain Analysis

The basic idea of value chain is based on chain of the events that every product or service mustgo through from its inception to its eventual sale. Value chain analysis is a way of seeing where inthis chain or network of activities an organization is successfully adding value. It lets us pinpointthe particular capabilities and resources that are important to an organization and show preciselywhere and how they are being applied.

1. Primary and support activities are those directly involved with delivering products orservices to a user.

Eg: manufacturing operations sales and marketing after!sales service for a manufactured productlike car" #ournalism and advertising sales for a magazine" till service and che$ue handling for bank.%ifferent types of organizations& value chain have different types of primary activity.

'upport activities contribute indirectly to the adding of value through supporting one or more ofthe primary activities.

Eg: (urchasing process development human resource management planning and financialcontrol.

). Deployment of resources: If an activity utilizes distinctive assets or capabilities then it mayenable the organization to be differentiated from its competitors in the levels of $uality itprovides to customers or the benefits that it incorporates into its products. *apabilities can bedeployed in production or in after!sales service. 'trong brand s and reputations can bedeployed to attract good staff to give differentiation in marketing and sales or to target adifferent market.

+. Vertical Integration and outsourcing Vertical integration ,make or buy- decisions involve

important trade!offs between keeping control of important activities and profiting from otherfirms& specialist resources. roadly there are three ways in which a firm can obtain theproducts or services:

/utsourcing 0 short term long term commitment. (roduce within its hierarchy. 2ybrid forms

*ompanies have been known to use third party suppliers for almost any activity in the value chainincluding advertising product and packaging design brand development manufacturingdistribution sales and after!sales product maintenance.

3ig 4.1 page )+) 5hatever the form of outsourcing network an organization may consider #oining it has to arrive ata trade!off between five factors:

(roduction and set!up costs : y using an outside supplier an organization can takeadvantage of that firm&s economies of scale and its learning. /utsourcing from ane6perienced third!party supplier may be cheaper than in!house production.

Transaction costs: The down side of buying goods and services on the open market is thatthere is a danger that the supplier may try to e6ploit the situation for e6tra profit. There arethree main ways in which it can happen:


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a. 'upplier may increase the charges because it believes that the client has becomedependent on him. This is known as hold-up . It may believe that the client hasinvested so much in the relationship that I can not afford to pull out.

b. The supplier may promise more than it can deliver. This is called adverse selection because it leads firms to select the wrong supplier.

c. The supplier might cut corners when it comes to delivering the product or service 0moral hazard . It may use inferior $uality components skimp on $uality assuranceprocedures or use people with lower $ualifications than those it promised.

3le6ibility and incentive : It gives incentives to suppliers to do things that the customerprobably welcomes such as keeping down the production and delivery costs and inventorylevels low. Third pary suppliers may feel these incentives more keenly than people withinthe firms& hierarchy.

7uality *ontrol and risk of loss of key resources .

Virtual Value Chains The logical outcome of an outsourcing strategy is a virtual value chainwhere almost all linkages are electronic. Value chains are increasingly being split up across

networks of specialist suppliers connected by E%I systems 0 potentially located across theglobe. 8 linked effect of this is that purchasing is increasingly taking place through websitesthat also may be located anywhere in the world.

8 virtual chain is hyperarchy where structures are constantly responding to changes incustomer demands and competitor behaviour. Virtual value chains therefore re$uire differentcompetencies and capabilities from the traditional hierarchy not least of which is the ability todevelop and use websites to transact business. Travel agencies retailing banks etc are goode6amples of industries whose value chains are changing fast.

Strategic Alliances: 8 partnership between two or more firms is commonly known as strategicalliance. Eg friendly agreement as to which company will be setting up retail outlet in aparticular geographical area. 'uch informal arrangements are common in areas where thereare long!standing friendships and relationships between firms such as in the Italian clothesmanufacturing industry or the 9apanese system of eiretsu.

2owever alliances including outsourcing agreements normally involve a legal contract whichdefines areas of cooperation:

;icensing: allocation of specific rights by one parent firm to a partner. The partner maybe given local manufacturing rights for a patented product or licensed to market locally

produced items under the parent firm&s brand name. In e6change the parent firmreceives royalty. This is common in media based industries music industry. 3ranchising: involves the sharing of profits and ownership between the parent and a

franchisee who agrees to sell the company&s products in a defined format. 3or eg (izzahut&s and Tanufacturing agreements:

The enefits of Alliances ;earning from organizations with complementary competencies. eing able to penetrate countries that restrict access to part or all of their economy. 8ccessing a local partner who knows the accepted ways of doing business has the

necessary contacts or understands the particular re$uirements of local customers in newlyopened markets about which there is little e6ternal knowledge.


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8ccess to organizations with cultures and architectures that promote creativity andinnovation.

!anagement ChallengesTrust has to be maintained between the organizations which may be difficult to do at times whenthese same firms are potentially in competition with one another for scarce resources and mayeven be selling products which are substitutes for their collaborators. There is a risk of hold!up andpossible logistical problems.

If physical inputs are being supplied then partners have to be close enough to each other foressential supplies to be delivered at right place at the right time and $uality has to be consistentlyhigh.

?. Scale of "perations: /rganizations face important trade!offs in choosing whether toma6imize the scale of an activity in order to get a cost advantage or opt for a smaller but moree6pensive scale of operation ,to gain differentiation-. /rganizations can operate at differentscales at different stages in their value chain and for different market segments.

#$ Scope of operations

%$ &ocation decisions

@. &in'ages: 2ow linkages between different activities can generate value. There are severalways:

a. /ne activity can partially substitute for another.b. /ne activity can improve the performance of another c. /ne activity can generate information that can be used by another.

($ Decisions and trade-offs in the value chain

Table 4.) page )?+

Types of Value chain

)$ !anufacturing style organizations

3ig 4.+ page )??

It includes si6 primary activities:

(roduct design and development 'upply /perations %istribution >arketing and 'ales 8fter 'ales service

3our support activities: (urchasing (rocess development 2uman resource management 3inance and planning

Table 4.+ page )?4 and 4.? page )?@


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*$ Professional services3ig 4.A page )AA and table 4.4 page )A4

+$ ,et or' "rganizations3ig 4.4 page )AB

.hat you should include in a value chain analysis: Value chain analysis is potentially avery powerful tool for understanding an organization&s strategy. It brings together a number ofdifferent aspects of the organization 0 decisions about scale and scope and vertical integrationstrategic resources 0 and shows how they combine to generate competitive advantage.

(orter proposed using the value chain as a framework for the financial analysis of a firm. 2esuggested assessing the cost and assets associated with each activity to see whether theamount the firm is investing in an activity is in line with its strategic value. 2owever its verydifficult to do in practice esp using secondary data.

If you identify an activity as important part of organization&s value chain be sure that it is

e6ceptional and identify how it leads to advantage. 'cope location and structural decisionssuch as vertical integration or alliances with other firms should only feature in your analysis ifthey are genuinely unusual in the industry in $uestion. Cou need to show in your analysisusing $ualitative and $uantitative evidence how it leads to cost and or differentiationadvantage.

Cou may also want to highlight why some elements of an org&s strategy do not feature in itsvalue chain.

strategic marketing - 6

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