PORTER’S VALUE CHAIN ANALYSIS A DETAILED WHITEPAPER BY: ARYA VARDHAN SINGH RIDDHIMA BIYANI Value Chain and its Significance ____________________________________________________ Background: Michael E. Porter introduced the concept of Value Chain in his book, Competitive Advantage: Creating and Sustaining Superior Performance. He wrote: "Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product." Value refers to the total sum buyers are willing to pay for the company’s product/service (i.e total revenue the company generates). Value Chain includes the set of processes and activities that need to be carried out in order to transform an idea/concept to a product/service. For instance, consider a company delivering goods. Its Value Chain would consist of all the processes required to bring a product from conception to distribution, including acquiring raw materials, manufacturing and marketing of the final product. At each step of the Value Chain, it is assumed that the product becomes more valuable as compared to the previous step. Value Chain can be used as a tool for disaggregating a company based on the different processes that are carried out to make the end product. This activity can help in assessing areas where the company holds an edge over its competitors and also exposes areas of weaknesses and possible opportunities for the company. Value Chain analysis involves detailed study of the company’s Value Chain to find areas of improvement and to improve efficiency, give a competitive edge and maximize margins generated by the company. Components of a Value Chain ___________________________________________________________ Based on its Value Chain, we can divide the company activities into a set of 5 Primary activities and 4 Secondary activities. This helps to analyze the company at each of these levels and understand the relationship between them. The organization can individually analyze each activity and sub-activity to improve the output with respect to time, money and effort. Primary Activities Primary activities are directly linked to the product and are essential to create a competitive edge. According to Porter, the 5 Primary Activities are: 1.) Inbound Logistics: Refers to inventory acquisition i.e. attaining the goods and raw materials in order to start manufacturing. This includes receiving, warehousing and managing the inventory. 2.) Operations: Involves the processes required to form the final product from the raw materials available. Product Value depends largely on this factor. 3.) Outbound Logistics: This includes distribution strategies of the final product. Distribution may be directly to customers, retailers or wholesalers. 4.) Marketing and Sales: Includes forming an efficient strategy for advertising and promoting the final product so that the right customer segment is targeted in order to maximize returns. It also includes pricing of the final product to gain Competitive Advantage. 5.) Services: These include other services such as guarantees, refunds, repairs and warranties which enhance customer experience and help in building good customer relationships. As evident, all the 5 primary orders are linked to one another and occur in a well defined sequence : Inbound Logistics → Operations → Outbound Logistics → Marketing and sales → Services Support Activities Support activities or secondary activities are processes that don’t directly add to the value of the product, but act as underlying support to the primary activities. There are 4 major areas of support activities which are: 1.) Firm Infrastructure: It is important for any organization to have a strong foundation in terms of the structure on which it operates. Not having strong management, finances etc result in work inefficiency, resource wastage and can hamper the company’s reputation. 2.) Procurement: This includes the procedures adopted by the company to acquire raw materials for product development considering the company’s budget. 3.) Technology Development: Includes technical innovations made by the company to develop technology to gain competitive advantage with improved efficiency and cost leadership (investment in R&D). 4.) Human Resource Management: This refers to all the processes connected to acquiring an efficient employee portfolio. Hiring new staff, deciding paychecks etc come under this category. Having a good employee base can give competitive advantage to the company. UNDERSTANDING COMPETITIVE ADVANTAGE ____________________________________________________ There are two types of competitive advantage that a company wants to create1. Cost advantage- when companies work on providing a product or service at a lower price than its competitors. 2. Differentiation advantagewhen companies produce superior products or services than their Competitors. SOURCES OF COMPETITIVE ADVANTAGE ___________________________________________________________ COST ADVANTAGE There are mainly 5 analysis steps that the companies need to undergo STEP 1: Identify the company’s primary and support activities- the producing, selling, receiving, storing and after sales services need to be identified and distinguished and see how these activities create customer value. STEP 2: Establish the relative importance of each activity in the total cost of the product- First the cost for each activity is calculated and then the activities that require more cost or inefficacious are focused majorly. STEP 3: Identify the factors that drive the cost for each activitywithout knowing what factors play a role in increasing the cost, we can not make amendments. For example- the cost for labor activities is driven by speed, wage rate, working hours etc. STEP 4: Identify link between activities- most of the operations of a company are interlinked. Reducing the cost for one activity may reduce costs of others too or the reverse may happen. So it is very important to analyze the relationship between various activities. STEP 5: Identify opportunities for reducing costs- once the sources of cost, the inefficient activities and links are analyzed, we look for the opportunities to reduce the cost. DIFFERENTIATION ADVANTAGE The value chain analysis when the company wants to create a differentiation advantage is different as the company plans to add more features to the product to improve customer satisfaction which sometimes increases the cost of the product. There are 3 main stepsSTEP 1: Identify value creating activities- once all the activities are identified, we need to focus on the activities that create the maximum customer value. For example superior features or better marketing skills etc. STEP 2: Evaluate the differentiation strategies for improving customer value- once we know where our company can increase the customer value, we must focus on strategies that increase product differentiation in that arena. For example- improving and adding product features, improving after sales services, adding customization, offering complementary products etc. STEP 3: Identify the best sustainable differentiation- sustainable differentiation mainly focuses on the quality of human resources behind the product, the quality of after sales services etc. the companies, apart from the main business model and technologies, should start focusing on creating sustainable differentiation. VALUE CHAIN MANAGEMENT ___________________________________________________________ Value Chain Management refers to the execution of strategies and insights gained after carrying out Value Chain Analysis. It is done to optimize the Value Chain or certain phases of the Value Chain in order to maximize profitability and efficiency of business activities. ADVANTAGES OF VALUE CHAIN MANAGEMENT 1.) Standardized processes: Refers to having a repeatable and reliable set of standard activities. This is an essential component of Value Chain as it makes sure the product matches customer expectations after optimization. Automation is a suitable example. 2.) Improved Vendor Management: This signifies the relationship between the internal business activities (Between Inbound and Outbound Logistics) and the external supply chain. Making sure any exterior material meets the company’s quality standards and there is no loss in the form of waste or because of developmental flaws. 3.) Reduced Costs and Better Product Quality: One of the most significant advantages provided by Value Chain Management. This is ensured by implementation of a standard, efficient and streamlined set of activities that help reduce costs by eliminating wastes and also enhance product quality 4.) Post-Sales Services and Support: After implementing the tool, we can focus on services and support activities (Eg: Attractive offers and discounts) that are offered alongside the product that are aimed towards customer acquisition VALUE CHAIN VERSUS SUPPLY CHAIN ___________________________________________________________ SUPPLY CHAIN VALUE CHAIN 1. Activities that conduct when and how the products will be manufactured and transported to the markets. The activities that add value to a product or service in every step till it reaches the consumers. 2. Originates from operational management. Originates from business management. 3. Its major objective is customer satisfaction. Its major objective is to gain competitive advantage. 4. The steps involve- product development, marketing, operations, distribution, finance and service. The steps involve- inbound logistics, operations, outbound logistics, marketing and sales, service. VALUE CHAIN ANALYSIS: STARBUCKS ___________________________________________________________ Starbucks is one of the most successful companies in the world right now. Below is the value chain analysis of Starbucks. Primary Activities Inbound Logistics Starbucks buys the best quality coffee beans from Latin America, Africa and Asia, green beans directly from farms and transports to storage sites, does proprietary roasting and packaging and then distributes them without outsourcing their procurement. Operations Starbucks runs over 32,000 self-owned and licensed stores and operates in over 80 markets besides owning several brands like Teavana, Seattle’s Best Coffee etc. Outbound Logistics Majority of Starbucks products are sold directly in stores without the presence of intermediaries. However, a significant role is played by storage and distribution centers. Marketing and Sales Starbucks targets the niche population and focuses on customer experience more than marketing. New products are sampled in areas around the stores. Service Starbucks focuses on providing a unique experience to the customers and creating a loyal customer base through services. It gives a personalized experience to the customers by carrying out activities like writing names on cups etc. Support Activities Infrastructure Main areas of focus are finance, legal and management sectors. It has customer-friendly employees and managers to oversee the stores. Human Resource Management Starbucks aims on Human Resource Management. The employees are given proper training and great benefits and incentives, due to which they are motivated, efficient and employee retention is high. Technology Development Starbucks uses technology for platforms where customer reviews can be taken and they can ask questions and the stores provide unlimited wifi for customers. Customers can order drinks through a mobile application also. Procurement One of the competitive advantages of Starbucks is its handling of all of the procurement for its own coffee beans. CONCLUSION ____________________________________________________ ● Value Chain Refers to the set of processes carried out by a company that give the product its final value. Product Value increases as we progress in a Value Chain ● Value Chain analysis is the analysis done using the organization’s Value Chain as a tool to disaggregate it based on the processes involved in Product Development ● Value Chain consists of 5 Primary activities and 4 support activities: Primary Activities: Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Services Support Activities: Procurement, HR Management, Infrastructure and Technology Development ● The ultimate goal of any organization is to attain competitive advantage which may be in the form of Cost Advantage or Differentiation Advantage ● Value Chain Management essentially refers to the processes involved in application of insights gained from the analysis.
