Value Chain Analysis
Victor Marbun (M987Z259)
Nguyen Phan Anh Huy (M987Z264)
Outline
 The Value Chain Concept
 Methodology
 Case Study
 Ajax Airlines
 People Airlines & United Airlines
Outline
 The Value Chain Concept
 Methodology
 Case Study
 Ajax Airlines
 People Airlines & United Airlines
The value chain concept
 According to Porter (1980), a business
unit can develop a sustainable
competitive advantage either based on
cost or based on differentiation or
based on both.
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Superior
Differentiation
Advantage
Differentiation –cumCost Advantage
Relative
Differentiation
Position
Inferior
Stuck-in-the-Middle
Inferior
Low Cost Advantage
Superior
Relative Cost Position
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 Low cost:




Economies of scale in production
Experience curve effects
Tight cost control
Cost minimization in areas such as R&D, service, sales
force, or advertising.
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 Differentiation:





Brand loyalty
Superior customer service
Dealer network
Product design and product features
Technology
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Value Chain Linkages
 The value chain framework is a method for breaking
down the chain-from basic raw materials to end-use
customers- into strategically relevant activities in
order to understand the behavior of costs and the
sources of differentiation.
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Value Chain in the
Paper Products
Industry
Silvarculture and
Timber Farming
Pulp
Manufacturing
Paper
Manufacturing
End-Use
Customer
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Competitor F
Distribution
Competitor E
Converting
Operations
Competitor G
Competitor D
Competitor C
Competitor B
Competitor A
Logging and
Chipping
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 Every firm must construct a value chain for the total
paper industry, break the value in the chain into its
fundamental sources of economic value.
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Value Activities within a firm
R&D
Manufacturing
Marketing
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Distribution
Service
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 A firm’s value chain is embedded in a large system
that includes suppliers’ and customers’ value chains.
 A firm can enhance its profitability not only by
understanding its own value chain--from design to
distribution--but also by understanding how the firm’s
value activities fit into suppliers’ and customers’ value
chains.
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Value chain VS Value-Added
 Value-added refer to the contribution of the internal
focus such as land, labor, capital goods.
 Value chain concept highlights four profit
improvement areas :




Linkages with suppliers
Linkages with customers
Process linkages within the value chain of a business
Linkages across business unit value chains within the
firm
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Outline
 The Value Chain Concept
 Methodology
 Case Study
 Ajax Airlines
 People Airlines & United Airlines
Value Chain Methodology process
Identify the industry
value chain
Assign costs
Revenues
Assets
Return on Assets
Diagnose the cost
drivers for each
value
fixed cost VS variable cost
average cost VS marginal cost
break even analysis
Develop
sustainable
competitive
advantage
evaluation
improvement
Identify The Value Chain
Activities should be isolated and separated if:
a. They represent a significant percentage of
operating costs.
b. The cost behavior of the activities (cost driver
different.
c. They are performed by competitors in different
ways.
d. They have a high potential of being able to create
differentiation.
Diagnose Cost Drivers
1. Structural cost driver.
 Scale, Size of operation.
 Scope, Degree of vertical integration.
 Experience, past activity.
 Technology, what process technologies used.
 Complexity, number of product lines.
Diagnose Cost Driver (Cont’d)
2. Executional Cost Drives.
 Work force involvement (participation).
 Total quality management.
 Capacity utilization.
 Exploiting linkage.
Develop Sustainable Competitive Advantage
1. Control cost driver better than competitors.
 Can we reduce costs in this activity, holding value
(revenues) constant?
 Can we increase value (revenues) in this activity,
holding cost constant?
 Can we reduce assets in this activity, holding costs
and revenues constant?
Develop Sustainable Competitive
Advantage (cont’d)
2. Reconfigure the Value Chain.
 Redefining the value chain (payoffs could be more
significantly).
 The company has fought to hold down labor costs.
Problems in Constructing a Value Chain
1. Calculational Difficulties.
 Calculating value (revenues) for intermediate
products.
 Isolating key cost drivers.
 Identifying linkages across activities.
 Computing supllier and customer margins.
 Constructing competitor’s cost structures.
Problems in Constructing a Value Chain
(cont’d)
2. Value Chain difficulties
 The process of performing the value chain analysis.
i.e. :
- how does my activity add value to the chain of
customers to the end-user.
- How does my cost structure compare with those of my
competitors.
Outline
 The Value Chain Concept
 Methodology
 Case Study
 Ajax Airlines
 People Airlines & United Airlines
EXHIBIT 6
Ajax Airlines: A Valuable Chain Analysis
1988
1987
$8800
$7200
Tickets&reservation
320
300
Aircraft Operations
4980
3900
Customer Service
2600
2400
7900
6600
Tickets reservations
2000
1000
Aircraft & operations
5000
5300
0
0
Sales
Expenses
Total Expenses
Identifiable property, plant,&
equipment assets
Customer Service
Total
$7000
$6300
Ajax Airlines: A Value Chain Analysis (Cont’d)
Per Seat Mile Flown
Per Available Mile
1988
1987
1988
1987
Costs: Tickets &Reservation $.005
$.005
$.003
$.003
Aircraft Operations
.077
.069
.049
.044
Customer Service
.040
.042
.025
.027
Total
$.122
Assets: Ticket & Reservation $.031
Aircraft
Customer Service
Total
$.116
$.077
$.074
$.018
$.020
$.011
.077
.093
.049
0
0
0
$.108
$.111
$.069
.060
0
$.071
Case study: Ajax Airline
 Strategically, Ajax airlines hope that a small increase
in aggregate customer service expenditures and a
better ticketing and reservation system will justify
higher prices.
 However, increase aircraft operations cost wipe out
most of the profit impact of increase in revenue per
seat mile flown.
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Case study: Ajax Airline
 By the conventional analysis, this strategy seems hard
to be successful.
 Value chain analysis can yield very different insights.
We believe that the linking of financial analysis to
strategic positioning in this way is a critical element in
effective financial analysis.
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Outline
 The Value Chain Concept
 Methodology
 Case Study
 Ajax Airlines
 People Airlines & United Airlines
EXHIBIT 7
Value Chain Configurations: A Comparison Between People Express
and United Airlines Cost Per 10.000 Seat Miles
Cost Per 10.000 Seat Miles
$ 1,000
Advertising &
Publicity
$ 1,300
Ticketing
Offices
$ 9.,000
People Express
Ticket Counter
Operations
$ 13,200
Gate
Operations
United Airlines
Baggage
Handling
$ 4,900
$ 6,700
fleets
$ 11,600
Aircraft
Operations
$ 15,600
$ 1,500
$ 28,400
On-Board
Service
$ 4,700
$ 41,500
Exhibit 8
Strategic Inference from the Value Chains of People Express and United Airlines
Value Chain Elements
People Express less than
United Airlines (cost per
10,000 seat miles)
Strategic Differences
Strategic Differences
People Airlines
United Airlines
Advertising & Publicity
$ 300
Heavy promotion to tout low
price/no frills airlines
Heavy promotion of full
service airline
Reservation & Ticketing
$ 3,200
No ticket offices
No separate computer
Reservation system
Ticket Offices in
Downtown locations
Extensive computer
Reservation System
Secondary airport and
Terminals
No Ticket counters
(check in only)
Full service
Full Service
Free baggage checking
Fleet Costs
$ 1,800
Used Aircraft-Budget
airplanes
New aircraft
Flight Operations
$ 4,000
High-density seating
Non-union pilots
Flying hour per day
Union pilots
Bigger crews
Crew paid on higher scale
Cabin Operations
$ 3,200
Non-Union flight attendants
Lower pay scale
No first class, no meals
Full service