Session 10: The Value Chain LAS 20 • Introduced by Michael Porter in his Book, “Competitive Advantage: Creating and Sustaining Superior Performance” (1985) • Value - The customer’s perception about whole bundle of benefits, being tangible or intangible, which satisfy the needs of the customer timely, effectively and efficiently. A framework that presents a series of activities within the company that is assumed to create competitive advantage and value to both the customer and owner • Value Chain • Something new • Performance • Customization • "Getting the Job Done" • Design (ex: form factor) • Brand/status Value Propositions • Price • Cost Reduction (ex: BPO) • Risk Reduction (ex: warranties) • Accessibility • Convenience usability Value Chain • Each activity is assumed to contribute value to the product at a certain cost. • The value created in each activity must be more than the costs attached to the activity to generate profit • All firms in a given industry have similar value chains • How these activities are arranged modifies the business model • A business must be aware of the competitor’s value chain and be aware where cost advantages and disadvantages in their value chain occur relative to the value chain of rival firms Value Chain • Where in the value chain is the core competence of the firm? • When the core competence evolves into a major competitive advantage, then it is called a distinctive competence • The source of the competitive advantage lies in the ability to perform particular activities and manage the linkages between these activities • The firm’s margin or profit then depends on its effectiveness in performing these activities efficiently • A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation Value Chain Activities • Primary Activities: directly concerned with the creation or delivery of a product or service • Inbound Logistics – The receiving and warehousing of raw materials and their distribution to manufacturing as they are required How are raw materials received and brought to the processing area? • Operations – The process of transforming inputs into finished products and services How are the raw materials transformed into the finished good? Value Chain Activities • Outbound Logistics: The warehousing and distribution of finished goods Where are the finished goods stored and how is it distributed? • Marketing and Sales – The identification of customer needs and the generation of sales Who are involved in the marketing department and what processes are involved? • Service – The support of customers after the product and services are sold to them What activities does the organization perform after the sale has been made Value Chain Activities • Secondary Activities – linked with primary activities • Infrastructure – Organizational structure, control systems, company culture, etc. What structures, systems, cultures, etc., are in place? • Human Resource – employee recruiting, hiring, training, development and compensation How does the company manage its employee resource? • Technology – technologies that support value-creating activities What technological support does the company use? • Procurement – purchasing inputs How does the company acquire the raw materials needed for the business? • While the primary activities directly deal with the production of the good, competitive advantages can also be found in the support activities • • • • Ex: Infrastructure – nimble and responsive Ex: Human Resource – talent development Ex: Procurement – supplier relationships Ex: Technology – automation/data analytics The Value Chain Value Chain Activities • Linkages • flows of information, goods and services, as well as systems and processes for adjusting activities • about seamless cooperation and information flow between the value chain activities. • Most often, organizations are part of a bigger value chain • Cost advantage • Identify what factors drive those costs • Differentiation advantage • Identify what activities separate themselves from the competitors The Value Chain: Using the tool • Cost advantage 1. Identify the firm’s primary and support activities • Look at how the work is done to deliver customer value 2. Establish the relative importance of each activity in the total cost of the product • Address major sources of cost or inefficiencies relative to competitors 3. 4. Identify cost drivers for each activity Identify links between activities • Cost reductions in one activity may lead to reductions in another 5. Identify opportunities for reducing costs The Value Chain: Using the tool • Break down the firm’s operations into its various activities • Is it able to identify where its competitive advantage is? • How much does it cost the firm to perform the activity? Is the value worth the cost associated with it? • Observe and identify competitor’s value chains • Where are the competitor’s competitive advantages in the value chain? • The more dynamic the business environment is, the more companies leverage on their competencies How to Start Definition of Functional Areas • Accounting: Accounting is an information and measurement system that identifies records and communicates relevant, reliable, and comparable information about an organization’s business activities (Wild, Shaw, Chiapetta, 2011). • Marketing: The process by which companies create value for customers and build strong customer relationships in order to capture value from customers in return (Kotler, 2014). • Operations: The activity of managing the resources which produce and deliver products and services (Slack, Chambers, Johnston, 2010) Definition of Functional Areas • Human Resource: The design of formal systems in an organization to ensure effective and efficient use of human talent to accomplish organizational goals (Mathis, Jackson, 2003).
