Chapter 3
Matching Firm Capabilities
with Opportunities
by Robert Pitts
& David Lei
Slides prepared by
John P. Orr
Webster University
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-1
What you will learn…
Slide 1 of 2
• The strategic tool known as the
value chain
• The use of the value chain in evaluating
an organization’s internal strengths and
weaknesses
• The difference between primary and
supporting value-adding activities
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-2
What you will learn…
Slide 2 of 2
• The concept of competitive advantage
• The concept of distinctive competence
• Some important economic
sources of competitive
advantage
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-3
Strategic
Snapshot
1
Pizza Hut vs.
Domino’s Pizza
These competitors can be compared on
the following key advantages:
•
•
•
•
•
•
Location
Reputation
Purchase discounts
Interrelationships
First-mover advantages
Location advantage
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-4
Strategic
Snapshot
2
General Motors
Corporation
• Major push to “reinvent
itself”
• Seeks productivity
gains through…
–
–
–
–
Design
Operations
Inbound and outbound logistics
Procurement initiatives
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-5
The Value Chain
• An analytical tool that describes all
activities that make up the
economic performance and
capabilities of the firm.
• It is used to analyze and examine
activities that create value for a
given firm.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-6
SUPPORT ACTIVITIES
Exhibit 3-1
The Value Chain
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
PRIMARY
ACTIVITIES
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
/ Sales
Service
Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE:
Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-7
The Value Chain
• Primary Activities – Activities which
relate directly to the actual creation,
manufacture, distribution, and sale of a
product or service to the firm’s
customers.
• Secondary Activities – Economic
activities which assist the firm’s
primary activities.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-8
The Value Chain
• Upstream Activities – Economic
activities that occur close to the firm’s
suppliers but far away from the
customers.
• Downstream Activities – Economic
activities that occur close to the
customer but far away from the firm’s
suppliers.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-9
Primary Activities
•
•
•
•
•
Inbound logistics
Operations
Outbound logistics
Marketing/sales
Service
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-10
Secondary Activities
•
•
•
•
Procurement
Technology development
Human resources
Firm infrastructure
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-11
Technology Development
• Product Development – The
conception, design, and
commercialization of new products.
• Process Development – The design
and use of new procedures,
technologies, techniques, and
other steps to improve the
value-adding process.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-12
Exhibit 3-2
SUPPORT ACTIVITIES
Pizza Restaurant Industry
Value Chain
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
PRIMARY
ACTIVITIES
Acquire capital, perform accounting, legal and
administrative tasks for each activity
Supervise
warehouse or
facilities/shipping
personnel
Improve
supply chain
to cut costs of
ingredients
Lease space:
restaurants or
delivery
facilities
Transport
ingredients to
restaurants &
delivery
facilities
Inbound
Logistics
Supervise
kitchen
personnel/
training
Develop new
menu items,
improve
oven design
Supervise
drivers/
ensure
safety
Develop new
ordering
systems; cut
delivery time
Purchase
ingredients &
other supplies
Purchase or
lease phone
or online
order systems
Deliver
pizzas to
ordering
customers
Prepare
pizzas,
salads, other
food items
Operations
Outbound
Logistics
Copyright
Copyright ©2006
©2006 by
by South-Western,
South-Western, aa division
division of
of Thomson
Thomson Learning.
Learning. All
All rights
rights reserved.
reserved.
Oversee
marketing
personnel
Develop new
promotional
materials/
media
Buy TV time
Develop
advertising
copy,
programs,
promotions
Marketing
/ Sales
Develop
service
personnel,
waiters
Develop new
restaurant
formats/
layouts
Purchase
furniture,
tableware
Serve food in
restaurants
Service
Slide 3-13
Exhibit 3-3
Automotive Industry Value Chain
Acquire capital, perform accounting, legal and
administrative tasks for each activity
SUPPORT ACTIVITIES
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
PRIMARY
ACTIVITIES
Oversee
warehouse,
transport
personnel
Supervise
workforce,
union
relations
Oversee
warehouse,
transport
personnel
Work with
suppliers to
develop more
efficient means
to transport parts
Improve product
design &
manufacturing
processes;
quality programs
Work with
distributors,
logistics firms
to raise quality
Negotiate with
suppliers to cut
costs and
improve quality
Transport
components
to assembly
facilities
Buy
components,
assembly
equipment
Make and
assemble
components
into autos
Negotiate with
suppliers to cut
costs and
improve quality
Transport
autos to
dealers
Inbound
Logistics
Operations
Outbound
Logistics
Copyright
Copyright ©2006
©2006 by
by South-Western,
South-Western, aa division
division of
of Thomson
Thomson Learning.
Learning. All
All rights
rights reserved.
reserved.
Supervise
advertising &
sales
personnel
Improve
selling
methods
Supervise
maintenance
personnel
Improve
maintenance
procedures
Hire advertising Buy tools for
agency, buy
maintenance
media time
personnel
Advertise,
promote,
and sell
autos
Marketing
/ Sales
Maintain and
repair autos
Service
Slide 3-14
Exhibit 3-4A
Pizza Hut’s Business System
SUPPORT ACTIVITIES
Infrastructure
Administrative, legal and accounting tasks managed systemwide
Performed
by external
suppliers
Supervise
kitchen
personnel,
training
Supervise
drivers,
ensure safety
Oversee
marketing
personnel
Technology
Development
Outsourced to
software
companies
Develop new
menu items;
improve oven
design
Develop new
ordering systems
to service callers;
cut delivery times
Develop new
Develop new
promotions on restaurant
a regular basis formats
Procurement
Performed
by external
suppliers
Purchase
ingredients
and other
supplies
Purchase or
lease phone or
Buy TV time
online ordering
systems
Purchase
furniture,
tableware
Performed
by external
suppliers
Prepare
pizzas, salads
and other
foods
Deliver pizza
to ordering
customers
Serve food in
restaurants
Human
Resource
Management
PRIMARY
ACTIVITIES
Inbound
Logistics
Operations
Outbound
Logistics
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Develop ad
copy,
programs,
promotions
Marketing /
Sales
Oversee
waiters,
service
personnel
Service
Slide 3-15
Exhibit 3-4B
Domino’s Pizza Business System
SUPPORT ACTIVITIES
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
PRIMARY
ACTIVITIES
Administrative, legal and accounting tasks
managed systemwide
Performed
by external
suppliers
Supervise
kitchen
personnel,
training
Supervise
drivers,
ensure safety
Oversee
marketing
personnel
Outsourced to
software
companies
Develop new
menu items;
speed up
oven design
Develop new
ordering systems
to service callers;
cut delivery times
Develop new
promotions on
a regular basis
Lease
space for
cooking
facilities
Purchase
ingredients
and other
supplies
Purchase or
lease phone or
Buy TV time
online ordering
systems
Performed
by external
suppliers
Prepare
pizzas, salads
and other
foods
Deliver pizza
to ordering
customers
Inbound
Logistics
Operations
Outbound
Logistics
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
No
restaurant
service
Develop ad
copy,
programs,
promotions
Marketing /
Sales
Service
Slide 3-16
Exhibit 3-5
General Motors’ Business System
SUPPORT ACTIVITIES
Infrastructure
Administrative, legal and accounting tasks
managed systemwide
Human
Resource
Management
Oversee
supplier
management
personnel
Technology
Development
Streamline
turnaround time
with suppliers to
ship parts
Procurement
PRIMARY
ACTIVITIES
Oversee
personnel
involved in
distribution
Oversee
marketing
personnel
Invest in new
engine designs,
car models;
develop new
factories, tooling
Streamline
shipping time;
web-based
inventory
tracking
Work with
dealers to
improve selling,
product mix
Streamline
ordering and
documentation
systems
Source parts,
components;
partner with
key suppliers
Purchase
Buy media
capacity on
time; work
railroads/trucks with
advertisers
Adopt faster
means to order
and receive
components
Make and
assemble
components
into autos
Ship to
dealers using
railroads/
trucks; deliver
vehicles
Inbound
Logistics
Develop new
virtual teams;
union relations;
oversee workers
Operations
Outbound
Logistics
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
No direct
service to
customers
Advertise,
promote product
to public; work
with dealerships
Marketing /
Sales
Service
Slide 3-17
Exhibit 3-6
Common First-Mover Advantages
Patents
Channel Access
License
Supply Access
Location
Reputation
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Slide 3-18
Exhibit 3-7
Cost per unit of output
Economies of Scale
A
Scale of activity (plant size, sales volume.)
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Slide 3-19
Exhibit 3-8
Major Contributors to
Economies of Scale
Specialization
Purchase
Discounts
Fixed-Cost
Spreading
Vertical
Integration
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Slide 3-20
Exhibit 3-9
Cost per unit of output
Economies of Experience
Cumulative volume *
* Number of unit produced (or sold, serviced, developed, etc.)
since commencing an activity.
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-21
Exhibit 3-10
Major Contributors to
Experience Benefits
Employee
learning
Product
redesign
Process
improvement
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-22
Strategic
Competency in action
Creating Distinctive Value:
Toyota Motor of Japan
• Becomes world’s No. 2
automaker
• Engineer Ohno and kaizan
• Poke-yoke and synchronization
• CCC21 trims $2.6 billion in costs
• Second-generation hybrid Prius
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-23
Exhibit 3-11
SUPPORT ACTIVITIES
Activities Frequently Benefiting
From First-Mover Advantage
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
Hiring creative
personnel
Reputation
Patent
protection;
license;
innovative design
Creative
marketing
Supply access
Proprietary
License
processes;
patent protection,
license
PRIMARY
ACTIVITIES
Inbound
Logistics
Operations
Outbound
Logistics
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Location,
channel
access,
reputation
Marketing
/ Sales
Reputation;
license
Service
Slide 3-24
Exhibit 3-12
Requirements for Achieving
Scale and Experience Advantage
• Centralization
- Activity must be centralized
• Susceptibility
- Activity must be susceptible to
to the processes which produce
scale and experience benefits
• Implementation
- Activity must be properly
implemented
• Proprietary
- Benefits of scale and
experience must be proprietary
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-25
Internet Growth and Competitive
Advantage
• Compressing the value chain
• Building extended, Internet-driven
supply chains
• Competitive dynamics
and the Internet
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-26
Exhibit 3-13
SUPPORT ACTIVITIES
Pizza Hut’s
Sources of Competitive Advantage
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
of food (S)
Procurement
Procurement
of TV time
(S, I)
Reputation
(FM):
advertising
(S,I)
PRIMARY
ACTIVITIES
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
/ Sales
Service
Key: FM = First Mover Advantages; S = Scale Advantage; I = Interrelationship Advantage
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3-27
Exhibit 3-14
Comparative
Financial Analysis: Key Ratios
Type
Examples
Measures
Indicators
Productivity of
Profitability
Return on
Equity (ROE)
Profit after taxes
firm’s value-adding
Shareholder’s equity activities
Liquidity
Current Ratio
Current Assets
Current Liabilities
Measure of
financial solvency
Asset Turnover
Sales_________
Total Assets
Asset use
efficiency
Activity
Inventory Turnover Sales_________
Inventory
Leverage
Debt/Equity Ratio
Turnaround of
inventory
Corporate
Liabilities______
financing; financial
Shareholders’ equity risk; default risk
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Slide 3-28
Ethical Issues: Assessing Rivals
• Examining competitors’ products
• Questioning competitors’
employees
• Using consultants
• Engaging in industrial
espionage
• ‘Raiding’ employees
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Slide 3-29