VALUE CHAIN ANALYSIS

RAJA RATNAM T S DCSMAT

Value Chain

TOOL DEVELOPED BY DR. MICHAEL PORTER OF HBS CAN BE USED TO EXAMINE THE VARIOUS ACTIVITIES OF THE FIRM AND HOW THEY INTERACT IN ORDER TO PROVIDE A SOURCE OF COMPETITIVE ADVANTAGE BY:

- PERFORMING THESE ACTIVITIES BETTER

OR - AT A LOWER COST THAN THE COMPETITORS

SUPPORT

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT

MARGIN

ACTIVITIES

TECHNOLOGY DEVELOPMENT PROCUREMENT

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING & SALES

SERVICE
MARGIN

PRIMARY ACTIVITIES

THE GENERIC VALUE CHAIN

Types of firm activities

1. PRIMARY
- THOSE THAT ARE INVOLVED IN THE CREATION, SALE AND TRANSFER OF PRODUCTS (INCLUDING AFTER-SALES SERVICE) 2. SUPPORT - THOSE THAT MERELY SUPPORT THE PRIMARY ACTIVITIES

Primary activities

1. INBOUND LOGISTICS
-

CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS (e.g. HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY CONTROL)

2. OPERATIONS
-

COMPRISE THE TRANSFORMATION OF THE INPUTS INTO THE FINAL PRODUCT FORM (E.G. PRODUCTION, ASSEMBLY, AND PACKAGING)

3. OUTBOUND LOGISTICS

- INVOLVE THE COLLECTING, STORING, AND DISTRI BUTING THE PRODUCT TO THE BUYERS (e.g. PROCESSING OF ORDERS, WAREHOUSING OF FINISHED GOODS, AND DELIVERY)

4. MARKETING AND SALES - HOW BUYERS CAN BE CONVINCED TO PURCHASE THE PRODUCT (e.g. ADVERTISING, PROMOTION, DISTRIBUTION) 5. SERVICE INVOLVES HOW TO MAINTAIN THE VALUE OF THE PRODUC AFTER IT IS PURCHASED (e.g. INSTALLATION, REPAIR,

MAINTENANCE, AND TRAINING

Support activities

1. PROCUREMENT
CONCERNED WITH THE TASKS OF PURCHASING INPUTS SUCH AS RAW MATERIALS, EQUIPMENT, AND EVEN LABOR

2. TECHNOLOGY DEVELOPMENT THESE ACTIVITIES ARE INTENDED TO IMPROVE THE PRODUCT AND THE PROCESS, CAN OCCUR IN MANY PARTS OF THE FIRM

3. HUMAN RESOURCE MANAGEMENT INVOLVED IN RECRUITING, HIRING, TRAINING, DEVELOPMENT AND COMPENSATION

4. FIRM INFRASTRUCTURE THE ACTIVITIES WHICH ARE NOT SPECIFIC TO ANY ACTIVITY AREA SUCH AS GENERAL MANAGEMENT, PLANNING, FINANCE, AND ACCOUNTING ARE CATEGORIZED UNDER FIRM INFRASTRUCTURE.

SUPPORT

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT

MARGIN

ACTIVITIES

TECHNOLOGY DEVELOPMENT PROCUREMENT

FINDING POSSIBLE SOLUTIONS PROBLEM ACQUISITION & DIAGNOSIS CHOICE BETWEEN SOLUTIONS IMPLEMENTING CHOSEN SOLUTIONS EVALUATION & CONTROL

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PRIMARY ACTIVITIES

PROFESSIONAL SERVICE ORGANISATIONS VALUE CHAIN

Uses of value chain

THE SOURCES OF THE COMPETITIVE ADVANTAGE OF A FIRM CAN BE SEEN FROM ITS DISCRETE ACTIVITIES AND HOW THEY INTERACT WITH ONE ANOTHER. THE VALUE CHAIN IS A TOOL FOR SYSTEMATICALLY EXAMINING THE ACTIVITIES OF A FIRM AND HOW THEY INTERACT WITH ONE ANOTHER AND AFFECT EACH OTHERS COST AND PERFORMANCE A FIRM GAINS A COMPETITIVE ADVANTAGE BY PERFORMING THESE ACTIVITIES BETTER OR AT LOWER COST THAN COMPETITORS.

THE VALUE IS THE TOTAL AMOUNT (i.e. TOTAL REVENUE) THAT BUYERS ARE WILLING TO PAY FOR A FIRMS PRODUCTS. THE DIFFERENCE BETWEEN THE TOTAL VALUE (OR REVENUE) AND THE TOTAL COST OF PERFORMING ALL OF THE FIRMS ACTIVITIES PROVIDES THE MARGIN

Value Activities

THOSE ACTIVITIES THAT ARE DISTINCT BOTH PHYSICALLY AND TECHNOLOGICALLY SOME ACTIVITIES ARE MORE VITAL THAN OTHERS DEPENDING UPON THE INDUSTRY. FOR INSTANCE, MARKETING ACTIVITIES WOULD BE MORE VITAL IN A VERY COMPETITIVE CONSUMER GOODS INDUSTRY THAN IN A TELEPHONE MONOPOLY

SOME ACTIVITIES ARE DIRECT IN THE SENSE THAT THEY ARE DIRECTLY INVOLVED IN CREATING VALUE FOR THE BUYER

SOME ACTIVITIES ARE INDIRECT AND ARE INVOLVED ONLY IN MAKING IT POSSIBLE TO PERFORM THE DIRECT ACTIVITIES ON A CONTINUING BASIS (e.g. MAINTENANCE, SCHEDULING, OPERATION OF FACILITIES, RECORD KEEPING). SOME ACTIVITIES ARE PRIMARILY INVOLVED IN QUALITY ASSURANCE AND ARE INVOLVED MAINLY IN ENSURING THE QUALITY OF OTHER ACTIVITIES (e.g. MONITORING, INSPECTING, TESTING, ETC.) EVERY ACTIVITY THAT IS DONE BY A FIRM NEEDS TO BE CAPTURED IN A PRIMARY OR SUPPORT ACTIVITY.

EVERY ACTIVITY THAT IS DONE BY A FIRM NEEDS TO BE CAPTURED IN A PRIMARY OR SUPPORT ACTIVITY. THE ACTIVITIES WITH DISCRETE TECHNOLOGIES AND ECONOMICS SHOULD BE ISOLATED. THE VALUE LABELS ARE ARBITRARY AND THEY SHOULD BE CHOSEN IN ORDER TO PROVIDE THE BEST INSIGHT INTO BUSINESS IT IS ADVISABLE TO ASSIGN THE VALUE ACTIVITIES TO CATEGORIES THAT BEST REPRESENT THEIR CONTRIBUTION TO A FIRMS COMPETITIVE ADVANTAGE.

AN ACTIVITY CAN BE SEPARATED FROM OTHER ACTIVITIES IF IT HAS ANY OF THE FOLLOWING CHARACTERISTICS; A) HAS A DIFFERENT ECONOMICS COMPARED TO THE OTHERS B) HAS A HIGH POTENTIAL IMPACT OF DIFFERENTIATION AND, C) REPRESENTS A SIGNIFICANT OR GROWING PROPORTION OF THE COST OF PRODUCTION OR OPERATION.

SOME ACTIVITIES SHOULD BE COMBINED IF THEY ARE NOT IMPORTANT TO COMPETITIVE ADVANTAGE OF THE FIRM OR IF THEIR ECONOMICS ARE SIMILAR TO THE OTHER ACTIVITIES

How to analyse the value chain

COVER THE ENTIRE COST STRUCTURE OF THE COMPANY BE SURE TO INCLUDE THE SUB-CONTRACTED OR OUTSOURCED PORTIONS FIND THE LINKAGES WITHIN THE CHAIN

How to find the linkages within the value chain

NOT JUST A COMPILATION OF ACTIVITIES THAT ARE INDEPENDENT OF EACH OTHER; INSTEAD, IT IS A SYSTEM OF ACTIVITIES THAT ARE INTERDEPENDENT BECAUSE THEY ARE RELATED BY THEIR LINKAGES. THROUGH THE LINKAGES, THE PERFORMANCE OF ONE ACTIVITY AFFECTS THE COST OR PERFORMANCE OF ANOTHER. THESE LINKAGES BETWEEN THE ACTIVITIES SUGGEST THAT THE COST ADVANTAGE OR THE DIFFERENTIATION OF A FIRM WOULD DEPEND NOT JUST ON THE COST REDUCTION OR PERFORMANCE IMPROVEMENT OF AN INDIVIDUAL ACTIVITY. DO NOT JUST LOOK AT EACH ACTIVITY INDEPENDENTLY

THE LINKAGES BETWEEN THE ACTIVITIES CAN BE IDENTIFIED BY SEARCHING FOR WAYS IN WHICH EACH VALUE ACTIVITY AFFECTS OR IS AFFECTED BY OTHERS.
OPTIMIZATION AND COORDINATION BETWEEN THE VARIOUS ACTIVITIES OF THE FIRM CAN BE ACHIEVED BY EXPLOITING THESE LINKAGES.

Vertical Linkages

LINKAGES CAN ALSO EXIST OUTSIDE THE FIRM; FOR INSTANCE THERE IS A LINKAGE BETWEEN A FIRMS CHAIN AND THE VALUE CHAIN OF ITS SUPPLIERS AND CHANNELS -eg. THE ACTIVITIES OF THE RAW MATERIALS SUPPLIERS AFFECT THE ACTIVITIES OF THE FIRM. SIMILARLY, THE ACTIVITIES OF THE DISTRIBUTOR ALSO AFFECT THE FIRM. THESE LINKAGES CAN PROVIDE OPPORTUNITIES FOR THE FIRM TO ENHANCE ITS COMPETITIVE ADVANTAGE

THE VALUE CHAIN OF A FIRM IS A PART OF THE VALUE SYSTEM, WHICH IS THE LARGER STREAM OF ACTIVITIES FROM SUPPLIERS TO BUYERS. BECAUSE OF THE INTERACTIONS BETWEEN THEM, THE SUPPLIERS AND EVEN THE CHANNELS AFFECT A COMPANYS VALUE CHAIN.

THE PRODUCT OF A FIRM REPRESENTS A PURCHASED INPUT TO THE BUYERS CHAIN. DIFFERENTIATION CAN RESULT FROM HOW A FIRMS VALUE CHAIN RELATES TO THE VALUE CHAIN OF ITS BUYER

VALUE IS CREATED WHEN A FIRM CREATES COMPETITIVE

ADVANTAGE FOR ITS BUYER.

A FIRM CAN ALSO ENTER INTO COALITIONS WITH INDEPENDENT FIRMS TO ACHIEVE BENEFITS FROM THE LINKAGES AMONG THEIR VARIOUS VALUE CHAINS. EXAMPLES OF SUCH COALITIONS ARE TECHNOLOGY LICENSES AND JOINT VENTURES.

Defining competitive scope & business definition

DEFINE THE BUSINESS UNIT IN WHICH THE VALUE CHAIN WOULD BE OPTIMAL FOR THE FIRM
e.g. EXPORT SALES DIVISION vs. LOCAL SALES DIVISION

Strategic decisions in the value chain

Deployment of resources: which assets and capabilities an organization chooses to use in connection with specific activities. Vertical integration: whether the organization decides to carry out an activity itself, or to outsource it to a specialist supplier or a franchisee. Scale of operations: whether an organization tries to gain economies of scale, or other types of advantage, fro the scale of its operations in a particular activity.

Scope of operations: whether an organization tries to share one or more activities across different products and markets. Location of operations: in which country or region an organization chooses to locate particular activities. Linkages: whether the organization tries to gain advantage by linking its activities together in a new and different way.

Applying the value chain to an industry

THE VALUE CHAINS OF THE DIFFERENT FIRMS WITHIN AN INDUSTRY VARY FROM ONE ANOTHER IN FACT, THE DIFFERENCES IN THE VALUE CHAINS AMONG THE DIFFERENT INDUSTRY PLAYERS PROVIDE THE SOURCE OF COMPETITIVE ADVANTAGE BETWEEN THESE PLAYERS. SINCE THE APPLICATION OF THE VALUE CHAIN ANALYSIS TO AN INDUSTRY WILL LIKELY BLUR OR HIDE THESE SOURCES OF COMPETITIVE ADVANTAGE, DR. PORTER THEREFORE SUGGESTS THAT: THE BUSINESS UNIT IS THE CORRECT LEVEL TO CONSTRUCT A VALUE CHAIN AND THE APPLICATION TO AN ENTIRE SECTOR OR INDUSTRY IS NOT RECOMMENDED