JE CHAIN ANALYSIS ale chain describes 3 way of looking a busines sa chan of atv that wansform inputs that customers value Custoner vale derives fom thre basic source acti that diferent oduct activities that lower comand actvies ha met the customer nod quick ae chain (VA) ater to understand ow a business creates customer value by examining the contributions actives within the Basins otha vale Tes «process plat of view Ie divides (sometimes called dsaggregats the business int sos of tha occur hin he business ating with he inputs im reves an ining withthe firs (or services) and afertles seve to customers VCA atop to look tits costs across the Series the business performs o determine wher low-cost advantages or cost disadvantages exit. I th aitbues ofeach ofthese diferent activites o determine ia what ways each ati ha ears Purchasing ints and aersals service helps diferente the company’s products and services. "of VCA belie it allows managers to eter identify thir ims stents and weakness by the bosnes at» process —a chai of acvites_of what actully happens the business rate ooking at it bass on arbtaryorganiational diving lines or historical ccousting protocol. 5-7 shows a pclae cain framework I dvds activins within he im into two broad eat vimary activites and support aces. Primary acter (sometne called line factions) are owns) per 7 Thea cha oe i Seneties thes acts assaned sparc fms Mound gst puchasng acute those involved inthe physical creation of the produc, marketing and wansfer tothe buyer, and after-sale port. Suppor activites (sometimes eae sa or overhewd functions) assist the frm asa whole by provi infiastructure o inputs tat allow the primary activites to take place onan ongoing bass The val chain cludes a profit margin since a markup above the cost of providing a firm's value-adding activities is normallyie price pad by the buyer—creating value that exceeds cost so as to generate a return for the effort. is required across individual fies and diferent industries because what may be seen asa support ac- Jone firm or industry may bea primary activity in another. Computer operations might typically be seen as support, for example, but may be seen as primary activity in airlines, newspapers, or banks. Ex- ‘Strategy in Action, describes how Federal Express reconceptualized its company using a value chain that ultimately saw its information support become is primary activity and source of customer valu. ing a Value Chain Analysis Actives tc in value chain analysis isto divide a company's operation into specific atvites or business sally grouping them similarly tothe primary and support activity categories shown in Exhibit 7. each calgon. aim typically performs a umber of dscete activities tha may represent key tength Service activites, fr example, may include sich dscret activities as installation, repai, parts and upgrading -any of which cou be a major source of competitive advantage or disadvantage challenge a this point is tobe very detailed attempting to disaggregate” what actualy goes on ns sinc, analyzabe activities rather than sting fora oad gener categorization Costs stop is to attempt to attach costs to each discrete activity. Each activity in the value chain incurs costs Jp time and assets, Value chain analysis requires managers to assign costs and assets to each activity, thereby providing avery diferent way of viewing costs than atonal cost acountng methods ttce Exhibit 9 help usted dsiaction, Both approaches in Exhibit 9 tl that he ‘deparmeat (rocurment activites) cost $320(07S. The traitionl method es ws ce that pay ‘ue 73 percent (175+ $1530 of our outs with “oe fined charger’ the second lanes cor, 1 {62020 ofthe total procorement costs, YCA proponents woul! arg thatthe benefit of his Timed, Their atgumer might be the following: Wit tis inoraton we oud err our procurement cos key comets es indy we eu ndcnce tt were eer woe regu Ne cul en bert tha ur “pope cs da ‘ed chares” cox ravages, dst orn ine” with competion, Manages ould hen go at pope pope, nd oeren chars Hower, hy wou ett nwt aly le ‘ry dette wb eve caning wit toe pope do nach he rece fton, wh Saleh ves ow ot effrivecacksay \VCA proponent ol thatthe activity-Aased VCA approach would provide amore meaning ana ‘he prociement function’ costs and consequent value sed. The ati-besed side of Exhibit $9 tha approximately 21 perent ofthe procurement oso value-added invlves eating suplier ties. A Father sizable cost, 2 percent, inves inte administaton, with am adional 17 percent pet solving problems and almost 15 percent spent on gait contol efforts VCA advocates see thin ‘sbaing mech more usefl than Gaditional os aecounting information especialy when compared. te ‘information okey competitor or other “benchmark” companies VA soporr might assert he fl eguent hatte benefit ofthis activity Based informations substantia: Rar than amzing jst peopl” an “ther harps” wee pow loking at mesinghl exertions he woe ta poearenet atl doe We se, fr example ht ak) valusa act (and cox) oles ating sop capac” The am sto heal dns nd esling podem sem high nd mayne» weaker re or mrnemert ifthe where css an a fone fee The btm ie tt hs apo ss oka wat we actly ote Bs ‘pases crt tate ae a tna alls me pci irl analyst a he accounted ot cee.is. Likewise, in virtually all firms, the information requirements to support activity-based cost ac- unting can create redundant work because of the financial reporting requirements that may force firms to sn the traditional approach for financial statement purposes. The time and energy to change to an activ- approach can be formidable, and still typically involves arbitrary cost allocation decisions trying to cate selected asset or people costs across multiple activities in which they are involved. Challenges deal- with a cost-based use of VCA have not deterred use of the framework to identify sources of differentia- Indeed, conducting a VCA to analyze competitive advantages that differentiate the firm is compatible the RBV'S examination of intangible assets and capabilities as sources of distinctive competence. fy the Activities That Differentiate the Firm tnizing a firm's value chain may not only reveal cost advantages or disadvantages, it may also bring at- on to several sources of differentiation advantage relative to competitors. Dell Computer considers its In- fter-sales service (activities) to be far superior to any competitor's. Dell knows it has cost because ofthe time and expense replicating this activity would take, But Dell considers it an even important source of value to the customer because of the importance customers place on this activity, fferentiates Del from many similarly priced competitors. Likewise Federal Express, as we noted ear- ders its information management skills to have become the core competence and essence of the com- cause ofthe value these skills allow FedEx to provide its customers and the importance they in turn such skills. Exhibit 5-10 suggests some factors for assessing primary and support activities differ- and contribution. the Value Chain value chain has been documented, managers need to identify the activities that are critical to buyer on and market success. Ii those activities that deserve major scrutiny in an internal analysis. Three rations are essential at this stage inthe value chain analysis, Firs, the company's basic mission needs ee managers’ choice of the activities they examine in detail. If the company is focused on being a provider, then management attention to lower costs should be very visible; and missions built around ment to differentiation should find managers spending more on activites that are differentiation cor- Retailer Wal-Mart focuses intensely on costs related to inbound logistics, advertising, and loyalty Hits competitive advantage (see Exhibit $~3), while Nordstrom builds its distinct position in retailing sizing sales and support activities on which they spend twice the retail industry average. The appli value chain analysis to explore Volkswagen's strategic situation in 2003-2004 is described in Exhibit ategy in Action. the nature of value chains and the relative importance of the act tes. Yet for a distributor, such as the food distributor PYA, inbound and outbound logistics are the area. Major retailers like Wal-Mart have built value advantages focusing on purchasing and in- gstics while the most successful personal computer companies have built via sales, outbound logis- {service through the mail order process. ‘the relative importance of value activities can vary by a company’s position in a broader value system es the value chains of its upstream suppliers and downstream customers or partners involved in products or services to end users. A producer of roofing shingles depends heavily on the downstream ff wholesale distributors and building supply retailers to reach roofing contractors and do-it Maytag manufactures its own appliances, sells them through independent distributors, andEXHIBIT 5-10 Possible Factors for Assessing Sources of Differentiation in Primary and Support Activities Soe: Based on Mie or. On Compton, 19, Hana Rains School Pes ‘Support Actives ‘*Capabity to identity new-product market opportuni and potential environmental vests ‘Quay of the strategic planing sytem to achieve corporate cbecves '*Cocrdinatonandintegraton of al aie chain actises among organizational subunits 'Abaty to obtain relatively low-cost funds fr captal expences and working capital ‘Level of information systems suport in making seatogic and routine decisions ‘Timely and accurate management inermaton an general and competive erionments ‘Felaonsips wih publepoieymakers and interest groupe {Pubic image and coporte citzonanio General Administration ‘*Efeoteness of procedires for eculing, waning and promobng al lowl of employees ‘Appropriateness of reward systems or mothating and challenging employees "=A work anvironment hat minimizes absantoom and keeps trover at desrabl levels ‘Relatons wih ade unions 'Acveparcipaton by manages and techicl personnel in pofessional organizations Levis of employee matnaton and job satitacton Human Resource Management {Success of research and development active in leasing to product and proces ovations ‘Quay of working relationships between RAD personel and other departments ‘Timeiness of technology development active in moetngeriial doadinae ‘Quality of aborteies anc one tecies ‘Quaiicaton and experience of laboratory technicans and scinits Abily of work erironmento encourage creativity and innovation ‘Technology Development ‘Development of aterate sources fr inp to minnie dependence ona sing super ‘Procurement of raw materia (1) ona timely basi, 2) at owes posse cos, (3) at eccplae levels of quay ‘Procedures for procurement of plan, machinery, and buns ‘Development of rtera for easoverss-purcnase decisions ' Good np erm relationships wh relat eupoers Procurement ssouncnessot [sProaciviyot — [etinainess and Eocioneca a sieans i at amtomer nit mated and "J eauomenicam | | cencyet se. |manascacnto | erpmanaiprecatnne Iartonycontl | pardvotbatctiey | Weryartnenea | wensy eeronns Space| rps rods and series segmertandneeds | *Proinss ct terton Eticioncy ofr] mtgoroprate ato. Jacticeneyotth- |imoatonin sais | Sutem complaints rata are, | stent pose: | sed goods mare- | penton and aoversing | *ADoroorteres of warty Feng in | en peceee | gains [Po snd qunranee potion ‘sEtectveness of (deubuton channen ‘Qual of customer Sraane nore owaton and con- | eon aerating ‘tnt araroauce Petence fsaestoce | SABity prove coos ‘epacoment pare sewtepmontotan | Srdrepar aervces ‘Elciony ot pat image of uty ar a let an tow favre repaatn _ ten cf bad yay mong cstemore Exot of mart Semance win treraretsogrent reveal mart Inbound Operations Service Cogites