Strategic Management

Third Semester │ MBA │Batch 2018 - 2020

MODULE 7 Value Chain

 What is a Value Chain?
Interlinked value-adding activities that convert inputs into outputs which add to
the bottom line and help create competitive advantage.
A value chain typically consists of:
1. Inbound Distribution Or Logistics,
2. Manufacturing Operations,
3. Outbound Distribution Or Logistics,
4. Marketing And Selling, And
5. After-sales Service.
These Activities Are Supported By
1. Purchasing Or Procurement,
2. Research And Development,
3. Human Resource Development, And
4. Corporate Infrastructure.

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 Value Chain Analysis - Definition

Value chain analysis is a process of dividing various activities of the business in

primary and support activities and analyzing them, keeping in mind, their
contribution towards value creation to the final product.

And to do so, inputs consumed by the activity and outputs generated are
studied, to decrease costs and increase differentiation.

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 Porter’s views on Value Chain
▪ It evaluates which value each particular activity adds to the organization's
products or services.

▪ This idea was built upon the insight that an organization is more than a
random compilation of machinery, equipment, people and money.

▪ Only if these things are arranged into systems and systematic activates it will
become possible to produce something for which customers are willing to
pay a price.

▪ Porter argues that the ability to perform particular activities and to manage
the linkages between these activities is a source of competitive advantage.

4 Source: From Porter’s book- Competitive Advantage: Creating and Sustaining superior Performance" (1985).
 Porter’s value chain – The fishbone schematic

Source: https://www.business-to-you.com/value-chain/
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 Primary Activities
▪ Primary activities are directly concerned with the creation or delivery of a
product or service.

▪ Inbound logistics,
▪ Operations,
▪ Outbound logistics,
▪ Marketing and sales, and
▪ Service.

▪ Each of these primary activities is linked to support activities which help to

improve their effectiveness or efficiency.

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 Primary activities
Inbound Logistics
▪ Here goods are received from a company's suppliers. They are stored until they
are needed on the production/assembly line. Goods are moved around the
organization.

Operations
▪ This is where goods are manufactured or assembled. Individual operations could
include room service in an hotel, packing of books/videos/games by an online
retailer, or the final tune for a new car's engine.

Outbound Logistics
▪ The goods are now finished, and they need to be sent along the supply chain to
wholesalers, retailers or the final consumer.

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 Primary activities

Marketing and Sales

▪ In true customer orientated fashion, at this stage the organization prepares the
offering to meet the needs of targeted customers. This area focuses strongly
upon marketing communications and the promotions mix.

Service
▪ This includes all areas of service such as installation, after-sales service, complaints
handling, training and so on.

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 Support Activities
There are four main areas of support activities:
Procurement
▪ This function is responsible for all purchasing of goods, services and materials. The
aim is to secure the lowest possible price for purchases of the highest possible
quality.

Technology development (including R&D),

▪ Technology is an important source of competitive advantage.
▪ Companies need to innovate to reduce costs and to protect and sustain
competitive advantage.
▪ This could include production technology, Internet marketing activities, lean
manufacturing, Customer Relationship Management (CRM), and many other
technological developments.

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 Support Activities
Human resource management,

▪ Employees are an expensive and vital resource. An organization would manage

recruitment and selection, training and development, and rewards and
remuneration.

Infrastructure (systems for planning, finance, quality, information management

etc.).

▪ This activity includes and is driven by corporate or strategic planning. It includes

the Management Information System (MIS), and other mechanisms for planning
and control such as the accounting department.

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 Margin

Margin’ implies that organizations realize a profit margin that depends on their
ability to manage the linkages between all activities in the value chain.

Organization can deliver a product / service for which the customer is willing to
pay more than the sum of the costs of all activities in the value chain.

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 Typical Value Chain Analysis

▪ Analysis of own value chain – which costs are related to what

activities?

▪ Analysis of Customer value chain

▪ Identification of cost advantage

▪ Identification of potential “value” added for the customer—lower

cost/high performance-where does customer see “value”?

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 One quick example: Ikea

IKEA has quickly evolved from a local Swedish home furnishing manufacturer
into the largest home furnishing company in the world; partly by convincing
their customer to perform the transport and assembly processes of the furniture
manufacturing value chain.

They have executed their strategy by building a worldwide sourcing network of

high-quality global manufacturers to support their growth.

13 http://www.ichnet.org/ICH%20Value%20Chain%20White%20Paper%20v2.1.doc
 The Value Chain Linkages

Functional departments within an organization cannot work in silos

14 Source: https://www.business-to-you.com/value-chain/
 The integrated functions
▪ While value activities are the building blocks of competitive advantage, the
value chain is not a collection of independent activities.
▪ It is a system of interdependent activities that are related by linkages within the
value chain.
▪ Decisions made in one value activity (e.g. procurement) may affect another
value activity (e.g. operations).
▪ Since procurement has the responsibility over the quality of the purchased inputs, it will
probably affect the production costs (operations), inspections costs (operations) and
eventually even the product quality.
▪ Clear communication between and coordination across value chain
activities are therefore just as important as the activities itself.
▪ A company also needs to optimize these linkages in order to achieve
competitive advantage.

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 Example: The Pizza Restaurant Industry
Acquire capital, perform accounting, legal and administrative tasks for each
Infrastructure
activity

Supervise Supervise Develop

Human Supervise Oversee
warehouse or kitchen service
Support Activities

Resource drivers/ ensure marketing

facilities/shippi personnel/ personnel,
Management safety personnel
ng personnel training waiters
Improve supply Develop new Develop new Develop new Develop new
Technology chain to cut menu items, ordering promotional restaurant
Development costs of improve oven systems; cut materials/ formats/
ingredients design delivery time media layouts
Lease space: Purchase or
Purchase Purchase
restaurants or lease phone or
Procurement ingredients & Buy TV time furniture,
delivery online order
other supplies tableware
facilities systems
Transport Prepare Deliver pizzas Develop
Serve food in
ingredients to pizzas, salads, to ordering advertising,
Primary Activities restaurants
restaurants & other food customers programs,
delivery units items promotions
Inbound Operations Outbound Marketing Service
16 Logistics Logistics / Sales
 Example: Pizza Hut Value Chain

Infrastructure Administrative, legal and accounting tasks managed systemwide

Supervise
Human Performed by Oversee Oversee
kitchen Supervise drivers,
Support Activities

Resource external marketing waiters, service

personnel, ensure safety
Management suppliers personnel personnel
training
Develop new Develop new
Outsourced to Develop new Develop new
Technology menu items; ordering systems;
software promotions on restaurant
Development improve oven cut delivery
companies a regular basis formats
design times
Purchase Purchase or
Performed by Purchase
ingredients lease phone or
Procurement external Buy TV time furniture,
and other online ordering
suppliers tableware
supplies systems
Performed by Prepare pizzas, Deliver pizza to Develop advt.
Serve food in
Primary Activities external salads and ordering programs,
restaurants
suppliers other foods customers promotions

Inbound Operations Outbound Marketing Service

17 Logistics Logistics / Sales