Value Chain Analyis

The worst error in strategy is to compete with rivals on the same

dimensions.

Dr. Rajesh Verma

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Learning Outcome

 How to analyze value chain of a

company to enhance customer Value

2
Competitive Advantage

 … a basis for the firm’s long term success?

 … a basis for value creation?

 Do we really know how to create value?

 Can it be sustainable?
3
The Emergence of Competitive Advantage

How does competitive

advantage emerge?

External sources of
change e.g.: Internal sources
•Changing customer demand of change
•Changing prices
•Technological change

Some firms
Resource heterogeneity Some firms faster have greater creative
among firms means and more effective and innovative
differential impact in exploiting change capability

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 How to Gain a Competitive Advantage

Customers purchase based on value and not based on

features. What is meant by value? Value to the customer
means how your products, services, and brand can help them

Enhance Their Revenues Lower Their Costs

Implication #1: Buyers are not purchasing because of
interesting design/engineering features. Instead they are
buying because your solutions help them build their business.
Customers also purchase to relieve their pain. Seek data on pain
points, the factors that keep them from achieving their objectives.

Pain Points are typically related to business processes. For example,

a customer’s Pain Points might be an inability to
• take orders effectively
• process existing orders rapidly
• fulfill orders correctly and rapidly
• anticipate demand
• produce accurate after-sales service and billing

Implication #2: Seek insights on customer pain points. Do not

constrain your insights to product factors as service-related
issues often produce more pain.
Value Chain

• The term ‘Value Chain’ was used by Michael Porter in his

book "Competitive Advantage: Creating and Sustaining
superior Performance" (1985). The value chain analysis
describes the activities the organization performs and
links them to the organizations competitive position.

• The Value Chain is the set of business functions or

activities that involve designing, producing, delivering,
marketing, and supporting products and services.
Consider for a moment a person walking in
the desert, a person who is dying of thirst.
As that person walks they have one thing on
their mind, and that is water. At that moment
there is little consideration for the form of
the water, the container, or who will be
providing it. Water has a unique value to
that person.

When he find water, or is offered some,

money would be of little concern.
What is the point of this example?

First is that value is a subjective experience that is dependent on

context. In the context of a peon clearing a table, a glass of water
there has no value, or even negative value – it’s just more work for
him. But for the man dying of thirst, that same glass of water is
extremely valuable.

Second, value occurs when needs are met through the provision of
products, resources, or services – usually during some form of
transaction or exchange.

Finally, value is an experience, and it flows from the person (or

institution) that is the recipient of resources – it flows from the
customer. This is a key difference between a value chain and a supply
chain – they flow in opposite directions
Offering Compelling Value Propositions

The Value Proposition (VP) is the offer, the company makes

to the customer around product/service. A compelling VP
must
 Identify the target customer/segment
 Indicate key needs/pain points the customer/segment
wishes to satisfy
 Offer insights on how our product/service delivers on the
needs/pain points
 Show how our product/service addresses the needs and
pain points better than the competition
12
UPS

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Difference between Value Chain
& Supply Chain

The primary difference between a supply chain and a value chain is a fundamental shift
in focus from the supply base to the customer. Supply chains focus upstream on
integrating supplier and producer processes, improving efficiency and reducing waste,
while value chains focus downstream, on creating value in the eyes of the customer.
Value Chain Mapping

Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales

►Receiving ► Design & ► Inventory ► Channel ► Warranty &

►Warehousing Production of ► Order Design Guarantee
►Inventory Products Fulfillment ► Promotion Fulfillment
► Creation of ► Pricing ► Information
control ► Distribution
Services
► Creation of
Packaging

Procurement
Technology & Systems
Human resources
Firm Infrastructure
Source: Porter 1985
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Steps in Value Chain Analysis

A typical value chain analysis can be performed in the following steps:

 Analysis of own value chain – which costs are related to every single
activity
 Analysis of customers value chains – how does our product fit into
their value chain
 Identification of potential cost advantages in comparison with
competitors
 Identification of potential value added for the customer – how can
our product add value to the customers value chain (e.g. lower
costs or higher performance) – where does the customer see such
potential
KODAK

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Support
Activities

Primary Activities
Support
Activities
Logistics
Inbound

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 organisation.
Support
Activities

Operations
Logistics
Inbound

Primary Activities
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.
 Support
Activities
Inbound
Logistics

Operations

Primary Activities
Outbound
Logistics
 Support
Activities
Inbound
Logistics

Operations

Outbound

Primary Activities
Logistics

Marketing
& Sales
 Support
Activities
Inbound
Logistics

Operations

Outbound

Primary Activities
Logistics

Marketing
& Sales

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

Marketing and Sales

In true customer orientated fashion, at this stage the organisation 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.
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales
Primary 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. They will be responsible for outsourcing
(components or operations that would normally be done in-house are done by
other organisations), and ePurchasing (using IT and web-based technologies
to achieve procurement aims).
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities
Technological Development

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales
Primary Activities
Technology Development

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.
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Human Resource Management

Support
Activities
Technological Development

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales
Primary Activities
Human Resource Management

Employees are an expensive and vital resource. An organisation would

manage recruitment and s election, training and development, and rewards
and remuneration. The mission and objectives of the organisation would be
driving force behind the HRM strategy.
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure

Human Resource Management

Support
Activities
Technological Development

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales

Primary Activities
Firm Infrastructure

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.
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure

Human Resource Management M

Support A
R
Activities G
Technological Development IN

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales

IN
G
R
A
M
Primary Activities
Value Chain for Pizza Restaurant
Levi’s Strauss Case

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Value Chain for Automobile Industry
Value Chain for an Internet Start-Up

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Once the value chain has been defined, a cost analysis can be
performed by assigning costs to the value chain activities. Porter
identified 10 cost drivers related to value chain activities:
Economies of scale.
Learning.
Capacity utilization.
Linkages among activities.
Interrelationships among business units.
Degree of vertical integration.
Timing of market entry.
Firm's policy of cost or differentiation.
Geographic location.
Institutional factors (regulation, union activity, taxes, etc.).

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 Outsourcing
Strategic Choice to Purchase Some Activities
From Outside Suppliers

Firm Infrastructure

Support
Human Resource Management M
A
Activities R
G
Technological Development IN

Procurement

Service
Operations

Marketing
Logistics

Outbound
Inbound

& Sales
Logistics

IN
RG
A
M
Primary Activities
 Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management

Human Resource Management M

Support A
Firms often purchase a portion
Technological Development R
of their value-creating activities
Activities G
IN
Technological Developmentfrom specialty external
Procurement suppliers who can perform
these functions more efficiently
Procurement

Service
Operations

Outbound

Marketing
Service
Logistics
Inbound

Logistics

& Sales

IN
Outbound

G
R
Inbound Operations Logistics Marketing

A
Logistics & Sales

M
Primary Activities
To capitalize on the usefulness
of the Value Chain concept...

it is important to recognize that...

Value Chains are part of a
Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
 Firm Value Chain Channel Value Chain Buyer Value Chain

Supplier Value Chain

Upstream Value
Perform valuable activities that complement the firm’s activities
Supplier Value Chain Firm Value Chain Buyer Value Chain

Upstream Channel Value Chain

Value
Perform valuable activities
that complement the firm’s
activities

Each firm must eventually find a way to

become a part of some buyer’s value chain
Supplier Value Chain Firm Value Chain Channel Value Chain

Buyer Value Chain

Upstream Each firm must
Value eventually find a way to
Perform valuable activities become a part of some
that complement the firm’s buyer’s value chain
activities

Ultimate basis for differentiation is the ability to play a role in a

buyer’s value chain
This creates VALUE!!
Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

Upstream Each firm must eventually find a

Value way to become a part of some
Perform valuable buyer’s value chain
activities that Ultimate basis for differentiation
complement the firm’s is the ability to play a role in a
activities buyer’s value chain
This creates VALUE!!

Value chains vary for firms in an industry,

reflecting each firm’s unique qualities: History, Strategy & Success a
Implementation
Some Examples

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.
Microsoft

 Microsoft, has created a standard business

practice in the industry where the customer is an
integral part of the QA process. The customer,
in return for a flexible desktop platform that can
integrate a wide variety of third-party software
applications, tacitly agrees to troubleshoot
Microsoft products. This strategy proved more
successful then Apple’s more tightly controlled
and QA’ed product strategy.
Wal-Mart

 The strategy of Wal-Mart worked when

the company improved its business
through innovative practices in activities
such as purchasing, logistics, and
information management, which resulted
in the value offering of “everyday low
prices”
7-Eleven

7-Eleven had been vertically integrated, controlling most

activities in the value chain by itself. The company has
now outsourced many parts of its business including
functions like HR, IT management, finance, logistics,
distribution, product development, and packaging.
Apple

The Apple podcasting value chain is

comprised of nine steps that essentially
move from raw content to the listener. All
the steps of the value chain include
content, advertising, production,
publishing, hosting/bandwidth,
promotion, searching, catching, and
listening. It is important to note that each
step in the value chain adds value to the
podcast in distinctive ways, has its own
sets of challenges and opportunities.

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 Why Should We Examine Value Chains?
1. Ability to Attack Unserved Needs – Solve Higher Order Needs

1st Order Needs: 2nd Order Needs: 3rd Order Needs:

Product Improving Customer Solving Profound
Functionality Activity Economics Problems

Low Opportunity For Value-Added

High
Differentiation

Low Ability to Set vs. Respond

High
to Customer Agenda
 Why Should We Examine Value Chains?
2. Exploit Soft Skills - Examine the “soft skills” developed from
applications of “core” business
Skills
Reach: the ability to positively touch
many customers frequently
Interaction: frequent and extended
contact beyond company and the
customer
Insight: Deep understanding of a
customer problem
Location: the importance of your
location in the customer’s value chain
Examples
McDonalds efficiently serves 48
million customers a day
Wal-Mart customers visit stores 3x as
often as they visit the competition
Auto Cop understands pain points and
opportunities in automobile
security
better than other automotive
companies
UPS occupies a critical position in the
customer’s Value Chain, becoming
almost indispensable for many firms
Why Should We Examine Value Chains?
3. Leverage Hidden Assets - examine latent skills co have
acquired in support of core business

Company Core Business Hidden Asset

UPS Moving Packages ► expertise in managing customer logistics
and order fulfillment
► skills in working capital management
► expertise supply chain management &
consulting

Sears Soft and Hard ► skills in home maintenance services

► honors warranties on Sears and non-
Lines Retailer
Sears brands

Boeing Aircraft ► provides financing

Manufacturer ► supplies parts
► conducts pilot training
► performs maintenance
Voice of the Customer &
Value Chain Analysis
• Marketing Research
• In-depth Interviews
• Focus Groups
• Web Surveys
Competitive Advantages
• Product/Service
Differentiation
• Marketing Advantages
• Cost Advantages
• Financial Advantages

Implementation of Construction of
Value Propositions Value Propositions

Customer Response to
Value Propositions
Case I
 A high-tech manufacturer required a reliable supply of a rare chemical that cost
several thousand dollars per kilogram. The manufacturer guaranteed their supply
by establishing long-term contracts with major suppliers. 
 As their contracts were about to expire, the suppliers informed the manufacturer
that hey wanted to renegotiate a higher fixed price based on projections of
increased demand by the pharmaceuticals and plastic industries. 
 Before committing to their offer, the manufacturing company hired an intelligence
consultant to substantiate their suppliers' projections.  The consultant confirmed
the projections and more importantly, two additional pieces of information that
were strategically relevant to the manufacturer's buying decision.
 First, a major competitor had changed their manufacturing process allowing them
to recycle significant amounts of waste and reduce usage of the rare chemical.
Secondly, companies in China and the old Soviet states had begun producing the
rare chemical in significant quantities which created an unexpected source of future
supply.  
 Executive management used this intelligence to refine their suppliers' projections
and ultimately revealed that there would be a modest surplus of the chemical for
the next three to five years.  The result?  Armed with this knowledge, executive
management renegotiated a long-term, fixed price for the chemical that was 20%
less than their previous contract.