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PowerPoint Diagram Pack

Value Chain Analysis


PORTERS VALUE CHAIN ANALYSIS

Developed by Michael Porter, Value Chain Analysis is business management framework used to analyze the processes and key activities performed by a business or industry. This framework illustrates where value is created within an industry or company.

Firm Infrastructure Support Activities Human Resource Management Technology Development Procurement

Inbound Operations Outbound Marketing / Service / After Sales Support Sales Logistics Logistics

Primary Activities

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Value Chainintroduction
What It Is
A description of the processes and key activities performed either across an industry or across a company: Usually shown as a linear flow of activities A companys Value Chain, also shows the support activities performed, e.g. systems support A Value Chain should show where value is being created within an industry or company: Should be quantitative, not qualitative. Should show the value of costs and revenues at each stage in the value chain. Value Chain Analysis identifies areas of competitive advantage or disadvantage Value Chain Analysis drives strategic hypotheses to answer several questions: Where are we, and our competitors, earning money? Why? Should we forward or backward integrate? Should we outsource or spin-off value activities (i.e. business processes)? What are the industry critical success factors? What are our managerial action plans to control costs, improve service and increase delivered value?

Strengths & Limitations


Benefits: - Provides a structure for performing competitive analysis by separating the value generating stages - Aids in identifying critical cost drivers and non-value adding activities currently performed by your company - Helps your company identify areas for improvement or potential competitive advantage by benchmarking cost drivers - Allows your company to analyze opportunities for backward and forward integration by including suppliers and end-customers in the value chain Limitations: - Value Chain Analysis requires considerable data collection Data not be readily accessible Other data difficulties include calculating transfer prices for intermediate products, isolating key cost drivers, identifying linkages across activities, and computing supplier and customer margins - Comparisons with competitors is often very difficult Public data will not exist for privately held firms Subsidiaries of larger firms will often be aggregated with the parents information

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a. In his book Competitive Advantage, Free Press. b. Forward integration is moving into activities closer to the starting activity within an industry.

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Value Chainwhy we use it and how to apply it



Primary objective is to determine where value is created in an industry or company Value Chains are also used to: Understand the key activities within an industry or company Determine whether there is any backward or forward integration in an industry Map key players at each stage of an industrys value chain

Map the customers experience at each stage in a companys value chain Michael Porter, in his 1985 book Competitive Advantage, outlines the following three steps in developing a value chain: Identify individual value activities: Distinguish between primary and support activities Assign the value activities to the categories (or functions) that best represent their contribution to a firms competitive advantage Order the activities, broadly following the process flow: The appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed

Determine the links between activities Once the activities are detailed in the Value Chain, plot costs and players across the value chain where applicable

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a. A Free Press publication.

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The Value Chain approach has evolved from an internal to an external perspective
The traditional view of the Value Chain was developed by Michael Porter:

PORTERS VALUE CHAIN ANALYSIS


Firm Infrastructure
Shank and Govindarajan propose a more externally focused, or holistic view of Value Chain Analysis Focus on the industry Value Chain (i.e. value delivery system) Identifies the activities performed by a firm and how those activities impact, and are impacted by, other players in the end-customers value delivery system Cost drivers are compared at each stage of the industry value chain to identify potential competitive advantages or opportunities

Support Activities

Human Resource Management Technology Development Procurement

Inbound Logistics

Operations

Outbound Logistics

Marketing / Sales

Service / After Sales Support

Primary Activities

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In the initial step, the value activities within the industry must be separated out
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STEP 1: Identify the Industry Value Chain and map the value linkages The Industry Value Chain represents a linked set of value activities Mapping the Industry Value Chain requires Identifying and separating these value activities Each separate value activity becomes a different stage in the industry value chain* Generally, a value activity should be separated out if: There is (or could be) an external market for the product or outcome of that activity The activity represents a significant percentage of operating costs The cost behavior of the activity or the cost drivers is different The activity is performed by competitors in different ways The activity has a high potential for creating differentiation

Identify the industry value chain and map the linkages between the industry value activities

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Assign costs, revenues and assets to value activities

Determine the relevant cost drivers for each value activity

4 potential competitive advantages by either controlling cost drivers better than Identify
competitors or reconfiguring the value chain to better leverage the firms strengths

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* The analyst should be careful to control scope at this point in the analysis.

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An Industry Value Chain should include all competitors


Industry Value Chain Example Paper Products Industry
Silvaculture and Timber Farming

Value Activities

Competitor B

Logging and Chipping

Competitor C

Pulp Manufacturing

Competitor A

Competitor D

Paper Manufacturing

Distribution

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Customer

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at each stage of the Value Chain.
Source: Shank and Govindarajan, 1993, Exhibit 4-2

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Competitor F

Competitor E

Competitor G

Converting Operations

Each stage of the Industry Value Chain has associated primary and support activities
Industry Value Chain Example Paper Products Industry (continued)
COMPETITOR X VALUE DELIVERY SYSTEM General Management, Accounting, and Legal Human Resource Management Shipping and Tracking Systems Purchasing Timber Rights Selection of Timber for Harvest Quoting and Logging and Shipping Pricing Chipping Split Wood Wood Chip Operations to Pulp Mfg. Output Adapting to Output and Shipping Requirements of Specific Pulp Mfg.

Competitor X

General Management, Accounting, and Legal Human Resource Management Production and Shipping Technology Purchasing of Wood Chips for Pulp Inbound Pulp Mfg. Wood Chips Operations Shipping of Quoting and Pricing Pulp to Paper Mtg Wood Chip Output Adapting to Output and Shipping Requirements of Specific Pulp Mfg.

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You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ The level of analytical detail required depends on the
strategic hypothesis being considered*.
* This additional detail could confuse the analysis, but would be required if vertical integration was being analyzed.

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A list of potential cost drivers is presented below


Potential Cost Drivers
SCALE Facility size Production technology Operating efficiency Run length Factory costs LINKAGES Internal process linkages Quality Output linkages (mfg. / distro.) Vertical linkages Supplier imposed costs Supplier timeliness DISCRETIONARY POLICY Product complexity Product variety R&D Marketing expenses Delivery time Inventory levels Segments served INSTITUTIONAL FACTORS Government regulations Unionization Taxes, tariffs Local content rules LEARNING Experience (cumulative output) INTERRELATIONSHIPS Scope Other business units Shared activities Shared learning TIMING First mover advantage LOCATION Transportation costs Labor costs Raw materials costs Energy costs INTEGRATION Outsourcing Vertical integration Agency costs

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Cyclicality Forecast accuracy
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Timing of input purchases CAPACITY UTILIZATION Output level

Production technology used Plant layout efficiency

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The resulting Value Chain should drive strategic hypotheses


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STEP 4: Identify potential competitive advantages by either controlling cost drivers better than competitors or reconfiguring the Value Chain to better leverage the firms strength Closely analyze your companys cost structure and position in the industry value chain relative to competitors: Calculate standard financial statistics at each value chain stage, based on inputs and assets (e.g. ROA, DuPont, EVA, etc.) Understand the basic economics of each value activityWhy do we do it? What are the key cost and value determinants? Identify strategies to improve cost and value performance in each stage Consider linkages between stages to help identify overall improvements Consider spin-offs and forward / backward integration to reconfigure your companys Value Chain Consider threats and opportunities related to other chains which deliver substitute products or services to the ultimate customer

Identify the industry value chain and map the linkages between the industry value activities

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Assign costs, revenues and assets to value activities

Determine the relevant cost drivers for each value activity

4 potential competitive advantages by either controlling cost drivers better than Identify
competitors or reconfiguring the value chain to better leverage the firms strengths

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There are three levels of detail for conducting and presenting Value Chain analysis
Level 1: Qualitative Summary of Competitive Trends
VALUE CHAIN ELEMENTS STRATEGIC DIFFERENCES

Example

AT&T
Owns manufacturing branch (Western Electric)

NYNEX
Free to use any supplier it wants

IBM
Owns Rolm, CPE manufacturer Strong R&D in computer hardware and software technologies Global presence Leading computer technology Partnership with MCI

Procurement Technology Development Operations

Technological leadership through Bell Focus on software products Labs National presence High quality of equipment through heavy capital expenditures Similar communications standards nationwide Strongest national telecommunications network Regional monopoly Innovative equipment from outside suppliers High quality regional network through heavy capital investment

Sales & Marketing New emphasis on marketing (still


weak) Strong name and brand recognition Long-term relationships with clients Recruits computer executives

Use Bell logo Sales and distribution centers close to customers

Focus on 1K coprorate customers THIS IS A PARTIAL PREVIEW

Strong reputation for marketing excellence Already sells to most major corporations

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Source: Hax and Majluf, 1991.

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