VALUE CHAIN ANALYSIS

By – Kasimi Mudassar
 VALUE CHAIN ANALYSIS
 Value Chain analysis was first suggested by Michael Porter (1995)

 Shows how a product moves from the raw-material stage to the final customer.

 Highlights cost advantages and distinctive capabilities --the value processes.

 Focuses on how a business creates customer value by examining contributions of different

internal activities to that value.
 VALUE CHAIN ANALYSIS
 Divides a business into a set of activities within the business

 Starts with inputs a firm receives

 Finishes with firm’s products or services and after-sales service to customers

 Allows for better identification of a firm’s strengths and weaknesses since the business is
viewed as a process

 Identifies value processes and areas for cost improvement

 Allows the firm to understand the parts of its operations that create value and those that do not.
 THE VALUE CHAIN CONCEPT

A Value chain identifies

Activities, functions and business processes

that have to be performed in

Designing, producing, marketing, delivering

and supporting a product or service
 PRIMARY
PRIMARY
ACTIVITIES
ACTIVITIES

VALUE
CHAIN
SUPPORT
SUPPORT
ACTIVITIES
ACTIVITIES
 MICHAEL PORTER’s VALUE CHAIN (1985)

SUPPORT
ACTIVITIES

PRIMARY ACTIVITIES
Primary Activities
Inbound Logistics
CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS.

(e.g. HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY CONTROL)

Operations
COMPRISE THE TRANSFORMATION OF THE INPUTS INTO THE FINAL PRODUCT FORM
(E.G. PRODUCTION, ASSEMBLY, AND PACKAGING)
Primary Activities Contd…

Outbound Logistics
INVOLVE THE COLLECTING, STORING, AND DISTRIBUTING THE PRODUCT TO THE
BUYERS
(e.g. PROCESSING OF ORDERS, WAREHOUSING OF FINISHED GOODS, AND DELIVERY)

Marketing Sales
HOW BUYERS CAN BE CONVINCED TO PURCHASE THE PRODUCT
(e.g. ADVERTISING, PROMOTION, DISTRIBUTION)
Primary Activities Contd…

 Service
INVOLVES HOW TO MAINTAIN THE VALUE OF THE PRODUCT AFTER IT IS PURCHASE.
(e.g. INSTALLATION, REPAIR, MAINTENANCE, AND TRAINING)
Support Activities
Procurement
CONCERNED WITH THE TASKS OF PURCHASING INPUTS SUCH AS RAW MATERIALS,
EQUIPMENT, AND EVEN LABOUR.

Human Resource Management

INVOLVED IN RECRUITING
concerned in HIRING, TRAINING,DEVELOPMENT AND COMPENSATION
Support Activities Contd…

Technology Development
THESE ACTIVITIES ARE INTENDED TO IMPROVE THE PRODUCT AND THE PROCESS,
CAN OCCUR IN MANY PARTS OF THE FIRM

 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.
LINKAGES WITHIN THE VALUE CHAIN

Buyer/Channe
Supplier Firm
l
Value Chains Generic Strategies
 firms profit potential depends on its effectiveness in performing these activities
efficiently.

 firm can gain the opportunity to generate superior value.

 a competitive advantage can then be achieved by reconfiguring the value chain to provide
lower cost or better differentiation.
TWO TYPES
COMPETITIVE
ADVANTAGE

COST DIFFERENTIATATI
ADVANTAGE ON
 COST ADVANTAGE
 an organization always aims to be the low-cost producer in its industry.

 if an organization can attain and maintain overall cost leadership then it will reach superior
performance.

 cost leadership can be obtained by focusing on key aspects, reaping economies of scale,
controlling costs.
 COST LEADERSHIP AND THE VALUE-CHAIN
 reducing the cost of the individual value chain of activities or as what have been said before
reconfiguring the value chain to suit lower production costs.

 once the value chain is defined, a cost analysis can be performed by assigning costs to the
value chain activities.

 the costs obtained from the accounting report may need to be modified in order to allocate
them properly to the value creating activity.

 in this way cost leadership is achieved by the firm in the industry it is operating.
How to Obtain a Cost Advantage
Determine and Reconfigure, if
control needed
Cost Drivers Value Chain

 Alter production process  New raw material

 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location relative
 Direct sales in place of to suppliers or buyers
indirect sales
Examples
of Value-Creating
Activities
Associated with the
Cost Leadership
Strategy
Value-Creating Activities for Cost Leadership
Value-Creating Activities Value-Creating Activities
• Cost-effective MIS • Monitor suppliers’
• Few management layers performances
• Simplified planning • Link suppliers’ products to
• Consistent policies production processes
• Effecting training • Economies of scale
• Easy-to-use manufacturing • Efficient-scale facilities
technologies • Effective delivery schedules
• Investments in technologies • Low-cost transportation
• Finding low cost raw • Highly trained sales force
materials • Proper pricing
Differentiation
 demand an organization in offering something unique to its target customers.

 the uniqueness can be concerned to products, the way it delivers its goods and
services, the way it markets its products or anything that shapes a customer's
perception in relation to differentiation.
DIFFERENTIATION AND THE VALUE-CHAIN
 A differentiation advantage can arise from any part of
the value chain.
 A procurement of technology, information, marketing
strategy or input that are unique and not widely
available to competitors create differentiation.
 This advantage may be achieved either by changing
individual value chain activities to increase uniqueness
in the final product.
How to Obtain Differentiation Advantage
Control if needed Reconfigure to
maximize
Cost Drivers Value Chain

 Lower buyers’ costs

 Raise performance of product or service
 Create sustainability through:
 Customer perceptions of uniqueness
 Customer reluctance to switch to non-
unique product or service
4–22 Copyright © 2004 South-Western. All rights reserved.
Examples
of Value-Creating
Activities
Associated with
the
Differentiation
Strategy
Value-Creating Activities for Differentiation
Value-Creating Activities Value-Creating Activities

• Highly developed MIS • High quality replacement parts

• Emphasis on quality • Superior handling of incoming
• Worker compensation for raw materials
creativity/productivity • Attractive products
• Use of subjective performance • Rapid response to customer
measures specifications
• Basic research capability • Order-processing procedures
• Technology • Customer credit
• High quality raw materials • Personal relationships
• Delivery of products
 Case Study – Dell Computers
 Dell Computer’s value chain is unique in the sense that the company sources all its
components from vendors across the world, undertakes the final assembly and sells it
directly to the consumer.

 Dell’s direct model of selling and build-to- order supply chain have been the main
driving forces that have enabled it to gain advantage over other players in the computer
industry that can be described as highly competitive.
Dell’s Value Chain (application of Porter’s 1985 model)

SUPPORT

Cu alu
Corporate Infrastructure

st
V
ACTIVITIES

om
Human Resource Management & Training

e
er
M
Research & Development

ar
gi
n
Inbound Final Outbound Direct Product

gin

r
Components Assembly Supply Marketing Service

lue me
ar
M
Logistics Logistics

Va sto
& Sales

Cu
PRIMARY ACTIVITIES
4-26 STRATEGIC COST MANAGEMENT - BA122B
– Spring 2010
Primary Activities
Inbound Logistics

 Goods are received from a company's suppliers.

 Stored until they are needed on the production/assembly line.

 Dell relies mostly on its highly reliable supplier, where Dell streamlines its operation and relies on its
computer monitor supplier to ship directly to the customer.

 As long as its supplier retains its leadership position, Dell would collaborate with it to achieve mutual
success.
Primary Activities
Operations

 Every Dell system is built to order.

 Customers get exactly what they want.

 Uses knowledge gained from direct customer contact before and after the sale to provide award-
winning reliability and tailored customer service.
Primary Activities
Outbound Logistics

 When Dell introduced the direct model, its competitors were selling computers to end consumers via
distributors.

 Sells directly to consumers and is continuously communicating with them and benefiting, especially in
two areas, seeing sales trends and learning about unmet customer needs.

 Relies on customers’ knowledge of what they want to purchase and when they want to complete the
transaction to drive the direct business model.

 Dell leverages this source to place a customized order electronically.

Primary Activities
Marketing and Sales

 Dells direct to customer model solve the problem for additional capital for marketing and sales.

 It eliminated retailers along the way.

 One advantage of this kind of system is that the firm is continuously in contact with its customers
 Primary Activities
Service

 Dell spent dollars training well-educated business segment managers provide state-of-the art advice to
customers.

 Initiated a collaborative customer-solution teams that collaborate with customers to fulfill any unmet
customer needs.
 Support Activities
Procurement

 It is on this activity that Dell is weak because Dell do not enjoy protected by trademark or patent or
copyright technology.

 The technology being used in the industry is shared by all industry players.
 Support Activities
Technology Development

 Technology is an important source of competitive advantage.

 Here is one strength of Dell for the firm enjoys better access to technology.

 Dell introduces the latest relevant technology much more quickly than companies with slow-moving
indirect distribution channels.
 Support Activities
Human Resource Management

 Dell’s mission statement is “to be the most successful computer company in the world at delivering the
best customer experience in markets we serve”.

 Dell employees, direct salespeople, help-desk operators, engineers, and the like all have to be
knowledgeable and customer focused to ensure Dell’s continued competitiveness.
 Support Activities
Firm Infrastructure

 Dell also employed a global business consultancy, to help it develop a set of metrics to judge business-
unit performance

 By doing so, daily decision making were more efficient.

 The chief financial objective that steered managerial evaluation at Dell was return on invested capital
(ROIC).

 Which leads to no inventory build-up, Dell turns over inventory every six days on average, keeping
related costs low.
CONCLUSION
 The value chain analysis can assist a manager in making the right
decision for his/her enterprise.

 It is a great tool to improve a company’s performance to meet the ever-

demanding environment.