Value chain analysis12 10 2009

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Value chain Analysis

Management Information Systems Value Chain Introduction: A value chain is a chain of activities. Products pass through all activities of the chain in order and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram:


Primary activities Primary activities are those that are directly concerned with creating and delivering a product (e.g. component assembly); Primary value chain activities include: Primary

Description

Activity Inbound

All those activities concerned with receiving and storing externally sourced

logistics Operations

materials The manufacture of products and services - the way in which resource

Outbound

inputs (e.g. materials) are converted to outputs (e.g. products) All those activities associated with getting finished goods and services to

logistics Marketing

buyers Essentially an information activity - informing buyers and consumers about

and sales Service

products and services (benefits, use, price etc.) All those activities associated with maintaining product performance after the product has been sold


Inbound logistics: Refers to goods being obtained from the organizations suppliers ready to be used for producing the end product. Operations: The raw materials and goods obtained are manufactured into the final product. Value is added to the product at this stage as it moves through the production line.

Outbound logistics: Once the products have been manufactured they are ready to be distributed to distribution centers, wholesalers, retailers or customers. Marketing and Sales: Marketing must make sure that the product is targeted towards the correct customer group. The marketing mix is used to establish an effective strategy, any competitive advantage is clearly communicated to the target group by the use of the promotional mix. Services: After the product/service has been sold what support services does the organization have to offer. This may come in the form of after sales training, guarantees and warranties. With the above activities, any or a combination of them, maybe essential for the firm to develop the competitive advantage which Porter talks about in his book. Support Activities Support activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.


Support activities include: Secondary

Description

Activity Procurement

This concerns how resources are acquired for a business (e.g. sourcing and

Human

negotiating with materials suppliers) Those activities concerned with recruiting, developing, motivating and

Resource

rewarding the workforce of a business

Management Technology

Activities concerned with managing information processing and the

Development Infrastructure

development and protection of "knowledge" in a business Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

The support activities assist the primary activities in helping the organization achieve its competitive advantage. They include: Procurement: This department must source raw materials for the organization and obtain the best price for doing so. For the price they must obtain the best possible quality Technology development: The use of technology to obtain a competitive advantage within the organization. This is very important in today’s technological driven environment. Technology can be used in production to reduce cost thus add value, or in research and development to develop new products, or via the use of the internet so customers have access to online facilities. Human resource management: The organization will have to recruit, train and develop the correct people for the organization if they are to succeed in their objectives. Staff will have to be motivated and paid the ‘market rate’ if they are to stay with the organization and add value to it over their


duration of employment. Within the service sector eg airlines it is the ‘staff’ who may offer the competitive advantage that is needed within the field. Firm infrastructure: Every organization needs to ensure that their finances, legal structure and management structure works efficiently and helps drive the organization forward. As you can see the value chain encompasses the whole organization and looks at how primary and support activities can work together effectively and efficiently to help gain the organization a superior competitive advantage.

Steps in Value Chain Analysis

Value chain analysis can be broken down into a three sequential steps: (1) Break down a market/organization into its key activities under each of the major headings in the model; (2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;


(3) Determine strategies built around focusing on activities where competitive advantage can be sustained

Creating a cost advantage based on value chain •By reducing cost of individual value chain activities •By reconfiguring value chain A cost advantages can be created by reducing the costs of the primary activities and also by reducing the costs of the supported activities. Recently there have been many companies that achieved a cost advantage by the clever use of information technology. Once the value chain has been defined, a cost analysis can be performed by assingning costs to the value chain activities. Porter identified 10 cost drives related to value chain activities: 1. Economics of Scale. 2. Learning 3. Capacity utilization. 4. Linkages among activities. 5. Interrelationships among business units. 6. Degree of vertical integration. 7. Timing of market entry. 8. Firm’s policy of cost or differentiation. 9. Geographic location 10. Institutional factors.


A firm develops a cost advantage by controlling these drives better than its competitors do. A cost advantage also can be pursued by “Reconfiguring “the value chain. “Reconfiguration” means structural changes such as: a new production process, new distribution process, new distribution channels, or a different sales approach. Normally, the value chain of a company is connected to other value chains and is part of a larger value chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire value chain. Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels.Differentiation stems from uniqueness. A differentiation advantage may be achieved either by changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain. Porter identified several drivers of uniqueness: •

Policies and decisions

Linkages among activities

Timing

Location

Interrelationships

Learning

Integration

Scale (e.g. better service as a result of large scale)

Institutional factors

Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation.


There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation. Technology and the Value Chain Because technology is employed to some degree in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. Various technologies are used in both primary value activities and support activities: •

•

•

Inbound Logistics Technologies o

Transportation

o

Material handling

o

Material storage

o

Communications

o

Testing

o

Information systems

Operations Technologies o

Process

o

Materials

o

Machine tools

o

Material handling

o

Packaging

o

Maintenance

o

Testing

o

Building design & operation

o

Information systems

Outbound Logistics Technologies


•

•

o

Transportation

o

Material handling

o

Packaging

o

Communications

o

Information systems

Marketing & Sales Technologies o

Media

o

Audio/video

o

Communications

o

Information systems

Service Technologies o

Testing

o

Communications

o

Information systems

Note that many of these technologies are used across the value chain. For example, information systems are seen in every activity. Similar technologies are used in support activities. In addition, technologies related to training, computer-aided design, and software development frequently are employed in support activities. To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage.

Linkages between Value Chain Activities Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities.


Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that inadvertently the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase. Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage.

Analyzing Business Unit Interrelationships Interrelationships among business units form the basis for a horizontal strategy. Such business unit interrelationships can be identified by a value chain analysis. Tangible interrelationships offer direct opportunities to create a synergy among business units. For example, if multiple business units require a particular raw material, the procurement of that material can be shared among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities. Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to reap the benefits of the synergies.

Outsourcing Value Chain Activities


A firm may specialize in one or more value chain activities and outsource the rest. The extent to which a firm performs upstream and downstream activities is described by its degree of vertical integration. A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must understand the firm's strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. Managers may consider the following when selecting activities to outsource: •

Whether the activity can be performed cheaper or better by suppliers.

Whether the activity is one of the firm's core competencies from which stems a cost advantage or product differentiation?

The risk of performing the activity in-house. If the activity relies on fast-changing technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.

Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc.

Partex Beverage Ltd.: Partex Beverage Limited commenced commercial production on 6th October 1997 in Bangladesh with RC cola. The company has earned excellent reputation for its better quality, competitive price. Their products are Mum mineral water, Rc cola, Rc


Lemon, Rc orange and upper 10. In their speech, “We are proud to say that we have stuck to our mission and are now worth over Taka 80 crore (US$ 16 Million)�. Sacred value chain Administration and Management Electronic scheduling and messaging system

Support Activities

Human Resource Workforce planning system Technology Computer aided design system Firm Value Chain

Procurement Computerized ordering system

Primary Activities

Inbound Logistics

Operation

Sales and Marketing

Service

Automated warehousin g system

Computer aided operation

Internet based order

Equipment maintenance system

Outbound Logistics Computer aided shipment scheduling

Application of Information system on sacred value chain Primary Activities: Inbound Logistics: Sacred maintain its inbound logistics by automated warehousing system. Operation: Its operation is not fully computer based but it use computer in production process and use computer aided operation. But they are very interested to introduce computer based operation by computer aided operation system.


Sales and marketing: It maintains it sales and marketing mainly through internet. It also communicates with customers by internet. But they want to introduce system which can be share by their customer. Service: Machinery and equipment is maintained by equipment maintenance system. Outbound logistics: Company distributes its good by outbound operation. Good outbound operation creates value to customer. It maintains outbound activity through Computer aided shipment schedule. Secondary Activities: Procurement: Procurement is one of important activity of garments factory. Without timely procurement company can not fulfill its order on time. Sacred maintain it procurement Computerized ordering system Technology: It helps create value to customer by Computer aided design system Human Resource: Flow of human resources is maintained by Workforce planning system Administration and Management: It can be maintained by Electronic scheduling and messaging system CONCLUSION A value chain is a chain of activities. Products pass through all activities of the chain in order and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. Information system is very helpful to add more value. -----------


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