Value Chain Analysis

The basic idea of value chain is based on chain of the events that every product or service must go through from its inception to its eventual sale. Value chain analysis is a way of seeing where in this chain or network of activities an organization is successfully adding value. It lets us pinpoint the particular capabilities and resources that are important to an organization and show precisely where and how they are being applied. 1. Primary and support activities are those directly involved with delivering products or services to a user.

Eg: manufacturing operations sales and marketing after!sales service for a manufactured product like car" #ournalism and advertising sales for a magazine" till service and che$ue handling for bank. %ifferent types of organizations& value chain have different types of primary activity. 'upport activities contribute indirectly to the adding of value through supporting one or more of the primary activities. Eg: (urchasing process development human resource management planning and financial control. ). Deployment of resources: If an activity utilizes distinctive assets or capabilities then it may enable the organization to be differentiated from its competitors in the levels of $uality it provides to customers or the benefits that it incorporates into its products. *apabilities can be deployed in production or in after!sales service. 'trong brand s and reputations can be deployed to attract good staff to give differentiation in marketing and sales or to target a different market. +. Vertical Integration and outsourcing Vertical integration ,make or buy- decisions involve important trade!offs between keeping control of important activities and profiting from other firms& specialist resources. .roadly there are three ways in which a firm can obtain the products or services: /utsourcing 0 short term 1 long term commitment. (roduce within its hierarchy. 2ybrid forms *ompanies have been known to use third party suppliers for almost any activity in the value chain including advertising product and packaging design brand development manufacturing distribution sales and after!sales product maintenance. 3ig 4.1 page )+) 5hatever the form of outsourcing network an organization may consider #oining it has to arrive at a trade!off between five factors: (roduction and set!up costs: .y using an outside supplier an organization can take advantage of that firm&s economies of scale and its learning. /utsourcing from an e6perienced third!party supplier may be cheaper than in!house production. Transaction costs: The down side of buying goods and services on the open market is that there is a danger that the supplier may try to e6ploit the situation for e6tra profit. There are three main ways in which it can happen:

a. 'upplier may increase the charges because it believes that the client has become dependent on him. This is known as hold-up. It may believe that the client has invested so much in the relationship that I can not afford to pull out. b. The supplier may promise more than it can deliver. This is called adverse selection because it leads firms to select the wrong supplier. c. The supplier might cut corners when it comes to delivering the product or service 0 moral hazard. It may use inferior $uality components skimp on $uality assurance procedures or use people with lower $ualifications than those it promised. 3le6ibility and incentive: It gives incentives to suppliers to do things that the customer probably welcomes such as keeping down the production and delivery costs and inventory levels low. Third pary suppliers may feel these incentives more keenly than people within the firms& hierarchy. 7uality *ontrol and risk of loss of key resources.

Virtual Value Chains The logical outcome of an outsourcing strategy is a virtual value chain where almost all linkages are electronic. Value chains are increasingly being split up across networks of specialist suppliers connected by E%I systems 0 potentially located across the globe. 8 linked effect of this is that purchasing is increasingly taking place through websites that also may be located anywhere in the world. 8 virtual chain is hyperarchy where structures are constantly responding to changes in customer demands and competitor behaviour. Virtual value chains therefore re$uire different competencies and capabilities from the traditional hierarchy not least of which is the ability to develop and use websites to transact business. Travel agencies retailing banks etc are good e6amples of industries whose value chains are changing fast. Strategic Alliances: 8 partnership between two or more firms is commonly known as strategic alliance. Eg friendly agreement as to which company will be setting up retail outlet in a particular geographical area. 'uch informal arrangements are common in areas where there are long!standing friendships and relationships between firms such as in the Italian clothes manufacturing industry or the 9apanese system of :eiretsu. 2owever alliances including outsourcing agreements normally involve a legal contract which defines areas of cooperation: ;icensing: allocation of specific rights by one parent firm to a partner. The partner may be given local manufacturing rights for a patented product or licensed to market locally produced items under the parent firm&s brand name. In e6change the parent firm receives royalty. This is common in media based industries music industry. 3ranchising: involves the sharing of profits and ownership between the parent and a franchisee who agrees to sell the company&s products in a defined format. 3or eg (izza hut&s and T<I3&s =: frenchisee is 5hitbread (;* %istribution rights: agents with local geographical knowledge %evelopment agreements: >anufacturing agreements:

The enefits of Alliances ;earning from organizations with complementary competencies. .eing able to penetrate countries that restrict access to part or all of their economy. 8ccessing a local partner who knows the accepted ways of doing business has the necessary contacts or understands the particular re$uirements of local customers in newly opened markets about which there is little e6ternal knowledge.

8ccess to organizations with cultures and architectures that promote creativity and innovation.

!anagement Challenges Trust has to be maintained between the organizations which may be difficult to do at times when these same firms are potentially in competition with one another for scarce resources and may even be selling products which are substitutes for their collaborators. There is a risk of hold!up and possible logistical problems. If physical inputs are being supplied then partners have to be close enough to each other for essential supplies to be delivered at right place at the right time and $uality has to be consistently high. ?. Scale of "perations: /rganizations face important trade!offs in choosing whether to ma6imize the scale of an activity in order to get a cost advantage or opt for a smaller but more e6pensive scale of operation ,to gain differentiation-. /rganizations can operate at different scales at different stages in their value chain and for different market segments. #$ Scope of operations %$ &ocation decisions @. &in'ages: 2ow linkages between different activities can generate value. There are several ways: a. /ne activity can partially substitute for another. b. /ne activity can improve the performance of another c. /ne activity can generate information that can be used by another. ($ Decisions and trade-offs in the value chain Table 4.) page )?+

Types of Value chain

)$ !anufacturing style organizations 3ig 4.+ page )?? It includes si6 primary activities: (roduct design and development 'upply /perations %istribution >arketing and 'ales 8fter 'ales service 3our support activities: (urchasing (rocess development 2uman resource management 3inance and planning Table 4.+ page )?4 and 4.? page )?@

*$ Professional services 3ig 4.A page )AA and table 4.4 page )A4 +$ ,et-or' "rganizations 3ig 4.4 page )AB .hat you should include in a value chain analysis: Value chain analysis is potentially a very powerful tool for understanding an organization&s strategy. It brings together a number of different aspects of the organization 0 decisions about scale and scope and vertical integration strategic resources 0 and shows how they combine to generate competitive advantage. (orter proposed using the value chain as a framework for the financial analysis of a firm. 2e suggested assessing the cost and assets associated with each activity to see whether the amount the firm is investing in an activity is in line with its strategic value. 2owever its very difficult to do in practice esp using secondary data. If you identify an activity as important part of organization&s value chain be sure that it is e6ceptional and identify how it leads to advantage. 'cope location and structural decisions such as vertical integration or alliances with other firms should only feature in your analysis if they are genuinely unusual in the industry in $uestion. Cou need to show in your analysis using $ualitative and $uantitative evidence how it leads to cost and1or differentiation advantage. Cou may also want to highlight why some elements of an org&s strategy do not feature in its value chain.