ISM module 2

VALUE CHAIN ANAYLYSIS

Examination of the theory of competitive Advantage

( Basis of value chain analysis)

The theory of Competitive Advantage

Founded by Michael Porter

Ideology: That any nations competitiveness of its industries are

based on the following four attributes

Factor Endowments ( presence of abundant factors and

necessary infrastructure)

Demand Conditions

Related and supporting industries

Firm strategy structure and rivalry

Example: Nokia in Finland, Swiss industries in precision

instruments
FORMULATIONS OF COMPETITIVE STRATEGIES IN IB
( Towards value chain Analysis)

The idea is that a firm should systematically form and

implement a strategy( plan of action) in order to excise control
over its environment ( competitors, markets, suppliers and Govt)

Basic Strategies in the corporate sector:

DELIBERATE

EMERGENT

Deliberate is planning for future action on factors in IB

Emergent is patterned strategies on the results of past and

present action

BASIC PRINCIPLES OF COMPETITIVE STARTEGY IN IB

External forces that drive a firms structure

Types of strategy that determines firms competitive positioning

within industry

The internal organisation of firm ( Value chain) or internal

sources of competitive advantage

External Structure
 Market, suppliers, product services , threat of new entrants ,
other competitors

This will effect firms profitability, pricing policies, levels of

profits

Competitive positioning

Porters GENERIC strategies of cost leadership and product

differentiation

Cost leadership

Product differentiation

Cost leadership

Development of value attributes and quality to achieve industry

standards

Have a cost strategy which other firms cannot imitate focusing

on larger market share
Product Differentiation:

Uniqueness of product and services

Eg, everready batteries, Escorts tractors

Again a strategy that can achieve unique advantage on features

highly valued by customers and not easy for firms to copy

“ niche’

THE VALUE CHAIN

M PORTER’S CONCEPT

Internal structure of any company into 5 primary and 4 support

activities

Primary acts are those that are directly involve in the creation of
product or service

Support acts are those that facilitate the creation and also the
transfer to the customer

DIAGRAM

In bound logistics:

Inward delivery of input to be disseminated to the creation, e.g

raw material, body parts,

Operations:
Actvities that transform the inputs , maintain production and
keep order in process

Out bound Logistics:

Transport of products from the firm to the customers , order

processing

Marketing and Sales

After sale service

To increase the probability of a repeat purchase

SUPPORT ACTIVITIES

Procurement;

Purchase of all essential setup of business in all fields

Technological Development

( process innovation) applied everywhere

HR Management

Training and evaluation is required in all fields whether primary

or support
Quality of staff important

Firm Infrastructure
Financing accounting, legal, safety standards

Every business requires an infrastructure suitable to various

requirements of production e.g fashion industry

Added value to products can increase sales in the longer run

Collective value of performing activities in each element of the

value chain exceeds their cost

Assessing the External Environment in relation to strategy

formulation

The External environment can be classified as

Remote Environment
Operating Environment

Remote Environement

Economic

Political

Social

Technological
Operating Environment

Competitors

Creditors

Customers

Labour market

Suppliers

Remote Environment

Economic points

Along with GDP, GNP, FX position

Key Factors: inflation, income levels, credit availability,
consumer purchasing power

Example:

Global recession due to excessive distribution of Sub prime

loans in US primarily and the inability of consumers to spend
more

Social:

Social values, key points:

Marriage, lifestyle, ethics, racial behaviour, education,
aesthetics, population changes

Example
Declining birth rate of US in early 60s and 70s became a threat
to some industries like children food, toys, clothes, the few
firms that did well, learned to recognize socio cultural values

Political:

Changes in Govt policy related to industries, foreign trade,

taxation, environment, defence, foreign trade,

Example:
Reagan administration favoured military policies of developing
defense systems, and cut Govt spending else where

Further examples can be equity requirements, nationalism,

patent protection

Technological

Current state, new products to become technically feasible,

Best example telecom domination and telecom innovations like

Key issues on operating environment

Competitors:

Level of competition can be determined by the following factors

Market share, breadth of product line, effectiveness of sales
distribution, price competitiveness, raw material costing and
availability, staff quality, research, advertisement

Competitors can evaluated on any the criterias,

Suppliers and Creditors:

Dependable ongoing relationship

Are suppliers competitive on pricing, quality, delivery,

Do potential creditors perceive the firm as having an acceptable
record? Their loan terms compatible with companys financial
status and profitability

Can they extend their line of credit?

Eg Global recession, the impact of credit crunch or irrecoverable
loans

Customer profile and Market changes:

The Japanese research future customer needs and wants by

interviewing those who own products of their competitors

Eg automobile, Japanese interviewed VW car owners in 70s and

then designed Toyota, Datsun to overcome American
domination

To expand market share Coke after generating 3.5 billion in

revenues and taking 90 % market share is now diversifying into
wines to target aging population
Internal Factors:

Financial ratios

Location and Coordination issues