The value chain The value a company creates is measured by the amount that buyers are willing to pay

for a product or service. A company is profitable if the value it creates exceeds the cost of performing value creation functions, such as procurement, manufacturing and marketing. To gain a competitive advantage a company must either perform value creation functions at a lower cost than its rivals or perform them in a way that its leads to differentiation and a premium price. That is, it must pursue the strategies of low cost or differentiation. The value chain is divided between primary activities and support activities.

The value chain Infrastructure (Structure & Leadership)

Support Activities

Human Resources Research & Development Materials Management Manufacturing Marketing Sales & Services Goal

Primary Activities

The Value Chain

Cross Functional goals C u s t o m e r R e s p o n s Goal i v e n e s s Marketing

Infrastructure Human Resource R&D Materials Management Manufacturing E f f i c i e n c y Q u a l i t y I n n o v a t I o n

Cross Functional Goals and Value Chain Primary activities have to do with the physical creation of the product (manufacturing) and those involved in marketing, delivery and after sales service (marketing) . Support activities are the functional activities that allow the primary activities of manufacturing and marketing to take place. The materials management function controls the transmission of physical materials through the value chain, from procurement through operations into distribution. The efficiency with which it can be carried out can lower the cost of value creation . In addition, An effective materials management function can monitor the quality of inputs into the manufacturing process. This results in an increase in the quality of a companys outputs, thereby facilitating premium pricing . The R & D function develops new products and process technologies. Technological developments can lower manufacturing costs and result in the creation of more attractive products that demand a premium price. Thus R & D can affect primary manufacturing and marketing activities and through them Value Creation.

The Human Resource function ensures that the company has the right mix of skilled people to perform its value creation activities effectively . Infrastructure is the company wide context within which all the other value creation activities take place; it includes the companys organizational structure , control systems and culture. Cross functional goals can be regarded as goals that cut across the different value creation functions of a company. Achieving Superior efficiency : 1. By Economies of scale : -

Unit Cost

Minimum efficient scale Volume One way of achieving superior efficiency is by gaining economies of scale. Economies of scale is the ability to spread fixed costs over a large production volume. Another source of scale economies is the ability of companies producing in large volumes to achieve a greater division of labour and specialization. Specialization in turn will increase employee productivity.

2. By Learning Effect : Learning effects are cost saving that come from learning by doing. Labour learns by repetition how best to carry out a task. Learning effects tend to be more significant in situations where a technologically complex task is repeated, since there is more to learn . No matter how complex the task, however learning effects typically die out after a limited period of time.

Unit cost

Accumulated Output Thus company A because it is further down the experience curve has a clear cost advantage over company B . This concept is more important in those industries where the production process involve the mass production of a standardized output.(for example the manufacturer of semiconductor chips) . So every company must try to ride down the experience curve as quickly as possible. 3. By Flexible Manufacturing (Lean Production) Best way to achieve high efficiency and hence low unit costs, is through the mass production of a standardized output. The trade off implicit in this idea is one between unit costs and product variety . Producing greater product variety from a factory implies an inability to realize economies of scale. According to this

Total

Variety Related

Unit Cost Volume Related

Low Production Volume Traditional Manufacturing

High

logic, the way to increase efficiency and drive down unit cost is to limit product variety and produce a standardized product in large volumes. total

Unit cost

Volume Related

Variety Related low production volume & product variety Flexible (Lean) Manufacturing high

Flexible (Lean) Manufacturing The term flexible manufacturing technology or lean production covers a range of manufacturing technologies designed to : a) Reduce setup times for complex equipment. b) Increase the utilization of individual machines through better scheduling. c) Improve quality control at all stages of manufacturing . Flexible manufacturing technologies allow the company to produce a wider variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output. Marketing Strategy and Efficiency Marketing strategy the position that a company takes with regard to pricing , promotion, advertising, product design and distribution can play a major role in boosting a companys efficiency.

Average Unit Cost

Low

Customer Defection Rate

High

Relationship Between average unit costs and Customer Defection Rates Customer defection rates are the percentage of a companies customers that defect every year to competitors. Defection rates are determined by customer

loyality which in turn is a function of the ability of a company to satisfy its customers. Because acquiring a new customer entails certain one time fixed costs for advertising , promotions etc, there is a direct relationship between defection rates and costs. +

profit per customers o length of time customer has been with the company

_ Because of the fixed costs of acquiring new customers that stay with the company only for a short time before switching to competitors can often yield a negative profit. However, the longer a customer stays with the company, the more the fixed costs of acquiring that customer can be spread out over repeat purchases, which boosts the profit per customer. Achieving Superior Quality : Achieving superior quality gives a company two advantages. The enhanced reputation for quality lets the company charge a premium for its products and the elimination of defects from the manufacturing process increases efficiency and hence lowers costs. Achieving TQM requires the adoption of strategies that cut cross functions. This includes building an organization wide commitment to quality.

Achieving Superior Innovation : Successful innovation of products or process gives a company something unique that its competitors lack. This uniqueness may allow a company to charge a premium price or lower its cost structure below that of its rivals. Competitors, however, will try to imitate successful innovations. Often they will ultimately succeed, although high barriers to imitation can slow it down. Therefore maintaining a competitive advantage requires a continuing commitment to innovation. But failure rate of innovation is very high , only 10 to 20 % of new products actually generate profit when they get to market place. Achieving Superior Customer Responsiveness : The more responsive a company is to the needs of its customers, the greater the brand loyality that the company can command. Achieving superior customer responsiveness involves giving customers value for money. In fact achieving superior efficiency , quality, and innovation are all part of achieving superior customer responsiveness. It must ensure a strong customer focus which can be attained through leadership.

Strategic Management Theory by Charles W.L. Hill / Gareth R.Jones