Papers on Value chain analysis; Reports on Different Companies The article focuses on the main aspects of Value chain

analysis. The activities entailed in the framework are discussed in detail, with respect to competitive s trategies and value to the customer. The article includes tips for students and analysts on how to write a good Value chain analysis for a firm. Moreover, sourc es of findings information for value chain analysis have been discussed. The lim itations of Value Chain analysis as a model have also been discussed. Introduction The value chain approach was developed by Michael Porter in the 1980s in his boo k Competitive Advantage: Creating and Sustaining Superior Performance (Porter, 198 5). The concept of value added, in the form of the value chain, can be utilised to develop an organisations sustainable competitive advantage in the business are na of the 21st C. All organisations consist of activities that link together to develop the value of the business, and together these activities form the organi sations value chain. Such activities may include purchasing activities, manufactu ring the products, distribution and marketing of the companys products and activi ties (Lynch, 2003). The value chain framework has been used as a powerful analys is tool for the strategic planning of an organisation for nearly two decades. Th e aim of the value chain framework is to maximise value creation while minimisin g costs (www.wikipedia.org). Main aspects of Value Chain Analysis Value chain analysis is a powerful tool for managers to identify the key activit ies within the firm which form the value chain for that organisation, and have t he potential of a sustainable competitive advantage for a company. Therein, comp etitive advantage of an organisation lies in its ability to perform crucial acti vities along the value chain better than its competitors. The value chain framework of Porter (1990) is an interdependent system or network of activities, connected by linkages (p. 41). When the system is managed careful ly, the linkages can be a vital source of competitive advantage (Pathania-Jain, 2001). The value chain analysis essentially entails the linkage of two areas. Fi rstly, the value chain links the value of the organisations activities with its m ain functional parts. Then the assessment of the contribution of each part in th e overall added value of the business is made (Lynch, 2003). In order to conduct the value chain analysis, the company is split into primary and support activit ies (Figure 1). Primary activities are those that are related with production, w hile support activities are those that provide the background necessary for the effectiveness and efficiency of the firm, such as human resource management. The primary and secondary activities of the firm are discussed in detail below. Primary activities The primary activities (Porter, 1985) of the company include the following: Inbound logistics These are the activities concerned with receiving the materials from supplie rs, storing these externally sourced materials, and handling them within the fir m. Operations These are the activities related to the production of products and services. This area can be split into more departments in certain companies. For example, the operations in case of a hotel would include reception, room service etc. Outbound logistics These are all the activities concerned with distributing the final product a nd/or service to the customers. For example, in case of a hotel this activity wo uld entail the ways of bringing customers to the hotel. Marketing and sales This functional area essentially analyses the needs and wants of customers a

nd is responsible for creating awareness among the target audience of the compan y about the firms products and services. Companies make use of marketing communic ations tools like advertising, sales promotions etc. to attract customers to the ir products. Service There is often a need to provide services like pre-installation or after-sal es service before or after the sale of the product or service. Support activities The support activities of a company include the following: Procurement This function is responsible for purchasing the materials that are necessary for the companys operations. An efficient procurement department should be able to obtain the highest quality goods at the lowest prices. Human Resource Management This is a function concerned with recruiting, training, motivating and rewar ding the workforce of the company. Human resources are increasingly becoming an important way of attaining sustainable competitive advantage. Technology Development This is an area that is concerned with technological innovation, training an d knowledge that is crucial for most companies today in order to survive. Firm Infrastructure This includes planning and control systems, such as finance, accounting, and corporate strategy etc. (Lynch, 2003). Figure 1: The Value Chain: Source: Porter (1985) Figure 1 Porter used the word margin for the difference between the total value and the cos t of performing the value activities (Figure 1). Here, value is referred to as t he price that the customer is willing to pay for a certain offering (Macmillan e t al, 2000). Other scholars have used the word added value instead of margin in or der to describe the same (Lynch, 2003). The analysis entails a thorough examinat ion of how each part might contribute towards added value in the company and how this may differ from the competition. In a study of Saudi companies, Ghamdi (20 05) found that 22% of the companies in the study used value chain frequently, wh ile 17% reported that they somewhat used it, and 42% did not use the tool at all . An interesting finding of the study was that the manufacturing firms were freq uent users of the tool compared to their service counterparts (Ghamdi, 2005). How to write a Good Value Chain Analysis The ability of a company to understand its own capabilities and the needs of the customers is crucial for a competitive strategy to be successful. The profitabi lity of a firm depends to a large extent on how effectively it manages the vario us activities in the value chain, such that the price that the customer is willi ng to pay for the companys products and services exceeds the relative costs of th e value chain activities. It is important to bear in mind that while the value c hain analysis may appear as simple in theory, it is quite time-consuming in prac tice. The logic and validity of the proven technique of value chain analysis has been rigorously tested, therefore, it does not require the user to have the sam e in-depth knowledge as the originator of the model (Macmillan et al, 2000). The first step in conducting the value chain analysis is to break down the key acti vities of the company according to the activities entailed in the framework. The next step is to assess the potential for adding value through the means of cost advantage or differentiation. Finally, it is imperative for the analyst to dete rmine strategies that focus on those activities that would enable the company to attain sustainable competitive advantage. It is important for analysts to remember to use the value chain as a simple chec

klist to analyse each activity in the business with some depth (Pearson, 1999). The value chain should be analysed with the core competence of the company at it s very heart (Macmillan et al, 2003). The value chain framework is a handy tool for analysing the activities in which the firm can pursue its distinctive core c ompetencies, in the form of a low cost strategy or a differentiation strategy. I t is to be noted that the value chain analysis, when used appropriately, makes t he implementation of competitive strategies more systematic overall. Analysts sh ould use the value chain analysis to identify how each business activity contrib utes to a particular competitive strategy. A company may benefit from cost advan tages if it either reduces the cost of individual activities in the value chain or the value chain is essentially reconfigured, through structural changes in th e activities. One of the problematic areas of the value chain model, however, is that the costs of the different activities of the value chain need to be attrib uted to an activity. There are few costing systems that contain detailed activit y level costing, unless an Activity Based Costing (ABC) system is in place in th e company (Macmillan et al, 2003). Another relevant area of concern that analyst s must pay particular attention to is the customers view point of value. The cust omers of the firm may view value in a generic way, thereby making the process of evaluating the activities in the value chain in relation with the total price i ncreasingly difficult. It is imperative for analysts to note that the overall di fferentiation advantage may result from any activity in the value chain. A diffe rentiation advantage may be achieved either by changing individual value chain a ctivities to increase uniqueness in the final product or service of the company, or by reconfiguring the companys value chain. The difference between a low cost strategy and differentiation in practice is un like the rigidity that is provided regarding the same in theory. Analysts must n ote that the difference between these two strategies is one of the shades of gre y in real life compared to the black and white that is offered in theory. For ex ample, Emerson Electric, which is a cost leader, has quality as a strategic conc ern in achieving its best costs strategy (Pearson, 1999). Ivory Soap, a leading pr oduct of P&G, is a broad differentiator that turned into a cost leader. Quality is a strategic concern for managers of Ivory Soap, along with delivering a high value product consistently. Note that in a company with more than one product area, it is appropriate to con duct the value chain analysis at the product group level, and not at the corpora te strategy level. It is crucial for companies to have the ability to control an d make most of their capabilities. In the advent of outsourcing, progressive com panies are increasingly making their value chains more elastic and their organis ations inherently more flexible (Gottfredson et al, 2005). The important questio n is to see how the companies are sourcing every activity in the value chain. A systematic analysis of the value chain can facilitate effective outsourcing deci sions. Therefore, it is important to have an in-depth understanding of the compa nys strengths and weaknesses in each activity in terms of cost and differentiatio n factors. The strategy of Wal-Mart worked when the company improved its business through i nnovative practices in activities such as purchasing, logistics, and information management, which resulted in the value offering of everyday low prices (Magretta , 2002). It is important to note that refining business models on a constant bas is is as critical to the success of the company as its business strategy. Notabl y, both the strategy and business model of an organisation are crucial for the r obustness of the overall value chain. For example, 7-Eleven had been vertically integrated, controlling most activitie s in the value chain by itself. The company has now outsourced many parts of its business including functions like HR, IT management, finance, logistics, distri bution, product development, and packaging. According to Gottfredson et al (2005 ), the value chain decisions of companies will increasingly shape their overall

organisational structure. Moreover, the value chain decisions will play a role i n determining the type of management skills that companies may need to develop o r acquire to survive in fiercely competitive business markets. The Apple podcasting value chain is comprised of nine steps that essentially mov e from raw content to the listener. All the steps of the value chain include con tent, advertising, production, publishing, hosting/bandwidth, promotion, searchi ng, catching, and listening. It is important to note that each step in the value chain adds value to the podcast in distinctive ways, has its own sets of challe nges and opportunities. It is important to note that the nature of value chain activities differs greatl y in accordance with the types of companies and industries. For companies with c omplex systems like IBM, Accenture and Cisco etc., it is not possible for one me mber of the value chain to provide all the products and services from start to f inish. The marketing function in such companies focuses on aligning with key par tners and allies that must collaborate with each other. For example, installing SAP s ERP system requires direct involvement from companies like HP, Oracle, and Accenture, along with indirect involvement of companies like EMC, Cisco, and Mi crosoft, and collaboration between many departments within the company. The mark et assets contrast starkly between the companies with complex systems and those that are driven by volume operations. For example, in case of Apples leading prod ucts like Macintosh and the iPod, the entire offer is inside a package, and the entire value chain is preassembled. The change of supplier for the Macintosh fro m IBM, to Intel, improved the system performance while retaining the value in te rms of price to the consumer. The only variable to manage in Apples case is the c onsumers preferences. The role of creating differentiation through unique quality features, along with promotion in order to create brand awareness, image and ev entually brand equity becomes imperative for volume operations driven companies like Apple (Moore, 2005). It is imperative to note that the value chains of companies have undergone many changes over the last two decades, due to the rapidly changing business environm ent. Information technology and the Internet have played a fundamental role in t ransforming certain parts and the interlinkages between parts of the value chain s of companies today. Moreover HRM is increasingly becoming a vital asset in the value chain that contributes to competitive advantage. Strategic alliances are also becoming an integral part of the value chains. For example, IBM once enjoye d backward vertical integration into the disk drive industry and forward vertica l integration into the consulting services and computer software industries (Hil l et al, 2007). According to the changing business environment, IBM had more tha n 400 strategic alliances as of 2003 (Thompson et al, 2003). Herein, the value c hain analysis is useful in providing a framework to examine the advantages that partners can give to each other (Pathania-Jain, 2001). It is important to note t he source of competitive advantage of a company for the value chain analysis. Th e competitive advantage for IBM, for example, lies in depth, breadth and the geo graphic spread of its global operations (Rai, 2006) and the loyalty that the big blue enjoys from its clientele. Lastly, analysts should look for the managerial implications that the new era of capability outsourcing may bring. The value chain decisions of companies will i ncreasingly shape their organisational structure. Furthermore these decisions wi ll determine the types of managerial skills that companies may need to develop t o survive in an increasingly competitive business environment. Where to find information for Value Chain Analysis Analysts can explore various sources to find information necessary for conductin g the value chain analysis. Up to three years of annual reports of the company c an be analysed to see how the costing of the activities are changing over the pe riod and whether they are in unison with the competitive strategy of the firm. T

hese annual reports of the company can be compared to the annual reports of the key competitors in order to see how competitive strategies differ between the co mpanies, along with finding the difference in the contribution of activities to the companys profitability. In order to gain knowledge about the core competence of the company, analysts ca n look at the company and competitor websites. SWOT analysis of the companies do ne by companies like Datamonitor etc. can help the analyst to understand the key strengths and weaknesses of the company and how the firm differs from its compe titors. Furthermore, journal articles, trade publications and magazines are usef ul sources of information to identify how value is created in the particular ind ustry in which the company operates and which activities play a key role in the generation of that value. Limitations of Value Chain Analysis One of the limitations of the value chain model is that it describes an industri al organization which essentially buys raw materials and transforms these into p hysical products. Notably, at the time when the model was introduced (Porter, 19 85), service industries in the western countries employed lesser workforce compa red to todays statistics of the same (www.wikipedia.org). Academics and practitio ners alike have critiqued the model and its applicability in the context of serv ice organisations. Partnerships, alliances and collaboration along with differen tiation and low costs are common drivers of value today. The limitations of the model include the fact that value for the final customer is the value only in its theoretical context (Svensson, 2003), and not practical t erms. The real value of the product is assessed when the product reaches the fin al customer, and any assessment of that value before that moment is only somethi ng that is true in theory. Despite this limitation, analysts can effectively use the value chain model to determine the value to the final customers in a theore tical way. Use of other planning tools and techniques like Porters generic strate gies, analysis of critical success factors etc. is recommended in conjunction wi th the value chain framework for a more comprehensive analysis of a companys stra tegy and planning. Conclusion The value chain framework has been used as a powerful analysis tool for organisa tional strategic planning for nearly two decades now. The value chain framework shows that the value chain of a company may be useful in identifying and underst anding crucial aspects to achieve competitive strengths and core competencies in the marketplace. The model also reveals how the value chain activities are tied together to ultimately create value for the consumer. The five primary activiti es and four support activities form an interdependent system that is connected b y linkages. Analysts conducting the value chain analysis should break down the k ey activities of the company according to the activities entailed in the framewo rk, and assess the potential for adding value through the means of cost advantag e or differentiation. Finally, it is important to determine strategies that focu s on those activities that would enable the company to attain sustainable compet itive advantage. It is important to analyse the value chain of a company with the core competence at its very heart. The nature of value chain activities differs greatly in acco rdance with the types of companies and industries. The value chains of companies have undergone many changes in the last two decades due to advancements in tech nology facilitating change at a very rapid pace in the business environment. Out sourcing will cause major changes in organisations and their value chains, with significant managerial implications. Sources for finding information on value chain analysis include three years annu al reports of the particular company and its key competitors, company websites,

journal articles, and other reputed trade ools and techniques like Porters generic factors etc. is suggested in conjunction ore comprehensive analysis of a companys

magazines etc. Use of other planning t strategies, analysis of critical success with the value chain framework for a m strategic planning.

If you found this article useful please have a look at the other articles we hav e written: Ansoff analysis, McKinsey 7S Framework, SWOT analysis, Scenario Plann ing, Porter s 5 Forces analysis, Product Life Cycle, BCG Growth-Share Matrix, Pe st Analysis, Balanced Scorecard, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix and Porter s Generic Strategies. References Ghamdi, S. M. Al (2005), The Use of Strategic Planning Tools and Techniques in S audi Arabia: An Empirical study, International Journal of Management, Vol. 22, N o. 3, p. 376-395. Gottfredson, M. & Puryear, R. & Phillips, S. (2005), Strategic Sourcing From Per iphery to the Core, Harvard Business Review, Vol. 83, No. 2, p. 132-139. Hill, W. L. C. & Jones, R. G. (2007), Strategic Management: An Integrated Approa ch, 7th ed., Houghton Mifflin Company, Boston: New York. Lynch, R. (2003), Corporate Strategy, 3rd ed., Prentice Hall Financial Times. Macmillan, H. & Tampoe, M. (2000), Strategic Management, Oxford University Press . Magretta, J. (2002), Why business models matter, Harvard Business Review. Moore, G. A. (2005), Strategy and your stronger hand, Harvard Business Review. Pathania-Jain, G. (2001), Global parents, local partners: A value-chain analysis of collaborative strategies of media firms in India, Journal of Media Economics , Vol. 14, No. 3, p. 169-187. Pearson, G. (1999), Strategy in Action, Prentice Hall Financial Times. Porter, M. E. (1985), Competitive Advantage: Creating and Sustaining Superior Pe rformance, New York: Free Press. Porter, M. E. (1990), The competitive advantage of nations, New York: Free Press . Rai, S. (2006), India becoming a crucial cog in the machine at IBM, The New York Times. Rainbird, M. (2004), A framework for operations management: the value chain, Int ernational Journal of Physical Distribution & Logistics Management, Vol. 34, No. 3/4. Svensson, G. (2003), Consumer driven and bi-directional value chain diffusion mo dels, European Business Review, Vol. 15, No. 6, p. 390-400. Thompson, A. A. & Strickland, J. A. (2003), Strategic Management: Concepts and C ases, Thirteenth ed., McGraw-Hill. Wikipedia, The free encyclopaedia, [Accessed on 6/10/06] Copyright 2002-2009 Papers4You.Com All Rights Reserved