Value Chain Analysis

Internal Analysis
Lecture 8

Value Chain Analysis

Porter (1985) - The Value Chain
The fundamental objective of all
organisations is to serve the needs of
customers, better than their rivals
They must do this by adding value.
Thus, all processes that occur in
organisations must operate to add value.

Value Chain Analysis

What is value?
It is the perceived value that we as
consumers get from the products and
services that we choose to buy.
Increasingly in consumer markets value
is more than the components that make
up a good.

Value Chain Analysis

What value does Mercedes Benz add to
an E-Class that makes it sell for a price
50% or more higher than a Ford Mondeo,
that in purely physical terms is the same
sort of size, has the same sort of
components, and does the job of moving
people from A to B in much the same
manner?

Value Chain Analysis

Some aspects of value will be in
the quality and reliability of the components
used
The quality and reliability of the manufacturing
processes
The design and aesthetics of the vehicles
The marketplace perception of the MB brand

Value Chain Analysis

Michael Porter standardised this by
looking at aspects of what he called The
Value Chain.
The basic diagram looks like this:

Value Chain Analysis

THE VALUE CHAIN

Support
activities

Firm infrastructure
Human Resource Management
Technology Development
Procurement

Inbound
logistics

Porter (1985)

Operations

Outbound
logistics

Primary value adding activities

Sales
&
Markg

Service

Concept: Company Value Chain

A companys business consists of all activities undertaken
in designing, producing, marketing, delivering, and supporting
its product or service
All these activities a company performs internally combine to
form a value chain so-called because the underlying intent
of a companys activities is to do things that ultimately create
value for buyers
The value chain contains two types of activities
Primary activities Where most of
the value for customers is created
Support activities Facilitate
performance of primary activities

Figure 4.3: A Representative Company Value Chain

4-9

Value Chain Analysis

Managing the linkages in the value chain:
Internally - ensuring that the resources of the
organisation are focused in those areas that are
critical to the value adding activity. This includes
development of core competencies in these areas.
Remember, for Mercedes Benz, these might be
quality of materials used, quality and consistency of
manufacturing and additional services provided,
such as a worldwide recovery service for its car
owners who break down

Example: Value Chain Activities

for a Bakery Goods Maker
Primary Activities

Supply chain management

Recipe development and

testing
Mixing and baking
Packaging

Support Activities

Quality control
Human resource

management
Administration

Sales and marketing

Distribution

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Example: Value Chain Activities

for a Department Store Retailer
Primary Activities

Merchandise selection and

purchasing
Store layout and product

display
Advertising

Support Activities

Site selection
Hiring and training
Store maintenance
Administrative activities

Customer service

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Why Do Value Chains of

Rivals Differ?
Several factors give rise to differences
in value chains of rival companies
Different strategies
Different operating practices
Different technologies
Different degrees of vertical integration
Some companies may perform particular activities
internally while others outsource them
Differences among the value chains of competing companies
complicate the task of assessing rivals relative cost positions

Value Chain Analysis

Managing the linkages in the value chain:
Externally - focusing on those activities that are
critical to the value adding process and out
sourcing those activities that are not. For
Mercedes Benz this will involve managing the
links to suppliers and distributors.

Value Chain Analysis

Issues arising:
changes in the value drivers (from KSIs and
KSFs) may leave the organisation exposed and
lacking the core competencies required to
compete in the future.
concentration upstream, or downstream may
shift power within the value system.
competitors may establish strategic alliances in
your value system.

Value Chain Analysis

The Value System:
refers to the upstream and downstream
linkages that exist between one
competitive arena and another.
in general these linkages are between
supplying firms and buying firms.

Value Chain Analysis

THE VALUE SYSTEM
Supplier A

Supplier B

Supplier C

Upstream

Distributor A

Firm
value chain

Distributor B

Distributor C

Downstream

The Value Chain System

for an Entire Industry
Assessing a companys cost competitiveness
involves comparing costs all along an industrys value chain
Suppliers value chains are relevant because
Costs, performance features, and quality of inputs provided
by suppliers influence a firms own costs and product
performance
Value chains of distributors and retailers are relevant
because
Their costs and profit margins
represent value added and are part
of the price paid by ultimate end-user
Activities they perform affect
end-user satisfaction

Representative Value Chain for an Entire Industry

4-19

Example: Value Chain Activities

Pulp & Paper Industry

Timber farming
Logging
Pulp mills
Papermaking
Distribution
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Value Chain Analysis

Issues to consider:
most operating environments involve highly
complex relations in the value system e.g.
car manufacturers deal with hundreds of
supplying firms in very different competitive
arenas.
How easy is it to compile such information,
even for your own business, let alone that of
rivals?

Value Chain Analysis

Issues to consider :
a firms suppliers may be supplying other
firms, some of which may be direct
competitors while others are in different
industries.
How would you ever find out costs for
them? firms would not willingly give out
such detailed financial information!

Value Chain Analysis

Issues to consider :
defining the competitive arena - firms may
be regarded as being in the same
competitive arena if they are trying to satisfy
the same basic customer need.
What need is an auto producer trying to
satisfy? Transportation? Flaunting of wealth?
Status?
What would compete? A Patek Philippe watch? A
luxury yacht? A private jet?

Value Chain Analysis

Issues to consider :
What about segmentation? i.e.. an auto firm
supplying a car for a low income family, or a very
wealthy private individual - is this meeting the
same need? i.e. Does Toyota really compete
with Lamborghini?
What about vertically integrated firms? Some
may or may not supply competitors, i.e. BT and
the physical telephone network.

Value Chain Analysis

Issues to consider :
What about spatial and geographical
factors?
Does a small English wine producer compete at all
with big, international French producers like Baron
Rothschild or Australians like Wolf Blass?

Should one include potential

competitors? If so, when?
When if ever - should Wolf Blass need to notice
and start to worry about, the competition from an
English producer like Three Choirs?

Value Chain Analysis

Competitive Advantage:
An organisation will only achieve a
competitive advantage (CA) over its rivals
if it can add more value, or the same level
of value at a lower cost.

Value Chain Analysis

Economies
Economies
ofofScale
Scale

Suppliers
Suppliers

Cost
CostReduction
Reduction

Design
Design

Sources of Cost
Reduction

Proprietary
Proprietary
Experience
Experience

Value Chain Analysis

Sources of Added Value
Suppliers
Suppliers

Design
Design

Proprietary
Proprietary
Experience
Experience

Added
AddedValue
Value

Value Chain Analysis

Issues to consider:
Uniqueness - can that CA be copied by rivals?
Improvements in value added and cost
reductions do not always improve profitability.
Profitability is linked to market power - the
dominant firm may be able to control the value
system to improve their profitability - e.g.
Supermarkets.