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To conduct a value chain analysis, the company begins by identifying each part of its
production process and identifying where steps can be eliminated or improvements can be
made. These improvements can result in either cost savings or improved productive capacity.
The end result is that customers derive the most benefit from the product for the cheapest cost,
which improves the company's bottom line in the long run.
Value is the amount that buyers are willing to pay for what a firm provides them and is
measured by total revenue
To understand how to conduct a value chain analysis, a business must first know
what its value chain is. A value chain is the full range of activities including
design, production, marketing and distribution businesses go through to bring a
product or service from conception to delivery. For companies that produce goods,
the value chain starts with the raw materials used to make their products, and
consists of everything that is added to it before it is sold to consumers.
The process of actually organizing all of these activities so they can be properly
analyzed is called value chain management. The goal of value chain management
is to ensure that those in charge of each stage of the value chain are
communicating with one another, to help make sure the product is getting in the
hands of customers as seamlessly (Good condition) and as quickly as possible.
With growing competition the organisations are becoming customer driven where
customer satisfaction is priority.
Value chain analysis is a strategic management tool to assess and review various
business functions in which usefulness is added to product or services.
An enterprise converts inputs into outputs where value is added to inputs to convert
them into outputs .
The chain of activities that is performed to add value to inputs in order to arrive at the
final outputs is referred to as value chain.
Competitive Advantage
Essential Requirements
If an enterprise wishes to enjoy competitive advantage it must carry out its activities in
a cost effective way.
Porter classified the full value chain into nine interrelated primary and support
activities.
Primary Activities
Inbound logistics: This refers to everything involved in receiving, storing and distributing
the raw materials used in the production process.
Location of distribution facilities,
Warehouse layout and designs
Operations: This is the stage where raw products are turned into the final product.
Marketing and sales: This stage involves activities like advertising, promotions,
sales-force organization, selecting distribution channels, pricing, and managing customer
relationships of the final product to ensure it is targeted to the correct consumer groups.
Service: This refers to the activities that are needed to maintain the product's performance
after it has been sold out. This stage includes things like installation, training, maintenance,
repair, warranty and after-sales services.
Quality of service
personnel and
ongoing training
Primary activities
Each of the categories may be vital to competitive advantage depending on the industry.
For a distributer, inbound and outbound logistics are the most critical.
For a service firm providing the services on its premises such as restaurant or retailer.
For a bank engaged in corporate lending , marketing and sales are a key to competitive
advantage through the effectiveness of the calling officer and the way in which loans are
packaged and priced.
However all the categories of primary activities will be present to some degree and play
some role in competitive advantage.
Support activities
Infrastructure -
Technology Department
Procurement.
Procurement: It refers to the function of purchasing inputs used in the firms value chain,
not to the purchase input themselves. This is how the raw materials , supplies and the other
consumable items for the product are obtained as well as assets such as machinery
,laboratory equipment, office equipment and buildings. For e.g. chocolate manufacturing
and electric utilities for example procurement of cocoa beans and fuel respectively is by far
the most important determinant of cost position.
Technology development: Technology can be used across the board in the development of a
product, including in the research and development stage, in how new products are
developed and designed, and process automation.
Activity types
Within each category of primary and support activities, there are three activity types that play a
different role in competitive advantage.
Direct activities- Activities directly involved in creating value for the buyer , such as assembly,
parts matching, sales force operation, advertising, product design, recruiting etc.
Indirect Activities that make it possible to perform direct activities on a continuing basis, such
as maintenance, scheduling, operation of facilities, sales force administration, research
administration, vendor record keeping etc.
Quality assurance- Activities that ensure the quality of other activities, such as monitoring,
inspecting, testing, reviewing, checking, adjusting and reworking.
Acquisition cost : Cost of research, design and testing and purchase of capital
equipment.
Maintenance cost
Initial Cost Capital cost and set up cost . The asset can be in house or can
be procured from supplier.
Operating cost Apart from the operation and maintenance it includes some
support costs like material handling, quality control and energy cost.
Disposal Cost
Disposal cost
Disposal cost may be significant as the asset must be dismantled and removed
and the site made good for other use.
Quantify the other life cycle cost apart from purchase cost
Optimise the trade-off between acquisition cost operation cost and disposal
cost over the economic life of the asset.
Example : Computers sold with a one year guarantee . In this case it might be
worth increasing manufacturing cost by 2% in order to improve the reliability
of computers performance so that cost of repairs are less in the time of
guarantee.
XYZ ltd is about to replace its old boiler requirement either by a coal fired
system or by an oil fired system. Finance cost is 15% per annum.
Initial Cost of Boiler : Rs.70000 for Coal and Rs.100000 for oil fired.
Annual operating cost of boiler : Rs60000 for Coal and Rs.45000 for oil.
If the company expected the new boiler system to work for at least 15 years
which system should be chosen.
Assignment
S ltd is about to replace its boiler equipment. Following three type of boiler systems
are considered for replacement. The associated cost are given also. The new boiler
system will have economic life of 10 years. The finance cost of the firm is 15% p.a.
Which system should be chosen? (Present value Annuity factor @15% for 10 years: 5.019)
Boiler System
Cost of Boiler
Annual Fuel cost
Annual labour cost
Annual maintenance Cost
Annual Electricity Cost
Oil fired
67000
25000
nil
3000
1000