Value Chain Analysis - PowerPoint

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					VALUE CHAIN ANALYSIS

APPROACH

THE VALUE CHAIN CONCEPT
A Value chain identifies

Activities, functions and business processes that have to be performed in

Designing, producing, marketing, delivering and supporting a product or service

MICHAEL PORTER’s VALUE CHAIN (1985)
SUPPORT ACTIVITIES

PRIMARY ACTIVITIES

THE VALUE SYSTEM

Suppliers value chain

Firm value chain

Channel value chain

Buyer value chain

DIRECT

• Activities directly involved in creating value • Assembly, advertising

ACTIVITIES

INDIRECT

• Makes it possible to perform direct activities on continuing basis • Maintenance, scheduling

QUALITY ASSURANCE

• Ensures quality of various activities • Monitoring, testing

COMPETITVE ADVANTAGE

TWO TYPES
COMPETITIVE ADVANTAGE

COST ADVANTAGE

DIFFERENTITATION

COST ADVANTAGE

COST ADVANTAGE
Behavior of firm`s cost and relative cost position based on value activities the firm performs.
This calls for independent analysis of value activities.

Each value activity has its own cost structure.
Behavior of cost affected by linkages and interrelationship.

VALUE CHAIN AND COST ANALYSIS

Each activity- operating costs & assets in form of fixed and working capital.

Activities separated if:-

• They represent significant or rapidly growing percentage of operating cost. • They have different cost drivers. • It is shared with other business units. • Affected by competitor`s behavior.

COST BEHAVIOR AND DRIVERS

Firm`s cost position results from cost behavior of its value activities

Cost behavior depends a number of structural factors that influence cost-known as cost drivers

MAJOR COST DRIVERS
Managerial control No managerial control

• Economies of scale • Learning • Pattern of capacity utilization • Linkages • Interrelationships • Integration • Timing

• Discretionary policies • Location • Institutional factors.

IDENTIFYING COST ADVANTAGE
A firm has cost advantage if its cumulative cost of performing all value activities is lower than the competitor’s

Sustainability: if the sources of a firm’s cost advantage are difficult for competitors to imitate

A FIRM’S RELATIVE COST POSITION IS A FUNCTION OF:

• The composition of its valuechain versus the competitors’ • Its relative position vis-a-vis the cost drivers of each activity

Two conditions are possible:
1. Competitors’ value chain are

different from that of the firms’
2. Competitors have the same value

activities as the firm

DETERMINING THE RELATIVE COST OF COMPETITORS
 First step: identify the competitor’s value chain  In order to estimate costs the firm should

employ comparisons between itself & the competitor

Examining several competitors simultaneously  Estimate differences in the competitors’ costs

THERE ARE 2 MAJOR WAYS TO GAIN COST ADVANTAGE
Control Cost Drivers

Reconfigure the Value Chain

 The two sources are not mutually exclusive  Successful cost advantage from multiple sources  Aggressively pursue cost reduction in activities that do not influence differentiation

RESULT OF COST ANALYSIS

Help managers in decision making.

Decision about
To expand activities To narrow company`s participation
“Make-or-buy” decision

Vertical or Horizontal integration

VERTICAL INTEGRATION

 The degree to which a firm owns its upstream suppliers & its

downstream buyers
 Significant impact on a business’s unit position in its industry with

respect to cost, differentiation and other strategic issues
 Expansion of activities downstream is called forward integration
 While expansion upstream is called backward integration

Vertical Integration: Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fiber intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain.

HORIZONTAL INTEGRATION

 The acquisition of additional business activities at the same level of

the value chain
 Horizontal growth can be achieved by internal expansion or by

external expansion through mergers and acquisitions of firms offering similar products and services
 A firm may diversify by growing horizontally into unrelated

businesses.

 Reliance Industries (Reliance) absorbing its 70%-

owned Reliance Petroleum (Reliance Petro) is a classic example of horizontal integration

MAKE-OR-BUY DECISION

Specialization : As the required service inputs become more specialized, it often becomes Complementarities increasingly difficult for in-house staff to effectively perform the functions

MAJOR INFLUENCES: decision 2 major factors influencing
Economies of scale

Complementarities
if services can be provided as a joint product, enabling better utilization of managerial or other scarce resources.

engaging personnel to provide a service in-house can only be justified if a firm (and, more specifically, certain service-consuming functions within a firm) attains a certain scale or size of operations

Standardization: An increasing standardization of service inputs often enables different tasks to be performed by a single person and Economies of scale also permits tasks to be executed by less-specialized personnel

DIFFERENTIATION

DIFFERENTIATION AND THE VALUE CHAIN
A differentiation advantage can arise from any part of the value chain. Differentiation stems from uniqueness.

Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation.

CONCLUSION
The value chain analysis can assist a manager in making the right decision for his/her enterprise. It is a great tool to improve a company’s performance to meet the ever-demanding environment.


				
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