Value chain management

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Meaning of value chain analysis

Value chain model
Inbound and outbound logistics management process
Other support activities (HR, procurement ,IT etc)

MEANING OF VALUE CHAIN ANALYSIS

Value chain analysis (VCA) is a process where a firm identifies its primary and
support activities that add value to its final product and then analyze these activities to
reduce costs or increase differentiation.
Value chain represents the internal activities a firm engages in when transforming
inputs into outputs.
VCA is a strategy tool used to analyze internal firm activities. Its goal is to recognize,
which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive
advantage. In other words, by looking into internal activities, the analysis reveals where a
firms competitive advantages or disadvantages are. The firm that competes through
differentiation advantage will try to perform its activities better than competitors would
do. If it competes through cost advantage, it will try to perform internal activities at lower
costs than competitors would do. When a company is capable of producing goods at
lower costs than the market price or to provide superior products, it earns profits.
M. Porter introduced the generic value chain model in 1985. Value chain represents all
the internal activities a firm engages in to produce goods and services. VC is formed
of primary activities that add value to the final product directly and support
activities that add value indirectly. Below you can see the Porters VC model.

Primary Activities

Support Activities

Although, primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive advantage
mainly derives from technological improvements or innovations in business models or
processes. Therefore, such support activities as information systems, R&D or general
management are usually the most important source of differentiation advantage. On the
other hand, primary activities are usually the source of cost advantage, where costs can be
easily identified for each activity and properly managed.

Value Chain Analysis

A framework that firms can use to identify and evaluate the ways in which their
resources and capabilities can add value is value chain analysis. This framework is
useful because it enables firms to understand which parts of their operations or
activities create value by segmenting the value chain into primary and secondary
activities as illustrated in Figure 3.3.

Figure Note: Students should refer to Figure 3.3 and Tables 3.6 and 3.7 during your explanation of
the value chain concept. Tables 3.6 and 3.7 develop the criteria for examining the value-creating
potential of the firm's primary and secondary activities, respectively, after these terms are introduced
in Figure 3.3.

FIGURE 3.3
The Basic Value Chain

Figure 3.3 illustrates how the value-creating activities performed by the firm can be
separated into primary and secondary activities.

Primary activities represent traditional line activities such as inbound logistics,

operations, outbound logistics, marketing and sales, and service.

Support activities are represented by a firm's staff activities and include its financial
infrastructure, human resource management practices, technological development,
and procurement activities.

Table Note: The first step in value chain analysis is to carefully examine each of the firm's
primary activities to assess the potential for creating or adding value (see Table 3.6).

TABLE 3.6
Examining the Value-Creating Potential of Primary Activities

Table 3.6 presents value-creating issues to be addressed for each primary activity.
Activities are rated as superior, equivalent, or inferior (relative to competitors).
Students can refer to this table during your discussion.

Inbound logistics: Examine all activities related to the receipt, control,

warehousing, inventory, and distribution of raw materials or component parts into
the production process.
Operations: Activities to be examined are all of those necessary to convert the
inputs (raw materials or components) available as a result of inbound logistics into
finished products. Examples include machining, assembly, equipment maintenance,
and packaging.
Outbound logistics: This category represents the firm's activities involved with the
collection, storage, and physical distribution of products to customers. Examples
include warehousing or storage of finished products, material handling, and order
processing.
Marketing and sales: Several marketing and sales activities must be completed to
both induce customers to purchase products and ensure that products are available.
Activities include developing advertising and promotion campaigns; selecting and
developing distribution channels; and selecting, training, developing, and
supporting a sales force.
Service: These are the activities that a firm offers to enhance or maintain a
product's value, including installation, product use training, adjustment, repair, and
warranty services.

Table Note: The next step in the value chain analysis process is to examine the firm's support
activities to determine any value-creating potential in those activities (see Table 3.7).

TABLE 3.7
Examining the Value-Creating Potential of Support Activities

Table 3.7 presents value-creating issues to be addressed for each support activity.
Activities are rated as superior, equivalent or inferior, relative to competitors.
Students can refer to this table during your discussion.

Procurement: These are activities that are completed to purchase the inputs
needed to produce a firm's products, including items consumed or used in the
manufacturing process (such as raw materials or component parts), supplies, and
fixed assets (machinery, equipment and facilities).
Technological development: All activities that are completed to either improve a
firm's products or its production processes. This includes basic research, process
and equipment design, product design, and servicing procedures.
Human resource management: These activities are related to the recruiting,
hiring, training, developing, and compensating (including performance assessment
and reward systems) of a firm's employees.
Firm infrastructure: These activities support the activities performed in the firm's
value chain, including general management practices, planning, finance,
accounting, legal, and government relations. By performing its infrastructure-related
activities, a firm identifies external opportunities and threats, and internal strengths
and weaknesses related to firm resources and capabilities, and supports or nurtures
its core competencies.

Using the value chain framework enables managers to study the firm's resources and
capabilities in relationship to the primary and support activities performed to design,
manufacture, and distribute products, and to assess them relative to competitors'
capabilities. For these activities to be sources of competitive advantage, a firm must
be able to:
perform primary or support activities in a manner superior to the ways that
competitors perform them
perform a primary or support activity that no competitor is able to perform to create
superior value for customers and achieve a competitive advantage
This implies that, given that individual firms are comprised of unique or heterogeneous bundles of activities,
reconfiguring the value chainor rebundling resources and capabilitiesmay enable a firm to develop unique valuecreating activities.

Figure Note: The potential to configure the value chain to create a core competency and achieve
competitive advantage is illustrated in Figure 3.4, and with a great deal of detail.

FIGURE 3.4
Prominent Application of the Internet in the Value Chain

This is a very involved figure, but it helps to illustrate the vast potential of the Internet to change the way managers think
about the value chain. Explaining the ins-and-outs of the figure will take a good bit of time, but it is worth the
investment.

The managerial challenge is that the value-creation process is difficult and there is no
one best way to assess a firm's primary and support activities or to evaluate the valuecreating potential of those activities either within the firm or relative to competitors,
because of incomplete or ambiguous data.

By being objective, managers may be able to use the value chain framework to identify
new, unique ways to combine resources and capabilities to create value that are
difficult for competitors to recognize, understand, or imitate. The longer a firm is able
to keep competitors "in the dark" as to how resources and capabilities have been
combined to create value, the longer a firm will be able to sustain a competitive
advantage.

Firms can use outsourcing as an alternative to identify primary or support activities for
which its resources and capabilities are not core competencies and do not enable the
firm to add superior value and achieve competitive advantage.