Haberberg and Rieple: Strategic

Management
Chapter Six: Distinctiveness (3): The
Value chain

Value chain
Value chain: A linked set of value
creating activities that begin with basic raw
materials coming from suppliers, moving on
to a series of value-added activities involved
in producing and marking a product or
service, and ending with distributors getting
the final goods into the hands of the ultimate
consumer

Value Chain Analysis

Allows the firm to understand the parts of its
operations that create value and those that
do not
A template that firms use to:
Understand their cost position
Identify multiple means that might be used to
facilitate implementation of a chosen businesslevel strategy

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33

Value Chain Analysis (contd)

Value chain
Shows how a product moves from raw-material
stage to the final customer

To be a source of competitive advantage, a

resource or capability must allow the firm:
To perform an activity in a manner that is superior
to the way competitors perform it, or
To perform a value-creating activity that
competitors cannot complete
Copyright 2004 South-Western. All rights
reserved.

34

Value chain analysis

Primary activities
Directly involved in delivering products or services
to a customer

Support activities
Contribute indirectly through supporting the
primary activities

The value chain for manufacturingstyle organizations

Value chain activities

Product design and development (R &D) : material
science, electronics, product design, development , testing

Supply (inbound logistics) : brings inputs , ordering,

delivery procedures, quality check of input. Investment in MRP, JIT etc:
quickly placing ordering and reliably.

Operations : functions related to production, scheduling etc

Distributions: managing relationship with distributors,
wholesalers, retailers ensuring right stock

Marketing & Sale : identifying need, promotional activity,

setting prices of product. Selection of sales person, distributors, retailers.

After sale Service : repair, maintenance , complaints

handling, customer training , telephone helplines etc

Secondary Activities
Purchasing : identification of potential suppliers, negotiation of
prices, delivery terms

Process Development : activities enhancing technologies

like ERPS, reduce no. of parts, no. of assembly lines, times, time spent
in fabricating, less attrition, enhancing output/employee

Human Resource management :Activities involved with

recruiting, hiring, training, developing, and compensating all
personnel

Finance & Planning: Activities that support the work of the

entire value chain (general management, planning, finance,
accounting, legal, government relations, etc.)
Support core competencies

5.3 Value Chain Analysis

Value chain analysis

Each activity should be examined relative to
competitors abilities and rated as
superior, equivalent or inferior

Strategic decisions in the value chain

Vertical integration and outsourcing

Buy on open market
Outsourcing
Insourcing
Offshoring
Nearshoring

Make within organizations hierarchy

Intermediate forms
Strategic alliances
Networks

Make or buy decisions

Trade off between

Production and set-up costs

Transaction costs
Flexibility and incentives
Control and the risk of loss of key resources.
Quality

Transaction costs
Avoidable administration costs
Transaction costs cost of doing business
with other organizations:
Include costs of being exploited or of trying to
prevent it

Value chain choices

The scale of operations
Trade-off between cost minimisation and local
responsiveness

The scope of operations

Dedicated or shared activities

Location of activities

Economies of Scale

Purchasing discounts
Spreading overheads and fixed costs
Division of labour: specialization
Utilizing expensive technologies
Not affordable or economic at low volumes

Economies of Scope
Shared tangible resources
Shared intangible resources
Competences, customer data, reputation

Linkages
One activity can partially substitute for others
Eg: process improvement- reduces after sale service, HR customer
complaint software marketing role

One activity can generate information that

can be used by others

Eg Customer database of marketing for production scheduling

Value chain analysis

Case Study H&M

Company Overview
Second largest Global apparel retailer
Name :
H for Hennes Women in Swedish
M for Mauritz Widfors,Mens clothing Company
(Purchased in 1964)

44 Countries 2600 Stores 94000

Employees, How big?
2011 Annual sale of 15.8B EUR
H&M commits to provide fashionable and
quality apparels at best price.

History
1947
Founded by Erling
Persson
1950-1960 Expanded in
Sweden
1964
First Overseas store
in Norway
1964
First Overseas store
in Norway

Fast Fashion Industry

Fast in Producing
(Responsiveness)

Fast
Fashion
Affordable Price
(Economies of
Scale)

Design
Creating products differentiated from
competitors
Outsourcing if possible.
Coming to H&M Design Department
100 Designers and 50 Pattern Designers only in
Sweden
Material Both Affordable and Organic

Ex : H&M started producing clothes with organic hemp in

2011

Manufacturing
10 in Asia, 10 in Europe and 1 in Africa
Responsible for finding manufacturing
suppliers
Inspect production process,finished good and
other code of conduct

Distribution
Cheaper Cost of Production, Transport,
Service
Effective linking of all operations
Centralization Strategy

Supply
Supply activity or inbound logistics Important
in Retails and Manufacturing Organizations
Systems MRP, JIT, EDI to link with suppliers
and to place orders Quickly and Reliably

Firms location as near as possible to

suppliers

Operations
Aim : Low unit Production Cost, Reduce
wastage, Maximize Asset Utilization, Improve
Quality
Economies of Scale and Scope Important
Location Low wage levels and high
education standard
Skilled staff , a bonus
Assessment of Operations COGS ,
Defects , Wastage cost

Zara

H&M

Studying purchasing behavior instead

of simply following the fashion show

Rely on fashion show , invite

celebrity and customers

Most fashion garment manufactured

in house

Outsource everythin

60% in Europe

70% in Asia

Production in small batch

Bulk production
Frequent Inspection

Central Warehouse
Own Retail stores

H&Ms lead time

here is 5 t0 6
days more than
ZARAs

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