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Value Chain Analysis

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Developed by Michael Porter, Value Chain Analysis is business management framework used to analyze the processes and key activities performed by a business or industry. This framework illustrates …

Developed by Michael Porter, Value Chain Analysis is business management framework used to analyze the processes and key activities performed by a business or industry. This framework illustrates where value is created within an industry or company.

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  • 1. PowerPoint Diagram Pack Value Chain Analysis Developed by Michael Porter, Value Chain Analysis is business management framework used to analyze the processes and key activities performed by a business or industry. This framework illustrates where value is created within an industry or company.
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    PORTER’S VALUE CHAIN ANALYSIS Support Activities Primary Activities Marketing / Sales Outbound Logistics Operations Inbound Logistics Service / After Sales Support Firm Infrastructure Human Resource Management Technology Development Procurement
  • 2. Value Chain—introduction What It Is
    • A description of the processes and key activities performed either across an industry or across a company:
      • Usually shown as a linear flow of activities
      • A company’s Value Chain, also shows the support activities performed, e.g. systems support
    • A Value Chain should show where value is being created within an industry or company:
      • Should be quantitative, not qualitative.
      • Should show the value of costs and revenues at each stage in the value chain.
    • Value Chain Analysis identifies areas of competitive advantage or disadvantage
    • Value Chain Analysis drives strategic hypotheses to answer several questions:
      • Where are we, and our competitors, earning money? Why?
      • Should we forward or backward integrate?
      • Should we outsource or spin-off value activities (i.e. business processes)?
      • What are the industry critical success factors?
      • What are our managerial action plans to control costs, improve service and increase delivered value?
    Strengths & Limitations
    • Benefits :
      • Provides a structure for performing competitive analysis by separating the value generating stages
      • Aids in identifying critical cost drivers and non-value adding activities currently performed by your company
      • Helps your company identify areas for improvement or potential competitive advantage by benchmarking cost drivers
      • Allows your company to analyze opportunities for backward and forward integration by including suppliers and end-customers in the value chain
    • Limitations :
      • Value Chain Analysis requires considerable data collection
        • Data not be readily accessible
        • Other data difficulties include calculating transfer prices for intermediate products, isolating key cost drivers, identifying linkages across activities, and computing supplier and customer margins
      • Comparisons with competitors is often very difficult
        • Public data will not exist for privately held firms
        • Subsidiaries of larger firms will often be aggregated with the parent’s information
    a. In his book “Competitive Advantage” , Free Press. b. Forward integration is moving into activities closer to the starting activity within an industry. THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  • 3. Value Chain— why we use it and how to apply it
    • Primary objective is to determine where value is created in an industry or company
    • Value Chains are also used to:
      • Understand the key activities within an industry or company
      • Determine whether there is any backward or forward integration in an industry
      • Map key players at each stage of an industry’s value chain
      • Map the customer’s experience at each stage in a company’s value chain
    • Michael Porter, in his 1985 book “Competitive Advantage,” outlines the following three steps in developing a value chain:
      • Identify individual value activities:
        • The appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed
        • Distinguish between primary and support activities
      • Assign the value activities to the categories (or functions) that best represent their contribution to a firm’s competitive advantage
      • Order the activities, broadly following the process flow:
        • Determine the links between activities
    • Once the activities are detailed in the Value Chain, plot costs and players across the value chain where applicable
    a. A Free Press publication.     1 2 3 THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  • 4. The Value Chain approach has evolved from an “internal” to an “external” perspective
    • The traditional view of the Value Chain was developed by Michael Porter:
    • Shank and Govindarajan propose a more externally focused, or holistic view of Value Chain Analysis
      • Focus on the industry Value Chain (i.e. “value delivery system”)
      • Identifies the activities performed by a firm and how those activities impact, and are impacted by, other players in the end-customer’s “value delivery system”
      • Cost drivers are compared at each stage of the industry value chain to identify potential competitive advantages or opportunities
    PORTER’S VALUE CHAIN ANALYSIS Support Activities Primary Activities THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Marketing / Sales Outbound Logistics Operations Inbound Logistics Service / After Sales Support Firm Infrastructure Human Resource Management Technology Development Procurement
  • 5. In the initial step, the value activities within the industry must be separated out * The analyst should be careful to control scope at this point in the analysis. THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Identify the industry value chain and map the linkages between the industry value activities Assign costs, revenues and assets to value activities Determine the relevant cost drivers for each value activity Identify potential competitive advantages by either controlling cost drivers better than competitors or reconfiguring the value chain to better leverage the firm’s strengths 1 2 3 4
    • The Industry Value Chain represents a linked set of value activities
    • Mapping the Industry Value Chain requires Identifying and separating these value activities
    • Each separate value activity becomes a different stage in the industry value chain*
    • Generally, a value activity should be separated out if:
      • There is (or could be) an external market for the product or outcome of that activity
      • The activity represents a significant percentage of operating costs
      • The cost behavior of the activity or the cost drivers is different
      • The activity is performed by competitors in different ways
      • The activity has a high potential for creating differentiation
    STEP 1 : Identify the Industry Value Chain and map the value linkages
  • 6. An Industry Value Chain should include all competitors Source: Shank and Govindarajan, 1993, Exhibit 4-2 Competitor A Competitor C Competitor D Competitor B Competitor F Competitor E Competitor G Value Activities Industry Value Chain Example – Paper Products Industry Your company will face different competitors, with different cost structures, at each stage of the Value Chain. THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Silvaculture and Timber Farming Pulp Manufacturing Converting Operations Paper Manufacturing Logging and Chipping Distribution End-Use Customer
  • 7. Each stage of the Industry Value Chain has associated primary and support activities Competitor X * This additional detail could confuse the analysis, but would be required if vertical integration was being analyzed. Industry Value Chain Example – Paper Products Industry (continued) The level of analytical detail required depends on the strategic hypothesis being considered*. COMPETITOR X VALUE DELIVERY SYSTEM THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Selection of Timber for Harvest General Management, Accounting, and Legal Human Resource Management Shipping and Tracking Systems Purchasing Timber Rights Logging and Chipping Operations Shipping Split Wood to Pulp Mfg. Quoting and Pricing Wood Chip Output Adapting to Output and Shipping Requirements of Specific Pulp Mfg. Inbound Wood Chips General Management, Accounting, and Legal Human Resource Management Production and Shipping Technology Purchasing of Wood Chips for Pulp Pulp Mfg. Operations Shipping of Pulp to Paper Mtg Quoting and Pricing Wood Chip Output Adapting to Output and Shipping Requirements of Specific Pulp Mfg.
  • 8. A list of potential cost drivers is presented below Potential Cost Drivers
    • SCALE
    • Facility size
    • Production technology
    • Operating efficiency
    • Run length
    • Factory costs
    • LINKAGES
    • Internal process linkages
      • Quality
      • Output linkages (mfg. / distro.)
    • Vertical linkages
      • Supplier imposed costs
      • Supplier timeliness
    • DISCRETIONARY POLICY
    • Product complexity
    • Product variety
    • R&D
    • Marketing expenses
    • Delivery time
    • Inventory levels
    • Segments served
    • Production technology used
    • Plant layout efficiency
    • INSTITUTIONAL FACTORS
    • Government regulations
    • Unionization
    • Taxes, tariffs
    • Local content rules
    • LEARNING
    • Experience (cumulative output)
    • INTERRELATIONSHIPS
    • Scope
    • Other business units
    • Shared activities
    • Shared learning
    • TIMING
    • First mover advantage
    • Timing of input purchases
    • CAPACITY UTILIZATION
    • Output level
    • Facility utilization
    • Seasonality
    • Cyclicality
    • Forecast accuracy
    • INTEGRATION
    • Outsourcing
    • Vertical integration
    • Agency costs
    • LOCATION
    • Transportation costs
    • Labor costs
    • Raw materials costs
    • Energy costs
    THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
  • 9. The resulting Value Chain should drive strategic hypotheses THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Identify the industry value chain and map the linkages between the industry value activities Assign costs, revenues and assets to value activities Determine the relevant cost drivers for each value activity Identify potential competitive advantages by either controlling cost drivers better than competitors or reconfiguring the value chain to better leverage the firm’s strengths 1 2 3 4
    • Closely analyze your company’s cost structure and position in the industry value chain relative to competitors:
      • Calculate standard financial statistics at each value chain stage, based on inputs and assets (e.g. ROA, DuPont, EVA, etc.)
      • Understand the basic economics of each value activity—Why do we do it? What are the key cost and value determinants?
      • Identify strategies to improve cost and value performance in each stage
      • Consider linkages between stages to help identify overall improvements
      • Consider spin-offs and forward / backward integration to reconfigure your company’s Value Chain
      • Consider threats and opportunities related to other chains which deliver substitute products or services to the ultimate customer
    STEP 4 : Identify potential competitive advantages by either controlling cost drivers better than competitors’ or reconfiguring the Value Chain to better leverage the firm’s strength
  • 10. There are three levels of detail for conducting and presenting Value Chain analysis Source: Hax and Majluf, 1991. Level 1: Qualitative Summary of Competitive Trends Example THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
    • Strong reputation for marketing excellence
    • Already sells to most major corporations
    • Experience sales force
    • Use Bell logo
    • Focus on 1K coprorate customers
    • Sales and distribution centers close to customers
    • New emphasis on marketing (still weak)
    • Strong name and brand recognition
    • Long-term relationships with clients
    • Recruits computer executives
    Sales & Marketing
    • Global presence
    • Leading computer technology
    • Partnership with MCI
    • Regional monopoly
    • Innovative equipment from outside suppliers
    • High quality regional network through heavy capital investment
    • National presence
    • High quality of equipment through heavy capital expenditures
    • Similar communications standards nationwide
    • Strongest national telecommunications network
    Operations
    • Strong R&D in computer hardware and software technologies
    • Focus on software products
    • Technological leadership through Bell Labs
    Technology Development
    • Owns Rolm, CPE manufacturer
    • Free to use any supplier it wants
    • Owns manufacturing branch (Western Electric)
    Procurement IBM NYNEX AT&T STRATEGIC DIFFERENCES VALUE CHAIN ELEMENTS
  • 11. END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
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