Competitive advantage cannot be understood by looking at a firm as a whole. It steams from the many discrete activities the firm performs in designing, producing, marketing, delivering and supporting its product. A systematic way of examining all the activities a firm performs and how they interact is necessary for analyzing the sources of competitive advantage. The VALUE CHAIN is the essential tool in analyzing competitive advantage. The VALUE CHAIN disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors.
Every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. All this activities can be represented using a value chain (figure above), as a reflection of firm’s history, its strategy, its approach to implementing strategy, and the underlying economics of the activities themselves. In competitive terms, value is the amount buyers are willing to pay for firm’s products/services. Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it costs involved in creating the product. A firm is profitable if the value it commands exceeds the costs involved in creating the product. The value chain displays value activities and margin . Value activities are physically and technologically distinct activities a firm performs. Margin is the difference between total value and the collective cost of performing the value activities.
Inbound logistics – activities related with receiving, storing, and disseminating inputs to the product, such as material handling, warehousing, inventory control, vehicle scheduling, returns to suppliers Operations – transforming inputs into the final product such as editing, packaging, testing, printing, etc Outbound logistics – product distribution to buyers, material handling, delivery vehicle operation, scheduling, etc Marketing and sales – providing means by which buyers can purchase the product and inducing them to do so, such as advertising, promotion, sales force, channel selection (print, online, TV), pricing Service – providing service to enhance or maintain the value of the product (newsletters, subscriptions, home-delivery, etc) Each of this categories may be vital to competitive advantage, depending on the industry. For example, in newspaper industry, marketing and sales are a key to competitive advantage through the effectiveness of advertising sales agents and the way in which AD offer is presented and adapted to the customer’s business.
Procurement – refers to purchasing inputs used in the firm’s value chain. Includes technique equipment (e.g. broadcasting equipment for TV channels), office equipment, buildings, etc. Technology Development – includes new technologies in designing or distributing product, market research, etc. Involves innovation and can represent a powerful competitive advantage by improving the business processes speed, quality, etc. Human Resource Management – involves recruiting, hiring, training, development and compensation of all types of personnel. Affects competitive advantage of a firm through its role in determining the skills and motivation of employees and the cost of hiring and training. Firm Infrastructure – consists of a number of activities including general management, planning, finance, accounting, legal, quality management, etc. Usually supports the entire value chain and not individual activities. Can represent an important competitive advantage, for example, in a media company, negotiation and maintaining ongoing relations with key advertisers on the market can be one of the most important activities for competitive advantage.
Value chain is not a collection pf independent activities, but a system of interdependent activities. Value activities are related by linkages within the value chain. Linkages are relationships between the way one value activity is performed and the cost or performance on another. Linkages can lead to competitive advantage in two ways: optimization and coordination. Linkages often reflect tradeoffs among activities to achieve the same overall result. For example, a more costly product design, or greater in-process inspection may reduce the service costs. Linkages arise from a number of generic causes: The same function can be performed in different ways – for example, conformance to product initial specifications can be achieved through high quality inputs (best people involved, best materials, etc) or 100% inspection of final product. The cost or performance of direct activities is improved by greater efforts in indirect activities – for example, better scheduling (indirect activity) reduce sales force traveling time. Activities performed inside a firm reduce the need to demonstrate, explain or service a product in the field – 100% inspection can substantially reduce service costs in the field. Quality assurance functions can be performed in different ways – for example, incoming inspection is a substitute for finished product inspection. Important: Linkages exist not only within firm’s value chain but between firm’s chain and the chains of firm’s suppliers, customers, competitors, etc
The above figure displays Dell’s Internal Activities (Value Chain), configured for advantage. Dell is a leading American computer-hardware company that employs more than 78 thousand people world wide.
The above figure displays Dell’s Internal Activities (Value Chain) and several linkages that may occur among them.