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Developed by Michael Porter, Value Chain Analysis is a business management framework used to analyze the processes and key activities performed by a business or industry. This Porter's Value Chain model illustrates where value is created within an industry or company. This is a partial preview of the document. View and download the full PowerPoint here: http://learnppt.com/powerpoint/39_Value-Chain-Analysis.php
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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 where value is created within an industry or company.
PORTER’S VALUE CHAIN ANALYSIS
SupportActivities
Primary Activities
Marketing /Sales
Outbound LogisticsOperationsInbound
LogisticsService / AfterSales Support
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
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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.
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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.
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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
SupportActivities
Primary Activities
Marketing /Sales
Outbound Logistics
OperationsInboundLogistics
Service / AfterSales Support
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
THIS IS A PARTIAL PREVIEW
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5Questions & feedback? Email me – dave@learnppt.comThe diagrams in this pack are to be used by the original buyer only.
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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.
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
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STEP 1: Identify the Industry Value Chain and map the value linkages
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
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An Industry Value Chain should include all competitors
Source: Shank and Govindarajan, 1993, Exhibit 4-2
Silvaculture andTimber Farming
Pulp Manufacturing
ConvertingOperations
Paper Manufacturing
Logging andChipping
Distribution
End-Use Customer
Com
petit
or A
Com
petit
or C
Com
petit
or D
Com
petit
or B
Com
petit
or F
Com
petit
or E
Com
petit
or 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.
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Each stage of the Industry Value Chain has associated primary and support activities
Com
petit
or 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*.
Selection of Timberfor Harvest
General Management, Accounting, and Legal
Human Resource Management
Shipping and Tracking Systems
Purchasing Timber Rights
Logging andChippingOperations
ShippingSplit Woodto Pulp Mfg.
Quoting andPricing Wood Chip Output
Adapting to Outputand ShippingRequirements ofSpecific Pulp Mfg.
InboundWood Chips
General Management, Accounting, and Legal
Human Resource Management
Production and Shipping Technology
Purchasing of Wood Chips for Pulp
Pulp Mfg.Operations
Shipping ofPulp to Paper Mtg
Quoting andPricing Wood Chip Output
Adapting to Outputand ShippingRequirements ofSpecific Pulp Mfg.
COMPETITOR X VALUE DELIVERY SYSTEM
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A list of potential cost drivers is presented belowPotential 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
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The resulting Value Chain should drive strategic hypotheses 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
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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
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
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There are three levels of detail for conducting and presenting Value Chain analysis
Source: Hax and Majluf, 1991.
Level 1: Qualitative Summary of Competitive TrendsExample
VALUE CHAIN ELEMENTS
STRATEGIC DIFFERENCES
AT&T NYNEX IBM
Procurement Owns manufacturing branch (Western Electric)
Free to use any supplier it wants Owns Rolm, CPE manufacturer
Technology Development
Technological leadership through Bell Labs
Focus on software products Strong R&D in computer hardware and software technologies
Operations National presence
High quality of equipment through heavy capital expenditures
Similar communications standards nationwide
Strongest national telecommunications network
Regional monopoly
Innovative equipment from outside suppliers
High quality regional network through heavy capital investment
Global presence
Leading computer technology
Partnership with MCI
Sales & Marketing
New emphasis on marketing (still weak)
Strong name and brand recognition
Long-term relationships with clients
Recruits computer executives
Use Bell logo
Focus on 1K coprorate customers
Sales and distribution centers close to customers
Strong reputation for marketing excellence
Already sells to most major corporations
Experience sales force
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END OF PARTIAL PREVIEW
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