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Presented to
Prof. Sitangshu Khatua
By
Manish Jaiswal (JSB-01-007)
Sohong Chakravorty(JSB-01-012)
Sanchita Debnath (JSB-01-011)
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Concept of Value chain approaches
Introduction:
The value chain approach was developed by Michael Porter in the 1980s
in his book “Competitive Advantage: Creating and Sustaining Superior
Performance” (Porter, 1985). The concept of value added, in the form of
the value chain, can be utilized to develop an organization’s sustainable
competitive advantage in the business arena of the 21st Century. All
organizations consist of activities that link together to develop the value
of the business, and together these activities form the organization’s
value chain. Such activities may include purchasing activities,
manufacturing the products, distribution and marketing of the company’s
products and activities (Lynch, 2003). The value chain framework has
been used as a powerful analysis tool for the strategic planning of an
organization for nearly two decades. The aim of the value chain
framework is to maximize value creation while minimizing costs.
Value chain analysis is a powerful tool for managers to identify the key
activities within the firm which form the value chain for that
organization, and have the potential of a sustainable competitive
advantage for a company. Therein, competitive advantage of an
organization lies in its ability to perform crucial activities along the value
chain better than its competitors.
The value chain framework of Porter (1990) is “an interdependent system
or network of activities, connected by linkages”. When the system is
managed carefully, the linkages can be a vital source of competitive
advantage (Pathania-Jain, 2001). The value chain analysis essentially
entails the linkage of two areas. Firstly, the value chain links the value of
the organization’s activities with its main functional parts. Then the
assessment of the contribution of each part in the overall added value of
the business is made (Lynch, 2003). In order to conduct the value chain
analysis, the company is split into primary and support activities (Figure
1). Primary activities are those that are related with production, while
support activities are those that provide the background necessary for
the effectiveness and efficiency of the firm, such as human resource
management. The primary and secondary activities of the firm are
discussed in detail below.
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Primary activities
• Inbound logistics
These are the activities concerned with receiving the materials from
suppliers, storing these externally sourced materials, and handling them
within the firm.
• Operations
• Outbound logistics
These are all the activities concerned with distributing the final product
and/or service to the customers. For example, in case of a hotel this
activity would entail the ways of bringing customers to the hotel.
• Service
Support activities
• Procurement
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• Human Resource Management
• Technology Development
• Firm Infrastructure
Porter used the word ‘margin’ for the difference between the total value
and the cost of performing the value activities (Figure 1). Here, value is
referred to as the price that the customer is willing to pay for a certain
offering (Macmillan et al, 2000). Other scholars have used the word
‘added value’ instead of margin in order to describe the same (Lynch,
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2003). The analysis entails a thorough examination of how each part
might contribute towards added value in the company and how this may
differ from the competition.
In a study of Saudi companies, Ghamdi (2005) found that 22% of the
companies in the study used value chain frequently, while 17% reported
that they somewhat used it, and 42% did not use the tool at all. An
interesting finding of the study was that the manufacturing firms were
frequent users of the tool compared to their service counterparts
(Ghamdi, 2005).
The ability of a company to understand its own capabilities and the needs
of the customers is crucial for a competitive strategy to be successful.
The profitability of a firm depends to a large extent on how effectively it
manages the various activities in the value chain, such that the price that
the customer is willing to pay for the company’s products and services
exceeds the relative costs of the value chain activities. It is important to
bear in mind that while the value chain analysis may appear as simple in
theory, it is quite time-consuming in practice. The logic and validity of
the proven technique of value chain analysis has been rigorously tested,
therefore, it does not require the user to have the same in-depth
knowledge as the originator of the model (Macmillan et al, 2000). The
first step in conducting the value chain analysis is to break down the key
activities of the company according to the activities entailed in the
framework. The next step is to assess the potential for adding value
through the means of cost advantage or differentiation. Finally, it is
imperative for the analyst to determine strategies that focus on those
activities that would enable the company to attain sustainable
competitive advantage.
It is important for analysts to remember to use the value chain as a
simple checklist to analyze each activity in the business with some depth
(Pearson, 1999). The value chain should be analyzed with the core
competence of the company at its very heart (Macmillan et al, 2003).
The value chain framework is a handy tool for analyzing the activities in
which the firm can pursue its distinctive core competencies, in the form
of a low cost strategy or a differentiation strategy. It is to be noted that
the value chain analysis, when used appropriately, makes the
implementation of competitive strategies more systematic overall.
Analysts should use the value chain analysis to identify how each business
activity contributes to a particular competitive strategy. A company may
benefit from cost advantages if it either reduces the cost of individual
activities in the value chain or the value chain is essentially reconfigured,
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through structural changes in the activities. One of the problematic areas
of the value chain model, however, is that the costs of the different
activities of the value chain need to be attributed to an activity. There
are few costing systems that contain detailed activity level costing,
unless an Activity Based Costing (ABC) system is in place in the company
(Macmillan et al, 2003). Another relevant area of concern that analysts
must pay particular attention to is the customers’ view point of value.
The customers of the firm may view value in a generic way, thereby
making the process of evaluating the activities in the value chain in
relation with the total price increasingly difficult. It is imperative for
analysts to note that the overall differentiation advantage may result
from any activity in the value chain. A differentiation advantage may be
achieved either by changing individual value chain activities to increase
uniqueness in the final product or service of the company, or by
reconfiguring the company’s value chain.
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success of the company as its business strategy. Notably, both the
strategy and business model of an organization are crucial for the
robustness of the overall value chain.
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undergone many changes over the last two decades, due to the rapidly
changing business environment. Information technology and the Internet
have played a fundamental role in transforming certain parts and the
inter linkages between parts of the value chains of companies today.
Moreover HRM is increasingly becoming a vital asset in the value chain
that contributes to competitive advantage. Strategic alliances are also
becoming an integral part of the value chains. For example, IBM once
enjoyed backward vertical integration into the disk drive industry and
forward vertical integration into the consulting services and computer
software industries (Hill et al, 2007). According to the changing business
environment, IBM had more than 400 strategic alliances as of 2003
(Thompson et al, 2003). Herein, the value chain analysis is useful in
providing a framework to examine the advantages that partners can give
to each other (Pathania-Jain, 2001). It is important to note the source of
competitive advantage of a company for the value chain analysis. The
competitive advantage for IBM, for example, lies in depth, breadth and
the geographic spread of its global operations (Rai, 2006) and the loyalty
that the big blue enjoys from its clientele.
Lastly, analysts should look for the managerial implications that the new
era of capability outsourcing may bring. The value chain decisions of
companies will increasingly shape their organizational structure.
Furthermore these decisions will determine the types of managerial skills
that companies may need to develop to survive in an increasingly
competitive business environment.
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generation of that value.
Conclusion
The value chain framework has been used as a powerful analysis tool for
organizational strategic planning for nearly two decades now. The value
chain framework shows that the value chain of a company may be useful
in identifying and understanding crucial aspects to achieve competitive
strengths and core competencies in the marketplace. The model also
reveals how the value chain activities are tied together to ultimately
create value for the consumer. The five primary activities and four
support activities form an interdependent system that is connected by
linkages. Analysts conducting the value chain analysis should break down
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the key activities of the company according to the activities entailed in
the framework, and assess the potential for adding value through the
means of cost advantage or differentiation. Finally, it is important to
determine strategies that focus on those activities that would enable the
company to attain sustainable competitive advantage.
References
www.wikipedia.com
www.marketing.com
www.management.com
www.scribd.com
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