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International Business

Unit 3/Lecture 20
BBM Semester VI
Value Chain analysis
:Unit 3
 Introduction to International Business
strategy
 Lecture -17 :Domestic to International
Business strategy
 Lecture -18: International Personnel strategy
 Lecture -19: International Operations strategy
 Lecture- 20 : Value chain analysis
Question Bank
1. Enumerate the concept of value chain
analysis in the strategic decision making.
Give suitable examples
Context
Michael Porter published the Value Chain
Analysis in 1985 as a response to criticism
that his Five Forces framework lacked an
implementation methodology that bridged the
gap between internal capabilities and
opportunities in the competitive landscape.
This framework focused on industry
attractiveness as a determinant of the profit
potential of all companies within that
particular industry.
Context
However, significant differences in performance
exist between companies operating within the
same industry that can be explained either by
the company's participation in a successful
strategic group or by a firm's specific
competitive advantages.
Operations of firm can be thought of as a value
chain composed of series of distinct value
creation activities including production ,
marketing , sales , materials management , R
& D , Customer service, human resources ,
information systems , logistics and firms
infrastructure.
Basic concept : Value
creation
 The way to increase profitability is to
create more value .
 The amount of value a firm creates is
measured by the difference between its cost
of production and value that consumers
perceive in the product .
 Normally companies charge slightly less
than the value that customer gives to the
product due to competition .
Value creation model
V= Value of product to an average consumer
P= Price per unit
C=Cost of production per unit

V-P

V-C
P-C
V

V-P = consumer surplus per unit


C C
P-C= profit per unit sold

V-C = Value created per unit


Value creation
 Value creation is measured by difference between V and C
 A company can more value (V-C) either by lowering
production costs C or making product more attractive thru
superior designing , styling , features , reliability , after
sales service which makes consumer to pay more as V goes
up which can make company increase P.
 It means firm has high profits when it creates more value
for its customers and does so at lower cost.
 Michael Poter has argued that “low cost “ and
differentiation are two basic startegies for value creation.
(If they don’t floow any one of them , they are started to be
having Hybrid strategy )
Porter’s Strategic
positioning
 It is important for to decide its strategic focus of value
creation thru a) Low cost b) differentiation and link it
internal operations .

Increased Efficiency frontier


Value /
differentiation
Four seasons
V
Marriot
Starwoods not
Being on efficiency
Starwood Strategic choices
curve In this area not viable in
Means that its internal International Hotel Industry
operations
Are not working
efficiently

High cost Low cost C


Strategic choice in international hotel industry
Charles hill
Value chain analysis
 Value chain analysis : ‘describes the
activities within and around an
organisation and relates them to an
analysis of the competitive strengths of
the organisation’ that creates value to
customer.
Theory
 All organizations consist of activities that link together to
develop the value of the business .
 these activities together form the organization's value
chain.
 The Value added is depended on the value chain
 The Core actvities in value chain are Purchase ,
operations , R & D ,distribution , Marketing etc .
 One or more of the activities can give sustainable
advantage .
 The support activities can focus and support the core
activity in the area of its unique offering .
 competitive advantage of an organisation lies in its ability
to perform crucial activities along the value chain better
than its competitors.
Value chain analysis
process
Value Chain Analysis helps identify a firm's core
competencies and distinguish those activities that drive
competitive advantage thru value creation.
The cost structure of an organisation can be subdivided into
separate processes or functions assuming that the cost
drivers for each of these activities behave differently.
Porter's strength was to condense this activity based cost
analysis into a generic template consisting of five primary
activities and four support activities. The nine activity
groups are:
Primary activities:

1. inbound logistics: materials handling,


warehousing, inventory control,
transportation;
2. operations: machine operating, assembly,
packaging, testing and maintenance;
3. outbound logistics: order processing,
warehousing, transportation and distribution;
4. marketing and sales: advertising, promotion,
selling, pricing, channel management;
5. service: installation, servicing, spare part
management;
Support activities:

6.firm infrastructure: general management, planning, finance,


legal, investor relations;
7. human resource management: recruitment, education,
promotion, reward systems;
8. technology development: research & development, IT,
product and
process development;
9. procurement: purchasing raw materials, lease properties,
supplier contract negotiations.
Value as core concept
By subdividing an organisation into its key processes or
functions, Porter was able to link classical accounting to
strategic capabilities by using value as a core concept, i.e. the
ways a firm can best position itself against its competitors
given its relative cost structure.
how the composition of the value chain allows the firm to
compete on price, or how this composition allows the firm to
differentiate its products to specific customer segments.
value chain template
firm infrastructure

human resource management m


ar
gi
technological development n
support
activities procurement

service
operations

marketing
outbound

& sales

n
logistics

logistics
inbound

gi
ar
m
primary activities

source: Michael Porter, competitive advantage


Porter used the word ‘margin’ for the difference between the total value and the cost of performing the value activities.
value is referred to as the price that the customer is willing to pay
Profitability depends on “V-
C”
 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.
 Hence Companies have to either increase
V (differentiation ) or reduce C ( cost
leadership ) to sustain competitive
advantage
Examples
 Marketing : Ford expedition SUV Vs Lincon Navigator ( same
vehicle but price is $ 10000 more )
 R & D: 3 M ( 80% revenue from new products )
 Sales and services ;Caterpillar
 Production ./Operations : (Wal-mart )The strategy of Wal-Mart
worked when the company improved its business through
innovative practices in activities such as purchasing, logistics, and
information management, which resulted in the value offering of
“everyday low prices” (Magretta, 2002).
 The Apple podcasting value chain is comprised of nine steps that
essentially move from raw content to the listener. All the steps of
the value chain include content, advertising, production,
publishing, hosting/bandwidth, promotion, searching, catching,
and listening. It is important to note that each step in the value
chain adds value to the podcast in distinctive ways, has its own
sets of challenges and opportunities.
How to do Value Chain
analysis
 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.
 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
Q2
1. Highlight Key steps taken by Toyota to
become Globally competitive
Corporation?

 Pl see the book


Definitions
 Global :A strategy that focuses
homogenous customer base and hence
focus on global scalability of operations .
 Transnational : A strategy that can exploit
local differences and achieve global
efficiencies is called transnational strategy
 Local : Strategy is based on Unique local
demand and adoption to local needs and
realities
definitions
 General differentiation strategy : It
involves offering something that a broad
segment of something that they especially
value.
 A focus differentiation strategy involves
only a narrow segment.
Some articles worth
reading
 Douglas & wind “Price-based strategies are easily imitated
 Theodore Levitt :Marketing myopia : world is moving
towards global convergence as world tastes were
becoming 'irrevocably homogenized'.
 'Icarus paradox‘ : Firms that have been successful in the
past can fail to see the need for innovation thus becoming
a victim of their own success
 In a 1992 article, Miller noted that some businesses bring
about their own downfall through their own successes, be this
through over-confidence, exaggeration, complacency. (It
refers to Icarus of Greek mythology who flew too close to the
Sun and melted his own wings. The book is a key source of
insight in Escaping the Progress trap by Daniel O'Leary )
Robert M. Grant ;
The Resource-Based Theory of Competitive Advantage", Californian Management

Review 33 (3): 114–135, 199

 Robert M. Grant is a US economic strategy academic who


challenged Michael Porter 's views on the basis for
competitive advantage. He suggested that competitive
advantage was more frequently to be discovered in access
to distinctive or unique internal resources, rather than a
choice between the different forms of generic strategies
externally.
 Grant is best known for his suggestion that insights into
competitive positioning were more likely to come from
understanding a company's resource base rather than from
its generic strategies. He particularly focused on the extent
to which organizations had non-imitable resources.
 Grant's work has close links to Gary Hamel and Coimbatore
Krishnarao Prahalad – in the form of 'core competencies‘ .
In many ways Grant's 'resources' and Hamel and Prahalad's
'core competencies' overlap to a considerable extent. His
concepts have also been taken further by Bowman.
THANK YOU!