VALUE CHAIN ANALYSIS

Value Chain Concept

- Based on process view or systems made up of subsystems each with inputs, transformation
processes, and outputs of the company
- Creating competitive advantage comes from many different activities that a company performs
- The linkages of the company and its suppliers and customers should be managed for the benefit
of all parties
- Value Chain
o Represents the interrelated value creating activities inside the company
o These activities affect each other and cannot be treated in isolation
- Value System
o Set of interdependent value chains all the way from the suppliers up to the end user or
final consumers
o To gain competitive advantage, a company has to realize that the cost and benefits which
are the values associated with the products must be examined from the final consumer's
point of view

Fundamental Methodology for Strategic Cost Management

- Considering or examining costs within the individual value activities carefully and in detail (and
NOT the cost of the company as a whole)
- Principal Stages:
1. Identify the value chain activities and this aggregate the firm into separate activities
o Significant activities are separated into different distinguishable activities that drive cost
o Minimal costs can be grouped or aggregated depending on the judgment of management
2. Establish the relative importance of different activities and the total cost of the product
3. Compare costs by activity
o Company should benchmark key activities against those of its competitors
4. Identify cost drivers
5. Identify linkages and interrelationships in the value chain
o It is important not to think of the value chain as a set of independent activities, but as a
system of interdependent activities
o By reducing costs in various parts of the value chain, the company may be able to reduce
cost effectively since one part may affect other parts or functions of the company
6. Identify opportunities for reducing costs and/or improving value
o Opportunities are derived from various sources in the value chain within the company
o Redefining the value chain and exploiting all opportunities to eliminate non-value-adding
may help the company gain competitive advantage

Strategic Framework for Value Chain Analysis

- Value chain analysis requires strategic framework for organizing varied information
- 3 Generally Accepted Strategic Factors:
1. Industry Structure Analysis
o 5 Forces that Determine Profit Potential of Industry Firms (by Porter):
▪ Bargaining power of buyers
▪ Bargaining power of suppliers
▪ Threat of substitute product or services
▪ Threat of new entrants
▪ Rivalry among competitors
o Since these five forces are ever changing, the framework needs to be employed as a
dynamic analytical tool and should not be viewed as a very fixed tool because
competition is a dynamic process
o Analysis of a particular industry in terms of the opportunities and threats in the
immediately prevailing environment in order to appraise the attractiveness of the industry
to investors or new entrants, and to devise competitive strategies appropriate to the
industry
 2. Core Competency Analysis
o Unique and distinctive skill or technological know-how that creates distinctive customer
value which cannot be imitated by its competitors
o Function of the collective skill set of people, organization structure resources, and
technical know-how
o Primary source of competitive advantage which results from cost leadership or product
differentiation. (Therefore, firms need to continuously evolve their core competencies and
remain relevant in the ever changing business environment.)
o Test how much access we have to a wide variety of markets, and how difficult it is for
competitors to imitate
o End-product benefits
3. Segmentation Analysis
o Helps firms to decide to exit/enter/reconfigure a segment or embark on cost reduction or
differentiation programs
o Reveals the advantages and disadvantages of different segments in order for a firm to
decide and manage the segments whether to exit, improve, or reconfigure

Superior Performance & Competitive Advantage

- A company which attains superior performance gains competitive advantage
- To survive and prosper in an industry, firms must:
1. Supply what customers want to buy
2. Survive competition
- In order to attain superior performance and competitive advantage, firms must have distinctive
competencies, such as:
o Cost Leadership
▪ Enables the company to charge a lower price to gain market share or to match
the price in the market and gain greater profitability
o Product Differentiation Advantage
▪ When customers perceive the product offering involves higher quality or fewer
risks, or when customers perceive the product to be superior.
- Value Chain Approach for Assessing Competitive Advantage
o Companies must not only focus on the end product or service but also on the process or
activities involved in the creation of these products or services
o Can be done through:
▪ Internal Cost Analysis
▪ Internal Differentiation Analysis
▪ Vertical Linkage Analysis