BPS CH. 3

Value-Chain Analysis Cont.

- "margin" = Value - Costs - Margin: Key in analyzing firm's competitive advantage

The Balanced Scorecard

- A meaningful integration of many issues that come into evaluating performance - Four key perspectives: > How do customers see us? (customer perspective) > What must we excel at? (internal perspective) > Can we continue to improve and create value? (innovation & learning perspective) > How do we look to shareholders? (financial perspective)

Organizational capabilities

- Are competencies or skills that a firm employs to transform inputs into outputs; the capacity to combine tangible & intangible resources to attain desired ends - Outstanding customer service - Excellent product development capabilities - Superb innovation processes & flexibility in manufacturing processes - Ability to hire, motivate, & retain human capital

Streamlining the Value Chain

- Benefits of value chain streamlining: > Commonality between parts & suppliers > Integration of sales forecasting & inventory management > Lowered transaction, infrastructure & operating costs > Deliver products to market faster

Marketing & sales activity

- Contributes to firm's competitive advantage: > Development of a highly motivated and competent sales force > Innovative approaches to promotion and advertising > Selection of the most appropriate distribution channels > Proper identification of customer segments and needs > Development of effective pricing strategies

Service

- Contributes to firm's competitive advantage: > quick response to customer needs and emergencies > effective management of parts and equipment inventory > quality of service personnel > ongoing training

Outbound logistics contributes to firm's competitive advantage:

- Effective shipping processes to provide quick delivery and minimize damages - Efficient finished goods warehousing processes - Minimize transportation costs by shipping large lot sizes

Operations contributes to firm's competitive advantage:

- Efficiency of plant operations to minimize costs - Incorporation of appropriate process technology - Efficient plant layout and workflow design - Degree of automation - Extent of appropriate quality control systems

Financial Ratio Analysis

- Five types of financial ratios > Short-term solvency or liquidity > Long-term solvency measures > Asset management or turnover > Profitability > Market value - Meaningful ratio analysis must include: > Analysis of how ratios change over time > How ratios are interrelated

Support Activity: General Administration

- General administration involves > Effective planning systems to attain overall goals & objectives > Excellent relations with diverse stakeholder groups > Effective information technology to coordinate & integrate value-creating activities across the value chain > Ability of top management to anticipate & act on key environmental trends & events, create strong values, culture & reputation

Innovation and Learning Perspective

- How can we better adapt to changes? - Managers must make frequent changes to existing products & services as well as introduce entirely new products with extended capabilities. This requires: > Human capital (skills, talent, knowledge) > Information capital (information systems, networks) > Organization capital (culture, leadership)

Financial Perspective

- How do we look to our shareholders? - Managers must measure how the firm's strategy, implementation, and execution are indeed contributing to bottom line improvement. Financial goals include: > Profitability, growth, shareholder value > Improved sales > Increased market share > Reduced operating expenses > Higher asset turnover

Customer Perspective

- How well are we satisfying our customers? - Managers must articulate goals for four key categories of customer concerns: > Time > Quality > Performance and service > Cost

Internal Business Perspective

- How well our internal processes, decisions, and actions are contributing to our customers' satisfaction ? - Managers must focus on those critical internal operations that enable them to satisfy customer needs: > Business processes >> Cycle time, quality, employee skills, productivity > Decisions > Coordinated actions > Key resources and capabilities

Support Activity: Human Resource Management

- Human resource management consists of activities involved in recruitment, hiring, training, development, & compensation of all types of personnel: > Effective employee retention mechanisms > Quality relations with trade unions > Reward & incentive programs to motivate all employees

Primary Activity: Inbound Logistics

- Inbound logistics is primarily associated with receiving, storing & distributing inputs to the product: > Material handling > Warehousing > Inventory control > Vehicle scheduling > Returns to suppliers

Types of Firm Resources: Intangible resources

- Intangible resources are difficult for competitors to account for or imitate - are embedded in unique routines & practices: - Human resources: trust, experience & capabilities of employees; managerial skills & effectiveness of work teams - Innovation resources: technical & scientific expertise & ideas; innovation capabilities - Reputation resources: brand names, reputation for fairness with suppliers; reliability & product quality with customers

Interrelationships Among Value-Chain Activities

- Managers must not ignore the importance of interrelationships among value-chain activities - Relationships among activities within the firm and with other stakeholders such as customers & suppliers - Interrelationships among activities within the firm expand the value chain by exchanging resources.

Primary Activity: Marketing & Sales

- Marketing & sales activities involve purchases of products & services by end users and includes how to induce buyers to make those purchases: > Advertising > Promotion > Sales force management > Pricing & price quoting > Channel selection > Channel relations

Inbound logistics contributes to firm's competitive advantage:

- Minimizes shipping times - Optimizes layout to increase efficiency

Limitations of the Balanced Scorecard

- Not a "quick fix" - needs proper execution - Needs a commitment to learning - Needs employee involvement in continuous process improvement - Needs cultural change - Needs a focus on nonfinancial rather than financial measures - Needs data on actual performance

Primary Activity: Operations

- Operations include all activities associated with transforming inputs into the final product form: > Machining > Packaging > Assembly > Testing or quality control > Printing > Facility operations

Primary Activity: Outbound Logistics

- Outbound logistics includes collecting, storing, & distributing the product or service to buyers: > Finished goods > Warehousing > Material handling > Delivery vehicle operation > Order processing > Scheduling & distribution

Sources of Inimitability

- Physical uniqueness: resources that are physically unique - Path dependency: scarce because of all that has happened along the path followed in a resource's development and/or accumulation (i.e. loyalty) - Causal ambiguity: impossible to explain what caused it to exist or how to re-create it - Social complexity: a result of social engineering such as interpersonal relations

Value-Chain Analysis Cont.

- Primary activities contribute to the physical creation of the product or service; the sale & transfer to the buyer; and service after the sale: > Inbound logistics > Operations > Outbound logistics > Marketing & sales > Service

Support Activity: Procurement

- Procurement involves how the firm purchases inputs used in its value chain: > Procurement of raw material inputs - Optimizing quality & speed - Minimizing associated costs - Development of collaborative win-win relationships with suppliers - Analysis & selection of alternative sources of inputs to minimize dependence on one supplier

Primary Activity: Service

- Service includes all actions associated with providing service to enhance or maintain the value of the product: > Installation > Repair > Training > Parts supply > Product adjustment

The Limitations of SWOT Analysis

- Strengths may not lead to an advantage - SWOT's focus on the external environment is too narrow - SWOT gives a one-shot view of a moving target - SWOT overemphasizes a single dimension of strategy - SWOT provides the raw material for a more in-depth analysis - SWOT does not show how to achieve a competitive advantage

Value-Chain Analysis Cont.

- Support activities either add value by themselves or add value through important relationships with both primary activities & other support activities: > Procurement > Technology development > Human resource management > General administration

Types of Firm Resources: Tangible resources

- Tangible resources are assets that are relatively easy to identify: - Physical assets: plant & facilities, location, machinery & equipment - Financial assets: cash & cash equivalents, borrowing capacity, capacity to raise equity - Technological resources: trade secrets, patents, copyrights, trademarks, innovative production processes - Organizational resources: effective planning processes & control systems

Support Activity: Technology Development

- Technology development is associated with the development of new knowledge that is applied to the firm's operations : > R&D activities for process & product initiatives > Collaborative relationships between R&D and other departments > State-of-the-art facilities & equipment > Professional qualifications of personnel > Organizational culture to enhance creativity & innovation

Resource-Based View of the Firm

- The resource-based view of the firm (RBV) > Combines an internal analysis of phenomena within a company > With an external analysis of the industry & its competitive environment (goes beyond SWOT) - Resources can lead to a competitive advantage > If they are valuable, rare, hard to duplicate > When tangible resources, intangible resources, & organizational capabilities are combined

Strategic resources have four attributes:

- Valuable in formulating & implementing strategies to improve efficiency or effectiveness - Rare or uncommon; difficult to exploit - Inimitable (difficult to imitate or copy) due to physical uniqueness, path dependency, causal ambiguity, or social complexity - Non-substitutable (difficult to substitute) with strategically equivalent resources or capabilities

Value-Chain Analysis

- Value-chain analysis looks at the sequential process of value-creating activities > Value is the amount buyers are willing to pay for what a firm provides > A firm is "profitable" when the value received exceeds the costs of production

The Value Chain

- View the broadest context - To get the most out of value chain analysis, view the concept without regard to the boundaries of your own organization - Consider everyone involved - Place your organization within a more encompassing value chain that includes your firm's suppliers, customers, and alliance partners - Why? - Helps identify how value is created for other organizations in the chain

The Importance of the Internal Environment

- Why is value chain analysis important? - Two firms compete in the same industry and both have many strengths in a variety of functional areas: marketing, operations, logistics, etc. - However, one of these firms outperforms the other by a wide margin over a long period of time. How can this be?