Value Chain Analysis

Firm Infrastructure

A company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.

Vertical Integration

A strategy used by a company to gain control over its suppliers or distributors in order to increase the firm's power in the marketplace, reduce transaction costs and secure supplies or distribution channels.

Forward Integration

A strategy where a firm gains ownership or increased control over its previous customers (distributors or retailers).

Backward Integration

A strategy where a firm gains ownership or increased control over its previous suppliers.

Service

Activities related to maintaining the value of the product or service to the customers, once it's been purchased.

Technology Development

Activities relating to managing and processing information, as well as protecting a company's knowledge base. Minimizing IT costs, staying current with advances, and maintenance are sources of value creation.

Outbound Logistics

Activities that deliver a product or service to the customer, like collection, storage, and distribution systems, that may be internal or external to the organization.

Primary Activities

Activities that relate directly to the physical creation, sale, maintenance and support of a product or service.

Support Activities

Activities that support each primary activity. Support activities are as important as primary activities.

Value Chain Analysis (VCA)

Analyzing internal activities to recognize which are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm. VCA can also determine which activities should could be improved or outsourced to provide competitive advantage.

First-Order Fit

Basic consistency, where each activity is aligned with the company's value proposition and each contributes incrementally to its dominant themes.

Fit

Competitive advantage comes from the way its activities fit and reinforce one another. Fit locks out imitators by creating a chain in which the value or cost of one activity is affected by the way other activities are performed.

Two Kinds of Competitive Advantage

Cost and Differentiation

Cost Advantage Analysis Step 2

ESTABLISH THE RELATIVE IMPORTANCE OF EACH ACTIVITY IN THE TOTAL COST OF THE PRODUCT. Activity based costing is used to calculate costs for each process. The largest sources of cost or inefficiency must be addressed first.

Differentiation Advantage Analysis Step 2

EVALUATE THE DIFFERENTIATION STRATEGIES FOR IMPROVING CUSTOMER VALUE such as adding more product features, improving customer service and responsiveness, Increasing customization, and offering complementary products.

Obstacles to Focusing on Fit

Focusing on capabilities, critical resources, and key success factors are popular management trends that often fail to see how activities affect one another.

HR Management

How well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices.

Cost Advantage Analysis Step 1

IDENTIFY AND SEPARATE THE FIRMS PRIMARY AND SUPPORT ACTIVITIES to produce goods or services. Requires an adequate knowledge of company's operations because value chain activities are not organized in the same way as the company itself.

Cost Advantage Analysis Step 3

IDENTIFY COST DRIVERS FOR EACH ACTIVITY. Only by understanding what factors drive costs, can managers focus on improving them. For instance, costs for labor-intensive activities will be driven by work hours, work speed, wage rate, etc.

Cost Advantage Analysis Step 4

IDENTIFY LINKS BETWEEN ACTIVITIES will lead to better understanding how cost improvements affect the whole value chain. Sometimes, cost reductions in one activity lead to higher costs for other activities.

Cost Advantage Analysis Step 5

IDENTIFY OPPORTUNITIES FOR REDUCING COSTS. When the company knows its inefficient activities and cost drivers, it can plan on how to improve them.

Differentiation Advantage Analysis Step 3

IDENTIFY THE BEST SUSTAINABLE DIFFERENTIATION. The result of best combination of many interrelated activities and strategies.

Differentiation Advantage Analysis Step 1

IDENTIFY THE CUSTOMERS VALUE-CREATING ACTIVITIES that contribute the most to creating customer value.

Value Creation

In the past VC was based on economies of industrial scale or mass production and the high efficiency of repeatable tasks. Now VC is based on economies of creativity or mass customization, bringing a new product or service improvement to market; solving a vexing customer problem; the way a new product or service is sold and delivered.

Value Chain

Modeling an organization as a sequence/chain of processes, or interlinked value-adding activities that convert inputs into outputs, each of which add value to the product or service.

Second-Order Fit

Occurs when activities complement or reinforce each other. There lies a synergy, where the value of each activity is raised by the other.

PEST Factors

Political, economic, socio-cultural and technological factors that affect firm's external environment.

Inbound Logistics

Processes related to receiving, storing, and distributing inputs internally. Supplier relationships are a key factor in creating value here.

Marketing and Sales

Processes used to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here.

Horizontal Integration

The process of acquiring or merging with competitors, leading to industry consolidation.

Two Paths to Competitive Advantage

Through external PEST factors, or VRIO resources.

Operations

Transformation activities that change inputs into outputs that are sold to customers. Quality operational systems can create value.

VRIO Resources

Valuable, Rare, hard to Imitate and Organized resources such as Intellectual property, Brand equity, Culture, Know-how and Reputation.

Procurement or Purchasing

What the organization does to get the resources it needs to operate. This also includes finding vendors and negotiating best prices.

Third-Order Fit

When fit goes beyond the activity of reinforcement then optimization of efforts occur wherein performing one activity makes it possible to eliminate another.

Differentiation Advantage

When organization strive to create superior products, add more features, resulting in higher cost structure.

Cost Advantage

When organizations try to compete on costs and want to understand what factors drive those costs.