Value Chain and Supply Chain
Value Chain Analysis (VCA)
Value Chain Analysis is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. The goal of a value chain analysis is to discover which activities deliver the most value in terms of lower costs or competitive differentiation, and which ones could be improved. Successful enterprises focus resources and investment in the activities that bring them the most value. They will also reduce the focus on the activities that do not deliver higher value from the customer's point of view.
Porter's Value Chain Model
Business management consultant Michael Porter launched his Value Chain Analysis model in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance. His model viewed the value chain as a collection of activities that a company performs to create value for its customers. Delivering a higher level of value will lead to a competitive advantage and higher profitability for the organization.
According to Porter, “A company's competitive advantage cannot be seen from the perspective of the entire enterprise as a whole”. Instead, "it stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm's relative cost position and create a basis for differentiation," Porter wrote.
Primary & Secondary Value Chain Activities
Porter identified two categories of activities: primary and secondary. Primary activities are core functions for the enterprise, creating and delivering products and services for customers. Secondary activities support the primary activities and are common to many organizations. These activities often play a more significant role in the success of the primary activities than is commonly thought.
PRIMARY ACTIVITIES
Inbound Logistics: Includes all processes related to suppliers and the activities required to receive, store, and disseminate inputs or raw materials.
Operations: Value-added activities required to transform the inputs into outputs, i.e., products and services.
Outbound Logistics: All activities that a company undertakes to gather, store, and distribute the output to customers.
Marketing and Sales: Activities that inform buyers about products and services, engage buyers in purchasing them and facilitating the purchase process. This set including product development, pricing, promotions and sales force management.
Service: All after-sales activities required to maintain the product or service working for the buyer after it is sold and delivered. This set includes installation, training, maintenance, warranty response and repairs.
SECONDARY ACTIVITIES
Procurement: Acquiring raw materials or inputs for the products, managing relationship with suppliers and negotiating prices. Ideally, this should be in sync with marketing, inbound logistics and operations to source materials on time and cost-effectively.
Human Resources: All activities involving recruiting, hiring, training, developing, compensating and dismissing personnel that design, build, and distribute the product.
Technology: Includes equipment, hardware, software, procedures and technical knowledge used to transform materials into products.
Infrastructure: Administrative functions including accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.
Competitive advantage types
Cost advantage Differentiation advantage
This approach is used when organizations try to compete on costs and want to understand the sources of their cost advantage or disadvantage and what factors drive those costs.(good examples: Amazon.com, Wal-Mart, McDonald's, Ford, Toyota)
The firms that strive to create superior products or services use differentiation advantage approach. (good examples: Apple, Google, Samsung Electronics, Starbucks)
? Step 1. Identify the firm’s primary and support activities.
? Step 2. Establish the relative importance of each activity in the total cost of the product.
? Step 3. Identify cost drivers for each activity.
? Step 4. Identify links between activities.
? Step 5. Identify opportunities for reducing costs. ? Step 1. Identify the customers’ value-creating activities.
? Step 2. Evaluate the differentiation strategies for improving customer value.
? Step 3. Identify the best sustainable differentiation.
Cost advantage
To gain cost advantage a firm has to go through 5 analysis steps:
Step 1. Identify the firm’s primary and support activities. All the activities (from receiving and storing materials to marketing, selling and after sales support) that are undertaken to produce goods or services have to be clearly identified and separated from each other. This requires an adequate knowledge of company’s operations because value chain activities are not organized in the same way as the company itself. The managers who identify value chain activities have to look into how work is done to deliver customer value.
Step 2. Establish the relative importance of each activity in the total cost of the product. The total costs of producing a product or service must be broken down and assigned to each activity. Activity based costing is used to calculate costs for each process. Activities that are the major sources of cost or done inefficiently (when benchmarked against competitors) must be addressed first.
Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the costs, managers can focus on improving them. Costs for labor-intensive activities will be driven by work hours, work speed, wage rate, etc. Different activities will have different cost drivers.
Step 4. Identify links between activities. Reduction of costs in one activity may lead to further cost reductions in subsequent activities. For example, fewer components in the product design may lead to less faulty parts and lower service costs. Therefore identifying the links between activities will lead to better understanding how cost improvements would affect he whole value chain. Sometimes, cost reductions in one activity lead to higher costs for other activities.
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. Too high wage rates can be dealt with by increasing production speed, outsourcing jobs to low wage countries or installing more automated processes.
Differentiation advantage
VCA is done differently when a firm competes on differentiation rather than costs. This is because the source of differentiation advantage comes from creating superior products, adding more features and satisfying varying customer needs, which results in higher cost structure.
Step 1. Identify the customers’ value-creating activities. After identifying all value chain activities, managers have to focus on those activities that contribute the most to creating customer value. For example, Apple products’ success mainly comes not from great product features (other companies have high-quality offerings too) but from successful marketing activities.
Step 2. Evaluate the differentiation strategies for improving customer value. Managers can use the following strategies to increase product differentiation and customer value:
? Add more product features;
? Focus on customer service and responsiveness;
? Increase customization;
? Offer complementary products.
Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and customer value will be the result of many interrelated activities and strategies used. The best combination of them should be used to pursue sustainable differentiation advantage.
Value Chain Vs. Supply Chain
The concepts of the value chain and the supply chain may sound similar, but in reality, they are different.
Simply put, the value chain is all the activities that a company undertakes to create a competitive advantage and value for its customers. That includes the supply chain that can consist of product design, procurement, manufacturing, distribution and fulfillment.
The supply chain is a component of the value chain. In the strict sense of the supply chain, the enterprise does not add value to the products other than in transporting materials and products to the correct locations. The value chain is a series of interrelated activities that an enterprise employs to create a competitive advantage.
It's a matter of looking at an enterprise from two different perspectives. From the supply chain point of view, the flow of activities is from the source to the consumer. Companies begin at the state of raw materials or basic inputs and then follow the chain to the end user, looking at all the process along the way.
In the value chain perspective, the analysis starts with the consumer. The process begins with the end user and assigns a higher value to those activities that are most important to the customer. Supply chain analysis typically focuses on the costs of goods or services. Value chain focuses on creating value in the customer's eyes. An enterprise that understands its value chain will create strong connections between those things customers value and the company's activities. Value chains provide a strategic view, emphasizing innovation, technology, social trends and research and development.
An enterprise that competes on differentiation rather than cost typically enjoys higher margins and greater customer loyalty. Look at any number of companies from Burberry to Mercedes-Benz to Apple; they all have competitors that offer essentially similar products at lower price points. Their value chains allow them to charge higher prices that the consumers are willing to pay.
Abdul Gafoor . www.digitalsupplychaintoday.com