Value Chain Analysis

Presented by Mike Abbott, Emily Garrigues, and Kacy Meadows

What is value chain analysis?

Used to identify sources of competitive advantage Specifically:
Opportunities to secure cost advantages Opportunities to create product/service differentiation

Includes the value-creating activities of all industry participants

Michael Porter
VCA popularized by Porters 1985 book, Competitive Advantage An approach to close the strategic gap between internal capabilities and external opportunities

Background
Portfolio theorys worth questioned VCA encouraged exploiting the ignored potential of vertical synergies Porter offered VCA as a way to implement competitive strategy

What is the value chain?

Porters definition includes all activities to design, produce, market, deliver, and support the product/service. Two categories:
Primary Activities (operations, distribution, sales) Support Activities (R&D, Human Resources)

Value Chain Activities, cont.

Most value chain activities are interlinked, and dependant upon the others Competitive advantage can be achieved by single activities The best competitive advantages are based upon complex linkages Value Chain Analysis pinpoints these opportunities

Secondary Applications
Competitor analysis Customer value analysis Determining company scope Strategic cost management Integration Supply chain management Strategic outsourcing Acquisitions, mergers, strategic alliances Organizational structure Global strategy

Strengths and Advantages

Porter challenged conventional management theory VCA = superior method of exploiting sources of competitive advantage Encourages internal/external synergies (strategic fits)

Strengths and Advantages

VCA & SWOT Tool for understanding:
Strengths Weaknesses Competitive positioning

Illustrates how competitive advantage can be achieved & sustained

Greatest Weakness
Technology
VCA needs updated tools to maintain effectiveness with intellectual competition. Virtual Value Chain (VVC) adds a 4th dimension to VCA. VCA lacks robustness to be applied to service and e-commerce businesses.

Virtual Value Chain (VVC)

5 new principles underlying the VCA gap.
The Law of Digital Assets marginal costs are zero or very near zero. New Economies of Scale cost efficiencies at low volumes for small firms too. New Economies of Scope one asset may provide both breadth and depth. Reduction of Transaction costs much lower on virtual value chain than physical value chain. Rebalancing Supply and Demand focus on market of one.

Value Web Management

Synchronization - Value is only created if input is complete, real-time, and simultaneous to each member. The Guiding Principles of the Value Web Affecting the rules of competition.
Disintermediation Reintermediation Infomediation Role transformation Dematerialization Digitization

VVC / VWM / VCA

Theoretical
All are still in their infancy, more will change

Managing value chains in the context of information communication and technology requires the analyst to broaden his or her scope to include new and challenging economic realities that are not explicitly address by Porters VCA model.
Value creating factors must be managed and intertwined with the physical value chain.

Too Simplistic
Porters VCA is a straightforward theory, but much more difficult to apply in practice.
Major Factor - $$$$$$$$$$$$$$ for
Customer Research Competitive Analysis Industry Structure Analysis

Data is not easily available

Accounting systems are not set up to gather the correct information to make VCA data gathering easy.
Solution: Activity Based Accounting (ABC)

Applying VCA
Step 1: Define firms strategic business units Draw boundaries around business segments
Different segments Different competitive advantages Different strategies

Step 2: Identify critical value-creating activities

Different economic structures Contribute large/growing % of total costs Contribute to product/service differentiation

Step Three
Step 3: Conduct internal cost analysis Internal
Identify cost drivers
Functional Executional

Identify existing VCA Explore strategic cost management

External
Benchmark competition Revamp cost structure & secure low cost advantage

Step Four
Conduct an Internal Differentiation Analysis
Identify value creating activities and cost drivers. Meld customer knowledge with appropriate strategy.
Engage in customer dialogue (surveys, focus groups, etc.) Find out how to provide more value to the customer.

Determine differentiation strategy.

Product or Service Attributes Channel Management Customer Support Pre- and Post-Sale Support Branding Price

KEY: Choose best strategy to meld companies core competencies with customer demands for value.

Step Five
Industry Profit Pool
Define parameters of the Industry Profit Pool
Who or what is considered a market or a competitor. (Dont forget crossovers and migrating companies.)

Estimate the total size of the Industry Profit Pool

Use government resources and accounting information.

Estimate Distribution of the Profit Pool

Who has what amount of the market share?

Step Six: Vertical Linkage Analysis

Allows analyst to determine how to reposition the firm in the deep end of the industry profit pooland stay there. Most difficult step, since vertical linkages are less tangible. First, analyze the industry using Porters Five Forces analysis. Second, determine the cost drivers and core competencies driving each competitor. Core competency = capabilities, skills, and technologies that create low cost or differentiation customer value.

Step Six, cont.

Third, evaluate the firms existing core competencies. Determine opportunities to acquire or strengthen related competencies through vertical linkages with suppliers, buyers, etc. Avoid the temptation to utilize a mixed strategy (low-cost and differentiation)

Step Seven: Iteration

Repeat steps one through six periodically to proactively manage industry change.