VALUE CHAIN ANALYSIS

 The Value chain is a set of interconnected value-generating activities commencing with basic raw materials reaching from suppliers, moving on to a series of value added activities involved in producing and marketing a product or service, and finishing with distributors getting the final goods into the hands of the final consumer.
The value chain analysis is a nice way to begin an organization analysis to determine where a firm’s products are located in the overall value chain and is a method for evaluating the strengths and weaknesses of an organization based on an understanding of the series of activities  a firm performs.  It is a set of interlinked value-creating activities of an organization that may begin with the procurement of basic raw materials, go through its process in different stages, and remain till the end products finally marketed for the ultimate consumption. The value chain is exhibited in the following figure.

The value chain concept permits the firm to be dis-aggregated into a variety of strategically relevant activities particularly those that have different economic characteristics, have a high potential for creating differentiation, and those that are most important in developing cost structure. The value chain concept thus helps to identify cost behavior in detail. From this analysis, different strategic courses of action should be identifiable in order to develop differentiation and less price sensitive strategies. Competitive advantage is then achieved by performing strategic activities better or cheaper than competitors.

Value is the amount that buyers are willing to pay for the product or service that a firm provides. Profits alter when the value created by the firm increases. Value is the amount that buyers are willing to pay for the product or service to compensate the cost of providing it.  This is the goal of strategy, and therefore value creation becomes a critical ingredient in competitive analysis. Every value activity incurs costs such as for raw materials, and other purchased goods and services for “purchased inputs”, human resources (direct and indirect labor), and technology to transform raw materials into finished goods. Each value activity creates information that is needed to establish what is going on in the business. Similarly, producing stocks, accounts receivable, and the like create value while value is lost via raw material purchases and other liabilities. Most organizations thus engage in many activities in the process of creating value. These activities can generally be classified into either primary or support activities. Porter states that there are five generic categories of primary activities involved in competing in any industry, each of that is divisible into a number of specific activities that vary according to the industry and chosen strategy of the firm.  Primary activities are concerned to the flow of the product to the customer.Primary activities include:

1. Inbound logistics 

The activities associated with receiving, storing, and distributing rights to the product/service, such as material handling, warehousing, stock management, transport and the like are inbound logistics.

2. Operations 

Operations are the activities required to transform inputs into outputs and the critical functions that add value, such as machining, packaging, assembly, service, testing, and the like.

3. Outbound logistics

Outbound logistics are activities required to collect, store, and physically distribute the product to customers. These activities can prove to be extremely important both in generating value and in improving differentiation, as in many industries control over distribution strategies is proving to be a major source of competitive advantage.
 

4. Marketing and Sales

Activities associated with informing potential buyers about the firm’s products and services, and inducing them to buy. This would include sales administration, personal selling, advertising, promotion, and the like.

5. Service

Service covers all those activities that enhance the physical product features through after- sales service, installation, repair, training, spares and the like.

There are four generic strategies that support the primary activities of the firm:

1. Procurement:  

This concerns the acquisition of inputs or resources. Although technically procurement is the responsibility of the purchasing department, almost everyone in the firm are responsible for purchasing something. While the cost of procurement itself is relatively low, the impact can be very high.

2. Human resource management: 
This consists of all activities involved in recruiting, selecting, training, developing, rewarding, and recognizing the people in the organization.

3. Technology development:
This is concerned with the equipment, hardware, software, technical skills, and the like used by the firm in transforming inputs to outputs. Some such skills can be classified as scientific, while others – such as food preparation in a restaurant- are “artistic”. Such skills are not always recognized. They may also support limited activities of the business, such as accounting, order procurement and the like, and in this sense may be likened to the value added component of the experience effect.

4. Firm infrastructure: 
This consists of the many activities, including general management, planning, finance, legal, external affairs, and the like, that support the operational aspect of the value chain. This may be self-contained in the case of an un-diversified firm or divided between the parent and the firm’s constituent business units. 

Porter identifies three types of activity within primary and support activities that play different roles in achieving competitive advantage.
1. Direct: 
Direct activities include activities directly contributing to creating value for buyers, such as assembly, sales and advertising.
2. Indirect: 
These are activities that facilitate the performance of the direct activities on a continuing basis, such as maintenance, scheduling, and administration.
3. Quality assurance:
These are activities that insure the quality of other activities, such as monitoring, inspecting, testing, and checking.

In order to diagnose competitive advantage, it is necessary to define the firm’s value chain for operating in a particular industry and compare this with those of key competitors. A comparison of the value chains of different competitors often identifies ways of achieving strategic advantage by re-configuring the value chain of the individual firm. In assigning costs and assets it is important that the analysis be done strategically rather than seeking accounting precision. 

This should be accomplished using the following principles:

1. Operating cost should be assigned to activities where incurred.
 2. Assets should be assigned to activities where employed, controlled, or influencing usage. 
3. Accounting systems should be adjusted to fit value analysis. 
4. Asset valuation may be difficult, but should recognize industry norms- particular care should be taken in evaluating property assets.

Successful competitors have used the re-configuration of the value chain in achieving competitive advantage. When seeking to reconfigure the value chain in an industry, the following questions need to be answered :
1. How can an activity be done differently or even eliminated? 
2. How can linked value activities be recorded or regrouped? 
3. How could coalitions with other firms reduce or eliminate costs?
Successful reconfiguration strategies usually occur with one or more of the following moves: 
1. A new production process, 
2. Direct versus indirect sales strategy, 
3. The opening of new distribution channels, 
4. New raw materials used, 
5. Differences in forward and/or backward integration, 
6. New advertising media

Thus, to summarize the value chain provide the useful tool for analyzing the different activities of the firm to add value to the products and services.