133897456 Porter Value Chain Analysis Doc

PORTER’S VALUE CHAIN The Value Chain A methodology of separating a business system into a series of value-generating activities that develop competitive advantage. Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter's Generic Value Chain

M A Outboun Marketing Inbound R d & > Operations > > > Service > G Logistics Logistics Sales I N

Firm Infrastructure HR Management Technology Development Procurement Goal - offer the customer a level of value that exceeds the cost of the activities, resulting in a profit margin. Primary Value Chain Activities: • Inbound Logistics: o The receiving and warehousing of raw materials, and their distribution to manufacturing as they are required. • Operations: o The processes of transforming inputs into finished products and services. • Outbound Logistics: o The warehousing and distribution of finished goods. • Marketing & Sales: o The identification of customer needs and the generation of sales. • Service: o The support of customers after the products and services are sold to them. Supporting Activities: • Infrastructure of the firm: o Organizational structure, control systems, company culture, etc. • Human resource management: o Employee recruiting, hiring, training, development and compensation. •

Technology development: o Technologies to support value-creating activities.

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Procurement: o Purchasing inputs such as materials, supplies, and equipment.

Profit Margin: Depends on the Effectiveness in performing these Supporting Activities “Efficiently” -Revenues (customer is willing to pay for the products) must exceed the cost of the activities in the value chain. Generate Superior Value: A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. Use the value chain model to define a firm's core competencies and the activities in which it can pursue a competitive advantage: • •

Cost advantage: Better understanding and reducing costs Differentiation: Focus on those activities associated with core competencies and capabilities

Cost Advantage and the Value Chain 1- reduce the cost of individual value chain activities 2- reconfigure the value chain. A- Define the value chain is define via a cost analysis, by assigning costs to the value chain activities. B- Accounting reports are studied in order to modify or reallocate costs and produce value creating activities. 1- Reduce the cost of individual value chain activities Porter identified 10 cost drivers related to value chain activities: • Economies of scale • Learning • Capacity utilization • Linkages among activities • Interrelationships among business units • Degree of vertical integration • Timing of market entry • Firm's policy of cost or differentiation • Geographic location • Institutional factors (regulation, union activity, taxes, etc.) NOTE: 1- A firm develops a cost advantage by controlling these drivers better than do the competitors. 2- Reconfigure the value chain. Structural changes - such a new production process, new distribution channels, or a different sales approach. Differentiation and the Value Chain Increase Uniqueness- Changing any part of the value chain. - procurement of inputs that are unique

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distribution channels that offer high service levels

Porter identified several drivers of uniqueness: • • • • • • • • •

Policies and decisions Linkages among activities Timing Location Interrelationships Learning Integration Scale (e.g. better service as a result of large scale) Institutional factors

Reconfiguring value chain for uniqueness. -

Forward integrate - perform functions that once were performed by customers. Backward integrate- have more control over its inputs.

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Implement new process technologies or utilize new distribution channels.

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Develop a novel value chain configuration that increases product differentiation.

Technology and the Value Chain Can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage. Used in both primary value activities and support activities: •

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Inbound Logistics Technologies o Transportation o Material handling o Material storage o Communications o Testing o Information systems Operations Technologies o Process o Materials o Machine tools o Material handling o Packaging o Maintenance o Testing o Building design & operation o Information systems Outbound Logistics Technologies o Transportation o Material handling o Packaging

Communications Information systems Marketing & Sales Technologies o Media o Audio/video o Communications o Information systems Service Technologies o Testing o Communications o Information systems o o

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Linkages between Value Chain Activities One value chain activity often affects the cost or performance of other ones. Ex1. Design of a product is changed in order to reduce manufacturing costs, results in increased service costs Ex2. Design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced Value Chain analysis for Horizontal Strategy: Goal- Cost Reduction via synergy; Using value change analysis to identify Business Unit Interrelationships Identification of synergy among business units. Ex. If multiple business units require a particular raw material, sharing of the procurement activity can result in cost reduction. Caveat: The cost of coordination and the cost of reduced flexibility Outsourcing Value Chain Activities Using value change analysis to identify activities to outsource. Goal- Cost Reduction via outsourcing; Analysis of firm’s vertical integration (upstream and downstream activities) to uncover specialization potential in one or more value chain activities and outsource others. Each activity must be studied to understand it’s: 1- Strengths and weaknesses 2- Cost and ability to differentiate. Factors to consider when selecting activities to outsource: • Whether the activity can be performed cheaper or better by suppliers. • Whether the activity is one of the firm's core competencies from which stems a cost advantage or product differentiation. •

The risk of performing the activity in-house. If the activity relies on fast-changing technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.

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Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory

The Value Chain System Interconnected system of value chains of upstream suppliers and downstream channels and customers. Develop a competitive advantage via management of the value system of which it is a part.

The Value System Firm Supplier Channel Buyer ... Value > Value Chain > > Value Chain > Value Chain Chain Ex. Forge agreements with suppliers and channel partners to achieve better coordination. For example, an auto manufacturer may have its suppliers set up facilities in close proximity in order to minimize transport costs and reduce parts inventories.