VALUE CHAIN ANALYSIS : An Overview

1. VALUE CHAIN ANALYSIS :An Overview By: Dr. Rizalito L. Gregorio UNIVERSITY OF THE PHILIPPINES

2. THE VALUE CHAIN • A TOOL DEVELOPED BY DR. MICHAEL PORTER OF HARVARD BUSINESS SCHOOL

3. THE VALUE CHAIN • CAN BE USED TO EXAMINE THE VARIOUS ACTIVITIES OF THE FIRM AND HOW THEY INTERACT IN ORDER TO PROVIDE A SOURCE OF COMPETITIVE ADVANTAGE BY: - PERFORMING THESE ACTIVITIES BETTER OR - AT A LOWER COST THAN THE COMPET- ITORS

4. SUP-PORT ACTIV-ITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT MARGIN TECHNOLOGY DEVELOPMENT PROCUREMENT MARKET-ING & SALES INBOUND LOGISTICS OPER-ATIONS OUTBOUND LOGISTICS SERVICE MARGIN PRIMARY ACTIVITIES THE GENERIC VALUE CHAIN

5. TYPES OF FIRM ACTIVITIES 1. PRIMARY - THOSE THAT ARE INVOLVED IN THE CREATION, SALE AND TRANSFER OF PRODUCTS (INCLUDING AFTER-SALES SERVICE)

6. TYPES OF FIRM ACTIVITIES 2. SUPPORT - THOSE THAT MERELY SUPPORT THE PRIMARY ACTIVITIES

7. FIRM INFRASTRUCTURE SUP-PORT ACTIV-ITIES HUMAN RESOURCE MANAGEMENT MARGIN TECHNOLOGY DEVELOPMENT PROCUREMENT MARKET-ING & SALES INBOUND LOGISTICS OPER-ATIONS OUTBOUND LOGISTICS SERVICE MARGIN PRIMARY ACTIVITIES THE GENERIC VALUE CHAIN

8. PRIMARY ACTIVITIES 1. INBOUND LOGISTICS - CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS (e.g. HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY CONTROL)

9. PRIMARY ACTIVITIES 2. OPERATIONS - COMPRISE THE TRANSFORMATION OF THE INPUTS INTO THE FINAL PRODUCT FORM (E.G. PRODUCTION, ASSEMBLY, AND PACKAGING)

10. PRIMARY ACTIVITIES 3. OUTBOUND LOGISTICS - INVOLVE THE COLLECTING, STORING, AND DISTRI BUTING THE PRODUCT TO THE BUYERS (e.g. PROCESSING OF ORDERS, WAREHOUSING OF FINISHED GOODS, AND DELIVERY)

11. PRIMARY ACTIVITIES 4. MARKETING AND SALES - HOW BUYERS CAN BE CONVINCED TO PURCHASE THE PRODUCT (e.g. ADVERTISING, PROMOTION, DISTRIBUTION)

12. PRIMARY ACTIVITIES 5. SERVICE • INVOLVES HOW TO MAINTAIN THE VALUE OF THE PRODUCT AFTER IT IS PURCHASED (e.g. INSTALLATION, REPAIR, MAINTENANCE, AND TRAINING)

13. FIRM INFRASTRUCTURE SUP-PORT ACTIV-ITIES HUMAN RESOURCE MANAGEMENT MARGIN TECHNOLOGY DEVELOPMENT PROCUREMENT MARKET-ING & SALES INBOUND LOGISTICS OPER-ATIONS OUTBOUND LOGISTICS SERVICE MARGIN PRIMARY ACTIVITIES THE GENERIC VALUE CHAIN

14. SUPPORT ACTIVITIES 1. PROCUREMENT -CONCERNED WITH THE TASKS OF PURCHASING INPUTS SUCH AS RAW MATERIALS, EQUIPMENT, AND EVEN LABOR

15. SUPPORT ACTIVITIES • 2. TECHNOLOGY DEVELOPMENT • THESE ACTIVITIES ARE INTENDED TO IMPROVE THE PRODUCT AND THE PROCESS, • CAN OCCUR IN MANY PARTS OF THE FIRM

16. SUPPORT ACTIVITIES • 3. HUMAN RESOURCE MANAGEMENT – INVOLVED IN RECRUITING, HIRING, TRAINING, DEVELOPMENT AND COMPENSATION

17. SUPPORT ACTIVITIES • 4. FIRM INFRASTRUCTURE - THE ACTIVITIES WHICH ARE NOT SPECIFIC TO ANY ACTIVITY AREA SUCH AS GENERAL MANAGEMENT, PLANNING, FINANCE, AND ACCOUNTING ARE CATEGORIZED UNDER FIRM INFRASTRUCTURE.

18. FIRM INFRASTRUCTURE SUP-PORT ACTIV-ITIES HUMAN RESOURCE MANAGEMENT MARGIN TECHNOLOGY DEVELOPMENT PROCUREMENT MARKET-ING & SALES INBOUND LOGISTICS OPER-ATIONS OUTBOUND LOGISTICS SERVICE MARGIN PRIMARY ACTIVITIES THE GENERIC VALUE CHAIN

19. USES OF VALUE CHAIN ANALYSIS • THE SOURCES OF THE COMPETITIVE ADVANTAGE OF A FIRM CAN BE SEEN FROM ITS DISCRETE ACTIVITIES AND HOW THEY INTERACT WITH ONE ANOTHER.

20. USES OF VALUE CHAIN ANALYSIS • THE VALUE CHAIN IS A TOOL FOR SYSTEMATICALLY EXAMINING THE ACTIVITIES OF A FIRM AND HOW THEY INTERACT WITH ONE ANOTHER AND AFFECT EACH OTHER’S COST AND PERFORMANCE.

21. USES OF VALUE CHAIN ANALYSIS • A FIRM GAINS A COMPETITIVE ADVANTAGE BY PERFORMING THESE ACTIVITIES BETTER OR AT LOWER COST THAN COMPETITORS.

22. VALUE • THE VALUE IS THE TOTAL AMOUNT (i.e. TOTAL REVENUE) THAT BUYERS ARE WILLING TO PAY FOR A FIRM’S PRODUCTS. • THE DIFFERENCE BETWEEN THE TOTAL VALUE (OR REVENUE) AND THE TOTAL COST OF PERFORMING ALL OF THE FIRM’S ACTIVITIES PROVIDES THE MARGIN

23. FIRM INFRASTRUCTURE SUP-PORT ACTIV-ITIES HUMAN RESOURCE MANAGEMENT MARGIN TECHNOLOGY DEVELOPMENT PROCUREMENT MARKET-ING & SALES INBOUND LOGISTICS OPER-ATIONS OUTBOUND LOGISTICS SERVICE MARGIN PRIMARY ACTIVITIES THE GENERIC VALUE CHAIN

24. VALUE ACTIVITIES • THOSE ACTIVITIES THAT ARE DISTINCT BOTH PHYSICALLY AND TECHNOLOGICALLY

25. VALUE ACTIVITIES • SOME ACTIVITIES ARE MORE VITAL THAN OTHERS DEPENDING UPON THE INDUSTRY. • FOR INSTANCE, MARKETING ACTIVITIES WOULD BE MORE VITAL IN A VERY COMPETITIVE CONSUMER GOODS INDUSTRY THAN IN A TELEPHONE MONOPOLY.

26. VALUE ACTIVITIES • SOME ACTIVITIES ARE DIRECT IN THE SENSE THAT THEY ARE DIRECTLY INVOLVED IN CREATING VALUE FOR THE BUYER.

27. VALUE ACTIVITIES • SOME ACTIVITIES ARE INDIRECT AND ARE INVOLVED ONLY IN MAKING IT POSSIBLE TO PERFORM THE DIRECT ACTIVITIES ON A CONTINUING BASIS (e.g. MAINTENANCE, SCHEDULING, OPERATION OF FACILITIES, RECORD KEEPING).

28. VALUE ACTIVITIES • SOME ACTIVITIES ARE PRIMARILY INVOLVED IN QUALITY ASSURANCE AND ARE INVOLVED MAINLY IN ENSURING THE QUALITY OF OTHER ACTIVITIES (e.g. MONITORING, INSPECTING, TESTING, ETC.)

29. VALUE ACTIVITIES • EVERY ACTIVITY THAT IS DONE BY A FIRM NEEDS TO BE CAPTURED IN A PRIMARY OR SUPPORT ACTIVITY.

30. VALUE ACTIVITIES • THE ACTIVITIES WITH DISCRETE TECHNOLOGIES AND ECONOMICS SHOULD BE ISOLATED.

31. VALUE ACTIVITIES • THE VALUE LABELS ARE ARBITRARY AND THEY SHOULD BE CHOSEN IN ORDER TO PROVIDE THE BEST INSIGHT INTO THE BUSINESS. • IT IS ADVISABLE TO ASSIGN THE VALUE ACTIVITIES TO CATEGORIES THAT BEST REPRESENT THEIR CONTRIBUTION TO A FIRM’S COMPETITIVE ADVANTAGE.

32. VALUE ACTIVITIES • AN ACTIVITY CAN BE SEPARATED FROM OTHER ACTIVITIES IF IT HAS ANY OF THE FOLLOWING CHARACTERISTICS; A) HAS A DIFFERENT ECONOMICS COMPARED TO THE OTHERS B) HAS A HIGH POTENTIAL IMPACT OF DIFFERENTIATION AND, C) REPRESENTS A SIGNIFICANT OR GROWING PROPORTION OF THE COST OF PRODUCTION OR OPERATION.

33. VALUE ACTIVITIES • SOME ACTIVITIES SHOULD BE COMBINED IF THEY ARE NOT IMPORTANT TO COMPETITIVE ADVANTAGE OF THE FIRM OR IF THEIR ECONOMICS ARE SIMILAR TO THE OTHER ACTIVITIES.

34. ANALYZING THE CHAIN • COVER THE ENTIRE COST STRUCTURE OF THE COMPANY

35. ANALYZING THE CHAIN • BE SURE TO INCLUDE THE SUB-CONTRACTED OR OUTSOURCED PORTIONS

36. LINKAGES WITHIN THE VALUE CHAIN • NOT JUST A COMPILATION OF ACTIVITIES THAT ARE INDEPENDENT OF EACH OTHER; • INSTEAD, IT IS A SYSTEM OF ACTIVITIES THAT ARE INTERDEPENDENT BECAUSE THEY ARE RELATED BY THEIR LINKAGES. • THROUGH THE LINKAGES, THE PERFORMANCE OF ONE ACTIVITY AFFECTS THE COST OR PERFORMANCE OF ANOTHER.

37. LINKAGES WITHIN THE VALUE CHAIN • THESE LINKAGES BETWEEN THE ACTIVITIES SUGGEST THAT THE COST ADVANTAGE OR THE DIFFERENTIATION OF A FIRM WOULD DEPEND NOT JUST ON THE COST REDUCTION OR PERFORMANCE IMPROVEMENT OF AN INDIVIDUAL ACTIVITY. • DO NOT JUST LOOK AT EACH ACTIVITY INDEPENDENTLY

38. LINKAGES WITHIN THE VALUE CHAIN • THE LINKAGES BETWEEN THE ACTIVITIES CAN BE IDENTIFIED BY SEARCHING FOR WAYS IN WHICH EACH VALUE ACTIVITY AFFECTS OR IS AFFECTED BY OTHERS. • OPTIMIZATION AND COORDINATION BETWEEN THE VARIOUS ACTIVITIES OF THE FIRM CAN BE ACHIEVED BY EXPLOITING THESE LINKAGES.

39. FIRM INFRASTRUCTURE SUP-PORT ACTIV-ITIES HUMAN RESOURCE MANAGEMENT MARGIN TECHNOLOGY DEVELOPMENT PROCUREMENT MARKET-ING & SALES INBOUND LOGISTICS OPER-ATIONS OUTBOUND LOGISTICS SERVICE MARGIN PRIMARY ACTIVITIES THE GENERIC VALUE CHAIN

40. VERTICAL LINKAGES • LINKAGES CAN ALSO EXIST OUTSIDE THE FIRM; FOR INSTANCE THERE IS A LINKAGE BETWEEN A FIRM’S CHAIN AND THE VALUE CHAIN OF ITS SUPPLIERS AND CHANNELS. • e.g. THE ACTIVITIES OF THE RAW MATERIALS SUPPLIERS AFFECT THE ACTIVITIES OF THE FIRM. SIMILARLY, THE ACTIVITIES OF THE DISTRIBUTOR ALSO AFFECT THE FIRM.

41. VALUE SYSTEM: LINKAGES OF ACTIVITIES BETWEEN FIRMS CHANNEL / BUYER SUPPLIER F I R M

42. VERTICAL LINKAGES • THESE LINKAGES CAN PROVIDE OPPORTUNITIES FOR THE FIRM TO ENHANCE ITS COMPETITIVE ADVANTAGE.

43. VERTICAL LINKAGES • THE VALUE CHAIN OF A FIRM IS A PART OF THE VALUE SYSTEM, WHICH IS THE LARGER STREAM OF ACTIVITIES FROM SUPPLIERS TO BUYERS.

44. VERTICAL LINKAGES • BECAUSE OF THE INTERACTIONS BETWEEN THEM, THE SUPPLIERS AND EVEN THE CHANNELS AFFECT A COMPANY’S VALUE CHAIN.

45. VERTICAL LINKAGES • THE PRODUCT OF A FIRM REPRESENTS A PURCHASED INPUT TO THE BUYER’S CHAIN. • DIFFERENTIATION CAN RESULT FROM HOW A FIRM’S VALUE CHAIN RELATES TO THE VALUE CHAIN OF ITS BUYER

46. VERTICAL LINKAGES • VALUE IS CREATED WHEN A FIRM CREATES COMPETITIVE ADVANTAGE FOR ITS BUYER.

47. VERTICAL LINKAGES • A FIRM CAN ALSO ENTER INTO COALITIONS WITH INDEPENDENT FIRMS TO ACHIEVE BENEFITS FROM THE LINKAGES AMONG THEIR VARIOUS VALUE CHAINS. • EXAMPLES OF SUCH COALITIONS ARE TECHNOLOGY LICENSES AND JOINT VENTURES.

48. COMPETITIVE SCOPE AND BUSINESS DEFINITION • DEFINE THE BUSINESS UNIT IN WHICH THE VALUE CHAIN WOULD BE OPTIMAL FOR THE FIRM e.g. EXPORT SALES DIVISION vs. LOCAL SALES DIVISION

49. APPLYING THE VALUE CHAIN TO AN INDUSTRY • THE VALUE CHAINS OF THE DIFFERENT FIRMS WITHINAN INDUSTRY VARY FROM ONE ANOTHER • IN FACT, THE DIFFERENCES IN THE VALUE CHAINS AMONG THE DIFFERENT INDUSTRY PLAYERS PROVIDE THE SOURCE OF COMPETITIVE ADVANTAGES BETWEEN THESE PLAYERS.

50. APPLYING THE VALUE CHAIN TO AN INDUSTRY • SINCE THE APPLICATION OF THE VALUE CHAIN ANALYSIS TO AN INDUSTRY WILL LIKELY BLUR OR HIDE THESE SOURCES OF COMPETITIVE ADVANTAGE, DR. PORTER THEREFORE SUGGESTS THAT: THE BUSINESS UNIT IS THE CORRECT LEVEL TO CONSTRUCT A VALUE CHAIN AND THE APPLICATION TO AN ENTIRE SECTOR OR INDUSTRY IS NOT RECOMMENDED.