Value Chain Analysis

1. Value Chain Analysis Victor Marbun (M987Z259) Nguyen Phan Anh Huy (M987Z264)

2. Outline • The Value Chain Concept • Methodology • Case Study • Ajax Airlines • People Airlines & United Airlines

3. Outline • The Value Chain Concept • Methodology • Case Study • Ajax Airlines • People Airlines & United Airlines

4. The value chain concept According to Porter (1980), a business unit can develop a sustainable competitive advantage either based on cost or based on differentiation or based on both.

5. Superior Relative Differentiation Position Inferior Inferior Superior Relative Cost Position

6. Low cost: • Economies of scale in production • Experience curve effects • Tight cost control • Cost minimization in areas such as R&D, service, sales force, or advertising.

7. Differentiation: • Brand loyalty • Superior customer service • Dealer network • Product design and product features • Technology

8. Value Chain Linkages The value chain framework is a method for breaking down the chain-from basic raw materials to end-use customers- into strategically relevant activities in order to understand the behavior of costs and the sources of differentiation.

9. Value Chain in the Paper Products Industry Silvarculture and Timber Farming Logging and Chipping Competitor B Competitor C Competitor A Pulp Manufacturing Competitor D Paper Manufacturing Competitor G Converting Operations Competitor E Distribution Competitor F End-Use Customer

10. Every firm must construct a value chain for the total paper industry, break the value in the chain into its fundamental sources of economic value.

11. Value Activities within a firm

12. A firm’s value chain is embedded in a large system that includes suppliers’ and customers’ value chains. A firm can enhance its profitability not only by understanding its own value chain--from design to distribution--but also by understanding how the firm’s value activities fit into suppliers’ and customers’ value chains.

13. Value chain VS Value-Added • Value-added refer to the contribution of the internal focus such as land, labor, capital goods. • Value chain concept highlights four profit improvement areas : • Linkages with suppliers • Linkages with customers • Process linkages within the value chain of a business • Linkages across business unit value chains within the firm

14. Outline • The Value Chain Concept • Methodology • Case Study • Ajax Airlines • People Airlines & United Airlines

15. Value Chain Methodology process Identify the industry value chain Diagnose the cost drivers for each value Develop sustainable competitive advantage Assign costs fixed cost VS variable cost evaluation Revenues average cost VS marginal cost improvement Assets break even analysis Return on Assets

16. Identify The Value Chain Activities should be isolated and separated if: They represent a significant percentage of operating costs. The cost behavior of the activities (cost driver different. They are performed by competitors in different ways. They have a high potential of being able to create differentiation.

17. Diagnose Cost Drivers Structural cost driver. Scale, Size of operation. Scope, Degree of vertical integration. Experience, past activity. Technology, what process technologies used. Complexity, number of product lines.

18. Diagnose Cost Driver (Cont’d) Executional Cost Drives. Work force involvement (participation). Total quality management. Capacity utilization. Exploiting linkage.

19. Develop Sustainable Competitive Advantage Control cost driver better than competitors. Can we reduce costs in this activity, holding value (revenues) constant? Can we increase value (revenues) in this activity, holding cost constant? Can we reduce assets in this activity, holding costs and revenues constant?

20. Develop Sustainable Competitive Advantage (cont’d) Reconfigure the Value Chain. Redefining the value chain (payoffs could be more significantly). The company has fought to hold down labor costs.

21. Problems in Constructing a Value Chain Calculational Difficulties. Calculating value (revenues) for intermediate products. Isolating key cost drivers. Identifying linkages across activities. Computing supllier and customer margins. Constructing competitor’s cost structures.

22. Problems in Constructing a Value Chain (cont’d) Value Chain difficulties The process of performing the value chain analysis. i.e. : - how does my activity add value to the chain of customers to the end-user. - How does my cost structure compare with those of my competitors.

23. Outline • The Value Chain Concept • Methodology • Case Study • Ajax Airlines • People Airlines & United Airlines

24. EXHIBIT 6 Ajax Airlines: A Valuable Chain Analysis

25. Ajax Airlines: A Value Chain Analysis (Cont’d)

26. Case study: Ajax Airline Strategically, Ajax airlines hope that a small increase in aggregate customer service expenditures and a better ticketing and reservation system will justify higher prices. However, increase aircraft operations cost wipe out most of the profit impact of increase in revenue per seat mile flown.

27. Case study: Ajax Airline By the conventional analysis, this strategy seems hard to be successful. Value chain analysis can yield very different insights. We believe that the linking of financial analysis to strategic positioning in this way is a critical element in effective financial analysis.

28. Outline • The Value Chain Concept • Methodology • Case Study • Ajax Airlines • People Airlines & United Airlines

29. EXHIBIT 7 Value Chain Configurations: A Comparison Between People Express and United Airlines Advertising & Publicity Ticketing Offices Ticket Counter Operations Gate Operations Baggage Handling fleets Aircraft Operations On-Board Service Cost Per 10.000 Seat Miles Cost Per 10.000 Seat Miles $ 1,000 $ 1,300 $ 9.,000 $ 13,200 People Express United Airlines $ 4,900 $ 6,700 $ 11,600 $ 15,600 $ 1,500 $ 4,700 $ 28,400$ 41,500

30. Exhibit 8Strategic Inference from the Value Chains of People Express and United Airlines