Value Chain
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GENERIC STRATEGIES AND
VALUE CHAIN
What is Strategy? • A company's objectives and philosophy • Defining strategy – the five 'Ps' of strategy • a plan • a ploy • a pattern of behaviour • a position with respect to others • a perspective
– strategy as a mix of the five Ps
What is Strategy? • Strategic management – strategic and day-to-day management – the components of strategic management • strategic analysis • strategic choice • strategic implementation
– different business types • big or small business • manufacturing or service provider business • domestic or multinational business • private-sector or public-sector business • for-profit or not-for-profit organisations
Strategic Analysis • Factors affecting strategic choices • The business environment – PEST analysis – Porter's five forces model • the bargaining power of suppliers • the bargaining power of buyers • the threat of potential new entrants • the threat of substitutes • the extent of competitive rivalry
Porter's Five Forces Model
Industry competitors
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model
Industry competitors Rivalry among existing firms
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants
Industry competitors Rivalry among existing firms
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants
Industry competitors Rivalry among existing firms
Threat of substitutes
Substitute products Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants Bargaining power of suppliers
Industry competitors
Suppliers Rivalry among existing firms
Threat of substitutes
Substitute products Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants Bargaining power of suppliers
Industry competitors Bargaining power of buyers
Suppliers
Buyers Rivalry among existing firms
Threat of substitutes
Substitute products Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Generic Business Level Strategies Source of Competitive Advantage
Breadth of Competitive Scope
Cost
Uniqueness
Broad Target Market
Cost Leadership
Differentiation
Narrow Target Market
Focused Focused Low Cost Differentiation
Gaining competitive advantage out of Generic strategy
Example
The Value Chain Support activities
Primary activities Inbound logistics premises Operations Outbound logistics Marketing and Sales Service Corporate infrastructure planning,
Materials receiving, storing, and distribution to manufacturing Transforming inputs into finished products. Storing and distributing products Promotions and sales force Service to maintain or enhance product value Support of entire value chain, e.g. general management financing, accounting, legal services, government affairs, and
QM Human resources management
Recruiting,
hiring, training, and
VALURE CHAIN ANALYSIS
•Activity Analysis: Firstly, you identify the activities you undertake to deliver your product or service; 2.Value Analysis: Secondly, for each activity, you think through what you would do to add the greatest value for your customer; and 3.Evaluation and Planning: Thirdly you evaluate whether it is worth making changes, and then plan for action.
TYPE OF ACTIVITIES DIRECT
ASSEMBLY, PARTS MACHINING,ADVERTISING
INDIRECT
MAINTENANCE, SCHEDULING, RESEARCH ADMINISTRATION
QUALITY ASSURANCE
INSPECTING, TESTING, REVIEWING
IDENTIFICATION OF DISCRETE ACTIVITIES ACTIVITIES WITH DIFFERENT ECONOMICS ACTIVITIES HAVING POTENTIAL IMPACT ON DIFFERENTIATION ACTIVITIES REPRESENTING A GROWING PROPORTION OF COST
The Value Chain Support activities
Primary activities
MARKETING MANAGEMENT
ADVERTISING
SALES FORCE ADMIN & OPERATION
TECH LITERATURE
PROMOTION
LINKAGES WITHIN THE VALUE CHAIN THE SAME FUNCTION CAN BE DONE IN DIFFERENT WAYS THE COST OR PERFORMANCE OF DIRECT ACTIVITIES IS IMPROVED BY GREATER EFFORTS IN INDIRECT ACTIVITIES ACTIVITIES PERFORMED INSIDE A FIRM REDUCE THE NEED TO DEMONSTRATE , EXPLAIN, OR SERVICE A PRODUCT IN THE FIELD. QUALITY ASSURANCE FUNCTIONS CAN BE PERFORMED IN DIFFERENT WAYS.
Value chain participants
Value Creating Activities common to a Cost Leadership Business Level Strategy Relatively Few Management Layers to Reduce Overhead Effective Training Programs to Improve Worker Efficiency and Effectiveness
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes
Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Carriers Purchases
Small, Highly Trained Sales Force
Located in Close Proximity with Suppliers
Policy Choice of Efficient Order Plant Technology Sizes
National Scale Advertising
Organizational Learning
Interrelationships with Sister Units
Primary Activities
M
A
RG
IN
Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume
G IN
Consistent Policies to Reduce Turnover Costs
AR
Simplified Planning Practices to Reduce Planning Costs
M
Support Activities
Cost Effective MIS Systems
Value Creating Activities common to a Differentiation Business Level Strategy A company wide emphasis on producing high quality products
Compensation programs intended to encourage worker creativity and productivity
Extensive use of subjective rather than objective performance measures
Coordination among R&D, product development and marketing
Investments in technologies that will allow the firm to consistently produce highly differentiated products
A
RG
Strong capability in basic research
IN
Purchase of highest quality replacement parts Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Rapid responses to customers unique manufacturing specifications
Extensive Rapid and timely personal product deliveries relationships to customers with buyers
Primary Activities
Premium Pricing
G IN
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
M
AR
Systems and procedures used to find the highest quality raw materials
Superior personnel training
M
Support Activities
Highly Developed Information Systems to better understand customers’ purchasing preferences
Example of Reconfiguring the Value Chain
Old Way:
Collect Milk From villages
Transport to The plant Near the town
Convert to milk powder
Export and sell
Example of Reconfiguring the Value Chain
Feeder Balancing Dairy New New Way:
Collect milk
Make powder in the plant near village
Sell and export Milk powder directly
Save on shipping costs by 10 times Utilize cheaper non-union rural labor
THE COMPETITIVE SCOPE SEGMENT
NEEDS AND GROUPS
Microprocessor against mainframe Individual against Large corporation VERTICAL
IN HOUSE V/S OUTSOURCED
Make or Buy Self owned distribution system against distributors
GEOGRAPHICAL
RANGE OF marketing domain
Canon develops it at Japan and then spreads over globe Costs of coordination and differences amongst regions at times lead to reduce the advantage of sharing, however. INDUSTRY
RANGE OF RELATED INDUSTRIES
Shared R&D, joint technology or quality mission Common Logistical support
Broad scope Performing more activities internally Narrow scope Serve the target at a low cost uniquely COALITIONS AND SCOPE •Vertical and horizontal •Technology Licenses, Supply agreements, Marketing agreements, Joint ventures. •Bargaining powers to be evaluated before coalitions VALUE CHAIN AND INDUSTRY STRUCTURE Collective value chains of the competitors VALUE CHAIN AND ORGANISATIONAL STRUCTURE Departmental coordination and optimization should be the priority
VALUE CHAIN
What is Strategy? • A company's objectives and philosophy • Defining strategy – the five 'Ps' of strategy • a plan • a ploy • a pattern of behaviour • a position with respect to others • a perspective
– strategy as a mix of the five Ps
What is Strategy? • Strategic management – strategic and day-to-day management – the components of strategic management • strategic analysis • strategic choice • strategic implementation
– different business types • big or small business • manufacturing or service provider business • domestic or multinational business • private-sector or public-sector business • for-profit or not-for-profit organisations
Strategic Analysis • Factors affecting strategic choices • The business environment – PEST analysis – Porter's five forces model • the bargaining power of suppliers • the bargaining power of buyers • the threat of potential new entrants • the threat of substitutes • the extent of competitive rivalry
Porter's Five Forces Model
Industry competitors
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model
Industry competitors Rivalry among existing firms
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants
Industry competitors Rivalry among existing firms
Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants
Industry competitors Rivalry among existing firms
Threat of substitutes
Substitute products Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants Bargaining power of suppliers
Industry competitors
Suppliers Rivalry among existing firms
Threat of substitutes
Substitute products Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Porter's Five Forces Model Potential entrants Threat of new entrants Bargaining power of suppliers
Industry competitors Bargaining power of buyers
Suppliers
Buyers Rivalry among existing firms
Threat of substitutes
Substitute products Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)
Generic Business Level Strategies Source of Competitive Advantage
Breadth of Competitive Scope
Cost
Uniqueness
Broad Target Market
Cost Leadership
Differentiation
Narrow Target Market
Focused Focused Low Cost Differentiation
Gaining competitive advantage out of Generic strategy
Example
The Value Chain Support activities
Primary activities Inbound logistics premises Operations Outbound logistics Marketing and Sales Service Corporate infrastructure planning,
Materials receiving, storing, and distribution to manufacturing Transforming inputs into finished products. Storing and distributing products Promotions and sales force Service to maintain or enhance product value Support of entire value chain, e.g. general management financing, accounting, legal services, government affairs, and
QM Human resources management
Recruiting,
hiring, training, and
VALURE CHAIN ANALYSIS
•Activity Analysis: Firstly, you identify the activities you undertake to deliver your product or service; 2.Value Analysis: Secondly, for each activity, you think through what you would do to add the greatest value for your customer; and 3.Evaluation and Planning: Thirdly you evaluate whether it is worth making changes, and then plan for action.
TYPE OF ACTIVITIES DIRECT
ASSEMBLY, PARTS MACHINING,ADVERTISING
INDIRECT
MAINTENANCE, SCHEDULING, RESEARCH ADMINISTRATION
QUALITY ASSURANCE
INSPECTING, TESTING, REVIEWING
IDENTIFICATION OF DISCRETE ACTIVITIES ACTIVITIES WITH DIFFERENT ECONOMICS ACTIVITIES HAVING POTENTIAL IMPACT ON DIFFERENTIATION ACTIVITIES REPRESENTING A GROWING PROPORTION OF COST
The Value Chain Support activities
Primary activities
MARKETING MANAGEMENT
ADVERTISING
SALES FORCE ADMIN & OPERATION
TECH LITERATURE
PROMOTION
LINKAGES WITHIN THE VALUE CHAIN THE SAME FUNCTION CAN BE DONE IN DIFFERENT WAYS THE COST OR PERFORMANCE OF DIRECT ACTIVITIES IS IMPROVED BY GREATER EFFORTS IN INDIRECT ACTIVITIES ACTIVITIES PERFORMED INSIDE A FIRM REDUCE THE NEED TO DEMONSTRATE , EXPLAIN, OR SERVICE A PRODUCT IN THE FIELD. QUALITY ASSURANCE FUNCTIONS CAN BE PERFORMED IN DIFFERENT WAYS.
Value chain participants
Value Creating Activities common to a Cost Leadership Business Level Strategy Relatively Few Management Layers to Reduce Overhead Effective Training Programs to Improve Worker Efficiency and Effectiveness
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes
Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Costs Selection of Low Timing of Asset Cost Transport Carriers Purchases
Small, Highly Trained Sales Force
Located in Close Proximity with Suppliers
Policy Choice of Efficient Order Plant Technology Sizes
National Scale Advertising
Organizational Learning
Interrelationships with Sister Units
Primary Activities
M
A
RG
IN
Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume
G IN
Consistent Policies to Reduce Turnover Costs
AR
Simplified Planning Practices to Reduce Planning Costs
M
Support Activities
Cost Effective MIS Systems
Value Creating Activities common to a Differentiation Business Level Strategy A company wide emphasis on producing high quality products
Compensation programs intended to encourage worker creativity and productivity
Extensive use of subjective rather than objective performance measures
Coordination among R&D, product development and marketing
Investments in technologies that will allow the firm to consistently produce highly differentiated products
A
RG
Strong capability in basic research
IN
Purchase of highest quality replacement parts Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Rapid responses to customers unique manufacturing specifications
Extensive Rapid and timely personal product deliveries relationships to customers with buyers
Primary Activities
Premium Pricing
G IN
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
M
AR
Systems and procedures used to find the highest quality raw materials
Superior personnel training
M
Support Activities
Highly Developed Information Systems to better understand customers’ purchasing preferences
Example of Reconfiguring the Value Chain
Old Way:
Collect Milk From villages
Transport to The plant Near the town
Convert to milk powder
Export and sell
Example of Reconfiguring the Value Chain
Feeder Balancing Dairy New New Way:
Collect milk
Make powder in the plant near village
Sell and export Milk powder directly
Save on shipping costs by 10 times Utilize cheaper non-union rural labor
THE COMPETITIVE SCOPE SEGMENT
NEEDS AND GROUPS
Microprocessor against mainframe Individual against Large corporation VERTICAL
IN HOUSE V/S OUTSOURCED
Make or Buy Self owned distribution system against distributors
GEOGRAPHICAL
RANGE OF marketing domain
Canon develops it at Japan and then spreads over globe Costs of coordination and differences amongst regions at times lead to reduce the advantage of sharing, however. INDUSTRY
RANGE OF RELATED INDUSTRIES
Shared R&D, joint technology or quality mission Common Logistical support
Broad scope Performing more activities internally Narrow scope Serve the target at a low cost uniquely COALITIONS AND SCOPE •Vertical and horizontal •Technology Licenses, Supply agreements, Marketing agreements, Joint ventures. •Bargaining powers to be evaluated before coalitions VALUE CHAIN AND INDUSTRY STRUCTURE Collective value chains of the competitors VALUE CHAIN AND ORGANISATIONAL STRUCTURE Departmental coordination and optimization should be the priority
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