Value Chain

VALUE CHAIN ANALYSIS Group members: Rohit M Bagri 5 Dhaval Dave 12 Utkarsh Gandhi 16 Darshan Mehta 37 Abhilash Nair 42

APPROAC H

THE VALUE CHAIN CONCEPT

PRIMARY ACTIVITIE S

VALUE CHAIN SUPPORT ACTIVITIE S

MICHAEL PORTER’s VALUE CHAIN (1985) SUPPORT ACTIVITIES

PRIMARY ACTIVITIES

THE VALUE SYSTEM

ACTIVITIE S

COMPETITVE ADVANTAGE

TWO TYPES

COST ADVANTAGE

COST ADVANTAGE

VALUE CHAIN AND COST ANALYSIS

COST BEHAVIOR AND DRIVERS

MAJOR COST DRIVERS

IDENTIFYING COST ADVANTAGE A firm has cost advantage if its cumulative cost of performing all value activities is lower than the competitor’s

Sustainability: if the sources of a firm’s cost advantage are difficult for competitors to imitate

A FIRM’S RELATIVE COST POSITION IS A FUNCTION OF:

Two conditions are possible: 3. Competitors’ value chain are different from that of the firms’ 5. Competitors have the same value activities as the firm

DETERMINING THE RELATIVE COST OF COMPETITORS • First step: identify the competitor’s value chain • In order to estimate costs the firm should employ comparisons between itself & the competitor

Examining several competitors simultaneously • Estimate differences in the competitors’ costs

THERE ARE 2 MAJOR WAYS TO GAIN COST ADVANTAGE

§The two sources are not mutually exclusive §Successful cost advantage from multiple sources §Aggressively pursue cost reduction in activities that do not influence differentiation

RESULT OF COST ANALYSIS

VERTICAL INTEGRATION

• The degree to which a firm owns its upstream suppliers & its downstream buyers • Significant impact on a business’s unit position in its industry w.r.t. cost, differentiation and other strategic issues • Expansion of activities downstream is called forward integration • While expansion upstream is called backward integration

HORIZONTAL INTEGRATION

• The acquisition of additional business activities at the same level of the value chain • Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services • A firm may diversify by growing horizontally into unrelated businesses.

MAKE-OR-BUY DECISION

MAJOR INFLUENCES:

Specialization : As the required service inputs become more specialized, it often becomes increasingly difficult for in-house staff to effectively perform the functions

Standardization: An increasing standardization of service inputs often enables different tasks to be performed by a single person and also permits tasks to be executed by less-specialized personnel

DIFFERENTIATION

DIFFERENTIATION AND THE VALUE CHAIN A differentiation

advantage can arise from any part of the value chain.

Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation.

Differentiation stems from uniqueness.

References • Michael E. Porter, Competitive Advantage Chapter 2,3,4. • Robert Anthony, Accounting, Chapter 17,26