The resources audit provides an understanding of an organization’s capabilities.
Value Chain Analysis
The resources audit provides an understanding of an
organization’s capabilities. The next step is to identify how the
organizational activities contribute to the value - the price the customers are
willing to pay for the goods and services of the organization. If this value
exceeds the costs of performing those activities, company is said to be
profitable, otherwise it is a loss making company. Therefore to achieve the
long run objective of maximization of wealth and short –run goals of generating
reasonable profits, it is imperative that the company should gain a competitive
edge over its competitors.
Charles
W.L. Hill and Gareth R. Jones maintain
“To gain a competitive advantage, a company must
either perform value – creation functions at a lower cost then its rivals or
perform them in a way that leads to differentiation and a premium price. To do
either, it must have a distinctive competence in one or more of its value –
creation functions. If it has significant weaknesses in any of these functions,
it will be at a competitive disadvantage”
Michael Porter suggested the concept of “value –
chain” that sequences the activities related with creation of value (figure
7-3). These activities can be divided between
(a) | Primary activities, and |
The primary activities are concerned with physical
creation of the prod-uct, its marketing and delivery to buyers and after-sales
service. The support activities provide the inputs and infrastructure for the
primary activities.
Primary Activities
Some authors classify primary
activities into five categories
1. Inbound logistics (activities concerned with
receiving, storing and distributing the material, inventory control,
warehousing, etc.)
2. Operations (activities concerned with
transformation of inputs into final product or service: for example, matching,
packing, assembly testing etc.)
3. Outbound logistics (activities concerned with
collection, storage and physical distribution of finished goods to the
consumers)
4. Marketing
and sales (activities concerned with advertising, selling, administration of
sales personnel, etc.) 5. Service
(activities that enhance or maintain the value of a product / service, such as
installation, repair, training, etc.) Some others classify primary activities into two
main functions 1. Manufacturing
(physical creation of the product) 2. Marketing
(concerned with marketing, delivery and after sales service) Support
Activities
The support activities that provide inputs and
infrastructure for primary activities of manufacturing and marketing are
classified as follows 1. Material
management activities 2. Research
and Development activities 3. Human
Resources activities 4. Information
systems activities 5. Company
infrastructure activities Material Management activities are concerned with
procurement, storage and issuance of material to the production departments.
The inventory control that aims at keeping uninterrupted supply of material at
minimum associated costs is undertaken under this function. Research and Development activities permeate
manufacturing as well as marketing activities. It aims at developing new
products or process technology that provide additional benefits to customers,
improve quality, lower the cost of manufacturing and ultimately contribute to
the creation of value. The human resource activities aim at meeting the
personnel requirement of manufacturing and marketing departments by proper
selection of staff, their training and development.
The information system activities ensure efficient
and expeditious flow of needed information to the concerned managers for taking
decisions and actions. The infrastructure activities embrace all other
activities like finance, legal, public relations, etc which are essential for
the company. Corporate Value Chain Analysis
It involves the following steps. Figure 7-4 depicts
a corporate val-ue chain. 1. Examine each product lines value chain in terms of
various activities involved in producing a product or service. Examine the
S&W 2. Identify
the linkages in product lines value chain. Ex: quality control, check 100%
instead of 10% to avoid repairs and returns 3. Examine the synergies among value chains of
different product lines or SBUS. Ex: Cost of advertising, production etc
jointly will be cheaper

Primary
Activities
Figure
7.4 A Corporate value chainJR Galbraith suggests the other method of analyzing
a firm’s value chain. This analysis helps ascertain where a firm’s products are
located in the overall value chain. An illustrative value chain is given in
Figure 7-5 below. Henry ford I during 1920s and 1930s did this Value Chain
analysis. Visitors watched the entire process from an elevated walk way.

Industry
Value Chain Analysis
This can be split into two Upstream – Ex: Refers to oil
exploration, drilling, moving crude to refiners Downstream – Ex: Refining the oil +
transporting and marketing to distributors & retailers. Some
companies are experts in down stream like P&G & Texaco and some in
upstream like British Petroleum. According to Galbraith firm’s centre of gravity is
usually the point at which the company started. After a firm establishes well
in this point it can move forward or backward along the value chain to reduce
costs, access to raw material and guarantee distribution. This process is VERTICAL
INTEGRATION.
Tags : Strategic Management - Environmental Analysis and Diagnosis
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