a value chain is a chain of value added activities

8/8/2019 A Value Chain is a Chain of Value Added Activities

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A value chain is a chain of value added activities; products pass through the activities in a chain,

gaining value at each stage. Value chain analysis looks at the efficiency, effectiveness and costs

of each of these processes required to deliver the product to the customer. On top of this it also

includes support activities such as infrastructure maintenance, R&D and employment costs.

The ability of a company to understand its own capabilities and the needs of the customers is

crucial for a competitive strategy to be successful. The profitability of a firm depends to a large

extent on how effectively it manages the various activities in the value chain, such that the

price that the customer is willing to pay for the companys products and services exceeds the

relative costs of the value chain activities. It is important to bear in mind that while the value

chain analysis may appear as simple in theory, it is quite time-consuming in practice. The logic

and validity of the proven technique of value chain analysis has been rigorously tested,therefore, it does not require the user to have the same in-depth knowledge as the originator of

the model (Macmillan et al, 2000). The first step in conducting the value chain analysis is to

break down the key activities of the company according to the activities entailed in the

framework. The next step is to assess the potential for adding value through the means of cost

advantage or differentiation. Finally, it is imperative for the analyst to determine strategies that

focus on those activities that would enable the company to attain sustainable competitive

advantage.

It is important for analysts to remember to use the value chain as a simple checklist to analyse

each activity in the business with some depth (Pearson, 1999). The value chain should be

analysed with the core competence of the company at its very heart (Macmillan et al, 2003).

The value chain framework is a handy tool for analysing the activities in which the firm can

pursue its distinctive core competencies, in the form of a low cost strategy or a differentiation

strategy. It is to be noted that the value chain analysis, when used appropriately, makes the

implementation of competitive strategies more systematic overall. Analysts should use the

value chain analysis to identify how each business activity contributes to a particular

competitive strategy. A company may benefit from cost advantages if it either reduces the cost

of individual activities in the value chain or the value chain is essentially reconfigured, through

structural changes in the activities. One of the problematic areas of the value chain model,

however, is that the costs of the different activities of the value chain need to be attributed to an


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activity. There are few costing systems that contain detailed activity level costing, unless an

Activity Based Costing (ABC) system is in place in the company (Macmillan et al, 2003).

Another relevant area of concern that analysts must pay particular attention to is the customers

view point of value. The customers of the firm may view value in a generic way, thereby

making the process of evaluating the activities in the value chain in relation with the total price

increasingly difficult. It is imperative for analysts to note that the overall differentiation

advantage may result from any activity in the value chain. A differentiation advantage may be

achieved either by changing individual value chain activities to increase uniqueness in the final

product or service of the company, or by reconfiguring the companys value chain.

The difference between a low cost strategy and differentiation in practice is unlike the rigidity

that is provided regarding the same in theory. Analysts must note that the difference betweenthese two strategies is one of the shades of grey in real life compared to the black and white

that is offered in theory. For example, Emerson Electric, which is a cost leader, has quality as a

strategic concern in achieving its best costs strategy (Pearson, 1999). Ivory Soap, a leading

product of P&G, is a broad differentiator that turned into a cost leader. Quality is a strategic

concern for managers of Ivory Soap, along with delivering a high value product consistently.

Note that in a company with more than one product area, it is appropriate to conduct the value

chain analysis at the product group level, and not at the corporate strategy level. It is crucial for

companies to have the ability to control and make most of their capabilities. In the advent of

outsourcing, progressive companies are increasingly making their value chains more elastic and

their organisations inherently more flexible (Gottfredson et al, 2005). The important question is

to see how the companies are sourcing every activity in the value chain. A systematic analysis

of the value chain can facilitate effective outsourcing decisions. Therefore, it is important to

have an in-depth understanding of the companys strengths and weaknesses in each activity in

terms of cost and differentiation factors.

The strategy of Wal-Mart worked when the company improved its business through innovative

practices in activities such as purchasing, logistics, and information management, which

resulted in the value offering of everyday low prices (Magretta, 2002). It is important to note

that refining business models on a constant basis is as critical to the success of the company as


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its business strategy. Notably, both the strategy and business model of an organisation are

crucial for the robustness of the overall value chain.

For example, 7-Eleven had been vertically integrated, controlling most activities in the value

chain by itself. The company has now outsourced many parts of its business including

functions like HR, IT management, finance, logistics, distribution, product development, and

packaging. According to Gottfredson et al (2005), the value chain decisions of companies will

increasingly shape their overall organisational structure. Moreover, the value chain decisions

will play a role in determining the type of management skills that companies may need to

develop or acquire to survive in fiercely competitive business markets.

The Apple podcasting value chain is comprised of nine steps that essentially move from raw

content to the listener. All the steps of the value chain include content, advertising, production,

publishing, hosting/bandwidth, promotion, searching, catching, and listening. It is important to

note that each step in the value chain adds value to the podcast in distinctive ways, has its own

sets of challenges and opportunities.

It is important to note that the nature of value chain activities differs greatly in accordance with

the types of companies and industries. For companies with complex systems like IBM,

Accenture and Cisco etc., it is not possible for one member of the value chain to provide all theproducts and services from start to finish. The marketing function in such companies focuses

on aligning with key partners and allies that must collaborate with each other. For example,

installing SAP's ERP system requires direct involvement from companies like HP, Oracle, and

Accenture, along with indirect involvement of companies like EMC, Cisco, and Microsoft, and

collaboration between many departments within the company. The market assets contrast

starkly between the companies with complex systems and those that are driven by volume

operations. For example, in case of Apples leading products like Macintosh and the iPod, the

entire offer is inside a package, and the entire value chain is preassembled. The change of

supplier for the Macintosh from IBM, to Intel, improved the system performance while

retaining the value in terms of price to the consumer. The only variable to manage in Apples

case is the consumers preferences. The role of creating differentiation through unique quality


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features, along with promotion in order to create brand awareness, image and eventually brand

equity becomes imperative for volume operations driven companies like Apple (Moore, 2005).

It is imperative to note that the value chains of companies have undergone many changes over

the last two decades, due to the rapidly changing business environment. Information

technology and the Internet have played a fundamental role in transforming certain parts and

the interlinkages between parts of the value chains of companies today. Moreover HRM is

increasingly becoming a vital asset in the value chain that contributes to competitive advantage.

Strategic alliances are also becoming an integral part of the value chains. For example, IBM

once enjoyed backward vertical integration into the disk drive industry and forward vertical

integration into the consulting services and computer software industries (Hill et al, 2007).

According to the changing business environment, IBM had more than 400 strategic alliances asof 2003 (Thompson et al, 2003). Herein, the value chain analysis is useful in providing a

framework to examine the advantages that partners can give to each other (Pathania-Jain,

2001). It is important to note the source of competitive advantage of a company for the value

chain analysis. The competitive advantage for IBM, for example, lies in depth, breadth and the

geographic spread of its global operations (Rai, 2006) and the loyalty that the big blue enjoys

from its clientele.

Lastly, analysts should look for the managerial implications that the new era of capability

outsourcing may bring. The value chain decisions of companies will increasingly shape their

organisational structure. Furthermore these decisions will determine the types of managerial

skills that companies may need to develop to survive in an increasingly competitive business

environment.

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Business Review, Vol. 83, No. 2, p. 132-139.

Hill, W. L. C. & Jones, R. G. (2007), Strategic Management: An Integrated Approach, 7th ed., Houghton Mifflin

Company, Boston: New York.


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Lynch, R. (2003), Corporate Strategy, 3rd ed., Prentice Hall Financial Times.

Macmillan, H. & Tampoe, M. (2000), Strategic Management, Oxford University Press.

Magretta, J. (2002), Why business models matter, Harvard Business Review.

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Rai, S. (2006), India becoming a crucial cog in the machine at IBM, The New York Times.

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Wikipedia, The free encyclopaedia, [Accessed on 6/10/06]

a value chain is a chain of value added activities

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