value chain

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3 Corporate Strategy

Analysing resources – basics

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Key Corporate Strategy Questions

� What key industry factors deliver the objectives of the organisation?

� How do resources add value to the organisation?

� How can value added be improved?

� What are the main ways resources deliver competitive advantage?

� How can competitive advantage be enhanced?

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Key Learning Outcomes

� What are the KFS of an industry?

� How do I explain the concept of value added?

� How do I analyse the value chain?

� How do resources deliver SCA to an organisation?

� What are the 7 main concepts of SCA?

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Richard LynchCORPORATE STRATEGY

Chapter6.1

Third edition

Analysing resources - basicsLearning outcomes

When you have worked through this chapter, you will be able to:

1. Identify the key factors for success in an industry;2. Explore the main resources of an organisation and the strategic decision on whether to make

or buy;3. Explain the concept of value added;4. Analyse the value chain and value system of an organisation and comment on their strategic

significance;

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Analyse the role of resources

Environment

Resources

Purpose

Options

Options

Options

Choice Implement

This session

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Analysing resources – 2 routes

Figure 6.1

Individualorganisation’s

resources:make or buy?

Individualorganisation’s

resources:make or buy? Sustainable

CompetitiveAdvantage

(SCA)

SustainableCompetitiveAdvantage

(SCA)

Value added:How? Where?Value added:How? Where?

Valuechain

Valuesystem

Route 1Value added

Route 2SCA - Concept

Of economicrent

Thesevenmainconceptsof SCA

Value added can contribute to SCA and vice versa

Hierarchyof resources

Industry key factors for success

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Prescriptive v Emergent Approach

Prescriptive Approach:

Use resources efficiently and focus on resource strength.

E.g. GSK merger – lead to Economic gains of US$750m p.a.

Emergent Approach:

Question certainties of prescriptive approach – E.g. the human resourceimpact of GSK merger, could job cuts cause bad feeling? Is this a hindrance to the implementation of the strategic change?

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Prescriptive v Emergent Approach

Emergent Approach:

Question certainties of prescriptive approach – E.g. How valuable are patents as part of a SCA in the fast changing drug market?

Prescriptive approach implies resources give a definite advantage to organisation

Emergent approach sees a much more fluid relationship between resources and strategies

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Key Factors for Success

“Those resources, skills and attributes of the

organisations in an industry that are essential to deliver success in the market place”

� Different organisations will have different resources

1. Well established product range – Gillette, PG, Unilever…

2. Exceptional leadership – Anglo Irish Bank, Ryan Air…

3. New patented technology – Apple, GlaxoSmithkline..

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Key Factors for Success – Academic support

� Ohmae, K (1983)

� Three “Cs”: Customers, Competitors & Corporation.

� Porter, M E (1985)

� There are factors that determine the relative competitive position of a firm within an industry, such as the firm’s strategy

� Kay, J (1993)

� It is important to concentrate resources on the specific areas of the business which are most likely to be successful

� All agree that identifying these key factors is not an easy task.

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Key factors can be found in any area of the organisation and relate to the following:

� Skills

� Competitive advantage

� Competitive resources of an organisation in the industry

� Special technologies

� Customer contacts.

Key factors for success in an industry – 2

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“The 3 C’s”

“Those resources, skills and attributes of the

organisations in an industry that are essential to deliver success in the market place”

� Three principal areas to be analysed:

� Ohmae’s three “Cs”:

� Customers: Wants? Segments? Strategy directed to segments?

� Competitors: How survive? And beat? What resources? Comparison on price, quality, etc? Distribution network?

� Corporation: Any special resources essential? Cost comparison? Technologies? Human resources? Financial issues?

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� Customers: Wants? Segments? Strategy directed to segments?

� Look at

1. Price: high/medium/economy pricing? Airline tickets

2. Service: do customers want service? Aldi v M&S

3. Product or service reliability: how important is reliability? Heart pacemaker v pharmaceuticals

4. Quality: perceived or actual quality? Organic veg.

5. Technical specifications: specialist financial bonds

6. Branding: how important is it? Coca-Cola v Pepsi

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Competitors: How survive? And beat? What

resources? Comparison on price, quality, etc? Distribution network?

1. Cost comparisons: which company? E.g. Dell

2. Price comparisons: which company has high prices? Porsche, BMW etc.

3. Quality issues: which company have highest quality? Why? How?

4. Market dominance: which company dominates? Nestle in coffee production

5. Service: which company offers superior service?

6. Distributors: which company has fastest most extensive distribution?

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Corporation: Any special resources essential? Cost comparison? Technologies? Human resources? Financial issues?

1. Low-cost operation: are these important? Tesco(UK)

2. Economies of scale: are these important? Shell 3. Labour costs: and our SCA? Phillips (Netherlands)

have moved manufacturing to Singapore & Malaysia4. Production output levels: Heavy fixed cost? 5. Quality operations: are high/consistent quality

levels important? McDonalds6. Innovative abiity: is innovation important? Apple7. Labour/management relations: EU Steel companies8. Technologies/copyright: are these important?9. Skills: are specialist skills required?

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Key Factors for Success - criticism

1. Identification - difficult

2. Causality of relationships –identified but can’t identify relationship between factors

3. Dangers of generalising – to find one company’s SCA, we need more than industry wide KFS

4. Disregard of emergent perspective – change may lead to SCA

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Analysing the resources of an individual organisation

� Key factors for success in an industry represent a starting point for exploring the resources of the individual organisation.

� Value added and sustainable competitive advantage can come from beyond industry solutions.

� Individual resources must be identified for the organisation itself.

� The make-or-buy decision is the choice every organisation has of either making its own products or services or buying them from outside.

� Regular reappraisal of activities is important.

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To Make or Buy?

� Make if the costs of using the market are greater than the benefits.

� Companies like Benetton and IKEA use outsourcing very effectively to reduce costs and increase their SCA

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To Make or Buy? Reappraise regularly

� Benefits1. Outside supplier can access Economies

of Scale2. Outside supplier must be competitive,

innovative and efficient

� Costs1. May compromise production flows2. Intellectual property rights and SCA may

be threatened3. Extra costs which could be avoided

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Value added

� Consider 3 main costs

1. Labour – see a/c’s

2. Materials – see a/c’s

3. Capital – must look at:

� Value of land and machinery, stocks and WIPs

� Replacement costs

� Costs of capital

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Value added

� Kay, J (1993, p24), says that a commercial organisation that adds no value to its inputs has no long term reason for existence.

� Some organisations can actually lose value – if they cannot recover their costs.

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Value added by a pharmaceutical company such as Glaxo plc

Figure 6.3

Inputs toorganisation

Inputs toorganisation

Organisation’sresources

Organisation’sresources OutputsOutputs

Range of drugssent to distributorsfor onwarddistributionto customers

• Invents andpatents new drugs

•Manufactures itsproducts and packsthem.

•Markets them todoctors and healthauthorities

Raw materialsdelivered to thefactory gate, e.g.basic chemicals,electricity, water,steel piping, plasticpackaging, advertising agency,accountancy audit

Organisation addsits value here

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Value added

� Value added can be increased by:

� Raising the value of outputs –increasing quantity sold and/or price

� Reducing the cost of inputs – this may require investment

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In companies with more than one product range:

� Added value is best analysed by considering each group separately.

� Some groups may subsidise others in terms of added value.

� Not all groups are likely to perform equally.

Resource analysis and adding value – 3

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Value Chain

� Value according to Porter is that which is left after all the costs involved in undertaking to develop and market a product/service are deducted from the revenue it generates

� He also states that competitive advantage cannot be understood by looking at a company as a whole.

� It stems from the many discrete activities that a firm performs in designing, producing, marketing, delivering and supporting its product.

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The Value Chain is used for

1. Identification & diagnoses of value creating activities and the integration of these activities

2. Identification of cost drivers which contribute to differentiation or cost leadership.

3. By knowing the value chain of suppliers and buyers it becomes possible to outsource to cost leaders

4. Identification of competitive advantage potentials which will contribute to sustainability

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Value Chain – where does value added come from?

� A cost advantage may stem from a low cost physical distribution system, a highly efficient assembly process or superior sales force utilisation.

� Differentiation can stem from procurement of high quality raw materials, a responsive order processing system or superior product design.

� The Value Chain is the basic tool for examining all of the firms activities and how they interact.

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Value Chain

Firm InfrastructureHuman Resource Management

Technology DevelopmentProcurement

InboundLogistics Operations

OutboundLogistics

Marketing& Sales

Service

Support

Activities

Primary Activities

Margin

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Value Chain - Five generic categories of primary activities

1. Inbound Logistics: Activities include:

� Receiving, storing and disseminating inputs to the product such as

1. Materials handling,

2. Warehousing,

3. Inventory control,

4. Vehicle scheduling,

5. Returns to suppliers

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2. Operations:

� Transforming inputs into the final product form, such as:

1. Machining,

2. Packaging,

3. Assembly,

4. Maintenance, etc

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3. Outbound Logistics:

1. Storing,

2. Distribution and

3. Delivery of finished goods

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4. Marketing & Sales: Activities focusing on the means by which buyers are made aware of product/service offerings and by which they purchase such as:

1. Advertising,

2. Sales promotion,

3. Quoting,

4. Channel selection,

5. Pricing etc

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5. Service: Activities associated with providing service to enhance or maintain the value of the product/service such as:

1. Installation,

2. Commissioning,

3. Training,

4. Support,

5. Repairs etc

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Value Chain – Four Support Activities

1. Procurement: Refers to purchasing inputs and can relate to all primary and support activities, such as:

� Raw materials for ops,

� Temp sales people for Mkt & Sales or

� Lab equipment for R&D.

The dispersion of procurement throughout the firm often obscures the magnitude of total purchases.

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2. Technology Development: All technological developments in a firm such as technologies used in

1. administration (MIS)

2. transportation

3. in the product or process.

Note: Technology can be the key to SCA for example, commodity production where a firms process technology is the single biggest factor in it’s competitive advantage.

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3. Human Resource Management: Activities such as

1. Recruiting,

2. Training,

3. Compensation.

Supports the entire value chain (Labour Relations)

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4. Firm Infrastructure: Activities such as

1. General management,

2. Planning finance,

3. Accounting,

4. Legal,

It can often be a source of competitive advantage.

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Value System - Porter

� Value system. The wider routes in an industry that add value to incoming supplies and outgoing distributors and customers.

� It links the industry value chain to that of other industries.

� Real competitive advantage can be developed by using the best suppliers and distributors.

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Figure 6.6

Competitive advantage through linkages between the value chain and value system

Own companysupply

source B

Own companysupply

source B

Outsidesupplier AOutside

supplier A

Outsidesupplier BOutside

supplier B

Major own-company

supply source

Major own-company

supply source

Outsidesupplier COutside

supplier C

Outsidesupplier DOutside

supplier D

Own companysupply

source A

Own companysupply

source A

COMPANY VALUECHAIN

COMPANY VALUECHAIN

COMPETITOR VALUECHAIN

COMPETITOR VALUECHAIN

DistributorA

DistributorA

DistributorB

DistributorB

DistributorC

DistributorC

DistributorD

DistributorD

DistributorE

DistributorE

Low-cost

source

Low-cost

source

Moreexpensive,

brandedingredient

Company

Exceptionallylow cost

High-quality

products

Competitor

Strongdistributor

Threeweaker

distributors

Strongdistributor

Custom

ers in market place

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Analysis of value chain and system

� Can be costly and time consuming process

� Can use KFS to help focus on certain areas within the value chain and/or system.

� The KFS will often direct you towards the areas where value is added

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Comments on value chains and the value system

� Weaknesses in the practical application of value added include the following:– a lack of precision in identifying areas of resource advantage

– an inability to value clearlymajor assets like specialist knowledge and company leadership.

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Value analysis and GSK

� KFS

1. R&D

2. Marketing

3. Product performance

� Strategy in 1990’s

1. Invest heavily in R&D

2. Acquire companies with complementary drug pipelines – Wellcome in 1995

Note that the value chain focuses on existing relationships only

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Resource-based view of strategy development

� Focuses on the individual resources of the organisation, rather than strategies common to all companies in an industry.

� Basic argument: important to understand the competitive forces in an industry, but organisations should seek their individual solutions within this context.

� Competitive advantage: derives from the exploitation of the relevant resources of the individual organisation when compared to others in the industry.

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Identifying the resources that deliver SCA

Figure 6.11 Identifying the resources that deliver SCA

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Analysing the resources of the organisation

Useful to divide into three broad areas:

� Tangible resources: the physical resources of the organisation – e.g. plant and equipment.

� Intangible resources: those resources that have no physical presence but represent real benefit to the organisation – e.g. brand names, service levels and technology.

� Organisational capability: the skills, routines and leadership of the organisation – e.g. special skills related to speed of new product development or customer service.

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Improving competitive advantage

Three main ways of improving competitive advantage are as follows:

1. Benchmarking: a comparison of practice with another organisation considered to display best-practice in its field of operation.

2. Leveraging: exploiting existing resources.

3. Upgrading resources: through developing new resources, enhancing those threatened by competition and adding complementary resources.

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Case web links for chapter 6

Case 6.1 Resource strategy at GSK: negotiating a me rger and making it work.

GlaxoSmithKline(http://www.gsk.com/index.htm)

Case 6.2 How three European companies attempt to ut ilise their resources

GlaxoSmithKline(http://www.gsk.com/index.htm)

Nederlandse Spoorwegenhttp://www.ns.nl/domestic/index.cgi

Bouygues Grouphttp://www.bouygues.fr/english/index.html

Case 6.3 Xbox – the strategic battle for the home entertainment market has just begunXbox Official web sitehttp://www.xbox.com

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Related web links for chapter 6

For an up-to-date review of how firms are tackling the issue of managing their value chains see the Industry Week 2002 Value Chain Survey:http://www.industryweek.com/iwinprint/vcreport/

A very hot topic in debates about competitive advan tage these days is something called 'knowledge management'. T his is briefly discussed in this chapter but if you wish t o find out more, read this article from CIO magazine:http://www.cio.com/research/knowledge/edit/kmabcs.h tml

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Further Reading� Ohmae, K (1983), The Mind of the Strategist,

Penguin, Harmondsworth, chapter 3.

� Porter, M E (1985), Competitive Advantage, The New Press, NY, chapter 7.

� Kay, J (1993), Foundations of Corporate Success, Oxford University Press, Oxford, Chapter 5 to 8.

� Banerjee, Parthasarathi, (2003), “Resources, capability and coordination: strategic management of information in Indian information sector firms.” International Journal of Information Management; Aug2003, Vol. 23 Issue 4,

p303,

� Lieberman, Marvin B “Assessing the Resource Base of Japanese and U.S. Auto Producers: A Stochastic Frontier

Production Function Approach.” Management Science;

Jul2005, Vol. 51 Issue 7, p1060-1075

value chain

Documents

main resources

human resources

different resources

use resources

successthose resources

csthose resources

special resources essential

analysing resources