VALUE CHAIN ANALYSIS :

Prepared ByNITIN ARYA – MFM- 13-02

VIDHYADHAR KAMATH – MFM-13-06KIRAN GORAD – MFM-13-03

Introduction

Value Chain Analysis = Value + Chain + AnalysisValue means the total amount (i.e. total revenue)

that buyers are willing to pay for a firm’s products or service.

Chain means number of task which utimately lead to value creation.

Analysis means an study of every element of chain which helps in creating value by redefining and reengineering the activities if required.

What is the Value Chain? The Value Chain is a tool developed by Dr. Michael

Porter (Harvard Business School). Porter’s definition includes all activities to design,

produce, market, deliver, and support the product/service.

The value chain is concentrating on the activities starting with procurement of raw materials till the delivery of final goods or services.

Two categories:Primary Activities (operations, distribution, sales)Support Activities (R&D, Human Resources)

Value Chain Model(FISH BONE DIAGRAM)

Firm Infrastructure (General Management)Human Resource Management

Technology Development

Procurement

Inbound Logistics

Ops. Outbound Logistics

Sales & Marketing

Service and Support

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Custom

er

Value

Cust

omer

Valu

e

Margin

Mar

gin

Types of Firm Activities

• Primary activities:Those that are involved in the creation, sale and transfer of products (including after-sales service) Inbound logistics Operations Outbound logistics Sales and marketing Service and support

• Support Activities:Those that merely support the primary activities Human resources (general and admin.) Tech. development Procurement

PRIMARY ACTIVITIES

Value Chain Modelfrom Michael E. Porter’s Competitive Advantage

Firm Infrastructure (General Management)Human Resource Management

Technology Development

Procurement

Inbound Logistics

Operations

Outbound Logistics

Sales & Marketing

Service and Support

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Custom

er

Value

Cust

omer

Valu

e

Margin

Mar

gin

PRIMARY ACTIVITIES1.INBOUND LOGISTICS

- Concerned with receiving, storing, distributing inputs (e.g. Handling of Raw Materials, Warehousing, Inventory Control)

2. OPERATIONS - Comprise the transformation of the inputs into the final product form (E.G. Production, Assembly, And Packaging)

3. OUTBOUND LOGISTICS-Involve the collecting, storing, and distributing the product to the buyers (e.g. processing of orders, warehousing of finished goods, and delivery)

PRIMARY ACTIVITIES4. MARKETING AND SALES

-Identification of customer needs and generation of sales. (e.g. Advertising, Promotion, Distribution)

5. SERVICE -Involves how to maintain the value of the productafter it is purchased.(e.g. Installation, Repair,Maintenance, And Training)

SUPPORT ACTIVITIES

Value Chain Modelfrom Michael E. Porter’s Competitive Advantage

Firm Infrastructure (General Management)Human Resource Management

Technology Development

Procurement

Inbound Logistics

Ops. Outbound Logistics

Sales & Marketing

Service and Support

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Custom

er

Value

Cust

omer

Valu

e

Margin

Mar

gin

SUPPORT ACTIVITIES1.FIRM INFRASTRUCTURE

The activities such as Organization structure, control system, company culture are categorized under firm infrastructure.

2.HUMAN RESOURCE MANAGEMENT Involved in recruiting, hiring, training, development and compensation.

3.TECHNOLOGY DEVELOPMENT These activities are intended to improve the product and the process, can occur in many parts of the firm.

4.PROCUREMENT Concerned with the tasks of purchasing inputs such as raw materials,

equipment, and even labor.

Firm’s PerformanceFirms performance = ProfitProfit = amount customer is willing to pay – Cost of activities in

value chain.If the Product or Service cannot arouse Customer Interest and

convince him about value offered in comparison with that of others then firms existence may be at stake.

Hence firm can enhance profits by :1. enhancing value or 2. Reducing cost OR 3. Both togetherBy this company can either have COST ADVANTAGE or

DIFFERENTIATION

What is value chain analysis?

• Used to identify sources of competitive advantage • Specifically:– Opportunities to secure cost advantages– Opportunities to create product/service

differentiation• Includes the value-creating activities of all industry

participants

Uses Of Value Chain Analysis:

• The sources of the competitive advantage of a firm can be seen from its discrete activities and how they interact with one another.

• The value chain is a tool for systematically examining the activities of a firm and how they interact with one another and affect each other’s cost and performance.

• A firm gains a competitive advantage by performing these activities better or at lower cost than competitors.

• Helps you to stay out of the “No Profit Zone”• Presents opportunities for integration

Vertical Linkages:• While Implementing Value Chain System in an Organization

one must consider the various linkages in the following categories

• Linkage With Suppliers• Linkage With Customer• Process Linkage within the Value Chain

e.g. The activities of the raw materials suppliers affect the activities of the firm. Similarly, the activities of the distributor also affect the firm.

Applying The Value Chain To An Industry

• The value chains of the different firms within an industry vary from one another.

• In fact, the differences in the value chains among the different industry players provide the source of competitive advantages between these players.

Steps in Value Chain Analysis

• Break down the entire chain into logically controllable independent units

• Evaluate each unit significantly & its interdependence• Evaluate (if required) various vertical linkages. • Indentify loose element, potential candidate for

replacement who offers better performance• Plan a strategy replacing old one with new one • Evaluate the planned strategy for success

measurement

Types Of Value Chain:

• Value Chain is categorized into types based on the type of organizations.

• Manufacturing based.• Service based.• Both manufacturing and service based.

TATA MOTORS(A Manufacturing Based Company)

Linkages in the Value ChainPRIMARY ACTIVITIES

– INBOUND LOGISTICS Transparency and monitoring through deployment of IT – all transactions through

SAP. Efficient storage facilities – easy storage and retrieval DTL (daily transport logistics) supplies for critical high value items.

– OUTBOUND LOGISTICS Stockyards, all across the country. Long term contracts with transporter’s – higher volume of business to transporters

ensures competitive price.– MARKETING & SALES

Pan India presence and global footprint. Clear identification of product requirements, leading to development of innovative

products – Tata 207 DI, Tata Ace Structured approach to understanding the requirements of individual customers –

QFD’s (Quality Function Deployment) conducted at regular intervals.– SERVICE

Large network of workshops – Dealer workshops and TASS Easy availability of spare parts.

Linkages in the Value ChainSUPPORT ACTIVITIES

– PROCUREMENT Group resources – Tata Steel and Tata International . Global Sourcing Team – China , a key destination for sourcing essential items

like tires, power steering units etc.,– TECHNOLOGY DEVELOPMENT

Approximately 2% of the annual profits of the company invested in research and development

Extensive prototype building and testing facilities.– HUMAN RESOURCE

Vast pool of technically competent engineers and managers. Focus on development of technical capabilities – Technical Training Center’s,

Alliance with technical Institutes– FIRM INFRASTRUCTURE

Multi – Location facilities Strong leadership – under the aegis of Tata Sons Large product portfolio

Thank you