Value Chain Management

( V C M )*

Course introduction Value Chain Management

Course outline Definition of Value from the firms perspectiveProfitability and marginsThe structural analysis of the industry

Definition of value from the customers perspective The value equationQuality of product & service as perceived by customer The features of product and serviceCombining the firms and customers perspective of value to attain and sustain a competitive advantageMichael Porters concept of value chain

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Michael Porters generic Value Chain Model

The Primary value chain activitiesInbound logisticsOperationsOutbound logisticsMarketing and salesService

The Support value chain activitiesFirms infrastructureHuman resourceTechnology developmentProcurement

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The value system Suppliers value chain Distributors value chain Buyers value chain Competitors value chainLinkages within the value chains Linkages within the value chain of the firm Vertical linkages linkages with suppliers and channels Linkages with buyer*


Competitive scope and the value chain Segment scope Vertical scope Geographic scope Industry scope Coalitions and scope*

Value Chain Management (VCM)

The development of VCM the various stagesVertical integration Core competencies Supply chain management Value chain management*

VCM incorporates Integrated supply chain planningFull resource management Chain wide resource responsiveness Information integration

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The six essentials for VCM

Coordination and collaborationTechnology investment Organizational processesLeadershipEmployees & human resourceOrganization culture & attitudes

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Value chain mapping

Purpose of value chain mapType of value chain mapsFlow chartGrid chart*

Steps in mapping value chain using flow chart

Step-1. Indentify core transactions of value chain in target sectorStep-2. Identify and map key market playersStep-3. Identify opportunities and constrain at each value chain level (qualitative information)Step-4. Identify quantitative information for each value chain level*

Step in mapping value chain using grid charts

Step-1. Indentify different markets for product / serviceStep-2. Indentify the way by which product & service reach end usersStep-3. Display information and characteristics of service market channels*

The implementation of VCM

Identity customers by segmentsDetermine customers requirements vis--vis product / serviceDesign product / service based on customers feedbackEstablish value chain activities required to provide the above service/productAssign value chain activities to business functionsDefine organization structure to enable each business function to generate maximum valueDefine linkages between value chain activities & business functionDefine effective communication between business functionsDetermine the gap between the customers required product / service and the product service delivered by the firm Close the gap by improving at each stage of the value chain*

Total Quality Management and VCM

The definition of TQMThe use of value chain model to implement TQM*

The generic strategies for attaining and sustaining a competitive advantage

Cost LeadershipDifferentiationFocus

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Configuring the value chain model for competitive advantage

Cost advantage and the value chainCost analysisCost behavior Cost advantageSteps in strategic cost analysisPitfalls in cost leadership strategy*

Differentiation and the value chainSource of differentiation Cost of differentiationBuyer value and differentiationSteps in differentiation strategy Pitfalls in differentiation strategy*

Focus strategy and the value chainIndustry segmentationSegment inter relationship

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DEFINITION OF VALUE The Firms Perspective

Value is determined by the difference between the price at which the firm sells its product or services and the cost of producing these product or service.*

DEFINITION OF VALUEValue = Selling price of product or service less total cost of product or service.

If the price at which the product or service are being sold exceeds the cost of producing these product or service the firm is considered to be making a margin on its products or services and is said to be profitable.*

MARKETING ARITHMETIC - RELATED TERMSFixed costVariable costContribution Unit contributionProfit LossBreak evenMarket shareMarginsReturn on investment ( ROI ) price, cost & investmentSupply & Demand Share value*

THE DETERMINANTS OF FIRMS PROFITABILITY Structural analysis of the industry

The five competitive forces

Rivalry amongst existing competitorsBargaining power of suppliersBargaining power of buyersEntry of new competitorsThreat of substitutes*

FIGURE 1-1*

FIGURE 1-2*

RIVALRY DETERMINANTSIndustry growthFixed (or storage) costs / value addedIntermittent overcapacityProduct differencesBrand indentitySwitching costsConcentration and balanceInformational complexityDiversity of competitorsCorporate stakesExit barriers *

ENTRY BARRIERSEconomies of scaleProprietary product differencesBrand identity Capital requirementsAccess to distributionsAbsolute cost advantagesProprietary learning curveAccess to necessary inputsProprietary low-cost product designGovernment policyExpected retaliation *

DETERMINANTS OF BUYER POWERBargaining leverageBuyer concentrationVersus firm concentrationBuyer volumeBuyer switching costsRelative to firmSwitching costsBuyer information Ability to backward integrateSubstitute productPull-through

Price sensitivityPrice / total purchasesProduct differencesBrand identityImpact on quality / performanceBuyer profit Decision makers incentives*

DETERMINANTS OF SUPPLIER POWERDifferentiation of inputsSwitching costs of suppliers and firms in the industryPresence of substitute inputsSupplier concentrationImportance of volume to supplierCost relative to total purchases in the industry Impact of inputs on cost or differentiationThreat of forward integration relative to threat of backward integration by firm in the industry *

DETERMINANTS OF SUBSTITUTION THREATRelative price performance of substitutesSwitching costBuyers propensity to substitute *

DEFINITION OF VALUE The customers perspective

Beauty lies in the eyes of the beholder

The value equationV=Q+F/PV= Customer ValueQ= Product/service quality as perceived by the customerF= Product/service features valued by customerP= Price of product/service to customer

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EIGHT DIMENSIONS OF QUALITYPerformanceFeaturesReliabilityConformanceDurabilityServiceabilityAestheticPerception *

PRODUCT & SERVICES Firm may be involved inManufacturing a productProviding a serviceCombination of product and service

What is a productProduct attributes

What is a serviceDimensions of service

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COMBININGThe firms perspective of value andThe customers perspective of valuetoCreate and sustain a competitive advantage

Achieve a quality and cost combination of value that maximizes both the customers benefits and firms profitability *

SUSTAINABLE COMPETITIVE ADVANTAGEAbility of a firm to generate profit in the long run which are well above the average profit for that industry*

MICHAEL PORTERS VALUE CHAIN CONCEPTEvery firm is a collection of activities that are performed to design, produce, market, deliver and support its product or service.*

MICHAEL PORTERS VALUE CHAIN CONCEPTThe value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of cost and the existing and potential sources of differentiation.*

MICHAEL PORTERS VALUE CHAIN CONCEPTThe firm gains a sustainable competitive advantage by performing these activities more cheaply (low cost) or better than its competitors (differentiate)*

MICHAEL PORTERS VALUE CHAIN CONCEPTThe goal of these activities is to offer the customers a level of value that exceeds the cost of the activities thereby resulting in profit margins for the firm in the long run*

MICHAEL PORTERS VALUE CHAIN MODEL (FIGURE 2-2)*

MICHAEL PORTERS VALUE CHAIN MODELThe primary value chain activities

INBOUND LOGISTICSActivities associated with receiving, storing and disseminating inputs to the product such as material handling, warehouse, inventory control, vehicle scheduling and returns to suppliers*


OPERATIONSActivities associated with transforming inputs into the final product such as machining, packaging, assembly, equipment maintenance, testing, printing and facility operations*


OUTBOUND LOGISTICSActivities associated with collecting, storing and physically distributing the product to the buyers such as finished goods warehousing, material handling, delivery vehicle operations, order processing and scheduling *


MARKETING AND SALESActivities associated with providing a means by which buyer can purchase the product and inducing them to do so, such as advertising, promotion, sales force, quoting, channel selections, channel relations and pricing*


SERVICEActivities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply and product adjustment*

MICHAEL PORTERS VALUE CHAIN MODELApplicability and importance of each of the primary value chain activities varies with the industry though these activities are present to some degree in every industry

Distribution firm inbound & outbound logistics Service firm operations / outbound logistic non-existentBanking marketing & salesManufacturer service *

MICHAEL PORTERS VALUE CHAIN MODELThe support activities

PROCUREMENTActivities associated with the purchase of inputs to transform them into finished product or servicesAdds value by the acquisition of appropriate goods or services at the best price, at the right time and in the desired place with the desired quality and quantity*


TECHNOLOGY MANAGEMENTUsed in production to reduce costTo develop new productIncrease customer service facilitiesBuild up cost effective processSupport value chain activities such as R & D process automation, process design*


HUMAN RESOURCE MANAGEMENTSupport attainment of overall strategic business plan and objectivesDesigns work positions by hiring, recognition, rewards, appraisal systems, career, planning and employee development MotivationCreate congenial working environment*


INFRASTRUCTURERequired to perform value activities efficiently and includes following functions Planning managementLegal frameworkFinancingAccountingPublic affairsQuality management General management

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THE VALUE SYSTEMUpstream value suppliers value chainsChannel value distributors value chainsBuyers value chainsCompetitors value chain

To attain and sustain competitive advantage it is essential to have clear understanding of not only our own value chain but also how the firm is positioned in the overall value system*

LINKAGES WITHIN THE VALUE CHAIN OF THE FIRMValue chain is a collection of inter-dependent activities Linkages are relationships between the way one value activity is performed and the cost or performance of another activityLinkages lead to optimization and coordinationLinkages between support activities and primary activities Pitfalls*

VERTICAL LINKAGESLinkages between the firms & suppliers value chains

Product or service from supplier employed by the firm in its value chainFirms procurement and inbound logistics activities interact with suppliers order entry system (output)

Linkages between a firms & channels value chain Multiple points of contact between a firms & channels value chainsCoordination and optimization between these value chains can lower cost or differentiatePitfalls *

THE BUYERS VALUE CHAINFirms product is an input to the buyers value chainDetermining the points of contact between the firms value chain and buyers value chainEstablish how the firms product is consumed in the particular buyers activity.*

COMPETITIVE SCOPE AND VALUE CHAINSegment scopeVertical scopeGeographic scopeIndustry scope*

COMPETITIVE SCOPE AND VALUE CHAINSEGMENT SCOPEServing a particular product or specific buyer segment requires differences in value chainsLeads to competitive advantage through focusing strategy

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VERTICAL SCOPE / INTEGRATION

Defines division of activities between a firm and its suppliers channels/ distributors and buyers

FIRM AND SUPPLIERS

Purchase components instead of fabricatingContract for service instead of having a service department

FIRM AND CHANNEL / DISTRIBUTORS

Channels may perform many distributions, service and marketing functions instead of the firm

FIRM AND BUYERS

Firm may get involved in variety of buyers activities -inbound logistics, *

GEOGRAPHIC SCOPEAllows the firm to share or coordinate value activities used to serve different geographic areasNational and regional co-ordination of value chainsEnhances value and creates competitive advantage if sharing value activities reduces cost or enhances differentiation *

INDUSTRY SCOPEPotential inter relationship among the value chains required to compete in related industries Sharing logistics system or a common sales force of related products can lower cost & create differentiations*

COALITIONS & SCOPESLong term agreement between firmsCoalitions with independent firms to achieve benefits of broader scope without broadening the firm Vertical coalitionHorizontal coalition *

Value Chain Management

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