What do you think is the usefulness of the value chain evaluate and show how it can help the organization to identify sources of competitive advantage Present your answer in a report form.?

Answer 1

1.0 INTRODUCTION In a hyper-competitive world economy and with increasingly rational buyers, a company can only win by crating and delivering superior customer value than competitors do. To succeed, a company needs to use the concept of value chain. Value chain is identified as a means of analyzing an organization's strategically relevant activities (Primary and Support Activities) in order to offer the customer the level of value that exceeds the cost of the activities, than competition, thereby resulting in a profit margin. Competitive advantage comes from carrying out these activities in a more cost-effective way than competitors (M. Porter.1985). 2.0 USEFULNESS OF THE VALUE CHAINValue chain is a tool for identifying ways to create more customer value. Every firm is a collection (synthesis) of activities that are performed to design, produce, market, deliver and support its products. The value chain identifies nine strategically relevant activities that create value and cost in a specific business. These nine value-creating activities consist of five primary activities and four supporting activities. The primary value chain activities are: · Inbound Logistics: the receiving and warehousing of raw materials and their distribution to manufacturing as they are required. · Operations: the processes of transforming inputs into finished products and services. · Outbound Logistics: the warehousing and distribution of finished goods. · Marketing & Sales: the identification of customer needs and the generation of sales. · Service: the support of customers after the products and services are sold to them. These primary activities are supported by: * The infrastructure of the firm: organizational structure, control systems, company culture, etc. * Human resource management: employee recruiting, hiring, training, development, and compensation. * Technology development: technologies to support value-creating activities. * Procurement: purchasing inputs such as materials, supplies, and equipment. The value chain activities can be analyzed as to whether they provide opportunities for differentiation or cost reduction. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows. * Cost advantage: by better understanding costs and squeezing them out of the value-creating activities. * Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. 2.1 SOURCES OF COMPETITIVE ADVANTAGEValue chain helps the organization to identify its own 'roots' (strength), as well as competitors' strengths. For example, Canon's expertise in optics and imaging technology (its 'roots') allowed it to diversify from a camera company into image, information and communication products in the 1960s. Without understanding its own strength, canon would not have been able to exploit its sources of advantage into such tremendous growth. 2.2 Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. A cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activities. To succeed the flowing driver related to value chain activities must be undertaken: * Economies of scale * Capacity utilization * Linkages among activities * Interrelationships among business units * Learning * Degree of vertical integration * Timing of market entry * Firm's policy of cost or differentiation * Geographic location * Institutional factors (regulation, union activity, taxes, etc.) A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage can also be pursued by reconfiguring the value chain. Reconfiguring means structural changes such a new production process, new distribution channels, or a different sales approach. For example, FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system. 2.3 Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels. Differentiation stems from uniqueness. A differentiation advantage may be achieved either by changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain. Several drivers of uniqueness can be identified: * Policies and decisions * Linkages among activities * Timing * Location * Interrelationships * Learning * Scale (e.g. better service as a result of large scale) * Institutional factors There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can "forward integrate" in order to perform functions that once were performed by its customers. It can "backward integrate" in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop an original (new) value chain configuration that increases product differentiation. 2.4 Technology and the Value Chain Because technology is employed to some degree in every value crating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. Various technologies are used in both primary value activities and support activities: Inbound Logistics Technologies, Operations Technologies, Outbound Logistics Technologies, Marketing & Sales Technologies, and Service Technologies. Many of these technologies are used across the value chain. For example, information systems are seen in every activity. Similar technologies are used in support activities. In addition, technologies related to training, computer-aided design, and software development frequently are employed in support activities. To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage. 2.5 Linkages between Value Chain Activities Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities. Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose, for lack of attention, the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase. Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage. 2.6 Analyzing Business Unit Interrelationships Interrelationships among business units form the basis for a horizontal strategy. Such business unit interrelationships can be identified by a value chain analysis. Tangible interrelationships offer direct opportunities to create a synergy among business units. For example, if multiple business units require a particular raw material, the procurement of that material can be shared among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities. Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to reap the benefits of the synergies. 2.7 Outsourcing Value Chain Activities A firm may specialize in one or more value chain activities and outsource the rest. A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must understand the firm's strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. The following outsourcing activities may be considered: * Whether the activity can be performed cheaper or better by suppliers. * Whether the activity is on of the firm's core competencies from which stems a cost advantage or product differentiation. * The risk of performing the activity in-house. If the activity relies on fast-changing technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets. * Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc. 3.0 CONCLUSION A firm's value chain is part of a larger system that includes the value chains of upstream suppliers and downstream channels and customers. This system provide primary and support activities that help to achieve optimum value and develop competitive advantage over competition. The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin.