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3483046-What-is-Value-Chain-Analysis.doc

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Concept of Value chain approaches Introduction: The value chain approach was developed by Michael Porter in the 1980s in his book “Competitive Advantage: Creating and Sustaining Superior Performance” (Porter, 1985). The concept of value added, in the form of the value chain, can be utilized to develop an organisation’s sustainable competitive advantage in the business arena of the 21st C. All organisations consist of activities that link together to develop the value of the business, and togethe
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  Concept of Value chain approaches Introduction:  The value chain approach was developed by Michael Porter in the1980s in his book “Competitive Advantae! Creatin and ustainin uperior Per#ormance$ %Porter& 198'() The concept o# value added& in the #orm o# the value chain& can be utili*ed todevelop an oranisation+s sustainable competitive advantae inthe business arena o# the ,1st C) All oranisations consist o# activities that link toether to develop the value o# the business&and toether these activities #orm the oranisation+s value chain) uch activities may include purchasin activities& manu#acturinthe products& distribution and marketin o# the company+sproducts and activities %-ynch& ,00.() The value chain #rameworkhas been used as a power#ul analysis tool #or the strateicplannin o# an oranisation #or nearly two decades) The aim o# the value chain #ramework is to ma/imise value creation whileminimisin costs)  Main aspects of Value Chain Analysis alue chain analysis is a power#ul tool #or manaers to identi#ythe key activities within the #irm which #orm the value chain #orthat oranisation& and have the potential o# a sustainablecompetitive advantae #or a company) Therein& competitiveadvantae o# an oranisation lies in its ability to per#orm crucialactivities alon the value chain better than its competitors) The value chain #ramework o# Porter %1990( is “aninterdependent system or network o# activities& connected bylinkaes$ %p) 1() 2hen the system is manaed care#ully& thelinkaes can be a vital source o# competitive advantae%Pathania34ain& ,001() The value chain analysis essentially entailsthe linkae o# two areas) 5irstly& the value chain links the valueo# the oranisations+ activities with its main #unctional parts)Then the assessment o# the contribution o# each part in theoverall added value o# the business is made %-ynch& ,00.() 6norder to conduct the value chain analysis& the company is splitinto primary and support activities %5iure 1() Primary activitiesare those that are related with production& while supportactivities are those that provide the backround necessary #orthe e##ectiveness and e##iciency o# the #irm& such as humanresource manaement) The primary and secondary activities o# the #irm are discussed in detail below) 1  Primary activities The primary activities %Porter& 198'( o# the company include the#ollowin! ã Inbound logistics These are the activities concerned with receivin the materials#rom suppliers& storin these e/ternally sourced materials& andhandlin them within the #irm) 7 Operations  These are the activities related to the production o# productsand services) This area can be split into more departments incertain companies) 5or e/ample& the operations in case o# ahotel would include reception& room service etc) 7 Outbound logistics  These are all the activities concerned with distributin the #inalproduct andor service to the customers) 5or e/ample& in case o# a hotel this activity would entail the ways o# brinin customersto the hotel) ã Marketing and sales:  This #unctional area essentially analyses the needs and wants o# customers and is responsible #or creatin awareness amon thetaret audience o# the company about the #irm+s products andservices) Companies make use o# marketin communicationstools like advertisin& sales promotions etc) to attract customers to their products) 7 ervice There is o#ten a need to provide services like pre3installation ora#ter3sales service be#ore or a#ter the sale o# the product orservice) upport activities The support activities o# a company include the #ollowin! 7 Procurement  This #unction is responsible #or purchasin the materials that arenecessary #or the company+s operations) An e##icientprocurement department should be able to obtain the hihestuality oods at the lowest prices)  2  7 !uman esource Management  This is a #unction concerned with recruitin& trainin& motivatin and rewardin the work#orce o# the company) :uman resourcesare increasinly becomin an important way o# attaininsustainable competitive advantae) 7 #echnology $evelopment  This is an area that is concerned with technoloical innovation&trainin and knowlede that is crucial #or most companies todayin order to survive) 7 %irm Infrastructure  This includes plannin and control systems& such as #inance&accountin& and corporate stratey etc) %-ynch& ,00.() 5iure 1 The alue Chain ource! Porter %198'( Porter used the word ;marin+ #or the di##erence between thetotal value and the cost o# per#ormin the value activities %5iure1() :ere& value is re#erred to as the price that the customer iswillin to pay #or a certain o##erin %Macmillan et al& ,000()<ther scholars have used the word ;added value+ instead o#  3  marin in order to describe the same %-ynch& ,00.() The analysisentails a thorouh e/amination o# how each part mihtcontribute towards added value in the company and how thismay di##er #rom the competition) 6n a study o# audi companies& =hamdi %,00'( #ound that ,,> o# the companies in the study used value chain #reuently& while1?> reported that they somewhat used it& and ,> did not usethe tool at all) An interestin #indin o# the study was that themanu#acturin #irms were #reuent users o# the tool compared totheir service counterparts %=hamdi& ,00'() The ability o# a company to understand its own capabilities andthe needs o# the customers is crucial #or a competitive strateyto be success#ul) The pro#itability o# a #irm depends to a laree/tent on how e##ectively it manaes the various activities in thevalue chain& such that the price that the customer is willin topay #or the company+s products and services e/ceeds the relativecosts o# the value chain activities) 6t is important to bear in mindthat while the value chain analysis may appear as simple intheory& it is uite time3consumin in practice) The loic andvalidity o# the proven techniue o# value chain analysis has beenriorously tested& there#ore& it does not reuire the user to havethe same in3depth knowlede as the oriinator o# the model%Macmillan et al& ,000() The #irst step in conductin the valuechain analysis is to break down the key activities o# the companyaccordin to the activities entailed in the #ramework) The ne/tstep is to assess the potential #or addin value throuh the meanso# cost advantae or di##erentiation) 5inally& it is imperative #orthe analyst to determine strateies that #ocus on those activitiesthat would enable the company to attain sustainable competitiveadvantae) 6t is important #or analysts to remember to use the value chain asa simple checklist to analyse each activity in the business withsome depth %Pearson& 1999() The value chain should be analysedwith the core competence o# the company at its very heart%Macmillan et al& ,00.() The value chain #ramework is a handytool #or analysin the activities in which the #irm can pursue itsdistinctive core competencies& in the #orm o# a low cost strateyor a di##erentiation stratey) 6t is to be noted that the valuechain analysis& when used appropriately& makes theimplementation o# competitive strateies more systematic 4
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