Eleonora Escalante, MBA - MEng Strategic Corporate Advisory Services Creating Corporate Integral Value (CIV)

Transcription

1 Eleonora Escalante, MBA - MEng Strategic Corporate Advisory Services Creating Corporate Integral Value (CIV) Leg 6. Value Chain Analysis 27 Feb 2018

2 OUTLINE Leg 6. Value Chain Analysis 01 Key Concepts Value Chain Analysis 02 Value Chain Methodology Approach 03 Who Uses Value Chain Analysis? 04 Advantages and Disadvantages Value Chain 05 Innovating through Value Chain Analysis 26 Feb

3 Primary Activities Support Activities Leg 6. From Hong Kong to Auckland. Today we will do a wrap up of our material covered and we will list our conclusions from Leg 6. Let s start with the summary: During the last 20 days we have gone through a wonderful journey of the Value Chain. This theme is one of the basic tools used for 33 years since Porter published his book Competitive Advantage, Creating and Sustaining Superior Performance in INBOUND LOGISTICSP urchasing, Inventory, Materials handling FIRM INFRASTRUCTURE HUMAN TALENT DEVELOPMENT AND MANAGEMENT OPERATIONS TECHNOLOGY DEVELOPMENT PROCUREMENT OUTBOUND LOGISTICS Warehousing and Distribution Sales and Marketing The Value Chain. Dealer Support and Customer Service 03

4 The whole idea of the Value Chain Analysis is based in these two equations: For the customer VALUE = Utility - Price Maximize If we wish to maximize VALUE for the Customer Either we Maximize UTILITY or decrease our PRICE We Focus on Utility Drivers For the firm PROFIT = Price - Cost Maximize If we wish to maximize PROFIT for the Firm Either we Maximize PRICE or Reduce our COSTS We focus on Cost Drivers 04

5 The Value Chain consists of two type of activity which create value for customers: 1. Primary value activities 2. Support activities. Primary Activities Are activities involved in the physical creation of the product and its sale and transfer to the buyer as well as after sale assistance. These activities consist of bringing materials into the business, transforming them into products, distributing them, marketing and servicing them. The primary activities are 5: Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Service. Support Activities These activities support the primary activities and each other by providing the procurement, technology, human resources and various firm wide functions. Firm Infrastructure is not associated with particular primary activities but supports the entire chain. Each primary activity receives SUPPORT: procurement, human resources (labor and management, staff), some technology to perform its function. Each primary activity also uses and creates information (buyer data, order entry, performance parameters (testing) and quality-failure statistics.. 05

6 Maximize Profit Maximize Value Leg 6. From Hong Kong to Auckland. Value chain analysis can be used as an analytical tool in two (2) general situations. Common Uses PROFIT = Price - Cost Value Chain Analysis as a tool for Competitive Advantage VALUE = Utility - Price For the Firm, we focus on cost drivers 1. Cost Analysis and Performance Improvement 2. Competitive Differentiation Analysis For the Customer, we focus in utility drivers

7 The Cost Analysis using the Value Chain can be simplified in the next 6 main steps: 1. Identify the appropriate value chain and assign costs and assets to it 2. Diagnose the cost drivers of each value activity and how they interact 3. Identify competitor value chains and determine the relative cost of competitors and the sources o cost differences. 4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain 5. Ensure that cost reduction efforts do not erode differentiation or make a conscious choice to do so 6. Test the cost reduction strategy for sustainability. Main Cost Drivers (10) Economies of Scale Experience (Learning and Spillovers) Patterns of Capacity Utilization Linkages Interrelationships Integration Timing Location Institutional and Regulatory Factors Discretionary policies independent of other Drivers. 07

8 We saw the 10 main Cost Drivers in a separate post of February 15 th. 08

9 The Value Chain analysis second use is the Differentiation Analysis, and we learned what is the definition of the Buyer s perception Value. The concept of the Buyer s perception of value. Value for the Customer Buyer s Perception of Value Utility for the Customer Utility Drivers Price for the Customer Cost Drivers Perceived value is the worth that a product or service has in the mind of the consumer. For the most part, consumers are unaware of the true cost of production for the products they buy; instead, they simply have an internal feeling for how much certain products are worth to them. Buyers don t know what is valuable to them, and they infer or judge subjectively such value. We also saw the use criteria and signaling criteria used by buyers when valuing products or servicess. 09

10 Who The Real Buyer is? Identify the buyer s value chain and the firm s impact on it. Determine ranked buyer purchasing criteria Assess the existing and potential sources of uniqueness in a firm s value chain Identify the cost of existing and potential sources of differentiation Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating. Test the chosen differentiation strategy for sustainability Reduce cost in activities that do not affect the chosen forms of differentiation. Leg 6. From Hong Kong to Auckland. The Value Chain analysis second use is the Differentiation Analysis, and the process can be simplified in the next 8 main steps, we went through each step over Leg 6. 10

11 Uniqueness drivers are the underlying reasons WHY a value activity is different. Porter has ordered them in terms of their prominence. 1. Determine who the real buyer is 2. Identify the buyer s value chain and the firm s impact on it. 3. Determine ranked buyer purchasing criteria. 4. Assess the existing and potential sources of uniqueness in a firm s value chain 5. Identify the cost of existing and potential sources of differentiation 6. Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating. 7. Test the chosen differentiation strategy for sustainability 8. Reduce cost in activities that do not affect the chosen forms of differentiation. Main Uniqueness Drivers Policy Choices Linkages Timing Location Interrelationships Learning and spillovers Integration Scale Institutional Factors 11

12 We also saw in a separate post the material about uniqueness drivers used in the differentiation analysis. 12

13 After we finished with the Value Chain Methodology Approach for cost analysis and differentiation analysis, we discussed who uses the value chain analysis. Who Uses the Value Chain Analysis? The answer: Everyone who is involved in a beautiful business has to use and know how to apply the Value Chain Analysis. Particularly the CEO. All companies from all industries (no matter what level of technology) can be analyzed using the Value Chain (for Cost Analysis, and/or Uniqueness Analysis). Whatever is your strategy (Cost, Differentiation, or if you are stuck in the middle of a hybrid strategy Cost and Differentiation) has to know at least the basics of Value Chain Analysis. 13

14 Concerns about the Focus Concerns about the Context Concerns about the Process Concerns about the Strategies Leg 6. From Hong Kong to Auckland. We also saw the Advantages and Disadvantages of the Value Chain Analysis, we saw the critique to the positioning School (where our VCA belongs) and we identified the pitfalls of using this tool too. The positioning school is one of ten schools which have given us different strategy process views and models. The critiques of the positioning school can be applied to the VCA too: The focus is narrow (oriented to the economics, quantifiable as opposed to social or political aspects) It has been mis-utilized only for managing costs. The context is also narrow, because it based on data. Paralysis-analysis Difficulty to balance the internal capabilities and external conditions of the business Industry representatives do not create nor protect or evolve their own value chains but the analysis is done by outsiders. Massaging the numbers is what is expected. Strategists are supposed to deal in abstractions on paper, detached from the tangible world of making products, deliver and closing sales. The calculation of analysts can displace the commitment of the true actors. People from the business units and at the front line have to be included in VCA. It promotes copycatting and benchmarking with competitors. It is square to try to categorize and fit everything in boxes of value activities Generic Strategies of low cost, differentiation, focus-differentiation or stuck in the middle are some of the strategies. There are more strategies. 14

15 Finally yesterday we finished our Value Chain Journey with the theme Innovations through Value Chain Analysis and we saw five ramifications of the original Value Chain: a) The Supply Chain b) The Extended Value Chain c) The Digital Value Chain a) The Global Value Chain b) The Shared Value Chain 15

16 For the conclusions, read the blog s post of today... I am so glad Leg 6 is over. Don t you? Thank you! All the material shared today draws on ideas from several professors, sources, practitioner publications, books and articles. Additional Information may be found in the References provided. 16