Post on 30-Dec-2015
description
Value Chain AnalysisVictor Marbun (M987Z259)
Nguyen Phan Anh Huy (M987Z264)
The Value Chain Concept Methodology Case Study
Ajax Airlines People Airlines & United Airlines
Outline
The Value Chain Concept Methodology Case Study
Ajax Airlines People Airlines & United Airlines
Outline
According to Porter (1980), a business unit can develop a sustainable competitive advantage either based on cost or based on differentiation or based on both.
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The value chain concept
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Superior
Inferior
SuperiorInferior
Relative DifferentiationPosition
Relative Cost Position
Low cost: Economies of scale in production Experience curve effects Tight cost control Cost minimization in areas such as R&D,
service, sales force, or advertising.
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Differentiation: Brand loyalty Superior customer service Dealer network Product design and product features Technology
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The value chain framework is a method for breaking down the chain-from basic raw materials to end-use customers- into strategically relevant activities in order to understand the behavior of costs and the sources of differentiation.
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Value Chain Linkages
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Silvarculture and Timber
Farming
Logging and Chipping
Pulp Manufacturin
g
Converting Operations
Distribution
End-Use Customer
Paper Manufacturin
g
Value Chain in the Paper Products
Industry
Com
petito
r A
Com
petito
r B
Com
petito
r C
Com
petito
r D
Com
petito
r G
Com
petito
r E
Com
petito
r F
Every firm must construct a value chain for the total paper industry, break the value in the chain into its fundamental sources of economic value.
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Value Activities within a firm
A firm’s value chain is embedded in a large system that includes suppliers’ and customers’ value chains.
A firm can enhance its profitability not only by understanding its own value chain--from design to distribution--but also by understanding how the firm’s value activities fit into suppliers’ and customers’ value chains.
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Value-added refer to the contribution of the internal focus such as land, labor, capital goods.
Value chain concept highlights four profit improvement areas : Linkages with suppliers Linkages with customers Process linkages within the value chain of a
business Linkages across business unit value chains within
the firm
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Value chain VS Value-Added
The Value Chain Concept Methodology Case Study
Ajax Airlines People Airlines & United Airlines
Outline
Assign costs fixed cost VS variable cost evaluation Revenues average cost VS marginal cost improvement Assets break even analysis Return on Assets
Value Chain Methodology process
Identify the industry value
chain
Diagnose the cost drivers for
each value
Develop sustainable competitive advantage
Activities should be isolated and separated if:a.They represent a significant percentage of operating costs.b.The cost behavior of the activities (cost driver different.c.They are performed by competitors in different ways.d.They have a high potential of being able to create differentiation.
Identify The Value Chain
1. Structural cost driver. Scale, Size of operation. Scope, Degree of vertical integration. Experience, past activity. Technology, what process technologies
used. Complexity, number of product lines.
Diagnose Cost Drivers
2. Executional Cost Drives. Work force involvement (participation). Total quality management. Capacity utilization. Exploiting linkage.
Diagnose Cost Driver (Cont’d)
1. Control cost driver better than competitors. Can we reduce costs in this activity,
holding value (revenues) constant? Can we increase value (revenues) in this
activity, holding cost constant? Can we reduce assets in this activity,
holding costs and revenues constant?
Develop Sustainable Competitive Advantage
2. Reconfigure the Value Chain. Redefining the value chain (payoffs could
be more significantly). The company has fought to hold down
labor costs.
Develop Sustainable Competitive Advantage (cont’d)
1. Calculational Difficulties. Calculating value (revenues) for
intermediate products. Isolating key cost drivers. Identifying linkages across activities. Computing supllier and customer margins. Constructing competitor’s cost structures.
Problems in Constructing a Value Chain
2. Value Chain difficulties The process of performing the value chain
analysis. i.e. :- how does my activity add value to the chain
of customers to the end-user.- How does my cost structure compare with
those of my competitors.
Problems in Constructing a Value Chain (cont’d)
The Value Chain Concept Methodology Case Study
Ajax Airlines People Airlines & United Airlines
Outline
1988 1987
Sales $8800 $7200
Expenses
Tickets&reservation 320 300
Aircraft Operations 4980 3900
Customer Service 2600 2400
Total Expenses 7900 6600
Identifiable property, plant,& equipment assets
Tickets reservations 2000 1000
Aircraft & operations 5000 5300
Customer Service 0 0
Total $7000 $6300
EXHIBIT 6Ajax Airlines: A Valuable Chain Analysis
Per Seat Mile Flown
Per Available Mile
1988 1987
1988 1987
Costs: Tickets &Reservation
$.005 $.005
$.003 $.003
Aircraft Operations
.077 .069
.049 .044
Customer Service
.040 .042
.025 .027
Total $.122 $.116
$.077 $.074
Assets: Ticket & Reservation
$.031 $.018
$.020 $.011
Aircraft .077 .093
.049 .060
Customer Service
0 0
0 0
Total $.108 $.111
$.069 $.071
Ajax Airlines: A Value Chain Analysis (Cont’d)
Strategically, Ajax airlines hope that a small increase in aggregate customer service expenditures and a better ticketing and reservation system will justify higher prices.
However, increase aircraft operations cost wipe out most of the profit impact of increase in revenue per seat mile flown.
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Case study: Ajax Airline
By the conventional analysis, this strategy seems hard to be successful.
Value chain analysis can yield very different insights. We believe that the linking of financial analysis to strategic positioning in this way is a critical element in effective financial analysis.
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Case study: Ajax Airline
The Value Chain Concept Methodology Case Study
Ajax Airlines People Airlines & United Airlines
Outline
Cost Per 10.000 Seat Miles Cost Per 10.000 Seat Miles $ 1,000 $ 1,300
$ 9.,000 $ 13,200
People Express United Airlines
$ 4,900 $ 6,700
$ 11,600 $ 15,600
$ 1,500 $ 4,700 $ 28,400 $ 41,500
EXHIBIT 7 Value Chain Configurations: A Comparison
Between People Express and United AirlinesAdvertising & Publicity
Ticketing OfficesTicket
Counter Operations
Gate Operations
Baggage Handling
fleets
Aircraft Operations
On-Board Service
Value Chain Elements
People Express less than United Airlines (cost per 10,000 seat miles)
Strategic Differences
People Airlines
Strategic Differences
United Airlines
Advertising & Publicity $ 300 Heavy promotion to tout low price/no frills airlines
Heavy promotion of full service airline
Reservation & Ticketing
$ 3,200 No ticket officesNo separate computer Reservation system
Ticket Offices in Downtown locationsExtensive computer Reservation System
Secondary airport and TerminalsNo Ticket counters (check in only)
Full service
Full Service
Free baggage checking
Fleet Costs $ 1,800 Used Aircraft-Budget airplanes
New aircraft
Flight Operations $ 4,000 High-density seatingNon-union pilotsFlying hour per day
Union pilotsBigger crewsCrew paid on higher scale
Cabin Operations $ 3,200 Non-Union flight attendantsLower pay scaleNo first class, no meals
Full service
Exhibit 8Strategic Inference from the Value Chains of People Express
and United Airlines