Eleonora Escalante, MBA - MEng · The Cost Analysis using the Value Chain can be simplified in the...

Eleonora Escalante, MBA - MEngStrategic Corporate Advisory Services

Creating Corporate Integral Value (CIV)

Leg 6. Value Chain Analysis

Summary and Conclusions

27 Feb 2018

OUTLINE Leg 6. Value Chain Analysis

Leg 6. From Hong Kong to Auckland.

Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services

© 2017 Eleonora Escalante-all rights reserved

01Key Concepts

Value Chain

Analysis

26 Feb2018

We are here!

02

02Value Chain

Methodology

Approach

03Who Uses Value

Chain Analysis?

04Advantages and

Disadvantages

Value Chain

05Innovating

through Value

Chain Analysis

06Summary and

Conclusions

https://support.office.com/es-ES/article/b89770f1-deb1-4a19-94ef-342aa15a4689



© 2017 Eleonora Escalante-all rights reserved 27Feb2018

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FIRM INFRASTRUCTURE

HUMAN TALENT DEVELOPMENT AND MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND

LOGISTICSP

urchasing,

Inventory,

Materials

handling

OPERATIONS

OUTBOUND

LOGISTICS Warehousing

and

Distribution

Sales and Marketing

Dealer

Support

and

Customer

Service

Pri

mary

Act

ivit

ies

Su

pp

ort

Act

ivit

ies

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:06

Summary and

Conclusions

The Value Chain.

• 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

1985.





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SUMMARY:06Summary and

Conclusions• The whole idea of the Value Chain Analysis is based in these two equations:

VALUE = Utility - Price PROFIT = Price - Cost

For the customer For the firm

MaximizeMaximize• If we wish to maximize

VALUE for the Customer

• Either we Maximize UTILITY

or decrease our PRICE

• We Focus on Utility Drivers

• If we wish to maximize

PROFIT for the Firm

• Either we Maximize PRICE or

Reduce our COSTS

• We focus on Cost Drivers





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Summary and ConclusionsSUMMARY:

06Summary and

Conclusions

• 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..





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06Summary and

Conclusions

Value Chain

Analysis as a

tool for

Competitive

Advantage

1. Cost Analysis

and

Performance

Improvement

2. Competitive

Differentiation

Analysis

Value chain analysis can be used as an analytical tool in two (2) general situations.

Common Uses

PROFIT = Price - Cost VALUE = Utility - Price

For the Firm,

we focus on

cost drivers

For the Customer,

we focus in utility

drivers

Maxi

miz

e

Pro

fit

Maxi

miz

e

Valu

e





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06Summary and

Conclusions

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.





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06Summary and

Conclusions

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





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06Summary and

Conclusions

The Value Chain analysis second use is the Differentiation Analysis, and we learned what

is the definition of the Buyer´s perception Value.

Value for the

Customer

Buyer´s

Perception of

Value

Utility for the

Customer

Utility

Drivers

Price for the

Customer

Cost Drivers

The concept of the Buyer´s perception of value.

• “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.





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06Summary and

Conclusions

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.W

ho

Th

e

Real

Bu

yer

is?

Iden

tify

th

e

bu

yer´

s va

lue

chain

an

d t

he

firm

´s im

pact

on

it.

Dete

rmin

e r

an

ked

bu

yer

pu

rch

asi

ng

crit

eri

a

Ass

ess

th

e e

xist

ing

an

d

po

ten

tial so

urc

es

of

un

iqu

en

ess

in

a f

irm

´s

valu

e c

hain

Iden

tify

th

e c

ost

of

exi

stin

g a

nd

po

ten

tial so

urc

es

of

dif

fere

nti

ati

on

Ch

oo

se t

he c

on

fig

ura

tio

n o

f va

lue

act

ivit

ies

that

create

s th

e m

ost

valu

ab

le d

iffe

ren

tiati

on

fo

r th

e b

uyer

rela

tive t

o c

ost

of

dif

fere

nti

ati

ng

.

Test

th

e c

ho

sen

dif

fere

nti

ati

on

str

ate

gy f

or

sust

ain

ab

ilit

y

Red

uce

co

st in

act

ivit

ies

that

do

no

t aff

ect

th

e

cho

sen

fo

rms

of

dif

fere

nti

ati

on

.





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06Summary and

Conclusions

Main Uniqueness

Drivers

• Policy Choices

• Linkages

• Timing

• Location

• Interrelationships

• Learning and spillovers

• Integration

• Scale

• Institutional Factors

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.





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06Summary and

Conclusions

We also saw in a separate post the material about uniqueness drivers used in the

differentiation analysis.





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06Summary and

Conclusions

After we finished with the Value Chain Methodology Approach for cost analysis and

differentiation analysis, we discussed 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.

Who Uses the Value Chain Analysis?





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06Summary and

Conclusions

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:

Co

ncern

s ab

ou

t th

e F

ocu

s

•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.

Co

ncern

s ab

ou

t th

e C

on

text

•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. Co

ncern

s ab

ou

t th

e P

rocess

•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.

Co

ncern

s ab

ou

t th

e S

trate

gie

s

•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.





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06Summary and

Conclusions

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




© 2017 Eleonora Escalante-all rights reserved 27Feb2018 16

Thank you!

For the conclusions, read the blog´s post of today... I am so glad Leg 6 is over.

Don´t 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.

We are

here!


06Summary and

Conclusions


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