Submitted To:Prof.Rutvi SarangSubmitted By:Dharmishtha BariaRoll.No.1

Value chain AnalysisValue chain Analysis

Definition: Value chain- consists of the major activities that have been added to the product during its creation, development or sale.

A company’s value chain consists of a linked set of value-creating activities performed internally The value chain contains two types of activities

Primary activities – where most of the value for customers is created

Support activities – facilitate performance of the primary activities

Value chain AnalysisValue chain Analysis

Primary activities : the creation of product or service◦inbound logistics - order entry data

collection, obtain raw materials, subassemblies

◦Operations - order processing, MRP; transformation of inputs to finished goods

◦Outbound logistics - distribution & sales data; storing products,

◦Marketing sales - promotions, discounting; establishing a customer need

◦Service activities - calls, returns, product rotation and maintenance

Support activities: The required infrastructure◦Org's infrastructure◦Human resources◦Technology◦Procurement

ValueValueChains of Rivals DifferChains of Rivals Differ

Several factors can cause differences in value chains of rival companies

◦Internal operations

◦Strategy

◦Approaches used in execution of the strategy

◦Underlying economics of the activities

◦Differences complicate task of assessing rivals’ relative cost positions

The Value Chain SystemThe Value Chain Systemfor an Entire Industry for an Entire Industry Assessing a company’s cost

competitiveness involves comparing costs all along the industry’s value chain

Suppliers’ value chains are relevant because◦ Costs, performance features, and quality of inputs

provided by suppliers influence a firm’s own costsand product performance

Forward channel allies’ value chains are relevant because ◦ Costs and margins are part of price paid

by ultimate end-user◦ Activities performed affect end-user satisfaction

Representative Value Chain Representative Value Chain for an Entire Industry for an Entire Industry

Developing Data to Developing Data to Measure a Company’s Cost Measure a Company’s Cost Competitiveness Competitiveness

After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities

Appropriate degree of disaggregation depends on◦ Economics of activities◦ Value of comparing narrowly defined

versus broadly defined activitiesGuideline – Develop separate cost

estimates for activities◦ Having different economics◦ Representing a significant or growing proportion

of costs

Activity-Based Costing: A Activity-Based Costing: A KeyKeyTool in Analyzing CostsTool in Analyzing CostsDetermining whether a company’s

costs are in line with those of rivals requires◦Measuring how a company’s costs

compare with those of rivals activity-by-activity

Requires having accounting data to measure costof each value chain activity

Activity-based costing entails◦Defining expense categories according

to specific activities performed and◦Assigning costs to the activity

responsible for creating the cost

Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain ActivitiesFocuses on cross-company

comparisons of how certain activities are performed and costs associated with these activities◦Purchase of materials◦Payment of suppliers◦Management of inventories◦Getting new products to market◦Performance of quality control◦Filling and shipping of customer orders ◦Training of employees◦Processing of payrolls

Objectives of Objectives of BenchmarkingBenchmarkingIdentify best practices in performing an

activity

Understand the best practices in performingan activity – learn what is the “best” wayto do a particular activity from thosedemonstrating they are “best-in-world”

Learn how other firms achieve lower costs

Take action to improve company’s cost competitiveness

What Determines if aWhat Determines if aCompany Is Cost Company Is Cost Competitive?Competitive?Cost competitiveness depends on

how well a company manages its value chain relative to how well competitors manage their value chains

When costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities

Options to CorrectOptions to CorrectInternal Cost Internal Cost DisadvantagesDisadvantages Implement use of best practices throughout

companyEliminate some cost-producing activities

altogether by revamping value chain systemRelocate high-cost activities to lower-cost

geographic areasSee if high-cost activities can be performed

cheaper by outside vendors/suppliers Invest in cost-saving technology Innovate around troublesome cost

componentsSimplify product designMake up difference by achieving savings in

backward or forward portions of value chain system

Translating Performance of Value Translating Performance of Value Chain Activities to Competitive Chain Activities to Competitive AdvantageAdvantageA company can create competitive

advantage by managing its value chain to

◦ Integrate knowledge and skills of employees in competitively valuable ways

◦Leverage economies of learning / experience

◦Coordinate related activities in ways that build valuable capabilities

◦Build dominating expertisein a value chain activity critical to customer satisfaction or market success

Translating Performance of Value Translating Performance of Value Chain Activities into Competitive Chain Activities into Competitive Advantage Advantage

Examples:Examples:Merck and Glaxo: world’s most

competitively capable Pharmaceutical companies.

Competitively crucial activities:extensive R&D to achieve first discovery of new drugs,carefully consructed approach to patenting,rapid and thorough clinicaly clearance through ragulatory Bodies,strong distribution and sales force.

FedEx

Value Chain Analysis is a useful way of thinking through the ways in which you deliver value to your customers, and reviewing all of the things you can do to maximize that value.

It takes place as a three stage process:Activity Analysis, where you identify the

activities that contribute to the delivery of your product or service.

Value Analysis, where you identify the things that your customers value in the way you conduct each activity, and then work out the changes that are needed.

Evaluation and Planning, where you decide what changes to make and plan how you will make them.

Example:Lakshmi is a software development manager for a software house. She and her team handle short software enhancements for many clients. As part of a team development day, she and her team use Value Chain Analysis to think about how they can deliver excellent service to their clients.

Activity Analysis: Order takingEnhancement specificationSchedulingSoftware developmentProgrammer testingSecondary testingDeliverySupport Lakshmi also identifies the following non-

client-facing activities as being important:Recruitment: Choosing people who will

work well with the teamTraining: Helping new team members

become effective as quickly as possible, and helping team members learn about new software, techniques and technologies as they are developed.

She focus on Order taking process to deliver more value to customers

She identify the following Value Factors:

Giving a quick answer to incoming phone calls;

Having a good knowledge of the customer's business, situation and system, so that they do not waste the customer's time with unnecessary explanation.

Asking all the right questions, and getting a full and accurate understanding of the customer's needs.

Explaining the development process to the customer and managing his or her expectations as to the likely timetable for delivery.

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