Haberberg and Rieple: Strategic ManagementChapter Six: Distinctiveness (3): The Value chain

Value chain Value chain: A linked set of value creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marking a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer

Copyright 2004 South-Western. All rights reserved. 3*Value Chain AnalysisAllows the firm to understand the parts of its operations that create value and those that do notA template that firms use to:Understand their cost positionIdentify multiple means that might be used to facilitate implementation of a chosen business-level strategy

Copyright 2004 South-Western. All rights reserved.

Copyright 2004 South-Western. All rights reserved. 3*Value Chain Analysis (contd)Value chainShows how a product moves from raw-material stage to the final customerTo be a source of competitive advantage, a resource or capability must allow the firm:To perform an activity in a manner that is superior to the way competitors perform it, orTo perform a value-creating activity that competitors cannot complete

Copyright 2004 South-Western. All rights reserved.

Value chain analysisPrimary activitiesDirectly involved in delivering products or services to a customer

Support activitiesContribute indirectly through supporting the primary activities

The value chain for manufacturing-style organizations

Value chain activities Product design and development (R &D) : material science, electronics, product design, development , testing Supply (inbound logistics) : brings inputs , ordering, delivery procedures, quality check of input. Investment in MRP, JIT etc: quickly placing ordering and reliably.Operations : functions related to production, scheduling etcDistributions: managing relationship with distributors, wholesalers, retailers ensuring right stock Marketing & Sale : identifying need, promotional activity, setting prices of product. Selection of sales person, distributors, retailers.After sale Service : repair, maintenance , complaints handling, customer training , telephone helplines etc

Secondary Activities Purchasing : identification of potential suppliers, negotiation of prices, delivery terms Process Development : activities enhancing technologies like ERPS, reduce no. of parts, no. of assembly lines, times, time spent in fabricating, less attrition, enhancing output/employeeHuman Resource management :Activities involved with recruiting, hiring, training, developing, and compensating all personnelFinance & Planning: Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.)Support core competencies

5.3 Value Chain Analysis

Value chain analysis Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior

Strategic decisions in the value chain

Vertical integration and outsourcingBuy on open marketOutsourcingInsourcingOffshoringNearshoringMake within organizations hierarchyIntermediate formsStrategic alliancesNetworks

Make or buy decisionsTrade off betweenProduction and set-up costsTransaction costsFlexibility and incentivesControl and the risk of loss of key resources. Quality

Transaction costsAvoidable administration costsTransaction costs cost of doing business with other organizations:Include costs of being exploited or of trying to prevent it

Value chain choicesThe scale of operationsTrade-off between cost minimisation and local responsivenessThe scope of operationsDedicated or shared activitiesLocation of activities

Economies of Scale Purchasing discountsSpreading overheads and fixed costsDivision of labour: specializationUtilizing expensive technologies

Not affordable or economic at low volumes

Economies of Scope Shared tangible resourcesShared intangible resourcesCompetences, customer data, reputation

Linkages One activity can partially substitute for others Eg: process improvement- reduces after sale service, HR customer complaint software marketing role

One activity can generate information that can be used by othersEg Customer database of marketing for production scheduling

Value chain analysis

Case Study H&M

Company OverviewSecond largest Global apparel retailerName : H for Hennes Women in SwedishM for Mauritz Widfors,Mens clothing Company (Purchased in 1964) 44 Countries 2600 Stores 94000 Employees, How big?2011 Annual sale of 15.8B EURH&M commits to provide fashionable and quality apparels at best price.

History1947Founded by Erling Persson 1950-1960 Expanded in Sweden1964First Overseas store in Norway1964First Overseas store in Norway

Fast Fashion IndustryFast in Producing(Responsiveness)Affordable Price(Economies of Scale)Fast Fashion

DesignCreating products differentiated from competitorsOutsourcing if possible.Coming to H&M Design Department100 Designers and 50 Pattern Designers only in SwedenMaterial Both Affordable and OrganicEx : H&M started producing clothes with organic hemp in 2011

Manufacturing10 in Asia, 10 in Europe and 1 in AfricaResponsible for finding manufacturing suppliersInspect production process,finished good and other code of conduct

DistributionCheaper Cost of Production, Transport, ServiceEffective linking of all operationsCentralization Strategy

SupplySupply activity or inbound logistics Important in Retails and Manufacturing OrganizationsSystems MRP, JIT, EDI to link with suppliers and to place orders Quickly and Reliably

Firms location as near as possible to suppliers

OperationsAim : Low unit Production Cost, Reduce wastage, Maximize Asset Utilization, Improve QualityEconomies of Scale and Scope ImportantLocation Low wage levels and high education standardSkilled staff , a bonus Assessment of Operations COGS , Defects , Wastage cost

Central WarehouseOwn Retail stores

ZaraH&MStudying purchasing behavior instead of simply following the fashion showRely on fashion show , invite celebrity and customersMost fashion garment manufactured in houseOutsource everythin60% in Europe70% in AsiaProduction in small batchBulk productionFrequent Inspection

H&Ms lead time here is 5 t0 6 days more than ZARAs

Read link https://books.google.co.in/books?id=yjIQ_pde0_kC&pg=PA228&lpg=PA228&dq=distinctiveness+(3)+the+value+chain&source=bl&ots=0norJ8eU9C&sig=KHJVGtWcBkx8kmnu1O0WcfjXdhg&hl=en&sa=X&ved=0ahUKEwi3zqyDxOLKAhWECI4KHe_TBYQQ6AEIITAB#v=onepage&q=distinctiveness%20(3)%20the%20value%20chain&f=falseFrom page no: 229-255