The Value Chain Analysis Ahmed Mohammed Bostan Miss: Yassmen Al- Bubo
The Value Chain To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities. Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chain and is depicted below:
Primary Value Chain Activities The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin. Inbound logisticsinclude the receiving, warehousing, and inventory control of input materials. Operations are the value-creating activities that transform the inputs into the final product. Outbound logisticsare the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc. Marketing & Salesare those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. Serviceactivities are those that maintain and enhance the product's value including customer support, repair services, etc.
Support Activities The primary value chain activities described above are facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific. Procurement- the function of purchasing the raw materials and other inputs used in the value-creating activities Technology Development- includes research and development, process automation, and other technology development used to support the value-chain activities. Human Resource Management- the activities associated with recruiting, development, and compensation of employees. Firm Infrastructure- includes activities such as finance, legal, quality management, etc.
Value Chain Analysis In order to better understand the activities leading to a competitive advantage, one can begin with the generic value chain and then identify the relevant firm-specific activities. Process flows can be mapped, and these flows used to isolate the individual value-creating activities. Once the discrete activities are defined, linkages between activities should be identified. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities. The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage.
How to write a Good Value Chain Analysis The ability of a company to understand its own capabilities and the needs of the customers is crucial for a competitive strategy to be successful. The profitability of a firm depends to a large extent on how effectively it manages the various activities in the value chain, such that the price that the customer is willing to pay for the company’s products and services exceeds the relative costs of the value chain activities. It is important to bear in mind that while the value chain analysis may appear as simple in theory, it is quite time-consuming in practice. The logic and validity of the proven technique of value chain analysis has been rigorously tested, therefore, it does not require the user to have the same in-depth knowledge as the originator of the model (Macmillan et al, 2000). The first step in conducting the value chain analysis is to break down the key activities of the company according to the activities entailed in the framework. The next step is to assess the potential for adding value through the means of cost advantage or differentiation. Finally, it is imperative for the analyst to determine strategies that focus on those activities that would enable the company to attain sustainable competitive advantage.
Technology and the Value Chain The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive Because technology is employed to some degree in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. Various technologies are used in both primary value activities and support activities:
Inbound Logistics Technologies • Transportation • Material handling • Material storage • Communications • Testing • Information systems • Marketing & Sales Technologies Media • Audio/video • Communications • Information systems • Outbound Logistics Technologies • Transportation • Material handling • Packaging • Communications • Information systems • Operations Technologies Process • Materials • Machine tools • Material handling • Packaging • Maintenance • Testing • Building design & operation • Information systems • Service Technologies Testing • Communications • Information systems
Linkages Between Value Chain Activities Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities. Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that inadvertantly the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase. Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage.
Conclusion The value chain is a model that presents the different value-adding activities in a company’s operation. Activities that add value to the company’s products and services are divided into primary and support. Primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities are procurement, technology development, human resources management and infrastructure. In the given case study, we analyze these activities as they affect Cathay Pacific’s services. Cathay Pacific is considered as the embodiment of success in the airline industry. From its humble beginning up to now when it is considered as one of the leading airlines in Asia and the world, Cathay Pacific continues to increase its competitive advantages through its value-adding activities. Cathay Pacific’s effective use of its resources, its ability to keep pace with the changes in technology, its close connection with its customers, its strong marketing efforts, and its ability to differentiate itself from its competitors remain as the company’s ingredients to success.