Internal Analysis Value ChainVic Saunders1What is a Value Chain?A value chain describes the categories of activities within and around an organisation, which together create a product or service.2Value ChainA structured framework for examining costs and performance.It provides a sound basis for inter-firm comparisons.Allows companies to improve performance and effectiveness. Identify areas in which they can add customer value.3The Value Chain Within an Organisation4Primary ActivitiesInbound Logistics activities concerned with receiving, storing and the internal distribution of raw materials.Operations the means by which raw materials are converted into the final product.Outbound Logistics activities that relate to the process of delivering the product to the customer such as storage, warehousing and transportation.5Primary ActivitiesMarketing and Sales involves making sure the customers are aware of the product.Service includes activities such as customer service, after-sales service, installation and training.6Support ActivitiesFirm Infrastructure this relates to the organisational structure, culture and systems.Human Resource Management recruitment, training and rewarding of staff.Technology Development includes R&D, IT and process improvements.Procurement purchasing of various inputs.7Using the Value ChainBy using the value chain a firm can gaincompetitive advantage by (Porter 1998):Inventing new or better ways to do the activities.Combining the activities in better ways.Managing linkages better in the value chain and the value network.8Limitations of the Value ChainThe model has a number of limitations(Meek et al 2003):It is not easy to use, particularly for service organisations.It is very inwardly orientated, rather than being focused on the external environment (in particular the market and customers).In most industries a single organisation rarely undertakes all the value-creating activities and therefore any analysis should recognise the wider value system.9What is a Value Network?A value network is the set of interorganisational links and relationships that are necessary to create a product or service.10Value NetworkThe value chain can be extended to include suppliers and distributors.It can be used to analyse the relationship between companies and to identify ways of adding value in the supply chain.Porter (1998) refers to this as the value network.For example, in a restaurant the quality of ingredients is determined by the grower. In essence the grower has added value.11The Value Network12Understanding the Capabilities in Relation to the Value NetworkWhich activities are central important to organisations strategic capability?Where are the profit pools?What should be outsourced?Who might be the best partners in the parts of the value network?13Student ActivityIn small groups prepare a briefing paper on:How a washing machine manufacturer could improve each area of the value chain to help gain competitive advantage.14Primary ActivitiesInbound Logistics careful handling to ensure no damage to incoming goods, ease of access to them, linking of purchases to production requirements.Operations high quality, few rejections, delivery on time.Outbound logistics rapid delivery where and when customers need it.Marketing and sales well trained and motivated sales force, advertising tied to market segments, good literature.After Sales Service rapid installation, speedy after sales service and repair.15Support ActivitiesProcurement purchasing high quality materials, regional warehousing of finished products.Technology Development development of unique features, new products, use of IT to manage logistics most effectively.Human Resource Management high quality training and development, recruitment of the right people, appropriate reward systems.Firm Infrastructure investment in suitable physical facilities to improve work conditions, support from senior management in customer relations, investment in IT systems.16Possible Exam QuestionAs a consultant you have been asked, as an initial step, to use a structured framework to examine the core capabilities and performance of Virgin Atlantic. In particular you have been asked to evaluate the usefulness of the value chain in analysing their performance and demonstrate how they have used it to add value in each of the areas. 17Extended KnowledgeFor further reading on the Value Chain and the Value Network see Johnson et al (2008) pp.110-114 and Hooley et alAn extensive discussion of the value chain concept and its application can be found in M.E. Porter (1985) Competitive Advantage18