Value Chain: A source of competitive advantage

Strengths and weaknesses are mere words and competency is a petty consolation unless the organization can recognize for what it stands. Before strategy, an analysis of the capability of the firm is required once the external environment is aligned with the internal capacity. The Value Chain analysis is used to identify and measure the resources and capabilities of the firm. The prerogative of the firm is to amass profits by establishing itself based on its competitive advantage which emanates from its core competencies.
                 Competitive advantage emanates from the resources, competencies and capabilities and resources the firm has at its disposal. What are these resources? Simply put, they are the inputs required in the production function of the firm. Among the vast spectrum of resources are land, labour, capital, infrastructure, skill and knowledge which are essential for a firm to gain an advantage over its competitors. They can be tangible or intangible.
                 Capabilities emanate from these resources integrated to achieve a certain use and state. The base of these capabilities lies in the skill and knowledge that the firm possesses and the functional expertise that it gains over time. Core competency is a function of these resources and capabilities. A key aspect of core competency is the stability that it gives to the firm in terms of operations and stability. The focus of competitive advantage is to create a gap as wide as possible between the customer's willingness to pay and the cost of purchasing the product. To achieve it,

• Increase consumer willingness
• Reduce the cost of production

Hence, firms are faced with a choice of either increasing the willingness to pay substantially with a marginal increase in production costs (differentiation strategy) or decreasing the production costs substantially with a marginal fall in the willingness to pay (low cost strategy).
             Take the example of Accenture, Dell, Virgin Airlines or Future Retail, all of them were successes based on their differentiated strategies. Hence, what we need is an internal analysis of the firm to identify the sources of differentiation.

• Identification of the activities of the company
• Cost analysis of each activity vis-a-vis those of its competitors with reasons
• Identify scope of improvement in the activities and potential ways for change

Let us now look at the various ways we can analyse the internal value chain of an organization. Thankfully, we have Mr. Porter once again to our aid.

The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.
Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.
According to Porter (1985), the primary activities are:

1. Inbound Logistics - involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs.
2. Operations - are all the activities required to transform inputs into outputs (products and services).
3. Outbound Logistics - include all the activities required to collect, store, and distribute the output.
4. Marketing and Sales - activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase.
5. Service - includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered.

Secondary activities are:

1. Procurement - is the acquisition of inputs, or resources, for the firm.
2. Human Resource management - consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.
3. Technological Development - pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs.
4. Infrastructure - serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management

Once the chain of activities has been identified, we need to analyse the prevalent cost structures by determining the cost driving factors at each level of the activities. For e.g. the delivery cost depends upon the local consumption and the distance to market. Similarly, cost of outbound logistics increases if the variety of products is high. As we gauge the cost structure of competitors, we focus on the cost differential at each stage of the process. It is important to analyse those activities which have a higher impact on the overall cost of the firm and on parameters which are constant across the industry.

To analyse the customer's willingness to pay, we need to pay a heed to the actual value creation/addition that is happening through the activities of the firm. This can be measured through popular perception of the product - something which is a mixture of functional associations like price, features, packaging, performance or symbolic associations like aesthetics, aspirations etc.

• Identify the consumer of the product
• Understand the decision making process leading to the purchase
• Correlation between success in satisfying the consumer needs to value chain activities

The challenges in this measurement would originate from separate preferences of each buyer, product variety, heterogeneity of consumers, quantification of the various influences on purchase etc.

A value chain analysis would lead to a better cost management and enable it to emphasize on the fruitful activities while relinquishing control of the others.

To develop a competitive strategy,

• Giving the firm a unique positioning in the market
• Have a balance of forces in the industry to improve the firm's relative position in the market
• Including the aspect of change management within the competitive strategy

Well, that's all I had on offer at the present moment. Until next time,

Cheers!!!
Signing off,
Shauvik.