Value Chain Analysis, model, significance, stages, linkages, approaches, adv & disadv, example.

1. STRATEGIC COST MANAGEMENT :
VALUE CHAIN ANALYSIS
By
Femina Thomas
II MBA (PSM)
Indian Maritime University

2. VALUE CHAIN ANALYSIS
• The idea of a value chain was first suggested by Michael Porter (1985)
• To depict how customer value accumulates along a chain of activities that lead
to an end product or service
• Porter describes the value chain as the internal processes or activities a
company performs “to design, produce, market, deliver and support its
product.”
• Value chain analysis (VCA) is a "process where a firm identifies its primary
and support activities that add value to its final product and then analyze these
activities to reduce costs or increase differentiation."
• a useful tool as a firm seeks to achieve competitive advantage by cost
advantage and differentiation

3. Value Chain Model
Primary Activities
Inbound Logistics—material handling and
warehousing;
Operations—transforming inputs into the final
product;
Outbound Logistics—order processing and
distribution;
Marketing and Sales—communication, pricing and
channel management; and service—installation,
repair and parts.
Support Acitivities
Procurement—purchasing of raw materials, supplies
and other consumable items as well as assets;
Technology development—know-how, procedures and
technological inputs needed in every value chain
activity;
Human Resource Management—selection, promotion
and placement; appraisal; rewards; management
development; and labor/employee relations; and
Firm Infrastructure—general management, planning,
finance, accounting, legal, government affairs and
quality management.

4. SIGNIFICANCE
Value chain analysis for strategic cost management could help a company to
assess and improve its strategic position by
Improving quality by providing better understanding of customer requirements
when products are assembled from multiple input sources (e.g. cars,
computers...).
Providing a way to evaluate competitive cost position and thereby improving
strategic positioning.
Reducing time when there is a great deal of interdependency between the
participants in a value chain.
Reducing cost by focusing attention on areas needing cost reduction and by
reconfiguring the value chain.

5. STAGES
The principal stages of value chain analysis for strategic cost management are
1. Identify the value chain activities and disaggregate the firm into separate activities.
2. Establish the relative importance of different activities in the total cost of the product.
3. Compare costs by activity.
4. Identify cost drivers.
- Structural cost drivers such as scale, scope, experience, technology used in the value
chain, and supply cost.
- Executional cost drivers such as capacity utilization, product and process design,
- Operational cost drivers (activity drivers) include such factors as number of parts,
number of moves, number of products, number of customer orders, and number of
returned products.
5. Identify linkages and interrelationships in the value chain.
6. Identify opportunities for reducing costs and/or improving value.

6. LINKAGES
1. Internal linkages means that relationships between activities are assessed and
used to reduce costs and increase value.
2. Exploiting external linkages means managing these linkages so that both
the company and the external parties receive an increase in benefits.
3. Exploiting customer linkages

7. There are two different approaches on how to perform the analysis, which depend on what
type of competitive advantage a company wants to create

8. ADVANTAGES OF VALUE CHAIN:
1. Flexible strategy tool
2. Used to diagnose and create competitive advantages on both cost and differentiation.
3. It helps in understanding the organization issues
4. Comparing the business model with the competitors
5. It can be adapted for any type of business – manufacturing, retail or service, big or small.
6. Better understanding of the much broader competitive arena.
DISADVANTAGES OF VALUE CHAIN:
1. It has to be adapted to a particular business situation
2. Heavily oriented to a manufacturing business
3. The scale and scope of a value chain analysis can be intimidating.
4. Business information systems are often not structured in a way to make it easy to get
information for value chain analysis

10. THANK YOU!