[MHR 410] Value Chain Analysis

What the Firm Might Do

• External Environment 
• Five Forces Analysis
•  Sustainable Competitive Advantage

What the Firm Can Do

• Internal Environment
• Resources, Capabilities and Core Competencies
• Sustainable Competitive Advantage

Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Sources of
Core
Competencies
Competitive
Advantage
Strategic
Competitiveness
Above-Average
Returns
Competitive
Advantage
Gained through
Core Competencies
Discovering
Core
Competencies
Criteria of
Sustainable
Advantages
Value
Chain
Analysis
Discovering Core Competencies
Valuable
Rare
Costly to Imitate
Nonsubstitutable
*
*
**
* Outsource

The Concept of a Company
Value Chain
.The Value Chain
.Identifies the primary internal activities that create
customer value and the related support activities.
.Permits a deep look at the firm’s cost structure and
ability to offer low prices.
.Reveals the emphasis that a firm places on activities
that enhance differentiation and support higher prices.

4.3 A Representative Company Value Chain

Comparing the Value Chains of
Rival Firms
.Value Chain Analysis
.Facilitates a comparison, activity-by-activity, of how
effectively and efficiently a company delivers value to its
customers, relative to its competitors.
.The Value Chain Analysis Process:
.Segregate the firm’s operations into different types of
primary and secondary activities to identify the major
components of its internal cost structure.
.Use activity-based costing to evaluate the activities.
.Do the same for significant competitors.

Value Chain System for an Entire
Industry
.Industry Value Chain:
.The firm’s internal value chain
.The value chains of industry suppliers
.The value chains of channel intermediaries
.Effects of the Industry Value Chain:
.Costs and margins of suppliers and channel partners can
affect prices to end consumers.
.Activities of channel partners can affect industry sales
volumes and customer satisfaction.

4.4 Representative Value Chain System for an Entire Industry

Benchmarking and Value Chain Activities
.Benchmarking:
.Involves improving a firm’s internal activities based on
learning other companies’ “best practices.”
.Assesses whether the cost competitiveness and
effectiveness of a firm’s value chain activities are in line
with its competitors’ activities.
.Sources of Benchmarking Information
.Reports, trade groups, analysts and customers
.Visits to benchmark companies
.Data from consulting firms

Strategic Options for Remedying a Disadvantage
in Costs or Effectiveness
.There are three places in the total value
chain system for a company to look for
ways to improve its efficiency and
effectiveness:
.The firm’s own activity segments
.The suppliers’ part of the overall value chain
.The distribution channel portion of the chain.

Options for Improving the Efficiency and
Effectiveness of Internal Value Chain Activities
.Implement best practices throughout the company, particularly
for high-cost activities.
.Redesign products to eliminate high-cost components or
facilitate speedier and more economical assembly or manufacture.
.Relocate high-cost activities to areas where they can be
performed more cheaply.
.Outsource activities that can be performed by contractors more
cheaply than in-house.
.Shift to lower-cost technologies and/or invest in productivityenhancing,
cost-saving technological improvements.
.Stop performing activities that add little or no customer value.

Ways to Improve the Effectiveness of the Customer
Value Proposition and Enhance Differentiation
.Implement best practices throughout the company, particularly
for high-cost activities.
.Adopt best practices and technologies that spur innovation,
improve design, and enhance creativity.
.Implement the best practices in providing customer service.
.Reallocate resources to devote more to activities that will have
the biggest impact on the value delivered to the customer and that
address buyers’ most important purchase criteria.
.For intermediate buyers, gain an understanding of how the
activities the firm performs impact the buyer’s value chain.
.Adopt best practices for signaling the value of the product and
for enhancing customer perceptions.

4.5 Translating Company Performance of Value Chain Activities
into Competitive Advantage

4.5 Translating Company Performance of Value Chain Activities
into Competitive Advantage (cont’d)

QUESTION 5: IS THE COMPANY
COMPETITIVELY STRONGER OR WEAKER
THAN KEY RIVALS?
.Competitive Advantage Indicators:
.Ability to effectively and efficiently bundle
resources and capabilities.
.Achieving a high rank on each key success
factor.
.Having a net competitive advantage over its
rivals.

The Competitive Strength Assessment Process
Step 1
Make a list of the industry’s key success factors and
measures of competitive strength or weakness (6 to
10 measures usually suffice).
Step 2 Assign a weight to each competitive strength
measure based on its perceived importance.
Step 3
Rate the firm and its rivals on each competitive
strength measure and multiply by each measure by
its corresponding weight.

4.4 A Representative Weighted Competitive Strength Assessment

Business-Level Strategy

.Understand what distinguishes each of the five generic
strategies and why some of these strategies work better in
certain kinds of industry and competitive conditions than in
others.
.Gain command of the major avenues for achieving a
competitive advantage based on lower costs.
.Learn the major avenues to a competitive advantage
based on differentiating a company’s product or service
offering from the offerings of rivals.
.Recognize the attributes of a best-cost provider strategy
and the way in which some firms use a hybrid strategy to go
about building a competitive advantage and delivering
superior value to customers.
Learning Objectives

Why Do Strategies Differ?
Is the competitive advantage
pursued linked to low costs
or product differentiation?
Is the firm’s market target
broad or narrow?
Key factors that
distinguish one
strategy
from another

THE FIVE GENERIC
COMPETITIVE STRATEGIES
Low-Cost
Provider
Striving to achieve lower overall costs than rivals on
products that attract a broad spectrum of buyers.
Broad
Differentiation
Differentiating the firm’s product offering from rivals’ with
attributes that appeal to a broad spectrum of buyers.
Focused
Low-Cost
Concentrating on a narrow price-sensitive buyer
segment and on costs to offer a lower-priced product.
Focused
Differentiation
Concentrating on a narrow buyer segment by meeting
specific tastes and requirements of niche members
Best-Cost
Provider
Giving customers more value for the money by offering
upscale product attributes at a lower cost than rivals

5.1 The Five Generic Competitive Strategies: Each Stakes Out
a Different Market Position

LOW-COST PROVIDER STRATEGIES
.Effective Low-Cost Approaches:
.Pursue cost-savings that are difficult imitate.
.Avoid reducing product quality to unacceptable
levels.
. Competitive Advantages and Risks:
.Greater total profits and increased market share
gained from underpricing competitors.
.Larger profit margins when selling products at prices
comparable to and competitive with rivals.
.Low pricing does not attract enough new buyers.
.Rival’s retaliatory price cutting set off a price war.

Major Avenues for Achieving a Cost Advantage
.Low-Cost Advantage
.A firm’s cumulative costs for its overall value chain must be
lower than its rival’s cumulative costs.
.How to Gain a Low-cost Advantage:
.Do a better job than rivals of performing value chain
activities more cost-effectively.
.Revamp the firm’s overall value chain to eliminate or
bypass cost-producing activities.

5.2 Cost Drivers: The Keys to Driving Down Company Costs

Example of Reconfiguring the Value
Chain
Ranch
Cattle
Ship “on the
Hoof” to Rail
Center (Chicago)
Slaughte
r into
sides of
beef
“Boxed
Cuts” at
Markets
Old
Way
:
Iowa Beef Packers
Save on shipping and cattle weight
lUotsilsize cheaper non-union rural
labor
New
Way
:
:
Locate large
automated plants
near ranches
Process into
“Boxed Cuts” at
plants
Ship cuts
already “Boxed”
to Markets

When a Low-Cost Provider Strategy Works Best
.Price competition among rival sellers is vigorous.
.Products are readily available from many sellers.
.Industry products are not easily differentiated.
.Most buyers use the product in the same ways.
.Buyers incur low costs in switching among sellers.
.Large buyers have the power to bargain down prices.
.New entrants can use introductory low prices to attract
buyers and build a customer base.

Pitfalls of a Low-Cost Provider Strategy
.Lowering selling prices results in gains that
are smaller than the increases in total costs,
reducing profits rather than raising them.
.Relying on a cost advantage that is not
sustainable because rivals can copy or
otherwise overcome it.
.Becoming too fixated on cost reduction such
that the firm’s offering is too features-poor to
generate sufficient buyer appeal.

BROAD DIFFERENTIATION STRATEGIES
.Effective Differentiation Approaches:
.Carefully study buyer needs and behaviors, values
and willingness to pay a unique product or service.
.Incorporate features that both appeal to buyers and
create a sustainably distinctive product offering.
.Use higher prices to recoup differentiation costs.
.Advantages of Differentiation:
.Premium prices for products
.Increased unit sales
.Brand loyalty

Cost-Efficient Management of Value Chain Activities
.A Uniqueness Driver Can:
.Have a strong differentiating effect.
.Be based on physical as well as functional attributes
of a firm’s products.
.Be the result of superior performance capabilities of
the firm’s human capital.
.Have an effect on more than one of the firm’s value
chain activities.
.Create a perception of value (brand loyalty) in buyers
where there is little reason for it to exist.

5.3 Uniqueness Drivers: The Keys to Creating
a Differentiation Advantage

Revamping the Value Chain
System to Increase Differentiation
Coordinating with suppliers
to better address customer
needs
Coordinating with channel
allies to enhance customer
perceptions of value
Approaches
to enhancing
differentiation

When a Differentiation Strategy Works Best
Diversity of
buyer needs
and uses for
the product
Many ways that
differentiation
can have value
to buyers
Few rival firms
follow a similar
differentiation
approach
Rapid change
in technology
and product
features
Market Circumstances
Favoring Differentiation

Pitfalls of a Differentiation
Strategy
.Relying on product attributes easily copied by rivals.
.Introducing product attributes that do not evoke an
enthusiastic buyer response.
.Eroding profitability by overspending on efforts to
differentiate the firm’s product offering.
.Not opening up meaningful gaps in quality, service, or
performance features vis-à-vis the products of rivals.
.Adding frills and features such that the product
exceeds the needs and uses of most buyers.
.Charging too high a price premium.

FOCUSED (OR MARKET
NICHE) STRATEGIES
Focused
Market Niche
Strategy
Focused
Low-Cost
Strategy
Focused Strategy
Approaches

When a Focused Low-Cost or Focused
Differentiation Strategy Is Attractive
.The target market niche is big enough to be profitable
and offers good growth potential.
.Industry leaders do not see that having a presence in
the niche is crucial to their own success.
.It is costly or difficult for multisegment competitors to
meet the needs of target market niche buyers.
.The industry has many different niches and
segments.
.Rivals have little or no interest in the target segment.
.The focuser has a reservoir of buyer goodwill and
long-term loyalty.

The Risks of a Focused Low-Cost or
Focused Differentiation Strategy
. Competitors will find ways to match the focused
firm’s capabilities in serving the target niche.
. The specialized preferences and needs of niche
members to shift over time toward the product
attributes desired by the majority of buyers.
. As attractiveness of the segment increases, it
draws in more competitors, intensifying rivalry
and splintering segment profits.

Value-Conscious Buyer
BEST-COST PROVIDER
STRATEGIES
Best-Cost Provider
Hybrid Approach
Differentiation:
Providing desired quality/
features/performance/
service attributes
Low Cost Provider:
Charging a lower price
than rivals with similar
caliber product offerings

Market Characteristics Favoring
a Best-Cost Provider Strategy
. Product differentiation is the market norm.
. There are a large number of value-conscious buyers
who prefer midrange products.
. There is competitive space near the middle of the
market for a competitor with either a medium-quality
product at a below-average price or a high-quality
product at an average or slightly higher price.
. Economic conditions have caused more buyers to
become value-conscious.

The Big Risk of a Best-Cost Provider Strategy—
Getting Squeezed on Both Sides
High-End
Differentiators
Low-Cost
Providers
Best-Cost
Provider
Strategy

Successful Competitive
Strategies
Are Resource-Based
.A firm’s competitive strategy is unlikely to
succeed unless it is predicated on leveraging a
competitively valuable collection of resources
and capabilities that match the strategy.
.Sustaining a firm’s competitive advantage
depends on its resources, capabilities, and
competences that are difficult for rivals to
duplicate and have no good substitutes.