ISM module 2
VALUE CHAIN ANAYLYSIS
Examination of the theory of competitive Advantage
( Basis of value chain analysis)
The theory of Competitive Advantage
Founded by Michael Porter
Ideology: That any nations competitiveness of its industries are
based on the following four attributes
Factor Endowments ( presence of abundant factors and
necessary infrastructure)
Demand Conditions
Related and supporting industries
Firm strategy structure and rivalry
Example: Nokia in Finland, Swiss industries in precision
instruments
FORMULATIONS OF COMPETITIVE STRATEGIES IN IB
( Towards value chain Analysis)
The idea is that a firm should systematically form and
implement a strategy( plan of action) in order to excise control
over its environment ( competitors, markets, suppliers and Govt)
Basic Strategies in the corporate sector:
DELIBERATE
EMERGENT
Deliberate is planning for future action on factors in IB
Emergent is patterned strategies on the results of past and
present action
BASIC PRINCIPLES OF COMPETITIVE STARTEGY IN IB
External forces that drive a firms structure
Types of strategy that determines firms competitive positioning
within industry
The internal organisation of firm ( Value chain) or internal
sources of competitive advantage
External Structure
Market, suppliers, product services , threat of new entrants ,
other competitors
This will effect firms profitability, pricing policies, levels of
profits
Competitive positioning
Porters GENERIC strategies of cost leadership and product
differentiation
Cost leadership
Product differentiation
Cost leadership
Development of value attributes and quality to achieve industry
standards
Have a cost strategy which other firms cannot imitate focusing
on larger market share
Product Differentiation:
Uniqueness of product and services
Eg, everready batteries, Escorts tractors
Again a strategy that can achieve unique advantage on features
highly valued by customers and not easy for firms to copy
“ niche’
THE VALUE CHAIN
M PORTER’S CONCEPT
Internal structure of any company into 5 primary and 4 support
activities
Primary acts are those that are directly involve in the creation of
product or service
Support acts are those that facilitate the creation and also the
transfer to the customer
DIAGRAM
In bound logistics:
Inward delivery of input to be disseminated to the creation, e.g
raw material, body parts,
Operations:
Actvities that transform the inputs , maintain production and
keep order in process
Out bound Logistics:
Transport of products from the firm to the customers , order
processing
Marketing and Sales
After sale service
To increase the probability of a repeat purchase
SUPPORT ACTIVITIES
Procurement;
Purchase of all essential setup of business in all fields
Technological Development
( process innovation) applied everywhere
HR Management
Training and evaluation is required in all fields whether primary
or support
Quality of staff important
Firm Infrastructure
Financing accounting, legal, safety standards
Every business requires an infrastructure suitable to various
requirements of production e.g fashion industry
Added value to products can increase sales in the longer run
Collective value of performing activities in each element of the
value chain exceeds their cost
Assessing the External Environment in relation to strategy
formulation
The External environment can be classified as
Remote Environment
Operating Environment
Remote Environement
Economic
Political
Social
Technological
Operating Environment
Competitors
Creditors
Customers
Labour market
Suppliers
Remote Environment
Economic points
Along with GDP, GNP, FX position
Key Factors: inflation, income levels, credit availability,
consumer purchasing power
Example:
Global recession due to excessive distribution of Sub prime
loans in US primarily and the inability of consumers to spend
more
Social:
Social values, key points:
Marriage, lifestyle, ethics, racial behaviour, education,
aesthetics, population changes
Example
Declining birth rate of US in early 60s and 70s became a threat
to some industries like children food, toys, clothes, the few
firms that did well, learned to recognize socio cultural values
Political:
Changes in Govt policy related to industries, foreign trade,
taxation, environment, defence, foreign trade,
Example:
Reagan administration favoured military policies of developing
defense systems, and cut Govt spending else where
Further examples can be equity requirements, nationalism,
patent protection
Technological
Current state, new products to become technically feasible,
Best example telecom domination and telecom innovations like
Key issues on operating environment
Competitors:
Level of competition can be determined by the following factors
Market share, breadth of product line, effectiveness of sales
distribution, price competitiveness, raw material costing and
availability, staff quality, research, advertisement
Competitors can evaluated on any the criterias,
Suppliers and Creditors:
Dependable ongoing relationship
Are suppliers competitive on pricing, quality, delivery,
Do potential creditors perceive the firm as having an acceptable
record? Their loan terms compatible with companys financial
status and profitability
Can they extend their line of credit?
Eg Global recession, the impact of credit crunch or irrecoverable
loans
Customer profile and Market changes:
The Japanese research future customer needs and wants by
interviewing those who own products of their competitors
Eg automobile, Japanese interviewed VW car owners in 70s and
then designed Toyota, Datsun to overcome American
domination
To expand market share Coke after generating 3.5 billion in
revenues and taking 90 % market share is now diversifying into
wines to target aging population
Internal Factors:
Financial ratios
Location and Coordination issues