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(VC M )

VALUE CHAIN MANAGEMENT

COURSE OUTLINE

Course introduction Value Chain Management


Course outline Definition of Value from the firms perspective Profitability and margins The structural analysis of the industry Definition of value from the customers perspective The value equation Quality of product & service as perceived by customer The features of product and service Combining the firms and customers perspective of value

to attain and sustain a competitive advantage


Michael Porters concept of value chain

Michael Porters generic Value Chain Model


The Primary value chain activities Inbound logistics Operations Outbound logistics Marketing and sales Service

The Support value chain activities Firms infrastructure Human resource Technology development Procurement

Michael Porters generic Value Chain Model


The value system

Suppliers value chain Distributors value chain Buyers value chain Competitors value chain

Linkages within the value chains

Linkages within the value chain of the firm Vertical linkages linkages with suppliers and channels Linkages with buyer

Michael Porters generic Value Chain Model


Competitive scope and the value chain

Segment scope Vertical scope Geographic scope Industry scope Coalitions and scope

Value Chain Management (VCM)


The development of VCM the various stages

Vertical integration Core competencies Supply chain management Value chain management

VCM incorporates Integrated supply chain planning Full resource management Chain wide resource responsiveness Information integration

The six essentials for VCM


Coordination and collaboration Technology investment

Organizational processes
Leadership Employees & human resource

Organization culture & attitudes

Value chain mapping


Purpose of value chain map

Type of value chain maps Flow chart Grid chart

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Steps in mapping value chain using flow chart

Step-1. Indentify core transactions of value chain in target sector Step-2. Identify and map key market players Step-3. Identify opportunities and constrain at each value chain level (qualitative information) Step-4. Identify quantitative information for each value chain level

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Step in mapping value chain using grid charts

Step-1. Indentify different markets for product / service Step-2. Indentify the way by which product & service reach end users Step-3. Display information and characteristics of service market channels

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The implementation of VCM


Identity customers by segments Determine customers requirements vis--vis product / service Design product / service based on customers feedback Establish value chain activities required to provide the above service/product Assign value chain activities to business functions Define organization structure to enable each business function to generate maximum value Define linkages between value chain activities & business function Define effective communication between business functions Determine the gap between the customers required product / service and the product service delivered by the firm Close the gap by improving at each stage of the value chain

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Total Quality Management and VCM


The definition of TQM The use of value chain model to implement TQM

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The generic strategies for attaining and

sustaining a competitive advantage


Cost Leadership

Differentiation
Focus

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Configuring the value chain model for

competitive advantage
Cost advantage and the value chain

Cost analysis Cost behavior Cost advantage Steps in strategic cost analysis Pitfalls in cost leadership strategy

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Differentiation and the value chain Source of differentiation Cost of differentiation Buyer value and differentiation Steps in differentiation strategy Pitfalls in differentiation strategy

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Focus strategy and the value chain Industry segmentation Segment inter relationship

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DEFINITION OF VALUE
The Firms Perspective
Value is determined by the difference

between the price at which the firm sells its product or services and the cost of producing these product or service.

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DEFINITION OF VALUE
Value = Selling price of product or service less total cost of product or service.
If the price at which the product or service are

being sold exceeds the cost of producing these product or service the firm is considered to be making a margin on its products or services and is said to be profitable.
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MARKETING ARITHMETIC

RELATED TERMS

Fixed cost Variable cost Contribution Unit contribution Profit Loss Break even Market share Margins Return on investment ( ROI ) price, cost & investment Supply & Demand Share value
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THE DETERMINANTS OF FIRMS PROFITABILITY

Structural analysis of the industry


The five competitive forces
Rivalry amongst existing competitors Bargaining power of suppliers Bargaining power of buyers Entry of new competitors Threat of substitutes
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FIGURE 1-1

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FIGURE 1-2

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RIVALRY DETERMINANTS

Industry growth Fixed (or storage) costs / value added Intermittent overcapacity Product differences Brand indentity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers
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ENTRY BARRIERS

Economies of scale Proprietary product differences Brand identity Capital requirements Access to distributions Absolute cost advantages
Proprietary learning curve Access to necessary inputs Proprietary low-cost product design

Government policy Expected retaliation


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DETERMINANTS OF BUYER POWER


Bargaining leverage Buyer concentration
Versus firm concentration

Buyer volume Buyer switching costs


Relative to firm Switching costs

Buyer information Ability to backward

integrate Substitute product Pull-through

Price sensitivity Price / total purchases Product differences Brand identity Impact on quality / performance Buyer profit Decision makers incentives

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DETERMINANTS OF SUPPLIER POWER


Differentiation of inputs
Switching costs of suppliers and firms in the industry Presence of substitute inputs

Supplier concentration
Importance of volume to supplier Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Threat of forward integration relative to threat of

backward integration by firm in the industry

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DETERMINANTS OF SUBSTITUTION THREAT


Relative price performance of substitutes
Switching cost Buyers propensity to substitute

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DEFINITION OF VALUE
The customers perspective
Beauty lies in the eyes of the beholder The value equation
V=Q+F/P V= Customer Value Q= Product/service quality as perceived by the customer F= Product/service features valued by customer P= Price of product/service to customer
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EIGHT DIMENSIONS OF QUALITY


Performance
Features Reliability

Conformance
Durability Serviceability

Aesthetic
Perception

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PRODUCT & SERVICES


Firm may be involved in
Manufacturing a product Providing a service Combination of product and service

What is a product
Product attributes

What is a service
Dimensions of service
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COMBINING
The firms perspective of value and The customers perspective of value to Create and sustain a competitive advantage
Achieve a quality and cost combination of value that maximizes both the customers benefits and firms profitability
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SUSTAINABLE COMPETITIVE ADVANTAGE


Ability of a firm to generate profit in the long run which are well above the average profit for that industry

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MICHAEL PORTERS VALUE CHAIN CONCEPT


Every firm is a collection of activities that are performed to design, produce, market, deliver and support its product or service.

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MICHAEL PORTERS VALUE CHAIN CONCEPT


The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of cost and the

existing and differentiation.

potential

sources

of

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MICHAEL PORTERS VALUE CHAIN CONCEPT


The firm gains a sustainable competitive advantage by performing these activities more cheaply (low cost) or better than its

competitors (differentiate)

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MICHAEL PORTERS VALUE CHAIN CONCEPT


The goal of these activities is to offer the customers a level of value that exceeds the cost of the activities thereby resulting in

profit margins for the firm in the long run

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MICHAEL PORTERS VALUE CHAIN MODEL (FIGURE 2-2)

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MICHAEL PORTERS VALUE CHAIN MODEL


The primary value chain activities
INBOUND LOGISTICS
Activities associated with receiving, storing and disseminating inputs to the product such as material handling, warehouse, inventory control, vehicle scheduling and returns to suppliers

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MICHAEL PORTERS VALUE CHAIN MODEL


The primary value chain activities
OPERATIONS
Activities associated with transforming inputs into the final product such as machining, packaging, assembly, equipment maintenance, testing, printing and facility operations

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MICHAEL PORTERS VALUE CHAIN MODEL


The primary value chain activities
OUTBOUND LOGISTICS
Activities associated with collecting, storing and physically distributing the product to the buyers such as finished goods warehousing, material handling, delivery vehicle operations, order processing and scheduling

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MICHAEL PORTERS VALUE CHAIN MODEL


The primary value chain activities
MARKETING AND SALES
Activities associated with providing a means by which buyer can purchase the product and inducing them to do so, such as advertising, promotion, sales force, quoting, channel selections, channel relations and pricing

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MICHAEL PORTERS VALUE CHAIN MODEL


The primary value chain activities
SERVICE
Activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply and product adjustment

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MICHAEL PORTERS VALUE CHAIN MODEL


Applicability and importance of each of the primary value chain activities varies with the industry though these activities are present to some degree in every industry
Distribution firm Service firm Banking Manufacturer

inbound & outbound logistics operations / outbound logistic non-existent marketing & sales service
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MICHAEL PORTERS VALUE CHAIN MODEL


The support activities
PROCUREMENT
Activities associated with the purchase of inputs

to transform them into finished services Adds value by the acquisition of goods or services at the best price, time and in the desired place with quality and quantity

product or appropriate at the right the desired

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MICHAEL PORTERS VALUE CHAIN MODEL


The support activities
TECHNOLOGY MANAGEMENT
Used in production to reduce cost To develop new product Increase customer service facilities Build up cost effective process Support value chain activities such as R & D

process automation, process design


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MICHAEL PORTERS VALUE CHAIN MODEL


The support activities
HUMAN RESOURCE MANAGEMENT
Support attainment of overall strategic business

plan and objectives Designs work positions by hiring, recognition, rewards, appraisal systems, career, planning and employee development Motivation Create congenial working environment
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MICHAEL PORTERS VALUE CHAIN MODEL


The support activities
INFRASTRUCTURE

Required to perform value activities efficiently and includes following functions Planning management Legal framework Financing Accounting Public affairs Quality management General management
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THE VALUE SYSTEM


Upstream value

suppliers value chains Channel value distributors value chains Buyers value chains Competitors value chain
To attain and sustain competitive advantage it is

essential to have clear understanding of not only our own value chain but also how the firm is positioned in the overall value system

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LINKAGES WITHIN THE VALUE CHAIN OF THE FIRM

Value chain is a collection of inter-dependent activities


Linkages are relationships between the way one value

activity is performed and the cost or performance of another activity Linkages lead to optimization and coordination Linkages between support activities and primary activities Pitfalls

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VERTICAL LINKAGES
Linkages between the firms & suppliers value chains
Product or service from supplier employed by the firm in its value

chain Firms procurement and inbound logistics activities interact with suppliers order entry system (output)

Linkages between a firms & channels value chain


Multiple points of contact between a firms & channels value chains Coordination and optimization between these value chains can lower

cost or differentiate Pitfalls

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THE BUYERS VALUE CHAIN


Firms product is an input to the buyers value chain
Determining the points of contact between the firms

value chain and buyers value chain Establish how the firms product is consumed in the particular buyers activity.

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COMPETITIVE SCOPE AND VALUE CHAIN


Segment scope
Vertical scope Geographic scope

Industry scope

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COMPETITIVE SCOPE AND VALUE CHAIN


SEGMENT SCOPE
Serving a particular product or specific buyer

segment requires differences in value chains Leads to competitive advantage through focusing strategy

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VERTICAL SCOPE / INTEGRATION

Defines division of activities between a firm and its suppliers channels/ distributors and buyers

FIRM AND SUPPLIERS


Purchase components instead of fabricating Contract for service instead of having a service department

FIRM AND CHANNEL / DISTRIBUTORS

Channels may perform many distributions, service and marketing functions instead of the firm

FIRM AND BUYERS

Firm may get involved in variety of buyers activities -inbound logistics,

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GEOGRAPHIC SCOPE
Allows the firm to share or coordinate value activities

used to serve different geographic areas National and regional co-ordination of value chains Enhances value and creates competitive advantage if sharing value activities reduces cost or enhances differentiation

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INDUSTRY SCOPE
Potential inter relationship among the value chains

required to compete in related industries Sharing logistics system or a common sales force of related products can lower cost & create differentiations

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COALITIONS & SCOPES


Long term agreement between firms
Coalitions with independent firms to achieve benefits of

broader scope without broadening the firm Vertical coalition Horizontal coalition

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