The Value Chain and Competitive Advantage

Chapter 2

The Value chain system

The value chain will help us determine the source of competitive advantage of a firm in terms of cost and differentiation Supplier value chain Firm value chain Channel value chain Buyer value chain These value chains togather can give competitive advantage through interrelationships

The Value Chain

Firm Infrastructure

Human Resource Management Technology Development Procurement

Inbound Logistics

Operations Outbound Logistics

Marketing & Service Sales

Value Chain
The value chain displays total value It consists of value activities and margin Margin is difference between total value and the collective cost of performing the value activities Value activities are of two types: Primary and secondary How the activities are performed combined with its economies determine high or low cost w.r.t. rivals Performance of value activities will also determine its contribution to buyer needs and thus differentiation

Primary Activities
Inbound logistics: Linked to receiving, storing and disseminating raw material Operations: Transforming input to final product Outbound logistics: Linked to collecting, storing and physically distributing final product to buyers Marketing and sales Service: Linked to maintenance of product

Activity types
Primary and support activities can be of three types 1. Direct- involves creating value for buyer like assembly, product design 2. Indirect: Involves activities that help perform direct activities like maintenance, scheduling 3. Quality assurance: Involves activities that ensure the quality of other activities such as monitoring, inspecting etc

Understanding the value chain

The basic principle is that activities should be isolated and separated that 1. Have different economies 2. Have a high potential impact on differentiation 3. Represent a large proportion of cost

Linkages within the value chain

Linkages are relationships between the way one value activity is performed and the cost or performance of another Linkages lead to competitive advantage in two ways : 1. Coordination E.g. On time delivery may require coordination between operations, outbound logistics and service leading to differentiation 2. Optimization E.g. Better operation activities can reduce cost of service Linkages can be between primary and support activities and can also be between primary activities

Vertical linkages
Linkages that exist between the firms value chain and the value chain of the suppliers and channels are termed as vertical linkages

Value chain and competitive scope

1. Competitive scope shapes the configuration and economies of the value chain Its four dimensions are Segment scope : product varieties produced and buyers served Vertical scope: Extent to which activities are performed in house instead of by independent firms Geographic scope: Consists of the range of regions, countries or groups of countries in which a firm competes with a coordinated strategy Industry scope: consists of range of related industries in which the firm competes with a coordinated strategy

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