Value Chain Analysis

VALUE CHAIN ANALYSIS

Concept of Value Chain Developed By: Michael Porter A Technique for describing all activities performed by an organization (from purchase of raw material to final delivery of product) Relate all activities to an assessment of competitive strength of an organization.

The Value Chain A framework for identifying core competencies Inside the firm In the supply chain

Can be used to Identify strengths and weaknesses Identify sources of competitive advantage Identify market opportunities

The Value Chain Supporting Activities

Firm Infrastructure Human Resource Management Technological Development Procurement

Inbound Operations Logistics

Outbound Marketing Service Logistics & Sales

Relationship with Suppliers

Elapsed Time - Value added time cost

Relationship with Buyers

Value Chain

Value Chain= Value Activity + Margin

Primary Activities in the Value Chain  Inbound Logistics  Materials handling, warehousing, inventory control used to receive, store and disseminate inputs to a product  Fertilizer and chemical storage, delivery of inputs, application of inputs

 Operations  Take inputs from inbound logistics and convert to final products  Plowing, planting, spraying, harvesting, feeding, medicating, weighing,etc.

 Outbound Logistics  Collecting, Storing, and physical distribution of the final product.  Crop storage, finished hog handling, Processing and determining delivery dates, delivery to the packer or elevator etc. Procurement

Technology

Firm Infrastructure

Human Resource management

Service Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Primary Activities in the Value Chain  Marketing and Sales  Provide means through which customers can purchase products and to induce them to do so  Advertising, communicating with buyers, developing customer relationships, pricing products (futures, hedging, forward contracting, etc.), delivery scheduling

 Service  Activities designed to enhance or maintain a product’s value  Timely delivery, identity preservation, ISO9000, certifying as organic, etc. Procurement

Human Resource management Human Resources

Firm Infrastructure

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

Supporting Activities in the Value Chain

Procurement Technological Development Human Resources Firm Infrastructure

Procurement

Service Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Activities to purchase the inputs needed to produce products Negotiating with suppliers, standard timing of replenishing parts and tools, setting up buying groups, etc.

Technological Development Activities that improve the firm’s products and/or processes Volunteering for test plots, being a part of feeding trials, attending technology seminars/field days, designing equipment to make specific production tasks more efficient, etc.

Human Resources

Recruiting, hiring, training, developing, and compensating al personnel

Supporting Activities in the Value Chain

Human Resource management Procurement

Technology Firm Infrastructure

Service Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

 Firm Infrastructure  General Management, planning, finance, accounting, legal support, governmental relations, etc.  Establishment of accounting practices, management information systems, compliance with environmental regulations, tracking and reporting for government programs, etc.  Where strategy development takes place identifying opportunities and threats, resources and capabilities, and support of core competencies

The Result of the Value Chain  Margins Capture the value from performing value-creating activities as cheaply as possible The basic idea is that the consumer is willing to pay a certain amount for the value you create. This is depicted as the size of the overall pentagon. The size of the individual activity boxes represents the cost of performing those particular activities. Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm.

The Value Chain – Grains Farm Supporting Activities

Firm Infrastructure Human Resource Management Technological Development Procurement

Inbound Operations Logistics

Outbound Marketing Service Logistics & Sales

Relationship with Suppliers

Elapsed Time - Value added time cost

Relationship with Buyers

Primary Activities for a Grain Farm Service Outbound On-time delMarketing Logistics ivery Inbound Operations & Sales Forward Logistics contract Grain

Tillage Planning Fertilizer and Fertilizing chemical storage, Spraying custom Cultivate application Harvest of inputs

transport Fwd. contracts to elevator Futures or buyer Options IP grain Grain Value added transport grain to storage

IP Storage Tracing QA

Relationship with Suppliers Relationship with Buyers

Supporting Activities for a Grain Farm Infrastructure: management, planning, finance, accounting, government compliance, quality control Human Resource: motivation tools, compensation, training, and directing farm employees, including family, management, and laborers

Technological Development: research and adoption practices for things like GPS, VRT, GMO’s, No-Till, the Internet, IP storage facilities

Procurement: Purchasing inputs: seed, fertilizer, chemicals, fuel, land, Machinery, storage equipment, office supplies, parts, tools, insurance etc. with focus on negotiating capabilities

Value Chain Analysis  A firm’s value chain must be compared to competitors’ value chains to determine where competitive advantages exist.  To be a source of competitive advantage a resource or capability must allow a firm to: Perform an activity in a manner that is superior to competitor’s performances Perform a value-creating activity that competitors cannot complete

Linkages within the Value Chain  Optimization and coordination of activities in the value chain  Linkages exist between support activities and primary activities and between separate primary activities  Generic causes for linkages Same function can be performed in different ways Efforts in indirect activities Activities performed inside the firm reduce the need for activities in the field Quality Assurance can be performed in different ways

Value Chain Linkages in the Supply Chain Buyer Chain Supplier Chain Firm Chain

Buyer Chain

Supplier Chain Buyer Chain

Linkages with Supplier Value Chain  Linkages between suppliers’ value chains and a firms chain provide opportunities for the firm to enhance competitive advantage.  Division of benefits between firm and its suppliers is a function of supplier’s bargaining power and reflecting in supplier’s margins.  Both coordination with suppliers and hard bargaining are important to competitive advantage.

The Buyer’s Value Chain  A firm’s differentiation stems from how its value chain relates to its buyer’s chain.  Differentiation derives fundamentally from creating value for the buyer through a firm’s impact on the buyer’s value chain.  Value is created when a firm creates a competitive advantage for its buyer.  The buyer must perceive the value to pay a premium price.