Saturday 15 December 2018

Value Chain Analysis

Value Chain Analysis

A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. It is  strategy tool used to analyze internal firm activities. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage.

Value Chain (Value Chain) Porter

A value chain is a series of activities for the company's operations in a specific industry. The business unit is the appropriate level for the construction value chain, not the level of Division or corporate level. Products pass through all the chain of events in the order, and at each activity the product gains some value. The chain of activities provides value-added products from the amount of the value add of all activities. It is important not to mix the concept of value chains with costs that occur throughout the activities.

The value chain categorizes the generic value-adding activities of an organization. The main activities include: logistics in, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). Support activities include: administrative infrastructure management, human resource management, technology (R & D), and procurement. Cost and value drivers are identify for each value of the activity.

The activities are divided into two types, namely:

  1. Primary activities:

  • Inbound logistics: activity related to the material handling before use.

  • Operations: activities that are associate with the processing of the input into the output.

  • An Outbound logistics: activities undertaken to deliver product into the hands of consumers.

  • Marketing and sales: activities that relate to the direction of the consumer in order to be interest in buying the product.

  • Service: activities that maintain or increase the value of the product.

  1. Supported activities:

  • Procurement: with regard to the process of obtaining inputs/resources.

  • Human Resources Management: HR Settings ranging from recruitment, compensation, up to dismissal.

  • Technological Development: development tools, software, hardware, procedures in the transformation of products from the input into the output.

  • Infrastructure: comprising departments/functions (accounting, finance, planning, GM, etc) that serves the needs of the Organization and to bind the parts into a unity.

Value chain analysis, understanding the value chain and its Marketing strategy

The six functions of the business value chain:

  • Research and development

  • Product design, service, or Process

  • Production

  • Marketing & Sales

  • Distribution

  • Customer service

Value chain analysis, understanding the value chain and its Marketing strategy

 Value chain analysis and value chain Understanding, Marketing strategy, consisting of activity value and margin. The activity value is physically real activity and technology commit companies. The building blocks of which the company create a product that is valuable to a buyer.

The margin is the difference between the total value and the costs of activities conduct collective value. Margins can be measure in many different ways. Channel mask and the value chain also includes important margins for separate in understanding the sources of the company's cost position, because the supplier and channel margin is part of the total cost of which is borne by the buyer.

The value chain (value chain) is the pattern use the company to understand the position of the charge and to identify ways that can be use to facilitate the implementation of the business-level strategy. A Value chain shows how a product moves from raw material stage to the final customers.

The value chain describes the activities require to bring a product or service from conception, through the various stages of production (involving a combination of physical transformation and the input of various manufacturers services), delivery on the consumer end, and final disposal after use.

Value Chain Model

Value chain Model is a useful analytical tools to define the core competencies of the company where the company can pursue competitive advantage as follows: Cost Advantages: better understand the costs and press it out of the activity of the addition value. Differentiation: by focusing on activities that relate to the core competencies and the ability to do better than competitors.

Activity values can be branch into two broad types, primary and supporting activities of the activity. Primary activities include the creation of a physical product and sale and transfer to the buyer as well as post-sales assistance. Activity of primary activity and support each other by giving input purchases, technology, human resources, and the functions of the various companies.

Value chain analysis shows the Organization as an ongoing process in the creation of value. The analysis done by studying the potential for value creation. Porter divides activities into two categories.

Chain Analysis

First is the primary activities (primary activity), the activities relating to the creation of a physical product, sales and distribution to the buyer, and service after the sale. This activity consists of inbound logistics (logistics into), operations (operations), outbound logistics (logistics to the outside), marketing and sales (sales and marketing), services (services). The second is the support activities (activities of supporters), i.e. activities that provide the necessary support for the continuation of the primary activity.

This activity consists of procurement (purchasing/procurement), technology development (technology development), human resource management (human resource management) and firm infrastructure (infrastructure company)

Primary Activity

Inbound Logistics (logistics into), associate with the receiving, storing, and disseminating input-input to the product. It includes raw material handling, warehousing and inventory control.

Operations (operation), all activities necessary to convert input-the input provide by the logistics of getting into the shape of the final product. Including machining, packaging, Assembly, and maintenance of the equipment.

Outbound logistics (logistics to the outside), activities that involve the collection, storage, and distribution of physical product to its final customers. Includes storage of finish goods in storage, handling and processing of raw materials, orders.

Marketing and Sales (sales and marketing), activities that are resolve to provide a means through which its customers can buy products and influence them to do so. To effectively market products, the company develop the advertisements and campaign professional, choose a proper distribution network, and selecting, developing, and supporting their sales force.

Service (service), activities which are design to improve or maintain the value of the product. The company is involve in a number of activities related to services, including installation, repair, training, and customization.

Supporting Activities

Procurement (purchasing/procurement), activities undertaken to purchase input-input need to produces the company's products. Input-the input purchase includes items that are all consume during the manufacturing process of the product.

Technology development (technology development), activities undertaken to improve the product and the process use to produce it company. Technological development can be done in various forms, for example, process equipment design, research, and development of the Foundation, and the procedure of granting of services.

Human resources management (human resource management), activities that involve the recruitment, training, development, and the granting of compensation to all personnel.

Firm infrastructure (infrastructure company) or general administration (public administration), corporate infrastructure includes activities such as general management, planning, finance, accounting, legal, and Government relations, which are necessary to support the work of the entire value chain through this infrastructure, the company sought to effectively and consistently identify the opportunities and threats, identify resources and capabilities, and supports the core competencies.

The value chain provides a systematic way to split a company into a variety of different activities so that it can be use to elucidate how do a range of activities within the company. By using analyses chain is a company able to detect activities that do not add value (non-value add) so that it can be eliminate.

Strategy for Competitive Advantage

A strategy is a collection of integrate actions taken to use the core competencies and gain competitive advantage. The success of a company, as measure by the strategic competitiveness and high profitability is a function of the company's ability to develop and use new core competency more quickly than on the efforts of competitors to imitate competitive advantage that exists today.

Competitive advantage according to Porter is the ability of a company to grab the advantage economically over the profits gain by capable competitors in the market in the same industry.
The Company has a competitive advantage always has the ability to understand changes in the structure of the market and is capable of selecting an effective marketing strategy.

Study by Porter generic strategies set further classify in three categories, cost leadership, differentiation, and focus. The choice of each company against a generic strategy will depend on an analysis of the business environment to determine opportunities and threats.

Cost Advantage strategy

The cost advantage is one of two types of competitive advantage which may be own by the company. Cost is also a thing that is very important for the strategy of differentiation for a differentiates must defend the position of the costs compare to its competitors.

Nowadays many companies realize the importance of cost and many of the company's strategic plan sets the cost leadership or cost reduction as a goal. But his behavior on some companies are often less well understood.

Most companies only focus on manufacturing costs and ignore the cost impact on other activities such as marketing, service, and other infrastructure. When applying the company offers cost advantage strategy product with functions that are acceptable to the consumer on prices remain low.

Thus the ultimate source of value offer to consumers through the implementation of this strategy is the low cost of the product. Bargaining power company of the five forces of competition will determine the fee structure of the company. Generally, companies that apply this strategy to sell standard products to the consumer.

Cost advantage strategy

The cost advantage strategy is not without risks. The company's production equipment that excels in terms of costs may be obsolete through technological innovations of its competitors. This innovation allows competitors produce with lower costs. The other is the risk of impersonation. Sometimes competitors learn how to replicate the low-cost strategy. When this occurs the company will be challenge to increase the value of the resulting product.

According to Porter risk excellence costs was not able to survive long because competitors imitate, technological change and other bases for cost advantage has been lost. Another risk is the equality in the differentiation is lost as a result of the company only emphasize on price for pursuing a market sensitive to price. This condition is exacerbate when the company implement the strategy of focus [no cost reach cost lower in these segments.

Strategy of Low cost

The strategy of low cost (cost leadership) emphasizes the efforts of producing standard products (same in all aspects) and costs per unit are very low. This product (goods or services) usually address to consumers relatively easily influence by shifts in prices (price sensitive) or using price as a determining factor in the decision.

The behavior of customers, this very type of strategy in accordance with customer requirements that are include in the category of low-involvement behavior, when the consumer is not (too) care about the difference the brand, (relatively) not requires a differentiation of the product, or if there are a large number of consumers have significant bargaining power.

Especially in the commodity markets, this strategy will not only make companies able to withstand price competition that happens but it can also be the leader of the market (market leader) in determining pricing and ensuring profitability market high (above average) and stable through ways that are aggressive in cost efficiency and effectiveness.

Source of cost effectiveness

The source of cost effectiveness (cost effectiveness) is vary. Include in it is the utilization of economies of scale (economies of scale), investing in the best technology, cost-sharing and knowledge in the internal organization, the impact of the learning curve and experience (learning and experience curve), optimization utility capacity, and access to the raw materials or distribution channels.

In principle, the main reason for implementing the strategy of integration to upstream (backward integration), downstream (forward integration), as well as to the side (horizontal integration) is to obtain some benefits from a low-cost strategy.

This strategy is typically run hand in hand with a strategy of differentiation. To be able to run a low-cost strategy, a company must be able to meet the requirements in two areas, namely: resources (resources) and organizations. This strategy can only be run if own several advantages in the areas of resource company.

Namely: strong capital, skill on the engineering process (process engineering), strict scrutiny, easily produce, as well as the cost of distribution and promotion low. While the field organization, the company must have: the ability of controlling costs with tight, control information is good, the incentive base on the target

Differentiation Strategy

In the company's differentiation strategy seeks to be unique in the industry in a number of specific dimensions that are generally value buyers. The company chose one or several attributes that many buyers in this industry is viewed essential and put him uniquely to fulfill this need. Because of the unique position (typical), the company felt it worthy to set a premium price.

How do different differentiation for each industry? Differentiation can be based on product attributes, product delivery system, based on marketing, and some other aspects. Companies that can achieve and preserve will be the companies with above average performance in the industry if a premium price specified exceeds the additional costs that are incurred to obtain uniqueness.

Cost of differentiation

Therefore, companies that implement a differentiation should always be looking for ways of doing differentiation that allows heading a premium price is greater than the cost of differentiation. As a side note though differentiation can be a choice of strategies but should not ignore its cost position, for a premium price would be meaningless if the cost is a very bad position. The company must have the differentiation scale priorities to suppress the cost at all the value chain that are not relevant to the business differentiation.

Differentiation can be done by creating different products, provide a different service, or creating image products that are unique and different from other competitors. With such a product would be more easily recognized and gave the attraction for consumers. So they prefer the company's products, compared to other products on the market.

Some of the advantages that would accrue to entrepreneurs as well as market participants of the strategy of differentiation.

Step #1

More memorable Product consumers. Basically everything that is unique and different, will certainly give the attraction for consumers. So they are easier to recognize and remember the product, compared to other products that are already common in the market.

Step #2

Product is superior compared to other products. If other products already considered standard by the consumer, by creating differentiation of products the company will look more superior compared to other products that are already circulating in the market. It is certainly very lucrative for marketers, because with a superior product will build consumer loyalty makes it.

Step #3

Higher product selling prices. A product that has a special uniqueness, will usually hunted with consumers at any price. So it is not surprising that the selling price of the product limited edition can be higher than the prices of other products that are already circulating in the market. Because most consumers pay dearly, for the brave can enjoy innovative product offered market participants.

Step #4

Address the problem of saturation of the market. Considering the sale of a product often experience ups and downs. In accordance with the cycle of his life that continues to spin. Then the existence of the differentiation of the product can help entrepreneurs. As well as market participants when consumers have start. To be saturate with the usual products It offers.

Step #5

Help create a product image. The more unique the products the company can offer; it will increasingly facilitate consumers in identifying the product. And more and more consumer products companies that recognize the greater your chances to instill the image of products that companies offer in the hearts of the consumers. So the company can determine the right positioning, in accordance with the target market that you snap away.

This is in accordance with the expression of Porter that Competitor can easily imitate the improvement of the quality of the company and how the way of efficiency. But they can't imitate the strategic positioning of the company which is about what a difference the company from all existing competitors.

Differentiation is indeed expensive but customers who has ter-Lock in will not be sensitive to the price of persuasion or competitors.

Product Differentiation Strategies (finding)

Pushing the company to able to find its own uniqueness in the market so the goal. The uniqueness of the products (goods or services). That allows a company noteworthy for the interest of most of the tremendous potential consumers. How to differentiate a product varies from market to market. But with regard to the nature and physical attributes of a product or experience the satisfaction. (by real and psychological) obtain by consumers of these products.

A variety of additional features, ease of maintenance, flexibility, comfort and various other things. That are difficult to emulate the opponent is a little example of differentiation. This type of strategy address to the potential consumer with relatively no emphasis on price in its decision-taking (price insensitive).

Different levels of differentiation

Note that there are different levels of differentiation. Differentiation does not provide a guarantee against a competitive advantage, especially. If the standard products in circulation has been (relatively) meets. The needs of the customer or if competitor/competitors can perform impersonation.

An example of this strategy is precisely on a product. That is durable goods (durable) and difficult to be imitate by competitors. Other risks of this strategy is that if the difference or uniqueness of the offer products are apparently not appreciate (consider normal) by consumers.

If this is the case, then a competitor that offers standard products with a low cost strategy. It will be very easy to seize the market. Therefore, in this type of strategy, the strength of the research and Development.  Department is very instrumental. Generally low cost and differentiation strategy of the product of the company. It is apply in order to achieve competitive advantage (competitive advantage) against its competitors on all markets.

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