A companys strategic options for internally performed value chain activities do not include

The stronger a company's financial performance and market position, the more likely it has a well-conceived, well-executed strategy.

SWOT analysis is a simple but powerful tool for sizing up a company's resource capabilities and deficiencies, its market opportunities, and the external threats to its future well-being.

A company's resource strengths represent competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace.

A competence is an activity that a company has learned to perform well.

A core competence is a competitively important activity that a company performs better than other internal activities.

A distinctive competence is a competitively important activity that a company performs better than its rivals—it thus represents a competitively superior resource strength.

A distinctive competence is a competitively potent resource strength for three reasons: (1) it gives a company competitively valuable capability that is unmatched by rivals, (2) it can underpin and add real punch to a company's strategy, and (3) it is a basis for sustainable competitive advantage.

A company's ability to succeed in the marketplace hinges to a considerable extent on the competitive power of its resources—the set of competencies, capabilities, and competitive assets at its command.

A company's resource strengths represent competitive assets; its resource weaknesses represent competitive liabilities. A company is well advised to pass on a particular market opportunity unless it has or can acquire the resources to capture it.

Simply making lists of a company's strengths, weaknesses, opportunities, and threats is not enough; the payoff from SWOT analysis comes from the conclusions about a company's situation and the implications for strategy improvement that flow from the four lists.

The higher a company's costs are above those of close rivals, the more competitively vulnerable it becomes.

A company's value chain identifies the primary activities that create customer value and the related support activities.

A company's cost-competitiveness depends not only on the costs of internally performed activities (its own value chain) but also on costs in the value chains of its suppliers and forward channel allies.

Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques (or “best practices”) to improve the cost and effectiveness of a company's own internal activities.

Benchmarking the costs of company activities against rivals provides hard evidence of whether a company is cost-competitive.

Performing value chain activities in ways that give a company the capabilities to either outmatch the competencies and capabilities of rivals or else beat them on costs are two good ways to secure competitive advantage.

A weighted competitive strength analysis is conceptually stronger than an unweighted analysis because of the inherent weakness in assuming that all the strength measures are equally important.

High competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.

A company's competitive strength scores pinpoint its strengths and weaknesses against rivals and point directly to the kinds of offensive/ defensive actions it can use to exploit its competitive strengths and reduce its competitive vulnerabilities.

Zeroing in on the strategic issues a company faces and compiling a “worry list” of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention.

Actually deciding upon a strategy and what specific actions to take is what comes after developing the list of strategic issues and problems that merit front-burner management attention.

A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead.

Definition

Value chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation.

Value chain represents the internal activities a firm engages in when transforming inputs into outputs.

Understanding the tool

Value chain analysis is a 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. In other words, by looking into internal activities, the analysis reveals where a firm’s competitive advantages or disadvantages are. The firm that competes through differentiation advantage will try to perform its activities better than competitors would do. If it competes through cost advantage, it will try to perform internal activities at lower costs than competitors would do. When a company is capable of producing goods at lower costs than the market price or to provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal activities a firm engages in to produce goods and services. VC is formed of primary activities that add value to the final product directly and support activities that add value indirectly.

Although, primary activities add value directly to the production process, they are not necessarily more important than support activities. Nowadays, competitive advantage mainly derives from technological improvements or innovations in business models or processes. Therefore, such support activities as ‘information systems’, ‘R&D’ or ‘general management’ are usually the most important source of differentiation advantage. On the other hand, primary activities are usually the source of cost advantage, where costs can be easily identified for each activity and properly managed.

Firm’s VC is a part of a larger industry’s VC. The more activities a company undertakes compared to industry’s VC, the more vertically integrated it is. Below you can find an industry’s value chain and its relation to a firm level VC.

Using the tool

There are two different approaches on how to perform the analysis, which depend on what type of competitive advantage a company wants to create (cost or differentiation advantage). The table below lists all the steps needed to achieve cost or differentiation advantage using VCA.

Competitive advantage types

Cost advantage

To gain cost advantage a firm has to go through 5 analysis steps:

Step 1. Identify the firm’s primary and support activities. All the activities (from receiving and storing materials to marketing, selling and after sales support) that are undertaken to produce goods or services have to be clearly identified and separated from each other. This requires an adequate knowledge of company’s operations because value chain activities are not organized in the same way as the company itself. The managers who identify value chain activities have to look into how work is done to deliver customer value.

Step 2. Establish the relative importance of each activity in the total cost of the product. The total costs of producing a product or service must be broken down and assigned to each activity. Activity based costing is used to calculate costs for each process. Activities that are the major sources of cost or done inefficiently (when benchmarked against competitors) must be addressed first.

Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the costs, managers can focus on improving them. Costs for labor-intensive activities will be driven by work hours, work speed, wage rate, etc. Different activities will have different cost drivers.

Step 4. Identify links between activities. Reduction of costs in one activity may lead to further cost reductions in subsequent activities. For example, fewer components in the product design may lead to less faulty parts and lower service costs. Therefore identifying the links between activities will lead to better understanding how cost improvements would affect he whole value chain. Sometimes, cost reductions in one activity lead to higher costs for other activities.

Step 5. Identify opportunities for reducing costs. When the company knows its inefficient activities and cost drivers, it can plan on how to improve them. Too high wage rates can be dealt with by increasing production speed, outsourcing jobs to low wage countries or installing more automated processes.

Differentiation advantage

VCA is done differently when a firm competes on differentiation rather than costs. This is because the source of differentiation advantage comes from creating superior products, adding more features and satisfying varying customer needs, which results in higher cost structure.

Step 1. Identify the customers’ value-creating activities. After identifying all value chain activities, managers have to focus on those activities that contribute the most to creating customer value. For example, Apple products’ success mainly comes not from great product features (other companies have high-quality offerings too) but from successful marketing activities.

Step 2. Evaluate the differentiation strategies for improving customer value. Managers can use the following strategies to increase product differentiation and customer value:

• Add more product features;
• Focus on customer service and responsiveness;
• Increase customization;
• Offer complementary products.

Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and customer value will be the result of many interrelated activities and strategies used. The best combination of them should be used to pursue sustainable differentiation advantage.

Value Chain Analysis Example

This example is partially adopted from R. M. Grant’s book ‘Contemporary Strategy Analysis’ p.241. It illustrates the basic VCA for an automobile manufacturing company that competes on cost advantage. This analysis doesn’t include support activities that are essential to any firm’s value chain, thus the analysis itself is not complete.

Sources

1. Grant, R.M. (2010). Contemporary Strategy Analysis. 7th ed. John Wiley & Sons, p. 239-241
2. Wikipedia (2013). Value Chain. Available at: https://en.wikipedia.org/wiki/Value_chain
3. NetMBA (2010). Value Chain.