Page 104 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes Technology Development

Activities relating to product R&D, process R&D, process design improvements, equipment
design, computer software development etc.

Human Resource Management

Activities associated with recruiting, hiring, training, development, compensation, labour
relations, development of knowledge-based skills etc.
Firm Infrastructure

Activities relating to general management, organisational structure, strategic planning, financial
and quality control systems, management information systems etc.
Johnson and Sholes (2002) observe that few organisations undertake all activities from production
of raw materials to the point–of–sale of finished products themselves. But, the value chain
exercise must incorporate the whole process, that is, the entire value system. This means, for
example, that even if an organisation does not produce its own raw materials, it must nevertheless
seek to identify the role and impact of its supply sources on the final product. Similarly, even if
it is not responsible for after-sales service, it must consider how the performance of those who
deliver the service contribute to overall product/service cost and quality.

6.2.2 Conducting a Value Chain Analysis

Value chain analysis involves the following steps.

Identify Activities
The first step in value chain analysis is to divide a company’s operations into specific activities
and group them into primary and secondary activities. Within each category, a firm typically
performs a number of discrete activities that may reflect its key strengths and weaknesses.
Allocate Costs

The next step is to allocate costs to each activity. Each activity in the value chain incurs costs and
ties up time and assets. Value chain analysis requires managers to assign costs and assets to each
activity. It views costs in a way different from traditional cost accounting methods. The different
method is called activity-based costing.

Identify the Activities that Differentiate the Firm

Scrutinizing the firm’s value chain not only reveals cost advantages or disadvantages, but also
identifies the sources of differentiation advantages relative to competitors.
Examine the Value Chain

Once the value chain has been determined, managers need to identify the activities that are
critical to buyer satisfaction and market success. This is essential at this stage of the value chain
analysis for the following reasons:
1. If the company focuses on low-cost leadership, then managers should keep a strict vigil on
costs in each activity. If the company focuses on differentiation, advantage given by each
activity must be carefully evaluated.

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