Page 105 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 6: Organisational Appraisal: Internal Assessment 2

2. The nature of value chain and the relative importance of each activity within it, vary from Notes
industry to industry.
3. The relative importance of value chain can also vary by a company’s position in a broader
value system that includes value chains of upstream suppliers and downstream distributors
and retailers.

4. The interrelationships among value-creating activities also need to be evaluated.
The final basic consideration in applying value chain analysis is the need to use a comparison
when evaluating a value activity as a strength or weakness. In this connection, RBV and SWOT
analysis will supplement the value chain analysis.
To get the most out of the value-chain analysis, as already noted, one needs to view the concept
in a broader context. The value chain must also include the firm’s suppliers, customers and
alliance partners. Thus, in addition to thoroughly understanding how value is created within
the organisation, one must also know how value is created for other organisations involved in
the overall supply chain or distribution channel in which the firm participates.
Therefore, in assessing the value chains there are two levels that must be addressed.

1. Interrelationships among the activities within the firm.
2. Relationships among the activities within the firm and with other organisations that are
a part of the firm’s expanded value chain.

6.2.3 Usefulness of the Value Chain Analysis

The value chain analysis is useful to recognize that individual activities in the overall production
process play an important role in determining the cost, quality and image of the end-product or
service. That is, each activity in the value chain can contribute to a firm’s relative cost position
and create a basis for differentiation, which are the two main sources of competitive advantage.
While a basic level of competence is necessary in all value chain activities, management needs
to identify the core competences that the organisation has or needs to have to compete effectively.
Analyzing the separate activities in the value chain helps management to address the following
issues:
1. Which activities are the most critical in reducing cost or adding value? If quality is a key
consumer value, then ensuring quality of supplies would be a critical success factor.
2. What are the key cost or value drivers in the value chain?
3. What linkages help to reduce cost, enhance value or discourage imitation?

4. How do these linkages relate to the cost and value drivers?
Porter identified the following as the most important cost and value drivers:

Cost Drivers

1. Economies of scale
2. Pattern of capacity utilization (including the efficiency of production processes and labour
productivity)
3. Linkages between activities (for example, timing of deliveries affect storage costs, just-in
time system minimizes inventory costs)
4. Interrelationships (for example, joint purchasing by two units reduces input costs)

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