Benefits of Value Chain Analysis
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In this assignment I'm going to show that an organisation can add value with its success and how the concept of a Value Chain can be used to assess where organisations add value and develop future strategy.
According to Wright (2004), Value Chain is a traditional manner of departmentalising stages of the business process. The value chain highlights the importance of the operational manager being involved in all aspects of the process, from suppliers right trough the customer. With the value chain approach functional boundaries are ignored and in many organisations its now accepted that the operations manager has to control the whole process from buying in goods and services to the final stage of satisfying the customer. Marketing, accounting, human resources are not showing up in the value chain, but the operational manager has to be interesting and to be involved in these internal functions of the organisation as well. (Wright and Race 2004)
Information technology is changing the way companies operates.
According to Porter (1985), cost leadership and product differentiation can be pursued simultaneously only under rare conditions.
If organisations are to achieve competitive advantage by delivering value to customers, managers need to understand which activities the undertake are especially important in creating that value and which are not (Johnson et all 2008) . The value chain concept is important to understand this describing the categories of activities within and around an organisation, which together create a product or service". The concept was developed by Michael Porter with his book "competitive advantage 1985" where the idea of value chain is based on the processe view of organisations, the idea of seeing a manufacturing or service organisation as system, made up of subsystems each with inputs, transformation process and outputs which involve the acquisition and consumption of resources (money, equipment, labour, land, buildings, management and administration).
The primary value chain activities are:
- Logistics/ Inbound:the distribution of manufacturing after the raw materials are received and warehoused.
- Operations: the transformation process of inputs into services and finish products.
- Logistics/ Outbound: The warehousing and distribution of the finished goods.
- Marketing and sales: Placing the product on the market generating sales reaching the right people interested to buy it
- Service: The tool used to offer the product on the market and the service offered after the product is sold (customer service)
This Primary Activities are supported by:
- The infrastructure of the firm: organisational structure, control system, company culture etc.
- Human resource management: employee recruiting, hiring, training, development and compensation.
- Technology development: technologies to support the value chain activity
- Procurement: purchasing input such as materials, supplies, and equipments. (http://www.netmba.com/strategy/value-chain/)
"The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation". (http://www.netmba.com/strategy/value-chain/)
External efficiency is measured by customer satisfaction and by market share. To achieve customer satisfaction the company requires, and is depends on, the timely received goods and its services to specification by external suppliers. Is very important to have a good communication, and teamwork between suppliers at one end, and the customer at the other end of the value chain. (Wright and Race 2004)
Cost advantage and Value Chain
A firm maybe create a cost advantage either by reducing the cost of individual value chain activities, or by reconfiguring the value chain. Once the value chain is defined, a cost analysis can be performed by assessing the costs of the value chain activities. The cost obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activity.
Porter identified 10 cost drivers realting to the value chain activities:
- Economies of scale
- Capacity utilisation
- Linkages among activities
- Interrelationships among business units
- Degree of vertical integration
- Timing of market entry
- Firm's policy of cost or differentiation
- Geographic location
- Institutional factors (regulation, union activity, taxes etc.)
A firm develops a cost advantage by controlling these drivers better than do the competition.
A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguration means structural changes such a new production process, new distribution channels, or a different sales approach. For example FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system. (http://www.netmba.com/strategy/value-chain/)
Differentiation and Value Chain
A differentiation advantage can arise from any part of the value chain. For example procurements of inputs that are unique and widely available for competitors can create differentiation, as can distributor channels that offers high service levels. A differentiation advantage may be achieved by changing individual value chan activities to increase uniqueness in the final product, or by reconfiguring the value chain.
Porter identified several drivers of uniqueness:
- Policies and decision
- Linkages among activities
- Scale (eg better service as a result of large scale)
- Institutional factors
Most of these also serve a cost drivers. There are several ways which a firm can reconfigure its value chain in order to create uniqueness. (http://www.netmba.com/strategy/value-chain/)
Technologies and the Value Chain
The changes in technologies can impact the competitive advantage changing and making possible new configuration of value chain. Many technologies are used in both primary value activities and support activities:
- Inbound Logistic Technologies
- Material handling
- Material storage
- Information systems
- Operations Technologies
- Machine tools
- Material handling
- Building design & operation
- Information systems
- Outbound Logistics Technologies
- Material handling
- Information systems
- Service Technologies
- Information systems
In order to compare value chain activities and how can be added value to a company, I chosen few international hotel chain:
Is the leading global hospitality company, spanning the lodging sector from luxurious full-service hotels and resorts to extended-stay suites and mid-priced hotels. For over 90 years Hilton has been offering business and leisure travellers the finest in accommodations, service, amenities and value. Company dedicated for the tradition of providing exceptional guest experience across its global brands distributed over a total of more than 3400 hotels in 79 countries. The company manages the world-class guest reward program called Hilton HonoursÂ®, innovative technologies to enhance the guest experience. http://www.hiltonworldwide.com/aboutus/index.htm
Marriott's brands are leading in customer satisfaction and owner and franchisee preferences. Exceptional amenities. Attentive guest guest care. In-depth local knowledge set industy standards around the world.
Marriott International has become the world's leading lodging company, not only through its deiverse portfolio of global brands, but also by training and engaging the best employees (300.000) to delivery the best service. http://www.marriottdevelopment.com/
As we can see, two very big hospitality company operating worldwide are constantly trying to add value. In the service industry and especially in the hotel industry, the value is added and created from the people inputs of time, knowledge, equipments and systems to serve the hotel guests and customers. Customers in these companies can be also employees from the same organisation. The more value is created, the more people will be ready to pay the price for the service or product and the more they will keep on buying from the same company.
Value chain analysis
To understand and find out where we can create value we need to use a Value Chain Analysis.
The first step for the analysis is the Activity Analysis:
Where all the activities to serve the customer and to deliver the service are analysed.
In this step of activities analysis we are going to collect as much information as we can from all the people involved within the organisation such us guest, employees, suppliers, business partners, travel agents and tour operators. This stage will also involve the way to recruit people with the right skills that will deliver the best service. How to keep the team motivated and informed about the performance. In the case of these featured company the KPI system (Key Performance Indicator) has been introduced to control the standard of performance that will help to get feedback from the guest to enhance the guest engagement.
To conduct the Value Chain Analysis are needed up to three years of annual repors to understand and analyse how the costing of the activities are changing and whether they are in unison with the competitive strategi of the firm. To gain knowledge about the core competence of the company, we can have a look at the company and competitor websites and SWOT analysis of both companies can be done to understand the key strengths and weaknesses of the company and how different are the firms from the direct competitor. (http://www.coursework4you.co.uk/essays-and-dissertations/value-chain-analysis.php)
After few activities are identified we list the "Value Factors" which is the kind of service that the customer value in the way the activity is conducted.
If we analyse a telephone order, the customer will value a quick answer to his/her call, a good an polite manner, efficient taking of order details with fast and knowledgeable answering of questions and a quick resolution to any problems that arise during the order. Delivering a professional service, the customer will like the correct solution based on the good options and up to date alternatives.
This analysis will give us what needs to be done or changed to provide a great value for each Value factor.
Evaluate changes and Plan for Action
With the Value Analysis, we will generate so many ideas for increasing the value that we are going to deliver to customers
Value Chain in the Hotel Industry
The primary activities in the Hotel industry:
Starting from the Inbound Logistics where we have all the contracts with supplier that are delivering the food and beverage, providing laundry service and other services; Back of the house storage and distribution within the hotel's departments and inventory control and stock requisitions.
The Operations are represented from all the procedures and processes that, with the support from all the advanced equipments and tools, will produce goods and service to offer on the market.
Outbound Logistics in the hotel can be the way the services and final products are offered and distributed to the different outlets and different guests.
Marketing and Sales: all the activities that are trying to get customers and people interested in the hotel for rooms, conferences, restaurants but also the promotion of the hotel with advertise and pricing considering the competitors
Service in the hotel industry is crucial for its succes. The quality of service is created with a certain number of employees in proportion with the hotel capability and with the respective training. A good service will enhance the product's value and will be crucial for the guest that will have to chose in which of the many hotels to stay. An example can be made between the company Hilton and Marriott where both can offer the same guest room, the same equipment in the room, same facilities with different price; probably the price for Hilton is more competitive but the service offered will be not at the same level as a Marriott hotel. The same room at the Marriott hotel with a nice presentation of the hotel services from the reception staff will probably an added value and the travellers will be more likely to go back where a better service is offered if the price is not much higher (value for money).
Support activities in the Hotel industry
The Procurement in the hotel can be the facilities offered to guest, the building, and the equipment that will support all the operations to make easy and smoothly the service.
Technology Development is very important within the hospitality as it is a modern industry in constantly growth where new technologies are needed to save time and work smarter. The Propriety Management System is the most important to take into consideration which is the software to manage all the operations and share all the information with all the hotel departments in real time. The innovation and the technology are developing the hotel industry.
The Firm Infrastructure is represented from the management team with the long term planning, the quality management , public affairs, finance and accounting.
A good example for these two organisations can be the reservation system. If we got feedback from the customers not happy with the website for the difficulties to make the reservations or we know that both the company are occurring the same problem, therefore we know that if we want to add value for one of the company, we are going to find the solution to make easier the reservation system for the guests.
- Porter, M. E. - Competitive Advantage: Creating and Sustaining Superior Performance, 1985, New York: Free Press
- Wright N. & Race P. - The Management of service Operations, second edition 2004, Thomson
- Johnson G. et all - Exploring corporate strategy, eight edition, 2008, FT Prentice Hall
- Porter, M. E. - The competitive advantage of nations,1990, New York: Free Press.
The Value Chain and its components:
The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter is his book, Competitive Advantage(1980). The chain consist of a series of activities that create and build value. The organisation is split into 'primary activities' and 'support activities'.
Here goods are received from a company's suppliers. Stored until they are needed on the production/ assembly line. These goods are moved around the organisation.
This is where goods are manufactured or assembled. Individual operations could include room service in a hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine.
The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final customer.