Value Chain Business


1_ Introduces the concept and benefits of Value Chain Analysis in preparing business strategies:

To survive in today's highly competitive business environment, any organization must achieve, at least temporarily, a competitive advantage.

A low cost/price strategy: focuses on providing goods, services at a lower cost than the competition. This strategy requires as well a tight cost-control system, benefiting from economies of scale in production and experience curve effects.

Differentiation strategies: The firm ability to offer products and services that are perceived by the customer as being superior and unique relative to those of its competitors like Coca-Cola in the soft drink industry......

A value chain can be described as the key activities engaged in by the organisation or industry.: Value chain analysis may benefit an organisation in a number of ways including:

- Value chain framework: complements other recent initiatives like strategic cost management, which refers to the simultaneous focus on reducing costs and strengthening an organisation's strategic position. This commonly involves taking a longer-term view of cost management and decision making

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- Provides a foundation for strategic alliance decisions. A value chain framework serves as the foundation for considering decisions such as outsourcing of particular parts of the value chain and for considering the formation of strategic alliances with say a distributor. In this way, the value chain serves as a strategic tool.

- Focuses on activities. The central feature of the value chain is its focus on activities and processes rather than functions or departments. This makes identification of improvements across segments more likely.

- Encourages a broader organisational view. This is particularly for accounting staff and business unit managers. Management accounting staffs are more likely to take a broader perspective if using a value chain framework when considering the consequences of decisions.

- External thinking by incorporating suppliers and customers. Analysis of the value chain leads to improved relationships between the organisation and others, value chains explicitly recognise that no organisation operates in isolation from suppliers and customers.

- Supports initiatives like supply chain analysis. As organisations work to increase profitability, improving their relationships with suppliers becomes a priority. Improvements can be identified through supply chain analysis. The supply chain is the flow of resources from the initial suppliers through the delivery of goods and services to customers and clients. The initial suppliers may be inside or outside the organisation. Negotiating lower costs with suppliers is a straightforward way to reduce costs. Suppliers may be willing to reduce prices, particularly for organisations willing to sign long-term purchase commitments

- Value-added and non-value-added. Value chain analysis determine whether some activities can be eliminated because they do not add value. This analysis extends to suppliers and customers, and includes shared planning, inventory, human resources, information technology systems, and even corporate cultures. Eventually, the analysis leads to business decisions for improving (increase) value.

2- Explains the finding from the analysis of Ajax Airlines financial statement and situation.

Most of the airline company will compare with the competitor by the value to the customer (value chain) in both qualitative and quantitative term. That is:

  • Information, ticketing, reservation.

  • The travel from point A to point B.

  • Any other service to passengers before on flight, during and after flight.

Thought the financial statement of Ajax Airlines, shown us nothing about the value chain, strategies pursuing, separate value-creating activities, how to improve the asset of the Ajax Airlines but it is really interesting about the developing of the company.

The dupont analysis show us they are improve the asset turn over from 0.857 to 0.917 so the profit increase following from 0.028 to 0.038

The profit Ajax marking thought sale from 1988 increased by 22.2%

compared with previous years 1987 by selling 8000 tickets more than last years. Also we can see the financial leverage business remains constant, they are holding the financial risk constant, both margins and asset utilization improve. The management prove they are done really well by the way they improving business.

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Under the traditional management: The Ajax Airlines ignores a value chain, they are not using the high fix costs and contribution analysis is the key. Usually for the profit is higher the company always try to reduce the cost of petrol, flight attendant, pilot, service... by the way try to get full capacity, reduce the price but the Ajax Airlines did not following that, they were able to charge significantly more to each seat mile flown without improving utilization of available seat miles (stay in constant 64% exhibit 4) but under the exhibit 3 show us increase.

With the management analysis the Ajax Airlines don't have strategies to pursued because if they want to improve the quality of the service or the brand name of the company they will not increase the price (the compensation per seat mile flown increase from 0.042 to 0.045 and the feet operation cost increase from 0.056 to 0.060 (exhibit 4)). This may be the answer to how they make profit.

More than that under exhibit 5 shows us that the company invested heavily in ticketing and reservations by 8000 ticket compare with 1987(exhibit 4) and under exhibit 5 the cost remain constant at 0.005 so may be that is the fix cost, under the traditional management shown us the company not using the traditional which mean not using the fix cost that why the cost driver is increase by number of seat miles14%, operating expenses 28%, aircraft operation increase from 0.068 to 0.077, service drop from 0.043 to 0.040 ... We can see the management totally not control the system, the company spending more time on the activity than adjusted for volume .

With the strategies Ajax Airlines using they were not focus on the unit activity, they are brought non value chain to the customer....

3- Summarises and interprets the comparative analysis of United Airlines and People Express.

Both of the People express and united airline bring to customer the value of activities they are provide by the service. With what people wants and needs

We can see between two companies, they are using different strategies: with People Express they are focus internal strategy with the value adds. they bring to the customer with low cost for the ticket by the way of cost minimization most of activities (like advertising, Fleets, aircraft operation, on board services, ticketing offices, counter operation, gate operation....)

But the United Airlines they are focus on external in differentiation strategies where the customers' perceiver as being unique with non value adds. The United Airlines are pay more than the People Express for (advertising, fleets, aircraft operation, on board services, ticketing offices, counter operation, gate operation...) which means they charge for the ticket higher than People Express.

However, both of company under the industry value chain. They were identifying, assign cost, revenue, asset to separate activities (ABC) and Control cost driver for compare with other competitor.

The People express focus to the value add with single cost drive, application at the overall firm level, with the cost containment philosophy (cross the board) which mean deduction and insights for the strategic decision is non readily apparent.

But the United airline was focuses on non value add. They were multiple cost driver, (scare, scope, experience, management quality, plan...) cost containment philosophy with customer, supply and they were identifying each cost, develop, controlling of separate activity. United airline really qualify with the supply power and customer power.

We can see totally the difference analysis strategies, the value chain bring to the customer. We can see the value of activities from the value chain analysis will show us the position of the company, the decision from customer (make or buy), the value chain can fit into the buyer's and the value analysis chain can helps to calculating the totally the percentage of profit, this activity can help the business identify the way to exploit linkages with the supply.

Following the developing of the company depending on the company they will have lower cost or difference strategies.