The worst error in strategy is to compete with rivals on

same dimensions…
MGN571

2
LEARNING OBJECTIVES

Understand Value Chain Analysis and its use.

3
4
Consider for a moment a person walking in the
desert, a person who is dying of thirst. As that
person walks they have one thing on their mind,
and that is water. At that moment there is little
consideration for the form of the water, the
container, or who will be providing it. Water has
a unique value to that person.

When he find water, or is offered some, money

would be of little concern.
WHAT IS THE POINT OF THIS EXAMPLE?

First is that value is a subjective experience that is dependent on context. In

the context of a peon clearing a table, a glass of water there has no value, or
even negative value – it’s just more work for him. But for the man dying of
thirst, that same glass of water is extremely valuable.

Second, value occurs when needs are met through the provision of
products, resources, or services – usually during some form of transaction or
exchange.

Finally, value is an experience, and it flows from the person (or institution)
that is the recipient of resources – it flows from the customer. This is a key
difference between a value chain and a supply chain – they flow in opposite
directions
OFFERING COMPELLING VALUE PROPOSITIONS

The Value Proposition (VP) is the offer, the company makes to the customer
around product/service. A compelling VP must

• Identify the target customer/segment

• Indicate key needs/pain points the customer/segment wishes to satisfy
• Offer insights on how our product/service delivers on the needs/pain points
• Show how our product/service addresses the needs and pain points better
than the competition
VALUE CHAIN

• The term ‘Value Chain’ was used by Michael Porter in his book
"Competitive Advantage: Creating and Sustaining superior
Performance" (1985). The value chain analysis describes the
activities the organization performs and links them to the
organizations competitive position.

• The Value Chain is the set of business functions or activities

that involve designing, producing, delivering, marketing, and
supporting products and services.
DIFFERENCE BETWEEN VALUE CHAIN & SUPPLY CHAIN

The primary difference between a supply chain and a value chain is a fundamental shift in
focus from the supply base to the customer. Supply chains focus upstream on
integrating supplier and producer processes, improving efficiency and reducing waste,
while value chains focus downstream, on creating value in the eyes of the customer.
VALUE CHAIN MAPPING

Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales

►Receiving ► Design & ► Inventory ► Channel ► Warranty &

►Warehousing Production of ► Order Design Guarantee
►Inventory Products Fulfillment ► Promotion Fulfillment
► Creation of ► Pricing ► Information
control ► Distribution
Services
► Creation of
Packaging

Procurement
Technology & Systems
Human resources
Firm Infrastructure
Source: Porter 1985
Support
Activities

Primary Activities
VALUE CHAIN
VALUE CHAIN ANLYISIS

Steps in Value Chain Analysis

A typical value chain analysis can be performed in the following steps:

 Analysis of own value chain – which costs are related to every single
activity
 Analysis of customers value chains – how does our product fit into
their value chain
 Identification of potential cost advantages in comparison with
competitors
 Identification of potential value added for the customer – how
can our product add value to the customers value chain (e.g. lower
costs or higher performance) – where does the customer see such potential
VALUE CHAIN FOR PIZZA RESTAURANT
VALUE CHAIN FOR AUTOMOBILE INDUSTRY
VALUE CHAIN FOR AN INTERNET START-UP

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OUTSOURCING

Strategic Choice to Purchase Some Activities

From Outside Suppliers

Firm Infrastructure

Support
Human Resource Management M
A
Activities RG
Technological Development IN

Procurement

Service
Operations

Marketing
Logistics

Outbound

& Sales
Inbound

Logistics

IN
G
R
A
M
Primary Activities
 Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management

Human Resource Management Firms often purchaseM a portion of their

Support Technological Development AR
Activities value-creating activitiesGfrom specialty
Technological Development external suppliers who can IN perform these
Procurement functions more efficiently
Procurement

Service
Operations

Outbound Service

Marketing
Logistics

Logistics

& Sales
Inbound

IN
G
Outbound

AR
Inbound Operations Logistics Marketing
& Sales

M
Logistics

Primary Activities
s.

s.
es.

The value chain is subdivided into two main headings.

These are primary activities and:

Peripheral activities.

Support activities.

Secondary activities.

Outsourced activities.

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Which of the following is not considered a primary activity in the value chain
framework developed by Michael Porter?

Inbound logistics
Procurement
Sales and service
Outbound logistics

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Which of the following is not considered a secondary activity in the value
chain framework developed by Michael Porter?

Technology development
Firm infrastructure management
Sales and service
Procurement

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To capitalize on the usefulness
of the Value Chain concept...

it is important to recognize that...

Value Chains are part of a
Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

Upstream Value Each firm must eventually find a way to

become a part of some buyer’s value chain
Perform valuable activities that
complement the firm’s activities Ultimate basis for differentiation is the
ability to play a role in a buyer’s value
chain
This creates VALUE!!

Value chains vary for firms in an industry, reflecting each

firm’s unique qualities:
History, Strategy & Success at
Implementation
IKEA

IKEA has quickly evolved from a

local Swedish home furnishing
manufacturer into the largest home
furnishing company in the world;
partly by convincing their customer
to perform the transport and
assembly processes of the furniture
manufacturing value chain. They
have executed their strategy by
building a worldwide sourcing
network of high quality global
manufacturers to support their
growth.
MICROSOFT

• Microsoft, has created a standard business practice in the

industry where the customer is an integral part of the QA
process. The customer, in return for a flexible desktop platform
that can integrate a wide variety of third-party software
applications, tacitly agrees to troubleshoot Microsoft products.
This strategy proved more successful then Apple’s more tightly
controlled and QA’ed product strategy.
WALMART

Wal-Mart

• The strategy of Wal-Mart worked when the company improved

its business through innovative practices in activities such as
purchasing, logistics, and information management, which
resulted in the value offering of “everyday low prices”
 7-Eleven

7-Eleven

7-Eleven had been vertically integrated, controlling most activities in the

value chain by itself. The company has now outsourced many parts of its
business including functions like HR, IT management, finance, logistics,
distribution, product development, and packaging.
McDONALD’s PRODUCTION SYSTEM

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OPERATIONAL STRATEGIC PERFORMANCE DIMENSIONS

COST
QUALITY
SPEED
FLEXIBILITY

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COST & QUALITY

COST
Make it cheap:
– Economies of scale
• Allows McD’s to pass the value to consumers
– McValue Dollar Menu
– Party Pack
– Cost controls

QUALITY
Make it consistent:
– Universal taste
– Core offerings globally
Order Qualifier: Make it good:
– Taste appeal to its target market
– Healthy options
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SPEED

Make it fast:
– 90 second service goal
Order Qualifier: Make it dependable:
– Menu items available daily
– Hot & Fresh
Order Qualifier: New Product Development:
– Regional menu items
– Healthy menu options

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FLEXIBILITY

Order Qualifier: Product design:

– S/M/L/Super size
– Gender based kids meals
– Happy meals vs. Mighty kids meals
– Promotional packaging
Order Qualifier: Product Mix:
– Sandwich varieties
– Soft serve offerings (milkshakes, ice cream cones, sundaes)
– Salads
Order Qualifier: Production Volume:
– Staffing based on consumer traffic and meal time
– 24 Hour restaurants and drive-thru
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Mc DONALD’s VALUE CHAIN ANALYSIS

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FIRM INFRASTRUCTURE

Strengths:
•Brand recognition
•#1 in retail fast food industry
•Leadership
•Financial Strength
•Company image
•Intellectual property
•Franchising

Weaknesses:
•Lawsuits
•Company image
•Culture insensitivities 35
OPERATIONS

Strengths:
•On-line & on-site kiosk job application systems
•2nd largest employer in the U.S.
•Reinforced information systems
•Wireless headsets
•Wi-Fi offered in all locations
•R&D in target consumer demands and trends
•Corporate guidelines imposed on franchisees
•Franchisees must purchase supplies from McD’s

Weaknesses:
•High turn-over (more then 100%)
•90 second drive-thru rule (unsuccessful)
•Impersonal drive-thru greeter (telemarketer like, person is not in
store)

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OPERATIONS

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OUTBOUND LOGISTICS

• Distributor agreements
• Quality control
– Freight truck inspections
– random audits
• Refrigerated trucks
• Reinforced Information Systems
– Cashier
– Assembly Line
– Order fulfilment
• Just in time order and delivery
– Ensuring freshness
• Packaging quality reinforces freshness
– Hot/Warm food 38
MARKETING & SALES

Strengths:
•Product
– Health and wellness campaign & product offerings
– Consumer and market research
•Price
– McValue Dollar Menu
– Party pack
•Promotion
– Disney and Nickelodeon license agreements
– Coca-Cola endorsement
– “Feeding the athletes” Olympic sponsorship
•Place
– MD’s goes “green”
– McCafe
– McDonald’s Play Place
•Ronald McDonald
•Community outreach
Weakness:
•“Supersize Me” movie
•Media/PR
•Adaptation to global culture and customs
•Product failures 39
MARKETING & SALES

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SERVICE

Strengths:
•Fast food service
•Order accuracy
•Clean environment
•Friendly customer service
Weaknesses:
•Lack of customer service
•Employee apathy
•Dissatisfied customers

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SERVICE

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THANK YOU

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