Theory of Competitive Advantage Value Chain Analysis

Theory of Competitive Advantage Value Chain AnalysisThe initial surmise regarding relative serves was related to comparative vantages of regions or nations. It included land, location, labor, natural resources and local population size. But it is not true always as rise of round the most advanced industrial nations have proved that the above factors have less bow in their course of development. For example, japan had disadvantage regarding availability of raw materials, abundant space and even access to other lands. But still the Nipponese companies have prospered and rose to be among the best in the world. Again Japan also has disadvantage in term of population size available. But that could not stop Japan from being a leader in business. in like manner economic hardship can really fuel fixth in a nation. It has been seen both in case if both Japan and Germ either. Both these nations were under severe economic trouble after World War II, but still they grew to be consta ncy major countries in the world.The reason for such port of nations or organizations in particular can be understood from The theory of competitory advantage which says that at that place argon other critical factors that determine the industry leadership. As per Michael Porter, the renowned Harvard business school professor sustainable industrial offset is hardly dependent on the above inherited factors. But it depends on groups of interconnected regulars, suppliers, related industries, and institutions that arise in certain locations and termed them as clusters. These clusters ar geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field. They grow on locations where enough resources and copences amass and reach a critical threshold, giving it a key position in a given economic sort out of activity, with a decisive sustainable agonistical advantage over others places, or even a world supremacy in that field.Porter says clusters can influence competition in three waysThey can growth the productivity of the companies in the cluster.They can drive innovation in the field.They can stimulate red-hot businesses in the field.The competitive advantage of any industry or organization is determined by five forces of Porter. These five forces help the managers to focus on competitive forces that prevail in the industry and the possible threats to their organizations.Diagrammatic view of Porters five forcesThese areExisting competitive rivalry among organizations in industry The much that companies compete against one another for customers, ex- by take downing the prices of their products or by increasing advertising the lower is the level of industry profits. So this is a threat to the companies. thence in order to sustain the companies whitethorn come up with new strategies and innovations in their technologies as well as business processes. gum olibanum competitio n fuels growth in the industry as well as leads to innovations.Threat of new foodstuff entrants The easier it is for companies to enter the industry, because for ex- barriers to entry, such as brand loyalty are low, more than the likely it is for industry prices and hence the industry profits to be low. In the wake of such a situation the companies might go for further innovations or even differentiations in their products or businesses. Thus it helps in the evolution process of the companies.Bargaining power of buyers It depends on the size of the customers. The bargaining powers of the customers come if they are cock-a-hoop in size. So they can bargain to drive down the price of that output. As a result the industry producers might encounter low profits. So the bargaining power of buyers also decides the competitive advantage of the industry.Power of suppliers The suppliers also have important role in deciding the competitive advantage of firms. If in that location are only fe w large suppliers of an important input, then suppliers can drive up the price of that input and expensive inputs result in lower profits for profits for companies in an industry.Threat of substitute products (including technology change) Often the output of one industry is a substitute for the output of another industry. Ex- bendable may be substitute for steel in some industry. When this type of substitutes exists in the industry companies cannot demand very high prices for it or customers will electrical switch to the substitute and this constraint keeps their profits low.Again the above all factors lead the managers to take decisions in quadruple business level strategies to gain competitive advantage.These areLow cost strategy It is the strategy where the alliance focuses all its energies to lower its be in all the departments. As a result it can betray its products in lower costs than its rivals. Here though the companies are selling the products at low prices but since the product costs are low the company still makes profits. Ex- BIC competes Gillette with this strategy in razor blade industry.Focused low cost strategy In such a strategy managers focus to practice only a segment of overall market and tries to be lowest cost organization in that segment.Differentiation strategy It is the strategy where organizations products can be distinguished from the products of other organizations on factors like product design, quality, service, or after sales service. Here the process of differentiation may be unique and expensive. coca plant cola, PepsiCo, PG practice such strategies.Focused differentiation strategy it is the strategy that tries to serve only one segment of the overall market and aims to be the most tell organization serving that segment. For ex, BMW focuses on this strategy.The theory of competitive advantage can be also easily extended to the position of various nations. Here four factors have taken into consideration to nalayze the c ompetitive position of the nations. Germany and Japan are most apt examples of such a competitive advantage. These are discussed as follows intravenous feeding factors for competitive advantageThe strategy, structure and rivalry of firms As there is high competition among the firms, this competitive environment leads the firms to work harder for increase in productivity and innovation. The Japanese companies are cooperative at certain levels but they are also fiercely competitive. Thus it is the strategy and structure and rivalry of the firms that gives rise to excellence to the firms in terms of efficiency.Demand conditions If the firms face challenging and demanding customers then they constantly face pressure to improve their competiveness by innovative products, high quality etc. associate supporting industry A company prospers when supporting companies are located in the same area. Presence of supporting companies in the vicinity gives the firm added advantage in terms of gaini ng technological support and expertise.Factor conditions Specialized factors of production are skilled labor, capital and infrastructure. Non-key factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors come to heavy, sustained investment. They are more difficult to duplicate. This creates a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.VALUE cooking stoveValue Chain is a model that helps to analyze specific activities through which firms can create honour and competitive advantage. A tax scope is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a observe chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains s ome value. The chain of activities gives the products more added value than the add up of the independent activitys value. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter, as a profession, can be used to illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond.Value Chain framework modelValue Chain ensample of PorterTHE ACTIVITIES OF THE VALUE CHAINPrimary activities (line functions)inward Logistics. Includes receiving, storing, inventory control, transportation planning.Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.Outbound Logistics. The activities required to feel the finished product at the customers ware housing, order fulfillment, transportation, distribution management.Marketing and Sales. The activities associated with getting buyers to purchase the product, including channel selection, advertising, promotion, selling, pricing, retail management, etc.Service. The activities that maintain and enhance the products value, including customer support, regular services, installation, training, spare parts management, upgrading, etc.Support activities (Staff functions, overhead)Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc.Technology Development. Includes technology development to support the value chain activities. much(prenominal) as Research and Development, Process automation, design, redesign.Human Resource Management. The activities associated with recruiting, development (education), retention and compensation of employees and managers.Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.A COST ADVANTAGE BASED ON THE VALUE CHAINA firm may create a cost advantageby trim back the cost of individual value chain activities, orby reconfiguring the value chain.Note that a cost advantage can be created by lessen the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of Information Technology.Once the value chain has been defined, a cost analysis can be performed by assigning costs to the value chain activities. Porter identified 10 cost drivers related to value chain activitiesEconomies of scale.Learning.Capacity utilization.Linkages among activities.Interrelationships among business units.Degree of vertical integration.Timing of market entry.Firms policy of cost or differentiation.Geographic location.Institutional factors (regulation, union activity, taxes, etc.).A firm develops a cost advantage by cont rolling these drivers better than its competitors do. A cost advantage also can be pursued by Reconfiguring the value chain. Reconfiguration means structural changes such as a new production process, new distribution channels, or a different sales approach.DIFFERENTIATION AND VALUE CHAINA differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that adjure high service levels.Differentiation stems from uniqueness. A differentiation advantage may be achieved either by ever-changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain.Porter identified several drivers of uniquenessPolicies and decisionsLinkages among activitiesTimingLocationInterrelationshipsLearning consolidationScale (e.g. better service as a result of large scale)Institutional factorsMany of thes e also serve as cost drivers. Differentiation ofttimes results in greater costs, resulting in tradeoffs amid cost and differentiation. There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation.TECHNOLOGY AND VALUE CHAINBecause technology is employed to some degree in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain.Various technologies are used in both primary value activities and support activitiesInbound Logi stics TechnologiesTransportationMaterial handlingMaterial storageCommunicationsTestingInformation systemsOperations TechnologiesProcessMaterialsMachine toolsMaterial handlingPackaging maintenanceTestingBuilding design operationInformation systemsOutbound Logistics TechnologiesTransportationMaterial handlingPackagingCommunicationsInformation systemsMarketing Sales TechnologiesMedia phone/videoCommunicationsInformation systemsService TechnologiesTestingCommunicationsInformation systemsNote that many of these technologies are used across the value chain. For example, information systems are seen in every activity. Similar technologies are used in support activities. In addition, technologies related to training, computer-aided design, and software development frequently are employed in support activities.To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage.LINKAGES BETWEEN VALUE CHAIN ACTIVITIESValue chain activities are no t isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities.Consider the case in which the design of a product is changed in order to reduce manufacturing costs. allege that inadvertently the new product design results in increased service costs the cost reduction could be less than anticipated and even worse, there could be a net cost increase.Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage.ANALYZING BUSINESS UNIT INTERRELATIONSHIPSInterrelationships among business units form the footing for a horizontal strategy. Such business unit i nterrelationships can be identified by a value chain analysis.Tangible interrelationships offer film opportunities to create a synergy among business units. For example, if multiple business units require a particular raw material, the procurement of that material can be shared among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities.Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to reap the benefits of the synergies.OUTSOURCING VALUE CHAIN ACTIVITIESA firm may specialize in one or more value chain activities and outsource the rest. The extent to which a firm performs upstream and downstream activities is d escribed by its degree of vertical integration.A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must understand the firms strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. Managers may consider the following when selecting activities to outsourceWhether the activity can be performed cheaper or better by suppliers.Whether the activity is one of the firms centre competencies from which stems a cost advantage or product differentiation?The risk of performing the activity in-house. If the activity relies on fast-changing technology or the product is interchange in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, highe r flexibility, reduced inventory, etc.Thus we can see that every aspect of an organization can be rightly explained in light of value chain analysis to judge the competitive position of the organization. Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Hence, developing a competitive advantage depends on how efficiently we can analyze and manage the entire Value Chain.