The Bridge Between Value Chain & Competitive Advantage
"Value Chain activities are the discrete building blocks of competitive advantage."
This are my notes from the Collective Academy‘s Strategy and Value Chain Class.
We used Porter’s The Value Chain and Competitive Advantage.
When it comes to strategy, there are two ways to increase the value (read profit) the business generates. You can either cut the costs or increase the benefits. Expressed simply:
Business Value = Value Propositions Benefits – Costs
In order to increase the value, by reducing the costs, we can analyze the *Value Chain*. Hence, identifying a new competitive advantage.
The relevant level to redefine a *Value Chain* is at the business unit, because it highlights important sources of competitive advantage. (Think Blue Ocean Strategy here).
The differences in value chains among competitors are the key source of competitive advantage.
In competitive terms, value is the amount buyers are willing to pay for what a firm provides them.
The value chain displays total value, and consists of value activities and margin, which is the difference between total value and the collective cost of performing the value activities.
“Value Chain activities are the discrete building blocks of competitive advantage.”
I. Value Activity Categories
Value activities can divided in primary and support activities.
1. Primary Activities
- Inbound Logistics: Activities associated with receiving, storing, and disseminating inputs to the product
- Production: Activities associated with transforming inputs into the final product form
- Outbound Logistics: Activities associated with collecting, storing, and physically distributing the product.
- Sales and Marketing: Activities associated with providing a means by which buyers can purchase the product and inducing them to do so
Services: Activities associated with providing service to enhance or maintain the value of the product
2. Support Activities
One of the main benefits of having clear support activities is reducing the internal frictions of value creation.
Procurement: Procurement refers to the function of purchasing inputs used in the firm’s value chain
Technology Development: Every value activity embodies technology, be it know-how, procedures, or technology embodied in process equipment.
Human Resource Management: Human resource management consists of activities involved in the recruiting, hiring, training, development, and compensation of all types of staff.
Firm Infrastructure: Firm infrastructure consists of a number of activities including general management, planning, finance, accounting, legal, government affairs, and quality management.
II. Defining the Value Chain
To diagnose competitive advantage, it is necessary to define firm’s value chain for it’s specific industry. Defining relevant value activities requires that activities with discrete technologies and economics be isolated, and be subdivided into activities. As basic principle activities should be isolated and separated that:
* have different economics,
* have a high potential impact of differentiation, or
* represent a significant or growing proportion of cost.
Value activities should be assigned to categories that best represent their contribution to a firm’s competitive advantage.
However such classified can be redefined of if the function can have a greater competitive impact. Firms have often gained competitive advantage by redefining the roles of traditional activities.
Finally, everything a firm does should be captured in a primary or support activity.
III. Processes in Competitive Advantage-Oriented Value Chain.
The role of processes in a value chain for competitive advantage, repositions the focus from a vertical perspective inside the organization (the supervisor, costs, times) — to an horizontal one, with value generation at the end of the process: Better Value and Profits.
While this might sound a logic and simple change of focus, it has profound implications. Since now processes must be in constant redesign to be a source of benefits. No longer considered just tools for optimization and productivity.
1. The value chains can be mapped in key activities inside the business model canvas.
1. Each activity must be single verb in infinite: a) buy, b) sell, c) pack, d) ship, etc. Then, each activity can be then unbundled in more concrete activities. For example “Buy” can be then unbundled as: a) prospect providers in local region, b) select the best value proposition, c) order once a month, d) receive merchandise, e) store in warehouse.
1. Success. = External Marketing (opportunity and capability) / Internal Marketing (Confidence and trust) — **I disagree and find this quite cheesy.**