Competitive advantage and Value chain analysis
Value chain analysis
To secure competitive advantage, a business must be able to perform key activities more successfully than its competitors. This means that it must either obtain some cost advantage over its competitors, or differentiate itself in some way from them. To help identify particular ways in which competitive advantage may be achieved, it is useful to analyze a business into a sequence of value-creating activities. This sequence is known as the value chain, and value chain analysis examines the potential for each link in the chain to add value.
For a manufacturing business, the value-creating sequence begins with the acquisition of inputs, such as raw materials and energy, and ends with the sale of completed goods and after-sales service. Figurebelow sets out the main ‘links’ in the value chain for a manufacturing business. We can see that five primary activities are supported by four secondary activities.
Value chain analysis applies as much to service-providing businesses as it does to manufacturers. Service providers similarly have a sequence of activities leading to provision of the service to their customers. Analysing these activities in an attempt to identify and eliminate non-value-added activities is very important. Each link in the value chain represents an activity that will incur costs and affect profits. Ideally, each will add value – that is, the customer will be prepared to pay more for the activity than it costs to carry out. If, however, a business is to outperform its rivals, it must ensure that the value chain is configured in such a way that it leads either to a cost advantage or to differentiation.
To achieve a cost advantage, the costs associated with each link in the chain must be identified and then examined to see whether they can be reduced or eliminated. For example, a business may identify a non-value-added activity, such as the inspection of the completed product by a quality controller. The introduction of a ‘quality’ culture in the business could lead to all output being reliable. As a result, inspection would no longer be needed and therefore this cost can be eliminated. To achieve differentiation from its rivals, a business must achieve uniqueness in at least one part of the value chain. A large baker, for example, may try to differentiate its products by moving production facilities to its retail shops to ensure that the products are freshly available to customers.
In some cases, value chain analysis may result in significant operational changes such as the introduction of new manufacturing or service-provision technology, or the development of new sales policies. In other cases it may result in significant strategic shifts. A manufacturing business, for example, may find that it is unable to match the manufacturing costs achieved by its rivals. Nevertheless, it has competitive strengths in the areas of marketing and distribution. In such circumstances, a decision may be made to focus on the business’s core competencies. This may lead it to outsource the manufacturing function and to concentrate on the marketing and distribution of the goods.