Lecture 22

Electronic Business (MGT-485)

Recap – Lecture 21

• E-Business Strategy: Formulation– Internal Assessment • Nature of Internal Audit • Key Internal Forces • Internal Audit• Integrating Strategy and Culture • Technology Audit• Internal Analysis

Contents to Cover Today

• E-Business Strategy: Formulation– Internal Assessment• Value Chain Analysis• Linkages within the Value Chain• Value Chain Linkages in the Supply Chain• Linkages with Supplier Value Chain• The Buyer’s Value Chain

The Value Chain

• A framework for identifying core competencies– Inside the firm– In the supply chain

• Can be used to– Identify strengths and weaknesses– Identify sources of competitive advantage– Identify market opportunities

The Value Chain

Firm Infrastructure

Human Resource Management

Technological Development

Procurement

InboundLogistics

Operations Outbound Logistics

Marketing& Sales

Service

MARGIN

MARG

IN

Supp

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gAc

tiviti

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imar

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Relationship with Suppliers Relationship with Buyers

Elapsed Time - Value added time cost

The Value Chain• The Value Chain, or value plate illustrates how

to break down the functions of a company into its activities.

• The bottom half of the figure contains the primary activities that the firm conducts.

• These include inbound logistics, or the way in which the company receives, stores, etc. its inputs.

• Operations is the basic activity of producing your product.

• Outbound logistics are the activities associated with storing and distributing your final product.

The Value Chain• Marketing and sales are all of the activities

associated with attracting and keeping customers for your products.

• Service is the activities associated with providing support to your customers for your products including users manuals, help lines, warranties, etc.

• Inbound logistics and Operations relate to your suppliers.

• Outbound logistics, marketing and sales and service relate to buyers.

The Value Chain• As you move from left to right the primary

activities move through time and adding further value to the end product.

• Linking these five primary activities together forms a chain.

• The top half of the graph represents a set of activities that are conducted to support the primary activities of the firm.

• These would include procurement which are all of the activities associated with negotiating, financing, and paying for all inputs necessary for the business from raw inputs used in the final product to pencil used in the accounting office.

The Value Chain• Technology development is the activities associated

with research and development and included R&D in all phases of the primary activities not just R&D associated with new product development (things like process improvement research, distribution improvement research, market research activities to support marketing, etc.

• Human resources are the support activities associated with hiring, firing, compensating, retaining, and training personnel for the company.

• Finally firm infrastructure is the top management activities of the firm which include, negotiating with the government, negotiating with competitors, developing the firms long-term strategy, development and maintenance of information systems for assessing firm performance, etc.

The Value Chain:What do you do with this figure?

• That is, what support and primary activities do you do better than your competitors and which ones do you not do so well relative to your competitors.

• This is a great tool for helping you assess your strengths and weaknesses in a more structured way.

• It helps think about ALL of the activities that you conduct in your business and critical assess whether you are doing each activity as well as you can.

• This figure helps you focus on specific activities that you do well relative to your competitors so that you can determine what your core competencies are relative to your competitors.

Primary Activities in the Value Chain

• Inbound Logistics – Materials handling, warehousing, inventory control used to

receive, store and disseminate inputs to a product– Fertilizer and chemical storage, delivery of inputs,

application of inputs

• Operations– Take inputs from inbound logistics and convert to final

products– Plowing, planting, spraying, harvesting, feeding, medicating,

weighing etc.

Primary Activities in the Value Chain

• Outbound Logistics– Collecting, Storing, and physical distribution of the final

product.– Crop storage, finished hog handling, Processing and

determining delivery dates, delivery to the packer or elevator etc.

• Marketing and Sales– Provide means through which customers can purchase

products and to induce them to do so– Advertising, communicating with buyers, developing customer

relationships, pricing products (futures, hedging, forward contracting, etc.), delivery scheduling

Primary Activities in the Value Chain

• Service– Activities designed to enhance or maintain a

product’s value– Timely delivery, identity preservation, ISO9000,

certifying as organic, etc.

Supporting Activities in the Value Chain

• Procurement– Activities to purchase the inputs needed to produce products– Negotiating with suppliers, standard timing of replenishing

parts and tools, setting up buying groups, etc.

• Technological Development– Activities that improve the firm’s products and/or processes – Volunteering for test plots, being a part of feeding trials,

attending technology seminars/field days, designing equipment to make specific production tasks more efficient, etc.

Supporting Activities in the Value Chain

• Human Resources– Recruiting, hiring, training, developing, and compensating all

personnel

• Firm Infrastructure– General Management, planning, finance, accounting, legal

support, governmental relations, etc.– Establishment of accounting practices, management information

systems, compliance with environmental regulations, tracking and reporting for government programs, etc.

– Where strategy development takes place identifying opportunities and threats, resources and capabilities, and support of core competencies

The Result of the Value Chain• Margins– Capture the value from performing value-creating

activities as cheaply as possible– The basic idea is that the consumer is willing to pay a

certain amount for the value you create. This is depicted as the size of the overall pentagon.

– The size of the individual activity boxes represents the cost of performing those particular activities.

– Thus, the smaller the size of the individual activity boxes relative to the value the consumer is willing to pay, the greater the MARGIN will be for the firm.

Value Chain Analysis

• A firm’s value chain must be compared to competitors’ value chains to determine where competitive advantages exist.

• To be a source of competitive advantage a resource or capability must allow a firm to:– Perform an activity in a manner that is superior to

competitor’s performances– Perform a value-creating activity that competitors cannot

complete

Linkages within the Value Chain• Optimization and coordination of activities in the

value chain• Linkages exist between support activities and

primary activities and between separate primary activities

• Generic causes for linkages– Same function can be performed in different ways– Efforts in indirect activities– Activities performed inside the firm reduce the need for

activities in the field– Quality Assurance can be performed in different ways

Value Chain Linkages in the Supply Chain

Supplier Chain

Firm Chain

Buyer Chain

Supplier Chain

Buyer Chain

Buyer Chain

• The value chain a firm has for a product is just a part of the industry. • The supplier sells to a buyer and buys from a supplier, each of which have their own value chains.

Linkages with Supplier Value Chain

• Linkages between suppliers’ value chains and a firms chain provide opportunities for the firm to enhance competitive advantage.

• Division of benefits between firm and its suppliers is a function of supplier’s bargaining power and reflecting in supplier’s margins.

• Both coordination with suppliers and hard bargaining are important to competitive advantage.

The Buyer’s Value Chain

• A firm’s differentiation stems from how its value chain relates to its buyer’s chain.

• Differentiation derives fundamentally from creating value for the buyer through a firm’s impact on the buyer’s value chain.

• Value is created when a firm creates a competitive advantage for its buyer.

• The buyer must perceive the value to pay a premium price.

Summary

• E-Business Strategy: Formulation– Internal Assessment• Value Chain Analysis• Linkages within the Value Chain• Value Chain Linkages in the Supply Chain• Linkages with Supplier Value Chain• The Buyer’s Value Chain