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Using examples, discuss how the Value Chain and the Value System may contribute towards understanding competitive advantage

In his book ‘ Competitive Advantage: Creating and Sustaining Superior Performance’ (1985) Michael Porter introduces the concept of the value chain, a chain of activities which an organisation undertakes in order to create competitive advantage over their competitors. Activities connected to product and service creation are called ‘primary activities’ (inbound logistics, operations, outbound logistics, marketing and sales and service) and these areas are supported by ‘support activities’ (infrastructure, human resource management, technology and procurement). Porter argues that the strength of the chain is dependant upon the interrelations between each activity and that strength in these areas leads to competitive advantage.

Traditionally, a value added approach was used purely for financial reasons and to secure financial advantage, by securing against risk and ensuring sustainable profit. However, management researchers such as Michael Porter and Johnson and Scholes promote the idea, backed by their own research, that competitive advantage can be identified by undertaking a value chain analysis. The value chain analysis process looks at all areas, both , primary and secondary activities, analyses the people, processes and machines that make up each activity and determines where value is added in the business. Value can be both tangible and intangible, it could be a unique bespoke machine which keeps the company ahead of it’s competitors, or it could be unique knowledge, patents etc. During the analysis the company’s strengths and weaknesses in all areas of business would be identified. The business managers’ would then need areas ripe for improvement or even outsourcing. Basically, if a process, procedure or machine does not in any way add value to the company then either process may need to be improved to add to the profit margins, or alternatives would need to be considered, such as outsourcing.

In determining which activities may be retained, and which may be outsourced, it would be prudent for the business to decide upon its strengths and where its core competencies lie. For competitive advantage, a core competence should be unique or at least very hard to replicate. In today’s modern working environment, this is almost impossible to achieve. Knowledge is everywhere and replication of products and services happens at great speed. Big name brands will bring out a new product, only for their competitors to replicate as soon as possible, and protecting the brand offerings is more and more difficult. As an example, a few years ago, much noise was made in the national press about ‘designer watches and electrical goods’, but to the untrained eye the difference was hard to detect. Whilst the trading standards department now have the power to confiscate such, it is not unusual to still observe these replica items on market stalls and at car boot sales at greatly reduced coast. Much of the Japanese market place has been built on replication, in his book ‘The mind of the Strategist’ Kenechi Omae describes how the Japanese would take products apart to analyse how goods were made, and then replicate them at reduced cost, so quality and service are often quoted by companies as their differentiating factors, but how much control do they actually have over that?.

It is very common for companies nowadays to outsource, particularly in the area of logistics and transport. However, whenever outsourcing takes place another factor is added into the value chain and a whole value system emerges. The value system represents the whole system, from start to finish that a company uses to ensure that its product or service gets to the market and final customer, when the customer wants it. Therefore, it not only includes its own primary and support activities, but the primary and support activities of its suppliers, distributors/ channel and customers. So a manufacturing company may source metal from a foreign mine which is then distributed via a road system to a boat system to the factory which makes the parts that the manufacturing company requires for its products. The product is then manufactured and then distributed locally by road, nationally by rail and internationally by boat to distribution warehouses which sell onto its customers and so on. Obviously in this example there is a lot of reliance on external factors and a reputation at stake, but most importantly is the customer satisfied and will he continue to be so with ever growing chains?

Johnson and Scholes emphasise the importance of managing the linkages in the chain effectively, but how effective can this really be without control? Many companies may form alliances/ partnerships with the outsourced companies, for example Marks and Spencer has used the same transport operator for many years and knows that they can rely upon them to get their goods to the stores on time. However, on the other hand, widely reported in the national press over the last couple of years, they have recently rescinded agreements with British clothing manufacturers in favour of low cost foreign suppliers. The middle age middle class lady, the typical M&S shopper have rebelled by shopping elsewhere and M&S are now fighting for new and a different profile of customer. Profits have plummeted. Has the value system broken down?

To summarise, necessary to any success is the ability to understand the customer and what it is that he wants from the product or service and why he or she buys from one company rather than another. Are the customers really loyal, or are they transient? What is the cost of customer satisfaction and corporate profit? Managing linkages in a vast chain can prove quite a minefield. Quality systems can be introduced, service level agreements along with satisfaction surveys and so on, but unless the linkages are controlled and all customers along the chain working toward the same goal, then of course, any company is only as strong as it’s weakest link.

 

Bibliography

Johnson, G. Scholes, K (2002)
“Exploring Corporate Strategy” 6th edition (Harlow: Financial Times, Prentice Hall)

Lynch, R (2003)
“Corporate Strategy” 3rd edition. (London: Financial Times Pitman)

Porter, M (1985)
“Competitive Advantage: Creating and Sustaining Superior Performance” (New York, Free Press: 1985)

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