Analysis of costs and prices For a company to compete successfully, its costs and prices must be in line with those of close rivals. Thus costs and prices are one of the most telling signs of whether a company’s business position is strong or precarious. Two analytical tools that are most useful in analysing costs and prices are the value chain analysis and benchmarking.

Value Chain Analysis A value chain is a chain of activities for a firm operating in a specific industry or It refers to the internal processes or activities a company performs “to design, produce, market, deliver and support its product.” (Michael Porter)or It is a series of value generating activities that a firm performs in producing its goods and services

Value Chain Analysis Value Chain Analysis is a process where a firm identifies its primary and support activities that add value to its final product and then analyse these activities to reduce costs or increase differentiation. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage.

Value Chain Analysis The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors.

Value Chain ctd According to Michael Porter, these activities in a business can be grouped under two headings: 1) Primary activities- those that are directly concerned with creating and delivering a product, and 2) Support activities – which whilst they are not directly involved in production, may increase effectiveness or efficiency (eg HRM,Admin) See diagram

Diagram for Value Chain Analysis General Administration Human Resources Department Support Activities Margin Technology Development Procurement Service Inbound Logistics Operations Outbound Logistics Marketing & Sales Margin Primary Activities

Primary Activities Inbound logistics—material handling and warehousing; Operations—transforming inputs into the final product; Outbound logistics—order processing and distribution; Marketing and sales—communication, pricing and channel management; and Service—installation, repair and parts.

Support Activities 1) Procurement – purchasing of raw materials, supplies and other consumable items as well as assets 2) HRM – selection, promotion and placement; appraisal; rewards; management development; and labor/employee relations 3) Technology Development – know-how, procedures and technological inputs needed in every value chain activity

Support Activities ctd General Administration – concerned with a wide range of support systems and functions such as finance, planning, legal and regulatory affairs, forming strategic alliances and collaborating with strategic partners, and other overhead functions.

VCA ctd The process of classifying a company’s operations into different types of primary and secondary activities is the first step in understanding its cost structure. It will be now very easy to make some cost estimates and capital requirements for each individual activity (Activity based cost acc). The cost of each activity contributes to whether the company’s overall cost position relative to its rivals is favorable or unfavorable.

The application of VCA in the strategic management process To apply VCA in the SMP of an org requires 3 sequential steps as follows: 1. Break down the organisation into its key activities under each of the major headings in the model. 2. Assess the potential for adding value via cost advantage or differentiation or identify current activities where a business appears to be at a competitive disadvantage 3. Determine strategies that can be built around activities where competitive advantage can be sustained.

Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. Cost drivers related to value chain activities include economies of scale, learning, capacity utilisation, degree of vertical intergration, timing of market entry, institutional factors etc

Cost Advantage and the Value Chain A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage also can be pursued by reconfiguring the value chain.

Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain eg Procurement of unique inputs or distribution channels that are advantageous. Examples of differentiation drivers include Intergration, technological changes, timing etc

Benchmarking This is a very important tool for assessing the competitiveness of value chain activities. Benchmarking is the process of identifying "best practice" in relation to both products and the processes by which those products are created and delivered. The search for "best practice" can take place both inside a particular industry, and also in other industries

Benchmarking Ctd Benchmarking entails comparing how different companies perform various value chain activities i.e 1. how materials are purchased 2. how inventories are managed 3. how products are assembled 4. how fast other companies get new products to the market e.t.c

Objectives of Benchmarking 1. To identify the best practices in performing an activity 2. To learn how other companies have achieved lower costs or better results in performing benchmarked activities 3. To take action to improve a company’s competitiveness whenever benchmarking reveals that its costs and results of performing an activity are not at par with other companies.

Benchmarking Ctd Thus benchmarking involves looking outward to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organisation

Steps in Benchmarking benchmarking involves four key steps: (1) Understand in detail existing business processes (2) Analyse the business processes of others (3) Compare own business performance with that of others analysed (4) Implement the steps necessary to close the performance gap

Types of Benchmarking Strategic Benchmarking – Here the business seeks to improve overall performance by examining the long-term strategies and general approaches that have enabled high-performers to succeed. It involves considering high level aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes in the external environment. Results from this type of benchmarking may take a long time to materialise

Types of Benchmarking ctd Performance or Competitive Benchmarking Businesses consider their position in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector. This type of analysis is often undertaken through trade associations or third parties to protect confidentiality

Types of Benchmarking Process Benchmarking Focuses on improving specific critical processes and operations. Benchmarking partners are sought from best practice organisations that perform similar work or deliver similar services.

Types of benchmarking Functional Benchmarking Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements.

Types of Benchmarking Internal Benchmarking Involves benchmarking businesses or operations from within the same organisation (e.g. business units in different countries). The main advantages of internal benchmarking are that access to sensitive data and information is easier; standardised data is often readily available; and, usually less time and resources are needed.

Types of benchmarking External Benchmarking Involves analysing outside organisations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the "leading edge".

Types of Benchmarking International Benchmarking Best practitioners are identified and analysed elsewhere in the world, perhaps because there are too few benchmarking partners within the same country to produce valid results. Globalisation and advances in information technology are increasing opportunities for international projects. However, these can take more time and resources to set up and implement and the results may need careful analysis due to national differences