Exploiting Value Chain for Competitive Advantage

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School of Business Management

Subject: Strategy Cost Management

Prepared By:

 Nikhita Gaikwad (C020)

Akshay Kumar (C035)

Dhruvi Shah (C051)

Ketan Yagnick (C065)

Rutvij Vaishnav (G064)

Faculty: Dr. Debashis Sanyal, Dr. Smita Mazumdar

Topic: Exploiting the Value for Competitive Advantage

Exploiting Value Chain for Competitive Advantage

Creating efficiencies in the links of the Value Chain are a source of competitive advantage for companies. The traditional value chain can be broken down into three distinct linkages: value identification, value processing and value delivering. This article explains how organizations like AirBnB, Narayana Hrudalaya, Dell and Netflix have achieved competitive advantage by altering or redefining a particular linkage.  

Organizations around the world conduct business by selling goods and services in exchange for money. The price a market is willing to pay for a product or service is equivalent to the value it offers. In other words, businesses create and sell a value proposition in a market (Kotler & Keller, 2000). The fundamental question of great significance to organizations is – How to change business inputs into business outputs, in such a way that the total value of the output is greater than the sum of individual parts?

Manufacturing firms create value by converting a set of raw materials into a more useful product. Retail stores offer a wide range of products to consumers in a convenient manner, sometime supported by services like personalised advice and easy exchange policy. The value created and captured by a company enables it to build a competitive advantage over its competitors and has a greater share in the profit pool of the industry (Porter, 1985).

Competitive strategy is about being different. It involves deliberately choosing a differentiated set of activities to deliver a unique mix of value. Sustainable competitive advantage can only be achieved if organizations are able to create a unique position for themselves. These strategic positions can be based on customers’ needs (need – based positioning), customers’ accessibility (access based positioning) or a variety of a company’s products or services (variety – based positioning) (Porter, 1996).  

In 1985, Michael Porter in his book titled “Competitive Advantage” introduced the term Value Chain. A value chain is a set of activities that an organization carries out to create and build value for its customers. Porter proposed a generic value chain (fig.1) which companies could use to examine their activities and understand how they are connected.

[pic 2]Source: Competitive Advantage, Porter 1985

Figure 1: Porter’s Generic Value Chain

The linkages in the value chain can be finely tuned to gain a competitive edge. Value chain analysis can be used to formulate competitive strategies, understand the sources of competitive advantage and integrating activities in the value chain (Porter, 1985). Porter suggests that in an increasingly competitive environment, customer demand and market forces may require the firm to re-inforce the co-ordination between traditional departments, products and geographies. The Boeing 787 “Dreamliner” is a classic example of co-ordination between departments and geographies, with various components manufactured in the UK, France, Sweden, Japan, Canada, and elsewhere before being assembled in the United States.

     A value chain depicts the way a product gains value (and costs) as it moves along the path of design, production, marketing, delivery and service to customer. It represents a particular configuration of activities needed to create value in a product or service. These activities need not be lineal, as depicted by the value chain, but may be iterative in nature and can include detailed description with numerical analyses of strategically important activities (McKinsey Quarterly, April 2017). Additionally, the value chain is not only confined to activities within the organization. External dependencies like inter-firm and network relationships in are also to be considered at the time of making important decisions that affect competitive position and profitability.  

Since cost and differentiation is derived from the way resources are configured, value chain analysis is an excellent tool for the purpose of strategic planning (Porter, 1985). Further, the value chain approach emphasises the importance of co-ordinating the linkages and inter-relationships among activities. This approach is relevant in strategy formulation for traditional manufacturing and service industries as well in new internet based firms. The ability of value chain analysis to dissect activities and view the linkages and inter-relatedness separately, leads to identification of specific activities that are sources of superior profit. An organization can then build competitive advantage based on those activities in which they proprietary access to scarce resources (skills, assets, intellectual property, distribution network, etc.).

With the evolution of two-sided markets (platform business models) and pervasion of digital technologies (complemented by low computing and data storage costs) new markets are emerging which have shifted the profit pools. Abundance of data has changed the nature of competition (The Economist, May 2017). What organizations like Uber and Airbnb did was identify new sources of supply (cars and hotel rooms respectively) for their businesses, which transformed and disrupted the existing value chain of the transport and hotel industry. Data is expected to topple crude oil as the world’s most valuable resource in the near future. This is evident by the fact the five of the ten most valuable listed firms in the world are Apple, Alphabet, Microsoft, Amazon and Facebook (The Economist, May 2017).

This article explains how nascent companies have built competitive advantage and grown rapidly in a short span of time by analysing the linkages of the existing value chain and have subsequently altered the same to their advantage. The article trisects the value chain into three segments

1. Upstream – Concerned with supply side activities
2. Mainstream – Concerned with internal value adding operations
3. Downstream – Concerned with delivery of final product or service

Each section talks about how the value chain was exploited or altered by organizations to gain competitive advantage over existing players in the market.

Companies like Air BNB, Netflix and Aviation Industry have exploited the upstream activities in the value chain to gain competitive advantage. They identified new sources of supply which resulted in a business modelled around the concept of a “shared economy”. The section below explains the idea in a more elaborate manner.