Theory of Competitive Advantage Value Chain Analysis

Theory of Competitive Advantage Value scope AnalysisThe initial theory regarding relative returnss was related to comparative shelters of regions or nations. It included land, location, labor, natural resources and local population size. But it is non true always as rise of almost the most advanced industrial nations receive proved that the above factors become less ascertain in their course of development. For example, Japan had disadvantage regarding avail cogency of raw materials, abundant station and as yet access to early(a) lands. But still the Japanese companies have prospered and rose to be among the best in the world. Again Japan similarly has disadvantage in wrong of population size available. But that could non stop Japan from being a leader in seam. similarly economic hardship raise re altogethery fuel growth in a nation. It has been seen both in typeface if both Japan and Germany. two these nations were under severe economic trouble after World war II, besides still they grew to be industriousness major countries in the world.The reasonableness for much(prenominal) behavior of nations or formations in particular tail be understood from The theory of warring advantage which says that in that respect ar other critical factors that determine the manufacture leadership. As per Michael Porter, the renowned Harvard tune instruct professor start outable industrial growth is hardly dep residuument on the above inherited factors. But it depends on groups of interconnected unanimouss, suppliers, related industries, and institutions that initiate in certain locations and termed them as clusters. These clusters ar geographic concentrations of interconnected companies, specialise suppliers, service providers, and associated institutions in a particular field. They grow on locations where abounding resources and competences amass and reach a critical threshold, giving it a gravest maven position in a given economic branc h of activeness, with a decisive sustainable free-enterprise(a) advantage over others places, or even a world supremacy in that field.Porter says clusters nooky influence competition in three waysThey seat increase the productivity of the companies in the cluster.They gouge drive innovation in the field.They can buzz off new businesses in the field.The competitive advantage of any fabrication or presidency is determined by five forces of Porter. These five forces help the managers to focal point on competitive forces that prevail in the labor and the possible threats to their organizations. delineate view of Porters five forcesThese atomic number 18Existing competitive disceptation among organizations in industry The more that companies compete against one another for customers, ex- by with child(p) the prices of their products or by increasing advertising the turn away is the level of industry profits. So this is a threat to the companies. Hence in order to sustain the companies may come up with new strategies and innovations in their technologies as hale as business assistes. Thus competition fuels growth in the industry as well as leads to innovations.Threat of new market entrants The easier it is for companies to cipher the industry, because for ex- barriers to entry, such as brand loyalty argon low, more the belike it is for industry prices and hence the industry profits to be low. In the wash of such a situation the companies might go for further innovations or even differentiations in their products or businesses. Thus it helps in the evolution exhibit of the companies.Bargaining power of buyers It depends on the size of the customers. The bargaining powers of the customers come if they ar immense in size. So they can bargain to drive shovel in the price of that output. As a precede the industry producers might go steady low profits. So the bargaining power of buyers also decides the competitive advantage of the industry.Pow er of suppliers The suppliers also have important role in deciding the competitive advantage of firms. If there be only few large suppliers of an important foreplay, then suppliers can drive up the price of that input and expensive inputs result in lower profits for profits for companies in an industry.Threat of substitution products (including applied science change) Often the output of one industry is a substitute for the output of another industry. Ex- plastic may be substitute for steel in some industry. When this type of substitutes exists in the industry companies cannot demand very senior high prices for it or customers will switch to the substitute and this constraint keeps their profits low.Again the above all factors lead the managers to sign decisions in tetrad business level strategies to gain competitive advantage.These areLow embody strategy It is the strategy where the come with focuses all its energies to lower its be in all the departments. As a result it can sell its products in lower personifys than its rivals. Here though the companies are selling the products at low prices but since the production prices are low the company still makes profits. Ex- BIC competes Gillette with this strategy in razor brand industry.Focuse low cost strategy In such a strategy managers focus to serve only a segment of general market and tries to be lowest cost organization in that segment. speciality strategy It is the strategy where organizations products can be distinguished from the products of other organizations on factors like product design, quality, service, or after sales service. Here the process of differentiation may be unique and expensive. Coca cola, PepsiCo, PG practice such strategies.Focused differentiation strategy it is the strategy that tries to serve only one segment of the overall market and aims to be the most differentiated organization serving that segment. For ex, BMW focuses on this strategy.The theory of competitive adv antage can be also easily extended to the position of various nations. Here four factors have taken into consideration to nalayze the competitive position of the nations. Germany and Japan are most apt examples of such a competitive advantage. These are discussed as followsFour factors for competitive advantageThe strategy, structure and rivalry of firms As there is high competition among the firms, this competitive environment leads the firms to work harder for increase in productivity and innovation. The Japanese companies are cooperative at certain levels but they are also fiercely competitive. Thus it is the strategy and structure and rivalry of the firms that gives rise to excellence to the firms in terms of efficiency.Demand conditions If the firms face contest and demanding customers then they constantly face pressure to improve their competiveness by advanced(a) products, high quality etc.Related avowing industry A company prospers when prolonging companies are located i n the same area. heraldic bearing of brooking companies in the vicinity gives the firm added advantage in terms of gaining technological support and expertise.Factor conditions Specialized factors of production are apt labor, capital and infrastructure. Non-key factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors necessitate heavy, sustained investment. They are more difficult to duplicate. This piddles a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.VALUE CHAINValue set up is a model that helps to analyze specific activities through which firms can execute prise and competitive advantage. A look upon grasp is a ambit of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value range of a function, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activitys value. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter, as a profession, can be used to instance the difference of cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond.Value Chain framework modelValue Chain nonplus of PorterTHE ACTIVITIES OF THE VALUE CHAINPrimary activities (line functions)Inbound Logistics. Includes receiving, storing, inventory control, tape drive plan.Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform th e inputs into the final product.Outbound Logistics. The activities require to get the finished product at the customers warehousing, order fulfillment, transportation, distribution management. marketing and Sales. The activities associated with getting buyers to purchase the product, including channel selection, advertising, promotion, selling, pricing, retail management, etc. overhaul. The activities that maintain and recruit the products value, including customer support, repair services, installation, training, spare parts management, upgrading, etc.Support activities (Staff functions, overhead) procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc.Technology Development. Includes technology development to support the value chain activities. Such as Research and Development, Process automation, design, redesign. man Resource Management. The activities associated with recruiting, development (education), retention and compensation of employe es and managers.Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.A COST ADVANTAGE base ON THE VALUE CHAINA firm may frame a cost advantageby reducing the cost of individual value chain activities, orby reconfiguring the value chain.Note that a cost advantage can be created by reducing the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of nurture Technology.Once the value chain has been defined, a cost analysis can be performed by assign costs to the value chain activities. Porter identified 10 cost drivers related to value chain activitiesEconomies of scale. learning.Capacity utilization.Linkages among activities.Interrelationships among business units.Degree of unsloped integration.Timing of market entry.Firms policy of cost or differentiation.Geographic lo cation.institutional factors (regulation, union activity, taxes, etc.).A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost advantage also can be pursued by Reconfiguring the value chain. Reconfiguration means structural changes such as a new production process, new distribution channels, or a different sales approach.DIFFERENTIATION AND VALUE CHAINA differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels.Differentiation stems from uniqueness. A differentiation advantage may be achieved either by ever-changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain.Porter identified several drivers of uniquenessPolicies and decisionsLinkages among activitiesTimingLocationInterrelationships LearningIntegrationScale (e.g. better service as a result of large scale)Institutional factorsMany of these also serve as cost drivers. Differentiation a lot results in greater costs, resulting in tradeoffs in the midst of cost and differentiation. There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation.TECHNOLOGY AND VALUE CHAINBecause technology is employed to some phase in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations o f the value chain. variant technologies are used in both primary value activities and support activitiesInbound Logistics TechnologiesTransportationMaterial handlingMaterial storagecommunicationsTesting nurture systemsOperations TechnologiesProcessMaterialsMachine toolsMaterial handlingPackagingMaintenanceTestingBuilding design operationInformation systemsOutbound Logistics TechnologiesTransportationMaterial handlingPackagingCommunicationsInformation systemsMarketing Sales TechnologiesMediaAudio/videoCommunicationsInformation systemsService TechnologiesTestingCommunicationsInformation systemsNote that many of these technologies are used across the value chain. For example, information systems are seen in every activity. standardised technologies are used in support activities. In addition, technologies related to training, computer-aided design, and parcel development frequently are employed in support activities.To the effect that these technologies affect cost drivers or uni queness, they can lead to a competitive advantage.LINKAGES BETWEEN VALUE CHAIN ACTIVITIESValue chain activities are not isolated from one another. Rather, one value chain activity frequently affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities.Consider the case in which the design of a product is changed in order to sign on manufacturing costs. Suppose that inadvertently the new product design results in increase service costs the cost drop-off could be less than pass judgment and even worse, there could be a net cost increase.sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change at the same time reduces manufacturing costs and improves reliability so that the service costs also are cut. Through such improvements the firm has the potential to develop a competitive advantage.ANALYZING BUSINESS U NIT INTERRELATIONSHIPSInterrelationships among business units form the basis for a plain strategy. Such business unit interrelationships can be identified by a value chain analysis.Tangible interrelationships offer direct opportunities to create a synergy among business units. For example, if dual business units require a particular raw material, the procurement of that material can be dual-lane among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities.Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to delineate the benefits of the synergies.OUTSOURCING VALUE CHAIN ACTIVITIESA firm may specialize in one or more value chain activities and outsource the rest. The issue to which a firm performs upstream and downstream activities is described by its degree of vertical integration.A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must recognize the firms strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. Managers may consider the following when selecting activities to outsourceWhether the activity can be performed cheaper or better by suppliers.Whether the activity is one of the firms core competencies from which stems a cost advantage or product differentiation?The risk of performing the activity in-house. If the activity relies on fast-changing technology or the product is exchange in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of spend in specialized asse ts.Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc.Thus we can see that every aspect of an organization can be rightly explained in light of value chain analysis to judge the competitive position of the organization. Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Hence, developing a competitive advantage depends on how efficiently we can analyze and manage the entire Value Chain.