3-1

Learning Objectives

LO1 Value chain analysis for assessing competitive

advantage
LO2 The concept value chain
LO3 Competitive advantage and customer value
LO4 The value chain approach for assessing competitive
advantage
LO5 Strategic frameworks for value chain analysis
LO6 Porter’s diamond model
LO7 Value chain management
 How does one create a competitive
advantage in the market?
Firstly, business is about understanding the
needs of the customers and
Then strive to meet and exceed try by any
means to satisfy such needs by any ethical
means possible.
Value chain analysis is a strategic tool which is
used to measure the importance of the
customers’ perceived value.
Example
 Concept of Value Chain

Refers to the accumulation of customer value

along the chain of activities that lead to an end
product or service
 Porter, 1985
Defining Customer Value
 Value Chain Analysis
Focuses on how a business creates customer value by
examining contributions of different internal activities to
that value
Divides a business into a set of activities within the
business
 Starts with inputs a firm receives
 Finishes with firm’s products or services and after-
sales service to customers
Allows for better identification of a firm’s strengths and
weaknesses since the business is viewed as a process
Customer Value-Delivery Network*
 COMPETITIVE ADVANTAGE
AND CUSTOMER VALUE
Two criteria:
they must supply what customers want to buy,
and
they must survive competition.

A firm’s overall competitive advantage derives

from the difference between the value it offers to
customers and its cost of creating that customer
value.
Two main types of competitive
advantage
 Differentiation Advantage
 Industry offers homogenous products
 Pay premium vs. Superior quality

 On time delivery, producing better quality

products, offering wide range of products or
services to customers and providing unique
customer value.
Buyer’s Value
 Low-Cost Advantage
Sources of relative low-cost advantage;
Access to low cost raw materials
 Innovative process technology
 Low cost access to distribution channels or
customers
 Superior operating management
Competitive Advantage through
low cost and/or differentiation
 The Value Chain Approach For
Assessing Competitive Advantage
 Internal cost analysis: This analysis is done in order to determine what
are the profitability sources and the costs positions for the processes which
created values internally associated with it.

 Internal differentiation analysis: This analysis is done to determine

what are the differentiation sources within the internal value-creating
processes.

 Vertical linkage analysis: This analysis is done so that one can make
sense out of the relationships and associated costs amongst the external
suppliers and customers so that it can lead to the maximization of customer
value, while minimizing the costs at the same time.
 New Market Entrants
Entry Ease/Barriers
Geographical Factors
Incumbents Resistance
New Entrant Strategy
Routes To Market

Supplier Power Competitive Rivalry Buyer Power

Brand Reputation Number and Size of Firms Buyer Choice
Geographical Coverage Industry Size and Trends Buyers Size/Number
Product/Service Level Quality Fixed/Variable Cost Bases Change Cost/Frequency
Relationships With Customers Product/Service Ranges Product/Service Importance
Bidding Processes/Capabilities Differentiation, Strategy Volumes, JIT Scheduling

Product and Technology

Development
Alternatives Price/Quality
Market Distribution Changes
Fashion and Trends
Legislative Effects
 Factors That Influence National
Competitive Advantage
 Factor conditions: This refers to position of the nation with respect to
the factors of production. It includes skilled labour, infrastructure,
etc. which are necessary to compete in a given industry
 Demand conditions: This refers to the nature of domestic demand for
the industry’s good or service.
 Related and supporting industries: The presence or absence in the
nation of supplier industries and related industries that are
internationally competitive
 Firm strategy, structure and rivalry: The conditions in the nation
governing how companies are created organized and managed. It
also looks at the nature of domestic rivalry.
Porter’s ‘Competitive Advantage of
Nations’ : An Assessment
The Competitive Advantage of Nation’s is
focused on addressing a question which lies at
the heart of economic and managerial science:

‘Why do some social groups, economic

institutions and nation’s advance and
prosper?’
(Porter, 1990 : xi)
Porter’s Two Monographs
Porter conducted a comprehensive study on 10 leading
nations to learn what leads to competitive advantage of
nation’s.

United States Japan

Germany Korea
Italy Denmark
Sweden Singapore
United Kingdom Switzerland
 The Theory
• The primary role of a nation is to provide ‘home base’
to a firm.

• Home base is the nation in which the essential

competitive advantages are created and sustained.

• Usually home base will be the location of most

productive jobs, core technologies and the most
advanced skills.
 Competitive Advantage of Nation’s

Michael Porter* describes four keys to a

nation’s competitive advantage in relation to
other countries
 Factor Endowments
 Demand conditions
 Related and supporting industries
 Firm Strategy, Structure and Rivalry.

* Popularly referred to as “Porter’s Diamond”

 Porter’s Diamond
Determinants of National Competitive Advantage

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Factor Endowments Demand Conditions

Co Related and
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 Factor Conditions:
 BASIC FACTORS – Natural resources, climate, location and demographics

 ADVANCE FACTORS – Communication Infrastructure, skilled labour, Research facilities and so on.

 Basic factors can provide only an initial advantage

 They must be supported by advanced factors to maintain success.

E.g.
 Switzerland was the First country to experience labour shortages. They abandoned labour-intensive watches and
concentrated on innovative/high-end watches.

 Japan has high priced land and so its factory space is at a premium. This led to just-in-time inventory techniques.

 Sweden has a short building season and high construction costs. These two things combined created a need for
pre-fabricated houses.
 Demand Conditions:

 Home country Demand plays an important role in producing

competitiveness.

 Enables better understand the needs and desires of the customers

 It shapes the attributes of domestically made products and

creates pressure for innovation and quality.
E.g. 1
 Italian ceramic Industry after the world war II
 There was a postwar housing BOOM !!
 Consumers wanted cool floors because of Hot climatic conditions
E.g. 2
 Japan’s knowledgeable buyers of cameras made that industry to innovate and grow tremendously
E.g. 3
 The French wine industry. The French are sophisticated wine consumers. These consumers force and
help French wineries to produce high quality wines.
 Related and Supporting Industries:

 Benefits of investment in advanced factors by Suppliers and

related industries is significant
 Creates clusters of supporting industries, thereby achieving a
strong competitive position internationally.

E.g.1
 The enamel production unit was available.
 The glazes production was also favorable.
 These two were the main composition of producing tiles.
 This reduces the Transportation cost.
E.g. 2
 Switzerland success in pharmaceutical industry is closely related to its
international success in technical dye industry.
 Firm Strategy, Structure & Rivalry:

 Long term corporate vision (Strategy) is a determinant of success

 Ability of the companies to develop and sustain a competitive advantage requires the 4th
attribute.

 Presence of domestic rivalry improves a company’s competitiveness

E.g. 1
 Low entry barriers to market in the tile industry
 Rivalry became very intense
 Breakthroughs in both product and process technologies

E.g. 2
 Japan has high priced land and so its factory space is at a premium

 This led to just-in-time inventory techniques

 (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of not have goods
around when they need it)

 They innovated traditional inventory techniques.

 International Trade and Investment

Contribution Towards The Theory

Direct relation with Stages of National

Competitive Development
 Porter’s Stages of
National Competitive Development
Driver of Development Source of competitive advantage Examples

Factor Condition •Basic factors of CANADA,

production AUSTRALIA,
i.e., Natural Resources, SINGAPORE,
Geographic Locations, SOUTH KOREA before 1980
Unskilled Labour

Investment •Investment in Capital JAPAN during 1960’s

equipment.
•Transfer of technology. SOUTH KOREA during 1980’s
•Presence of national
consensus in favour of
investment over
consumption

Innovation All four determinants of national JAPAN since late 1970’s

advantage interact to drive the
creation of new technology ITALY since early 1970’s

Wealth Emphasis on managing existing UK during post war period

wealth USA
Competitive Advantage Switzerland since 1980
 Government Policy
&
Nation’s Competitiveness
The differences between Porter's

theory of national competitive

advantage and the existing theory
of international trade and
investment are highlighted by their
respective public policy
implications.
Policy Measure Traditional Thinking Porter Model
Devaluation Improves competitiveness of Devaluation is detrimental to
domestic industries by giving the upgrading process: it
them cost advantage over encourages dependence upon
overseas competitors. price competition and a
concentration upon price
sensitive industries and
segments. It discourages
investment in innovation and
automation.
Policy towards R&D Govt. Investment in R&D Govt. should support research into
stimulates the innovation within commercially relevant technologies
the country. in preference to defence.
Support research institutions
Defense-based research offers focused upon industry
commercial spin-offs. clusters/crosscutting technologies.
Cooperative research pools Cooperative research is of limited
efforts and avoids wasteful value.
duplication.
Government Procedure Provides secure home While government can act as
demand for domestic firms an early, sophisticated buyer,
hence encourages investment procurement can
and economies of learning easily act to protect weak
and scale. national champions from
international and domestic
Defense procurement, in rivalry, and distort product
particular, provides an early development from global
market for technically market needs.
sophisticated products.

Regulation of product and Stringent regulations impose Stringent performance, safety

process standards costs which hamper and environmental standards
competitiveness in home and can pressure
overseas markets. firms to improve quality,
upgrade technology and
provide superior product
features. Particularly
beneficial are regulations
which anticipate standards
which will spread
internationally.
Antitrust Policy and The presence of international Antitrust Policy plays an
Regulation of Competition competition important role in maintaining
means that domestic the strength of domestic
monopolies and mergers are rivalry. But must not act as a
ineffective in creating and barrier to vertical
exercising market power. collaboration, between
suppliers
The interests of and buyers, that is integral to
global competitiveness may innovation.
require the
relaxation of antitrust Regulation of competition, on
constraints in order the other hand, is likely to be
to encourage strategic detrimental to rivalry
alliances and the and new enterprise creation:
development of world-class deregulation
competitors. of competition and
privatization of domestic
monopolies usually spurs
national advantage.
 How competitive strategy is interlinked with
competitive advantage?
Competitive
Advantage
The Firm
The Industry
Resource Competitive Environment
Strengths
Strategy
The National Context

Strategy, Structure and Rivalry

Resource Availability Demand Conditions

Related and Supporting Industries

According to Porter’s Competitive advantage of
nation, there has been a shift from a static to a
dynamic analysis of competitive advantage.

Competitive advantage is a consequence of change

through the emergence of new technologies,
changing buyers need, new industry segment,
shifting input supply conditions, or changes in
government regulations.
Competitive advantage is subject to erosion. A firms
ability to sustain the same depends upon the ease
with which competitors can duplicate the
competitive advantage.

Targeting customers which are demanding and have

difficult needs, a firm can help establish leadership in
quality and innovation.
 Value Chain Management
 Value
 The performance characteristics, features and
attributes, and any other aspects of goods and
services for which customers are willing to give up
resources (i.e., spend money).
 The Value Chain
 The entire series of organizational work activities that
add value at each step beginning with the processing
of raw materials and ending with the finished product
in the hands of end users.
Value Chain Management (cont’d)
What is Value Chain Management?
 The process of managing the entire sequence of
integrated activities and information about
product flows along the entire value chain.
Goal of Value Chain Management
 To create a value chain strategy that fully
integrates all members into a seamless chain that
meets and exceeds customers’ needs and creates
the highest value for the customer.
Six Requirements for Successful
Value Chain Management
Value Chain Management (cont’d)
Requirements for Value Chain Management
 A new business model incorporating:
• Coordination and collaboration
• Investment in information technology
• Changes in organizational processes
• Committed leadership
• Flexible jobs and adaptable, capable employees
• A supportive organizational culture and attitudes
Benefits of Value Chain
Management
Obstacles to Successful Value Chain
Management
Value Chain Management (cont’d)
Obstacles to Value Chain Management
 Organizational barriers
• Refusal or reluctance to share information
• Reluctance to shake up the status quo
• Security issues
 Cultural attitudes
• Lack of trust and too much trust
• Fear of loss of decision-making power
 Required capabilities
• Lacking or failing to develop the requisite value chain
management skills
Value Chain Management (cont’d)
Obstacles to Value Chain Management (cont’d)
 People
• Lacking commitment to do whatever it takes
• Refusing to be flexible in meeting the demands of a
changing situation
• Not being motivated to perform at a high level
• Lack of trained managers to lead value chain initiatives
 Sources of Reference
The Competitive Advantage of Nations, 1990,
Michael Porter

Excerpts from the PDF Article Grant R Review

on Porter sent by Prof. Y.C. Kim.

Strategic Management Journal, Vol. 12, No. 7.

(Oct., 1991), pp. 535-548.