Relating Value Chain Analysis to Competitive Advantage

Value chain expresses the activities that are taking place in a business firm, and relates them to an analysis of the competitive strength of the business firm. Therefore, it evaluates which value with each particular activity adds to the organisations products or services. This concept was built upon the insight that an organisation is more than a random collection of machinery, equipment, people and money. Only if these factors are arranged into systems and systematic activities it will become possible to generate something for which customers are willing to pay a price.[1]

Value chain concept divides the generic value-adding activities of an organisation. The major activities respectively are: inbound logistics, production, outbound logistics, sales and marketing, maintenance. These activities are supported by: administrative infrastructure management, human resources management, Research and development and procurement. The value driver and cost are identified for each value activity. The value chain structure rapidly made its way to the forefront of management as a influential and a powerful analysis tool for strategic planning. Its main objective is to maximise value creation while minimising costs.

There are two main types of Activities

(1) Primary Activities – are directly concerned with creating and delivering a product.

(2) Support Activities – although they are not directly involved in production, may increase effectiveness or efficiency.

The significance of value chain analysis is that it can help to assess costs in your chain that might be reduced or affected by a change in one of the chain’s processes. By comparing your value chain to the competitors, the links of the chain where they might be more efficient can be identified and determine which areas can be improved.

A competitive advantage can be described as an advantage over competitors gained by offering consumers a greater value, either by means of lowering the price of products/services or by providing a greater benefits and service that justifies higher prices.

[1] Michael Porter in his book “Competitive Advantage: Creating and Sustaining superior Performance” (1985)

Relating Value Chain Analysis to Competitive Advantage

The kind of activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which desires to outperform its competitors through differentiating itself through higher quality of services and products will need to perform its value chain activities better than the opposition. On the other hand, a strategy based on seeking cost leadership will require a reduction in the costs related with the value chain activities, or the total quantity of resources used need to be reduced.

Primary Activities

Inbound logistics: this concerns all of the activities that deal with receiving and storing externally sourced materials.

Operations: The manufacture of products and services, the way in which resource inputs are converted to outputs

Outbound logistics: this is associated with the activities that deal with getting finished goods and services to buyers.

Marketing and sales: it’s a fundamental an information activity that informs buyers and consumers about products and services (benefits, use, price etc.)

Service: All those activities related with maintaining product performance after the product has been presented to consumers and sold

Support Activities (Secondary Activity)

Procurement: This is related to how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers)

Human Resource Management: these activities are concerned with recruiting, developing, motivating and rewarding the workforce of a business.

Technology Development: Activities that are related with managing information processing and the development and protection of “awareness” in a business.

Infrastructure: Concerned with a wide variety of support systems and functions such as quality, finance, control, planning, and general senior management.

Stages in Value Chain Analysis

Value chain analysis can be broken down into a three steps:

(1) Categorise a market/organisation into its main key activities under each of the major headings in the model.

(2) Evaluate the potential for adding value via cost advantage or differentiation, or recognising current activities where a business appears to be at a competitive disadvantage.

(3) Decide on the strategies built around focusing on activities where competitive advantage can be obtained and continued.

Value Chain Analysis is a three-step process:

Activity Analysis: First, Identify the activities that need to be carried out to deliver the product or service.

Value Analysis: Second, for each activity, think of the actions that could be done to add the greatest value for the customer

Evaluation and Planning: Thirdly, evaluate whether it is worth making changes, and then plan for action.

Step 1 – Activity Analysis

The first action to take is to brainstorm the activities that the team or the company undertakes that in some way that contribute towards the customer’s experience.

At an organisational level, this will consist of the step-by-step business processes that are used to serve the customer. These will include marketing of the products or services, sales and order-taking, delivery, support, operational processes, and so on (this may also involve many other steps or processes specific to the industry).

At a personal or team level, it will involve the step-by-step flow of work that are carried out.

Step 2 – Value Analysis

After identifying each activity, at this stage the value factors should be listed – the things that the customers’ value in the way that each activity is conducted.

Next to each identified activity, the value factors should be stated and written.

For instant, if the firm is thinking about a telephone order-taking process, the customers will appreciate and value a quick answer to their call; a polite manner; efficient taking of order details; fast and well-informed answering of questions; and a quick and an efficient resolution to any problems that arise.

And finally next to the indentified value factors, state down what needs to be changed or done to provide great value for each Value Factor.

Step 3 – Evaluate Changes and Plan for Action

After the completion the value analysis, the process of taking action should being: numerous of ideas will have been generated for increasing the value that is presented to customers.

At this stage prioritize the action plan is very important, as lots of energy and effort could be wasted on hundred different jobs and none get done. Therefore the firm should start with changes that are quick, easy and cheap wins. Then screen the more complex changes.

Lastly prioritize the remaining tasks and plan to tackle them in an practicable, step-by-step way that delivers steady improvement at the same time that it keeps the team’s enthusiasm going.

Value Chain Analysis is a constructive way of thinking through the ways in which value can be delivered to customers, and re-evaluate all of the things you can do to maximize that value.

By the use of Value Chain Analysis and by following it through to action, you can achieve quality and excellence in the things that really matter to customers.

TESCO

Tesco plc (LSE: TSCO) is a global grocery and general merchandising retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest measured by profits (after Wal-Mart).It has stores in 14 countries across Asia, Europe and North America and is the grocery market leader in the UK (where it has a market share of around 30%), Malaysia and Thailand.[2]

The chain was founded by Jack Cohen in 1919. The brand first appeared after Cohen bought a shipment of tea from T.E. Stockwell and he used those initials and added the first two letters of his own surname. The first Tesco store was opened in 1929 in Burnt Oak, Edgware, and Middlesex. Originally a UK-focused retailer specialising in food and drink, it has diversified both geographically and by product, into areas such as clothing, electronics, financial services, telecoms, home, health, car and dental insurance, retailing and renting DVDs, CDs, music downloads, Internet services and software. [2]

[2] http://en.wikipedia.org/wiki/Tesco

Porter’s Five Forces Analysis

An analysis of the structure of the industry should be carried out in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to evaluate the competitive environment of Tesco, Porter’s five forces analysis has been used by the researcher as follows:

Threat of substitute products and services

The threat of alternatives in the grocery retail market is significantly low for food items and medium to high for non-food items.

In the food retail market, the alternatives of major food retailers are small chains of convenience stores, organic shops and off licences which are not seen as a threat to supermarkets like Tesco that offer high quality products at significantly lower prices (Financial Times, 2009)[3]. Furthermore, Tesco is further getting hold of these shops by launching Express stores in local towns and city centres creating an obstacle for these substitutes to enter the market.

However, the threat of replacements for non-food items, for instance clothing, is fairly high. It should be known that so long as the economic recession prevails, customers will be liable to go towards discounted prices hence Tesco is a threat to the speciality shops.

Threat of entry of new competitors

The threat of new competitor’s entrance into the food retail industry is low.

It needs huge capital investments in order to be competitive and to establish a brand name. Main brands that have already captured the food retail market are Tesco, Sainsbury’s, Asda, and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010)[4]. Therefore, new competitors have to produce something at an exceptionally low price and/or high quality to establish their market value.

Gaining planning approval and authorisation from local government takes a significant amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants.

[3] (Financial Times, 2009) – international business, finance, economic and political news http://www.ft.com/home/

[4] (Mintel, 2010)- provides global insight into consumer behaviour, product innovation and competitive marketing strategies http://www.mintel.com

Intensity of competitive rivalry

The competitive rivalry in the food and grocery retail industry is very intense and extremely high.

Tesco encountering intense competition from its direct competitors, including Sainsbury’s , Asda, ,Waitrose and Morrisons, which are competing with each other over price, products and promotions occasionally. It should therefore be highlighted that Asda is one of the main key competitors in this division with an increase of market share from 16.6% to 16.8% during the economic year 2010/ 09, while Sainsbury’s has shown an increase to 16.1% from 15.8% and Morrisons to 11.6% from 11.3% through the same period (Euro monitor, 2010)[5]. The market growth is essentially small which means that these increasing market shares from competitors have made the market rivalry even more intense, which is threatening Tesco’s market leadership position.

In countryside areas where the nearest superstore can be some distance away, some primary consumers are attracted by retailers like Somerfield and Co-op .

Tough discounters like Aldi and Lidl have taken over the market in times of recession. During 2008 they achieved a growth of sales of over 25% (Keynote, 2010)[6].

Bargaining power of buyers

The bargaining power of buyers is comparatively high.

The products that have a slight differentiation and are more benchmarked, the switching cost is very low and the buyers can easily switch from one brand to another.

It has been projected that customers are attracted towards the low prices, and with the accessibility of online retail shopping, the prices of products are easily measured, compared and thus selected.

Bargaining power of suppliers

The bargaining power of suppliers is moderately low.

It should be stated that the suppliers are inclined towards major food and grocery retailers and fear losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Sainsbury’s and Asda is further strengthened and negotiations are positive in order to get the lowest potential price from the suppliers.

[5] (Euro monitor, 2010)- international market intelligence on industries, countries and consumers http://www.euromonitor.com/

[6] (Keynote, 2010)- market intelligence, business information, market analysis http://www.keynote.co.uk/

TESCO Value Chain Analysis

can be defined as the links between key value adding activities and their interface with the support activities. Value chain has been implied as a strategic assessment tool used for individualising the strengths and weaknesses in value adding processes. A diagram of Tesco value chain is demonstrated below: Fig 6: Value Addition in Value Chain of Tesco

Inbound Logistics

The overall cost leadership strategic management of Tesco is demonstrated in its lean and supple inbound logistics function. The company uses economies of scope and its leading market position as key bargaining powers to attain low costs from its suppliers. The analysts have also highlighted the constant upgrading of their approved vendor lists, ordering system, and in-store processes to induce efficiency and effectiveness into the company’s inbound logistics operations.

Operations Management

Tesco has been praised by numerous supply chain management critics for its effective use of IT systems that smoothes the progress of the company’s low cost leadership strategy. According to Tesco (2010), the company has invested over £76 million in reformation of its operations through their Tesco Digital program, which is a third generation ERP solution for the company. The company has achieved £550 million in increased profitability during 2009 alone due to the introduction of this system. The company’s wide ERP system has also facilitated the minimisation of stock holdings within the company.

Outbound Logistics

Tesco has a well-grounded leadership position in online and offline food retail divisions, which is due to its effective and efficient outbound logistics. Drawing upon Mintel (2010), the company has developed a range of store formats and types, which are strategically placed to accomplish maximum customer exposure. These formats include Express, Metro, Superstores, Extra and Homeplus, which are segmented according to the target population.

Marketing and Sales

Loyalty programs like Tesco Club-card are being introduced through information technology advances which discouraged the customers from switching over to their competitors. Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues, including how to reduce food waste and their carbon footprint when preparing meals.

Services

Tesco has been followed a dual strategy of cost leadership and differentiation, which has led to an increased importance placed on customer service. Drawing upon Keynote (2010), this dual strategy is demonstrated through the development of financial services, self-service kiosks, focused direct marketing and promotions.

Conclusion

As a summary of the above analysis, it can be concluded that Tesco maintains a hold on its leadership position within the highly turbulent retail segment, where companies are obligated to pursue both cost leadership and differentiation strategies. Tesco has been continually able to achieve both with the help of a agile and lean supply chain management, along with the strategic use of information technology. The inner core competencies of Tesco have been seen to be united with the business environment, therefore highlighting a positive future outlook for the company.

The value chain framework proven that the value chain of a company may be useful in understanding and identifying crucial concepts to achieve competitive strengths and core competencies in the marketplace. The model also reveals how the value chain activities are united together to ultimately create value for the consumer. The four support activities and five primary activities form an interdependent system that is connected by linkages. Analysts carrying out the value chain analysis should break down the main key activities of the company according to the activities entailed in the framework/business structure, and consider the potential for increasing value through the means of cost advantage or differentiation. Finally, it is very essential to determine strategies that focus on those activities that would allow the company to attain sustainable competitive advantage.