The Value Chain Analysis Tool Marketing Essay

Introduction

This report will focus on the value chain analysis tool and how it can be used to enhance the performance of Zenox computers. It will start with an overview of the traditional accounting techniques and the value chain concept, what strategic decisions this concept supports within the firm, how it can be integrated, implemented to improve the overall performance, identifying its limitations and making recommendations that will reduce the impact of such limitations.

Traditional Accounting techniques: An overview

Up until the twentieth century, traditional techniques were adaptable to the business environment when overheads in firms were relatively low, product varieties were few, automation was minimal and labour was intensive (Sulaiman, Ahmad and Alwi, 2004). The complexities of the modern business environment have made researchers emphasise the need for modern accounting techniques to capture essential aspects of firms’ operations which have been neglected by the traditional techniques (Sulaiman, Ahmad and Alwi, 2004). Table 1 shows the differences between traditional techniques and the business environment for which they were applied and the contemporary accounting techniques and their modern day business climate:

Traditional Accounting Techniques

Contemporary Accounting Methods

Longer product life cycles, more emphasis on direct labour with less emphasis on technology

Shorter product life cycles with advanced manufacturing technology and less physical labour

Less global competition in the business environment

Global business environment is highly competitive

Varieties in products was minimal

Hugely diversified product base

Business strategies largely linked to volume

Business strategies linked to quality improvement, meeting customer needs, inventory and stock control

Excessive focus on financial data

Focuses on both operational and financial data

Strategies are mainly internal to the company

Strategies are based on both the internal and external environment

Focuses on the short term performance of the firm

Focuses on the long term sustainability of the firm

Table 1: Traditional and Contemporary Accounting Techniques

Value Chain Analysis

Value chain is the set of linked activities of a firm carried out from the initial stage of sourcing for raw materials to the final stage of delivering the product to customers (Shank and Govindarajan, 1989). These include purchase of raw materials, production and distribution of the company’s products and each activity contributes to buyer value (Porter, 1998). It is considered as a tool to disaggregate a firm’s activities into its individual components and identify points along the chain where value can be added (Walter and Lancaster, 2000). Value on its own can be expressed as the ability of a product or service to meet customer’s priority (Walter and Lancaster, 2000).

Porter (1998) suggested that firms adds value to their products and gain competitive advantage by conceiving new ways to conduct the activities in the value chain and treating the chain as a system which can be reconfigured, possibly by adding or eliminating certain activities in the process, to enable the company perform crucial activities along the value chain better than its competitors. He further suggested that firm activities are broadly divided into two namely Primary activities and Support Activities.

Primary Activities – Activities that are directly related to the ongoing production, marketing, delivery and servicing of the firm’s product. Table 2 shows the activities involved:

Primary Activities

In-bound Logistics

These are activities concerned with receiving material from suppliers, inventory control of input materials and warehousing.

Operations

These are the processes of transformation of the input into final products

Outbound logistics

These are concerned with the distribution of the products to the consumers.

Marketing and sales

Which employ tools such as advertising and marketing communications with the aim of making a sale.

Service

These may be needed to maintain or enhance product’s value and may include installation, customer care and repair services

Table 2: Primary Activities in the Value Chain

Support activities – these are not directly involved in production, but may increase effectiveness or efficiency. The activities involved are shown in Table 3.

Support Activities

Procurement

This is responsible for purchasing all materials necessary for the company’s operations and value creating activities.

Human resource management

These are activities that involve recruitment, training and compensating of employees.

Technology development

This involves research and development, technological innovations and knowledge enhancing capabilities which are essential in giving a firm an edge

Firm infrastructure

This includes planning and control systems, such as finance, accounting, and corporate strategy etc

Table 3: Support Activities in the Value Chain

Value Chain of Zenox Computers

Fig. 1 below shows the current operational structure and value chain of Zenox Computers and Fig. 2 shows the value chain. The company currently produces the hardware components of laptops, procures required microchips, integrated circuits and other sensitive electronic parts from specialised companies, assembles the motherboard and produces the laptops. The company warehouses the finished products prior to transporting them to the retailers, thus employing an indirect sales mechanism. It is also involved in the marketing of the product and awareness creation to promote sales.

Design of Product

Assembly and Production of final laptop

Software Installation

Branding & Marketing

Production of Hardware Components

Sub Assembly of Motherboards

Distribution of Products

Retailing via Indirect Channels

Fig 1 – Value chain of Zenox computers

Inbound Logistics

Operations

Sales and Marketing

Outbound Logistics

Service

Firm Infrastructure

Human Resources

Technological Development

Procurement

Relating with suppliers to purchase stock required for production

Innovative research into new processes and technology that will give the company a competitive edge

Recruitment and training of skilled and competent staff that will add value to the company

Backward integrated into production of hardware software components.

Support Activities

Raw materials for hardware and sub assembly

Stock warehousing

Low inventory Turnover

Production of Hardware Components

Motherboard Assembly

Software Production

Laptop Production

Warehousing of Laptops Produced

Shipment to Retail Channels

Sales Promotions

Advertising Campaigns

Sponsorships

Market Expansion

3 year Warranty

After sale service and repairs

t

Primary Activities

Fig 2: Porter’s Value Chain for Zenox Computers

Industry Structure – Analysis of the Micro Environment

Porter (1995) showed the micro environment of the firm is constituted by five forces made up of the industry rivalry, bargaining power of suppliers, bargaining power of buyers, threat of substitutes and threat of new entrants. The analysis of these is shown in Table 4 and diagrammatically expressed in Figure 3.

Industry Rivalry

The computer industry is a competitive one with quite a number of players. As several companies compete for a large share of the market, brand name, quality and pricing becomes very important

Threat of New Entrants

The high cost of entry into the market, level of technology and cost of penetrating a very competitive market where exit costs is high significantly raises the entry barrier of the industry

Bargaining Power of Suppliers

The large number of hardware suppliers for the industry makes the bargaining power low. However for the software industry the near monopoly makes the bargaining power very high.

Bargaining power of buyers

Due to the high number of manufacturers, the buyer has a variety to chose from thus making the bargaining power quite high

Threat of Substitutes

Demand for laptops remain higher but competition from cloud computing, palm tops, desk stops, smart phones is on the increase.

Industry Rivalry

High Threat due to high number of competing producers.

Bargaining Power of Suppliers

High (For Software suppliers)

Low (For Hardware suppliers)

Bargaining Power of Buyers

High Threat due prevalence of varieties of laptop brands.

Threat of Substitutes

Medium Threat; Alternatives are Desktops, Palm tops and Smart phones.

Threat of New Entrants:

Low Threat due to high cost of entry

Table 4: Effect of Five Forces on Laptop Industry

Fig 3: Effect of Five Forces on the Laptop Industry

Strategic Decisions and the Value Chain Analysis

In making our strategic decisions, strategic questions arose after a comprehensive analysis of the value chain and the cost drivers in each aspect of the chain. These are:

Whether to make or buy

Either to make a forward integration or a backward integration

To quantify and assess the bargaining power of buyers and suppliers

How do we exploit the linkages with the suppliers and the buyers.

These questions are answered from two major perspectives, the supplier and the consumer as shown in Table 5 .

Service Perspective

The hardware component manufacture and sub-assembly aspects of the business will be phased out and outsourced to competent suppliers.

Zenox will adopt the build to order strategy and increase inventory turnover by warehousing stock based on preconfigured options which is determined by market forecasts

Given the low bargaining power of the hardware suppliers a relationship will be established with several firms to reduce risk of singular control by one supplier. The monopoly of Microsoft will be exploited by negotiating a long term deal in order to reduce the variation in Zenox cost structure.

Customer Perspective

Zenox will cut off the retailing, marketing and sales aspect which utilises indirect channels

Zenox will forward integrate into sales and support service market

Zenox will sell directly to customers and create a link with them

A build to order strategy will be established to customise the product according to customer specifications

Table 5: Strategic Decisions and Value Chain Analysis

Selling directly will eliminate the middle man, reduce capital expended on marketing and sales and enable Zenox sell at lower prices to the customers.

In addition the products will be promoted through popular internet sites such as yahoo and google to reach a wider audience at cheaper cost. A comparison of these strategic decisions with existing practices is shown in Table 6.

Existing Practices

Strategic Decisions

Zenox currently produces hardware components. Producing a limited quantity is disadvantageous to the firm as cost per item is high.

Existing hardware manufacturers supply other firms thus produce more enabling them spread their costs. This makes cost per item cheaper. The company will outsource this aspect and save resources by procuring hardware than producing them.

Zenox produces operating software which is installed on the final product.

Microsoft has a near monopoly in the software production. Zenox will establish a partnership with Microsoft. This will reduce cost of access to software and make the product available to a larger customer base which is accustomed to Windows.

Zenox is heavily involved in sales and marketing but sells through retailers

Direct marketing strategy will enable company representatives interact with customers and understand their requests. The company will differentiate by building to order and then sell directly to customers at cheaper prices.

Zenox currently warehouses a lot of stock leading to a low inventory turnover

The company will order based on demand and forecasts and will reduce stock volumes tying down less cash.

Zenox currently has a high level of advertising

Advertising activities will embrace cheaper mediums such as the internet while sales and marketing will be emphasised

Table 6: Comparison of new strategies with existing practices

EFFECT OF THE STRATEGIC DECISIONS ON THE PERFORMANCE OF ZENOX COMPUTERS

Outsourcing the manufacturing of hardware components and sub-assembly units will help Zenox eliminate the cost of those aspects and procure assembled mother boards from supplier companies. This is to take advantage of the cheaper prices at which they will be supplied to the company, given the suppliers will enjoy the advantage of economies of scale which will lower their production costs. It thus becomes considerably cheaper for Zenox to procure the components than to manufacture them, enabling the company make savings. Nike’s outsourcing of its manufacturing and assembly departments following its realization of its core competencies allowed Nike to produce its goods at lesser cost and better quality (Crain & Abraham, 2008).

The build to order strategy is a differentiation strategy which allows Zenox computers stand out as a brand. Its adoption will enable the company tailor its products to suit individual and corporate needs, open up new opportunities, capture new markets and increase market share. Increasing inventory turnover by minimising stock and ordering stock based on request and forecasts will reduce the current assets in stock and increase free cash which can be channelled to other uses. HP’s comprehensive warehouse management services created fulfilment centres close to FEDEX super hubs, therefore eliminating the inbound transportation leg to FEDEX (Atikomtrirat, 2007).

The company will utilise the low bargaining power of the hardware suppliers to negotiate supplier deals that are efficient and cost effective, taking into cognizance the capacity of the company to deliver on time. This will enable Zenox actualise the low inventory strategy and minimise costs. HP’s integration of order management and inventory management systems were also designed to proactively monitor and control product inventory level through its FEDEX enabled hpshopping.com (Atikomtrirat, 2007).

A software deal with Microsoft will enable the company hedge against unfavourable changes in cost of software procurement while the cost of software development would have been completely eliminated.

Promotion of the product through internet sites such as yahoo and google will create cheaper and wider avenues by which awareness of the brand will be enhanced while direct selling gives an opportunity for price reduction having largely eliminated the price mark up attributed to retailers. Using HP’s value chain, in-depth solution for the creation of a new online sales channel for customers known as hpshopping.com, this was expected to enable HP capture a larger share of sales, enhance its relationship with customers, and complement its existing network of retail distributors

These strategies will enhance operational efficiency and maximisation of available resources while reducing expenses, thus boosting company performance. The restructured operational chain and value chain are shown in Fig 4 and Fig 5.

Design of Product

Distribution

Direct Sales

Software

Assembly and Production

Branding and Marketing

Hardware Components

Integrated Circuits & Microchips

Support Services

SUPPLIERS

Fig 4: Restructured Value Chain for Zenox computers.

Inbound Logistics

Operations

Sales and Marketing

Outbound Logistics

Service

Firm Infrastructure

Human Resources

Technological Development

Procurement

Relating with suppliers to purchase stock required for production

Innovative research into new processes and technology that will give the company a competitive edge

Recruitment and training of skilled and competent staff that will add value to the company

Forward integration into assembly of relevant components to produce company branded laptops

Support Activities

Delivery of computer hardware and electronic components

Minimal Stock warehousing

High inventory Turnover

Assembly and production of Zenox laptops

Warehousing of Laptops Produced

Shipment to Sales outlets

Direct Sales and marketing

Advertising through internet

Market Expansion

3 year Warranty

After sale service and repairs

t

Primary Activities

Fig 5: Restructured Porter’s Value chain for Zenox computers

The value chain analysis should be consistently used to evaluate the performance of the company so that necessary adjustments can be made in reaction to market trends.

LIMITATIONS OF THE VALUE CHAIN ANALYSIS

Most industries have complex value chains, which makes analysis difficult. Some industries involve activities that cannot easily be valued.

It was created in an era when service industries in the Western countries employed lesser workforce compared to today’s statistics. This is why the model has come under heavy scrutiny by academicians and practitioners.

The value chain is used to analyse a firm’s position in relation to its direct competitors with the assumption that rivalry drives profitability in other words, the value chain cannot be used in isolation when comparing a firm with its competitors. This limitation has been minimized through the introduction of a benchmarking tool to analyse the strength of Zenox’s competitors.

The value chain analysis does not include a customer segmentation analysis to mix the internal and external view, Differentiating Competitive advantage can only be gained if customers are willing to pay for Zenox’s product. This limitation has been reduced by the creation of a customer segmentation model to show the firm’s target group.

Fig 6: Zenox Value Chain Incorporating Customer Segmentation

ROLE OF MANAGEMENT ACCOUNTING

The role of management accounting in implementing Zenox’s value chain and ensuring that improvement in performance is achieved is shown in Table 7 below:

Building interfirm relationships with supliers by playing a key role in make or buy decision

Following Zenox resolve to go with a buy decision by outsourcing certain aspects of its production, this can lead to the initiation of partnership with our chosen suppliers. Therefore management accounting will help in identifying ways of making relationship more efficient and helping members to reduce their production costs

Usage in actual management of Zenox partnerships with its suppliers

This can be achieved by providing support for inter-firm teams in research and development projects and also through designing of the product jointly and thus searching for one global minimum cost.

Managing partners’ responsibilities with each other thereby creating a role for performance management

It will achieve this by supplying performance report which compare actual performance with the planned performance and which therefore highlights those activities that are not conforming to plan

Management of appropriation concerns

This involves the need to safeguard the interest of partners in interfirm relationships against the potentially opportunistic behaviour of the others. Since Zenox’s value chain allows it to create relationship with suppliers. It will be important to safeguard its interest while building trust with suppliers. Management accounting could be applied here by creating a system of planning and budgeting as well as financial incentive system to manage any appropriation concerns.

Table 7: Role of Management Accounting in Zenox Value Chain

RECOMMENDATION

To sustain its competitive advantage, Zenox computers would have to treat its customers separately. In other words, it should adopt different strategies for its different sets of customers.

For corporate customers, more research should be carried out on types of enterprise solutions that corporate firms are increasingly adopting.

For individual customers, a strategy of direct marketing should be tilted towards technology savvy customers who are either buying a second product or replacing the old ones. It is recommended that Zenox attempts to provide its customers with more services and products specifically targeted at the need of these customers. Aggressive selling can also be incorporated into the company’s direct selling strategy in order to help capture a larger share of the market.

The company should realize that with commoditization of the computer market, there will be more players in the market and the company at appoint in time will have to focus on volumes rather than margins.

CONCLUSION

Zenox’s strategies of building-to-order, high inventory turnover and direct marketing should give the firm a distinct position in the industry. Its competitive advantage can only be sustained in the fast growing computer industry through continuous exploitation of its resources