Value Chain as Competitive Advantage Essay
Value Chain as Competitive Advantage
Effective value chain as a competitive advantage can contribute significantly to the prosperity of a firm in the competitive arena, but it can cause dire situations if not operated properly (Guy, 2011). However, there are conflicts among companies as to how stakeholders think they gain competitive advantage. Porter (1996) suggests: A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at lower cost or do both.
The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average costs (Walters & Rainbird, 2007, p.25). Walters & Rainbird (2007) states that an effective value creating strategy takes an organization beyond its own boundaries. An organization has an advantage over other providers of the same goods or a service in a consumer market unless it has a monopoly or is the first to create the market. Review of Concepts
Value chain helps companies assess their competitive advantage through internal cost analysis, internal differentiation analysis, and vertical linkage analysis. Competitive advantage is about discovering what customers want and profitably satisfying those needs and exceeding their expectations. Customer delight is a principle that drives repeat purchasing and customer loyalty. It is about creating a WOW feeling and it can be the difference between success or failure. Two criteria must be met for a company to survive and prosper in the industry: the company must supply what the customers want to buy and they must survive the competition.
Value Chain A value chain describes the full range of activities that companies and workers do to bring the product from its conception to its end use and beyond. These activities are design, production, marketing, distribution and support to the final consumer. The value chain analysis can produce goods and services that can be contained within a single geographical location or a wider area (Global Value Chains, 2006).
Michael Porter (1985) described value chain as the internal processes or activities that a company performs “to design, market, deliver, produce, and support its product”. He even when a step further and stated “a firm’s value chain and the way it performs individual activities are a reflection if its history, its strategy, and the underlying economics of the activities themselves”. Companies use the value chain approach to understand which distribution channels, price points, segments, product differentiation, and selling propositions to yield them the greatest advantage of competition. Competitive Advantage
A competitive advantage is when the company sustains profits that exceed the average for its industry. Competitive advantage is assess by using the following value chain analysis of internal cost analysis to determine the sources of profitability; internal differentiation analysis to understand the sources of differentiation; and vertical linkage analysis to understand the relationships and associated costs among external suppliers and customers. The advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost, or deliver benefits that exceed those of competing products. A competitive advantage allows the company to create superior value for its customers and superior profits for itself (QuickMBA, 2010).
QuickMBA (2010) states that a competitive advantage is created by using resources and capabilities to achieve a lower cost structure or a differentiated product and this decision is a central component of the company’s strategy for competition. In order to achieve this advantage, the company must perform one or more value creating activities that will create more overall value than the competitors. A company’s success in developing and sustaining its competitive advantage does not depend on its own value chain but on its ability to manage the value system on which it is a part. An example would be an automobile manufacturer that may have its suppliers set up facilities in close proximity in order to minimize transport costs and reduce parts inventories. Customer Delight
Steve Denning (2011), states that customer delight is the firm’s new bottom line and delighting the customer from outsets to outcomes. By focusing on delighting the customer the firm makes a lot more money than they would if they set out to make money. Delighting the customers make a lot of money. Customer delight = providing a continuous stream of additional value to customers and delivering it sooner. It is measurable and means a different way of running the company.
Delighted customers are those where the needs are anticipated, solutions are provided to them before they ask and observations are made to determine if new and/or additional expectations are ready to be required. Delighting the customers keep them coming back for more and causes new customers to come. Customer delight distinguishes a company from the rest, allows the company to make more return on its investment, and allows the employees to be rewarded (Customer Delight).
Inter-relationship of Concepts Having inter-relationships among businesses can be identified by a value chain analysis. Competitive advantage enables a company to create superior value for its customers and superior profits for itself which leads to customer delight. When multiple business units share the procurement of raw materials there is a cost reduction. These inter-relationships exist simultaneously in value chain with multiple activities. Examples of Successful Companies
FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system. This was done after they reconfigured its value chain. Customer demands are increasing in step with rapidly evolving technology and they want their technology partner to make it simple. This is why Dell changed its approach to client systems and decided to refresh its purpose to deliver technology solutions that enables people everywhere to grow and thrive (Raghava Rau, et al). Wal-Mart is the most capitalized company in the world. Thanks to its low pricing strategy that became its strong source of competitive advantage. Holding strategic assets such as patents is a strong source of sustained competitive advantage and General Electric has stood the test of time because of the several patents held. Mind you that possession of these strategic assets has made General Electric one of the most powerful companies in the world. Examples of Unsuccessful Companies
Conclusion The value chain activities are not isolated from one another but one value chain activities affects the cost or performance of other ones. Value chain is a necessary component for competitive advantage and custom delight. They each are inter-related with the success of the others. A company’s success in developing and sustaining its competitive advantage does not depend on its own value chain but on its ability to manage the value system on which it is a part. In order for companies to survive and prosper in its industry, they must supply what the customers want to buy and they must survive the competition.
Subject: Value chain,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 25 November 2016
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