Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-1 Matching Firm Capabilities with Opportunities by Robert Pitts & David Lei Slides prepared by John P. Orr Webster University Chapter 3

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-2 What you will learn… The strategic tool known as the value chain The use of the value chain in evaluating an organization’s internal strengths and weaknesses The difference between primary and supporting value-adding activities Slide 1 of 2

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-3 What you will learn… The concept of competitive advantage The concept of distinctive competence Some important economic sources of competitive advantage Slide 2 of 2

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-4 Pizza Hut vs. Domino’s Pizza These competitors can be compared on the following key advantages: Location Reputation Purchase discounts Interrelationships First-mover advantages Location advantage Strategic Snapshot 1

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-5 General Motors Corporation Major push to “reinvent itself” Seeks productivity gains through… –Design –Operations –Inbound and outbound logistics –Procurement initiatives Strategic Snapshot 2

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-6 The Value Chain An analytical tool that describes all activities that make up the economic performance and capabilities of the firm. It is used to analyze and examine activities that create value for a given firm.

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-7 The Value Chain Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter. Exhibit 3-1

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-8 The Value Chain Primary Activities – Activities which relate directly to the actual creation, manufacture, distribution, and sale of a product or service to the firm’s customers. Secondary Activities – Economic activities which assist the firm’s primary activities.

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-9 The Value Chain Upstream Activities – Economic activities that occur close to the firm’s suppliers but far away from the customers. Downstream Activities – Economic activities that occur close to the customer but far away from the firm’s suppliers.

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-10 Primary Activities Inbound logistics Operations Outbound logistics Marketing/sales Service

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-11 Secondary Activities Procurement Technology development Human resources Firm infrastructure

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-12 Technology Development Product Development – The conception, design, and commercialization of new products. Process Development – The design and use of new procedures, technologies, techniques, and other steps to improve the value-adding process.

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-13 Pizza Restaurant Industry Value Chain Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Exhibit 3-2 Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Acquire capital, perform accounting, legal and administrative tasks for each activity Supervise warehouse or facilities/shipping personnel Improve supply chain to cut costs of ingredients Lease space: restaurants or delivery facilities Transport ingredients to restaurants & delivery facilities Supervise kitchen personnel/ training Develop new menu items, improve oven design Purchase ingredients & other supplies Prepare pizzas, salads, other food items Oversee marketing personnel Develop new promotional materials/ media Buy TV time Develop advertising copy, programs, promotions Develop service personnel, waiters Develop new restaurant formats/ layouts Purchase furniture, tableware Serve food in restaurants Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Supervise drivers/ ensure safety Develop new ordering systems; cut delivery time Purchase or lease phone or online order systems Deliver pizzas to ordering customers Slide 3-13

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-14 Automotive Industry Value Chain Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Exhibit 3-3 Oversee warehouse, transport personnel Work with suppliers to develop more efficient means to transport parts Negotiate with suppliers to cut costs and improve quality Transport components to assembly facilities Supervise workforce, union relations Improve product design & manufacturing processes; quality programs Buy components, assembly equipment Make and assemble components into autos Supervise advertising & sales personnel Improve selling methods Hire advertising agency, buy media time Advertise, promote, and sell autos Supervise maintenance personnel Improve maintenance procedures Buy tools for maintenance personnel Maintain and repair autos Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Infrastructure Human Resource Management Technology Development Procurement SUPPORT ACTIVITIES PRIMARY ACTIVITIES Acquire capital, perform accounting, legal and administrative tasks for each activity Oversee warehouse, transport personnel Work with distributors, logistics firms to raise quality Negotiate with suppliers to cut costs and improve quality Transport autos to dealers Slide 3-14

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-15 Exhibit 3-4A Pizza Hut’s Business System Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Infrastructure Human Resource Management Technology Development Procurement SUPPORT ACTIVITIES PRIMARY ACTIVITIES Administrative, legal and accounting tasks managed systemwide Performed by external suppliers Outsourced to software companies Performed by external suppliers Supervise kitchen personnel, training Supervise drivers, ensure safety Oversee marketing personnel Oversee waiters, service personnel Prepare pizzas, salads and other foods Develop new menu items; improve oven design Purchase ingredients and other supplies Develop new ordering systems to service callers; cut delivery times Purchase or lease phone or online ordering systems Deliver pizza to ordering customers Develop new promotions on a regular basis Buy TV time Develop ad copy, programs, promotions Develop new restaurant formats Purchase furniture, tableware Serve food in restaurants

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-16 Exhibit 3-4B Domino’s Pizza Business System Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Infrastructure Human Resource Management Technology Development Procurement SUPPORT ACTIVITIES PRIMARY ACTIVITIES Administrative, legal and accounting tasks managed systemwide Performed by external suppliers Outsourced to software companies Lease space for cooking facilities Performed by external suppliers Supervise kitchen personnel, training Supervise drivers, ensure safety Oversee marketing personnel Prepare pizzas, salads and other foods Develop new menu items; speed up oven design Purchase ingredients and other supplies Develop new ordering systems to service callers; cut delivery times Purchase or lease phone or online ordering systems Deliver pizza to ordering customers Develop new promotions on a regular basis Buy TV time Develop ad copy, programs, promotions No restaurant service

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-17 Exhibit 3-5 General Motors’ Business System Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Infrastructure Human Resource Management Technology Development Procurement SUPPORT ACTIVITIES PRIMARY ACTIVITIES Administrative, legal and accounting tasks managed systemwide Oversee supplier management personnel Streamline turnaround time with suppliers to ship parts Streamline ordering and documentation systems Adopt faster means to order and receive components Develop new virtual teams; union relations; oversee workers Oversee personnel involved in distribution Oversee marketing personnel Make and assemble components into autos Invest in new engine designs, car models; develop new factories, tooling Source parts, components; partner with key suppliers Streamline shipping time; web-based inventory tracking Purchase capacity on railroads/trucks Ship to dealers using railroads/ trucks; deliver vehicles Work with dealers to improve selling, product mix Buy media time; work with advertisers Advertise, promote product to public; work with dealerships No direct service to customers

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-18 Exhibit 3-6 Common First-Mover Advantages Patents License Location Channel Access Supply Access Reputation

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-19 Economies of Scale Scale of activity (plant size, sales volume.) Cost per unit of output A Exhibit 3-7

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-20 Major Contributors to Economies of Scale Specialization Fixed-Cost Spreading Fixed-Cost Spreading Purchase Discounts Purchase Discounts Vertical Integration Vertical Integration Exhibit 3-8

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-21 Economies of Experience Cumulative volume * * Number of unit produced (or sold, serviced, developed, etc.) since commencing an activity. Cost per unit of output Exhibit 3-9

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-22 Major Contributors to Experience Benefits Employee learning Employee learning Product redesign Product redesign Process improvement Process improvement Exhibit 3-10

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-23 Strategic Competency in action Creating Distinctive Value: Toyota Motor of Japan Becomes world’s No. 2 automaker Engineer Ohno and kaizan Poke-yoke and synchronization CCC21 trims $2.6 billion in costs Second-generation hybrid Prius

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-24 Activities Frequently Benefiting From First-Mover Advantage Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Supply access Proprietary processes; patent protection, license Reputation; license Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service License Patent protection; license; innovative design Reputation SUPPORT ACTIVITIES Location, channel access, reputation Exhibit 3-11 Hiring creative personnel Creative marketing

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-25 Requirements for Achieving Scale and Experience Advantage Centralization Susceptibility Implementation Proprietary - Activity must be centralized - Activity must be susceptible to to the processes which produce scale and experience benefits - Activity must be properly implemented - Benefits of scale and experience must be proprietary Exhibit 3-12

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-26 Internet Growth and Competitive Advantage Compressing the value chain Building extended, Internet-driven supply chains Competitive dynamics and the Internet

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-27 Pizza Hut’s Sources of Competitive Advantage Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Procurement of food (S) Reputation (FM): advertising (S,I) Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Key: FM = First Mover Advantages; S = Scale Advantage; I = Interrelationship Advantage Procurement of TV time (S, I) SUPPORT ACTIVITIES Exhibit 3-13

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-28 Comparative Financial Analysis: Key Ratios Profitability Leverage Activity Liquidity Type Examples Measures Indicators Profit after taxes Shareholder’s equity Return on Equity (ROE) Current Ratio Asset Turnover Inventory Turnover Debt/Equity Ratio Current Assets Current Liabilities Liabilities______ Shareholders’ equity Sales_________ Total Assets Sales_________ Inventory Productivity of firm’s value-adding activities Measure of financial solvency Asset use efficiency Turnaround of inventory Corporate financing; financial risk; default risk Exhibit 3-14

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-29 Ethical Issues: Assessing Rivals Examining competitors’ products Questioning competitors’ employees Using consultants Engaging in industrial espionage ‘Raiding’ employees