1. Victor Marbun (M987Z259) Nguyen Phan Anh Huy (M987Z264)
Value Chain Analysis
Victor Marbun (M987Z259)
Nguyen Phan Anh Huy (M987Z264)

2. Outline The Value Chain Concept Methodology Case Study Ajax Airlines
People Airlines & United Airlines

3. Outline The Value Chain Concept Methodology Case Study Ajax Airlines
People Airlines & United Airlines

4. The value chain concept
According to Porter (1980), a business unit can develop a sustainable competitive advantage either based on cost or based on differentiation or based on both.
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5. Differentiation –cum-Cost Advantage
Stuck-in-the-Middle
Low Cost Advantage
Superior
Relative
Differentiation
Position
Inferior
Inferior
Superior
Relative Cost Position
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6. Low cost: Economies of scale in production Experience curve effects
Tight cost control
Cost minimization in areas such as R&D, service, sales force, or advertising.
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7. Differentiation: Brand loyalty Superior customer service
Dealer network
Product design and product features
Technology
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8. Value Chain Linkages
The value chain framework is a method for breaking down the chain-from basic raw materials to end-use customers- into strategically relevant activities in order to understand the behavior of costs and the sources of differentiation.
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9. Value Chain in the Paper Products
Industry
Silvarculture and Timber Farming
Logging and Chipping
Competitor B
Competitor C
Competitor A
Pulp Manufacturing
Competitor D
Paper Manufacturing
Competitor G
Converting Operations
Competitor E
Distribution
Competitor F
End-Use Customer
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10. Every firm must construct a value chain for the total paper industry, break the value in the chain into its fundamental sources of economic value.
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11. Value Activities within a firm
R&D
Manufacturing
Marketing
Distribution
Service
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12. A firm’s value chain is embedded in a large system that includes suppliers’ and customers’ value chains.
A firm can enhance its profitability not only by understanding its own value chain--from design to distribution--but also by understanding how the firm’s value activities fit into suppliers’ and customers’ value chains.
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13. Value chain VS Value-Added
Value-added refer to the contribution of the internal focus such as land, labor, capital goods.
Value chain concept highlights four profit improvement areas :
Linkages with suppliers
Linkages with customers
Process linkages within the value chain of a business
Linkages across business unit value chains within the firm
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14. Outline The Value Chain Concept Methodology Case Study Ajax Airlines
People Airlines & United Airlines

15. Value Chain Methodology process
Identify the industry value chain
Diagnose the cost drivers for each value
Develop sustainable competitive advantage
Assign costs fixed cost VS variable cost evaluation Revenues average cost VS marginal cost improvement Assets break even analysis Return on Assets

16. Identify The Value Chain
Activities should be isolated and separated if:
They represent a significant percentage of operating costs.
The cost behavior of the activities (cost driver different.
They are performed by competitors in different ways.
They have a high potential of being able to create differentiation.

17. Diagnose Cost Drivers Structural cost driver.
Scale, Size of operation.
Scope, Degree of vertical integration.
Experience, past activity.
Technology, what process technologies used.
Complexity, number of product lines.

18. Diagnose Cost Driver (Cont’d)
Executional Cost Drives.
Work force involvement (participation).
Total quality management.
Capacity utilization.
Exploiting linkage.

19. Develop Sustainable Competitive Advantage
Control cost driver better than competitors.
Can we reduce costs in this activity, holding value (revenues) constant?
Can we increase value (revenues) in this activity, holding cost constant?
Can we reduce assets in this activity, holding costs and revenues constant?

20. Develop Sustainable Competitive Advantage (cont’d)
Reconfigure the Value Chain.
Redefining the value chain (payoffs could be more significantly).
The company has fought to hold down labor costs.

21. Problems in Constructing a Value Chain
Calculational Difficulties.
Calculating value (revenues) for intermediate products.
Isolating key cost drivers.
Identifying linkages across activities.
Computing supllier and customer margins.
Constructing competitor’s cost structures.

22. Problems in Constructing a Value Chain (cont’d)
Value Chain difficulties
The process of performing the value chain analysis.
i.e. :
- how does my activity add value to the chain of customers to the end-user.
- How does my cost structure compare with those of my competitors.

23. Outline The Value Chain Concept Methodology Case Study Ajax Airlines
People Airlines & United Airlines

24. Ajax Airlines: A Valuable Chain Analysis
EXHIBIT 6
Ajax Airlines: A Valuable Chain Analysis
1988
1987
Sales
$8800
$7200
Expenses
Tickets&reservation
320
300
Aircraft Operations
4980
3900
Customer Service
2600
2400
Total Expenses
7900
6600
Identifiable property, plant,& equipment assets
Tickets reservations
2000
1000
Aircraft & operations
5000
5300
Total
$7000
$6300

25. Ajax Airlines: A Value Chain Analysis (Cont’d)
Per Seat Mile Flown
Per Available Mile
Costs: Tickets &Reservation
$ $.005
$ $.003
Aircraft Operations
Customer Service
Total
$ $.116
$ $.074
Assets: Ticket & Reservation
$ $.018
$ $.011
Aircraft
$ $.111
$ $.071

26. Case study: Ajax Airline
Strategically, Ajax airlines hope that a small increase in aggregate customer service expenditures and a better ticketing and reservation system will justify higher prices.
However, increase aircraft operations cost wipe out most of the profit impact of increase in revenue per seat mile flown.
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27. Case study: Ajax Airline
By the conventional analysis, this strategy seems hard to be successful.
Value chain analysis can yield very different insights. We believe that the linking of financial analysis to strategic positioning in this way is a critical element in effective financial analysis.
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28. Outline The Value Chain Concept Methodology Case Study Ajax Airlines
People Airlines & United Airlines

29. EXHIBIT 7 Value Chain Configurations: A Comparison Between People Express and United Airlines
Cost Per Seat Miles Cost Per Seat Miles $ 1,000 $ 1,300 $ 9.,000 $ 13,200 People Express United Airlines $ 4,900 $ 6,700 $ 11,600 $ 15,600 $ 1,500 $ 4,700 $ 28,400 $ 41,500
Advertising & Publicity
Ticketing Offices
Ticket Counter Operations
Gate Operations
Baggage Handling
fleets
Aircraft Operations
On-Board Service

30. Exhibit 8 Strategic Inference from the Value Chains of People Express and United Airlines
Value Chain Elements
People Express less than United Airlines (cost per 10,000 seat miles)
Strategic Differences
People Airlines
United Airlines
Advertising & Publicity
$ 300
Heavy promotion to tout low price/no frills airlines
Heavy promotion of full service airline
Reservation & Ticketing
$ 3,200
No ticket offices
No separate computer
Reservation system
Ticket Offices in
Downtown locations
Extensive computer
Reservation System
Secondary airport and
Terminals
No Ticket counters
(check in only)
Full service
Full Service
Free baggage checking
Fleet Costs
$ 1,800
Used Aircraft-Budget airplanes
New aircraft
Flight Operations
$ 4,000
High-density seating
Non-union pilots
Flying hour per day
Union pilots
Bigger crews
Crew paid on higher scale
Cabin Operations
Non-Union flight attendants
Lower pay scale
No first class, no meals