CI 402 – Value Chain Analysis
WHEN: October 31, 2023 Virtual
FACULTY: ROTHBERG
CREDITS: 0.7 CEU CREDITS
SUMMARY: Perform competitive cost analysis based on the Value Chain Framework and give your management in-dept numerical insights on its competitive (dis)advantage.
A NOTE TO PARTICIPANTS:
To gain the greatest benefit from this course, please be sure to review the case material in advance.
How does Dell manage to be so profitable in a generally unattractive industry? CI analysts often need to explain a competitor’s competitive advantage. How can it do what it does? The proper answer can come only from a Value Chain Analysis (VCA), which closely analyzes the chain of activities performed by a company to identify precisely (and numerically) the sources of differentiation and cost-value advantages. Interpreting the value chain of a competitor means accurately understanding the value of its strategic differentiation. The same is true for interpreting the threats to your own company’s position.
You will learn how to:
- Identify key value chain activities at the root of core competencies and competitive advantage.
- Find methods for determining your own and your competitors’ relative cost position for different cost drivers.
- Compare the real strategic differences in value chain activities between your company and its rivals
- Examine the various sources of sustainable and non-sustainable competitive advantages
- Apply evidence based numeric relative cost analysis to strategic decision making
- Build an evidenced based map of different strategic value chain activity choices
Here we list the key questions that this seminar addresses. If you can answer “yes” to three or more of the 10 questions posed for this course, it will meet your needs.
Do you need to…
- Estimate cost positions among various rivals in your market?
- Identify how and why different industry players present – and can sustain – large differences in profitability?
- Determine the actual strategic differences in value chain activities between your company and its rivals?
- Deliver more precision in your strategic competitive assessments, offering more “hard” financial and performance models on competitors, customers, suppliers, and acquisition targets?
- Identify the precise nature and sources of competitive advantage in your industry?
- Alert management to threats regarding your company’s competitive advantage against competitors’ performance improvements
- Prepare recommendations to management on your company’s competitive positioning
- Improve your overall effectiveness in your competitive assessments?
- End analytical confusion and debate over why a particular rival possesses competitive advantage?
Finding a Source of Competitive Advantage
The Pharmaceutical industry’s profitability (operating income/assets) over the period 1988-1995 was around 25%. During the same time period, Motor Vehicle industry average yield was about 4%. Drug stores generated 12%.
Within the Pharmaceutical industry, J&J’s Operating income/assets ratio during that time period was 39%. Schering Plough, 35%. Abbott was 22% and Rhone-Poulenc achieved 13% only. Genentech was even worse (4%).
Questions
- What explains such persistent differences in profitability? Does the same analysis fit both examples (industries and companies)? If not, what is the difference in explanation?
- What is the source of competitive advantage (what’s behind the empty slogans)?
- Is creating and sustaining competitive advantage the same? How can your competitors sustain their advantage? How can your company?
- How can you use the Value Chain template to analyze your company’s cost vs. competitors? What does it tell you about your company’s sources of competitive advantage? What conclusions would you draw for management?
From Where Inside Its Operations Does a Rival View Its True Value
Airborne Express is a small carrier surviving the giants in this industry, FedEx and UPS. To understand how it can do that, you should draw an activity map, comparing the three companies. If you do that, you find out Airborne has, for example, a manual sorting operations, compared with FedEx and UPS’ fully automated hubs.
Questions
- How does a manual operating system deal with FedEx and UPS’ scale advantage?
- How does Airborne’s manual operations fit in with the other activities in Airborne’s whole value chain? How does Airborne achieve higher capacity utilization on its flights than its competitors?
- Why is that important in analyzing Airborne’s strategy?
How Much Cost Analysis is Enough – and When Do You Know?
If you can benefit from analyzing your competitor’s P&L to arrive at its relative cost (dis)advantage, start with your own P&L, then move to the competitor’s based on public and industry data. Identifying cost drivers associated with the activities you analyze on the P&L is crucial to analyzing differences between your company (or unit) and your competitor’s. Assigning cost figures follows the identification of cost drivers, and the assessment of how your competitor is affected by them relative to your own company.
Questions
- Do you analyze all the hundreds of a competitor’s activities? A subset of activities? Which subset should you concentrate on?
- How detailed is the analysis? What data do you use? Where do you get these data? What if it is a private company?
- If you have no strategic option to act differently on a cost driver, does it matter? For example, if all the rivals produce in plants located in the same region, is the manufacturing location a cost driver?
- How does relative cost analysis lead to better competitive positioning?