A Critical Evaluation of a Strategic Management Concept

A corporation examines the steps to improve or decrease cost differential by identifying the support and key activities that are crucial to its end product along the value chain. The value chain is a visual representation of the internal processes that a business uses to transform inputs into finished goods (Grant, 2016, p. 198).
The value chain is the most important instrument in the world for any firm looking to acquire an advantage over its rivals. Value chain analysis mostly relies on the fundamental benefit of economic theory. Firms are well served by operation in sectors that have an advantage in comparison to the competitors. Concurrently, firms should question themselves on where to deliver the best value to clients. In conducting any analysis using value chain, the firm starts by identification of every part of the production process and identify where steps ought to be removed or improved. The improvements can either result to good productive capacity or cost saving. The final result is that clients derive benefit from the output for a relatively cheaper cost which makes the bottom line of the company better (Grant, 2010, p. 165).

Value chain as a tool of strategic analysis is applied in analyzing internal activities of a firm. It aims to identify which events are vital or of more advantage to the company and the ones that can be improved to give a competitive advantage. A company's competitive disadvantage or advantages are revealed upon analyzing the internal activities. Any company that uses differentiation advantage to compete always performs better compared to other competitors. A firm earns a profit in case it is in a position to produce superior products or produce goods whose costs are lower than competitors.

In 1985 a model of value chain was introduced by Porter. According to him, value chain a representation of all internal activities a company takes part in to have output. The value chain is made up of essential events that put a value on the end product directly and add value to support activities indirectly. Although basic activities instantly add value to a production process, support activities are also equally important as they add value to the process of production. These days competitive advantage majorly derives from improvements in technology or business innovation processes and models. Therefore, informative services or general management as support services are usually the most vital origin of differentiation advantage. Besides, basic activities are always the cost advantage source, where costs, are easily pointed out for every activity and well managed (Grant, 2010, p. 132)

The value chain of a firm is part of a large firm value chain. The more activities a firm undertakes in comparison to industry value chain, the more it becomes more integrated.

An example of value chain of an industry

The first section has raw materials, intermediate goods, manufacturing, market and sales and after-sales service. In production, the chain is divided into functions, operations, inbound and outbound logistics. There is two types of competitive advantage: cost and differentiation advantage. In cost advantage, the approach is employed if organizations compete on and try to understand the origin of their disadvantage and advantage cost and which factors influence those prices.

Cost advantage

Step 1

Identify the company's support and primary service

Step 2

Establish relative importance of every activity in a products total cost

Step 3

Identify cost driver for every activity

Step 4

Point out how activities link

Step 5

Point out on reducing cost opportunity

Differentiation advantage

The company that wants to make superior services and products use an approach of differentiation advantage.

Step 1

Identify activities that create value

Step 2

Evaluation of differentiation strategies to improve customer value

Step 3

Identification of sustainable differentiation

Cost advantage

For any firm to gain a cost advantage, it has to pass five steps of analysis

Step 1

Identifying the firm's support and primary service

All activities including storing materials, receiving, marketing to sales that are used to make services and goods have to be identified and divided from the other. It requires enough company's knowledge of operations as value chain activities are usually not organized as the company itself. Managers that identify actions of value chain have to recognize how work is executed to deliver customer value.

Step 2

Establish the importance of every activity in total product cost. A product or service total production cost must be divided and assigned to every action. Costing that is activity based is used in the calculation of costs for every process. Activities that are main cost sources of done inefficiently should be addressed.

Step 3

Identifying cost driver for every activity

Managers can improve on costs if they get to understand what factors drive costs. Labor intensive costs activities are driven by the hour of work, wage rate and work speed. Different activities will lead to varying drivers of cost.

Step 4

Identification of links among activities

Cost reduction in any activity leads to further reductions in costs in following activities. For instance, fewer factors in production design lead to lower cost and the low number of faulty parts. Therefore, identification of links among activities leads to a better understanding of how costs improve would affect the value chain. At times, reductions in costs in an activity point to the cost of other activities rising.

Step 5

Identification of activities for cost reduction

When the firm knows its cost drivers and inefficient activities, it can set plans on improving them. Higher wages are dealt with through increasing of production speed, installing automated processes and outsourcing jobs to countries with low wage rate.

Differentiation advantage

The value chain is differently done if a company does not compete on cost but differentiation. The reason is that differentiation advantage source comes from the addition of more features, the creation of superior products and satisfaction of needs of customers which results in high cost.

Step 1

Identifying value-creating activities of customers

After identification of all value chain activities, the managers should focus on an activity that contributes most to the creation of customer value. For instance, the success of apple product comes from good marketing activities and not product features.

Step 2

Evaluation of the strategies of differentiation to improve customer value

Increase the number of product features, center on customer responsiveness and customer, increase customization and opt for complementary products.

Step 3

Identification of the most sustainable differentiation

To understand this much better Starbucks can be used as an example. The journey of Starbucks started with one store in 1971 in Seattle to be one of the recognized brands in the whole world. Starbuck mission is according to its website as inspiring and nurturing the human spirit.

Basic activity

Inbound logistics

Starbucks inbound logistics refers to the selection of finest quality of beans by the firm appointed buyers from producers in America, Asia, and Africa. For Starbucks, the unroasted beans or the green are obtained directly from farms by Starbuck buyers. These are then transported to stores after which seeds are packaged and roasted. They are then sent to distribution centers which are owned by the company and operated by logistic firms. The firm does not source its procurement from outside to ensure high standards of quality from the selection point of beans.

Operations

Starbucks is operational in 65 countries either as direct stores operated by the firm of stores that are licensed. Starbucks has over 21,000 stores globally which is inclusive of Seattle coffee, Starbuck coffee, and retail location. According to the yearly report, the firm generated 79 percent of the revenue during 2013 financial year from its business operated stores, but the stores accounted nine percent of income.

Outbound logistics

There is no or little presence of mediators in product selling. Many of the product sales take place in licensed or own stores. As the new business, the firm has made coffees which are to be sold via leading retailers in America.

Marketing and sales

The Starbuck has invested in quality and customer service of high level than marketing that is aggressive. Nevertheless, marketing activities are usually carried out when new products are to be launched in sampling form areas within the stores.

Service

Starbuck objects at building loyalty via high customer service level at its stores. The Starbuck retail objective is the leading retailer in its target markets as it sells the finest and related products giving every customer a good experience in a unique way.

Support Activities

Infrastructure

This is inclusive of all departments like legal, finance, and management which are needed to keep the firm's stores operational. The stores that belong to Starbucks are pleasing and designed in a way that they get complimented by customers.

Human resource

The firm's committed labor is taken as the major attribute in the firm's growth and success over time. Employees of Starbucks are motivated via generous incentives and benefits. The business is known for covering its workforce, and perhaps this is the reason as to why there is low employee turnover which shows good human resource. Many training programs are in place for employees in a work culture setting which keeps staff efficient and motivated.

Technology development

Starbucks is well known for technological use not only coffee related but connect to customers. Most customers use these stores as a meeting place because of unlimited and free WiFi availability. The firm in2008 launched a website where clients can air their views and share experiences. The firm implemented suggestions through the same platform. Starbucks use iBeacon systems where clients can order drinks via the phone app and be notified when buy.

Procurement

It involves buying of raw materials to be used in the final produce. The firm agents travel across the world to procure raw materials to be used for the production of the most exceptional coffee. The agents create a strategic partnership and relationship with supplies which are made after communication and reconnaissance about standards of the company. Standards of high quality are maintained with the involvement of the firm from the selection point of raw materials (Desai, Berger, and Higgs, 2016, p. 67)

Bottom line

The value chain concept assists segregate and understand the wasteful and useful activities accompanying every step throughout development product process. It explains that addition of value to every level, the overall products value gets enhanced consequently in achieving high profits. Manufacturing farms create value by procuring raw materials and employing them in the manner that it is converted to something useful. Retailers gather various products and use them in a way that is convenient to clients. The value created by any company is always the profit margin. The more an organization creates value, the more it is likely to make profits. And when the value is appreciated by many clients competitive advantage is created (Desai, Berger, and Higgs, 2016, p. 89)

In conclusion, value chain integrates internal and external data, applies proper cost drivers for processes creating value, exploit linkages in the value chain and continuously offer monitoring of strategic competitive opportunity of a company. It involves some strategic partners' inputs like final customer, finished goods, suppliers and wholesalers. The main aim is to carry out value chain analysis more effectively and finally exceed industrial competitors. Value chain evaluation can support firms to decide which competitive advantage type to follow and the way to follow it. Most academicians said that value chain is an effective technique for appraisal of an organization as it assists in giving clarity on strengths and weaknesses of areas. it is the best way of analyzing and developing advantage (Peppard and Ward, 2016, p. 89).

References

Desai, M.S., Berger, B.D. and Higgs, R., 2016. CRITICAL THINKING SKILLS FOR BUSINESS SCHOOL GRADUATES AS DEMANDED BY EMPLOYERS: A STRATEGIC PERSPECTIVE AND RECOMMENDATIONS. Academy of Educational Leadership Journal, 20(1).

Grant, R.M. (2010). Contemporary Strategy Analysis. 7th ed. John Wiley & Sons, p. 239-241

Grant, R.M., 2016. Contemporary Strategy Analysis Text Only. John Wiley & Sons.

Peppard, J. and Ward, J., 2016. The strategic management of information systems: Building a digital strategy. John Wiley & Sons.