To determine value creation possibilities (cost and/or differentiation), you should undertake a value chain analysis.
This is done by viewing the firm’s operations as a series of watertight, value creation activities.
There are two broad categories: primary activities and support activities. Primary activities range from design to after-sales customer service. Primary activities are supported by a cluster of other support activities (such as QA, HR, General Administration) that supply inputs to permit the primary activities to take place.
By carefully viewing each activity as a watertight unit, we can attempt to identify cost savings that might be achieved; for example outsourcing. We can also look for opportunities to differentiate our goods and services to accommodate value creation opportunities identified by our customers.
Your job is to ‘wring the pennies’ out of the activities in the value chain and/or to add value to the activities that will meet or create needs in customers’ minds.
Value chain analysis is also a valuable tool to assist in a competitive analysis. By comparing the same watertight compartments across firms, we could analyze, for example, the Cobbler’s competitors if we collected that data. Comparatively, where is the Cobbler strong? Where is the firm weak? How can the Cobbler exploit its strengths and mitigate its weaknesses? See the Cobbler Case for data.
The Cobblers’ have a core competency in product design and quality manufacturing. They add significant value-add to customers through these activities. In terms of their current market, these could be described as distinctive core competencies. Going forward, these skills can be developed into distinctive core competencies for a new market.
Based on their relationship management skills, they can also build core competency in sales and service.
The Cobblers’ will need to overcome a core deficiency in marketing to become successful. You get the idea!
Mergers and acquisitions tool… compare the two value chains and look for the fit… the ‘synergy’—2+2=5! If none… then don’t do the deal!
