Social Capital - Article

Value Chain Analysis

Value Chain Analysis views the organization as a sequential process of value-creating activities. Such an approach is very useful for understanding the building blocks of competitive advantage. In competitive terms, value is the amount that buyers are willing to pay for what a firm provides for them. And, a firm is profitable to the extent that the value that it receives exceeds the total costs involved in creating the product or service.

When using value chain analysis one needs to view the concept in its broadest context, i.e., without regard to the boundaries of a given organization. That is, include suppliers, customers, and alliance partners.

Advertisers Turn to New Value-Adding Media

It pays to advertise...that timeless adage is based on the belief that advertising is a value-adding activity. But there's another saying, attributed to John Wanamaker, a famed Philadelphia merchant and former U.S. Postmaster General, that epitomizes another problem advertisers face: "Half the money I spend on advertising is wasted; the trouble is I don't know which half". In a period of shifting tastes and technologies, businesses are faced with new choices about where to spend their advertising dollars in places that will add the most value.

The trend is toward the Internet and away from traditional media such as TV and print. The changes are so recent, in fact, that agencies that measure advertising spending are not sure what advertising choices companies are making. In 2006, TV and print spending fell 1.5 percent in the U.S. but overall spending grew 4.1 percent. Which new advertising media companies are choosing, however, is not being measured.

Johnson & Johnson, for example, recently cut its measured media expenditures by 20 percent overall. Their TV budget was down 25 percent or $254 million (Steele, 2007). Although some of their advertising spending shifted to the Internet, only a portion of that is measured and tracking agencies such as TNS Media Intelligence cannot account for all of Johnson & Johnson's spending. General Motors, DaimlerChrysler and Procter & Gamble have also recently shifted advertising dollars to the Internet as more companies recognize the value of advertising on the Web.

Reference

Steel, E. 2007. 'Measured' media lose in spending cuts. The Wall Street Journal, March 14: B3.

Additionally, the resource-based view of the firm (RBV) combines two perspectives: (1) the internal analysis of phenomena within a company, and (2) an external analysis of the industry and its competitive environment. It extends SWOT analysis by combining internal and external perspectives and provides a useful framework for exploring why some firms are more successful than others.

Moreover, resources are valuable when they enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. The SWOT framework suggests that firms improve their performance only when they either exploit opportunities or neutralize (minimize) threats.

When a Valuable Resource Becomes a Detriment

Back when General Motors commanded half of the U.S. automobile market, its huge dealer network was a competitive advantage. How things have changed! Now that GM is selling only 18.6% of the cars in the U.S., the dealers are a millstone.

Having too many showrooms depresses profits for all of them and leaves them unable to compete effectively with dealers of other carmakers. GM knows this; it has been gradually shrinking its dealer network since 1970. In the past four years GM has eliminated 15% of its dealerships, partly by encouraging separate Buick, Pontiac and GMC outlets to combine under one roof (Muller, 2009).

Over the next four years, the number will shrink by a further 25%, to 4,700, as GM sheds brands like Hummer, Saab and Saturn and owners go out of business (Muller, 2009). Its goal, now rejected by the government, was to have 4,100 dealerships by 2014 (Muller, 2009).

Reference

Muller, J. 2009. Driven to despair. Forbes. April 27: 30.

Forum assignment

After reading this week's material answer ONE of the following questions in this forum:

1 - After reading about primary and support activities in a firm's value chain, discuss how managers can create value by establishing important relationships among the value-chain activities both within their firm and between the firm and its customers and suppliers.

Instructions:

Your initial post should be at least 250 words, not including repeated questions, references and quotes. Please respond to at least two other students. Responses should be a minimum of 100 words and include direct questions. Use your own words.