1、Author:Tom MacinaReviewers:Scott Bender,Peter Fisher,Cyrus Villa,Ammar Maraqa bcValue ChainMarch 1998Copyright?1998 Bain&Company,Inc.bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis2valuechainValue ChainAgenda?The concept?Value Chain methodology?ExamplebcCHI Copyright?1998 Bain&Company,Inc
2、.Value Chain Analysis3valuechainValue ChainThe Concept?Value chain analysis is a systematic method for disaggregating a firm or industry into its major discrete activities to understand sources of competitive advantage?Value chain analysis can be used to identify opportunities togain cost advantage/
3、improve performanceincrease competitive differentiation?Value chain analysis is an analytical tool which can help provide clarity to consultants and clientsallows distinct boundaries to be drawn across business(or industry)processallows consultant to clearly evaluate and prioritize activities on whi
4、ch to focusfacilitates client understandingbcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis4valuechainValue ChainGeneric Value ChainSuccessively finer disaggregations of activities are made to expose differences important to competitive advantageThe generic value chain consists of six gene
5、ral activities.Tech.,R&DPurchasing/Inbound LogisticsManufact-uring/OperationsMarketing&SalesDistribution/OutboundLogisticsServicebcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis5valuechainValue ChainCommon UsesValue chain analysis can be used as an analytical tool in two general situations
6、.Value Chain Analysisas a tool forCompetitive AdvantageCost Analysis/Performance ImprovementCompetitive Positioning?RCP?Re-engineering?Business definition?VMR/Industry collaboration?Competitive differentiation?Drawing business boundariesbcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis6valu
7、echainValue ChainDistribu-tion/OutboundLogisticsServiceValue Chain ScopeThe scope of the value chain depends largely on the purpose for which the tool is being used.System or Industry Value Chain:Firm Value Chain:Major Activity Value Chain:Tech.,R&DPurchas-ing/InboundLogisticsManu-facturing/Operatio
8、nsMarketing&SalesMaterialPreparationConversionFinal AssemblyQuality AssurancePackagingInputs(Supplier)Conversion(Manufacturer)Distribution(Distributor/Retailer)Consumption(End-User)?VMR?Cost Analysis?Process Re-engineering?Cost AnalysisSample UsebcCHI Copyright?1998 Bain&Company,Inc.Value Chain Anal
9、ysis7valuechainValue ChainWhen to Use Value Chain AnalysisCost Analysis/RCPProcess Re-EngineeringBusiness DefinitionVMR/Industry CollaborationCompetitive PositioningMap Major ActivitiesMap Sub-ActivitiesAlwaysSometimesUnlikelybcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis8valuechainValue
10、 ChainAgenda?The concept?Value Chain methodology?ExamplebcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis9valuechainValue ChainValue Chain Methodology(1 of 2)1.What are the activities?2.Which activities are most critical?3.Which critical activities provide the most opportunity?(Where is the
11、 most leverage?)Tech.,R&DPurchas-ing/InboundLogisticsManu-facturing/Opera-tionsMarketing&SalesDistri-bution/OutboundLogisticsServiceTech.,R&DPurcha-sing/InboundLogisticsMarketing&SalesDistri-bution/OutboundLogisticsManu-facturing/OperationsService?There are three steps in doing value chain analysis.
12、bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis10valuechainValue ChainValue Chain Methodology(2 of 2)1.What are the activities?Step one is determining the appropriate activities to map.?Determine key steps in designing,producing,marketing,delivering and supporting a product or service?Act
13、ivities can be separated and grouped based ondifferent economicsprocesses using different people/equipment/technologyhigh or growing percentage of total costdistinction in mind of customer?Helpful methodology in mapping out activities:product floworder flowpaper flowbcCHI Copyright?1998 Bain&Company
14、,Inc.Value Chain Analysis11valuechainValue ChainSanding/DustingManu-facturingCuttingPackagingCookingFormingWrappingBulk ContainersMajor Activities:Sub-Activities:?Wrapping individual candies?Bagging individually wrapped candies for retail sale?Placing individually wrapped candies in bulk containers
15、for delivery to retail outlets that sell loose candy?Find“break points”in the process flowcooking through sanding all one continuous lineproduct conveyed to wrapping line?Packaging was actually separated into two activities,as there are two different product paths following wrappingmost process step
16、s similar,however,suggesting a“packaging”groupingBaggingDrawing Activity Boundaries(Candy Co.Example)bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis12valuechainValue ChainValue Chain Methodology(1 of 3)2.Which activities are most critical?Step two is determining which activities are most
17、critical.Cost Analysis CaseTech.,R&DPurch-asing/InboundLogisticsManu-facturing/Opera-tionsMarket-ing&SalesDistri-bution/OutboundLogisticsService5%35%30%15%10%5%?What are cost drivers?Explanation:Percent of total cost:?Allocate costs to each major activity?Determine which activities account for the g
18、reatest portion of total costbcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis13valuechainValue ChainValue Chain Methodology(2 of 3)Competitive Positioning CaseTech.,R&DPurch-asing/InboundLogisticsManu-facturing/Opera-tionsMarketing&SalesDistri-bution/OutboundLogisticsService?Which criteria
19、 drive customer decisions?Customer importance scale(1=low,7=high)Product InnovationReliabilityBrand ImageSpeed of DeliveryResponsivenessExplanation:?Determine relative importance of each activity in mind of customer?Determine which activities drive purchase decisionPrice4.06.34.86.05.14.7bcCHI Copyr
20、ight?1998 Bain&Company,Inc.Value Chain Analysis14valuechainValue ChainManu-facturing/OperationsValue Chain Methodology(3 of 3)Step three is determining which activities provide the most opportunity.3.Which critical activities provide the most opportunity?Tech.,R&DPurch-asing/InboundLogisticsMarket-i
21、ng&SalesDistribu-tion/OutboundLogisticsManu-facturing/OperationsCost Analysis CaseCompetitive Positioning Case?Where is greatest relative opportunity to improve cost structure?Where is greatest relative opportunity to improve performance/create gap relative to competitors?Tech.,R&DPurcha-sing/Inboun
22、dLogisticsDistribu-tion/OutboundLogisticsMarket-ing&SalesServiceServiceExplanation:Explanation:?Determine which costs are most controllablee.g.,raw materials costs may be largely commodity?Determine where largest relative performance gap liesrelative to competitorsrelative to internal comparables?De
23、termine where largest relative performance gap liesrelative to customer expectationsrelative to competitorsbcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis15valuechainValue ChainAgenda?The concept?Value Chain methodology?ExamplebcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis16va
24、luechainValue ChainAce Consumer ProductsBackground:?Ace Consumer Products was a weak number three in the U.S.Ketchup market?Division losing money,losses accelerating Complication:?Business interlinked with other operations-cant be closed or divestedQuestion:?What cost reductions can be done to resto
25、re profitability?bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis17valuechainValue ChainValue Chain Methodology1.What are the activities?2.Which activities are most critical?3.Which critical activities provide the most opportunity?Tech.,R&DPurch-asing/InboundLogisticsManu-facturing/Opera-t
26、ionsMarket-ing&SalesDistribu-tion/OutboundLogisticsServiceTech.,R&DPurch-asing/InboundLogisticsMarket-ing&SalesDistri-bution/OutboundLogisticsManu-facturing/OperationsService?bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis18valuechainValue ChainServiceKetchup Value ChainActualValue ChainP
27、urchasing/Inbound LogisticsManu-facturingPackagingMarketingSalesDistribution/OutboundLogisticsGeneric Value ChainTech.,R&DPurchasing/InboundLogisticsManu-facturing/OperationsMarketing&SalesDistributionOutboundLogisticsIn this consumer products example,R&D and service were removed as major activities
28、,packaging was broken out separately,and marketing&sales were separated.?Very little investment in product formulationnot a major activity?Raw materials substantial,but largely commoditymajor activity?Packaging critical for consumer productspackaging broken out separately?Brand building through mark
29、eting and sales force very discretemarketing and sales separated?Captive fleet distributes to customer warehousesmajor activity?Product support(800#)minimal and handled centrally with other product linesnot a major activitybcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis19valuechainValue C
30、hainValue Chain Methodology1.What are the activities?2.Which activities are most critical?3.Which critical activities provide the most opportunity?Tech.,R&DPurch-asing/InboundLogisticsManu-facturing/OperationsMarket-ing&SalesDistribu-tion/OutboundLogisticsServiceTech.,R&DPurcha-sing/InboundLogistics
31、Market-ing&SalesDistribu-tion/OutboundLogisticsManu-facturing/OperationsService?bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis20valuechainValue ChainAce Consumer Products100%80%60%40%20%0%Percent of TotalOtherVinegarPropylene glycolSugarOnionsTomatoOtherVariable manufacturingDepreciation
32、Mainten-anceLabor overheadDirect laborOtherLabelsBottleGroup administrationR&DDivision admin.HQ and systemsOperating marginOther operating and administrativeWagesVariableFixed$0.20$0.40$0.60$0.80$1.00$1.24Cost per Eight Ounce BottlePrice to consumer($1.08)RawPackagingOtherOverheadPromotionConsumerMe
33、diaMarketingProfitRetailerDealsOutbound freightPeriod distributionWarehousingRedistributionDistributionManufacturingAllocationsRaw materials,manufacturing,packaging and marketing drive total cost.SalesbcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis21valuechainValue ChainValue Chain Method
34、ology1.What are the activities?2.What activities are most critical3.Which critical activities provide the most opportunity?Tech.,R&DPurcha-sing/InboundLogisticsManu-facturing/OperationsMarket-ing&SalesDistribu-tion/OutboundLogisticsServiceTech.,R&DPurcha-sing/InboundLogisticsMarket-ing&SalesDistribu
35、-tion/OutboundLogisticsManu-facturing/OperationsService?bcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis22valuechainValue ChainRelative Cost Position-MethodologyDriversCompetitive CostSources?BAR/LNA?Leemis?Alumni interviewsBenchmarking was critical to understanding where the largest oppor
36、tunities were.?Material usage?OH structure?Advertising?Promotion?Wage rates?Benefit structure?Productivity?Reverse engineering?Plant surveys?Alumni interviews?Client plant reports?Commodity markets63.2 per 8oz.AllocationsSalesMarketingDistributionPackagingManufacturingRaw$0.00$0.10$0.20$0.30$0.40$0.
37、50$0.60$0.70Cost to Land 8oz.Bottle in Retailer Warehouse(Cents)?Client product reportsbcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis23valuechainValue ChainPackageDistributionMarketingManufacturingRawPackageDistributionMarketingManufacturingRawDistributionSalesPackageDistributionMarketin
38、gManufacturingAllocationsRegularSpicyBarbecue7.8(2.4)7.8(2.9)19.3(0.9)($0.05)$0.00$0.05$0.10$0.15$0.20Cost Advantage(Disadvantage)per Bottle(Cents)Cost Variance5.55.018.4Manufacturing turned out to be the activity with the greatest relative cost disadvantage.bcCHI Copyright?1998 Bain&Company,Inc.Val
39、ue Chain Analysis24valuechainValue ChainKetchup133%120%100%80%60%40%20%0%0%20%40%60%80%100%=830MM poundsTotal Ketchup CapacityProduct TypeIt was the low level of capacity utilization that created sizable manufacturing cost disadvantages.Average annual utilization13 week Peak period utilizationAverag
40、e capacity7 day 20 hours per daybcCHI Copyright?1998 Bain&Company,Inc.Value Chain Analysis25valuechainValue ChainLima Alternate UseGreen Bay Alternate UsePeriod Cost ReductionProductivity IncreaseProduct CostTransportation CostsInventory Build/Outside Storage/Overtime$7.5MM($3.6MM)($4)($2)$0$2$4$6$8On-Going Costs/Savings(Millions of Dollars)Consolidation SavingsConsolidating from six plants to four would save$3.9MM annually.$3.9MMConsolidating two plants has on-going savings impact of$3.9MM
