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Performing Value Chain Analysis

Value chain analysis is an important tool for looking at organisational strategy and ascertaining the parts that create value and those that fail to create value. It’s not that difficult and once you work through this a few times it becomes second nature.

Primary and Support Activities

The basic idea is to break down the business into the parts that create value (rather than making assumptions based on a broad ill-defined monolith). Those parts can be separated into Primary and Support activities.

Primary activities range from product creation through to distribution and after sales service – Services, Marketing, Sales, Outbound Logistics, Operations and Inbound Logistics.

Support activities provide the underlying organisational support for primary activities to occur – Firm Infrastructure, Human Resource Management, Technical Development and Procurement.

Identifying the Value Chain

This simple explanation may be deceptive in that a value chain may or may not look as you had originally expected, but once you’ve identified this value chain you can compare to competitors, look at ways to adjust the value chain (ie. non-core parts of the business that might be outsourced) and under-performing parts can be identified.

The value chain allows you to identify the organisation’s capabilities and core competencies – in turn informing you of the business they are actually in… and it can provide opportunities and feed directly into strategy. The value chain provides insight into how the organisation can achieve sustainable competitive advantage.

The Simplified Qantas Value Chain (2009)

That all sounds a little abstract – Qantas is a good example because its simplified value chain provides interesting results. In simple form it looks like this:

Qantas Frequent Flyer Program – QH Tours (Qantas Holidays and Viva! Holidays) – Jetset Travel World – check-in – baggage handling – Qantas flight catering (Q Catering and Snap Fresh) – Qantas Engineering – Qantas Airlines – QantasLINK – Jetset (budget) – customer.

These are supported by good corporate governance, marketing, human resource management, resource procurement and information technology functions.

Value Chain Analysis

Qantas below expectation $4 million profit in 2009 was due to the $225 million earnings from their Frequent Flyer Division – sale of seats-points to supermarkets and credit card companies. Every other part of their value chain ran at a loss… The interesting point is that Qantas remains one of the most profitable airlines in the world and one of the few that was still turning a profit in 2009. However, this identifies that with tumbling profits Qantas are in trouble.

It should also make you scratch your head and ask whether Qantas are in the business of flying passengers around the world, or if their primary business is selling frequent flyer points.

At this point Qantas can look at options like downscoping by divesting non-core business units from the Qantas portfolio for reinvestment into new opportunities and to finance their upgrade to Boeing’s latest aircraft. They could divest flight catering (Q and Snap Fresh), QH Tours and their interest in Travel World.

Finally, plug this value chain analysis into an overall strategic analysis document that looks at the organisation’s internal and external environments – including an industry analysis. It may all sound like boring business stuff but the objective is to gain sustainable competitive advantage… and this is how you go about it.

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Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark and I live in the Derwent Valley in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a mazer & a yeast farmer (making beer, fruit wine and mead as by-products of continuous improvement in my farming practices). I'm a photographer, although my film cameras are currently silent. I do not tolerate idiots. I do not tolerate bigotry. I do not tolerate excuses. Let's be clear, if you sit with my enemies you my are my enemy for life.

Blogger. Thinker. Brewer. Drinker. Life partner to the amazing and incredible Megan.

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