UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN
College of Business
Department of Business Administration
BADM449 Strategic Management/Business Policy
Resources and Capabilities/ Value-Chain Analysis
Appraising Resources |
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Resource |
Characteristics |
Indicators |
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Financial Resources |
Borrowing Capacity Internal funds/generation |
Debt/equity Credit rating Net cash flow |
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Physical Resources |
Plant and equipment Raw materials Land and buildings |
Market value of fixed assets Scale of plants |
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Human Resources |
Training, experience, adaptability, commitment and loyalty of employees |
Employee qualifications, pay rates, turnover |
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Technological Resources |
Patents, copyrights, know-how. R&D facilities Technical and scientific employees |
Number of patents owned. Royalty income R&D expenditure R&D staff |
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Reputation |
Brands Stability of customer base Reputation with suppliers |
Brand equity Product price premium Recognition |
Identifying Organizational Capabilities: A Functional Approach |
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Function |
Capability |
Exemplars |
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Corporate Management |
Financial control Strategic control Motivating and coordinating business units |
General Electric Shell |
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MIS |
Speed and responsiveness through rapid information transfer |
American Airlines L.L. Bean |
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R&D |
Research capability Development of innovative new products |
Merck AT&T 3M |
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Manufacturing |
Efficient manufacturing Continuous improvement Flexibility |
Nucor Motorola Benetton |
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Design |
Design capability |
Apple Swatch |
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Marketing |
Brand management |
Procter & Gamble Pepsico |
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Sales and Distribution |
Promoting reputation Responsiveness to market trends |
American Express The GAP Microsoft |
|
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Sales promotion Speed of distribution Customer Service |
Glaxo Federal Express Caterpillar |
Value Chain Analysis for Soft Drink Industry
- The following analysis is based on the $46 billion Soft Drink Industry case for 1991.
Coca-Cola versus Pepsi-Cola and the Soft-Drink Industry
Four reasons to like the business:
- Selling concentrate requires little capital;
- Selling concentrate produces superb returns;
- Selling concentrate demands minimal reinvestment; and
- Selling concentrate spills an ocean of cash.
Value Chain Analysis
- A systematic way of examining all the activities a firm performs and how they interact is
necessary for analyzing the sources of competitive advantage. In this handout, the value chain is
introduced as the basic tool for doing so. A firm's value chain and the way it performs individual
activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the
underlying economics of the activities themselves.
- A generic value chain includes primary activities such as inbound logistics, operations,
outbound logistics, marketing sales and service, and support activities such as firm infrastructure,
human resource management, technology development, and procurement.
- In this handout, we are going to focus on the vertical linkages between the firm's value chain
and the value chains of suppliers and channels. In particular, we will focus on the dynamics of the
value chain in the soft drink industry.
Value Chain:
Suppliers --> |
Concentrate --> |
Bottlers --> |
Retailers: |
Syrup, Sugar, Sweeteners, Glass, Plastics, Cans |
Producers |
Independent, Multi-Brand Franchise, Diversified Franchise |
Supermarkets, vending warehouses, superstores, fast food |
1. The soft drink industry evolved with a franchised bottler system. For most of the industry's history the concentrate producers nurtured and preserved the system.
Why?
The main features of the franchised bottler system are as follows:
- [1]
- Exclusive territories. There is an exclusive bottler in each area or territory;
- [2]
- Bottlers are given franchises in perpetuity;
- [3]
- Exclusive Dealing. Bottlers are prohibited from marketing competing brands. Thus,
a Coke bottler cannot bottle Pepsi. [This arrangement technically violates
antitrust norms, and it required a special act of Congress to adopt it.]
This setup has been nurtured by concentrate producers, primarily because it benefits them in a
number of ways:
- [1]
- Entry Barriers. The arrangement raises entry barriers into the industry. Bottlers
are a major distribution channel. Potential competitors to Coke and Pepsi are shut
out of this channel by the prohibition against carrying competitive brands (i.e.,
market foreclosure).
- [2]
- Risk Sharing. Bottlers absorb the risk associated with heavy capital investments
and new technological developments. Bottling is a capital-intensive process and involved specialized, high-speed lines. Moreover, innovations in packaging have
increased the rate of obsolescence of bottling lines. The franchise system means that
bottlers bear these expenses and associated risks, not the concentrate producers.
[Bottling and canning lines cost from $100,000 to several million dollars.]
- [3]
- Economies of Scale. The high fixed costs associated with bottling create the
maximum incentive for bottlers to build volume in order to amortize those costs.
In other words, the incentive structure of the arrangement favors the concentrate
producers, who want the bottlers to be aggressive in pushing their product.
- [4]
- The concentrate producers still retain control over the valuable asset -- the
concentrate. Thus, the concentrate producers are in a powerful bargaining position
relative to the bottlers. [NOTE: In 1990, Coke had 40.4% market share in the
United States and PepsiCo had 31.8% market share.]
Hence, the franchise "organizational mode" enables concentrate producers to build entry barriers and
to capture rents (i.e., achieve competitive advantage), without requiring them to become involved
in a capital-intensive production process where there is a high risk of technological obsolescence.
However, it is important to understand that this organizational mode does impose
some costs on the concentrate producers, although for most of the industry's history these costs have
been relatively minor compared to the benefits. Specifically:
- The concentrate producers are not in direct control of point-of-sale marketing. This
marketing function is controlled by the bottlers.
- The concentrate producers must pursue bottlers to add products and packaging.
Despite their bargaining power, they cannot dictate terms to the bottlers with regard
to new products and packaging.
- Thus, the concentrate producers do not have complete control over bottlers. While
the structure of the organizational mode does give bottlers an incentive to build
volume, it is possible that bottlers might become inefficient -- particularly given that
bottlers are granted franchises "in perpetuity."
Four organizational modes:
- Privately owned
- Large, publicly owned multibrand franchise firms
- Coke and Pepsi franchisees
- Operations of concentrate producers themselves
2. Recently the major soft-drink companies have begun to acquire bottlers. Why?
- As noted in the case, both Coca-Cola and Pepsi have been purchasing bottlers in recent years
-- integrating forward into bottling and distribution. Given the advantages of the franchised system
articulated above, this development is most likely explained by a shift in the benefit-cost equation
with regard to franchising versus vertical integration. What appears to have occurred is that as the
end market has become more competitive due to the intensification of the cola wars, and as the rate
of new product introductions has increased, both Pepsi and Coke have felt the need for greater
control over bottlers. Controlling bottlers enables both companies to ensure that bottlers adopt new
products, new packaging, and aggressive point-of-sale marketing.
- A second reason for the forward shift into bottling is that the structure of the bottling industry
itself has been changing in recent years. Most significantly, multiple franchise owners started to
purchase more bottlers. The total number of bottling plants had fallen from 2,613 (1974) to 1,522
(1984), and 780 (1990). In 1989, the seven largest bottlers operated 176 plants and produced 46.5%
of industry volume. By purchasing more bottlers, they started to change the bargaining power between bottlers and concentrate producers (multiple franchise bottlers are more powerful than
single franchise bottlers). The forward integration into bottling and distribution by concentrate
producers may in part have been an attempt to stop this trend from going too far.
NOTE: Activity-based Accounting can be useful in determining the cost drivers in a Value-
Chain Analysis
Example:
Traditional Accounting:
Salaries: $ 371,917
Fringes: $ 118,069
Suppliers: $ 76,745
Fixed costs: $ 23,614
-----------
Total $ 590,345
Activity-based Accounting:
Processing sales-orders $ 144,646
Sourcing parts $ 136,320
Expediting supplier orders $ 72,143
Expediting internal processing $ 49,945
Resolving supplier quality $ 47,599
Reissuing purchase orders $ 45,235
Expediting customer orders $ 27,747
Scheduling intracompany sales $ 17,768
Requesting engineering changes $ 16,704
Resolving problems $ 16,848
Scheduling parts $ 15,390
-------------
Total $ 590,345
An Illustrative Production-Cost Chain Comparing the Cost Competitiveness of U.S. Steel Producers
and Japanese Steel Producers in 1976 (Source: FTC)
Per-Ton Cost for Cold-Rolled Sheet Steel |
|
Cost Chain Elements |
Typical U.S. Producer |
Typical Japanese Producer |
Net Cost Advantage |
|
Coking coal |
$52.15 |
$41.45 |
$10.70 (Japan) |
|
Other energy |
30.25 |
21.49 |
8.76 (Japan) |
|
Scrap steel |
20.80 |
21.75 |
0.95 (United States) |
|
Iron Ore |
47.90 |
27.60 |
20.30 (Japan) |
|
Subtotal |
$151.10 |
$112.29 |
$38.31 (Japan) |
|
Manufacturing Labor |
$142.93 |
$52.25 |
$90.66 (Japan) |
|
Capital charges for facilities |
55.95 |
63.88 |
$7.93 (United States) |
|
Profit margin |
4.90 |
3.50 |
1.40 (Japan) |
|
Subtotal |
$203.78 |
$119.63 |
$84.15 (Japan) |
|
Trans-ocean shipping Import duties |
$ 0 |
$ 36.36 |
|
|
Price-paid by U.S. end-user |
$354.88 |
$268.28 |
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