Guide to Business Planning The Value Chain © Guide to Business Planning A principal use of value chain analysis is to identify a strategy mismatch between.

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1 Guide to Business Planning The Value Chain © Guide to Business Planning A principal use of value chain analysis is to identify a strategy mismatch between different elements of the value chain. If a company competes on the basis of low costs, then every part of the value chain should be geared towards low cost. For example, low-cost airlines have looked at every aspect of the value chain and taken out costs at all stages. Bookings are taken only via the internet rather than through travel agents; seats cannot be reserved; there are no paper tickets, free meals and drinks, or lounges; and flights depart from secondary airports with lower landing fees. The value is also useful in conjunction value add analysis, i.e. how much value is added by the different activities that go into the final product. A particular activity may have lower return on capital employed than the average return on capital employed for the company as a whole. For example, a manufacturing business has a return on average capital employed (ROACE) of 18%. Part of its operation is a chain of retail outlets. The ROACE from retailing is only 10%. The business could decide to withdraw from retailing and sell off the shops, thus releasing capital and generating a higher ROACE for the remaining business. The value chain can also be used to examine outsourcing decisions. Inbound Logistics Ope- rations Outbound Logistics Marketing & Sales Service Procurement Firm Infrastructure Human Resource Management Technology Development Margin The concept of the value chain developed by Michael Porter,, is used in most businesses. Managing the value chain can produce competitive advantage and increase returns. While it may appear a little dated in its original form, the concept is valid and is a useful tool to analyse your business. Porter, M.E., Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985