1. How does value chain analysis help you understand outsourcing decisions? In your opinion, how do companies typically make outsourcing decisions? How should they make them? (A reply of 200 words). 2

Topic 3b Internal Environment – Value Chain Analysis Value Chain Analysis • Value Chain ➢ A sequential process of value -creating activities within the firm, within an industry, or in the economy • Products and services are outcomes of activities performed by businesses. • Value is determined by the amount that buyers are willing to pay for what a firm provides them • Value Chain Analysis: ➢ Allows managers to understand the parts of its operations that create value (keep in -house) and those that do not (outsource) ➢ Allows managers to understand how their activities create value uniquely, compared to competitors Industry Value Chain Customers Firm Suppliers What unique suppliers are you working with? What unique relationship are you creating? What unique internal activities make you distinctive? What unique relationship are you creating? What unique customers are you working with? Company Value Chain Support Activities Primary Activities Research and Development Human Resource Management Finance, MIS, Legal Procurement Inputs Operations Distribution Marketing & Sales Service Identifying Activities and the Value they Add Operations Marketing and Sales Firm Infrastructure Outsourcing Decisions A firm may outsource all or only part of one or more primary and/or support activities.

Outsourced activity Inputs Service Distribution Human Resource Management Research and Development Procurement Outsourcing Decision Tree Think of an example for an activity (i.e. IKEA’s design capabilities) and try to work it out through this decision tree Primary Activities • Inputs ➢ Activities used to receive, store, and disseminate inputs to a product (materials handling, warehousing, inventory control) • Location of distribution facilities • Warehouse layout and designs • Operations ➢ Activities necessary to transform the inputs into final products (machining, packaging, assembly) • Efficient plant operations • Incorporation of appropriate process technology • Efficient plant layout and workflow design • Distribution ➢ Associated with collecting, storing, and distributing the product to customers • Effective shipping processes to provide quick delivery and minimize damages • Shipping of goods in large lot sizes to minimize transportation costs . The slides from here on are mostly for reference purposes Primary Activities • Marketing and sales ➢ Associated with purchases of products and services by end users and the inducements used to get them to make purchases • Innovative approaches to promotion and advertising • Proper identification of customer segments and needs • Service ➢ Providing service to enhance or maintain the value of the product • Quick response to customer needs and emergencies • Quality of service personnel and ongoing training Support Activities • Procurement ➢ Activities completed to purchase inputs needed to produce a firm’s products (raw materials and supplies, machines, laboratory equipment) • Development of collaborative “ win -win” relationships with suppliers • Analysis and selection of alternate sources of inputs to minimize dependence on one supplier • Research and development ➢ Activities completed to improve a firm’s product and the processes used to manufacture it (process equipment, basic research, product design) • Positive collaborative relationships between R&D and other departments • Excellent professional qualifications of personnel Support Activities • Human resource management ➢ Activities involved in recruiting, hiring, training, developing, and compensating all personnel • Effective recruiting, development, and retention mechanisms for employees • Quality relations with trade unions • Reward and incentive programs to motivate all employees • General administration – finance, IS, legal ➢ Supports the entire value chain and not individual activities • Effective planning systems • Excellent relationships with diverse stakeholder groups • Effective information technology to integrate value -creating activities Starbucks Value Chain Primary Activities Support Activities Debt free, Strong margins, Cash Benefits for all, Community involvement, Living wage Consumer research, Brewing technology, New beverages, Music Socially responsible purchasing, Post -recyclable cup No commodity exchange, Direct to farm to buy beans Stylish café, Baristas, Hand -crafted order, New foods, Credit cards 100% company owned, Location close, License to sell coffee to stores Store presence, Social community, Innovation, Atmosphere Baristas know customers, Personalization Financial, IS, Legal Human Resources Research & Dvmt Procurement Inputs Opers Distrib Mrktg Service Value Chains in Service Industries