In todays world, due to the development of globalization and the improvement of science and technology, the international economic situation is fast-changing. What’s more, competition is severer than before. It is unadvisable for managers to make a long-term plan and then ask the whole company to implement it days and nights. Managers should analyze the internal environments and external environments continuously surrounding their own company and then make plans in accordance with the analysis. There are lots of approaches which can be used during the strategic analysis process, such as SWOT analysis, PESTIN analysis, Value Chain analysis and Porter Five Forces. Therefore, it is very essential for managers to understand the usages of them during the strategic analysis process. Moreover, the functions of these approaches are also deserved to be researched.
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The main purpose of this dissertation is to evaluate critically two approaches, value chain analysis and porter five forces, during the strategic analysis process in order to make managers acquaintance with the knowledge about these two approaches and then make better plans for their own companies. There are four parts in this dissertation begun with an introduction. In the second and third parts, this dissertation will provide critical evaluation of value chain analysis and porter five forces separately by some empirical examples to illustrate the disadvantages and advantages of value chain analysis and porter five forces. A conclusion will be made in the end.
Critical Evaluation of Value Chain Analysis Used during the Strategic Analysis Process
According to Robbins (2009), only depending on value chain analysis, an organization delivers its products or services to its customers fast and quickly. This part will introduce what the value chain analysis is and the general review about value chain analysis. Simultaneously, this part will also explain the disadvantages and advantages of Value Chain Analysis by empirical examples.
2.1 What is Value Chain Analysis?
Value chain analysis was proposed in 1985 by Michelle Porter in his book “Competitive Advantage: Creating and Sustaining Superior Performance” (Robinson, 2009) to describe the way of “how customer value accumulates along a chain of activities leading to an end product or service” (Institute of Management Accountants, 1996). Porter described that value chain analysis was the internal processes or activities performed by a company to design, produce, market, deliver and support its products (Robinson, 2009, pp564). Porter also claimed that the main purpose of value chain analysis is to create a value chain strategy to meet and surpass customers’ demands and desires (Scholes and Whittington, 2010). And according to Robinson (2009), a successful value chain management should meet the following factors, including collaboration and cooperation, technical investment, organization process, leadership, employees, organizational culture and attitudes. “Porter describes two major categories of business activities: primary activities and support activities” (Institute of Management Accountants, 1996, pp1). In 1993, Shank and Govindarajan broadened the definition of value chain analysis and states that the value chain is the value-creating activities of any firm to provide products and services to final consumers’ hands.
2.2 The General review about Value Chain Analysis
The importance of value chain analysis propels lots of scholars to spend more time and energies to do researches on value chain analysis. In 2006, Khan, Pochampalli, Ding and Ponce adopted lots of approaches to make strategic case analysis, including value chain analysis taking the analysis of Nucor Corporation as the example. They analyzed Nucor Corporation’s mission, products and services, leadership, culture, structure and governance and gained the concluded that Nucor Corporation had the unique leadership, strong corporate culture and decentralized structure, which led this company to be successful and have effective corporate governance (Khan, Pochampalli, Ding and Ponce, 2006). In 2003, Dekker wrote an article named “Value Chain Analysis in Interfirm Relationships: A Field Study” to analyze the influence of value chain analysis on management accounting. In this article, Dekker pointed out that interfirm relationships was the new challenges for management accounting and a value chain analysis is a useful tool to meet this challenges. Moreover, Awa and other scholars also proposed a research called collaborative experience of value chain architecture: a systemic paradigm to building customer loyalty in 2011. There are still another researches on value chain analysis, due to the limited space, this dissertation will not list them one by one.
2.3 Explain the Disadvantages and Advantages of Value Chain Analysis by Empirical Examples
According to Robinson (2009), value chain analysis has a lot of advantages and disadvantages. In this part, this dissertation will explain the disadvantages and advantages of Value Chain Analysis by empirical examples.
2.3.1 The advantages of Value Chain Analysis by Empirical Examples
Before listing the advantages of value chain analysis, this dissertation first show a survey result about the benefits of value chain analysis made by Taninecz (2000) (p44).
From this survey result, it is reasonable to gain the conclusion that a successful value chain analysis can improve the services level to the customers. If the company performs well on each point of the value chain and the employees cooperate well and try their best to optimize service process, the service level to the customers can be improved (Scholes and Whittington, 2010). Meanwhile, a successful value chain analysis can help company increase sales, save cost, increase market, reduce inventory and improve logistics management (Robinson, 2009). Therefore, value chain analysis emphasizes not only the production process but also the various activities that make up the chain (McCormick and Onjala, 2007).
Tetra-Pak, a multinational food packaging and processing company of Swedish, is one of the excellent examples which reconfigured the value chain in the packaging industry (Institute of Management Accountants, 1996). Tetra-Pak designs and uses a filling machine to package step by step, which brings a great change to the packaging industry (Institute of Management Accountants, 1996). Under this circumstance, no space in filling and packing would be wasted. According to the survey made by institute of management accountants (1996), the famous furniture Sweden Company IKEA also reconfigures the value chain and IKEA Company divides its operation activities into several parts, including design, assembly and even home delivery and has specific requirements in each activity, which also brings a revolution to the furniture industry in Swedish and even worldwide.
Nucor Corporation is one of the largest steel manufacturers in the United States and takes value chain analysis during the strategic analysis process (Ding, Khan, Pochampalli and Ponce, 2006). According to them (2006), the value chain of Nucor Corporation includes firm infrastructure, human resource, technology development, procurement, logistics and other activities and due to the usage of value chain analysis help Nucor Corporation establish strong organization culture and unique leadership, which provide an excellent foundation for this company.
All in all, value chain analysis during the strategic analysis process can help managers to divide operation activities into several different activities and assign tasks to specific employees and then through the cooperation and collaboration between employees, company can be a success.
2.3.2 The Disadvantages of Value Chain Analysis by Empirical Examples
In the section 2.3.2, this dissertation has introduced the advantages of value chain analysis. However, managers should overcome some obstacles when they adopt value chain analysis during the strategic analysis process. In other words, there are some deficiencies of value chain analysis. For example, if the employees are unwilling to change their status and to share information between each other, they can not collaborate and cooperate with each other. Under this circumstance, the value chain analysis can not be implemented fully and effectively (McCormick and Onjala, 2007). Secondly, excessive trust between employees also can lead value chain analysis to become a failure (Scholes and Whittington, 2010). The implementing of value chain analysis needs employees and managers have necessary abilities, such as the abilities of good coordination and team spirits and the abilities to train all the employees. However, it is difficult for managers and employees to make themselves acquaintance with these abilities. For example, American Standard Company, Deere Company and Furon Company have come across lots of big difficulties.
Due to the development of information technology and knowledge economy, the global economic situation is fast-changing. The managers have to change the value chain of the operation activities according to the change of environment. Therefore, if the company wants to make a long-term plan, the value chain will lose its efficiency, otherwise the company will spend lots of costs to change the value chain and organize employees to implement the value chain (Cadle, Paul and Turner, 2010).
Pentagon Company, a famous high technology company in the United States, has no chance to take value chain analysis during the strategic analysis process if this company can not ensure the security of its own website (Robinson, 2009). Therefore, there are still some disadvantages of value chain analysis.
3. Critical Evaluation of Porters Five Forces Used during the Strategic Analysis Process
Same as the value chain analysis, Porters Five Forces also has advantages and disadvantages, which will be exposed in this part by some empirical examples.
3.1 What is Porters Five Forces?
Porters Five Forces Analysis is a theory made by Michael Porter, who is a professor in Harvard University. He came up with five factors that may influence the profitability of a company, namely the intensity of rivalry among existing competitors, threat of entry by new competitors, pressure from substitute products, bargaining power of buyers, and bargaining power of suppliers (Scholes and Whittington, 2010).
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First, the rivalry can be weak or intensive. If it is weak, there’s no need to worry about it. But if it is intensive, it should be pay much more attention to. When having the intensive rivalry among existing competitors, one is likely to be in a cut-throat position. Many factors will influence the intensity of rivalry, including the size of competitors, the costs of products, and the product differentiation (Scholes and Whittington, 2010). Second, the new companies are the other threats to one’s benefits. They will become the obstacles to expend your market scale and cut off your market share (Robinson, 2009). Third, pressure from substitute products is another barrier for a company to get interests. Fourth, bargaining power of buyers is of the vital importance in the effect of the benefits (Scholes and Whittington, 2010). Since the profit margin has close relationship with the price. When the price is low, the profit margin may be high and vise versa. Last but not the least, bargaining power of suppliers is much similar to the factor of bargaining power of buyers. When the supply price is low, the costs of the product are low. Therefore, the profit margin will be high due to the low cost.
3.2 The General Review about Porters Five Forces
As mentioned before, Porters Five Forces Analysis has its own characteristics. These are helpful when used as managerial strategies in big decision of the company. Most of the researches about the Porters Five Forces Analysis is based on the prior experiments, collective data and analysis. For example, the application of the Porter Five Forces Analysis in Internet (Nikolopoulos, 2005¼‰and automobile industry (Cafferky, 2005) . All these researches can be viewed as the practical theories for future use. Undoubtedly, the aim of these studies is to find out the managerial problems and ways to solve these problems. This model is strive to improve the company’s performance through the analysis, namely which part of its market it the most profitable one and which is the most cost-consuming one. After the Porter’s Five Forces Analysis, great efforts should be made to maximize the former market and minimize the latter market. It will help the company make the greatest profits as well. The well management of the five most important factors influencing the market share will reduce the difficulties standing in the progressing path. This framework of the Porters Five Forces can also define the opportunities, threats, strengths and weaknesses. One’s structure coping with these five forces can determine competitiveness of the company.
3.3 Explain the Disadvantages and Advantages of Porters Five Forces by Empirical Examples
The Porters Five Forces Analysis has its advantages and disadvantages. If used well, it will help make great profits for a company. As for the advantages, it is very simple and direct. It has a simple framework in dealing with managerial problems. However, it also has shortcomings. For examples, it is not as clear as the Value Chain Analysis. The five factors cannot be separated clearly when analyzing. On the other hand, it can be easily affected by other factors, such as the size of the company, different economic environment and national investments.
3.3.1 Advantages of Porters Five Forces
There are many advantages of Porters Five Forces Analysis, but two are among the most important ones. The first one is simplicity. Compared to other models, it is very simple. Five factors are easy to define. In the Mobile Company, the Porter’s theory provides an easy access to the information about these areas. It is known to all, this area is much more complicated regarding the practical market. But the five factors narrow these complicated factors down to the relationship among the suppliers, the sellers, and the buyers. The cash flows among the three most important participators. The main rivalries in this field in China are China Mobile, China Unicom and China Telecom. The competition is still very fierce (Wu, 2012). As the emerging of the iphones and various kinds of smart phones, China Unicom Company begins to take on the stage by its excellent 3G service. The company can quickly identify its valuable market and worthless market by the Porter’s theory. Here the word “valuable” means that it will make profits for the company and “worthless” means that it makes little contribution to the company’s benefits. Although there isn’t the fourth competitor, the potential threats still exist. However, from Porter’s theory, the problems can be simply defined and solutions can be easily made to solve the problems. The second one is directness. The diagram of the Porters Five Forces Analysis seems very direct to analyze. In automobile industry, substitute products are used in order to improve the performance and to increase profits. It goes straight to the point so that the weakness and threats. For example, the General Motors Corp decides to reduce the carbon emission of its cars. So it tries its best to cooperate with an Italy company who can produce the environmental-friendly combustion motor. With the new motors, the company successfully increases its competitiveness and decreases its costs. Innovation ranks the most important factor affecting one’s profitability. Without innovation, one could not move forward. But if substitute products are used instead of innovation, it may be a solution at the moment. And in modern society, such action can express its good images of being responsible. It means the company is not a profit-striving business man. It cares about people, society and the whole world.
3.3.2 Disadvantages of Porters Five Forces
The first one is that it is unclear. The five forces may be easy to define, but it has no clear boundary. Each involves many details. What is more important, they cannot be separated clearly. In other words, they overlap each other. For instance, in the steel industry, the supplier power changes with the buyer power, and the buyer power is also swifts with the supplier power. They are mutually influenced. It is difficult to say which one is the fatal factor. Also in the General Motors Corp, five factors should be analyzed together. None of them can be separated from others. For example, the threats of the new entry warn the General Motors Corp to change its traditional producing forms. New technology should be employed to enhance its images and competitiveness. Therefore, the company analyses all of the five factors to solve the problems and to expand its market share all over the world. Second, it is easy to be influenced by other uncontrollable factors. Also in the steel industry, it has gone through many stages, from immature to mature (Ponce, 2006). When at the immature stage of lifecycle, the suppliers and the buyers are instable, while in the mature stage, they are consolidate. Different states of the buyer power and the supplier power will lead to different problems. It is too hush to make decision only according the only five factors. An overview should be made to identify the whole situation. And a comprehensive thinking should be put into the analysis. Although there are shortcomings of the Porters Five Forces Analysis, it is still a valuable framework used to discriminate the strength, weakness, threats and opportunities of the company. And it is useful to solve various problems that one could meet.
Conclusion
In conclusion, managers should make plans for their own companies according the fast-changing economic situation worldwide and during the strategic analysis process, it is essential for them to adopt some useful approaches, such as value chain analysis, SWOT analysis, porter five forces analysis and the like. Therefore, this dissertation provides a critical evaluation of value chain analysis and porter five force during the strategic analysis process. Before representing the advantages and disadvantages of value chain analysis and porter five forces, this dissertation has provide the definition and general literature review about these two approaches. From the above analysis, it is reasonable to conclude that the value chain analysis and porter five forces have advantages as well as disadvantages, which can help managers to learn about the general knowledge about these two approaches. Meanwhile, during the strategic analysis process, the managers can make full use of their advantages to gain more efficiency.
Due to the limited energy and time, limitations must exist in any kind of research. This dissertation mainly takes the secondary data, which mainly are from journals, books and website, so it is difficult to ensure that the data are reliable enough. Due to the limited space, this dissertation can not explain all the disadvantages and advantages of these approaches and the listed examples may not represent all the industries and be typical. And all of these are the key points which are needed to be improved in the future.
In the end, this dissertation will give the audiences some suggestions for future research to do the researches about the merits and demerits of these approaches better in the future. For example, the researchers should do some practical surveys about these two approaches to learn about the usage situations in different industries. Secondly, the researches also can make good use of books, journals, websites and even magazines to gain more and better information to give more specific analysis about the disadvantages and advantages about these two approaches.
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