Review the information in Concepts & Connections 4.1 concerning the value chain average costs of producing and selling an upscale polo shirt and compare this with the representative value chain depicted in Figure 4.1. Then answer the following questions:
- Which of the company’s primary value chain activities account for the largest percentage of its operating expenses?
- What support activities described in Figure 4.1 would be necessary at KP MacLane?
- What value chain activities might be important in securing or maintaining a competitive advantage for a producer of upscale, branded shirts like KP MacLane?
This post was part of TyroCity discussion forum
Question asked by devi_ghimire
Latest comments (4)
A company value chain involves a series of processes or steps like supply chain management, operation, sales and marketing, distribution and several others. Each of the steps of the value chain must add value to the overall outcome. A company thus must monitor and make changes to the process if it’s not performing as expected. Figure 4.1 as of the book includes of a representative value chain for KP MacLane, a producer of Polo shirts. The answer below is based on the same records available (Gamble, Thompson & Peteraf, 2016).
The company has a total cost of $29.57 of which more than one third ($11.05) comprises of labor cost, which is the highest of all. (Gamble, Thompson & Peteraf, 2016) This cost is for the production and selling of a women’s polo shirt and thus may vary with the product however as per the records available, labor cost is the largest when it comes to company’s primary value chain activities.
KP MacLane would need all the support activities as described in Figure 4.1. The company has been able to make a name of its own and in the current age and time, a company must always be innovative to remain ahead in the game. KP MacLane doesn’t have the luxury to slow down in the category with other giants like Adidas, Nike, and Reebok all giving their best. R&D is vital for the business to research on what can be done for the product, how the cost can be reduced, quality enhanced and all different type of innovations (Mairesse & Mohnen, 2004). Then comes the innovation and improvisation on the technology and system development. Further, with labor being the largest contributor to the primary value chain expenses, human resources management is vital. With no proper system in place, chances of employee’s revolting with the growing dissatisfaction are higher as well. Having a HR unit in place ensures that the company can take care of the employee’s grievances and act on it sooner to ensure that it doesn’t spread and case negative implication to the organization in a bigger scale. Once that is taken care of general administration is required as well for the organization of that size with the resources widespread, it’s a nightmare to manage it all without a proper system in place. It also looks at finding and maintain a proper relationship with other strategic partners to collaborate and enhance the reach.
Brands like KP MacLane must always remain innovative as there are other similar but different brands in the market who can easily take up the market share of the company if they slow down or doesn’t meet customer demand (Chesbrough, 2007). The company thus need to focus on both primary and support activities to ensure that their competitive advantage withstands and the company can grow further. To do this, they need to have a solid supply chain management system in place. As this deals mainly with the management aspect of the overall supply process of acquiring materials required for the production, storage, to inventory management. A good supply chain helps the business cut down on this cost and thus enables the company have a smoother process in place so that they don’t have to stop the production process just because the materials aren’t there (Mentzer et al., 2001). In addition to this, the company must also ensure that the product R&D one of the support activity is up to the mark. With this the company can always remain innovative to come up with better materials to use for the manufacturing process and even in the product, can reduce the cost of the development process, and even make the process faster. This all adds to the profitability of the business and with better product output adds more value for the customer as well.
References
Chesbrough, H. (2007). Business model innovation: it’s not just about technology anymore. Strategy & Leadership , 35 (6), 12-17.
Gamble, J., Thompson, A., & Peteraf, M. (2016). Essentials of Strategic Management (5th ed.). New York: McGraw-Hill Education.
Mairesse, J., & Mohnen, P. (2004). The Importance of R&D for Innovation. The Journal Of Technology Transfer , 30 (1-2), 183-197.
Mentzer, J., DeWitt, W., Keebler, J., Min, S., Nix, N., Smith, C., & Zacharia, Z. (2001). Defining Supply Chain Managemnet. Journal Of Business Logistics , 22 (2), 1-25.
The combination of all the activities undertaken by an organization to design, produce, market, deliver and support its products or services form the value chain of that organization. It comprises everything an organization does starting from the product development to delivering it to end user (Gamble, Petaraf, & Thompson, 2015). The activities in value chain are broadly classified into primary and secondary activities. The primary activities consists of supply chain management, operations, distribution, sales and marketing, service and profit margin that are necessary for creating value for customers. On the other hand, support activities consists of product research and development, technology and systems development, human resource management and general administration that facilitates the primary activities (Porter, 1985).
The findings on comparing the value chain of KP MacLane with the value chain depicted in Figure 4.1 are:
Among the primary value chain activities, labor costs accounts for the largest percentage of operating expenses. Out of the total operating costs of $ 29.57, about 37% i.e. $11.05 is spent on the wages, benefits, taxes, allowances and insurance of the labors. This shows that the company is emphasizing more on the utilization of available human resource for creating and delivering value to the customers.
I think all the supporting activities described in Figure 4.1 is necessary at KP MacLane. Innovation is the key to successful business. Since the tastes and preferences of the customers change over time, the company have to come up with new designs of polo shirt to meet the changing demand. Similarly, the quality improvement and cost reduction is also possible by investing in product research and technology and system development. From the table, we can see that labor cost accounts for the highest percentage of operating costs because of which the human resource management is also equally important to ensure that the company has right people in right place at right time to deliver the desired value by the customers. Similarly, the general administration needs to be effective to support the primary as well as secondary activities of technological development and human resource management of the firm. The administrative efficiency affects the performance of each and every units of the organization so it cannot be ignored either.
In order to secure and maintain the competitive advantage, the company should pay attention to both the primary and secondary activities of value chain as all of them are equally important. The effective supply chain management ensures availability or required inputs in right time and quantity, the operations ensures production of final product as desired, distribution assists in reaching to end users and cover market and sales and marketing helps in creating brand image of the company. In order to make all these primary activities more efficient, investment in research and development is necessary. It will also help in cos reduction and quality improvement.
Thus by the help of value chain activities, the company can generate profit by serving the customers in effective and efficient manner.
References
Gamble, J. E., Petaraf, M. A., & Thompson, A. A. (2015). Essentials of Strategic Management: The Quest for Competitive Advantage (Fourth ed.). New York: McGraw Hill Education.
Porter, M. E. (1985). Competitive Advantage. New York: Free Press.
Value chain is a concept developed by Michael Porter in 1985. The concept was fist he described in book "Competitive Advantage: Creating and Sustaining Superior Performance”. A business may be seen as a chain activities that transforms inputs into outputs to create customer value. Value chain analysis attempts to understand how a business creates customer value by examining the contribution of different activities within the business to the value. According to Wheelen, (2012) "A value chain is a linked set of value - creating activities that being with basic raw materials coming from suppliers, moving on to a series of value added activities involved in producing and marketing a product or service, and ending with distributions getting the final goods into the hands of the ultimate consumer.” Similarly, "value chain analysis (VCA) refers to the process where by a firm determines the cost associated with organizational activities from purchasing raw materials to manufacturing product(s) to marketing these products” (David, 2011). Value chain analysis allows the firm to understand the parts of its operations that create value and those that do not. Understanding these issues is important because the firm can earn return only if it creates greater value than the cost incurred to create that value (Zamora, 2016). The value chain shows how a product moves from the raw - material stage to the final customer. Value chain analysis helps build sustained competitive advantage through the following process:
Value chain activities are identified and assessed
Core competencies arise in some activities
Some core competencies evolve into distinctive competencies
Some distinctive competencies yield sustained competitive advantage.
In my point of view an organization is normally not able to perform all the activities from product design development to after sales service. Organizations have their specialized function. In this way the organization can be viewed as a part of the overall value system. Value chain for Kp MACLANE, a producer of Polo Company is clearly explain in 3 terms in Figure 4.1. The first one is supply chain and the cost on supply chain is $ 10.00. Similarly the cost on operation is labor cost and cost is $ 11.50 and the distribution cost is $8.17. The large percentage of cost is in operation cost and the main operation cost is $11.07, which is approx. 35% of total manufacturing cost of Polo T - shirt.
Since, KP MACLANE is a cloth manufacturing Startup Company, I think this company should invest heavily in Research and Development (R&D) and its human resource’s capital because if it brings more quality clothes in the market then its success is guaranteed. Nowadays the clothes industries are going in fancy nature and everyone wants quality, flexible and fashionable cloths which is difficult task for company. So they invest their huge money in research and development. They need high no. of capable human capital to manufacture high quality product. So all most 35% cost is needed only for manufacturing labor and they need more cost on Marketing, distribution and other where also need a human capital. The fashion clothes needed a high marketing and publicity. So they need high cost for marketing and distribution.
As per my opinion, supply chain management is important in securing or maintaining a competitive advantage for KP MACLANE and the supply chain for KP MACLANE a producer of polo shirt manufacturing company is fuel, energy, raw material, parts, and competition because they need to manage their flow of goods, keep their raw material and inventory safely (Binkley, 2012).
At last, the competitive advantage of an organization also depends on the capabilities of competitors. Hence, it is necessary for a firm to outperform the competitors through superior performance. For this, development and understanding of standard is important. So the value system is a form of inter-organizational unity and relations needed for value creation. Value chain analysis involves cost-effective analysis and products features analysis (Parker, 2000).
References
Binkley, C. (2012). Polo Puzzle: What Goes Into a $155 Price Tag? Retrieved from WSJ: wsj.com/articles/SB100014240529702...
David, F. R. (2011). Strategic Management Concept. NewYork: Library of Congress Cataloging-in-Publication Data.
Parker, J. (2000). ‘Lean, Mean, Vulnerable… Up the Value Chain’. traffic would, Vol. 263 .
Wheeler, T. L. (2012). Management and Business Policy Strategic Management. Library of Congress Cataloging-in-Publication Data .
Zamora, E. A. (2016). Value Chain Analysis: A Brief Review. Asian Journal of Innovation and Policy, 5 (2), 116-128.
Value chain is the value that is finally received by the customer. People can get confused with supply chain which is the actors involved to get the product from manufacturing to the customers. Value chain on the other hand looks at the increase in value from one player to another until it reaches the customers.
To understand which activity has the largest percentage of its operating expenses let us review the following table.
Table 1:
The above table shows the cost per material, cost levied by wholesaler and retailer. The table also show the composition of each material to its total operating cost or company cost and further conducts a vertical analysis to analyse the value increase as it transitions from the production to wholesaler to retailer and finally to the customer.
The above table shows that there are four items that have the highest contribution to the production and selling cost and they are labour cost, cotton from France, shipping finished goods from factory to store and finally the packaging or hand embroidered linen bag from highest to lowest respectively. Among these the labour cost is the highest showing there is need to reduce the cost of labour by either finding cheaper labour force or incorporating machinery and technology with ROI analysis.
Support Activities required for Kp MacLane
As Kp MacLane also sales polo shirts, they require all the components mentioned in the table 4.1. Raw material, labour, logistics and sales packaging are seen to be the most important women polo shirt manufacturing. Look at the competitors such as Macys and Ralph Lawren, Kp MacLane should also study these aspect and understand its strength and weakness as compared to their competitors. Quality cotton, logistics expert, human resource to handle labour hiring, retaining and development and advertising should be activities that Kp MacLane should focus on.
Consumer purchasing habit is shifting drastically to online transaction especially bags, shoes, frocks etc. as compared to other goods. "Last year clothes and accessories accounted for a fifth of e-commerce, estimates Cowen, a financial-services firm; far higher than their 8% share of total retail spending. Cowen expects Amazon to surpass Macy’s as America’s top clothing seller this year (The Econonmist, 2017).” Thus online sales focus should be added into the mix as well.
Value chain activity for competitive advantage to Kp MacLane
As seen in the cost segregation in the manufacturing and selling of polo shirts, the fundamental aspect for gaining competitive advantage is to reduce the cost of production. With so many strong competitors in the scene there is a red ocean situation and Kp MacLane should strategize to find a blue ocean for its competitive advantage.
The cost statement shows labour and raw material force to hold the highest cost ratio followed by shipment logistics and marketing. Therefore outsourcing is one way to reduce cost of production. However the shipment cost should be analysed.
The garment and textile quotas that were place in 1974 to limit exports to the United States and European Union expired in 2006 and China has been one of the major producers in these segment and cheaper source of product (M2 Presswire, 2006). Kp MacLane could move its production base to either China or manufacture in the home country itself with better machinery to reduce the cost.
Most companies have their own outlet. As see in table 4.1, the largest value addition is seen in the top off value from wholesaler and retailer i.e 41 and 58% of the total value. If MacLane can bypass these and directly meet the customers then they can reduce the price drastically and price differentiation could help it to compete.
Another way to add to this is the online marketing and sale. As many marketing has shifted to online and customers seem to move to this change, online sales can reduce the number of outlets as well as the cost for logistics and reduction in the retail price.
These are some way in which Kp MacLane can increase its competitive advantage.
References
M2 Presswire. (2006, May 12). Research and Markets: Company profiles of the major T-shirt and polo- shirt manufacturers in China. M2 Presswire; Coventry .
The Econonmist. (2017, February 9). Ralph Lauren and Macy’s tell a similar tale of woe. The Economist.