Amity Business School

Value Chain Analysis

A value chain shows various activities, processes, etc., that are performed in a business. Value is created through nine activities- five primary and four support activities. The organisations value chain Firm infrastructure Human Resource Management Support Activities Technological Development Procurement

inbound logistics

operations

outbound logistics

Marketing & sales

services

Primary Activities

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Primary Activities
Inbound logistics : Soundness of material and inventory management Efficiency of raw material and warehousing activities. Operations: Productivity of equipment compared to that of key competitors Appropriate automation of production processes Effectiveness of production control system to improve quality and reduce cost Efficiency of plant layout and work flow design Outbound logistics Timeliness and efficiency of delivery of finished goods Efficiency of finished goods warehousing activities

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Marketing and Sales Effectiveness of market research to identify customers segments and needs Innovation in sales promotion and advertisement Evaluation of alternative distribution channels Motivation and competence of sales force Development of an image of quality and a favorable reputation Extension of brand loyalty among customers Extension of market dominance within the market segment or overall market Services Means to solicit customers input for product improvement Promptness of attention to customer complaints Appropriateness of warranty and guarantee policies Quality of customer education and training Ability to provide replacement parts and repair services

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Economic Value Added

Economic value added is an efficiency measurement technique that measures the efficiency with which the entire capital is used by an enterprise. Calculation of EVA :Economic value added per annum = post tax profit before interest total cost of capital including notional cost of reserves

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Question Total Asset value of the enterprise Operating profits Share capital $20m Reserves $12m 10% Loans $18m Total $50m

$100 millions $30 millions

Dividend expectation 15% Opportunity cost of Funds in the industry 12% Average annual rate of inflation 5% Tax rate 20%

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Calculation of EVA:Operating profit Less interest Pre tax profit Less taxes Profit after tax Add interest Profit after tax but before interest Less cost of dividend Less Interest Less opportunity cost of reserves EVA

$30m $1.8m $28.20m $5.64m $22.56m $ 1.80m $24.36m $ 3.00m $ 1.80m

$ 1.44m $18.12m