ipl project 2

Running Header: Value Chain Analysis 1

Value Chain Analysis Can Help Little General

Hayley Stringfield

BUSI 601-Business Research Methods-B05

Liberty University

Dr. William Haun

October 6, 2013

Value Chain Analysis 2

Value Chain Analysis Can Help Little General

Introduction

In a study performed by Campbell, Datar, Kulp, and Narayanan (2002), an analysis of

Store24’s balanced scorecard was performed using two different strategic methods. One of

which was differentiation as Little General’s main strategy, and the other was the traditional

speed of service and efficiency of the employees. It was determined that the use of a balanced

scorecard could be misleading if the correct parameters were not measured and that there is little

way to completely eliminate the variances between individual stores and managers. This leads to

the need for a different management technique to help with the competitiveness both internally

and externally.

Little General is practicing several of the present management techniques pertinent to its

industry, including benchmarking, total quality management, and sustainability. This company

could make use of one particular management technique it presently is not being fully used,

being that of value chain analysis. With many convenience stores altering their strategies to

focus on customer service, there is a need for inclusion of cost savings that can be found through

value chain analysis. This includes the analysis of the value of its managers, as one of the most

critical individual store differences in financial performance, due to their skills in driving

customer service (Campbell et al., 2002).

Value Chain Analysis

Reasons for use by Little General

According to Blocher, Stout, Juras, and Cokins (2013), “value chain is a tool firms use to

identify the specific steps required to provide a product or service to the customer” (p. 12). These

steps were primarily designed to determine measures for reducing costs to become or remain

competitive. In today’s analysis methods, researchers and management accountants are


developing new methods to quantify other aspects with a lot of emphasis on supply chain

management, but can even link a manager’s skills and abilities to company performance. These

analysises are designed to determine if internal or external activities are bringing value to the

customer, which makes it a great choice for Little General to add to their arsenal of management

techniques.

As with other convenience stores, there are managers at each store location who perform

actions such as the purchasing of products for sale, raw materials necessary for any on-site

cooking or sandwich making, leadership of the team or crew, and other managerial duties such as

employee scheduling and time keeping. This is a critical part of today’s business success since a

study performed showed that 14% of Chief Executive Officers (CEOs) account for the variances

within a company (Kaiser and Overfield, 2010, July). These activities individually or combined

will be the causes of individual store performance, thus driving company financial performance.

The products sold at most of the Little General Stores are common to all convenience stores and

their emphasis on customer service is becoming more common in this industry, thus leading to

the need for value and cost cutting. This can be accomplished by performing a value chain

analysis on the complete process involved, which is in this case primarily buying products from

manufacturers, distributers, or wholesalers, and directly selling to the customer or preparing a

fresh food product to the customer such as Cluckers Chicken (Little General, 2013).

In the convenience store industry there is a greater advantage to larger companies for the

purchasing of supplies and products since they are more capable of securing more appropriate

purchasing contracts with smaller costs due to the larger volume negotiated. According to

Saranga and Moser (2010), purchasing accounts for 40% - 70% of a firm’s sales revenues

depending on the variables playing into purchasing decisions such as the types of buyers and


number of suppliers. This would make appropriate sales forecasting and purchasing one of the

most critical success factors to Little General from both a cost and quality position.

Although cost was may not be a major concern to Vinkler-Clay (personal

communication, September, 4, 2013), there should be more concern at the higher levels within

the company around the supplier contracts. All the other critical success factors found during the

interview with Vinkler-Clay, can be measured for value to the customer and the company and

might be better measures used for individual store and its staff’s addition of value. This would

provide for a determination of the store’s performance versus other stores and aid in decisions as

to whether the store adds value to Little General or should be relocated or a personnel change

may be necessary. Critical success factors such as customer service, skilled employees, and

location, have newly developed methods to determine the value of these activities to the

company. Also, actual costs versus sales revenues can be determined on the very detailed level

of every product in the store or on a complete product order from a wholesaler. The level of

value analysis must be determined prior to analyzing the store’s activities and as to even how

much this analysis itself would add value to the company.

Description and implementation

Once a company has determined its competitive strategy, whether a cost leader or

differentiator, a value chain analysis can be used to help determine which activities will add

value to the product, customer, and ultimately the company (Blocher, et al., 2013, p. 40). The

identifying of activities acts as a method of determining which activities will be used in the value

chain analysis, by narrowing down those the company will focus on. Since value chain analysis

is a method that provides analysis of a more detailed level, there could be too many. This would


make a full value chain analysis of every activity loose its intrinsic value as so much time and

money would be spent on it, making it not feasible.

One reason for this selection can be seen as an example of analyzing the value of each

and every product within a convenience store. Sometimes suppliers push products found to be of

little value for in order to rid themselves of the product. While performing an interview with

Deann Vinkler-Clay on September 4, 2013, one of the employees approached her and asked her

where to put some lighters that had arrived. Vinkler-Clay told her to try and find somewhere to

place the products, which was hard to find due to shelf space requirements within convenience

stores. Due to the limited space in some stores, extra products used to promote a brand or

company can be shelf/space consuming thus making the idea of value chain analysis even more

important (Taylor & Fearne, 2009). The questions as to whether this promotion will add value to

Little General sales or customer service needs to be asked. If products are not helping the

supplier or selling at the store, there would be little value to using precious shelf space for this

promotion. This example can show a use for product valuation in a convenience store by

determining shelf space and layout, but to do this for each and every product in even a small

store would be too time and money consuming.

The activities selected will fall into one of three stages for accounting and many business

purposes. These are the supply, operations, and interactions with customers (Blocher, et al.,

2013, p. 40). Although, these three stages are specific for many businesses, the same principle of

inputs and outputs can be used for analyzing other activities that are non-tangible, such as that of

a manager’s skills and even has been used for safety analysis as well. In safety, according to a

training video (personal conversation, A. Smith, September 30), there are these three same ideas,

including start-up, operations, and shut-down, during the process of manufacturing a product.


Since these three concepts and stages are similar they can be adapted through new methods

developed by researchers.

Even in the study of one stage such as supply, there could be a narrowing down and

valuing of both tangible and non-tangible activities. During a study by Saranga and Moser

(2010), it was found that most purchasing and supply managers outlined specifically the

performance drivers for the supply, upstream phase, as being the number of strategic buyers,

number of transactional buyers, and the number of suppliers. These were then evaluated as

performance outputs and measured. These performance outputs were cost savings, cross-

sectional collaboration, and supplier performance, thus transforming these measures into a single

corporate financial output. The use of input drivers, along with a focusing on the intermediate

transitioning using the dependencies of performance outputs on the final single output can be

converted for almost any industry or business (Baig & Akhtar, 2011). This same principle can be

used with manager or leadership performance by the manager in the form of team performance,

with the manager as the driver, team’s performance, and then transformed into individual store

financial performance (Kaiser and Overfield, 2010, July).

Once the value activities are selected, there are three possible determinations that can be

made from the value chain analysis. These are whether the activity can aid in the competitive

strategy, whether value can be added, and whether costs can be reduced (Blocher, et al., 2013, p.

40-41). Each of these determinations can prompt a management decision to be made using the

five steps of decision making as outlined in Cost Management: A Strategic Emphasis (Blocher,

et al., 2013, p. 42). These five steps are not only used for analyzing decisions in accounting and

costing, but again were found in analyzing safety hazards (personal conversation, A. Smith,


September 30). These decisions can involve one or more of the determinations, such as reducing

supply costs which convenience stores may choose to do in order to remain competitive.

Application for Little General

The critical success factors for Little General were found to be great employees, great

customer service, foodservices, and location (personal communication, September, 4, 2013). In

order to determine the value of great employees, a leadership value chain can be performed on

each individual store’s crew, with the driver being a manager’s motivational skills (Kaiser and

Overfield, 2010, July). This evaluation needs to be performed on each store so that steps can be

taken to makes strategic decisions such as whether a new manager or crew members might be

needed or whether additional training might be of value to that individual store. With this

evaluation, the manager’s skills for motivation will be seen in the team’s views and abilities for

accuracy in ordering products, maintaining the store’s shelf and limited extra inventory,

housekeeping and cleanliness, and the continuance and growth of customers due to good

customer service. According to Kaiser and Overfield, (2010, July), there are three types of

human capital that a leader will provide, being psychological, intellectual, and social. Each of

these has specific good and bad drivers such as the personality type, the education and training,

and the manager’s ability to be social with the crew. All of these can be used to show the true

value of a manager through their leadership and motivational skills in the financial results each

store and then specific decisions regarding each store can be made.

A leadership value chain analysis performed for Little General would include the

manager’s skills, such as schedule planning, flexibility in scheduling, purchasing of products or

materials, and individual crew member training. The performance measures would be the wait

time of customer, employee absenteeism, and the presence or absence of products desired by the


customer. The final single measure would be of the store’s financial performance. This financial

performance could then be compared to other stores for valuation of the individual stores.

Along with the management and crew analysis of general convenience store retailing,

there can be a value chain analysis performed on the foodservice portion of management. This

will also show the store manager’s skills using the leadership value chain analysis, but the

individual department at Little General can be analyzed as well from the leadership and

motivational skills of its deli manager and the cooking crew. According to Taylor and Fearne

(2009), another way foodservice can be analyzed is by determining the value of the food made

since the deli makes the food fresh and other vendors such as Krispy Kreme doughnuts (of which

Little General has a franchise with purchase of fresh doughnuts delivered daily). The drivers of

the foodservices would be managers, the quality of the food items, quality of the cooking, and

the freshness rotation period. The performance outputs would be sales from the deli, how much

waste is thrown away from the freshness rotation (indicating a lack of need for the food item or a

problem with the food or service), and the number of times a particular food item is requested

and not available.

The drivers for valuing location would be size of the urban or rural area, closeness to

major highways or interstates, amount of residents within an appropriate distance, and whether

or not there are industries to support it (Bainbridge, 2012, winter). The performance indicators

would be the population of the city or rural area, number of vehicles entering the parking lot,

number of residents within a specific radius of the store, and number of businesses or large

industries within a specific radius. These performance indicators would again be seen in the

financial performance of each store. Although there would be several other drivers that could

affect such portions as the number of vehicles entering the parking lot being driven by ease of


access, proper corner location, whether or not there are stoplights, and the cost of fuel, it would

be too time consuming to value each of these drivers (Bainbridge, 2012, winter). This would be

one example of a value chain analysis that might not be necessary as different customers have

different reasons for stopping in a specific store and it has been found that traffic and location

studies may not be as accurate as the once were due to it being a large competitive industry. The

idea that traffic flow and store location, although critical, drives a customer choice in large urban

areas where there are convenience stores on every corner at stop lights and several in close

distances on the same street is now being dropped by many convenience store chains. This may

still be of value to Little General as they are much more rural areas and do not have the same

vastness of competition that an urban area may have (Convenience Stores, 2011).

Other Industries and Value Chain Analysis

According to Brookshire (2002), the use of steps in making anything of value has been

around forever. Examples are of historical artifacts found that show different qualities in how

these were made in the same societies. There are differences in the quality of items made, thus

giving to the idea that there was a value placed on them. One person would take more care in

making their item thus making it more valuable, while others would strive to make better items

to make their item more easily used or the work done by it (take a tool for example), thus leading

causing a drive for more value. All products today have been developed out of this drive to make

them more valuable by cost or differentiation.

One of the most common forms of value chain analysis today is for the supply side of

many businesses, but especially manufacturers, wholesalers, and retailers are using value chain

analysis for improving the supply chain function of their companies (Saranga and Moser, 2010).

Researchers have performed some value chain analysis on other specific industries, such as the


pharmaceutical, electronic semiconductor industry and natural gas industries. With this diversity

of industries performing value chain analysis in some format or another, there is a re-emergence

of this management technique as having value in itself, not just for cost but also other activities

that can add value to the product.

According to Brookshire (2002), Dr. Joseph E. Stiglitz describe value added as simply

the difference between the total costs of a product and its selling price, with value being added at

each stage of the production of drugs. This production begins with raw materials (inputs), sends

these to manufacturers who put the raw materials together (operations), and then provides a final

drug which is then shipped and sold in various countries (final output). Again this is the simple

premise of value chain analysis with input costs driving output costs. Since this industry is very

heavily watched by countries taxation systems for proper income reporting, there is a need to

determine the value in all three stages of the production of drugs by pharmaceutical companies,

just from the standpoint of production, while others items could have value chain analysis such

as the research and development of these drugs. There needs to be determinations as to how

much research and what drugs need to be developed to provide value to the customer, thus

adding value since the customer is the ultimate buyer and user of these drugs. According to

Brookshire (2002), this industry has been heavily watched due to the high costs of medicines

which are leaving those least able to pay, paying the most. This is a result of the understated

transfer prices from the supplier to the distributor and the customer and the final actual price.

The electronic and semiconductor industry is another industry that utilizes value chain

analysis. These industries are constantly changing looking for the next added value, due to the

large demand of new technologies by customers. In order to provide for these technologies, there

must be a correct addition of value, which according to Li, Huang, and Chen (2011), includes a


study of the patents on new technologies being added. Where many suppliers originally just

made semiconductor chips for electronics, they are now looking for ways to add value to their

chips and not just manufacturing them for downstream usage in products. As with many

industries there was complacency about just making a product to the customer’s specifications

and little concern for adding value. With the large competitiveness globally in the electronics and

semiconductor industry specifically, the supplier who is innovative with respect to their products

will win the competition race (Kess, Law, Kanchana, & Phusavat, 2010). Electronics is a highly

evolving industry with customer demand for new improved technologies, including faster,

smaller, and or more aesthetic designs, thus leaving this industry greatly in need of value chain

analysis to determine things like whether or not a company has already beat you to an idea and

patented it. If too much time and money is invested in a technology that has already been

developed, it could be wasted due to the timing of the entrance into the market, so these

manufacturers must look as supply chains, innovations within internal operations, and the value a

customer is looking for.

A third industry example that is using value chain analysis is that of the natural gas

industry. According to Weijermars (2010), the overall value chain of natural gas is from the

ground (the wellhead) to the transmission lines, to the distribution lines, and finally to the

customer who uses the gas as an energy source to end users. The natural gas industry is also

highly regulated on the supply side with restrictions placed to help the end users provide for their

ultimate customers such as the generation of electricity (power plants). In his study he compares

the physical value chain of the provision of liquefied natural gas (LNG) to the financial values in

its own value chain system. Again this simple idea of supply or input, production or operations,


and the output physically to the customer is used as a base for his financial value chain analysis

which uses the same approach.

Conclusion

These are just some examples of how a value chain analysis has helped various

businesses with the three simple stages being evaluated for value at each one. Also within these

stages there can be more breakdowns to determine value of a smaller chain of activities with

each. Each overall activity in the value chain from supplier to middle activities to the final

activity can be evaluated independently for ways to add value, reduce costs, and improve

competitive advantages. These activities involve determining specific value chain analyses in

supply management, production or service management, distribution management, and customer

management.

In the case of Little General, it may be using parts of an overall analysis, but should begin

to look at using it for a deeper value understanding of each individual store. Many convenience

stores are now using some value chain analysis, with those that should be benchmarked using it

the most as they are using the newer breakdowns of an overall value chain to determine the

service side of their retail business, which relies heavily on customer service (Convenience

Stores, 2011). Working backward from this, in a reverse value analysis, leads back to the crew

members and ultimately the management of them. The other critical success factors many of

which are performed by these managers, such as dealing with suppliers for ordering of store

products can be further evaluated as well in attempts to lower costs of the products they are

selling. With the value of convenience added into every product in the store there is a higher

price, thus hindering competition with convenience stores competitions with large retail

superstores, such as Wal-Mart and Kroger (Wood & Browne, 2007).


The need for cost cutting is becoming more critical every day to a convenience store as

these one-stop stores continue to become more competitive by providing more services, such as

banking, pharmacy, vision and other health services, and the new convenience store additions of

laundry services, movie rentals, and other services to draw more customers (Convenience Stores,

2011). With this cost cutting principle added, there is a great need to determine what is of value

at present and what can be discontinued both in products and services as well as keeping stores

open that are not as productive financially.


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