3.3.1 Value chain, Michael Porter (1985)
In order to develop recommendations and further answer the RQ the value chain is of significant purpose, as the stages of this analysis will have an accumulated impact on the added value to the product.
The sustainable advantage cannot only be obtained, by cutting costs in manufacturing. It is necessary for the brand to provide the value, that will justify and create foundation for the final price of the product, whether it is the product it self, service or the information that will add value for the end consumer. It is vital to discover and enlighten which activities to undertake in the relevance of creating value. The value chain offers the authors a framework to analyze which activities that adds value to the final product of AV.
In his book “Competitive Advantage: Creating and sustaining superior performance” from 1985, Michael E. Porter introduced the value chain framework. The framework suggests that a company can be divided into components of each primary activities and support activities.
The components of the primary activities are the inbound logistics, which are all the processes related to receiving and distributing the inputs internally. The key factor for creating value in this stage is the supplier relationship. The further step is operations. This is the step where the activities transform the inputs from the supplier, to outputs and thus is sold to the customer.
The outbound logistics involves the distributing system from AV to the customer. Marketing and sales carry the processes of persuading the customer to make the purchase from AV, rather than the competitors and finally the service activities of the customer pre- and post sales can
add value and can be done so by adding or deduct components in the way it seems fit for the service management for the consumer. The service activities are related to the maintenance of the added value of the product, once it has been purchased.
The support activities exist to support the primary activities. This includes procurement, technology development, and the company’s infrastructure. Each support activity, except for one, can be related to each of the primary activity and thus support the entire chain. The exception - the infrastructure – applies to the whole chain, instead of one part of it.
Porter’s figure indicates that the company achieves profit margins based on the management of the value chain and he believed that the value chain “Provides a systematic way of examining all activities a firm performs and how they interact with one another” (Mintzberg et. Al, 2009;
108). It is important to understand the value chain as a totality, as competent operations may not be a strategic advantage, if this does not match with marketing and sales.
(Chart 4, Value Chain, 1985)
When analyzing the value chain of AV, the authors will be provided with a clear indication of the allocation of AV’s added value to the products, and how they can establish competitive advantage.
The idea of the value chain is based on the process view of the organization as a system, made of subsystems – each holding input, transformation processes and outputs.
The definition of the value chain be interpreted in two ways; the simple or extended sense. In the simple definition, the value chain refers to the primary and support activities performed within the firm, whereas the extended definition pays attention to outsourced activities in the chain, and thus not activities performed and conducted by a single firm. The authors have chosen to adopt the extended definition of Porter’s value chain to the analysis, as AV has outsourced the inbound activity.
3.3.1.2 Critique of the Value Chain
Michael E. Porter’s framework is developed in order to optimize the efficiency of a known factor, which is at the same time the complexity of the analysis. Organizationally, the value chain means that one existing link follows another, which will have value as a result for the consumer.
The fundamental assumption of the framework is that the end consumer is relating to the process, which in the era of social media is not always the case (Differentiate your business, 2011). Michael Porter has helped shape the modern day strategy, however the framework was created before social media and interaction on the platforms was available. The analysis was created when being a large company and having scale, was enough to obtain profit and competitive advantage (Harvard Business Review, 2012). The mass market is a well suited fit for the value chain, as the customer remains at the end of the chain, which refers back to the new social era, where the consumer is included in more parts of the chain, hence the own interpretation of the value circle (chart 4) is more adequate for the contemporary time of today.
This shows the activities are interlinked and the consumer is not at the end of a chain, but a part of several layers of values. The paradigm of this paper is, as described earlier, pragmatism, which enforces the value chain thinking of the pragmatic outcome, why the chain is accommodated to this paper and now is observed at circles.
3.3.2 VRIO, J.B. Barney (1991)
In his book “Firm resources and competitive advantage” from 1991, J.B. Barney introduced the VRIN analysis as a framework l to analyze and determine the whether a firm’s internal
capabilities and resources in order to find if this can be a source to sustained competitive advantage. In this work Barney identifies four objects of which the company’s resources must live up to in order to source sustained competitive advantage. The VRIN framework, suggests that the resources should be Valuable, Rare, Imperfectly Inimitable and Non- substitutable. In his book “Looking inside for competitive advantage” from 1995, Barney updated his tool and thereby introduced the VRIO framework. To create sustainable competitive advantage, a company’s resources should now be Valuable, Rare, Inimitable and Organized meaning that a company should be able to utilize the resources. By the updated version, the capability of the organization was captured, as this has significance in order to manage the other aspects in the tool.
(Chart 5, VRIO framework, Barney, 1995)
As the figure shows, the organization is important in obtaining competitive advantage, as sustainable competitive advantage is dependent on whether the organization is able to orchestra and manage the capabilities and resources. While an analysis of the value chain can disclose where and how AV creates value to their customers, the VRIO framework can disclose whether the valuable resources and capabilities of AV can be utilized to create sustainable competitive advantage. The resources can be either tangible or intangible. Tangible assets such as land, building or machinery can easily be bought by competitors whereas intangible assets such as brand reputation, trademarks or a unique training system is not as easily acquired by others, why this offer the benefits of sustained competitive advantage. In order to locate valuable, rare and inimitable resources, only intangible assets of AV’s value chain will be considered for this framework. Awareness of AV’s resources and capabilities makes it clear to
the authors which components must be further developed in order to obtain sustainable competitive advantage.
3.3.2.1 Critique of VRIO
The framework of VRIO is established for assessing the micro level - the internal organization.
AV does not manufacture the watches themselves and they are not able to do so, hence this resource has been outsourced. This means another level has been applied to the framework at it is thus not internal anymore. The valuability can however still be put out, as AV can still make sure to show and tell the benefits of the outsourcing to Switzerland, China or Japan by involving the brand’s followers on e.g. Instagram - which is a platform that the framework does not consider. VRIO was evolved before the social media was developed and furthermore, before anyone could know this would have such a heavy power. This leads further on to criticize the lack of focus on capabilities as much the focus on resources (Sanchez, 2008). Majority of today’s companies do not obtain competitive advantage more than rather competitive survival with the resources, however, the capabilities of the company can ensure competitive advantage and thus does not perfectly apply to VRIO, as it would be difficult - if not impossible - to locate a resources that would satisfy of off Barney’s VRIO criteria. The rarity of the framework does not apply for many companies today, as most resources or capabilities have been exploited or can be obtained easily, however sustained competitive advantage can still be achieved, depending on the company’s ability to manage the rarity (Sanchez, 2008).
3.4 Strategic recommendations