Value Chain Analysis Of McKesson
Posted by Taylor Byrne on Sep-23-2018
1.1 Advantages of conducting Value Chain Analysis of McKesson
Value Chain Analysis of McKesson can offer various advantages:
1.1.1 Identify competitive advantage sources
By conducting the Value Chain Analysis of McKesson during the planning process, possible sources of competitive advantage can be identified. The firm/company is a collection of different activities that share relatedness to some extent. McKesson cannot trade all activities in the external market. The Value Chain approach suggests that a company can consider these activities as economic rent sources. These activities can also act as barriers to new entrants or cause cost disadvantages to competitors.
1.1.2 Identify complex inter-relationships and interdependencies
McKesson can identify various internal and external linkages among activities through the value chain lens. The internal linkages are- interrelationships between activities within same organisational units and external linkages are between business units of same or different firms. Studying these interrelationships can help a company take benefit from coordination and joint optimisation.
1.1.3 Improved flow of materials, information and finances
The use of Value Chain Analysis can optimise the finances, products and information flow.
- The improved information flow can help the company identify and exploit new opportunities and reduce external threats. The continuous Value Chain evaluation can result in timely filling important gaps that may affect a firm's productivity.
- The effective implementation of the Value Chain Analysis of McKesson can improve the material and product flow due to improved demand and sales forecasting. The inventory management also improves as McKesson can minimise the delays by tracking activities throughout the supply chain.
- Modern customers place high importance to the quick response and convenient access to the important product related information. The unexpected interruption in the information flow can affect the customer-supplier relationship. McKesson Value Chain Analysis and its implementation can highlight and remove the bottlenecks to the information flow.
1.1.4 Formulate effective firm-specific strategies
McKesson Value Chain Analysis can be used in the competitive strategic decision-making process. However, choosing the right competitive strategy (cost leadership, differentiation or focus) requires knowledge of own and rivals’ cost structure.
1.2 Challenges associated with Value Chain Analysis of McKesson
- The company may lose its vision and overall strategy by dividing operations into different activities.
- Dividing the operations into primary and support activities may not be separable due to increased complexity.
- The division process can be time consuming and finding the required information can also be difficult.
- Effective value chain implementation does not only require familiarity but detailed expertise.
- McKesson may find it difficult to get required information if its Business Information System is not structured accordingly.
2. Porter’s Value Chain Analysis of McKesson
Porter's value chain model is highly popular in the business world. However, McKesson must not take it as a rigid, standalone framework by assigning the equal importance to all activities. The effective Value Chain Analysis requires McKesson to realise that all activities or functions do not require same scrutiny level. Hence, the first step of adapting the Porter Value Chain framework is to identify the importance of activities according to their role in product/service delivery process.
Here is the list of primary value chain activities as proposed by Porter:
2.1 Primary Activities
The primary value chain activities of McKesson are directly involved in producing and selling the product to targeted customers. Analysis of primary value chain activities can improve the performance of McKesson as explained below.
2.1.1 Inbound Logistics
It is important to develop strong relationships with suppliers as their support is necessary to receive, store and distribute the product. Without analysing the in-bound logistics, McKesson can face various challenges in product development phases. Analysis of in-bound logistics requires a company to focus on every aspect of transformation from raw material to finished product. Some examples of inbound logistics are retrieving raw material, storing the inputs and internally distributing the raw material and components to start production.
The importance of analysing operational activities raises when raw material arrives, and McKesson is ready to process the raw material into the end product and launch it in the market. Some examples of operational activities are machining, packing, assembling and testing. Equipment repair and maintenance also falls into this category.
It includes both- manufacturing and service operations. Analysis of operational activities is important for improving productivity, maximising the efficiency and ensuring the competitive success of McKesson. The increased productivity can help McKesson to achieve consistent economic growth, increase profitability and set a powerful basis for competitive advantage.
2.1.3 Outbound Logistics
Outbound logistics include the activities that deliver the product to the customer by passing through different intermediaries. Some outbound logistics activities are material handling, warehousing, scheduling, order processing, transporting and delivering to the destination. McKesson can analyse and optimise the outbound logistics to explore competitive advantage sources and achieve its business growth objectives.
Because, when outbound activities are timely managed with optimal costs and product delivery processes put a minimum negative effect on the quality, it maximises the customer satisfaction and increases growth opportunities for the firm. McKesson should pay specific importance to its outbound value chain activities when its offered products are perishable and require quick delivery to the end customer.
2.1.4 Marketing and Sales
At this stage, McKesson will highlight the benefits and differentiation points of offered products to persuade the customers that its offering is better than competitors. Only producing a high quality product at affordable costs and distinctive features cannot create value until McKesson invests on the marketing and sales activities. The sales agents and marketers play an important role here.
Some examples of McKesson's marketing and sales activities are- sales force, advertising, promotional activities, pricing, channel selection, quoting and building relations with channel members. The company can use the marketing funnel approach to structure its marketing and sales activities. The marketing strategies can either be push or pull in nature, depending on the McKesson’s business objectives, brand image, competitive dynamics and current standing in the market.
Effective and wisely integrated marketing activities can develop the brand equity of McKesson and help it stand out from the competition. However, McKesson must avoid making false commitments about product features that cannot be fulfilled by the production department. It indicates the need to ensure coordination between different value chain activities.
The pre-sale and post-sale services offered by the McKesson will play an important role in developing customer loyalty. The modern customers consider post-sale services as important as marketing and promotional activities. The power of negative e-WOM due to poor support service cannot be undermined in the current technologically advanced era. The company must analyse its support activities to avoid damaging brand reputation, and instead use it as a tool to spread positive word of mouth due to quick, timely and efficient support services.
2.2 Secondary Activities
The support activities play an important role in coordinating and facilitating the primary value chain activities. McKesson can also benefit from analysis of its support activities as explained below.
2.2.1 Firm infrastructure
The firm infrastructure denotes a range of activities, such as- quality management, legal matters handling, accounting, financing, planning and strategic management. Effective infrastructure management can allow McKesson to optimise the value of the whole value chain. McKesson can control the infrastructure activities (or commonly called overhead costs) to strengthen the competitive positioning in the market.
2.2.2 Human resource management
McKesson can analyse human resource management by evaluating different HR aspects, including- recruiting, selecting, training, rewarding, performance management and other personnel management activities. The effective HR management can allow McKesson to reduce competitive pressure based on motivation, commitment and skills of its workforce. The company can also achieve its cost minimisation objectives by analysing hiring and training costs with their relative return. The heavy dependence of McKesson on employees' talent will increase the importance of this value chain support activity.
2.2.3 Technology development
In a modern, technological advanced era, almost all value chain activities depend on technological support. The technological integration in production, distribution, marketing and human resource activities requires McKesson to realise the importance of technology development. It can be divided into product and process technological development activities. Some examples are- automation software, technology-supported customer service, product design research and data analytics. The research and development department of McKesson is classified in this category.
The procurement in value chain denotes the processes involved in purchasing the inputs that may range from equipment, machinery, raw material, supplies, raw material and other items necessary for producing the finished product. Due to its linkage with multiple value chain activities, McKesson should carefully consider its procurement activities to optimise the inbound, operational and outbound value chain.
As mentioned above, the application of Porter Value Chain model depends on understanding the importance of all activities. After understanding the relative importance of identified value chain activities, McKesson should highlight areas where value can be added, cost efficiency can be achieved, differentiation basis can be set, or processes can be optimised.
Here is a pictorial presentation of Porter Value Chain model:
3. Competitive Advantages through Value Chain Analysis of McKesson
It is important for McKesson to base its competitive advantage on activities in which it has access to the rare or scare resources. It may include- intellectual capital, assets, skills or distribution network. The Value Chain Analysis can help McKesson identify those activities and develop those areas to get a strong competitive edge over rivals. There are many examples (like Toshiba and Sharp) that consider Value Chain Analysis as a tool to get a competitive advantage and invest heavily in research and development activities within their value chain network. Porter’s generic strategies for achieving the competitive advantage and value chain model can be used together to set strong competitive advantage basis.
Following diagram shows Porter's competitive advantage model:
The analysis of the value chain activities can be done to understand the competitive advantage sources. McKesson can either use the operations, marketing and other relevant value chain activities to avail the cost advantages or it can use the human resource, technology, infrastructure, service or other relevant activities to set the strong differentiation basis. Broadly, the competitive advantage sources can be grouped into two types- cost and differentiation. McKesson can obtain a competitive advantage from one or both sources, depending on the depth and breadth of its Value Chain Analysis. Next parts of the article present in detail how McKesson can configure primary and/or secondary value chain activities to achieve the desired cost and differentiation objectives.
4. Cost Advantage of McKesson
4.1 Cost advantage through Value Chain Analysis of McKesson
McKesson can avail the cost advantages by reducing the costs associated with the value chain activities. However, it requires the company to firstly map the activities and then associate costs to make necessary adjustments. The connection between the value chain and cost leadership strategy reflects a parallel focus on the low cost operational activities. If McKesson aims to obtain cost advantage, it needs to identify each element within the value chain can be optimised to get the whole effect
- A Value Chain Analysis Example for McKesson is that it can use the analysis as a tool to negotiate the best prices and maximise the in-bound and out-bound transportation processes.
- Another Value Chain Analysis Example is using the value chain information to make modest advertising budget that can reduce marketing costs and offer the product at an affordable cost.
If McKesson aims for the low-cost, the Value Chain Analysis can optimise the profitability. If product differentiation is the aim of McKesson, Value Chain Analysis will help the company in maximising the efficiency and enhancing the product quality by improving processes.
4.2 Cost drivers of McKesson Value Chain Analysis
McKesson can control following drivers to add value, set differentiation basis and enhance efficiency.
- Organisational policies
- Economies of scale
- Capacity utilisation
- Learning and Spillover
However, it is important to note that costs can be reduced only to some extent. McKesson Value Chain Analysis must also consider the customers’ perceived value that may justify the higher price charged by the company compared to competitors.
5. Company Differentiation Advantage
McKesson can obtain the differentiation advantage by analysing different value chain activities. For instance, a company can procure the unique and valuable inputs that are not easily available to competitors. McKesson can either reconfigure the whole value chain or change individual entities to set the differentiation basis. The cost drivers (such as timing, interrelationships, linkages, scaling and integration) can also be altered to develop uniqueness.
Some examples of differentiation through analysis of value chain are:
- Forward integration or backward integration to exercise better control over inputs
- Utilisation of new channels of distribution
- Implementation of innovative process technologies.
5.1 Differentiation through primary value chain activities
McKesson can individually analyse the primary activities from all aspects and create differentiation basis by identifying the following sources:
- Inbound logistics: possible differentiation basis for McKesson are:
- Procure high quality inputs to offer high quality finished product
- Effective incoming input handling to reduce damage
- Operations: possible differentiation basis for McKesson are:
- Flexible manufacturing system
- Wide product range
- Improved product appearance
- Prevention of product pre-mature failure
- Quick response to unique specifications
- Improved customer satisfaction through lower defect rate
- Improved product performance due to conformance to technical specifications
- Outbound logistics: possible differentiation basis for McKesson are:
- Effective handling and better shipping to reduce product damage
- Timely product delivery
- Flexible delivery capabilities
- Effective order processing procedure
- Marketing and sales: possible differentiation basis for McKesson are:
- Improved relationships with suppliers and customers
- Enhanced communication with customers by offering high quality information.
- Brand awareness, reputation and image development due to extensive and effective advertising.
- Effective coordination among product, research and marketing departments.
- Wider sales force coverage.
- Services: possible differentiation basis for McKesson are:
- Superior service quality
- High quality technical assistance
- Reliable and quick repair/maintenance service
5.2 Differentiation through secondary value chain activities
McKesson can also analyse the secondary value chain activities to set differentiation basis:
- Firm Infrastructure: McKesson can set differentiation basis through:
- Extensive database development for effective marketing
- Advanced information system to get deeper customer insights.
- Human Resource Management- McKesson can set differentiation basis through:
- Attractive rewards to encourage creativity and maximise productivity
- Personnel training for effective interaction and superior customer service
- Technological development- McKesson can set differentiation basis through:
- Quick new product development
- Innovation integration in product designing
- Innovative product features with patented technology
- Procurement- McKesson can set differentiation basis through:
- Reliable transportation to ensure quick delivery
- Procure high quality raw material and replacement parts.
6. Value Chain Analysis Example
Value Chain Analysis of the McKesson can be better understood with the help of some examples.
- By using Value Chain Analysis, McKesson can select and source premium quality raw material and develop
customer loyalty on the basis of it. It can also use Value Chain Analysis to develop brand identity.
- Starbucks provides a good Value Chain Analysis Example. The organisation created a strong brand identity and set a strong competitive advantage basis through aggressive marketing and strengthening coordination between marketing and product development department.
- McKesson can also achieve competitive differentiation by speeding up the delivery of offered products to the
- Pizza Hut provides another successful Value Chain Analysis Example where organisation outpaced competitors by re-configuring value chain activities to ensure quick delivery.
- The Value Chain Analysis can also be used by McKesson to improve its human resource practices.
- FedEx is a good Value Chain Analysis Example to understand how McKesson can achieve competitive advantage through analysis of its human resource activities.
- FedEx emphasised over its value chain support activities, invested heavily on employee development, took excellent human resource initiatives and made visible infrastructure improvements, resulting into visible increase in brand loyalty and market share.
- McKesson can analyse value chain activities to reduce the costs, find better deals with suppliers and offer
high quality products at affordable prices.
- A relevant Value Chain Analysis Example is provided by Walmart that continuously analyses its value chain activities to remain innovative, minimise operational costs and offer low-cost yet reliable services.
- McKesson can analyse the support value chain activities to offer superior customer support. It can also
analyse the operational activities to expand the presence in geographically dispersed areas.
- It can be understood with the help of another Value Chain Analysis Example. Starbucks places high importance to analysing value chain activities and has successfully opened direct stores in more than 50 countries.
- McKesson can also use the Value Chain Analysis as a tool to do backward integration. It can be done by
merging or purchasing the suppliers to ensure timely raw material availability.
- Apple provides a relevant Value Chain Analysis Example in this regard. The company is known for its efficient value chain and successfully controls the product and parts.
- The Value Chain Analysis can also be done by McKesson to maximise the operational efficiency, reduce waste
and integrate sustainability in business operations.
- Intel is a good Value Chain Analysis Example that has reduced the waste and negative impact on the environment by analysing its value chain operational activities. The company has received appreciation for its waste reduction efforts.
- McKesson can learn from value chain practices of Dow AgroSciences. Dow has used Value Chain Analysis to explore the unique marketing opportunities and extracted value from generic commodity market. The company has also used Value Chain to manage the risks at different product lifecycle phases.
The above-stated examples show how McKesson can benefit from conducting a detailed Value Chain Analysis. However, it is also important to note that the Porter Value Chain model application depends on the unique contextual variables that must be considered when assigning the weightage to primary and secondary value chain activities.
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