ZeePedia Add to Favourites   |   Contact us


Lesson 37
Personal finance allows the management of your financial matters in a customized manner. For example,
tax calculations or financial budgeting can be done through personal finance software. Popular software
packages for personal finance are Quicken, MS Money and Money 2003 etc. In personal finance online data
is imported automatically into the register of transactions maintained by the software package as the
account/transaction details are downloaded through the internet. This information can then systematically
be used to calculate taxes or prepare a budget for certain activities.
Value Chain
EC includes so many activities that it is difficult to figure out where and how to use it in the business. One
way to overcome this difficulty is to break business into many value adding activities. A strategic business
unit is a combination of a particular product, distribution channel and customer type. In 1985 Michael
Porter gave the idea of value chains in his famous book "Competitive advantage". A value chain is a way of
organizing activities that each strategic business unit undertakes to design, produce, promote, market,
deliver and support the products or services it sells.
Primary and Support activities
Porter identified that there are some primary activities as well as certain supporting activities in a strategic
business unit. Following is the example of value chain for a strategic business unit (see Fig. 1 below):
Primary activities
Provide after
sale service
product or create
and support
materials and
and sell
Support activities
Finance and
Fig. 1
`Identify customers' refer to those activities which try to find new customers and ways to serve
better to the existing ones, e.g, surveys and market research;
`Design' activities take a product form concept stage to manufacturing stage. They include concept
research, engineering, drawings preparation, test marketing etc.
`Purchase materials and supplies' activities relate to procurement of material, vendor
selection/qualification, negotiating supply contracts, monitoring quality and timely delivery etc.
`Manufacture product or create service' activities relate to transformation of materials and labor
into finished products, e.g, fabricating, assembling, packaging etc.
`Market and sell' activities give buyers a way to purchase and provide inducement for them to do
so, e.g, advertising, promotions, managing salespersons, monitoring distribution channel, pricing
`Deliver' activities relate to storage, distribution and shipment of final product, e.g, warehousing,
selecting shippers, material handling, timely delivery to customers etc.
`Provide after sales service and support' refer to those activities that aim at promoting a continuing
relationship with customers, e.g, installing, testing, repairing, maintaining a product, fulfilling
warranties etc.
Note that left to right flow does not mean a strict time sequence for these activities. For example,
marketing activity can take place before purchasing materials.
Importance of each primary activity depends on the product/service and the type of customers.
For example, for certain type of businesses/products manufacturing activities are more critical and
for others marketing activities may be more important.
Support activities provide infrastructure for a business unit's primary activities as indicated in Fig. 1
above. Following are the support activities:
`Finance and administration' activities relate to accounting, paying bills, borrowing funds and
complying with government regulations etc.
`Human resources' refer to the activities that coordinate management of employees, e.g, recruiting,
hiring, compensation and benefits etc.
`Technology development' relates to activities which help improve product/service that a business
is selling and also help improve processes in every primary activity, e.g, fields tests, maintenance of
procedures, process improvement studies etc.
Industry value chains
It is useful to examine where a strategic business unit fits within its industry. Porter uses the term value
system to describe larger stream of activities into which a business unit's value chain is embedded. Different
strategic business units are associated, each having its value chain, to form industry value chain. By
understanding how other business units in industry value chain conduct their activities, mangers can identify
new opportunities for cost reduction and product improvement. Fig. 2 below shows industry value
chain of wooden furniture:
Logger cuts down tree
Sawmill converse logs to lumber
Lumberyard (distributor) provides lumber
furniture factory manufactures/assembles
Furniture retailer markets and sells furniture
Consumer purchases and uses furniture
disposes of furniture which is recycled
Fig. 2
Note that loggers grow and cut the trees to convert them into logs. Sawmill purchases logs and processes
them in its processing unit to converts them to lumbers. The lumberyard business purchases lumbers form
the sawmill business and sells them to furniture factory, which manufactures furniture using the lumbers.
Furniture retailer buys the furniture from furniture factory and sells it to customers, who use it. After
sometime the furniture is of no use and is disposed of by the customer. It can be then recycled. Note that
each business unit has its own value chain. The analysis of industry value chain is useful for a sawmill
business that is considering entering the tree harvesting/growing business or for furniture retailer who
wants to be a partner with a transportation business. Industry value chain identifies opportunities up and
down the product' s life cycle for increasing efficiency or the quality of product.
Examining value chains one finds that EC can help in four different ways as follows:
It can reduce costs of a business;
It can improve quality of products;
It can help in reaching new customers or suppliers;
It can create new ways of selling products.
For example, a software developer who releases annual updates of his software might consider eliminating
software retailer from distribution channel for updates by offering to send updates through internet directly
to his customers. In this way he can reduce the price of his product and increase sales revenue since revenue
margin payable to the retailer can now be cut down from the price.
SWOT (strengths, weaknesses, opportunities and threats) analysis
In SWOT analysis, an analyst first looks into the business unit to identify its strengths and weaknesses then
looks into the environment in which the business operates and identifies opportunities and threats
presented by such environment.
While judging the strengths of a business, questions can be asked such as what does a business do well?.
Does it have a sense of purpose and culture to support that purpose? While judging weaknesses of a
business questions can be asked as to what does a company do poorly?. Has it any serious financial
liabilities?. Has it got the required skilled manpower? In analyzing opportunities a company can try to find
answers to questions, such as, what is the industry trend? Are there any new markets to enter/explore? Are
there any new technologies to use?. In finding threats to a company's business it can ask questions as to
what things the competitors of the business doing better? Are there any troublesome changes in company's
business environment? Are there any new technologies or laws likely to be introduced that might cause
problem to the company?
Example of Dell
Dell, a famous computer manufacturing brand, used SWOT analysis in mid 1990s to create a strong
business strategy that made it a successful competitor in its industry value chain. It found that its strength
was to sell directly to customers and design its computers to reduce manufacturing costs. It also found that
it had no relation with local computer dealers. It faced threats from competitors which had much stronger
brand names/quality at that time. Dell identified an opportunity by noting that its customers were becoming
more knowledgeable about computers and could specify what they wanted to buy without Dell sales person
helping them or answering their questions to develop configuration for them. Moreover, it decided to use
internet as a potential marketing tool.
Dell took all four SWOT elements into consideration (see Fig. 3 below) and decided to offer customized
computers. The computers could be built/configured according to the order or specifications of the
customers who could place orders through phone and internet. Thus, it developed a strategy using its
strengths effectively and avoiding reliance on dealer network. Note that brand and quality threats form
competitors were reduced in this case by Dell's ability to deliver higher perceived quality of its product in
the sense that each computer could be customized according to the needs/specifications of the customers.
sell directly to consumers
∑ No strong relationships
keep costs below competitor's
with computer dealers
Competitors have stronger
Consumers know what they
brand names
want to buy
Competitors have strong
Internet could be a powerful
relationships with computer
marketing tool
Fig. 3