THE IMPACT OF VALUE CHAIN ANALYSIS ON PROFITABILITY OF A FIRM

CHAPTER ONE

Introduction

1.1 Background to the study

Value chains are  key framework for understanding how inputs and services are brought together and  used to grow, transform, or manufacture a product; how the product then moves physically from the producer to the customer; and how value increases along the way. The value chain perspective provides an important means to understand business-to-business relationships that connect the chain, mechanisms for increasing efficiency, and ways to enable businesses to increase productivity and add value. It also provides a reference point for improvements in supporting services and the business environment. It can contribute to business initiation and better linking of small businesses with the market. Increasingly, the value chain approach is being used to guide and drive high-impact and sustainable initiatives focused on improving productivity, competitiveness, entrepreneurship, and the growth of small and medium enterprises (SMEs) (World Development Report, 2008).

Analysing a firm’s activities as a linked chain is a tried and tested way of revealing value creation opportunities. The value chain disaggregates the firm into its strategically relevant activities in order to understand the costs and existing potential sources of differentiation (Porter,1985). It is the micro mechanism at the level of the firm that equalizes supply and demand at the macro market level. Early applications in distribution, manufacturing and purchasing collectively gave rise to what is known today as the value chain (Oliver & Webber, 1982). Over time,  value chains have been transformed into faster, cheaper and more reliable modern value chains as a result of investment in information technology, cost-analysis and process-analysis. Marketing, sales and service are the other half of the value-chain analysis which collectively drive and sustain demand, and are known as the Demand Chain

Value chain approaches have been utilized by development practitioners and researchers alike to capture the interactions of increasingly dynamic (and complex) markets in developing countries like Nigeria and to examine the inter-relationships between diverse activities involved in all stages of the marketing channel (Kaplinsky, 2000; 2004; Dolan and Humphrey, 2000; Fitter and Kaplinsky, 2001; Ponte, 2001; Schmitz and Knorringa, 2000; Giulani et al., 2005; Bair and Peters, 2006; Pietrobelli and Saliola, 2008). They have alerted us to inequities in power relationships based on the governance of the supply chain and have highlighted potential points of entry (and exclusion) for smallholders (Dolan and Humphrey, 2000; Hess, 2008). Moreover, by going beyond firm- or activity-specific analysis, value chain analysis allows for an assessment of the linkages between and amongst productive activities. The value chain approach thus provides a framework to analyse the nature and determinants of competitiveness in value chains in which small firms can participate. It also provides the basic understanding needed for designing and implementing appropriate development programs and policies to support their market participation. Indeed, many development interventions now utilize the value chain approach as an important entry point for engaging small firms, individually or collectively (GTZ, 2007).

1.2 Statement of the problem

Over the last several years, a profound change in understanding the dynamics of competitive advantage as being a major problem . A firm’s success is tied, in part, to the strength of its weakest  supply chain and value chain . Only through close collaborative linkages through the entire supply chain, can one fully achieve the benefits of cost reduction and revenue enhancing behaviours (Spekman et al, 1998). Effective Value Chain Management (VCM) has become a potentially valuable way of securing competitive advantage, improving profitability and improving organizational performance since competition is no longer between organizations, but among the chains. But the problem is that most of the chains which deals on both supply,  production and demand if not well analysed in other to  enable adequate profitability leads to the firms  low profit level or loss which subsequently culminated in the death of the firm and which on the other hand affect the economic growth of the country. The question now is how can this various chains of production be effective analysis to ensure firms profitability? Base on this backdrop the study is intended to evaluate the impact of value chain analysis on profit making in Winco Foam industry in Nigeria.

1.3 Objectives of the Study

In order to give direction and meaning to this study, the main objective of this study will be to evaluate the impact of value chain analysis on profitability of a firm. Other specific objective will be to ascertain

1. The relevance of value chain analysis on profit making in a firm.
2. Strategies needed for effective analysis of value chain.
3. The relationship between value chain analysis and benefits derived by a firm from analysing the chains of production.
4. The reasons for analysing the chains of production.
5. The impact of value chain analysis on firm over a period of 10years.

1.4 Research Questions

In other to gather relevant responses from the respondent the following research questions will be   posed before the respondents.  They are as follows:-

• Does value chain analysis have any relevance in profit making of your organization?
• Are there strategies needed for effective analysis of value chain in your firm?
• Is there any relationship between value chain analysis and benefits derived by a firm from analysing the chains of production?
• Are there some reasons of analysing the chain of production?
• Does value chain analysis have any impact on your firm over the period of 10years?

1.5 Research Hypotheses

The following five research hypothesis will be used to test each of the responses of the respondents as follows:-

H_01: There is no significant relevance of value chain analysis on profit making of a firm.

H_02:  No effective strategies are needed for value chain analysis.

H_03:  No significant relationship exists between   value chain analysis in a firm and the benefits derived.

H_04:  There are no significant reasons for analysing the chains of production.

H_05:  Value chain analysis of a firm has no impact on the firm profit making over a period of time.

1.6 Scope of the Study

The scope of this study will be on impact of value chain analysis on profitability: and  will be  using Winco foam Nigeria as a case study. The main focus of the study will be to establish the link between firms value chain analysis which include supply chain, cost of production and  Demand chain  on  profit making of a firm which can lead to the sustainability of a firm. The study will be focusing on the impact of value chain has had on winco foam Nigeria over the period of 10 year and how this might affect economic growth of the region  were the firm is located as well as the economy of the Nigeria. The study will be sorting the opinions of the respondent  as regard the  impact value chain analysis have on the growth of industries.

In the light of this research, the researcher will also be discussing the various kinds of values chain analysis and how these various types of chain analysis will be affecting the growth of a firm. It will be focusing too, on the strategies needed for a company, firms or an organization to effectively analyse their chain of production in order to achieve their aim toward profit making and as well enhance the growth of the organisation. The research will be discussing the relationship that exists between value chain analysis on profit making and the other benefits derived from it by a firm.

1. 7 Significance of the Study

This study will be significant since it will be of immense benefit to production industries and the same time suggest possible strategies that are needed for a firm to analyse their value chains of production effectively in order to make profit which will lead to the growth of the firm. The study will also be of significant as it will establish the relationship which exists between value chain and the benefit derived from it by a firm. It will also be significant in that it will highlight the various types of value chains of production which is valuable for the growth of  a firm. The study will  give various reasons for value chain analyses in  a firm and at the same time highlight the impact of value chain analysis on the growth of a firm over a  long duration of time. It will add to the existing knowledge and serve as source of reference for follow researchers. On the other hand, the finding of the study will be of benefit to production firms, companies and industries who want to achieve  profit in their production and as well  growth in their organisation.

1.8 Definition of Terms

The follow terms that will be used in the study are defined as follows:

• Value chain: Value chains are a key framework for understanding how inputs and services are brought together and then used to grow, transform, or manufacture a product; how the product then moves physically from the producer to the customer; and how value increases along the way.
• Supply chain: it is the part of value chain which deals with the supply of goods form the producer to the final consumer.
• Demand chain: The Demand chain is that part of the value chain which drives demand
• Production : the set of activities which involve the producing of good from raw material to it finished state and which get to it final consumers.
• Physical/traditional value chain: A physical-world activity performed in order to enhance a product or a service as a firm aim at earning higher profit drives in a business.
• Virtual value chain: All activities of persistent physical world’s physical value-chain enhancement process, which is implemented in the cyber-market, are in general terms referred to as a virtual value chain.

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