Value Chain Analysis for Companies
Strategy and Corporate Governance
The primary purpose of the value chain in strategic management is to achieve operational effectiveness or strategic differentiation. Operational effectiveness allows companies to perform similar activities better than their rivals. Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals’ or performing similar activities in different ways. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.
For example, Southwest Airlines Company offers short-haul, low-cost, point-to-point service between midsize cities and secondary airports in large cities. Southwest avoids large airports and does not fly great distances. Its customers include business travelers, families, and students. Southwest’s frequent departures and low fares attract price-sensitive customers who otherwise would travel by bus or car, and convenience-oriented travelers who would choose a full-service airline on other routes.
Tax & Transfer Pricing
Value Chain Analysis has become a burning topic for discussion for many after the publication of the final report on BEPS Action Plan 13 and subsequent notifications by governments (especially the Chinese government) on the extent of information to be included in such analysis. Due to lack of consistent and clear guidance on what triggers the need for a value chain analysis, what a value chain analysis should entail, how the value chain analysis will be used by tax authorities around the globe etc., there emerges an imminent requirement on the part of the MNE to ensure that the information reported in the value chain analysis conducted for tax/TP purposes does not contradict that presented to various stakeholders through governance and operating models as well as is line with the strategic mandate of the company.
In summary, there appears to be an imminent need for clarification on what does a value chain analysis entail. This is because:
- BEPS = Full tax transparency;
- BEPS = a merger of residence of “taxable income” with the residence of “people functions” responsible for generating it;
- BEPS feeds “greed at the level of tax authorities”, i.e. the wide and/or different interpretations by different countries’ tax authorities of the BEPS/TP guidance can trigger even more than double taxation on the same profits;
- BEPS has already triggered some tax authorities to:
- Open the hunting season for aggressive tax structuring(s). For example, the Australian Tax Office; and
- Request a full value chain disclosure in TP local country files and CBC reporting. For example, the Chinese Tax Authorities.
- This means that the only way an MNE can defend its current tax/ TP structure is through:
- Full transparency on tax-sensitive data;
- The complete disclosure of their value chain;
- Syncing its corporate governance, operating model and tax/TP structure in the same way as syncing its economic, legal and financial realities.
If we want to fully understand the role of finance in an organization, we cannot consider it in isolation from other functions such as human resources, marketing, and information technology. Although the main reason for these functions is the gains to be made from specialization and the division of labor, coordination is required for an organization to achieve its objectives. Time must be spent on the alignment of goals, processes, and behaviors across functions, with significant risks arising through communication problems and misdirected effort.
Finance plays an existential role in the management of any business. In the words of John Nessel, president of the Restaurant Resource Group, “If you can’t count it, you can’t manage it”. Financial metrics have long been the standard for assessing a firm’s performance. The BSC supports the role of finance in establishing and monitoring specific and measurable financial strategic goals on a coordinated, integrated basis, thus enabling the firm to operate efficiently and effectively. The financial metrics can help firms to implement and monitor their strategies with specific, industry-related, and measurable financial goals, strengthening the organization’s capabilities with hard-to-imitate and non-substitutable competencies. They create sustainable competitive advantages that maximize a firm’s value, the main objective of all stakeholders.
In the recent development of multinational organizations’ business models, agility has become a primary value driver that ensures highly effective teams. Organizations adapt their tech teams to new ways of working that involve improving time to market, continuous learning, responsiveness, and collaboration. One of the challenges is that HR often works in annual cycles, while agile working requires short cycles, regular reflection, and course correction. In HR terms, an “agile” team should be based on effective collaboration, customer centricity, team-based culture, and continuous improvement.
Another challenge HR leaders in modern organizations face is how to apply a consumer and a digital lens to the HR function, to create an employee experience that mirrors their best customer experience. Many organizations still pursue the strategy of employee engagement, investing in a variety of programs. However, some of the organizations started to recognize that using tools for employee engagement without putting the employees at the center of organizations have fairly limited results. These organizations redesign outdated workplace practices to fit their employees. In this way, the HR can contribute to the value creation of the organization with full autonomous teams.
Currently, we can observe that traditional value chain models are becoming obsolete in the current market, and many new entrants are taking the lead with new ways of delivering the value to the customer. The large amounts of capital and infrastructure required for complex value chains often make organizations stiff and unable to respond flexibly to the new challenges. Digitization and IT solution allow companies to deliver value to the customer in exceedingly efficient ways. For example, a Chinese company Alibaba, was able to remove traditional contracting and purchasing from Chinese manufacturers, removing several elements of a typical value chain such as different layers of agents. The company was able to twist its business model dramatically, currently having 6 earning streams in different industries. One example is Alipay, which successfully dominated the banking industry as a payment provider, by eliminating typical elements of value chains of traditional banks.