To Minimize Costs or to Differentiate
Traditionally, the main use of value chain analysis has been to visualize product and service activities with all elements involved, in order to fully understand the associated costs and areas of differentiation. Operational effectiveness and differentiation are both essential to superior performance, which, after all, is the primary goal of any enterprise.
For example, Apple has mastered the value chain of smartphone industry, being able to negotiate very low production prices, on a supplier end, and very high sell price on a retail end. In a case of iPhone 7, the cost of the product was below 150 €, while the sell price to retail markets e.g. Media Market in Europe, was 850 €. The retailer ended up selling the iPhones for around 1000€ at the launch of iPhone 7, which is extremely low multiplier for the retailer compared with other smartphones and electronic products. In this way, Apple has completely mastered the value chain which allowed the company to control its suppliers and buyers, minimized its costs and so, increase revenue.
To Position Yourself for the Future
Value chain analysis also provides insights into elements that contribute to value creation all the way to the end user. Gaining knowledge about value creation of suppliers and customers allows companies to better understand the market and their own position in it. Companies can better identify value creating activities and can better position themselves for the future. Activities of a company that are not contributing to its new strategic position could be outsourced or redesigned.
For example, ING Bank have to lay off 5,800 (12% of total employees) in Belgium and the Netherlands in its digital transformation over five years. The current value creation model of a bank have became obsolete in the new market, where traditional banking services are on decline. ING was one of the first banks to adapt to new digital disruption announcing it changes its business model from traditional bank to a Fintech organization, with a significant change of how company operates. The senior management informed that the new company environment is now that of a tech campus rather than an old-style traditional bank.
To Be in Control Of Tax Position
With the BEPS publications in 2015, the OECD is of the view that some of the functions performed, risk assumed and assets employed, that were developed over the years do not provide a holistic view of allocation of margins/profit across the MNE Group i.e. the allocation of profit is often not aligned with the ‘people functions’ responsible for such profit creation.
One of the examples could be IP structures/entities without “people functions” claiming royalty from other group companies by acting as a legal owner of intangibles while no active value creation happens in such structures/entities. Thus, a value chain analysis is required to fully align the corporate governance framework, operating model and the tax/TP structure of an MNE. Any discrepancies in such alignment will trigger not only an additional tax liability (along with a penalty and interest) but also potential criminal charges.