An Explanation of the Value Chain Analysis

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Value Chain Analysis (charts and diagrams are attached in the accompanying Word documents)

Value chain analysis can help an institution determine which type of competitive advantage to pursue, and how to pursue it. There are two components of value chain analysis: the industry value chain and the organization's internal value chain. The industry value chain is composed of all the value-creating activities within the industry, beginning with the first step in the course development process, and ending with the completed delivery of courses and related services to the learner. Porter (1985) identified five competitive forces interacting within a given industry: the intensity of rivalry among existing competitors, the barriers to entry for new competitors, the threat of substitute products and services, the bargaining power of suppliers, and the bargaining power of buyers (see Figure 3-2). Analyzing these forces will reveal the industry's fundamental attractiveness, expose the underlying drivers of average industry profitability, and provide insight into how profitability will evolve in the future, given different changes among suppliers, channels, substitutes, competitors, or technology.

Figure 3-2.

Industry competitive forces:

The structural attractiveness of the distance education industry is also determined by the same five underlying forces. In 2001, Porter argued that, while the Internet has helped distance education to expand impressively, it has only changed the front end of the industry process (p. 66).

Hence, the competitive attractiveness of online education can be analyzed using Porter's framework. The competitive forces presented in Figure 3-2 show that deploying the Internet and other ICT's within distance education has expanded the size of the market, not only allowing access to greater markets but also bringing many more companies into competition with one another. This development can place intense demands on university administrations to manage costs while ensuring quality education and service (Woudstra & Powell, 1989). The pressure on administrators comes from the changing cost structure that the Internet and the use of ICT's produce; that is, a reduction in variable costs and a tilting of cost structures towards fixed costs (Porter, 2001). In fact, compared to other distance education systems, online learning requires a heavy investment in technology (computers; servers; learning specific hardware; learning systems; acquiring authoring development tools, delivery tools, and collaboration tools; etc.) and also requires specialists (multimedia instructional designers, Web designers, technologists, faculty, etc.) to develop, run, and integrate mediated instructions. These two major categories of costs are mainly fixed. On the other hand, instructional materials are partially or totally digitized, thus reducing variable costs. The concepts of fixed and variable costs are central to cost analysis, in particular to understanding the behavior of costs, and to cost/volume/profit (CVP) analysis.

CVP analysis is concerned with how profit is determined by sales volume, sales price, variable expenses, and fixed expenses. A major application of CVP is in breakeven analysis, which provides a concise presentation of the relationship between cost and volume changes, and their effect on profit. The break-even point is the point where total revenue equals total expenses, resulting in neither a profit nor a loss. Once "break-even" is achieved, net income will increase by the contribution margin per unit for each additional unit sold. From a managerial perspective, fixed costs increase the risk to the company because they cannot be altered once incurred; therefore, online learning increases the risk to the institution. This kind of cost structure creates greater pressure for managers to engage in destructive price competition.

To understand why managers adopt price competition strategies when corporate cost structure is predominately fixed, it is necessary to understand the concept of operating leverage. Operating leverage is the measure of the extent to which fixed costs are being used in an organization. Using fixed costs, managers apply operating leverage to convert small changes in revenue to significant changes in profitability. The idea of operating leverage is consistent with the economies of scale concept developed by economists to describe the fact that cost per unit can be reduced by taking advantage of opportunities that become available as the size of an operation increases.

The degree of operating leverage is very important to managers, as it enables them to focus on the appropriate activities. For example, when the company operates near the break-even point, managers should focus their attention on activities that increase sales (hence, the destructive price strategy), because increased sales will have a significant impact on profitability. On the other hand, when the company operates far from the break-even point, the focus of managers should be oriented to cost control or new product development.

Source: Value Chain Analysis: A Strategic Approach to Online Learning
Fathi Elloumi Athabasca University. <http://cde.athabascau.ca/online_book/ch3.html>

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