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120 PART 2 • STRATEGY FORMULATION

analyst converts the cost data into information by looking for competitive cost strengths
and weaknesses that may yield competitive advantage or disadvantage. Conducting a
VCA is supportive of the RBV’s examination of a firm’s assets and capabilities as
sources of distinctive competence.
When a major competitor or new market entrant offers products or services at very low
prices, this may be because that firm has substantially lower value chain costs or perhaps the
rival firm is just waging a desperate attempt to gain sales or market share. Thus value chain
analysis can be critically important for a firm in monitoring whether its prices and costs are
competitive. An example value chain is illustrated in Figure 4-7. There can be more than a
hundred particular value-creating activities associated with the business of producing and
marketing a product or service, and each one of the activities can represent a competitive
advantage or disadvantage for the firm. The combined costs of all the various activities in a
company’s value chain define the firm’s cost of doing business. Firms should determine
where cost advantages and disadvantages in their value chain occur relative to the value
chain of rival firms.
Value chains differ immensely across industries and firms. Whereas a paper products
company, such as Stone Container, would include on its value chain timber farming, logging,
pulp mills, and papermaking, a computer company such as Hewlett-Packard would include
programming, peripherals, software, hardware, and laptops. A motel would include food,
housekeeping, check-in and check-out operations, Web site, reservations system, and so on.
However all firms should use value chain analysis to develop and nurture a core competence
and convert this competence into a distinctive competence. A core competence is a value
chain activity that a firm performs especially well. When a core competence evolves into a
major competitive advantage, then it is called a distinctive competence. Figure 4-8 illustrates
this process.
More and more companies are using VCA to gain and sustain competitive advantage
by being especially efficient and effective along various parts of the value chain. For
example, Wal-Mart has built powerful value advantages by focusing on exceptionally
tight inventory control, volume purchasing of products, and offering exemplary customer
service. Computer companies in contrast compete aggressively along the distribution end
of the value chain. Of course, price competitiveness is a key component of effectiveness
among both mass retailers and computer firms.

Benchmarking
Benchmarking is an analytical tool used to determine whether a firm’s value chain
activities are competitive compared to rivals and thus conducive to winning in the
marketplace. Benchmarking entails measuring costs of value chain activities across an
industry to determine “best practices” among competing firms for the purpose of dupli-
cating or improving upon those best practices. Benchmarking enables a firm to take
action to improve its competitiveness by identifying (and improving upon) value chain
activities where rival firms have comparative advantages in cost, service, reputation, or
operation.
The hardest part of benchmarking can be gaining access to other firms’ value
chain activities with associated costs. Typical sources of benchmarking information,
however, include published reports, trade publications, suppliers, distributors,
customers, partners, creditors, shareholders, lobbyists, and willing rival firms. Some
rival firms share benchmarking data. However, the International Benchmarking
Clearinghouse provides guidelines to help ensure that restraint of trade, price fixing,
bid rigging, bribery, and other improper business conduct do not arise between partic-
ipating firms.
Due to the popularity of benchmarking today, numerous consulting firms such as
Accenture, AT Kearney, Best Practices Benchmarking & Consulting, as well as the
Strategic Planning Institute’s Council on Benchmarking, gather benchmarking data, con-
duct benchmarking studies, and distribute benchmark information without identifying the
sources.