Question

Thw company i want ro use is American Express ans please provide references

- Describe the value chain of the company's main products/or services - Analyze the extent to which the company is vertically integrated - Analyze the extent to which the company is horizontally integrated - Describe the company's principal-agent problem: - Is your company of choice a perfect competition model? If yes, describe it. If not, explain how it differs; Describe the types of costs involved in production of the company's main products/services - Analyze the factors that impact the costs of production of the company's main products/services; - Describe the factors that impact the supply of the company's main products/services - Examine the extent to which the company benefits from economies of scale and/or economies of scope

Answer 1

1. Describe the value chain of the company's main products & services? American Express Value Chain Analysis: Advantages of conducting Value Chain Analysis of American Express Value Chain Analysis of American Express can offer various advantages: Identify competitive advantage sources By conducting the Value Chain Analysis of American Express during the planning process, possible sources of competitive advantage can be identified. The firm/company is a collection of different activities that share relatedness to some extent. American Express cannot trade all activities in the external market. The Value Chain approach suggests that a company can consider these activities as economic rent sources. These activities can also act as barriers to new entrants or cause cost disadvantages to competitors. Identify complex inter-relationships and interdependencies American express can identify various internal and external linkages among activities through the value chain lens. The internal linkages are interrelationships between activities within same organizational units and external linkages are between business units of same or different firms. Studying these interrelationships can help a company take benefit from coordination and joint optimization Improved flow of materials, information and finances The use of Value Chain Analysis can optimize the finances, products and information flow. The improved information flow can help the company identify and exploit new opportunities and reduce external threats. The continuous Value Chain evaluation can result in timely filling important gaps that may affect a firm's productivity. The effective implementation of the Value Chain Analysis of American Express can improve the material and product flow due to improved demand and sales forecasting. The inventory management also improves as American Express can minimise the delays by tracking activities throughout the supply chain. Modern customers place high importance to the quick response and convenient access to the important product related information. The unexpected interruption in the information flow can affect the customer-supplier relationship. American Express Value Chain Analysis and its implementation can highlight and remove the bottlenecks to the information flow. Formulate effective firm-specific strategies

American Express Value Chain Analysis can be used in the competitive strategic decision- making process. However, choosing the right competitive strategy (cost leadership, differentiation or focus) requires knowledge of own and rivals' cost structure. Challenges associated with Value Chain Analysis American Express The company may lose its vision and overall strategy by dividing operations into different activities. Dividing the operations into primary and support activities may not be separable due to increased complexity. The division process can be time consuming and finding the required information can also be difficult. Effective value chain implementation does not only require familiarity but detailed expertise. American Express may find it difficult to get required information if its Business Information System is not structured accordingly. • Porter's Value Chain Analysis of American Express Porter's value chain model is highly popular in the business world. However, American Express must not take it as a rigid, standalone framework by assigning the equal importance to all activities. The effective Value Chain Analysis requires American Express to realise that all activities or functions do not require same scrutiny level. Hence, the first step of adapting the Porter Value Chain framework is to identify the importance of activities according to their role in product/service delivery process. Here is the list of primary value chain activities as proposed by Porter: Primary Activities The primary value chain activities of American Express are directly involved in producing and selling the product to targeted customers. Analysis of primary value chain activities can improve the performance of American Express as explained below. Inbound Logistics It is important to develop strong relationships with suppliers as their support is necessary to receive, store and distribute the product. Without analysing the in-bound logistics, American Express can face various challenges in product development phases. Analysis of in-bound logistics requires a company to focus on every aspect of transformation from raw material to finished product. Some examples of inbound logistics are retrieving raw material, storing the inputs and internally distributing the raw material and components to start production. Operations

The importance of analysing operational activities raises when raw material arrives, and American Express is ready to process the raw material into the end product and launch it in the market. Some examples of operational activities are machining, packing, assembling and testing. Equipment repair and maintenance also falls into this category. It includes both- manufacturing and service operations. Analysis of operational activities is important for improving productivity, maximising the efficiency and ensuring the competitive success of American Express. The increased productivity can help American Express to achieve consistent economic growth, increase profitability and set a powerful basis for competitive advantage. Outbound Logistics Outbound logistics include the activities that deliver the product to the customer by passing through different intermediaries. Some outbound logistics activities are material handling, warehousing, scheduling, order processing, transporting and delivering to the destination. American Express can analyze and optimize the outbound logistics to explore competitive advantage sources and achieve its business growth objectives. Because, when outbound activities are timely managed with optimal costs and product delivery processes put a minimum negative effect on the quality, it maximizes the customer satisfaction and increases growth opportunities for the firm. American Express should pay specific importance to its outbound value chain activities when its offered products are perishable and require quick delivery to the end customer. Marketing and Sales At this stage, American Express will highlight the benefits and differentiation points of offered products to persuade the customers that its offering is better than competitors. Only producing a high quality product at affordable costs and distinctive features cannot create value until American Express invests on the marketing and sales activities. The sales agents and marketers play an important role here. Some examples of American Express's marketing and sales activities are- sales force, advertising, promotional activities, pricing, channel selection, quoting and building relations with channel members. The company can use the marketing funnel approach to structure its marketing and sales activities. The marketing strategies can either be push or pull in nature, depending on the American Express's business objectives, brand image, competitive dynamics and current standing in the market. Effective and wisely integrated marketing activities can develop the brand equity of American Express and help it stand out from the competition. However, American Express must avoid making false commitments about product features that cannot be fulfilled by the production department. It indicates the need to ensure coordination between different value chain activities. Services

The pre-sale and post-sale services offered by the American Express will play an important role in developing customer loyalty. The modern customers consider post-sale services as important as marketing and promotional activities. The power of negative e-WOM due to poor support service cannot be undermined in the current technologically advanced era. The company must analyze its support activities to avoid damaging brand reputation, and instead use it as a tool to spread positive word of mouth due to quick, timely and efficient support services. Secondary Activities The support activities play an important role in coordinating and facilitating the primary value chain activities. American Express can also benefit from analysis of its support activities as explained below. Firm infrastructure The firm infrastructure denotes a range of activities, such as- quality management, legal matters handling, accounting, financing, planning and strategic management. Effective infrastructure gement can allow American Express to optimize the value of the whole value chain. American Express can control the infrastructure activities (or commonly called overhead costs) to strengthen the competitive positioning in the market. Human resource management American Express can analyze human resource management by evaluating different HR aspects, including- recruiting, selecting, training, rewarding, performance management and other personnel management activities. The effective HR management can allow American Express to reduce competitive pressure based on motivation, commitment and skills of its workforce. The company can also achieve its cost minimization objectives by analyzing hiring and training costs with their relative return. The heavy dependence of American Express on employees' talent will increase the importance of this value chain support activity. Technology development In a modern, technological advanced era, almost all value chain activities depend on technological support. The technological integration in production, distribution, marketing and human resource activities requires American Express to realise the importance of technology development. It can be divided into product and process technological development activities. Some examples are- automation software, technology-supported customer service, product design research and data analytics. The research and development department of American Express is classified in this category. Procurement The procurement in value chain denotes the processes involved in purchasing the inputs that may range from equipment, machinery, raw material, supplies, raw material and other items necessary for producing the finished product. Due to its linkage with multiple value chain activities,

American Express should carefully consider its procurement activities to optimize the inbound, operational and outbound value chain. As mentioned above, the application of Porter Value Chain model depends on understanding the importance of all activities. After understanding the relative importance of identified value chain activities, American Express should highlight areas where value can be added, cost efficiency can be achieved, differentiation basis can be set, or processes can be optimized. Here is a pictorial presentation of Porter Value Chain model: Support or secondary value activities Porter's value chain Firm infrastructure Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service Primary value activities 2. Analyze the extent to which the Company is horizontal & vertically integrated? Horizontal and vertical integration are the two ways businesses can expand. But which one makes the most sense for your business? Or can your company venture into doing both?

The fundamental questions companies should ask before setting a growth strategy is whether they should pursue it through horizontal and vertical integration. Horizontal integration is when a business grows by acquiring a similar company in their industry at the same point of the supply chain. Vertical integration is when a business expands by acquiring another company that operates before or after them in the supply chain. Deciding on which strategic direction a company should pursue is very important before starting any initiative. They need to decide if acquiring a company in an effort to achieve horizontal and vertical integration will provide the best growth leverage for the company. Horizontal Integration It is very common for companies to grow by taking customers from their competition. This is a form of horizontal integration. A company can pursue vertical integration when it can increase its profits by obtaining better control of its operations. Companies can also practice horizontal integration by buying or merging with their competitors. This works well when a company has a successful business model and needs to add more customers to increase their profit at higher economies of scale. Buying or merging is also done to diversify a company's products or services and reduce competitors in the marketplace. Examples of horizontal integration include when one large hotel chain buys another or when a major studio company purchases a small, independent film making company. Unfortunately, horizontal integration is not always successful. This method of growth works best when the two companies have synergistic cultures and customers. Even when two companies sell a similar product to a similar product, the merger may fail if there are problems merging the two company cultures. Vertical Integration Other businesses choose to expand by acquiring a company that occupies a critical place in their supply chain process. This includes raw materials sourcing, product manufacturing, transportation, distribution or retailing. Vertical integration can also be the degree to which a firm owns its upstream suppliers (backward integration) and its downstream buyers (forward integration). Businesses do this to secure the supplies, distribution points or other parts of the transaction necessary to produce or market products or services at a lower or more predictable price. (For example, an auction site purchasing a payment company to capture the revenue stream that comes from the fee of paying online.) The synergies involved in vertical integration are not always successful. Sometimes the two companies have uneven requirements of how much product or service needs to flow through

their part of the supply chain. Vertical integration also means making a commitment to a particular company, technology or process. This can result in a lack of flexibility when market trends change. Pursuing Horizontal and Vertical Integration in Your Business Deciding between horizontal and vertical integration? Here are some of the elements a company should consider. A business can pursue horizontal integration when it operates in a growing industry and its competitors lack some of the competencies or financial resources it possesses. It is typically successful when economies of scale of an existing process would have a significant effect on profit. Please remember that the acquiring or merging organizations need to have the financial resources to manage this process. A company can pursue vertical integration when it can increase its profits by obtaining better control of its operations. Through this growth method, it can reduce its costs across different parts of its production cycle, ensure higher quality control and get more control of information across their supply chain. Some companies pursue vertical integration when they want their existing suppliers or distributors to have less power over their business. Both horizontal and vertical integration can be successful. But before pursuing either strategy, a company should know which parts of its operation would produce the most leverage on its profit if drastically improved. 3. Describe the company's principle agent problem? Principle Agent Problem The principle agent problem arises when one party (agent) agrees to work in favor of another party (principle) in return for some incentives.

Definition: The principle agent problem arises when one party (agent) agrees to work in favor of another party (principle) in return for some incentives. Such an agreement may incur huge costs for the agent, thereby leading to the problems of moral hazard and conflict of interest. Owing to the costs incurred, the agent might begin to pursue his own agenda and ignore the best interest of the principle, thereby causing the principal agent problem to occur. Description: The costs to agent and subsequent conflict of interest arise due to the skewed information symmetry and the risk of failure faced by the principal. For example: Shareholders of a company appoint managers to look after the proceedings of the company and earn profits on their behalf. The shareholders expect the managers to distribute all the profits to the shareholders. But the managers sensing their own growth and salary expectation try to retain the profits for future as a safe side. This can lead to principle agent problem. It is one of the most noticed problems in the current situation when most companies are not being managed by the owners themselves. 4.Is your company of choice a perfect competition model? American Express's Main Competition: Master card, Visa, and Discover are top rivals of American Express

The American Express Company (AXP) is a global financial services company that competes in the credit card space with rivals such as Discover Financial Services (DFS), Visa Inc. (V), and Mastercard Incorporated (MA). While credit card users may consider these four competing companies similar, the companies differ in the customers they serve and the way they generate their revenues. Credit cards are not the only service American Express and its competitors offer. We explain how their other offerings and business models differ. KEY TAKEAWAYS As one of the biggest financial services companies in the world, American Express competes with Discover, Visa, and Mastercard in credit card services. Visa and Mastercard do not directly finance credit card transactions; instead, they operate payment processing networks that enable financial institutions to process credit card transactions. • Visa and Mastercard make money by charging processing and service fees to the financial institutions that issue credit cards. Both American Express and Discover issue credit cards directly to their customers without working with an intermediary financial institution. • In return for bearing the financing risk, American Express and Discover charge customers for the use of the card and charge merchants a fee as well. Visa and Mastercard Are Not Financiers Visa and Mastercard act as intermediaries in the credit card space. They don't directly finance credit card transactions. Instead, they allow financial institutions to participate in their networks and issue credit cards that bear the “Visa” or “Mastercard” brand name. When you buy something with your "Visa" or "Mastercard”-branded credit card, the merchant you buy from will process the transaction, using the Visa or Mastercard network, after your issuing financial institution approves the transaction, indicating that you have enough credit on your account. The business establishment will then approve your purchase. In return for their service, Visa and Mastercard receive a processing and service fee from the financial institution that issues the card. The issuing bank also gets a part of the transaction value as a fee and the merchant's bank also receives a fee for its service. As for consumers, they pay the issuing institutions in the form of card annual fees, monthly charges for carrying a balance, and late fees. American Express and Discover Issue Cards Discover Financial Services and American Express issue cards themselves and thus bear the financing risk. They charge customers for the use of the card and also charge merchants a fee. When you buy something on credit using your Discover brand name card, the merchant gets approval for the transaction from Discover directly. This sort of system is called an open-loop

system, rather than the so-called closed-loop system associated with the Visa and Mastercard business model. Transaction Volume Versus Value Discover charges you interest if you carry a balance and also other types of fees, such as a late payment fee. That's how the company, and American Express too, generate revenue from customer use of its credit cards. Thus, it is the transaction value that drives its credit card business. In the case of Mastercard and Visa, it is transaction volume that generates their credit card revenue. The more transactions that consumers engage in with their Visa or Mastercard-branded cards, the more processing fees these companies get. Competition Heats Up American Express has typically been associated with more of an up-market customer base than its competitors, historically targeting affluent customers. More recently, competing card issuers have been issuing cards with lower annual payments. As a response, American Express has come up with prepaid debit cards that are targeted at less affluent customers. As other companies enter this space, American Express cardholders are losing perks, such as exclusive admission to certain airport lounges. Costco and American Express decided to end their relationship in 2016. Costco later made Citigroup Inc. (C) its exclusive credit card issuer and Visa its new exclusive credit card network for the warehouse retailer in the U.S. and Puerto Rico. The Bottom Line American Express's main direct credit card competitors are Mastercard, Visa, and Discover. While Mastercard and Visa have a different business model than American Express, they all compete in the credit card space. Financial institutions that issue credit cards also compete with American Express for consumer business. 5.Cost Advantage of American Express Cost advantage through Value Chain Analysis of American Express American Express can avail the cost advantages by reducing the costs associated with the value chain activities. However, it requires the company to firstly map the activities and then associate costs to make necessary adjustments. The connection between the value chain and cost

leadership strategy reflects a parallel focus on the low cost operational activities. If American Express aims to obtain cost advantage, it needs to identify each element within the value chain can be optimised to get the whole effect • A Value Chain Analysis Example for American Express is that it can use the analysis as a tool to negotiate the best prices and maximise the in-bound and out-bound transportation processes. Another Value Chain Analysis Example is using the value chain information to make modest advertising budget that can reduce marketing costs and offer the product at an affordable cost. If American Express aims for the low-cost, the Value Chain Analysis can optimise the profitability. If product differentiation is the aim of American Express, Value Chain Analysis will help the company in maximising the efficiency and enhancing the product quality by improving processes. Cost drivers of American Express Value Chain Analysis American Express can control following drivers to add value, set differentiation basis and enhance efficiency. • • • • Organisational policies Integration Timing Economies of scale Linkages Interrelationships Capacity utilisation Learning and Spillover • However, it is important to note that costs can be reduced only to some extent. American Express Value Chain Analysis must also consider the customers' perceived value that may justify the higher price charged by the company compared to competitors. 10 Factors That Influence The Cost of Making Your Product Very few people walk into a store, take an item off the shelf and purchase it without looking at the price. Even if you're reasonably certain you can afford it, you'll glance at the label to see how much it's going to cost. If it's what you want, and the price is in line with your desire for the

item, you'll buy it. But retail prices aren't numbers plucked out of thin air. Everyone from the inventor to the manufacturer to the retailer is getting a piece of the price you're paying. The same thing is true in contract manufacturing. There are factors that influence the cost of making your product. When your contract manufacturer gives you a quote, you can expect to receive a costed bill of material (BOM) that breaks down the categories driving the cost of your product. Here's an overview of the items included. 1 | MATERIAL Raw Material: For example, if you ask for plastic, your manufacturer will counter by asking what type and what grade? In fact, they'll ask a range of questions to further narrow the exact specifications for the material. Here are a few questions you might be asked about plastic materials: Does it need to be fireproof? • • What temperature range will it need to withstand? . Will it be in contact with human skin? Should it be low odor? Are you required to verify origin, content or quality? Can you accept a percent or regrind? Expect the same depth of questioning for any type of material you might be considering. Hardware: Fasteners and other sourced components which include nuts, bolts or a power cable if it's an electronics project. Electronics: What grade (for automotive), what manufacturer and are alternatives an option? 2 | OVERHEAD & MARGIN Every company, including the contract manufacturer, has capital investment into their business. That means the price for equipment, land, facilities, raw materials, interest, insurance, taxes and yes, a little margin to reinvest in all of the above, gets factored into your price. 3 PACKAGING There are myriad packaging options, and each comes with its own cost structure. Individually wrapped, boxed, bulk? Blister packs, bags or corrugated boxes? Your contract manufacturer can advise you on the best options to suit your product and desired budget. 4 FREIGHT Hopefully you're looking at using a contract manufacturer who will handle this very complex aspect of overseas manufacturing on your behalf. If that is the case, the costs associated with shipping and logistics will be included in your price. Some of the items include: Ocean

• Full Container Load (FCL) • Less Than Container Load (LCL) • Air freight • Truck Expedited Need-to-clear customs Import/export VAT or monetary exchange fees If your contract manufacturer doesn't handle this, you'll need to find someone or a team who will. 5 TOOLING The cost of the tool used to make your product is part of the price. Several questions will determine the cost of your tool. Do you need a multi-cavity or single cavity tool? How many shots should it last? What grade of steel does it need to be? Don't forget to ask: Who owns the tool? Will your contract manufacturer guarantee it for the life of the project or just the life of the tool? 6 COST OF QUALITY It's surprising but true: Testing is typically the most underestimated factor in the overall cost of quality. You want your product to be right, every time it leaves the factory. Every factory. Product reliability testing should be part of the cost of your product. Here are two questions to ask: • If you have a product requiring assembly, will there be a need for test fixtures or assembly fixture? How long should each product be tested (possible test for heat, or function, or lifecycle). 7 | THIRD PARTY COMPLIANCE Does your product need approval from UL, ETL, CSA or perhaps FDA? Even after thorough third-party testing, it will still take time and money to receive validation. Can your contract manufacturer do the testing for you? Should they? Discuss those costs at the beginning. The time and cost involved are not something you want to learn at the last minute.

8|VOLUME DISCOUNTS You can break this down into: Estimated Annual Usage: The number of products per year and at the buying cycle you need, and can commit to purchasing. For example: 12,000 per year, 3000 per quarter, 1000 per month. EAU helps your contract manufacturing partner account for all the other variables to arrive at the best price for you. Minimum order quantity (MOR): For example, electronic components typically come in reels of 5,000. If your order was less than 5,000, the CM would need to account for that in price or look for ways to use that component elsewhere. 9 YIELD or SCRAP Mistakes or defects — both cosmetic or functional — will happen. Manufacturers will typically budget 1 to 2 percent for rework or scrapping altogether. 10 | LABOR Industrial robots haven't taken over manufacturing plants just yet. And even when they do, people will still be required to run the robots. Labor is a cost that will never go away. Employees are required to make and inspect goods, operate machinery, inspect again, test again, package, load and ship. 8 Factors that Influence the Supply of a Product In economics, supply refers to the quantity of a product available in the market for sale at a specified price at a given point of time. Unlike demand, supply refers to the willingness of a seller to sell the specified amount of a product within a particular price and time.

Supply is always defined in relation to price and time. For example, if a seller agrees to sell 500 kgs of wheat, it cannot be considered as supply of wheat as the price and time factors are missing. Similarly, if a seller is ready to sell 500 kgs at a price of Rs. 30 per kg then again it would not be considered as supply as the time element is missing. Therefore, the statement “a seller is willing to sell 500 kgs at the price of Rs. 30 per kg in a week” is ideal to understand the concept of supply as it relates supply with price and time. Apart from this, the supply also depends on the stock and market price of the product. Stock of a product refers to quantity of a product available in the market for sale within a specified point of time. Both stock and market price of a product affect its supply to a greater extent. If the market price is more than the cost price, the seller would increase the supply of a product in the market. However, the decrease in market price as compared to cost price would reduce the supply of product in the market. For example Mr. X has 100 kgs of a product. He expects the minimum price to be Rs. 90 per kg and the market price is Rs. 95 per kg. Therefore he would release certain amount of the product, say around 50 kgs in the market, but would not release the whole amount. The reason being he would wait for better rates for his product. In such a case, the supply of his product would be 50kgs at Rs. 95 per kg. Determinants of Supply: Supply can be influenced by a number of factors that are termed as determinants of supply. Generally, the supply of a product depends on its price and cost of production. In simple terms, supply is the function of price and cost of production. Some of the factors that influence the supply of a product are described as follows: i. Price: Refers to the main factor that influences the supply of a product to a greater extent. Unlike demand, there is a direct relationship between the price of a product and its supply. If the price of a product increases, then the supply of the product also increases and vice versa. Change in supply with respect to the change in price is termed as the variation in supply of a product. Speculation about future price can also affect the supply of a product. If the price of a product is about to rise in future, the supply of the product would decrease in the present market because of the profit expected by a seller in future. However, the fall in the price of a product in future would increase the supply of product in the present market. ii. Cost of Production:

Implies that the supply of a product would decrease with increase in the cost of production and vice versa. The supply of a product and cost of production are inversely related to each other. For example, a seller would supply less quantity of a product in the market, when the cost of production exceeds the market price of the product. In such a case the seller would wait for the rise in price in future. The cost of production rises due to several factors, such as loss of fertility of land, high wage rates of labor, and increase in the prices of raw material, transport cost, and tax rate. iii. Natural Conditions: Implies that climatic conditions directly affect the supply of certain products. For example, the supply of agricultural products increases when monsoon comes on time. However, the supply of these products decreases at the time of drought. Some of the crops are climate specific and their growth purely depends on climatic conditions. For example Kharif crops are well grown at the time of summer, while Rabi crops are produce well in winter season. iv. Technology: Refers to one of the important determinant of supply. A better and advanced technology increases the production of a product, which results in the increase in the supply of the product. For example, the production of fertilizers and good quality seeds increases the production of crops. This further increase the supply of food grains in the market. v. Transport Conditions: Refer to the fact that better transport facilities increase the supply of products. Transport is always a constraint to the supply of products, as the products are not available on time due to poor transport facilities. Therefore even if the price of a product increases, the supply would not increase. In India sellers usually use road transport and the poorly maintained road makes it difficult to reach the destination on time the products that are manufactured in one part of the city need to be spread in the whole country through road transport This may result in the damage of most of the products during the journey, which can cause heavy loss for a seller. In addition the seller can also lose his/her customers because of the delay in the delivery of products. vi. Factor Prices and their Availability: Act as one of the major determinant of supply. The inputs, such as raw material man, equipment, and machines, required at the time of production are termed as factors. If the factors are available in sufficient quantity and at lower price, then there would be increase in production. This would increase the supply of a product in the market. For example, availability of cheap labor and raw material nearby the manufacturing plant of an organization would help in reducing

the labor and transportation costs. Consequently, the production and supply of the product would increase. vii. Government's Policies: Implies that the different policies of government, such as fiscal policy and industrial policy, has a greater impact on the supply of a product. For example, increase in tax on excise duties would decrease the supply of a product. On the other hand, if the tax rate is low, then the supply of a product would increase. viii. Prices of Related Goods: Refer to fact that the prices of substitutes and complementary goods also affect the supply of a product. For example, if the price of wheat increases, then farmers would tend to grow more wheat than nee. This would decrease the supply of rice in the market.