1. CHAPTER TWO: VALUE CHAIN
2.1 HISTORY OF VALUE CHAIN:
Supply Chain - For a company, the supply chain is normally a big and wide concept that
describes the means by which the company produces products or services to meet its customers’
needs.
It seems to play a key role in the modern efficient manufacturing concept. In most cases,
however, a total or full supply chain concept consists of several networked companies, which all
have the same basic objective: “to fully meet customer requirements”.
Value chain - The idea of the value chain is based on the process view of organizations, the idea
of seeing a manufacturing (or service) organization as a system, made up of subsystems each
with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs
involve the acquisition and consumption of resources - money, labor, materials, equipment,
buildings, land, administration and management. How value chain activities are carried out
determines costs and affects profits. The value chain is a concept from business management that
was first described and popularized by Michael Porter. The value chain categorizes the generic
value-adding activities of an organization.The "primary activities" include: inbound logistics,
operations (production), outbound logistics, marketing and sales, and services (maintenance).
The "support activities" include: administrative infrastructure management, human resource
management, R&D, and procurement. The costs and value drivers are identified for each value
activity. The value chain framework quickly made its way to the forefront of management
thought as a powerful analysis tool for strategic planning. Its ultimate goal is to maximize value
creation while minimizing costs.
The concept has been extended beyond individual organizations. It can apply to whole supply
chains and distribution networks. The delivery of a mix of products and services to the end
customer will mobilize different economic factors, each managing its own value chain. The
industry wide synchronized interactions of those local value chains create an extended value
chain, sometimes global in extent. Porter terms this larger interconnected system of value chains
the "value system".
A value system includes the value chains of a firm's supplier (and their suppliers all the way
back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably
extended to the buyers of their products, and so on). Capturing the value generated along the
chain is the new approach taken by many management strategists. For example, a manufacturer
might require its parts suppliers to be located nearby its assembly plant to minimize the cost of
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2. transportation. By exploiting the upstream and downstream information flowing along the value
chain, the firms may try to bypass the intermediaries creating new business models, or in other
ways create improvements in its value system.
2.2 VALUE CHAIN DEFINITIONS:
The value chain is a series of activities a product/service must pass through until it serves
its final purpose of solving a customer need. In each phase of the value chain the
product/service gains some value. If a phase is malfunctioning the chain will break down
and the mission of generating value for the customer will not be accomplished.
Kotelnikov (2001), A high-level model of how businesses receive raw materials as input,
add value to the raw materials through various processes, and sell finished products to
customers.
John Del Vecchio, a value chain is "a string of companies working together to satisfy
market demands." The value chain typically consists of one or a few primary value
(product or service) suppliers and many other suppliers that add on to the value that is
ultimately presented to the buying public.
Interlinked value-adding activities that convert inputs into outputs which, in turn, add to
the bottom line and help create competitive advantage. A value chain typically consists of
(1) inbound distribution or logistics, (2) manufacturing operations,
(3) outbound distribution or logistics, (4) marketing and selling, and (5) after-sales
service. These activities are supported by (6) purchasing or procurement, (7) research and
development, (8) human resource development, (9) and corporate infrastructure.
The value chain is all about how good that product is. What’s its end value? And that
means looking at not only the product, but also the value an end user puts on it as well as
the cost of disposing the packaging. The goal of a value chain is to deliver maximum
value to the end user for the least possible total cost.
The successive stages during which value is created when producing, distributing, and
servicing a product. Distinct stages in the value chain may include: (1) receiving and
distributing raw materials, (2) converting raw materials into a finished product, (3)
identifying customers and distributing the product, and (4) providing customer support.
Identifying the value chain allows a firm to refine its operations in an effort to improve
quality, add efficiencies, and increase profits.
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3. 2.3 BENEFITS OF VALUE CHAIN:
Creating a Profit
Primary and secondary activities in a
Improved
business relate to production, distribution Logistics
and support. Primary services focus on
Enhanced
producing and distributing a product or Return on Customer
service. Secondary activities support Investment Order
Management
production and distribution. If managers
can successfully manage the connections
between all of these primary and
Benefits
secondary activities and keep total costs
in the value chain (including production,
of Value Increasing
Cooperation
delivery and support) below the total a
customer will pay, a value is created for
Chain Competetion
the customer and a profit is created for the
company. Globalization
Creating Profit of Supply and
Cooperation Production
A company in a value chain such as a
food market might work with other producers,processors and retailers to create a better
connection with customers. Working together, different players in the same market benefit the
customer and each other. They generate interest in their products and services in the market, and
each player develops a specialty. The relationships with all businesses in the value chain work to
maximize value for customers. These companies also maximize their profits within their
specialty.
Return on Investment
Whether a business is a producer/supplier, processor, distributor or retailer, it will seek a return
on investment for its participation in a value chain. This investment might seem far off when an
organization first joins a value chain. Remember that the success of the value chain depends on
the ability of its different members to work together toward common goals, such as increasing
product value for customers. Get a bigger return on investment by improving communication
among members of the value chain, by getting more players involved and by suggesting new
ideas that will benefit customers.
Increasing Competition and the Primacy of Strategy
The value chain is first and foremost a strategic concept, arising from a strategic theory of firm
competition. As companies struggle to compete in an environment of globalization and intense
competition, the focus shifts to alternative means to remain competitive. This creates an
increasing interest in Value Chains as a tool to model the extended enterprise and formulate
strategies for how to remain competitive.
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4. Evolving Governance Models for the Extended Enterprise
The information era spurred on by the recent focus of capital investment on internet technologies
and “dot-com” business models has increased general business and research interest in
alternative value chain and business models. This has been promoted in the research literature by
the focus on Core Competencies and the Resource Based View (RBV) of the firm. This growth
in modular/virtual collaborative enterprise business models has increased interest in the Value
Chain as a primary construction for analysis of new models for business governance.
Globalization of Supply and Production
The growth in global sourcing and supply has begun a long-term process of leveling the playing
field for adding valueworld wide. This leads to the need to model global value chains as the
predominant mode of business in many industries.
Many Benefits Alreadywrung out of Manufacturing and the Supply Chain
The Industrial Engineering and Operations Management disciplines, combined with management
and operations improvement initiatives such as lean manufacturing, TQM, and Six Sigma, have
been improving the efficiency of manufacturing and supply chain operations for many years.
While there is still considerable work to do in the field, academic theoreticians and practitioners
at many of the more advanced firms are beginning to turn to a broader view of the enterprise to
continue making a contribution to improving competitive stance. Improving the operational
capability of other value added activities in the enterprise, such as product development, requires
shifting perspective from the supply chain to the value chain.
Trends in Management Discourse
A final reason for the growing interest in Value Chains may simply be the nature of management
fashion trends in academic and management discourse. A lifecycle process revealing how
management knowledge entrepreneurs participate in the creation of trends in discourse was
described in a study of Quality Circles by Abrahamson and Fairchild.
Improved Customer Service
Itwas the major benefit those companies (44%) managing from a value chain perspective gives
organization’s a better handle on customer needs at all points the chain. As value chain partners
collaborate and optimize their processes to better meet customers’ needs customer service should
improve.
Cost Savings and Accelerated Delivery Times
The next two most cited benefits form value management reported by companies were cost
savings and accelerated delivery times (40%) as inefficiencies and non-value added activities are
dozen out of the value chain companies will achieve cost savings in different work activities and
areas.
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5. 2.4 ADVANTAGES OF VALUE CHAIN:
1. A big advantage is that the value chain is a very flexible strategy tool for looking at your
business, your competitors and the respective places in the industry’s value system.
2. The value chain can be used to diagnose and create competitive advantages on both cost and
differentiation.
3. It helps in understanding the organization issues involved with the promise of
making customer value commitments and promises because it focuses attention on the
activities needed to deliver the value proposition.
4. Comparing the business model with the competitors using the value chain can give much
deeper understanding of strengths and weaknesses to be included in The SWOT analysis.
5. It can be adapted for any type of business – manufacturing, retail or service, big or small.
6. The value chain has developed into an extra model, the industry value chain or value system
which lets you get a better understanding of the much broader competitive arena.
2.5 DISADVANTAGES OF VALUE CHAIN:
1. It’s very strengths of flexibility mean that it has to be adapted to a particular business
situation and that can be a disadvantage since, to get the best from the value chain, it’s not
“plug and play”.
2. The format of the value chain laid out in Porter’s book Competitive Advantage, is heavily
oriented to a manufacturing business and the language can be off-putting for other types of
business.
3. The scale and scope of a value chain analysis can be intimidating. It can take a lot of work to
finish a full value chain analysis for your company and for your main competitors so that you
can identify and understand the key differences and strategy drivers.
4. Many people are familiar with the value chain but few are experts in its use.
5. Michael Porter’s book is excellent but it is a tough read. It’s also dated in its examples which
can make some of the ideas more difficult to relate to and understand how things fit together
in the Internet age.
6. The value chain idea has been adopted by supply chain and operations experts and therefore
its strategic impact for understanding, analysing and creating competitive advantage has been
reduced.
7. Business information systems are often not structured in a way to make it easy to get
information for value chain analysis.
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6. 2.6 MANAGING THE VALUE CHAIN:
How does your organization create value? How do you change business inputs into business
outputs in such a way that they have a greater value than the original cost of creating those
outputs?
Manufacturing companies create value by acquiring raw materials and using them to produce
something useful. Retailers bring together a range of products and present them in a way that's
convenient to customers, sometimes supported by services such as fitting rooms or personal
shopper advice. And insurance companies offer policies to customers that are underwritten by
larger re-insurance policies. Here, they're packaging these larger policies in a customer-friendly
way, and distributing them to a mass audience.
The value that's created and captured by a company is the profit margin:
Value Created and Captured – Cost of Creating that Value = Margin
The more value an organization creates, the more profitable it is likely to be. And when you
provide more value to your customers, you build competitive advantage.Understanding how your
company creates value, and looking for ways to add more value, are critical elements in
developing a competitive strategy.
A value chain is a set of activities that an organization carries out to create value for its
customers. Porter proposed a general-purpose value chain that companies can use to examine all
of their activities, and see how they're connected. The way in which value chain activities are
performed determines costs and affects profits, so this tool can help you understand the sources
of value for your organization.
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8. TABLE OF CONTENTS
CHAPTER 2 1
SECTION 2.1: HISTORY OF VALUE CHAIN 1
SECTION 2.2: VALUE CHAIN DEFINITIONS 2
SECTION 2.3: BENEFITS OF VALUE CHAIN 3
SECTION 2.4: ADVANTAGES OF VALUE CHAIN 5
SECTION 2.5: DISADVANTAGES OF VALUE CHAIN 5
SECTION 2.6: MANAGING THE VALUE CHAIN 6
SECTION 2.7: REFERENCES 7
TABLE OF FIGURES
Figure 1 3
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