Value Chain Essay
The essence of strategy formulation is coping with competition (Porter, 1998). When an organization has competitive advantage, it has something that other competitor’s in its league doesn’t have. Competitive advantage is defined by Coulter, 2008 as what sets an organization apart or its competitive edge. Organizations can see internal and external factors to see where their competitive advantages can benefit them the most. Looking into internal analysis of organizations, it is important to emphasize on organizational resources. Resources include financial physical, human, intangible, and cultural structure assets used by an organization to develop, produce and deliver products or services to its customers (Coulter, 2008). The resource based view (RBV) states firm’s resources are important in getting and keeping a competitive advantage.
But all resources might not necessarily contribute for the organization’s competitive advantage, there for the RBV suggests that resources must be unique to be a resource of potential competitive advantage. Value is one of the characteristics that resources should have and these resources can play part in making a competitive firm. Adding value generally mean resources can be used to exploit external circumstances that are likely to bring in organizational revenue or it can be used to neutralize negative external situations that are likely to keep revenue from flowing in (Coulter, 2008). In other words organizational resources are not valuable by themselves, but only when they exploit those external opportunities or neutralize the threats.
2. Value chain Goal and objectives
The value chain is a model that describes a series of value-adding activities connecting a company’s supply side (raw materials, inbound logistics, and production processes) with its demand side (outbound logistics, marketing, and sales) (The McKinsey Quarterly 1996 no 1.). By analyzing the stages of a value chain, managers have been able to redesign their internal and external processes to improve efficiency and effectiveness. Therefore the goal of using a value chain technique is to define competencies and activities. According to Subramanian et. al., 2007 the metrics used to measure the performance of a value chain include:
3. Value added
Cost and productivity are the underlying factors in determining the competitiveness of an industry. The value chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers. It ensures that the analysis treats the whole cycle of production, including that governing connectedness to final markets. This forces the analysis to consider not just the efficiency of the production link in the chain, but also those factors which determine the participation of particular groups of producers in final markets.
In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram:
Figure 1 shows the generic value chain diagram. The sequencing and arrow format of the diagram underlines the sequential nature of the primary value activities. The support activities in the upper half potentially apply to each and all of the categories of primary activities. The layered nature of the support activities are apparently meant to tell us that activities are performed in parallel with the primary activities. The margin at the end of the value chain arrow underlines that the chain activities are all cost elements that together produce the value delivered at the end of the chain. For the analysis and diagnosis of a particular firm’s competitive advantage, it is necessary to identify the firm’s individual value activities using the generic value activity categories.
The primary value chain activities are:
* Inbound Logistics: the receiving and warehousing of raw materials and their distribution to manufacturing as they are required. * Operations: the processes of transforming inputs into finished products and services. * Outbound Logistics: the warehousing and distribution of finished goods. * Marketing & Sales: the identification of customer needs and the generation of sales. * Service: the support of customers after the products and services are sold to them. The deliver phase of VCA examines the moving of finished products or services to either the next production activity (e.g., printed fabric for apparel) or to the final consumer (e.g., shirts). The primary activity categories—particularly the inbound logistics–operation–outbound logistics sequence—are well suited to characterizing the main value creation process of a generic manufacturing company. Casual empiricism suggests that manufacturing or process industry firms frequently use the value chain activity category vocabulary when defining and describing their operations. These primary activities are supported by:
* The infrastructure of the firm: organizational structure, control systems, company culture, etc. * Human resource management: employee recruiting, hiring, training, development, and compensation. * Technology development: technologies to support value-creating activities.* Procurement: purchasing inputs such as materials, supplies, and equipment. The firm’s margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. The value chain model is a useful analysis tool for defining a firm’s core competencies and the activities in which it can pursue a competitive advantage as follows:
* Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. * Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. Linkages between Value Chain Activities
Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities. Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that inadvertently the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase.
Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage. Therefore it’s very essential to understand the linkage between activities and know how they affect one another.
3. Origin of the Value chain
The value chain helps one to identify those, activities that are strategically important. The heuristic proposed by Porter for disaggregating activities is that the resulting activities (1) have different economics, (2) have a high potential impact on differentiation (value), or (3) represent a significant or growing proportion of cost. The Value chain originated from the positioning school which was introduced in 1985, it was an additional technique after the five forces model and the generic model. The five forces focused on forces that can influence an organization form outside environment. The generic forces narrowed down the competitive advantages a firm can have into two, basic types of competitive advantages a firm can posses: low cost or differentiation Porter,1985. These combined with the focus of the organization give the three generic strategies. 1) Cost leadership, 2) Differentiation and 3)Focus
The positioning schools have the following characteristic
* Places the organization in its industry based on facts and questions how it can improve with in the industry * It provides content in a systematic way and takes Strategic management as a science * Focuses on economic facts, its useful during the early stages of strategy development when data is analyzed * Its disadvantages are like planning school its inflexibility and risk of being static, it ignores the effect of the outside environment and it’s number oriented which can be bias towards large firms Other strategic techniques include competitive advantage, fives forces, BCG Matrix, generic strategies
4. Value chain and the ten schools
Event though the value chain originated for the positioning school we can fit it in other schools to a certain level because of the characteristic of the technique (value chain)
Design school: this school relates to the value chain because of the following reasons * It acquires the relevant knowledge before a new intended strategy has to be implemented, situations have to be stable and predictable which is the first step in formulating a value chain * It considers the strength and weakness of the organization inside and out, where the value chain assess strength and weakness of activities in the organization including external relationships
* The value chain is a formal process where formation comes before implementation * The value chain uses data by analysts to come up with the right figures that would help in deciding which activities and resources are productive. The planning school emphasizes the need of analysts * Resources are allocated giving clear direction in the planning school which is the main element in the value chain Entrepreneurial School
* The value chain is formulated the top management and decisions are made by the CEO, if the person in charge have entrepreneurial skill and experience s/he might influence the technique positively or negatively
* To design a value chain management not only uses the data gathered but they need to process the information they get plus interpret it right and see how this information connect and what kind of relationships the have. In other words the person in charge has to have a map of all the activities and information together in a way that makes sense to the company * The school doesn’t relate with the value chain when data is collected and analyzed.
* The first steps to draw a value chain of the firm can make it relate to the learning school, since management have to identify which activities were profitable, which activities to keep or eliminate * The management have to keep on eye on what works and what doesn’t which is more like the value chain where resources that are valuable or invaluable are identified and incorporated in the frame work. The difference is in the learning school this is a continuous process where as on the value chain it is conducted until the value chain is on paper
* All activities and resources are used in a different way by the internal and external forces of the organization. People involved have different skills, knowledge financial capacity et. al. this capacities would be their power to manipulate the value customers might get at the end of production. * A firm can not produce everything on the value chain in house the fore it have to negotiate to get the best dale for the resources form suppliers. Here both sides would use their power influencing the value chain eventually
The Cultural school:
* The cultural school emphasizes on collective process in the same way value chain considers relationships and interactions of activities and department as the main driving force for profit. * The organization’s culture usually influences decision been made, relations with the external environment and how things are done.
The Environmental school:
* This school relates with the value chain on how a firm reacts with the factors outside the organization. Decisions in the firm can be influenced by outside factors and the value chain acknowledges the external link with other organizations * The value chain relates to this school since it addresses the influence of outbound relationships that are working well with the organization or not. * In the formulation process the organization have to find out which relationships are not important with in the organization
* This school integrates all the school together and the value chain can find most of the elements in the school as well as its limitations 5. Advantages and Disadvantages of the Value Chain
The advantages of this s technique include:
* It emphasizes the importance of customer value and how well an organization performs the primary and support activities in creating customer value * Reveals links between producers ,exporters and global market * Identify constraints all along the chain to competing in the market place * Clarify the relationships in the chain from buyers to producers * Highlight the distribution of benefits among buyers and producers * It is an analysis tool not only cutting cost but strategic factor
The disadvantages of this technique are mainly arise for its origin, the positioning school this advantages include: * Inflexible if capabilities of the firm change quickly because of outside factors. Factors changing the traditional business are:
Technological transformation is expanding the limits of what companies can do faster than managers can explore the opportunities (Porter 1985). One of this technologies is the internet where more information is available than ever for companies to use. By understanding the differences and the interplay between the value-adding processes of the physical and information worlds, senior managers can see more clearly and comprehensively the strategic issues facing their organizations. (The Mckinsey Quarterly 1996 No. 1)
There are three main sets of reasons why value chain analysis is important in this era of rapid globalization. They are:
1. With the growing division of labor and the global dispersion of the production of components, systemic competitiveness has become increasingly important 2. Efficiency in production is only a necessary condition for successfully penetrating global markets, understanding the advantages and disadvantages of firms and countries specializing in production rather than services, and why the way in which producers are connected to final markets may influence their ability to gain from participating in global markets. 3. Entry into global markets which allows for sustained income growth – that is, making the best of globalization – requires an understanding of dynamic factors within the whole value chain, distribution of benefits, particularly income, to those participating in the global economy.
* Sometimes it’s difficult to apply since organizational work activities don’t always fit nicely and neatly into the primary and support activities framework. * The value chain model treats information as a supporting element in the value-adding process, not as a source of value in itself (The Mckinsey Quarterly 1996 No. 1). Managers often use information that they capture on inventory, production, or logistics to help monitor or control those processes, for instance, but they rarely use information itself to create new value for the customer.
6. Value Chain in Service industry
All organizations profitable, non-profitable, service or production oriented, need a strategic plan to achieve the company goal, communicating their mission to their target audience clearly. And which type of strategic technique they choose to apply matters.
Even though, the definition of value chain includes both services and products, its application in a service industry might not be as easy as applying it in the manufacturing industry. Consider any service company, what is received, what is produced, and what is shipped? Its difficult to perceive what the raw materials are or products in a service industry, this is due to the intangibility of services. For example few insurance executives would perceive uninsured people as the raw material from which they produce insured people, or banks perceiving deposit as primary resources for the organization. However, such a description hardly captures the essence of value creation in a company from a strategic point of view.
To apply value chain analysis in a service oriented company we need do all the analysis to identify which activities are giving the firm an exceptional cost benefit that can be achieved through research in the different departments, but acquiring this data is usually not easy for different reasons.
First it’s hard to quantify what customer’s value in the services. Second traditional accounting data are most often not collected and reported in a fashion consistent with the needs of value chain analysis […] effective analysis for diagnosis of competitive advantage requires not only obtaining historical data, but also projecting trends and comparing results with similar data from competitors.
Services have another nature which makes the value chain look inapplicable, that is the simultaneous production and consumption of services. The customer have to me present when the service is produced or have to play a part, other wise it would not be a service. Customers are part of the production system more than in the manufacturing industry. Service customers have been referred to as “partial employees” of the organization human resources who contribute to the organization’s productive capacity (Kotler, 1983)
Never the less applying the value chain technique can be as effective as applying it on production of goods as long as the links and relationships are identified and understood. Management have to understand the level of customer involvement and expand the service link. Human resource should recruit and train employees that fit to the service industry but also include trainings customers for better performance since they influence the quality of services.
The challenges in applying value chain for service industry is the collection of data that can show which of the activities are important for the customer. In the quantitative research to find out about the customer service question
1. The number of complaints
2. Number of errors made
3. The number of employees per customer and their education etc
The above way of quantifying services can be a way to generate data for the value chain but still we need a qualitative data for the reason that customers experience and the way they perceive is not easily quantifiable.
The above value chain lays out the nine elements applied to a service company. On this particular service company its easy to quantify most of the elements because the customer involvement in the inbound, outbound and production stages is less. But still a client have to place order and provide full information in the kind of product thy want( the meeting) therefore its still hard for the firm to measure the satisfaction customers get from the treatment and answers they get form the company.
In my past experience working in a conference management company the client have to fill in an evaluation form after the meeting on the employees, the quality of service and over all performance on the company. But this questions are totally qualitative not quantitative which can not be used as a data for a value chain but which has more clear information about the customer experience how they perceived it and what are the expectations in the future.
In conclusion, a company in a service industry might find it difficult to point out exactly which activities are valued by the customer but in reality all activities have to add up in the value chain to give the finally product. Therefore in applying the value chain if a company enhances all the 9 elements treating customers as co produces, through time the outperforming activities would be identified. This also points out the value chain have to incorporate the learning process to be effective as well as help a company be competitive in the fast changing environment.
* Coulter, M., 2008, Strategic Management in Action (4th edn), Pearson Education * Johnson, G., & K. Scholes, 1999 Exploring Corporate Strategy( 6th edn), Financial times, Prentice Hall, London * Mintzberg, H., Bruce, A. & Lampel, J.,1998, Strategy Safari A Guided Tour Through the Wilds of Strategic Management, The Free Press, New York * P.K Mills, R. B, Chase and N. Margulies, 1983,” Motivating the Client/Employee System as a service Production Strategy” Academy of Management Review 8, no. 2 * Zetimal, Bitner & Gremler, 2006, “Service Marketing” Integrating
Customer Focus Across the Firem, McGraw-hill Companies, Inc.
* http://www.inti.gov.ar/cadenasdevalor/manualparainvestigacion.pdf * http://capita.wustl.edu/capita/researchareas/Networking/Topics/ValueNetwork/VirtualValChain.pdf * http://www.agbuscenter.ifas.ufl.edu/5188/miscellaneous/configuring_value.pdf * http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/09/11/000333037_20080911024311/Rendered/PDF/453090WP0Box331hain1Manual01PUBLIC1.pdf
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 19 October 2016
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