value chain detail

7/30/2019 Value Chain Detail

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1. CHAPTER TWO: VALUE CHAIN2.1 HISTORY OF VALUE CHAIN:Supply Chain - For a company, thesupply chain is normally a big and wide concept thatdescribes the means by which the company

produces products or services to meet its customersneeds.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 allhave 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 ideaof seeing a manufacturing (or service) organization as a system, made up of subsystems

eachwith inputs, transformation processes and outputs. Inputs, transformation processes, and

outputsinvolve the acquisition and consumption of resources - money, labor, materials,

equipment,buildings, land, administration and management. How value chain activities are carried

outdetermines costs and affects profits. The value chain is a concept from business management thatwas

first described and popularized by Michael Porter. The value chain categorizes the genericvalue-addingactivities 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 resourcemanagement, R&D, and procurement. The

costs and value drivers are identified for each valueactivity. The value chain framework quickly made its

way to the forefront of managementthought as a powerful analysis tool for strategic planning. Its ultimate

goal is to maximize valuecreation while minimizing costs.The concept has been extended beyond

individual organizations. It can apply to whole supplychains and distribution networks. The delivery of a

mix of products and services to the endcustomer will mobilize different economic factors, each managing

its own value chain. Theindustry wide synchronized interactions of those local value chains create an

extended valuechain, sometimes global in extent. Porter terms this larger interconnected system of value

chainsthe "value system".A value system includes the value chains of a firms supplier (and their suppliers

all the wayback), the firm itself, the firm distribution channels, and the firms buyers (and

presumablyextended to the buyers of their products, and so on). Capturing the value generated along

thechain is the new approach taken by many management strategists. For example, a manufacturermight

require its parts suppliers to be located nearby its assembly plant to minimize the cost of 1

2. transportation. By exploiting the upstream and downstream information flowing along the valuechain,the firms may try to bypass the intermediaries creating new business models, or in otherways 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


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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. Whats its end value? And that means looking at not only the product, but also the valuean 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. 2

3. 2.3 BENEFITS OF VALUE CHAIN:Creating a ProfitPrimary and secondary activities in aImprovedbusiness relate to production, distribution Logisticsand support. Primary services focus on

Enhancedproducing and distributing a product or Return on Customerservice. Secondary activities

support Investment Order Managementproduction and distribution. If managerscan successfully manage

the connectionsbetween all of these primary and Benefitssecondary activities and keep total costsin the

value chain (including production, of Value Increasing Cooperationdelivery and support) below the total

acustomer will pay, a value is created for Chain Competetionthe customer and a profit is created for

thecompany. Globalization Creating Profit of Supply andCooperation ProductionA company in a value

chain such as afood market might work with other producers,processors and retailers to create a

betterconnection with customers. Working together, different players in the same market benefit

thecustomer and each other. They generate interest in their products and services in the market, andeach

player develops a specialty. The relationships with all businesses in the value chain work tomaximize

value for customers. These companies also maximize their profits within theirspecialty.Return on


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InvestmentWhether a business is a producer/supplier, processor, distributor or retailer, it will seek a

returnon investment for its participation in a value chain. This investment might seem far off when

anorganization first joins a value chain. Remember that the success of the value chain depends onthe

ability of its different members to work together toward common goals, such as increasingproduct value

for customers. Get a bigger return on investment by improving communicationamong members of the

value chain, by getting more players involved and by suggesting newideas that will benefit

customers.Increasing Competition and the Primacy of StrategyThe value chain is first and foremost a

strategic concept, arising from a strategic theory of firmcompetition. As companies struggle to compete in

an environment of globalization and intensecompetition, the focus shifts to alternative means to remain

competitive. This creates anincreasing interest in Value Chains as a tool to model the extended

enterprise and formulatestrategies for how to remain competitive. 3

4. Evolving Governance Models for the Extended EnterpriseThe information era spurred on by the recentfocus of capital investment on internet technologiesand dot-com business models has increased general

business and research interest inalternative value chain and business models. This has been promoted in

the research literature bythe focus on Core Competencies and the Resource Based View (RBV) of the

firm. This growthin modular/virtual collaborative enterprise business models has increased interest in the

ValueChain as a primary construction for analysis of new models for business governance.Globalization

of Supply and ProductionThe growth in global sourcing and supply has begun a long-term process of

leveling the playingfield for adding valueworld wide. This leads to the need to model global value chains

as thepredominant mode of business in many industries.Many Benefits Alreadywrung out of

Manufacturing and the Supply ChainThe Industrial Engineering and Operations Management disciplines,

combined with managementand operations improvement initiatives such as lean manufacturing, TQM,

and Six Sigma, havebeen 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 practitionersat

many of the more advanced firms are beginning to turn to a broader view of the enterprise tocontinue

making a contribution to improving competitive stance. Improving the operationalcapability of other value

added activities in the enterprise, such as product development, requiresshifting perspective from the

supply chain to the value chain.Trends in Management DiscourseA final reason for the growing interest in

Value Chains may simply be the nature of managementfashion trends in academic and management

discourse. A lifecycle process revealing howmanagement knowledge entrepreneurs participate in the

creation of trends in discourse wasdescribed in a study of Quality Circles by Abrahamson and

Fairchild.Improved Customer ServiceItwas the major benefit those companies (44%) managing from a


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value chain perspective givesorganizations a better handle on customer needs at all points the chain. As

value chain partnerscollaborate and optimize their processes to better meet customers needs customer

service shouldimprove.Cost Savings and Accelerated Delivery TimesThe next two most cited benefits

form value management reported by companies were costsavings and accelerated delivery times (40%)

as inefficiencies and non-value added activities aredozen out of the value chain companies will achieve

cost savings in different work activities andareas. 4

5. 2.4 ADVANTAGES OF VALUE CHAIN:1. A big advantage is that the value chain is a very flexiblestrategy tool for looking at your business, your competitors and the respective places in the industrys

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. Its 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, its not plug and play.2. The

format of the value chain laid out in Porters 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 Porters book is excellent but it is a tough read. Its 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. 5

6. 2.6 MANAGING THE VALUE CHAIN:How does your organization create value? How do you changebusiness inputs into businessoutputs in such a way that they have a greater value than the original cost of

creating thoseoutputs?Manufacturing companies create value by acquiring raw materials and using them


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to producesomething useful. Retailers bring together a range of products and present them in a way

thatsconvenient to customers, sometimes supported by services such as fitting rooms or personalshopper

advice. And insurance companies offer policies to customers that are underwritten bylarger re-insurance

policies. Here, theyre packaging these larger policies in a customer-friendlyway, and distributing them to

a mass audience.The value thats created and captured by a company is the profit margin:Value Created

and Captured Cost of Creating that Value = MarginThe more value an organization creates, the more

profitable it is likely to be. And when youprovide more value to your customers, you build competitive

advantage.Understanding how yourcompany creates value, and looking for ways to add more value, are

critical elements indeveloping a competitive strategy.A value chain is a set of activities that an

organization carries out to create value for itscustomers. Porter proposed a general-purpose value chain

that companies can use to examine allof their activities, and see how theyre connected. The way in which

value chain activities areperformed determines costs and affects profits, so this tool can help youunderstand the sourcesof value for your organization.

value chain detail

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