Value Chain

Michael Porter proposed the value chain as the main tool for identifying ways to create more customer value (see Figure 11.2).15 Every firm consists of a collection of activities performed to design, produce, market, deliver and support the firm's products. The value chain breaks the firm into nine value-creating activities in an effort to understand the behaviour of costs in the specific business and the potential sources of competitive differentiation. The nine value-creating activities include five primary activities and four support activities.

The primary activities involve the -sequence of bringing materials into the business (inbound logistics), operating on them (operations), sending them out (outbound logistics), marketing them (marketing and sales) and servicing them (service). For a long time, firms have focused on the product as the primary means of adding value, but eustomer satisfaction also depends upon the other stages of the value chain.'1 The support activities occur within each of these primary activities. For example, procurement involves obtaining the various inputs for each primary activity - only a fraction of proeurement is done by the purchasing department. Technology development and human resource management also occur in all departments. The firm's infrastructure covers the overhead of general management, planning, finance, accounting and legal and government affairs borne by all the primary and support activities.

Under the value-chain concept, the firm should examine its costs and performance in each value-creating activity to look for improvements. It should also estimate its competitors' costs and performances as benchmarks. To the extent that the firm can perform certain activities better than its competitors, it can achieve a competitive advantage.

The firm's success depends not only on how well each department performs its work, but also on how well the activities of various departments are coordinated. Too often, individual departments maximize their own interests rather than those of the whole company and the customer. For example, a credit department might attempt to reduce bad debts by taking a long time to check the credi! of prospective customers: meanwhile, salespeople get frustrated and customers wait. A distribution department might decide to save money by shipping goods hy rail; again the customer waits. In each case, individual departments have erected walls that impede the delivery of quality customer service.

To overcome this problem, companies should place more emphasis on the smooth management of core business processes, most of which involve inputs and co-operation from many functional departments. These core business processes include the following;

• Product development process. All the activities involved in identifying, researching and developing new products with speed, high quality and reasonable cost.

Figure 11.2

The generic value chain

• Inventory management process. All the activities involved in developing and managing the right inventory levels of raw materials, semi-finished materials and finished goods, so that adequate supplies arc available while the costs of high overstocks are avoided.

• Order-to-payment process. All the activities involved in receiving orders, approving them, shipping the goods on time and collecting payment.

• Customer service process. All the activities involved in making it easy for customers to reach the right parties within the company to obtain service, answers and resolutions of problems.

Successful companies develop superior capabilities in managing these and other core processes. In turn, mastering core business processes gives these companies a stibstancial competitive edge.1" For example, one of Marks & Spencer's great strengths is its superiority in handling the inventory management and order flow process. As individual Marks & Spencer stores sell their goods, sales information flows not only to Marks & Spencer's headquarters, but to the company's suppliers, which ship replacement goods to Marks & Spencer stores almost as fast as they move off the shelf.

Continue reading here: Value Delivery System

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