Value Chain

Management

Nihan YILDIRIM, PhD

One of the simplest functional forms of value

is:
Value = Perceived benefits/Price (cost) to
the customer
If the value ratio is high, the good or service is
perceived favorably by customers, and the
organization providing it is more likely to be
successful. To increase value, an organization
must:
(a) increase perceived benefits while holding
price or cost
constant,
(b) increase perceived benefits while reducing
price or cost, or
(c) decrease price or cost while holding
perceived benefits
constant.

Michael Porters Value-Chain

Developed in 1985 by Michael E. Porter

in Competitive Advantage
Highlights cost advantages and
distinctive capabilities--the
capabilities
value processes
But note that there is no one template.
template

Basic Figures - Value Chain Analysis

Corporate value-chain analysis

Examine each product lines value chain in terms of the various
activities involved in producing the product/service
Examine the linkages within each product lines value chain
Examine the potential synergies among the value chains of different
product lines or business units.
Firm Infrastructure
(Financing, Planning, Investor Relations)

SUPPORT
ACTIVITIES

Human Resources Management

(Recruiting, Training, Compensation Systems)
Technology Development
(Product Design,Testing,Process Design,Material Research,Market
Research)
Procurement
(Components, Machinery, Advertising, Services)
Inbound
Logistics
(Incoming,
Material
Storage,
Data Col.
Service,
Customer
Access)

Operations

Outbound
Logistics

Marketing
and Sales

After-Sales
Service

(Assembly,
Component
Fabrication,
Branch
Operations)

(Order
Processing,
Warehousing,
Report
Preparation)

(Sales Force
Promotion
Advertising,
Trade Shows,
Proposal Writing)

(Installation,
Customer Support,
Complaint
Resolution,
Repair)

Primary Activities

Value Chain and the QCT

Triangle
VC allows alignment of processes with

customers. This generates a quality

advantage.
VC focuses cost management efforts.
VC provides for efficient processes
which improves the timeliness of
operations.

Value Chain Benefits

Identifies value processes
Identifies areas for cost improvement

Value Chain Elements

Customer value

added
Margin orientation
Primary activities

Inbound logistics
Operations
Outbound logistics
Sales and marketing
Service and support

Support Activities

Human resources
(general
and admin.)
Tech. development
Procurement

Goal of Value Chain

Driven by customer perceptions
Increase margins
Focus on value processess

Distinctive capabilities
Cost advantages

Some examples

Southwest Airlines
Intel Corporation

Value Chain Analysis

Document the activities
Understand the cost and margins at each

step.

Use Activity Based Costing

Map the value chain to the industry value

chain

Look for core competencies

Map the cost structure

Note that external values drive cost advantages

Discovering Your Own Value

Processes
Distribute a summary of the value chain model.
Create functional process lists.
lists
Transfer lists to color-coded labels.
labels
Pin the process on a large VC diagram.
Identify appropriate processes as:

$ (cost advantage)
CC (core competency)

Using the Value Chain

Helps you to stay out of the No Profit Zone
Presents opportunities for integration
Aligns spending with value processes
Provides for reconfiguration of the value chain

outsourcing
off-shoring
co-location with customers or suppliers
redesign for efficiency

Involves chain partners: customers &

suppliers

Value Chain and the TBC

Triangle

Technical:

Increases knowledge of no profit zones

Increases knowledge of forward and/or backward integration opportunities
Identifies value processes
Identifies win-win alliance opportunities

Behavioral:

Focus shifts to the customer

Focus shifts from conflict to partnering with customers & suppliers

Cultural

Creates externally focused mindset

Generates information sharing environment with respect for confidentiality

Value Chain Analysis

reviews all the activities that an organization performs to deliver its

products (or services) to determine the value that each adds to the
ultimate product/ service.
enables the organization to understand which activities are core to its

business (i.e., those value-added activities that provide a unique

advantage over its competitors). (hence to protect these and minimize
risks against them).
consider incremental changes to core activities, are not candidates

for large business transformation.

In times of uncertain economic conditions, there is value in building

financial and operational flexibility to the remaining non-core

activities.
activities
Reading material:
http://apps.develebridge.net/amap/index.php/How_to_Conduct_Value_Chain_Analysis

Practice: Read about the article given to you on Value Chain Analysis.
Based on this, try to draw a simple/lean value chain map of your company

Value Chain Analysis

If an organization understands which of its value chain activities is non-core, it may attempt to reduce the committed, fixed costs that are associated with them.
Striving to apply variable costs to these value chain activities results in an agile organization being able to transfer the costs to other resources quickly.
Continuously revisiting the business strategy and analyzing the value chain exposes transformation possibilities and creates an agile organization.
Agile organizations

are not reactionary to market conditions

understand their core competencies
are able transform quickly to take advantage of economic/market circumstance.

INTERLINKED VALUE CHAINS

Opportunities

-lower cost -within individual value chain

-add value -through improved linkages

Prof. Stuart Madnick-MIT

A Service View of a Business

Nestle once defined its business from a

physical good viewpoint as "selling coffee
machines." Using service management
thinking, they redefined their business from
a service perspective where the coffee
machine is more of a peripheral good.

They decided to lease coffee machines and

provide daily replenishment of the coffee
and maintenance of the machine for a
contracted service fee. This "primary
leasing service" was offered to
organizations that sold more than 50 cups
of coffee per day.

A Service View of a Business

The results were greatly increased

Nestle coffee sales, new revenue

opportunities, and much stronger
profits.
Nestle's service vision of their

business required a completely

new service and logistical value
chain capability.

Value and Supply Chains

A supply chain is the portion of the
value chain that focuses primarily on
the physical movement of goods and
materials, and supporting flows of
information and financial transactions
through the supply, production, and
distribution processes.
Many organizations use the terms
value chain and supply chain
interchangeably; however, we
differentiate these two terms in this

Chapter 2 Value Chains

Value and Supply Chains

A value chain is broader in scope
than a supply chain, and
encompasses all pre- and postproduction services to create and
deliver the entire customer benefit
package.
A value chain views an organization
from the customer's perspectivethe
integration of goods and services to
create valuewhile a supply chain is
more internally-focused on the

Pre- and Postservice View of the Value Chain

Procter & Gambles Supply Chain Structure

A model of a supply chain developed
by Procter & GambleP&Gs Ultimate
Supply System
The supply chain focus is on
understanding the impact of tightly
coupling supply chain partners to
integrate information, physical
material, product flow, and financial
activities to increase sales, reduce
costs, increase cash flow, and provide
the right product at the right time at
the right price to customers.

Procter & Gambles Conceptual Model of a Supply Chain

for Paper Products

Value Chain Design and Management

Outsourcing is the opposite
of vertical integration in the
sense that the organization is
shedding (not acquiring) a
part of its organization.

Chapter 2 Value Chains

Value Chain Design and Management

Vertical integration refers to the

process of acquiring and

consolidating elements of a value
chain to achieve more control.
Outsourcing is the process of

having suppliers provide goods and

services that were previously
provided internally.

Value Chain Design and Management

Backward integration refers to

acquiring capabilities at the frontend of the supply chain (for

instance, suppliers), while forward
integration refers to acquiring
capabilities toward the back-end of
the supply chain (for instance,
distribution or even customers).
Companies must decide whether to

integrate backward (acquiring

suppliers) or forward (acquiring
distributors), or both.

Value Chain Design and Management

Offshoring is the building, acquiring, or
moving of
process capabilities from a domestic location
to
another country location while maintaining
ownership and control.

Toyotas Product Lineup

Figure 9.2

Functional Strategies and

Value-Chain Management
Functional-level strategy

plan of action to improve the ability of each

of an organizations departments to
performs its task-specific activities in ways
that add value to an organizations goods
and services

Functional Strategies and

Value-Chain Management
Value chain

coordinated series or sequence of

functional activities necessary to transform
inputs into finished goods or services
customers value and want to buy

Functional Activities and

the Value Chain

Functional Strategies and

Value-Chain Management
Value-chain management

development of a set of functional-level

strategies that support a companys
business-level strategy and strengthen its
competitive advantage

Functional Strategies and

Value-Chain Management
Product development

engineering and scientific research

activities involved in innovating new or
improved products that add value to a
product

Marketing functions task is to persuade

customers a product meets their needs

and convince them to buy it

Functional Strategies and

Value-Chain Management
Materials management function

controls the movement of physical

materials from the procurement of inputs
through production and into distribution
and delivery to the customer

Functional Strategies and

Value-Chain Management
Production function

responsible for the creation, assembly or

provision of a good or service, for
transforming inputs into outputs

Sales function

plays a crucial role in locating customers

and then informing and persuading them to
buy the companys products

Functional Strategies and

Value-Chain Management
Customer service function

provides after sales service and support

Can create a perception of superior value
by solving customer problems and
supporting customers

Improving Responsiveness to
Customers
Good value-chain management requires

marketing managers to focus on defining

the company business in terms of
customer needs

What Do Customers Want?

1.
2.
3.
4.
5.

A lower price to a higher price

High-quality products
Quick service and good after-sales
service
Products with many useful or valuable
features
Products that are tailored to their
unique needs

Customer Relationship
Management
Customer relationship management

technique that uses IT to develop an

ongoing relationship with customers to
maximize the value an organization can
deliver to them over time