The value chain


Michael Porter of Harvard has proposed the value chain as a tool for identifying ways to create more customer value. According to this model, every firm is a synthesis of activities performed to design, produce, and market, deliver, and support its product. The value change identifies nine strategically relevant activities that create value and cost in a specific business. These nine value-creating activities consist of five primary activities and four support activities.

The primary activities cover the sequence of:

* bringing material into the business (in bound logistics)
* converting them into final product (operations)
* shipping out final products (outbound logistics)
* marketing them (marketing and sales)
* servicing them (service)

The support activities are handled in certain specialized departments and they are:

* Procurement
* Technology development
* Human resources management
* Firm infrastructure

Several departments, for example, may do procurement and hiring. The firm’s infrastructure covers the costs of general management, planning, finance, accounting, legal, and government affairs.

The firm’s task is to examine its costs and performance in each value-creating activity and to look for ways to improve it. The firm should estimate its competitors’ costs and performances as benchmarks against which to compare its own costs and performance. It should go further and study the “best of class� practices of the world’s best companies.

Ø The firm’s success depends not only on how well each department performs its work, but also on how well the various departmental activities are coordinated to conduct core business processes. These core business processes include:

Ø The market sensing process. All the activities involved in gathering market intelligence, disseminating it within the organization, and acting on the information.

Ø The new offering realization process. All the activities involved in researching, developing, and launching new high-quality offering quickly and within budget.

Ø The customer acquisition process. All the activities involved in defining target markets and prospecting for new customers.

Ø The customer relationship management process. All the activities involved in building deeper understanding, relationships, and offerings to individual customers.

Ø The fulfillment management process. All the activities involved in receiving and approving orders, shipping the goods on time, and collecting payment.

Strong companies develop superior capabilities in managing and linking their core business processes. For example, Wal-Mart has superior strength in its stock replenishment process. As Wal-Mart stores sell their goods, sales information flows via computer not only to Wal-Mart’s headquarters, but also to Wal-Mart’s suppliers, who ship replacement merchandise to the stores almost at the rate it moves off the shelf. The idea is to manage flows of goods, not stocks of goods. Wal-Mart has turned over this responsibility to its leading vendors in a system known as vendor-managed inventories (VMI)

Strong companies are also reengineering the work flows and building cross-functional teams responsible for each process. At Xerox, a Customer Operations Group links sales, shipping, installation, service, and billing so that these activities flow smoothly into one another. Winning companies are those that excel at managing core business processes through cross-functional teams. AT&T, Polaroid, and Motorola have reorganized their employees into cross –functional teams; cross-functional teams are also found in nonprofit and government organizations as well. Drug store chain Rite Aid is using cross-functional teams to try to push it store from third to first place in the drug store hierarchy. The company has created teams to focus on sales and margin growth, operational excellence, market optimization, continued supply chain improvements, and continued cost control.

To be successful, a firm also needs to look for competitive advantages beyond its own operations, into the value chains of suppliers, distributors, and customer. Many companies today have partnered with specific suppliers and distributors to create a superior value delivery network also called a supply chain

An Ohio-headquartered, $300-million-a-year manufacturer of control systems for big factories, Bailey Controls treats some of its suppliers as if they were departments with Bailey. The company recently plugged two of its suppliers directly into its inventory management system. Every week Bailey electronically sends Montreal-based Future Electronics its latest forecasts of the materials it will need for the next six months. Whenever a bin of parts falls below a designated level, a Bailey employee passes a laser scanner over the bin’s bar code, alerting Future to send the parts at once. Although arrangements like this shift inventory costs to the suppliers, the suppliers expect those costs to be more than offset by the gain in volume. It is a win-win partnership.

Supply chain concept was ushered into India by progressive group companies about a decade back. It is recognized as the value chain and cost saving technique by many large firms in India. If not as much as in U.S.A the supply chain method is implemented tp a large extent by manufacturers in India like Maruti Suzuki, Larsen & Toubro and a few others. Some of the firms are trying to introduce JIT inventory systems by providing ancillary facilities to their major and high tech vendors near their Plants.