Concepts and Models involved in the Value Chain

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The value chain, also called value chain analysis, is a concept in business management described firstly by Michael Porter in his book named Competitive Advantage: Creating and Sustaining Superior Performance in 1985. For better understanding of activities by which a firm develops its competitive advantage and gains shareholder value, its important to apart the business system into a series of value-generating activities which is referred to as the value chain.

Concept

Firm level

A value chain is a chain of activities operating in a firm

More values addition is during the chain of activities than the sum of added values of all activities. It is also important that the concepts of value chain and costs occurring through activities are not mixed. For example; a diamond cutter's cutting activity incurs less cost but that activity adds much of the value to the end product, as a cut diamond is more in value rather than a rough diamond. Thus, the documentation of processes, assessment and auditing of adherence to the process schedules along with the described value chain are at the core of the quality certification of business.

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Activities

Generic value adding activities of an organization is categorized by value chain.

The value drivers and costs for each activity are identified.

Industry level

A physical representation of various processes carried out in producing goods and services beginning with raw materials and ending with the delivered product. This depends upon the notion of value-added at the link level. The total value is yielded by the sum total of link level value. One of the earliest example of value chain is French physiocrat's Tableau économique.

Significance

The value chain framework has become an important analysis tool for strategic planning. Success was achievied in 1990s by this simple concept of value chain.

The concept of value chain can be extended beyond individual firms thereby applying to hwole supply chains and distribution networks. Mix of delivery of products and services to end customer will be mobilized by different economic factors, where each manages its own value chain. The synchronized interactions of each local value chains create an extended value chain in the industry and sometimes on a global scale. This is termed as value system by Porter. Value chains of a firms supplier, the firm, its distribution channels and the buyers comprises the value system.

The new approach taken by many management strategists are capturing the value generated along the value chain. For instance, a manufacture prefers its part suppliers to be located in near by areas so that the transportation costs are reduced. The firms are trying to bypass the intermediaries by exploiting the upstream and downstream information flowing along the the value chain therrby creating new business models thus inculcating improvements in the value system.

Large petrochemical plant maintanence oraginisations also use value chain analysis in showing work selection, work planning, wscheduling and finally execution. This helps in dirving lean approaches towards maintenance. This is successful if it is used as a tool for helping change management as it is considered ot be more user friendly as compared to the other business process tools.

Development sector can also employ this as a means of identifying poverty reduction strategies by up gradation. Although this was associated with export- oriented trades development practitioners have started using to highlight importance of developing national and intra-regional chains in international ones.

SCOR

A global trade consortium; the supply chain council with over 700 member companies, governmental, consulting and academic groups manages the supply chain operations reference(SCOR), the de facto universal reference model for Supply Chain including Planning, Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research, Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support, Sales, and Contract Management which are congruent to the Porter framework. This framework has been adopted by many companies as a standard for business excellence and the US DOD has adopted the newly launched design-chain operations reference(DCOR) framework for designing of product as standard used in managing development processes. These frameworks also maintain a vast database of standard process metrics aligned to Porter model and also as best practices for process execution.

[edit] Value Reference Model

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A Value Reference Model (VRM) developed by the global not-for-profit Value Chain Group offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks.

The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business.

The Value Chain Group claims VRM to be next generation Business Process Management that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence.

Six business functions of the Value Chain:

Research and Development

Design of Products, Services, or Processes

Production

Marketing & Sales

Distribution

Customer Service

The DELL computers and its value chain

Summary of DELL computers value chain analysis

Primary activities:

Inbound logistics:

Goods received from the suppliers are stored until they are needed in the assembly line. Dell relies on its highly reliable suppliers wherein it can streamline its operations and computer monitor suppliers are relied upon in shipping to the customers directly. Dell can along with its suppliers achieve success mutually till the time its suppliers retains its leadership position.

Operations:

This is the area where goods are manufactured or assembled. Every product of dell is built to order and hence customers get exactly what they want. Dell uses the feedback from customers before and after sales thereby to provide customer satisfaction by reliability and tailor made service.

Outbound logistics:

When dell came into the market with its products, its competitors were selling computers through distributors to the customers. While Dell sells directly to the customers without any intermediaries. Dell also continuously communicates with the customer who adds to its benefits of gaining knowledge regarding the sales trends and knowing about the unmet needs of customers. It relies on the customer's knowledge on what are their requirements and when to complete transaction in order to drive their direct business model. Dell leverages this knowledge by making it possible for them to place the customized order electronically.

Marketing and sales

Dell's direct to customer model has solved the problem of additional capital requirement for sales and marketing. By selling directly to customers dell has eliminated the retailers or distributors along the line. A main advantage of this system is that they are in continuous contact with customers and are benefiting in gaining knowledge of unmet customer needs and sales trends.

Service

Dollars are spent on training well educated business segment managers in providing expert advice to customers. It has also initiated a collaborative solution teams who collaborate with customers in fulfilling unmet customers if any. Employees are continually inspired in staying abreast of technology threats and opportunities which can alter their competitive landscape in future due to their nature of work.

Support activities

Procurement

This is an activity where dell is weak because dell doesn't like being protected by trademark or patent or copyright technology. All industry players are aware of the technology being used.

Technology development

An important source of competitive advantage is technology. And this is the area which forms the strength for dell because of its better access to technology. Dell introduces the latest technology much more quickly as compared to other companies with indirect distribution channels.

Human resource management (HRM)

Dells mission statements says it all "to be successful computer company in the world at delivering the best customer experience in market s we serve". To ensure dells continued competitiveness dells employees, direct salespeople, help-desk operators, engineers are ought to be highly knowledgeable and customer focused.

Firm infrastructure

Introduction of direct to customer model by Dell brought about a radical change in the traditional value chain of computer industry. It has employed global business consultancy, in helping to develop a set of metrics in judging business unit performance. Because of this, daily decision making has become more efficient. The main financial objective that steered the managerial evaluation at dell was return on investment; which led to no inventory backup, as it turns over its inventory every six days on average keeping the related costs low.

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