System Dynamics Approach To Value Chain Management Today Commerce Essay


This paper shall discuss the strengths and weaknesses of using a system dynamics approach to value chain management today. The need to come up with creative and more efficient business models is most widely felt today as businesses face stiffer competition and are subjected to greater demands from their customers.

With globalization, fast-paced changes in technology, and intense competition as the major characteristics of the current business environment, companies have to be able to evolve creative ways in order to maintain their share of the market and position their organizations for expansion and growth. Today's corporate managers are facing a highly competitive environment "that is increasingly complex, globally centered, and technologically uncertain where there is a critical need for dynamic, flexible, and proactive responses" (Miles, Preece, and Baetz, 1999).

But before any corporate organization can strategize to come up with the best way of handling its activities and operations to turn a bigger profit, it is of course important to have a comprehensive understanding of how the organization works as a whole. Traditional business models picture the organization as an aggregate group of discrete, self-sufficient models who work like an assembly line to produce a finished product or service.

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This kind of thinking is no longer tenable in today's more value-conscious society because consumers are now more apt to give attention not just to the actual product or service that they are purchasing, but also to the chain of events that has brought such product or service to their doorstep, in a manner of speaking. The systems dynamic approach is the most suitable analysis model to use because it allows the corporate manager a holistic and integrated view of the business operation, seeing each activity linked in a web that produces customer satisfaction and loyalty at all levels.

In this paper, the researcher shall discuss the importance of using the system dynamics approach as the best way of doing value chain analysis, owing to the fact that customers are now more concerned about the personal value that their purchases can provide them than with the actual price that they shelled out for it or the pecuniary value of the product or service that was bought. Value chain analysis requires looking at the whole process of research and development, product or service design, marketing, sales, ongoing improvement and customer feedback as a series of interconnected steps that leads from the manufacturer to the buyer.

The researcher shall likewise discuss some background concepts that will allow the reader to appreciate the importance of utilizing a particular model or framework with which to analyze an organization's current operation. This discussion shall highlight the effect of foresight and proper planning in the corporate sector, most especially given the rapid technological changes and wide variety of choices available to consumers. At the end of this paper, the researcher will recap the main points of the study and put together a strong case in favour of using the systems dynamic approach in value chain management.

Review of related literature

This part of the paper will deal with the various sub-concepts that make up the bigger picture of system dynamics as applied to value chain management. The nature of the research makes it important to have a clear background on organizations handle their production processes and align them towards the end user's greatest satisfaction. As we have already seen, the global competitive environment presents corporate organizations with more challenges to meet the demands and requirements of their customers and to keep ahead of their competitors.

Because of the bird's eye view offered by this section, it is hoped that a broad familiarity with the topic will be achieved. At the same time, the researcher is also able to present the topic in its societal context through a comprehensive survey of the literature, thus avoiding the tendency to isolate the research question into a sphere of its own. Finally, the literature review serves to identify the current trends and relevant conclusions that have already been arrived at in previous research. Knowing what previous scholars have found out about the topic makes it easier for the researcher not only to situate the current study but also to be able to identify the gaps in the literature, proceeding with the best ways on which to approach such gaps.

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This paper will use the systematic review methodology as the primary tool for investigating the history, development, and current status organizational success vis-à-vis the need for good leadership in the organization. Systematic review methodology is more typically applied to the primary data on health care technologies such as drugs, devices and surgical interventions (Green and Moehr, 2001, p.315).

But there is a growing tendency to apply this kind of review methodology to other topics such as policy-making and social research. The Cochrane Collaboration has taken the lead in this type of application, which consists of a regularly updated collection of evidence-based medicine databases. Systematic review methodology allows the researcher to have a wider look at the question at hand by looking at the various perspectives offered by previous research, and then synthesizing them to come up with a coherent answer as to the what, how, why and so what of the topic.

However, care should be made in choosing the right electronic sources that can offer us with the most number of relevant researches, as well as in establishing the key words that will be used exhaustively for turning up previous findings on the topic.

For the purpose of this paper, several key words were used to search Google, Questia and other suitable online sources for information on the integration of information and communication technology tools and government practices. The keywords used for the research are value chain management, value chain, and system dynamics approach. Other formulations of the main research topic yielded the same results and so only these three major key phrases were considered for the review of related literature.

This section of the paper is divided into three subsections, each one discussing a particular aspect of the topic at hand. The first section deals with describing the nature of the global competitive market today and the importance of developing strategies that will lead to the creation of competitive advantage. The next section is devoted to discussing the concept of value chain and its management, with particular emphasis on the different steps that make up a value chain. Finally, the researcher shall close this section with an overview of the system dynamics approach and its practical application in the business sector.

The nature of global competition

According to Huang (2006), the globalization of economic activities is the most significant development in the world economy in recent history. The volume and variety of products that have been included in the global trade have increased drastically. Likewise, the patterns of consumption and production are no longer as stable as they were before. Economic globalization refers not just to the geographic spread of economic activities but also the "functional integration of internationally dispersed economic activities" (Huang, 2006). Thus, whole countries, regions, and other transactional parties are formed into one functional global economy through highly intricate international systems of production, trade, and finance.

At this point, it becomes apparent how important competitive advantage is to a corporate organization. Most of the strategic planning that organizations make is concerned with maintaining their position in the market. Halawi, Aronson and McCarthy (2005) wrote that one of the main ingredients for corporate success in today's globalized environment is acknowledging how to create and sustain competitive advantage, which ultimately depends on what a company decides it will or will not do.

Competitive advantage may be defined as the "ability to earn returns on investment consistently above the average for the industry" (Halawi, Aronson and McCarthy, 2005) and is evident when the firms are able to create a value-adding strategy that is not employed by any of its current competitors. On the other hand, Becker and Huselid (2006, pp. 899) also concur by saying that the right corporate strategy that creates competitive advantage results, in turn, to above-average financial performance.

Continuous enjoyment of competitive advantage can only happen if (1) the level of performance that a firm attains in its implementation of the unique value-enhancing strategy is not concurrently being done by existing or potential competitors and (2) the competitors are either reluctant or unable to recreate the benefits of this particular strategy. Thus, competitive advantage can only arise from the maximization of the right strategic assets.

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The value chain as a competitive advantage

Competitive advantage can be made through hiring, developing and retaining a highly trained and dedicated employee base that is sensitive and responsive to the needs of the market. It can also be done through the creation of a well-maintained value chain that delivers optimum satisfaction for every buyer who avails of a particular product or service. It is the latter strategy that is the focus of this paper, with the additional emphasis of using system dynamics as a framework for analyzing how to build, maintain and improve on a value chain.

A company's value chain must be distinguished from the supply chain, which is more internal in nature because it involves the existing group of suppliers, affiliates, distributors and customers that make up a company's operations network. The value chain is ultimately oriented outwards-it is aimed at fulfilling the value requirements of the customer and ensuring that competitors are not able to do so for the same cost and using the same processes.

Teigen (1997) characterizes supply chain management as "the right product or service is distributed at the right quantities, to the right locations, and at the right time" while keeping the costs minimal and giving optimum customer satisfaction. It is the production and delivery of the product or service being offered. This process is usually seen as key in creating competitive advantage for business firms and keeping their activities and relationships with their business partners well-coordinated.

Creating a sustainable value chain management is significant in order for organizations to answer to the bottomline and ensure that their customers are getting what they paid for in terms of personal satisfaction in the product or service they availed of. A value chain is defined as a system of activities that, from the point of view of the end consumer, adds value to the products or services offered by the organization.

The idea of a value chain was first suggested by Michael Porter in 1985 and was used to explain how value for the customer accumulated along a fixed chain of production-related events. Instead of looking at the company as a set of fully independent and self-contained work units, emphasis is placed on each unit's ability to add more value to the product or service through its specific contribution in the chain.

Today's highly competitive business environment requires that an organization pay attention not only to what products or services they produce, but also how they produce such. The goal of a value chain is to deliver customer satisfaction at a level that exceeds the cost of the operational activities, which results in the profit margin for a company. A generic value chain model is said to have five different segments that are all inter-linked:

· Inbound logistics: receiving, warehousing, and inventory control of input materials

· Operations: transform the input into the finished product or service through value addition

· Outbound logistics: delivers the product or service from manufacturer to end user, such as warehousing, order fulfilment

· Marketing and sales: activities that attract buyer attention to the product or service being offered, including advertising, promotional strategies etc.

· After-sales service: maintain and enhance the product or service's value even after it was purchased, such as customer support, repair and other similar activities.

These primary activities are all supported by a network of the organizational structure, human resource management, technology development and procurement support. A company's goal is therefore to perform all the necessary operational activities at a cost that is lower than the amount that the customer is willing to pay for the particular service or product being offered. Competitive advantage is a matter of delivering superior value to the customer all the time.

Graphically speaking, the value chain can be illustrated in this manner:











The value chain is also linked with other concepts introduced by Porter, namely cost leadership and product differentiation. Porter noted that companies can expect a higher rate of (potential) profit in two ways: (1) they could provide a product or service also being offered by rival companies, but sell them at much lower prices than the latter or (2) they could offer a product or service that is differentiated from those offered by competitors, making customers more willing to pay an additional cost for their product instead of settling for the mediocre merchandise offered by other firms (Segal-Horn, 2005).

System dynamics in the corporate environment

How does one analyze and assess the efficiency of a system as complex as the value chain of a specific organization or the system of which it is a part? The most practicable answer seems to lie in using the system dynamics model. System dynamics or SD provides a useful technique for corporate managers to evaluate a particular system over a given period of time through making graphical illustrations of how these discrete units work together and provide collective results. A system is any group of people, items and capabilities that work in a coordinated manner to achieve specific goals.

According to Stevenson and Wolstenholme (1999), the idea of SD has been around for at least four decades, but most corporate managers remain unaware of its existence and possible application in the business setting. SD can be broken down into different focuses: qualitative and quantitative. At present, the latter concept is the one that is least used by corporate managers because it does not easily yield itself to drawing conclusions necessary for changing hands-on managerial tactics. The challenge now lies in converting data from SD into something that is more practical and usable for the everyday tasks of corporate managers.

Gill (1995, p.542) noted that system dynamics have one thing in common with institutional economics: both require an understanding of systems as holistic, feedback driven groups whose processes and activities have to be studied in order to explain the system's overall behaviour. Apart from the highly collective stance that they system dynamics model offers, it also offers managers an opportunity to study the organization's overall growth as an organic, and not static, entity. The idea is to look at the organization not as a fixed set of working units but rather as a group of evolving mini-systems that develop in particular ways.

Why is there a need to look at the value chain as a working system comprised of different parts with distinct functions and responsibilities? To understand how system dynamics is compatible with value thinking, one must remember that a value chain is not an isolated group of activities that produce positive or negative consequences for only a particular organization. A single organization's value chain has upward links to the value chain of its suppliers and downward linkages to its buyers.

This larger web of interconnected value chains forms what is called a value system. Competitive advantage can be enhanced not only by improving upon the value chain of a specific organization, but also by improving upon the whole system of which the organization is a part.

For Stevenson and Wolstenholme (1999), there is a perfect fit between value chain and the SD approach. The value chain is essentially a static framework because it does not provide for assessing the changes that an organization encounters over time. By using the SD model, a company's operational resources and business strategies are analyzed in light of their relation to potential value creation for the customer. Thus, what results here is a kind of project methodology that is founded upon the thinking that system dynamics is an engine that drives the value chain analysis.


At the end of the day, whichever strategic track corporate managers choose to engage in, they have to consider that the primary goal of these plans is to create and keep the organization's competitive advantage. It can be through the proper management of its human capital, through the development and production of products and services that few others can offer, or it can be through the strategic management of the value chain.

Going back to the earlier idea that the researcher offered, a single value chain must be seen as affecting the cost or performance of other value chains within its specific system. Linkages exist within the system at various levels: among the primary activities of one value chain, between its primary and support activities, between one value chain and another, and so on and so forth. The links do always exist, even if they are not usually appreciated by the corporate managers.

For example, company A can have better vertical integration and make its value chain the best in its particular industry. Another firm with lower vertical integration (company B) can still perform optimally within the market by utilizing superior horizontal integration for coordinating its activities with suppliers and distributors, such as when both are located nearby, thereby reducing transportation costs greatly.

Competitive advantage can therefore be realized by utilizing the necessary resources and forging linkages that add value to the finished product or service, from the time the raw materials are procured to the time that it is delivered to the end user. The goal is to produce the finished product or service with such value added that the customer is willing to pay more for it instead of settling for other products or services that have less value.