The purpose of value chain management anyalsis

Published Date: 23 Mar 2015

2.1 WHAT IS VALUE CHAIN MANAGEMENT.

A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities.

The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.

Primary activities

The primary activities (Porter, 1985) of the company include the following:

• Inbound logistics

These are the activities concerned with receiving the materials from suppliers, storing these externally sourced materials, and handling them within the firm.

• Operations

These are the activities related to the production of products and services. This area can be split into more departments in certain companies. For example, the operations in case of a hotel would include reception, room service etc.

• Outbound logistics

These are all the activities concerned with distributing the final product and/or service to the customers. For example, in case of a hotel this activity would entail the ways of bringing customers to the hotel.

• Marketing and sales

This functional area essentially analyses the needs and wants of customers and is responsible for creating awareness among the target audience of the company about the firm's products and services. Companies make use of marketing communications tools like advertising, sales promotions etc. to attract customers to their products.

• Service

There is often a need to provide services like pre-installation or after-sales service before or after the sale of the product or service.

Support activities

The support activities of a company include the following:

• Procurement

This function is responsible for purchasing the materials that are necessary for the company's operations. An efficient procurement department should be able to obtain the highest quality goods at the lowest prices.

• Human Resource Management

This is a function concerned with recruiting, training, motivating and rewarding the workforce of the company. Human resources are increasingly becoming an important way of attaining sustainable competitive advantage.

• Technology Development

This is an area that is concerned with technological innovation, training and knowledge that is crucial for most companies today in order to survive.

• Firm Infrastructure

This includes planning and control systems, such as finance, accounting, and corporate strategy etc. (Lynch, 2003).

The value chain, also known as value chain analysis, is a concept from business management that was first described and by Michael Porter.( Porter, M. E. 1996)

Michael Eugene Porter (born 1947) is the Bishop William Lawrence University Professor at Harvard Business School.

In his 1980 classic Competitive Strategy: Techniques for Analyzing Industries and Competitors, Porter simplifies the scheme by reducing it down to the three best strategies.( Porter, M.E. (1980) They are cost leadership, differentiation, and market segmentation (or focus). Market segmentation is narrow in scope while both cost leadership and differentiation are relatively broad in market scope.

This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what customers receive).

Differentiation is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customers service.

Focus describes the scope over which the company should compete based on cost leadership or differentiation. The firm can choose to compete in the mass market (like Wal-Mart) with a broad scope, or in a defined, focused market segment with a narrow scope.

2.2 WHAT IS PRODUCT AND SERVICE DESIGN.

Product/Service Design refers to the entirety of processes involved in bringing to market a new product or service offering. In practice, the organizational need for a competitive advantage in the marketplace may drive product and service design.

The product/service life cycle represents the evolution of products/services in the market; specifically, from introduction through growth, maturity and decline stages. Prior to the introduction of a product or service to the market.( Dr. Deanna Kennedy, U. Washington Bothell, 16 June, 2010.)

The way ideas for new products or services are generated may involve a variety of processes. These processes may depend on the particular approach the organization supports for idea generation.( Elmquist M and Blanche S ,2007)

Product design is particularly important for new product success because the design has broad implications for organizational relationships including supply chain members, production teams, marketing and sales, as well as warranty and maintenance claims.

Service design is complementary to that for new product development, however, the characterization of service offerings must take into account how the intangibile output that is consumed at the time it is rendered will be made reliable and reproducible in the market

Typically, product lifecycle management (PLM) aims at improving product development processes and involves activities such as information gathering, conception, design, manufacturing, sales and services. Figure 1 shows the wheel of PLM. (Xu and Bernard 2009).

The phase of Information Gathering mainly includes investigation, data collection and analysis, etc.

The phase of Design mainly includes requirement specification, product definition, general conception, detail design, embodiment, etc.

The phase of Development and Testing mainly includes prototype simulation, acquirement and adjustment of technical parameters, product validation, etc.

The phase of Manufacturing mainly includes product manufacturing, assembly, packing, etc.

The phase of Sales mainly includes advertising, selling, product/service delivery, etc.

The phase of Service mainly includes maintenance, after sales support, product retirement and recycling, etc.

Figure 1. The wheel of product lifecycle management (PLM).

(Xu, Yang and Bernard, Alain (2010) 'Knowledge value chain: an effective tool to measure knowledge value', International Journal of Computer Integrated Manufacturing, 23:11, 957 - 967)

2.3 LINK BETWEEN PRODUCT AND SERVICE DESIGN AND CUSTOMER VALUE.

Walters (2002) explains that "value is an interesting concept." "The underlying motivation for changes in customer expectations is a shift in the consumer perspective of value which has moved away from a combination of benefits dominated by price towards a range of benefits in which price, for some customer segments, has very little impact." "Value is assumed to be the benefits received from a product choice less their costs of acquisition".

Walters, D., 2002, "Operations Strategy", Palgrave Macmillan

According to Walters (2002) 'customers 'value' specific criteria. Product / service quality and reliability, service guarantees and so on are attributes that represent value to customers.

Bovet and Martha (2000) show that: "the value proposition is the utility-creating product and/or service that a company offers to customers".

Bovet, D., and Martha, J., 2000, "Value Nets - Breaking the Supply Chain to Unlock Hidden Profits", John Wiley and Sons.

Sheehy, Bracey and Frazier (1996) assert that: "the bundle of value that an organisation delivers to its customers is called 'the value proposition ". "More than just the product itself, it includes price, service, selection, and intangibles such as image and brand equity ". "The value proposition, in short, is not just what the customer is buying but what he or she thinks they are buying".

Sheehy, B., Bracey, H. and Frazier, R., 1996, "Winning the Race for Value - Strategies to Create Competitive Advantage in the Emerging Age of Abundance", American Marketing Association.

The process of converting customer value expectations into customer satisfaction through value chain activities requires a process of creating the value, delivering the value and communicating the value. By first understanding customer expectations, value chain members can then use a combination of technology, relationship and knowledge management to deliver the value proposition with the most possibility for success.

Generic Value Chain Processes