Implementing Value Strategy Through the Value Chain

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Implementing value strategy through the value chain

David Walters

Head of Department of Business, Macquarie University, Sydney, Australia

Geoff Lancaster

Chairman of Durham Associates Group Limited, Castle Eden, Co. Durham UK and

Lincoln School of Management and Macquarie University, Sydney, Australia

Background

In our earlier articles in this journal (Walters

and Lancaster, 1999a, 1999b) we offered basic

definitions for three aspects of value. In

summary these were:

1 Value is determined by the utility

combination of benefits delivered to the

customer less the total costs of acquiring

the delivered benefits. Value is then

a preferred combination of benefits

(value criteria) compared with acquisition

costs.

2 Relative value is the perceived satisfaction

obtained (or assumed to be available) from

alternative value offers.3 A value proposition is a statement of

how value is to be delivered to

customers. It is important both

internally and externally. Internally, it

identifies the value drivers it is

attempting to offer a target customer

group and the activities involved in

producing the value, together with the cost

drivers involved in the value-producing

activities. Externally it is the means by

which the firm positions itself in the

minds of customers. Webster (1994)

suggests: ``The value proposition shouldbe the firm's single most important

organising principle''.

Brown (1997) has offered a succinct definition

of the value chain:The value chain is a tool to disaggregate a

business into strategically relevant activities.

This enables identification of the source of

competitive advantage by performing these

activities more cheaply or better than its

competitors. Its value chain is part of a larger

stream of activities carried out by other

members of the channel-suppliers,

distributors and customers.

Introduction

Three important perspectives emerge. First

is the emphasis on relationship management

between activities (possibly organisations) in

the value chain. The second concerns the

need for the first to result in competitive

advantage. The third identifies the role of

information to evaluate the nature of

opportunities offered, to identify optional

methods for competing and to coordinate the

value chain's activities towards successful

implementation of the value strategy.

Brown's (1997) industry perspective of the

value chain raises other issues. These

concern the context of supply chain andlogistics management within the value chain.

We offer the following propositions:

Supply chain management is the

management of the interface relationships

among key stakeholders and enterprise

functions that occur in the maximisation of

value creation which is driven by customer

needs satisfaction and facilitated by efficient

logistics management. Logistics management

is the management of activities and costs that

occur within the supply chain.

Slywotzky and Morrison (1997) used a

``customer-centric'' approach to propose amodern value chain in which the customer is

the first link to all that follows. The task of

management is to identify:. Customer needs and priorities.. The channels that can satisfy those needs

and priorities.. The services and products best suited to

flow through those channels. The inputs and raw materials required to

create the products and services.. The assets and core competencies

essential to the inputs and raw materials.

They conclude:The value of any product or service is the

result of its ability to meet a customer's

priorities. Customer priorities are simply the

things that are so important to customers that

they will pay a premium for them or, when

The current issue and full text archive of this journal is available at

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Management Decision38/3 [2000] 160178

# MCB University Press[ISSN 0025-1747]

Keywords

Value chain, Model,

Supply chain management

Abstract

This article is a corollary to three

articles published earlier in

Management Decision. More

precise definitions of a modern

value chain are proposed, in terms

of it being a business system that

creates end-user satisfaction and

realises the objectives of other

member stakeholders. Compari-

sons are drawn with the current

notion of supply chain manage-

ment and an explanation is given

as to how the supply chain fits into

the wider perspective put forward

in this paper. Ideas are advanced

in relation to value chain

relationships and options. Models

are then suggested relating to a

number of well-known

international companies, where

the authors have researched, at

primary or secondary level.


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they can't get them, they will switch

suppliers.

It follows that value opportunities are

distinguished by understanding customers'

priorities and producing, communicating

and delivering the identified value. A value

perspective of strategy follows:Strategy is the art of creating value F F F the

way the company defines its business and

links together with the only two resources

that really matter in today's economy

knowledge and relationships on an

organisation's competencies and customers

(Normann and Ramirez, 1993).

This suggests the value chain as both an

analytical and a facilitating concept in which

value strategy is:F F F primarily the art of positioning a company

in the right place on the value chain the

right business, the right products and market

segments, the right value-adding activities

(Normann and Ramirez, 1993).

They see strategy as the value-creating

system itself in which members work

together to create value. A key strategic task

is the reconfiguration of value chain roles

and relationships in order to ``mobilise the

creation of value in new forms and by new

players''. The underlying goal is to ``create an

ever improving fit between competencies andcustomers''.

A value chain model

To understand how this may be achieved,

requires two models. The first is a model of

the value chain itself and the second is one

describing value chain structures and

processes.

Figure 1 is a composition of topics and sub-

components described in our earlier articles.

Thus the notion of customer value

comprising customer value criteria, lesstheir acquisition costs, is familiar; so, too,

will be key success factors and the value

proposition.

``Corporate value'' introduces the notion

that if the value chain is to be successful it is

essential that the individual objectives of all

stakeholders are met (or optimised after

negotiation) as well as those of the customer.

As the model suggests, ``corporate value'' is

an integral part of the value strategy and

positioning process (another concept defined

earlier).

Value production and coordination is

based on the argument Walters and

Lancaster, 1999a, 1999b) in which we

suggested that value is created by identifying

and understanding customer benefits and

costs and the combinations of organisational

knowledge and learning, together with

organisational structures that facilitate

response and delivery. Essentially this

requires management of information andrelationships. An important influence is the

impact of the value and cost drivers, which in

turn are the important strategic and

operational relationship criteria influencing

value delivery and cost structures.

Figure 2 offers a detailed view of the model.

``Corporate value'' is a value chain

perspective of profitability, productivity and

cash flow objectives. ``Knowledge'' refers to

market-based intelligence developed for

strategic and operational use within the

value chain. ` Information management''

components include; market identification,time, accuracy, relevance and control

aspects. ``Relationship management''

comprises the obvious coordination activity

together with coproduction (upstream and

downstream within the value chain),

codestiny (the promotion of

interdependence), cost management (to

achieve optimal value chain costs for the

value added throughout) and cost

transparency (the notion that effective

cooperation and coordination are only

achievable if visibility exists).

Organisational structure management is

concerned with ensuring maximum use ismade of knowledge generated in the value

chain and partnerships which lead to

effective learning. These activities and topics

influence the production and coordination of

value delivery through the impact of the

value/cost drivers. For example ``time to

market'' is suggested as a value/cost driver.

Rapid response/delivery may well be critical

to the customer and as such minimum

delivery times at low/optimal cost may best

be achieved by partnership arrangements

with specialist logistics services operators.

Similarly, after-sales service may be moreeffectively delivered by centralised

specialists (e.g. consumer durables in the

UK). Finally, reputation (such as that offered

by branding) may be more effectively

managed by a strong marketing company

coordinating its product design through

manufacturing and distribution

intermediaries.

Not surprisingly, the value/cost drivers

influence organisational and operations

structure and their management. As Figure 2

infers, both production and logistics are

important components of the operations

structure which is the other input into value

production and coordination. For example,

quality may also be important and as such

both the production and logistics activities

have significant inputs into quality products

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David Walters andGeoff LancasterImplementing value strategythrough the value chain



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and quality service. They are as their label

implies, the drivers of the value chain. We

shall offer examples of successful value

chains following a review of value chainprocesses.

Value chain processes

Sutton (1998) reminds us that Porter (1985)

referred `` F F F to the totality surrounding one

firm as the `value chain'''. To emphasise that

each step can only be justified if it creates

more in value to the end user than it

consumes as cost and partly to emphasise

that an individual firm's competitive

position depends on the effectiveness of the

chain as an entity, not just its own position asa link in the value chain. Porter's value chain

concept was used as a model for supply chain

studies. The impact of globalisation (for

procurement and marketing purposes) has

made the value chain a more useful approach

to identifying and evaluating business

opportunities. This was inferred in

Management Decision (Walters and

Lancaster, 1999b, Figure 8). We offer the

following composite definition:A value chain is a business system which

creates end-user satisfaction (i.e. value) and

realises the objectives of other member

stakeholders. Supply chain management is

the management of the interface

relationships among key stakeholders and

enterprise functions that occur in the

maximisation of value creation. This is

driven by customer needs satisfaction and

facilitated by efficient logistics management;

the management of activities and costs that

occur within the supply chain.

Here we can begin to distinguish between

mission (and business scope) strategy and

operations. In our definition, the value chain

identifies the mission or purpose of the

organisation (and any partners it becomes

involved with). The supply chain is strategic

in that it manages the relationships between

stakeholders and enterprise functions/

activities (which are of necessity long term)

and logistics management is the operational

management of the ``stocks and flows'' within

the supply chain.

Hence the value chain becomes a design for

the business mission, the supply chain offers

the strategic direction and organisationalvehicle and the operational/ implementation

role is assumed by logistics management.

Abell (1980) offered a useful model to explore

these relationships (and their

interrelationships). His three-dimensional/

vector approach to identifying the scope of

the business is illustrated in Figure 3. Abell's

argument is that the three vectors prescribe

the market available either currently or

potentially to an organisation. The current

activity is in customer group 1, using

technology identified as manufacturing and

logistics 1, meeting customer applications 1.The overall ``cube'' represents the potential

mission or value chain available. Should the

organisation wish to pursue expansion the

structure of the value chain may need to

change. At the firm's current position it may

meet the KSFs necessary for successful

Figure 1

A value chain model

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competition in the value chain, owning all of

the assets required and having the necessary

core competence(ies).

Expansion in any context may require thevalue chain to be restructured if the

customer expectations at application 2 are to

be met successfully. At this juncture the

involvement of specialists may be necessary

if the ``maximisation of value creation'' is to

be achieved and the stakeholders' objectives

realised. Clearly the same decisions may be

required concerning shifts in customer

groups and ``delivery technology''. Just how

these may be achieved within the value chain

structure depends on an understanding of the

processes within the value chain.

A typical view of value chain structure andprocess is illustrated by Figure 4, the

external influences have been omitted to

simplify the diagram. Figure 4 expands on

the role within the value chain and expands

the topics identified in the model described

by Figures 1 and 2. It is intuitively obvious,

simply by observation, that expansion is

unlikely to occur without expansion of assets

and core competencies. Consequently, this is

a means by which the relationship and

information management activities may

become more effective by identifying value

chain constraints and the activities needed

(typically by first review key success factors)

to ensure competitive advantage

characteristics necessary for strategic

success.

This issue is addressed in Figure 5. Here

the overall relationships within the valuechain are identified. For both current and

future perspectives precise details

concerning customer expectations of the

value created and costs to be added are

required. Clearly, current customer

satisfaction expectations may change and

require an ongoing review of value creation

and cost additions. Thus current and future

output of the value chain may require the

addition of activities only available outwith

the value chain. In Figure 5 a notional

``specialist activities'' suggests a generic

range of contributions that may be requiredas the value chain customer base (market

opportunity response) expands. It is not

surprising that value characteristics (e.g.

form, time, location and ownership) do

change among an existing customer base or

within adjacent segments. Indeed, adjacent

segments may only become attractive (and

attainable) with the addition of external (at

that point in time) specialist activities.

Again, the primary mechanisms of

relationship and information management

are necessary.

For effective value chain reconfiguration

some structure is required. Sutton (1998)

proposes the market mechanism as a means

Figure 2

Value chain components

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to coordinate activities. He suggests the term

``market coordination'' for the situation in

which specialism is separate and the value

chain comprises a series of sequentialindividual activities under individual

ownership. An alternative model is one in

which one or more firms `` F F F seek to combine

two or more stages under single control, and

rely upon internal management to ensure

coordination''. He uses the conventional term

``vertical integration'' for this structure.

There are hybrid structures. A firm may act

as a contractor to coordinate the other links

in the value chain but relies on external

agreements rather than internal

management. IKEA and Benetton are

examples of this structure. Possibly Nike isthe extreme example of what may be

described as a virtual company. Nike

controls (and owns) the key core asset the

brand and coordinates manufacturing and

marketing logistics together with some

retailing outlets. We suggest the use of the

term ``vertical coordination'' to describe the

coordination of individually-owned

activities. In Figure 6, vertical coordination

comprises individual organisations, having

specific objectives but shared purpose(customer satisfaction) within the value

chain. Examples of vertical coordination are

found in fast-moving consumer goods

retailing. The relationships established by

Marks & Spencer are among the oldest and

most successful. Marks & Spencer ` own'' the

brand; specify the customer response; use

individually-owned manufacturers and

logistics companies to provide

``manufacturing and distribution'' into

Marks & Spencer owned retail outlets. Recent

problems within Marks & Spencer may be

examined within the context of the valuechain. Reports of uncompetitively high

prices may be owing to a need for a review of

product quality and specification, together

with cost structures. The criticism of style

and design may require the company to

review its role in this activity and consider

the addition of an external specialist activity

Figure 3

Using Abell's customer application/customer segment/technology model to explore value chain opportunities and structures

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as occurs in automotive design. In other

words, the company no longer has the

expertise (core competence) necessary to

address the key success factor of ``anawareness of style/design awareness''.

Vertical integration has alternative

structural options. Sutton (1998) suggests

two: breadth and depth. Breadth occurs in

companies who rely on coordination of some

activities while assuming ownership of

others. Ownership may occur for a number of

reasons. Margins may appear attractive.

Typically, the reason is based on control of

resources or aspects of customer service

during the delivery process. He explains the

nature of these relationships and implies that

hybrid structures usually emerge as the mostcommon arrangements. He illustrates this

using the oil industry as an example,

suggesting also that brewing has similar

hybrid structures. In Figure 6, vertical

integration follows Sutton's suggested

differentiation: breadth is the extent of

coordination with vertical integration and

depth the activities that are combined into

one activity.

Given that the value chain is concerned

with value maximisation and cost

optimisation (cost minimisation not usually

being a feasible option) some mechanism or

method for deciding on structure is required.

A number of influences exist. The

availability of economies of scale and of

scope are important. Within the context ofour discussion these relate to the ability to

specialise and gain cost advantages and/or to

offer a limited range of specialist products

and/or services, that have significant impact

on customer costs and for which much of the

fixed costs are shared.

Hence the ability to avoid fixed-cost

commitment, or to transfer fixed costs to

variable costs, and at the same time, receive

or participate in either product/service

differentiation and cost efficiencies has

major attraction. Here the existence of

transactions costs are both important andsignificant. These include searching

(customer and supplier identification);

negotiation (trading and its associated

activities) and implementation (the

successful delivery of customer value, e.g. the

ability to meet rigorous delivery schedules

and product availability requirements) on an

agreed, contractual basis. More complex

examples. Readers are directed towards

Coase (1937), Williamson (1975, 1985) and

North (1990) for a rigorous review of the

subject. Clearly, the identification of

suppliers, the precise nature of the product/

Figure 4

The value chain process

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service offer and the transaction costs are

resolved by the effective use of both

information and relationship management.

Increasingly, coordination is replacingintegration. A number of reasons have

created this situation:. The impact of new technology in

operations management, e.g. flexible

manufacturing systems, just-in-time, lean

manufacturing numerical control, etc.,

have facilitated the offer of differentiation

at acceptable cost levels.. Markets have passed through

segmentation into fragmentation.. Vertical integration requires capital

investment/equity involvement in

processes within and outwith the firm,thereby raising risk.

. Increasingly, organisations prefer to focus

on core competencies and to outsource

those activities that may be performed

more cost-effectively (or cost-efficiently)

elsewhere. This focusses management

capacities and capabilities on the core

business activity of the business.

These trends have resulted in situations

whereby strong brands now outsource the

majority of the ``production and logistics''

process and focus on developing the brand

and products/services which relate tothe brand and which may be produced

through contract manufacturing facilities.

Sutton (1998) suggests limitations of

outsourcing. The first is that based on the

principle of comparative advantage any core

competency should be retained andstrengthened. An evaluation of competencies

and their impact on competitive advantage

should be regularly conducted. This ensures

the effective (strategic) allocation of

resources for future development as well as

the efficient (operational) allocation of

resources for improvement of profitability,

productivity and cash flow together with

``knowledge''. A second issue concerns the

development of future competencies,

necessary for future competitive advantage:

extensive outsourcing (recruiting specialist

activities into the value chain) may inhibitthe growth of competitive advantage for the

next generation.

The strategic implications for supply chain

management are not difficult to project.

Typically, procurement managers are

required to negotiate low prices with

suppliers. Their success in doing so is the

major criterion of performance. The value

chain approach requires a view to be taken of

both costs and value. Often negotiations

directed towards enhanced quality (at no cost

increases) will add to end-user value

satisfaction. Another view would be to

consider joint efforts (and possiblyinvestment) to reduce the costs of transaction

and negotiation processes. The adoption of

Figure 5

value chain relationships

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EDI (electronic data interchange) and ECR

(efficient consumer response) are examples

of how costs may be reduced, accuracy

improved and customer end-use satisfactionbe increased by cooperation within the

supply chain. These examples illustrate not

simply the need for effective (and efficient)

relationship management but perhaps an

integrated approach to relationship and

information management.

Active value chains

In order to establish the efficacy of the value

chain model, a number of company/industry

situations have been examined, using

interviews and published materials. The

examples that follow vary in complexity.

They vary in size of enterprise, the

complexity of the value chain and the nature

of product-markets examined.

The first company examined was the

Bluegum Group, a contract manufacturer of

electronic components. Bluegum is

Australia's largest contract electronics

component manufacturer. Bluegum is

expanding its business in this product-

market as the electronic manufacturers

increasingly turns to contract manufacturers

owing to decreasing product life-cycles inproducts such as personal computers. Our

review of Bluegum was based on published

material (an article by Banaghan, 1999) and

using comments derived from interviews

within Bluegum. Content was then used to

construct a value chain specification. In this

example the value chain is simple: dealing

with Bluegum and its customers.

Bluegum's CEO, Paul Zuber, identified the

primary benefits of their offer. Contract

manufacturers offer: ``leading-edge processes

and equipment, lower costs, faster time to

market and improved return on assets''.

Zuber identified: ``A combination of thetechnical expertise, innovation, cost

competitiveness, responsiveness and flexible

delivery F F F as: F F F key to the success of

contract manufacturers''. And: ``You need to

be fast and flexible, but scale is also

important F F F To be competitive in global

contract manufacturing, a company must

respond quickly to its customers' continually

changing demands''. Here we have identified

the elements of customer value and these are

included in Figure 7. The comments also

prescribe the key success factors.

From the customer value and key successfactor statements we can conclude the value

proposition statement. Clearly, consistent

costs and quality are vitally important. This

is confirmed by a comment by Zuber: ``As

much as 90 per cent of the cost of electronics

products is parts. Hence, since contract

manufacturers buy on global contracts that

provide the same delivered component cost to

any destination, 90 per cent of a particular

product cost will be the same anywhere in

the world''.

The structure of both information and

relationship management have an importantpart to play. Information management should

be structured to ensure rapid time response,

it should be accurate and have world-wide

application. Bluegum recently undertook an

extensive upgrade to the company's plants

and this included implementation of i2's

Rhythm decision-support software. This is

expected to increase response to customer

order enquiries: ``Before i2, it would take

Bluegum days to inform a customer when its

Figure 6

Value chain options

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order could be fulfilled. Now it takes

minutes''. The decision-support software is

part of a new breed of supply-chain

automation tools that use electroniccommerce on both an intranet and extranet

basis. Zuber comments: ``If you don't have on-

line capabilities across a broad spectrum of

what you do, you're just not going to be

competitive''. On-line configuration software

allows customers to place an order that is

automatically sent to Bluegum's factory

floor. And: ``They can then follow its progress

because we make our supply chain visible to

our customers and supplier through

intranets''.

Zuber suggests that while cost savings are

important, time savings can be even moreimportant: ``It does save you money, but more

importantly, it frees up your time to really

focus a lot more on your customers''. This

extends to the role of supply chain and

logistics management. A rapid response to

customers requires: `` F F F a very strong supply

chain and logistics capability''. And: `` F F F you

can't do it without suppliers. If they don't

know what's coming down the pipeline they

can't react quickly enough''.

A manufacturing perspective was given by

Paul Weiss, the manufacturing director: ``By

reducing our decision-making time fromdays to minutes, it somewhat lessens the

inventory trade-off between responsiveness

and level of inventory. We will be able to

achieve reduced inventory throughout

(authors' italics) our whole pipeline and,most importantly, for our customer, also

improve our responsiveness''.

The content of the interviews leads to an

interpretation of the Bluegum value chain

(illustrated in Figure 7). The company's

reference to techniques, processes and

procedures identifies the components and

activities in place and which ensure smooth

operation of the value chain process

supported by supply chain and logistics

management activities.

An industry perspective is provided by

Figure 8, which constructs a value chainspecification for the automotive industry.

Information for the analysis came from a

number of sources, principally a feature in

the International Herald Tribune (1998).

The feature identified four competitive

challenges confronting the automotive

industry: competition, complexity,

customisation and capacity in excess of

global demand. It was suggested that to be

competitive: ``They need to be in every niche

of the market to maximise cost efficiencies,

and they must be lean, agile and cost

conscious''. Complexity is due in part toglobalisation of the industry, this has

Figure 7

The Bluegum Group value chain specification

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Figure 8

An automotive industry value chain model

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resulted in a requirement to cope with: `` F F F a

variety of locations, government regulations

and incentives, distribution patterns and

consumer buying habitsF F F

Buyers aredemanding more and more customisation in

their cars, especially at the luxury end F F F

Very flexible production is needed to handle

this''. It is estimated that there is a 20 percent

excess capacity in the industry and,

furthermore, there is a cyclical nature to

demand.

We could add ``concentration'' to this list. It

is estimated that there will be ten major

manufacturers in the not too distant future;

the recent Ford/Volvo and Renault/Nissan

combinations add currency to this view. The

view of a former industry executive is thatthe manufacturers should: `` F F F provide

solutions, not build cars''.

Solutions or perhaps ``facilitating

influencers'' have been provided by the

information industry. Computer-aided

design (CAD) shortens development time,

and sophisticated links among designers,

suppliers and manufacturers lower costs and

contribute to competitiveness. Information

technology (IT) can resolve some complexity

issues. IBM offer ``global embedded and

production solutions'' (GEP). IBM identifies a

need for GEPs on the premise:

``manufacturing processes are now socomplex that nothing else can handle them''.

What is obvious is that IT has become

essential if activities such as design and

manufacturing processes are to be used to

facilitate mass-customisation (selective

exclusively) thereby: ``tailoring mass-

produced goods to individuals''. An

interesting claim made by IBM is: ``All our

technology has an end-user focus because the

customer is determinant F F F the business

drives the technology and not the other way

around''.

The extent of industry integration hasresulted in a major role of IT management,

which has significant implications for

relationship marketing: ``The integration of

suppliers, designers, manufacturers, dealers

and customers calls for information

networks operating on a real-time basis''.

Audi have introduced a customer

specification facility. A number of

dealerships, plus five airports, are to be

equipped with kiosks that enable customers

to ``build'' a vehicle to their own

specification. The system uses a standard

``hypertext'' markup language (HTML) so

information entered at a kiosk can be used on

the Audi Web site.

Design developments have been built

around a number of IT applications. CAD

packages have made strident advances in

recent years. Car designers now use 3-D

digital design, having forsaken physical

prototypes. This permits shorter production

cycles, with lower costs and quicker ``time-to-market''. CATIA (computer-aided

tridimensional interactive application) offers

the ability to introduce changes relatively

late in the product development cycle, as well

as features that bring the final customer

closer to the company. CATIA permits

``virtual reality'' test drives or specification

configuration in a distributor showroom.

CATWeb combines the efficiency of digital

prototyping with the collaborative power of

the Internet. An Italian vehicle design

company is testing CATWeb to distribute

design information throughout the company(an intranet application). The experiment

suggests considerable time and integration of

engineering and development benefits.

Chrysler are reported as having made use of

CATIA to identify ``part interferences'' prior

to production of a physical prototype. The

number of physical prototypes was reduced

from 50 to 27. Data management systems

become essential: effective data management

enables the tracking of input and updates of

all design, engineering and component

supply decisions. Two benefits cited are the

increase in design productivity and

profitability: `F F F

product life-cycles areshorter than ever. Instead of developing three

cars in ten years, today's engineers may

produce ten vehicles in two years''.

Mercedes and IBM created a fully-integrated,

enterprise-wide IT system to support the

Mercedes US plant's business processes.

There are no warehouses and no inventory.

Sequenced production techniques permit

customer ordering for specific motor cars. In

principle, the system has operated for some

time, but not without initial problems. In the

new system, a combination of lean

production, sequenced production andAutoView (automated line control)

customisation becomes a reality. AutoView

has quality checks built in, plus easy-to-

change features enabling a manufacturer to

individualise production based upon

customer requirements. A link is planned

with Java which will facilitate

Internetworking for JIT with suppliers.

On-line sales applications are expanding

for both new and used vehicles. Networks are

being established by manufacturers,

distributors and the media. Relationship

management becomes essential as

distributors' concern over direct sales by

manufacturers is seen as a major threat. An

independent view suggests Internet

customers to differ from ``average'' customers

as they (the customers) are well into the

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``sales cycle''. Reports of media success in the

used car market suggest the Internet to be

significant in reducing purchasers ``search''

costs.After-sales service also has intranet

applications. One, IRIS (intranet retail

information system) currently being

installed by Saab, aims at increasing after

sales support to both distributors and

customers. IRIS offers a data management

system detailing vehicle servicing records as

well as vehicle sales and parts availability.

Saab plan to expand IRIS to include links to

financial institutions, carriers (vehicle

transporters) (to notify customers of the

arrival of a new vehicle) used car

information, calendars for on-line schedulingof service appointments and on-line vehicle

purchasing.

Returning to the value chain perspective

provided by Figure 8, we can identify many of

the value chain components raised above.

Customer value issues clearly drive the

industry and there are equally obvious

indications of the important key success

factors. The value proposition is a customer-

led, IT-based response with an increasing use

of interactive and on-line information. A

number of important issues arise. First is the

increasing integration of information

management with relationship managementaspects. For example, the interaction

between designers and engineers within

organisations and component suppliers

requires new levels of trust and confidence as

competitive advantage features become the

result of joint R&D programmes. Equally, in

times of permanent excess capacity,

relationships with distributors become

important, if sales volumes are to be

maintained. Many of these issues are

identified as value/cost drivers, influencing

both information and relationship

management. Furthermore, many of thevalue/cost driver characteristics have

implications for both distributors and

customers and these in turn may require

joint manufacturer/distributor initiatives.

Relationship management has taken an

additional feature with the announcement by

Ford that it intends to vertically integrate

downstream by purchasing equity holding in

a number of its largest distributors. This may

be an initiative to reduce risk, make a greater

impact with reputation and enhance the

value delivered in service aspects. Upstream

activities by Ford included (reported)

brokering mergers among its suppliers. This

was discussed by Sutton (1998).

The McKesson corporation was cited by

Johnston and Lawrence (1988) as an example

of a ``value-adding partnership''. The authors

define a ``value-adding partnership'' as ``a set

of individual companies that work closely

together to manage the flow of goods and

services along the entire value-added chain''.This perspective makes it ideal for research

into value chain structures. Having

established this, it should be made clear that

Johnston and Lawrence shared the view

(current at that time, 1988) that the value-

added chain was a micro-economics concept.

They defined it as `` F F F the various steps a

good or service goes through from raw

material to consumption. Economics has

traditionally conceived of transactions

between steps in the chain as being arm's

length relationships or hierarchies of

common ownership''. Our perspective is thereverse of this, as the earlier definition

suggests, it is concerned with meeting

customer expectations which are identified

first and then configuring the value chain to

meet these and, at the same time, optimise

the return to all members of the value chain.

Returning to McKesson. The McKesson

Corporation is a distributor of drugs,

health-care products and other consumer

goods. In 1988 its revenues were US$6.67

billion and it was considered successful. It

was known for its application of IT to

improve customer service and cut order-entry

costs. McKesson's activities were initiated asa response to vertically-integrated chain

stores. McKesson's future was inextricably

tied into that of its independent customers. It

introduced a customer-based ordering

system that reduced order processing costs

by expediting the steps of inventory

checking, calling in an order, manually

recording the order and eventually packing

and delivering it. Management soon extended

this ``system'' to specify order packs so they

coincided with the merchandise profiles of

their customers' shelf plans. This increased

the efficiency of shelf merchandising. Other` innovations'' followed. McKesson managers

realised they could use the data generated to

help customers set prices and design store

layouts to maximise the profits of each

particular store. Two other important

applications followed. The data were used to

produce accounting statements for customers

and it was discovered that the system could

be used to warn consumers of potentially

harmful drug combinations by tracking

prescription histories.

McKesson's customers, the independent

drugstores, received a number of value

benefits. They were able to access benefits of

computerised systems and data management

which reduced their costs as well as

increased their efficiency and thus became

more price competitive, important in their

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competitive situation. This, together with

merchandise management and enhanced

customer service, gave ``real'' aspects of

competitive advantage when compared withthe chains. And, at the same time, they

retained their independence and autonomy

which permitted local responses to local

demands. McKesson also benefited. Sales

increased dramatically, the warehouse

system was reduced from 130 to 54 and

eliminated 500 clerical jobs. Most significant

was the strengthening of the customer base;

from 20,000 customers averaging $4,000 per

month to 15,000 customers averaging $12,000

to $15,000 per month. Shipments were also

reduced from an average of two per day to

two per week, while lowering its own andcustomers' inventory costs.

The company also recognised the value of

its data to its suppliers. The result was

improved logistics management with

computer-to-computer ordering that resulted

in a reduction of buying staff. McKesson also

used the computer system to help process

health insurance claims and for prescription

reimbursement. This move strengthened the

ties among insurance companies, consumers

and drugstores by accelerating payments and

smoothing administrative problems.

The McKesson value chain is illustrated in

Figure 9. The addition of a distributor leveladds few complications. The amount of detail

is increased, but this adds to richness of the

information available for planning and

control purposes.

The consumer value characteristics have

been assumed by inference. Clearly, the

model would be more robust if these were the

result of specific research. These in turn lead

to key success factors and a value proposition

for distributors. Notable here is the need for

product relevance and availability, cost

competitiveness and service/advice.

McKesson is an example of the use ofinformation management to develop strong

advantage and reinforced with relationship

management. A clear identification of how

its information systems were able to improve

the independent retailers' performance gave

McKesson indicators on how to use the

information to strengthen its own

performance. The cost efficiencies reinforced

by detailed and accurate merchandise

planning increased still further the

competitive position of the company with the

retailers. The inclusion of other stakeholder

interests (McKesson suppliers, insurance

companies) increased the overall

effectiveness of the value chain.

Caterpillar is a well-known international

brand. While generally assumed to be

successful, it admits to feeling the impact of

Japanese competition between 1982 and 1992.

Fites (1996) describes Caterpillar's response

to the Japanese challenge; his description

maps the Caterpillar value chain. While thethrust of Fites' article is aimed at the role

played by distributors in the industry, there

is sufficient material to be able to construct a

value chain.

Fites identifies the KSF requirements of a

major industry participant in his description

of the factors which were used defensively.

They are: a strong brand; responsiveness to

customers; efficient, flexible operations;

strong distributors who are loyal and

responsive to the company's leadership and a

product that is innovative, of high quality

and well supported in the field. Fitesidentifies the role of distributors as conduits

for information to the end user, often acting

as ``consultants''. This adds another KSF:

investment, in product development and in

the distribution network.

There are numerous examples of how

Caterpillar uses information management

and relationship management to construct an

effective value chain through the dealer

network. Given the commitment to the

distributor organisation, many decisions are

simplified. For example, product design

includes: ``A critical design criterion for our

machines is that they can be repairedeconomically and conveniently, and our

highly-integrated manufacturing and

distribution systems are designed so that we

can replace a part in any machine anywhere

in the world within 48 hours''.

Fites argues that Caterpillar competitors'

customers typically wait four or five days for

a part, suggesting: ``One possible reason for

the disparity is that few companies have

integrated their dealers into their business

systems to the degree we have''. Here is an

example of making supply chain and logistics

management an important component ofrelationships management.

The role of information to create market

knowledge comes from the learning aspects

of the manufacturer/distributor partnership

relationships. Another aspect of information

management concerns the productivity of

Caterpillar and distributor inventories and

customer equipment. The remoteness of

many applications implies serious problems

when parts of equipment begin to

deteriorate. Caterpillar have begun to resolve

such problems by installing sensors on each

machine that automatically spots a problem

which may occur and sends an electronic

alert to the local dealer's field technician

through his portable computer. The

symptoms and diagnosis are validated by a

technician who determines the necessary

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Figure 9

The McKesson Corporation value chain

[173]




15/19

actions. The computer program identifies

exactly the parts and tools required to effect

repair. This done, the technician can then

use another feature of the program toidentify sources of parts, availability and a

delivery date. Beyond this, an integrated

replenishment program retrieves parts from

storage and issues replenishment orders as

and when required. The computer program

contains best-practice repair procedures and,

on completion of the repair, will update the

equipment's service record and issue an

invoice. It can also handle electronic

payments.

The supply chain and logistics

management implications are major:

Caterpillar, in 1996, investing in theexpansion of the remote monitoring system

and the worldwide sharing of inventories by

the company, suppliers and distributors.

Already the company maintains 22 parts

facilities around the world, within excess of

10 million square feet of storage. Caterpillar

services 480,000SKUs, of which 320,000 are

stocked. Caterpillar dealers stock between

40,000 and 50,000 items. The remote sensing

facility permits the company to deliver a part

before a customer realises the need for it.

Linkages with both customers and

distributors are maintained in order to

monitor product performance and,subsequently, product development. Both

dealers and customers are involved in

programmes on product quality, cost

reduction and other manufacturing issues.

Measures of the strength of relationships

between Caterpillar and its distributors are

the actions taken to ensure the longevity of

the partnerships during periods of

difficulties. During recessions and foreign

exchange fluctuations, the company

undertakes whatever financial actions are

necessary to insulate the dealers from

financial difficulties. Dealer support, such asfinancial assistance for customers' purchases

is shared by the company and it supports the

dealers with inventory management and

control, logistics, equipment management

and maintenance programs. Many of these

aspects are reinforced by Caterpillar-designed

software programs. Dealer staff are trained

in technical and managerial techniques and

technical literature is constantly updated.

Business management programmes to

improve profitability, productivity and cash

flow ensure dealership performances.

The structure of the Caterpillar value

chain is shown in Figure 10. It includes both

customer and dealer perspectives. Each of

the attributes has been derived from the

material provided by Fites (Chairman and

CEO of Caterpillar, 1996). As with previous

examples, the role of information and

relationship management can be seen as

influencing the structure and operation of

the value chain. The role of integrated supplychain and logistics management has been

expressed both explicitly and implicitly.

Finally, we review Freedom Furniture.

The data used for this analysis is based on

interviews with Freedom Furniture and from

materials raised from in-house documents.

Freedom Furniture is based in Sydney and

opened its first store in 1981. It now has 42

retail stores, 22 are company owned and 20

are franchised stores in Australia and New

Zealand. Freedom was floated on the

Australian Stock Exchange in 1996, and since

then has exceeded its prospectus forecast andcontinues to increase sales, market share and

profit. Currently, sales are in excess of A$250

million and market share approximately

7 percent.

The company's target market is mainly

women with a ``taste and attitude for stylish

and value-oriented furniture and home

wares, aged 27 to 46-years-old with annual

household income in excess of A$30,000. In

terms of demographics, this represents

young singles, couples, families and young

single parent households. During a recent

review of strategy the company's corecompetencies were viewed as:. Idea generation/commercialisation of

trends and styles, and new product

development.. Strong management with positive attitudes.. Well-proven sourcing ability of domestic

and international products.. Effective information systems.. Effective visual merchandising.. Established franchising; strong

relationship management.

Those requiring strengthening:.

Store/location development.. ``Time-to-market'' for new products.. Marketing activities; brand

strengthening, communications,

catalogue development.. Value delivery; ``delivered in full and on

time'' (DIFOT).. Retail operations and training.

Freedom Furniture's strategic alternatives

appeared to be:. Category dominance.. A ``new'' superior customer proposition,

such as assured seven-day delivery..

Brand expansion and/or acquisition(s).. International expansion.. Expanding manufacturing.

While strategy and structure development is

not a specific topic of this article, there are

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Figure 10

The Caterpillar value chain

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some issues which clearly influence the

value chain in its mission to maximise

customer value and to optimise stakeholder

returns. What emerges are some issues forkey success factors. These include: supply

chain management (manufacturing,

inventory management and ``quick response''

(DIFOT) to direct customers and

franchisees); a strong, identifiable brand;

category dominance in selected product

ranges with strong supporting presence in

other ranges; critical mass from which to

influence market developments and value

chain delivery options (e.g. franchising).

The Freedom Furniture value chain is

shown in Figure 11. Customer satisfaction/

value criteria were derived from researchthat the company had undertaken and which

the company was addressing with both

strategic and operational decisions. Key

success factors were comprehensive but

there was an indication of the role of

specialists and support activities within the

value chain. A strong, identifiable brand and

critical mass volume was enhanced by

franchise operations. Expansion is capital

intensive (as well as consuming large

amounts of management capacity in detailed

activities) and has commensurate risk.

Franchising has enabled the company to

expand its volume towards a critical massvolume and to increase brand awareness,

often in areas/locations that are not

necessarily high on Freedom's store rollout

program.

The value proposition (product-service

attributes) is dominated by product and

advice. Product design and choice is very

important as is its rapid delivery once a

purchase decision has been made. The

process of decision making does require

support. As well as catalogues, which initiate

interest, ``ideas'' are essential and product

coordination and advice at the point of saleare essential features of the value

proposition.

Freedom's information system extends

throughout the value chain. The company

manufactures much of its range and sources

on an international basis. It follows that

accurate and timely information is

necessary. Relationships extend upstream

and downstream and form an important

feature of the Freedom Furniture operation.

Figure 11The Freedom Furniture value chain

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With much of its requirements manufactured

in-house, there are internal linkages to be

managed and overseas sourcing requires

detailed management of reliability ofsuppliers if customer delivery promises are

to be maintained. Potentially more difficult

are relationships with franchisees. The

franchisees are autonomous in that they may

differ with opinions on range plans and

stocking and use local knowledge to develop a

detailed understanding of local market

requirements. But they are also part of the

Freedom brand and as such are expected to

give visual support to its development and to

match this with service, the qualitative

aspects of a brand.

Organisational structure managementreflects the extent of the supply chain.

Control of relationships within the company

and with suppliers are influenced by a need

for innovative product development and

commercialisation, its sourcing (from own

manufacturing and/or external sources) the

logistics of product stocks and flows and cost

management. This has resulted in the need

for an operations structure that can respond

in many directions, volumes and time spans.

The fact that almost half of Freedom's outlets

(not in terms of volume) are franchise

operations, imposes additional pressures on

organisational and operations structures.

The conclusion is that the value/costdrivers for the Freedom value chain relate to

clear aspects of customer relationships

(innovative products, advice and delivery

promises that are maintained); volume

expansion (through new product categories,

market expansion of own and franchised

outlets, and possibly acquisitions); effective

and efficient supply chain and logistics

management, and; brand development.

Conclusion

This article has added to our previous three

and it has explored the concepts of value and

information in a contemporary context. It

has also broken new ground by suggesting

that supply chain and logistics management

are functions that are supporting activities in

the overall value chain. A comprehensive

definition of value chain management

concludes this series.

Value chain management is a coordinating

management process in which all of the

Figure 12

Value chain/supply chain/logistics management

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activities (and their suppliers) involved in

delivering customer value satisfaction are

integrated such that customer satisfaction is

maximised and the objectives of thestakeholders involved (the suppliers of

activities, processes, facilitating services,

etc.) are optimised such that no preferable

solution may be found. Supply chain

management is the management of the

interface relationships among key

stakeholders and enterprise functions that

occur in the maximisation of value creation.

This is driven by customer needs satisfaction

and facilitated by efficient logistics

management and the management of

activities and costs occurring within the

supply chain.

Successful value chain management

requires an identification of customer value

criteria and an understanding of the key

success factors which are necessary for

creating both competitive advantage and

resultant success. The value proposition

becomes the means by which the customer

understands the value offer (typically made

explicit as a series of product/service

attributes) and by which the value chain

enterprise components formulate, evaluate

and decide on their value-adding

contributions. Two functions manage the

value chain: information management andrelationship management. It is these that

determine the effective organisational

structure of the value chain and its efficient

operational management. Value/cost drivers

are the primary influences of the value chain.

They determine how value is identified and

made explicit, the assets and core

competencies necessary to ``produce'',

communicate and deliver value. Figure 12

summarises this proposition.

References

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Starting Point of Strategic Planning,

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Application questions

1 What are the key success factors in your

organizations?

2 What implications do the authors'

findings have for your organization?



Documents

Implementing Value Strategy Through the Value Chain