Nihan YILDIRIM, PhDValue ChainManagement

One of the simplest functional forms of value is:

Value = Perceived benefits/Price (cost) to the customer

If the value ratio is high, the good or service is perceived favorably by customers, and the organization providing it is more likely to be successful. To increase value, an organization must:

(a) increase perceived benefits while holding price or cost constant, (b) increase perceived benefits while reducing price or cost, or (c) decrease price or cost while holding perceived benefits constant.

Michael Porters Value-ChainDeveloped in 1985 by Michael E. Porter in Competitive AdvantageHighlights cost advantages and distinctive capabilities--the value processesBut note that there is no one template.

Basic Figures - Value Chain AnalysisCorporate value-chain analysisExamine each product lines value chain in terms of the various activities involved in producing the product/serviceExamine the linkages within each product lines value chainExamine the potential synergies among the value chains of different product lines or business units.

Firm Infrastructure(Financing, Planning, Investor Relations)Human Resources Management(Recruiting, Training, Compensation Systems)Technology Development(Product Design,Testing,Process Design,Material Research,Market Research)Procurement(Components, Machinery, Advertising, Services)Inbound Logistics(Incoming, MaterialStorage,Data Col.Service,Customer Access)Operations

(Assembly,ComponentFabrication,Branch Operations)Outbound Logistics

(OrderProcessing,Warehousing,ReportPreparation)Marketing and Sales

(Sales ForcePromotionAdvertising,Trade Shows,Proposal Writing)After-Sales Service

(Installation,Customer Support,ComplaintResolution,Repair)SUPPORTACTIVITIESPrimary Activities

Value Chain and the QCT TriangleVC allows alignment of processes with customers. This generates a quality advantage.VC focuses cost management efforts.VC provides for efficient processes which improves the timeliness of operations.

Value Chain BenefitsIdentifies value processes

Identifies areas for cost improvement

Value Chain ElementsCustomer value addedMargin orientationPrimary activitiesInbound logisticsOperationsOutbound logisticsSales and marketingService and supportSupport ActivitiesHuman resources (general and admin.)Tech. developmentProcurement

Goal of Value ChainDriven by customer perceptionsIncrease marginsFocus on value processessDistinctive capabilitiesCost advantagesSome examplesSouthwest AirlinesIntel Corporation

Value Chain AnalysisDocument the activitiesUnderstand the cost and margins at each step.Use Activity Based CostingMap the value chain to the industry value chainLook for core competenciesMap the cost structureNote that external values drive cost advantages

Discovering Your Own Value ProcessesDistribute a summary of the value chain model.

Create functional process lists.

Transfer lists to color-coded labels.

Pin the process on a large VC diagram.

Identify appropriate processes as:$ (cost advantage)CC (core competency)

Using the Value ChainHelps you to stay out of the No Profit ZonePresents opportunities for integrationAligns spending with value processesProvides for reconfiguration of the value chainoutsourcingoff-shoringco-location with customers or suppliersredesign for efficiencyInvolves chain partners: customers & suppliers

Value Chain and the TBC TriangleTechnical:Increases knowledge of no profit zonesIncreases knowledge of forward and/or backward integration opportunitiesIdentifies value processesIdentifies win-win alliance opportunitiesBehavioral:Focus shifts to the customerFocus shifts from conflict to partnering with customers & suppliersCulturalCreates externally focused mindsetGenerates information sharing environment with respect for confidentiality

Value Chain Analysisreviews all the activities that an organization performs to deliver its products (or services) to determine the value that each adds to the ultimate product/ service. enables the organization to understand which activities are core to its business (i.e., those value-added activities that provide a unique advantage over its competitors). (hence to protect these and minimize risks against them). consider incremental changes to core activities, are not candidates for large business transformation.In times of uncertain economic conditions, there is value in building financial and operational flexibility to the remaining non-core activities. Reading material: http://apps.develebridge.net/amap/index.php/How_to_Conduct_Value_Chain_AnalysisPractice: Read about the article given to you on Value Chain Analysis. Based on this, try to draw a simple/lean value chain map of your company and industry.

Value Chain AnalysisIf an organization understands which of its value chain activities is non-core, it may attempt to reduce the committed, fixed costs that are associated with them. Striving to apply variable costs to these value chain activities results in an agile organization being able to transfer the costs to other resources quickly.Continuously revisiting the business strategy and analyzing the value chain exposes transformation possibilities and creates an agile organization. Agile organizations are not reactionary to market conditionsunderstand their core competencies are able transform quickly to take advantage of economic/market circumstance.

INTERLINKED VALUE CHAINSOpportunities-lower cost -within individual value chain -add value -through improved linkagesProf. Stuart Madnick-MIT

A Service View of a BusinessNestle once defined its business from a physical good viewpoint as "selling coffee machines." Using service management thinking, they redefined their business from a service perspective where the coffee machine is more of a peripheral good.

They decided to lease coffee machines and provide daily replenishment of the coffee and maintenance of the machine for a contracted service fee. This "primary leasing service" was offered to organizations that sold more than 50 cups of coffee per day.

A Service View of a BusinessThe results were greatly increased Nestle coffee sales, new revenue opportunities, and much stronger profits.

Nestle's service vision of their business required a completely new service and logistical value chain capability.

Value and Supply ChainsA supply chain is the portion of the value chain that focuses primarily on the physical movement of goods and materials, and supporting flows of information and financial transactions through the supply, production, and distribution processes.

Many organizations use the terms value chain and supply chain interchangeably; however, we differentiate these two terms in this book.

Chapter 2 Value ChainsValue and Supply ChainsA value chain is broader in scope than a supply chain, and encompasses all pre- and post- production services to create and deliver the entire customer benefit package.

A value chain views an organization from the customer's perspectivethe integration of goods and services to create valuewhile a supply chain is more internally-focused on the creation of physical goods.

Pre- and Postservice View of the Value Chain

Procter & Gambles Supply Chain StructureA model of a supply chain developed by Procter & GambleP&Gs Ultimate Supply SystemThe supply chain focus is on understanding the impact of tightly coupling supply chain partners to integrate information, physical material, product flow, and financial activities to increase sales, reduce costs, increase cash flow, and provide the right product at the right time at the right price to customers.

Procter & Gambles Conceptual Model of a Supply Chain for Paper Products

Value Chain Design and Management

Outsourcing is the opposite of vertical integration in the sense that the organization is shedding (not acquiring) a part of its organization.

Value Chain Design and ManagementVertical integration refers to the process of acquiring and consolidating elements of a value chain to achieve more control.

Outsourcing is the process of having suppliers provide goods and services that were previously provided internally. Chapter 2 Value Chains

Value Chain Design and ManagementBackward integration refers to acquiring capabilities at the front-end of the supply chain (for instance, suppliers), while forward integration refers to acquiring capabilities toward the back-end of the supply chain (for instance, distribution or even customers).

Companies must decide whether to integrate backward (acquiring suppliers) or forward (acquiring distributors), or both.

Value Chain Design and Management

Offshoring is the building, acquiring, or moving ofprocess capabilities from a domestic location toanother country location while maintainingownership and control.

Toyotas Product LineupFigure 9.2

Functional Strategies and Value-Chain ManagementFunctional-level strategy plan of action to improve the ability of each of an organizations departments to performs its task-specific activities in ways that add value to an organizations goods and services

Functional Strategies and Value-Chain ManagementValue chain coordinated series or sequence of functional activities necessary to transform inputs into finished goods or services customers value and want to buy

Functional Activities and the Value Chain

Functional Strategies and Value-Chain ManagementValue-chain management development of a set of functional-level strategies that support a companys business-level strategy and strengthen its competitive advantage

Functional Strategies and Value-Chain ManagementProduct development engineering and scientific research activities involved in innovating new or improved products that add value to a productMarketing functions task is to persuade customers a product meets their needs and convince them to buy it

Functional Strategies and Value-Chain ManagementMaterials management function controls the movement of physical materials from the procurement of inputs through production and into distribution and delivery to the customer

Functional Strategies and Value-Chain ManagementProduction function responsible for the creation, assembly or provision of a good or service, for transforming inputs into outputsSales function plays a crucial role in locating customers and then informing and persuading them to buy the companys products

Functional Strategies and Value-Chain ManagementCustomer service function provides after sales service and supportCan create a perception of superior value by solving customer problems and supporting customers

Improving Responsiveness to CustomersGood value-chain management requires marketing managers to focus on defining the company business in terms of customer needs

What Do Customers Want?A lower price to a higher priceHigh-quality productsQuick service and good after-sales serviceProducts with many useful or valuable featuresProducts that are tailored to their unique needs

Customer Relationship ManagementCustomer relationship management technique that uses IT to develop an ongoing relationship with customers to maximize the value an organization can deliver to them over time

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