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STATE-OF-THE-ART REVIEW OF VALUE CHAIN MAPPING TECHNIQUES
RELEVANT TO THE AEROSPACE INDUSTRY INCLUDING A REVIEW OF VALUE
CONCEPTS AND VALUE CHAIN ANALYSIS
Article · January 2005
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STATE-OF-THE-ART REVIEW OF VALUE
CHAIN MAPPING TECHNIQUES
RELEVANT TO THE AEROSPACE
INDUSTRY
INCLUDING A REVIEW OF VALUE CONCEPTS AND VALUE CHAIN
ANALYSIS
by
David Buxton, Richard Farr & Bart MacCarthy
(University of Nottingham)
Abstract:
This document describes value chain concepts and value chain analysis for applications in
the aerospace industry, particularly the aero-engine industry. Discussion is made regarding
the value chain first proposed by Porter in the mid 1980s for strategy development and how
this has evolved to become a framework for value chain formation and for collaboration
decisions. A set of tools proposed or used by previous researchers for Value Chain Analysis
are described and analysed. It is concluded that no single methodology or approach fully
meets the aerospace sector requirements, indicating that the sector has at least some
bespoke requirements. A toolkit of methods is needed to support Value Chain Analysis in the
sector. A proposal is made for fieldwork to support Value Chain Analysis in the aero engine
industry.
Dissemination:
PU
Deliverable/Output n°:
D2.1.1_4
Issue n°:
1.0
Keywords:
Value chain, collaboration, aerospace, extended enterprise
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TABLE OF CONTENTS
1.
EXECUTIVE SUMMARY ...................................................................................7
2.
INTRODUCTION ...............................................................................................7
2.1.
Relationship with other work packages...................................................................... 8
2.2.
Structure of the document.......................................................................................... 8
2.3.
Objectives of the document........................................................................................ 9
3.
THE VALUE CHAIN ..........................................................................................9
3.1.
Michael Porter – Competitive Advantage................................................................... 9
3.2.
Value chain developments ....................................................................................... 13
3.3.
Definitions ................................................................................................................ 17
3.3.1.
Value................................................................................................................. 17
3.3.2.
Value chain management ................................................................................. 20
3.3.3.
Value chain analysis ......................................................................................... 24
4.
INDUSTRY ADOPTION...................................................................................27
4.1.
Competitive Advantage examples achieved through value chain analysis.............. 27
4.2.
The aero-engine industry sector .............................................................................. 32
5.
VALUE CHAIN MAPPING – METHODS, TOOLS AND TECHNIQUES .........36
5.1.
Introduction .............................................................................................................. 36
5.2.
Overview of tools...................................................................................................... 36
5.2.1.
Visualisation tools ............................................................................................. 37
5.2.2.
Analysis and investigation tools ........................................................................ 41
5.2.3.
Optimisation and improvement tools................................................................. 45
5.3.
6.
Tool Summary.......................................................................................................... 48
THE VALUE GRID...........................................................................................50
6.1.
Support during value chain formation ...................................................................... 51
6.2.
Value chain metrics.................................................................................................. 52
6.3.
Further Work ............................................................................................................ 54
7.
PLANNED FIELD WORK ................................................................................54
7.1.
Study Questions....................................................................................................... 55
7.2.
Propositions ............................................................................................................. 55
7.3.
Unit of Analysis ........................................................................................................ 55
7.4.
Criteria for interpreting the findings .......................................................................... 55
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8.
CONCLUSIONS ..............................................................................................56
9.
REFERENCES ................................................................................................57
LIST OF FIGURES AND TABLES
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Figure 1.
Porter’s Value chain model (taken from Porter, 1985)
10
Figure 2.
Value chain diagram for photocopier manufacturer (Stabell &
Fjeldstad, 1998)
11
Linkages and inter-relationships within the value chain (Hergert &
Morris, 1989)
12
Figure 4.
‘The value system’ (Porter, 1986)
12
Figure 5.
The structure of a business model (Osterwalder & Pigneur, 2002)
13
Figure 6.
Research focus within value chain research
15
Figure 7.
Traditional versus present day value structures (taken from Rainbird,
2004)
17
Figure 8.
Components of customer perceived value (Ulaga & Chacour, 2001)
18
Figure 9.
Steps involved in customer value audit (Ulaga & Chacour, 2001)
19
Figure 10.
Dimensions of relationship value (Ulaga, 2003)
20
Figure 11.
An international supply network for leather shoes (MacCarthy et al,
2003)
21
Figure 12.
Collaboration effects on the value proposition (Bititci et al, 2004)
22
Figure 13.
Cost drivers (taken from Hergert & Morris, 1989)
25
Figure 14.
UK iron and steel value chain
26
Figure 15.
Comparative positions & profitability of value chains (Deloitte, 2004)
28
Figure 16.
Supplier involvement in collaborative projects (AT Kearney, 2005)
29
Figure 17.
Results of audit of 32 European automotive value chain
Figure 3.
(Childerhouse, 2004)
30
Figure 18.
Semiconductor industry value chain (Macher et al, 2002)
31
Figure 19.
Geographic changes in the semiconductor manufacture (Macher et al,
2002)
31
Figure 20.
Simplified changes in business model for the aero-engine sector
34
Figure 21.
A ‘new’ value chain model of primary activities (Browne & Zhang,
1999)
35
Rolls-Royce aerospace value chain (provided by Doug Scott, RollsRoyce)
35
Figure 23.
A value network analysis diagram (Allee, 2000)
37
Figure 24.
The value net (Nalebuff & Brandenburger, 1995)
38
Figure 25.
The value net approach to value chain configuration (taken from Alves
& Roque, 2005)
38
Figure 26.
Competitive Advantage through various alliance types (Teng, 2003)
40
Figure 27.
Example resource activity map (Armistead & Clark 1993)
42
Figure 28.
A completed resource activity map (Armistead & Clark 1993)
42
Figure 22.
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Figure 29.
Core uses for the VALSAT tools (Hines & Rich, 1997)
44
Figure 30.
Example target cost curve (taken from Pirttila, 2003)
45
Figure 31.
DEA Ratings (Ling et al, 2000)
46
Figure 32.
Components of a BRP project (Al-Ahmari & Ridgway, 1999)
47
Figure 33.
IDEF syntax (Taken from Al-Ahmari & Ridgeway, 1999)
48
Figure 34.
IDEF model demonstrating ‘grouped’ activities (Taken from Al-Ahmari
& Ridgeway, 1999)
48
Figure 35.
Multiple suppliers, offering a variety of value chain combinations
51
Figure 36.
Selection of an extended enterprise value chain, for further
investigation
53
Value chain analysis tool summary
49
Table 1.
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1. EXECUTIVE SUMMARY
The value chain is a concept where an enterprise is considered as a system of separate but
interacting value generating activities. This document presents a review of the academic and
industrial literature on value chain theory since it was first proposed by Porter in the mid
1980s and discusses the subsequent evolution of the subject. It examines the tools proposed
and used for Value Chain Analysis and their relevance to the aerospace sector and, in
particular the aero-engine industry.
Definitions and descriptions of the key terms associated with value chain concepts and
thinking are presented. The review of research shows the potential operational and financial
benefits from adopting a value chain approach. Evidence of the use of value chain concepts
in relevant industries, including the automotive and semi-conductor industries, is presented.
Key value chain issues in the aero-industry sector are noted.
A range of techniques for Value Chain Analysis is reviewed under three broad categories –
value chain visualisation, value chain analysis and value chain improvement. The
assessment of these techniques aimed to identify a set of possible tools that could be used
to perform a valid and detailed value chain analysis in the aerospace sector. Some of the
tools have clear limitations. For instance, a number of tools are focussed at too low a level to
be useful for value chain analysis or fail to address key issues. This work has shown that
there is a collection of approaches with different potential applications and different levels of
applicability to the aerospace sector.
Value Chain analysis in the aerospace industry will have at least some bespoke
requirements. Developing a value chain model will therefore need a tailored approach. The
report highlights the need for a toolkit of methods for value chain visualisation, analysis and
improvement. In addition to this, one area of difficulty noted, is how to support value chain
decisions at the formation stage. To assist this, a proposed methodology – the Value Grid –
is presented in early draft form which draws on insights gained through the literature review.
The report highlights the need for field studies to improve the understanding of value chain
concepts in the aerospace businesses. An outline is given of the fieldwork that is being
undertaken to capture a better understanding of the aerospace sector, in particular the aeroengine value chain. The insights gained from studying the current collaboration and
partnership arrangements will help define a toolkit for value chain analysis with wider
applications and will indicate routes for further value chain modelling in the VIVACE project.
2. INTRODUCTION
The document is developed under Work Package 2.1 of the VIVACE extended jet engine
enterprise scenario. The aim of task 2.1.1 is to develop and test simulation models that
capture how the aero-engine business operates, and how the aero-engine extended
enterprise may perform under future business environments.
An extract from a recent document published by the consultancy firm AT Kearney identifies
that “nearly all [business] leaders recognise that the key to their business strategy is value
creation, which goes beyond the traditional elements of supply management” (AT Kearney,
2004). This statement suggests that organisations recognise that competitive advantage
needs to be drawn from all players involved in the supply of a product or service. Mapping
the value chain is a key enabler for this work. The term ‘value chain’ refers to the range of
organisations and activities involved in the manufacture and provision of a product or service
(Magretta, 2002) and, as such it may include similar partners and networks to those
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described by a supply chain model. However, the difference lies within the unit of analysis in
use – in a supply chain this is product or data, in the value chain this encompasses more
ephemeral concepts such as knowledge and customer value and trust.
This report provides a state-of-the-art review of value chain mapping, identifying tools and
methodologies that are or can be used when undertaking a value chain analysis and
demonstrates how these can be used in strategic decision making.
2.1.
RELATIONSHIP WITH OTHER WORK PACKAGES
This work reviews the frameworks available to conduct a value chain analysis and the data
required. The work forms part of the value chain modelling sub-tasks. The high level
objective of the value chain modelling work is to describe and model the existing value chain,
which can then be used to test ‘what if’ scenarios, specifically providing the test-bed for
assessing the impact and performance on the value chain of a proposed new business
model, developed in WP 2.1.2. This document represents the first stage in understanding the
justifications for conducting a value chain analysis in the aerospace sector and the steps
involved in achieving this.
To gain a practical insight into the aero-engine value chain it is proposed within this
document to conduct fieldwork at Volvo Aero Corporation and Rolls-Royce. Therefore, this
work will also be of importance to sub-task 2.1.3 (the 7 day proposal), as, through the
fieldwork, it will explore communication within the current value chain partners and the
relationship characteristics of the extended enterprise between Volvo Aero Corporation and
Rolls-Royce. These requirements have been highlighted in deliverable D2.1.3_1.
2.2.
STRUCTURE OF THE DOCUMENT
There are nine chapters in this document including references.
Chapter 3 provides a brief history and background for value chain research, starting with the
seminal work of Michael Porter (Porter, 1985) and discussing how the use and interpretation
of the value chain has changed over time. This chapter also gives definitions and
descriptions of the key terms associated with value chain concepts and thinking.
Chapter 4 highlights the previous research, showing the potential operational and financial
benefits through adopting a value chain approach. This chapter also includes industry case
studies including the automotive and semiconductor industries to highlight similarities and
differences in value chain structure, and the approaches that have been used for value chain
improvement. Finally, there is a discussion regarding some current issues in the aero-engine
industry sector and how these may influence the subsequent aero-engine value chain
analysis.
Chapter 5 describes the approaches that have been used or proposed in the literature to
map and analyse the value chain. Comments are made regarding the applicability of the
techniques to the aero-engine sector. This chapter will review tools that have been
specifically developed for value chain mapping and some general operations management
tools which may have use for this research.
A proposed methodology to support value chain formation is presented in Chapter 6, which
draws on the insights gained through the literature review to address some of the problems
encountered.
The value chain is a practical and analytical approach to strategy decisions. As such it is
essential that partner specific investigation is carried out to provide the inputs into the value
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chain analysis. Therefore, Chapter 7 proposes fieldwork to be undertaken in the near future
to understand the Rolls-Royce and Volvo Aero Corporation extended enterprise and value
chain.
Chapter 8 presents conclusions.
References are provided in the final section of the document.
2.3.
OBJECTIVES OF THE DOCUMENT
Through reading this document the reader should gain an understanding of the key value
chain concepts, why and how the value chain and value chain analysis can be important to
the strategic development of a company and an extended enterprise. This is the first part of a
series of deliverables on the value chain (the project partners will go on to develop value
chain models to be used to evaluate further business models and operating environments).
Therefore this work will not present a completed picture of the aerospace value chain. Its
purpose is to offer the reader insight into the existing academic literature and industrial tools
available for value chain investigation and to highlight specific value chain issues and
questions that are related to the aero-engine industry.
3. THE VALUE CHAIN
The opening two sections of this chapter will set the context for Porter’s value chain principle
and identify how the approach and its usage have evolved in the current commercial
environment. Section 3.3 will clarify the range of terms which are in use in this field and
define the core concepts and steps taken in value chain research.
3.1.
MICHAEL PORTER – COMPETITIVE ADVANTAGE
The origins of the value chain model lie in a book entitled ‘Competitive Advantage’ written by
Michael Porter in 1985. In essence, the book deals with company strategy by tracing sources
of customer value to where they reside within the activities and the interactions of the
network of companies involved in delivering the product or service. Porter (1985) argues that
competitive advantage is a function of the industry attractiveness and a company’s relative
position within it and therefore, the competitive advantage of a company is the strengths and
weaknesses of that company measured against the strengths and weaknesses of
competitors. The value chain approach focuses not only on the activities themselves but also
on the way in which the activities relate to each other and interact.
In analysing activities, Porter’s assertion is that competitive advantage has three sources –
cost, differentiation and focus. Strategies aimed at changing either of these three are termed
by Porter as generic strategies (Porter, 1985). The value chain is the system of independent
businesses (and business units) that contribute customer value and deliver competitive
advantage. Porter defined two types of activity – primary and support activities. The primary
activities are (Porter, 1985):
• Inbound logistics - activities associated with receiving, storing and disseminating
product inputs;
• Operations - transforming the inputs into the final product;
• Outbound logistics - collecting, storing and physically distributing the product to
buyers;
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•
Marketing and sales - all activities associated with providing a means for the product
to be purchased and all activities involved in accessing and encouraging customers to
purchase; and
• Service - actions related to maintaining or enhancing the value of the product once it
has been sold.
According to Porter these primary activities are supported by a range of ancillary services
that enable and improve the performance of the primary activities. These supporting activities
are:
• Procurement;
• Technology development. Broadly defined as efforts to improve product and process;
• Human Resource Management; and
• Firm infrastructure.
Figure 1 shows the generic value chain diagram (Porter, 1985):
Figure 1. Porter’s Value chain model (taken from Porter, 1985)
The formal definition of the value chain given by Porter (Porter, 1985) is:
“A series of inter-dependent (value) activities, which are connected by linkages. Linkages
exist when the way in which an activity is performed affects the cost or effectiveness of
another activity.” (Porter, 1985)
Perhaps one of the best interpretations of the value chain concept is provided by Ensign
(2001) who indicates that the “…value chain is a tool for conceptualising the activities that
are needed to create value in a product or service” (Ensign, 2001). This clearly highlights that
the value chain can include activities that lie outside the boundaries of the company. Of some
debate within the literature is the physical shape of the model used by Porter. Stabell and
Fjeldstad (1998) comment that the intention of the shape used by Porter’s is not to represent
the actual physical flow of the product through the system, in the same way as a supply chain
diagram. The authors’ interpretation of Porter’s arrow design is that this represents the
sequential nature of the value activities. This distinction is interesting as it shows that value is
built up through stages and therefore the value produced is the sum of all the value added by
the value chain activities. Porter notes that the company’s ability to differentiate itself from the
market place reflects the contribution of each value activity towards the fulfilment of buyers’
needs (Porter, 1986). The support activities layered in the upper half of Figure 1 demonstrate
that these are completed in parallel with the primary activities to support and develop these
processes (Stabell & Fjeldstad, 1998) but do not necessarily add value in their own right.
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An example of what these primary activities may be in an actual company is provided by
Stabell & Fjeldstad (1998) and shown in the example in Figure 2. It represents the value
chain’s primary (value) activities for a photocopier manufacturer. The company activities have
been mapped onto the broad headings used by Porter (inbound logistics; operations;
outbound logistics; marketing & sales; and service) which underlies where the value to the
customer is being produced. This might subsequently be used for a detailed value chain
analysis, but even at this relatively early stage of completeness, the analysis highlights one
of the key difficulties encountered in performing a value chain analysis – where and in what
relative proportions do activities transform into customer value?
Figure 2. Value chain diagram for photocopier manufacturer (Stabell & Fjeldstad, 1998)
Identifying core (value) activities demonstrates the origins of competitive advantage.
However, the value chain model is also about how these value activities interact and
influence each other. Porter highlights the importance of the linkages between these value
creating activities and how these can affect the overall value offered to the customer. It is
these inter-activity linkages where much of the focus for value chain research subsequent to
Porter has been concentrated. Porter identifies two types – internal linkages and vertical
linkages. The former are internal to the company and reflect the impact of one activity on
another, for example how design can simplify manufacture by reducing the number of moving
parts and therefore lowering costs (Hergert & Morris, 1989). Vertical linkages describe the
relationship between the firm and its suppliers. Each linkage can have characteristics and
delivery mechanisms. These provide potential for optimisation. This is a critical part of a
value chain analysis (Porter, 1985).
Walters & Rainbird (2004) note that the traditional view for generating competitive advantage
is that the most important aspect of the company is the final link to the customer - the better
that final link then the more customer value will be created. This places the focus on the
sales and marketing activities of the company. Porter’s value chain model opposes this view
and indicates that careful management of all linkages can be a source of competitive
advantage. By understanding each link and how well it performs in the chain, it is possible to
understand how processes integrate and affect each other. Competitive advantage can
therefore be achieved through improving these activities and through improving the
coordination of these activities, essentially creating a seamless operating environment of
inter- and cross-company activities. Using the value chain model, these linkages are
illustrated as shown in Figure 3.
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Figure 3. Linkages and inter-relationships within the value chain (Hergert & Morris, 1989)
Walters & Rainbird (2004) present a series of simple questions that can be posed to
demonstrate how linkages can be organised and optimised:
• What does my link do?
• Where does this (value) activity fit in the overall chain?
• Can I improve my link and to what effect?
• How do I interact with other links and how does the chain work as a whole?
When considering this complex interacting system of value generating activities, internal
linkages and vertical linkages, Porter (1985) coined the term the ‘value system’, this may also
be found within the literature referred to as the ‘value network’ (Walters, 2004). Figure 4
shows this enlarged view, highlighting that the Porter model is not intended to be used in an
isolated, single company situation. In order to fully achieve competitive advantage a value
chain modelling exercise must include the value chains of suppliers, and customers of which
the company is a part.
Figure 4. ‘The value system’ (Porter, 1986)
The difference between the value chain approach and other strategy development models is
the focus on tracing the origins of competitive advantage within the network of activities that
are required in delivering any product or service. It is this network of companies that is
termed the value chain. A fundamental concept in the value chain principle is that a product
accrues both value and costs as it passes through each activity within the organisation
(Armistead & Clark, 1993). By identifying the firm as a series of related production functions,
the contribution of each of the functions can be assessed for the ‘value’ they add to the
product offering. In Porter’s work, competitive advantage is achieved through strategy, which
is either based on low cost or differentiation (Armistead & Clark, 1993), implemented through
a business model. The connection between business models and the value chain concept is
described by Magretta (2002): “[business models] are all variations on the generic value
chain underlying business”.
In terms of VIVACE this indicates that the work complements the work of WP2.1.2. The work
package is considering the following generic business model description provided by
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Osterwalder & Pigneur (2002). The diagram has the value configuration and value
proposition as core elements of a business model and therefore by ensuring a valid and
optimised value chain of interacting companies, the value chain contributes to the delivery
and success of a business model.
Figure 5. The structure of a business model (Osterwalder & Pigneur, 2002)
This diagram clearly supports the work of Magretta (2002), depicting that the value chain is a
fundamental component of a business model.
3.2.
VALUE CHAIN DEVELOPMENTS
Subsequent to the publication of ‘Competitive Advantage’ Porter continued his focus on the
value chain. In a 1986 paper titled ‘How information gives you competitive advantage’, Porter
demonstrates that optimisation of the vertical linkages within the value chain can be achieved
through the use of information technology. It is argued that this ultimately has a significant
effect on company performance and strategy (Porter, 1986). Porter (1986) showed that new
information technology (IT) could have a significant impact on inter-company relationships
through three main effects:
• The alteration of industry structures. Through the automation of transactional
processes and automation of the exchange of orders, buyers are in a stronger
position through better access to data. In addition the industries that are investing
heavily in IT are creating barriers affecting potential future competition and the ability
for new suppliers to enter the value chain. This is an alternative route to creating
competitive advantage;
• IT can support cost and differentiation strategies. Technology can assist in lowering
costs through the automation of physical processes, and through the optimisation of
planning activities and inventory management practices. Differentiation can be
achieved through enhancing the customer’s product by using IT to bundle other
products or services contained within the value chain to either achieve an enhanced
offering or greater product customisation. Technology also presents opportunities to
co-ordinate activities on a regional, national or global scale that removes geographic
barriers to business location and issues such as closeness to market may reduce in
importance. By bundling value chain products together there is also the opportunity
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for industries to converge and join creating whole new entities and product offerings;
and
• IT has the power to develop entirely new businesses. As well as supporting existing
operations, IT will spawn demand for a new range of services and products which can
become a stand-alone industry.
Porter is therefore introducing globalisation and supplier collaboration as key aspects of the
value chain. In the literature, these themes are recurrent through the development of value
chain theory.
The later work published by Porter moves the debate regarding competitiveness from the
company level to the national perspective. In the 1990 paper ‘Competitive advantage of
nations’, the result of 4 years study analysing the sources of success in 10 leading nations,
Porter emphasises the importance of innovation (in both product and process) in achieving
competitive advantage – “Innovating to overcome local disadvantages is better than
outsourcing” (Porter, 1990), and when referring to vertical linkages explicitly, the paper
suggests that managers should
“Use alliances only selectively. Alliances with foreign companies have become another
managerial fad and cure-all: they represent a tempting solution to the problem of a company
wanting the advantages of foreign enterprises or hedging against risk, without giving up
independence. In reality, however, while alliances can achieve selective benefits, they
always exact significant costs: they involve coordinating two separate operations, reconciling
goals with independent entity, creating a competitor and given up profits” (Porter, 1990).
Comparing this to the value chain work in 1985, it suggests that Porter has identified that
linkage optimisation and collaboration is a significant problem that is not easy to overcome.
This paper does not contradict the value chain linkage approach entirely. Porter indicates
that suppliers have an important part to play in delivering innovation; however, the conclusion
is that these suppliers should be located close to the company to take advantage of short
lines of communication and quick exchange of information. The ideas proposed, therefore,
still follow the underlying value chain principles; however, it appears that Porter feels that
global competitive advantage does not always mean taking advantage of a global value
chain.
Figure 6 indicates recent trends within value chain research. It is based on a ProQuest
search, showing the numbers of papers containing value chain in either title or abstract,
broken down into ‘Business School’ subject areas.
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Figure 6. Research focus within value chain research
It is clear from Figure 6 that the main research attention comes from Accounting, Strategy &
IT, Operations Management and Marketing. However, each discipline tends to take a slightly
different perspective on the value chain and where it should be applied:
1. Strategy & Information Technology: the general themes of the research are on the
linkages between company boundaries and how these can be optimised through the
use of IT collaboration tools.
2. Marketing: the focus is on demonstrating how a value chain can be leveraged to
deliver value to the customer.
3. Operations Management: the dominant themes are how the different approaches to
manufacturing (for example Lean, Just-in-time, and MRP), affect value chain partners
and how these can function in a global environment and global spread of multinational organisations.
Reviewing Figure 6 it is evident that the level of interest and research into the value chain
model is increasing, and importantly, the largest rise is in the most recent five years. Rainbird
(2004) offers a possible explanation for this. He identifies the rise of the ‘new economy’,
characterised by consumer instability, low demand predictability, increased demand for
quality, fashion and service, and globalisation as the cause of the renewed interest in the
value chain model. Operations are now often characterised by being global, with high levels
of outsourcing. Organisations are being encouraged by the market place to focus on those
value-adding activities at which they excel and that offer the greatest competitive potential.
More peripheral activities are outsourced (Webster et al, 1997). The effect of this is to
increase value chain complexity by broadening the geographic dispersion of value creating
activities and by increasing the number of companies that are involved in the entire value
chain. Business linkages and their management are therefore increasingly important as
through understanding the value chain approach, they are related to overall competitive
advantage and therefore performance of the business. This may represent the origin of the
trend shown in Figure 6.
Managing an operation today involves the coordination of product engineering, sourcing,
manufacturing, logistics and marketing and sales that are increasingly scattered around the
world (Deloitte, 2004) whilst at the same time they must support more products with shorter
lifecycles (Rainbird, 2004). But, if the underlying value chain issue is a supply network
management issue, this is not a new characteristic, Rumelt (1974) identified that horizontally
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integrated companies performed better than conglometerates (now perhaps more commonly
known as Extended Enterprises), which hints at the fact that conglomerates may not have
had a good understanding of the value chain concept - inter-company links were not well
managed and were not being exploited to create competitive advantage. In this research it
was demonstrated that organisational boundaries tend to create impediments to coordination
across business lines (Rumelt, 1974).
Analysing the recent work indicates that the current use for the value chain is to provide
strategic insights into the vertical integration versus collaboration decision on organisational
structure. Rainbird (2004) and Walters (2004) argue that the value chain principle has
particular use within a vertical integration strategy decision based in the ‘new economy’. The
definition used by Walters is similar to Rainbird (2004) suggesting that the new economy is ‘a
globalised supply and trading environment, where technology has changed the business
mechanics and provides a link with both supplier and customers which is not affected by
geography’ (Walters, 2004). Vertical disintegration is the process where companies prefer to
focus on activities they consider to be core competencies with the remaining support
activities outsourced to specialists (Slack & Lewis, 2001). The reason for doing this is to
achieve competitive advantage within their specialism, and this decision can therefore be
greatly influenced and guided by Porter’s value chain model.
In a collaborative business structure coordination and integration is the key to delivering an
effective product as less of the ‘total customer solution’ is under a single company control.
Walters (2004), suggests that where this enlarged structure is evident the term ‘value
creating system’ should be employed to avoid the misleading, overly simplistic implications of
the value chain or value system term. These changes in company structure and organisation
design are further complicated as it is apparent that the market place and the demands of the
customer are also undergoing significant evolution. To retain customers and to gain a greater
proportion of the available market revenue, companies are now competing on a bundled
product and service offering (Rainbird, 2004). This enlarged (or full service) package is often
seen as a method to achieve competitive advantage (by offering a enhanced service to the
customer) whilst also capturing a greater proportion of the available industry revenue.
Therefore, it appears that there are two opposing drivers currently happening – companies
are trying to achieve competitive advantage by focussing on core activities (the activities they
do best) whilst selling to the customer an enlarged product, service and aftermarket package
with greater scope and a longer commitment. Solving this problem is where the value chain
model is currently used.
Rainbird (2004) demonstrates how these changes affect the income and value for an
automobile organisation (see Figure 7) and characterises the trend described above by
showing the relative decrease in importance of manufacturing compared to the rise in new
services and complementary product offerings in terms of revenue received.
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Figure 7. Traditional versus present day value structures (taken from Rainbird, 2004)
Value chains are (currently) complicated collections of companies working together (either
collaboratively or not) to provide this enlarged service offering. The term value chain is used
to provide a description and analysis structure for improvement opportunities and strategy
planning (Walters, 2004). Value chain analysis is therefore a process that can be undertaken
to define core (value creating) activities that are vital to achieving competitive advantage. It
also provides a structured approach to understanding the linkages, both internal and vertical
with collaborating companies, that will be required to provide a product to the customer
(Stabell & Fjeldstad, 1998) and which helps define the most appropriate structure for
delivery.
3.3.
DEFINITIONS
The collective value activities carried out by any collaborative enterprise and consumed by
the customer is known as the value proposition (Bititci, 2004). The method of delivery can be
structured in a number of ways and is known as the value chain. This is the basic value chain
definition that will be used by the VIVACE subtask team.
It is important not to confuse Porter’s value chain with other related concepts such as value
stream. Value stream mapping is the process of mapping the material and information flows
for components and sub-assemblies in a value chain from raw material to the customer (Seth
& Gupta, 2005). As such the focus of the value stream is more detailed, looking at individual
factory and supplier activities to ensure that the seven wastes are removed and a lean
operation is achieved (Slack et al, 2004). The value chain is viewed from the macro (inter
company) level and looks at the strategy and structure for how value will be delivered.
Having a clear understanding of the term Value is the fundamental to defining the scope of
activities, functions and processes to be included in a value chain analysis. Without an
agreement on the definition of the term value and particularly what is valuable to the
customer, it is difficult to define the services, functions and processes involved in value
creation (value creation is the purpose of the value chain).
3.3.1.
Value
Two examples of value definitions are given below. The first one is taken from the Collins
English Dictionary, while the second is taken from marketing literature:
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•
‘the regard that something is held to deserve; importance or worth’ and ‘value added’
being ‘the amount by which an article is increased at each stage of production,
exclusive of initial costs’ (Collins, 1999); and
• ‘customer value is a judgement between the value which has been created for them
by a supplier given the trade-offs between all relevant benefits and sacrifices in a
specific-use situation’ (Ulaga & Chacour, 2001).
In the first definition, value appears to be relatively straightforward, and could perhaps even
be considered as a metric with potential for quantification and optimisation.
The second definition shown diagrammatically in Figure 8 (Ulaga & Chacour, 2001), is
derived from a marketing perspective. It demonstrates that when value is considered from the
point of the view of the customer then a personal assessment of the factors which that
product delivers is important. The customer’s perception of what he/she is getting for their
money is critical. This may be termed Customer Perceived Value (CPV) and certainly
appears to capture a more modern interpretation of the purpose of a product. However,
adopting the second definition problems arise as interpreting customer perceived value.
Identifying what is valuable to the customer is far harder to quantify than when it is purely a
matter of financial sacrifice.
Figure 8. Components of customer perceived value (Ulaga & Chacour, 2001)
One of the earliest examples of the application of Porter’s value chain model to a real
situation, Hergert & Morris, discuss value and discuss that for a value chain exercise, value
needs to be quantifiable. The authors consider that a value chain analysis is an empirically
based tool and as such intangible value factors cannot be included (Hergert & Morris, 1989).
For the purposes of their work, Hergert & Morris (1989) used ‘price on the open market’ to
equate to value. However, this approach seems to imply that all decisions are financially
based and decisions will be made or interpreted based only on what can be measured. To
avoid this, some themes can be identified from the literature to give an indication of what
should be considered. These are as follows:
• Value must be considered from the perspective of the customer as a seller is unlikely
to be sufficiently objective to consider the issue independently (Bennett et al, 1999).
• Customer value is a subjective concept (Ulaga, 2003)
• Customer value is a trade-off between what the customer receives (quality, benefit
and worth) and what he/she gives up (money) to use the product (Bennett et al, 1999;
Ulaga, 2003).
• A distinction should be made between price and value
o Price is assigned to goods and services at a level to attract customers and
make profit
o Whereas value reflects the buyers view of the price as it relates to the
perceived benefits or functions.
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• Value perceptions are relative to the competition (Ulaga, 2003)
All these suggest that customer value is more than just the price paid by the customer. Value
also includes tacit issues such as worth. This disagrees to some extent with the interpretation
of value by Hergert & Morris (1989), which limits the scope of the value chain model by only
tracing value in terms of the monetary cost of the activities.
For developing a value chain model value adding activities are located within the
organisation (Perrey, 2004). Therefore, if it is agreed that value must include a more detailed
assessment than purely financial measures, some sort of measure of customer perceived
value is required at the outset of the model development to enable this tracing activity. This is
more difficult when using value measurement systems that have tacit factors associated with
them. Christopher et al (1993) recommends the use of customer satisfaction surveys,
customer relationship management and focus groups, with Ulaga & Chacour (2001)
recommending the use of a bespoke tool known as a Customer Value Audit. The audit
stages are shown in Figure 9:
Figure 9. Steps involved in customer value audit (Ulaga & Chacour, 2001)
These show that interpreting customer value is possible. However, it is a complicated
process that adds considerable complexity in identifying core (value-creating) activities.
Ulaga (2003) states that assessing value from the customer perspective is currently in its
infancy in terms of research but gaining importance due to a general trend for companies to
be reducing the numbers of suppliers. This increases importance on a few core relationships
and implies that companies need to be able to understand when to invest in a particular
relationship or when to divest for an under-performing relationship. In the 2003 paper, Ulaga
develops the framework shown in figure 10 to be used for measuring value within the
company inter-relationship.
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Figure 10. Dimensions of relationship value (Ulaga, 2003)
This adds to the research on tacit aspects of value, and gives an indication of more factors
that can be included in a when assessing value in a value chain analysis. Obviously,
relationship value is of particular important for an extended enterprise where achieving
competitive advantage is a result of the collective contributions from all members of the
supply network. This is discussed in greater detail in section 3.3.2.
3.3.2.
Value chain management
The value chain model may be considered to have three main uses (Porter, 1985) –
1. Strategy decision making
a. Value chain positioning
b. Collaboration
2. Decision making in partner selection
3. Highlighting costs versus value for improvement opportunities
a. Benchmarking
For strategic decision making, the value chain is useful as it provides the context for an
analysis of the vertical and horizontal position within the industry. This is value chain
positioning. If it is considered that the company value chain is one value chain operating in
Porter’s value system (Porter, 1985), then the scope of the operation in terms of the value
activities may be considered within this network of interlinked firms. Value chain positioning is
therefore the process of choosing position in terms of product scope, market scope and core
capability scope (Stabell & Fjeldstad, 1998) within the industry. The appropriate choice of
position depends on the drivers of cost and value.
In an analysis of 300 survey respondents carried out by Deliotte (2004), nearly all of the
respondents considered that their marketplace was global, and 80% were already selling
outside national borders. This survey was based on companies with a range of turnover from
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US$200 million upwards. It went on to highlight trends in outsourcing (currently 53% were
moving manufacturing to low-cost economies) and an increasing trend for the importance of
new products to the financial health of a company – 21% of revenue generated in 1998 was
by new products, 29% of revenue generated by new products in 2003, with the estimated
figure for 2006 being 35%. This indicates the decreasing lifecycle of products and places
significant importance on the company’s abilities to innovate, develop new products and
bring these to the market. Deloitte (2004) is therefore highlighting the increasing pressures
on lead time, in both terms of the design and manufacturing phases. This complicates the
coordination problems within the value chain whilst placing greater pressures to get the value
chain managed correctly.
An example of a complex global collaborative environment is shown in Figure 11, where
competitive advantage has been achieved through choosing the appropriate location of each
value chain function. For example, low cost nations have been selected for labour intensive
operations, and high capability regions for specific skilled tasks (MacCarthy et al, 2003). This
disagrees with the work of Porter (1990) and demonstrates that optimisation can be achieved
through exploitation of core capabilities at the global level.
Figure 11. An international supply network for leather shoes (MacCarthy et al, 2003)
To accommodate the business model shown in Figure 11 there must be investment in tools
and platforms to enable this collaboration. However, collaboration is more than just agreeing
the use of a common information technology infrastructure such as a shared ‘e’ workspace
and communication tool (Browne & Zhang, 1999; O’Neil & Sackett, 1994). The aims of many
these tools are to aid the successful development of competitive advantage through
collaboration achieved by the introduction of organisation wide ‘common’ technology that has
the potential to increase product, data and process visibility and provide a seamless
integration across company boundaries (O’Neil & Sackett, 1994). However, these IT systems
often fail due to the focus on the technology implementation rather than on the effect on the
organisation. Systems provided are often ill-equipped for interconnections and integration
within a heterogeneous, distributed environment (Perrey et al, 2004). Implementing
collaborative tools involves explicit knowledge of what is of value to the business, and the
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customer and therefore the tool should enable not just data connectivity but value creation.
Specific system behaviour mush be aligned effectively with the strategic aims of the business
and the potential possibilities enabled by the technology from a business perspective must
be examined (Perrey et al, 2004).
Collaboration is a broad term referring to various levels of joint working and various levels of
inter-company integration. For example, one definition of a virtual enterprise is that it is “an
alliance of independent business processes or enterprises each contributing core
competencies, virtual alliances are formed in the event of a market opportunity and then
dissolved when the opportunity passes” (Snow & Miles, 1992). The highest levels of
company and strategy integration (with the companies involved still being independent
organisations) is the extended enterprise concept (Browne & Zhang, 1999). This focuses on
long term enterprise relationships across the value chain where companies and people share
common goals. The structural differences and how this may affect the customer through the
effect on the value proposition delivered by the value chain is shown in Figure 12:
Figure 12. Collaboration effects on the value proposition (taken from Bititci et al, 2004)
The objective of this report is not to analyse different organisational relationships and there is
a significant literature available on this subject (Hayes et al, 2005). In the top diagram, the
value proposition is the sum of individual operations through the supply chain. This delivers
value to the next member of the supply chain but is not focussed on delivery to the end
customer. The extended enterprise example (in the lowest picture of the series)
demonstrates optimised competitive advantage through the value chain by bringing together
core competencies and capabilities. Thereby, creating a value proposition centred on the end
customer (Bititci et al, 2004) which is the objective of value chain management.
Porter’s (1985) model is set in the context of a traditional manufacturing firm (Armistead &
Clark, 1993). As such it is suggested by Stabell & Fjeldstad (1998) that although the Porter
model can aid collaborative developments, it is only applicable in certain, industries and not
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easily adopted in the new economy and in non-manufacturing firms. To widen the
applicability of the value chain methodology they present three structural typologies for the
value chain (Stabell & Fjeldstad, 1998):
• The value chain model, the traditional view of a manufacturing company where the
activities involve the transformation of raw materials through a series of linked stages
ending with delivery to the customer;
• The value shop model, where value is created by mobilising resources and activities
to resolve a particular customer problem; and
• The value network model, creating value by facilitating a network relationship
between the customers using a mediating technology.
The Stabell & Fjeldstad (1998) work is based on implementing the value chain model in over
two dozen firms with the authors preferring to use the term value configuration analysis
instead of value chain analysis as a more appropriate description of the modern value chain.
The typologies identified by Stabell & Fjeldstad vary along eight dimensions:
• Value creation logic
o Value chain - the transformation of inputs into products;
o Value shop - resolving customer problems;
o Value network - linking customers;
• Primary technology
o Value chain - long-linked;
o Value shops – intensive;
o Value network – mediating;
• Primary activity categories
o Value chain - inbound logistics, operations, outbound logistics, marketing and
service;
o Value shop - problem-finding & acquisition, problem solving, choice,
execution, control/evaluation;
o Value network - network promotion and contract management, service
provisioning, infrastructure operation).
• Main interactivity relationship logic
o Value chain - Sequential, cyclical;
o Value shop - spiralling, simultaneous;
o Value network - parallel
• Primary activity interdependence
o Value chain – pooled, sequential;
o Value shop – pooled, sequential, reciprocal;
o Value network - pooled, reciprocal
• Key cost drivers
o Value chains – Scale, capacity utilisation;
o Value shops – not defined by authors;
o Value networks – Scale, capacity utilisation;
• Key value drivers
o Value chain – not defined by authors;
o Value shops - reputation, scale;
o Value networks - capacity utilisation;
• Business value system structure
o Value chains - interlinked chains;
o Value shops - referred shops;
o Value networks - layered and interconnected networks.
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These classifications can therefore be used to extend the applicability of the value chain
model into more complex areas of business research and can be used to redefine the Porter
(1985) model for use in situations where value is more than a product.
3.3.3.
Value chain analysis
Value chain analysis is the process of identifying the firm’s competitive position and how it
can be sustained and improved (Porter, 1985). The steps in performing a value chain
analysis are defined by Hergert & Morris (1989) as:
1. Determining the boundaries of the business segments to be analysed. This requires
dividing the firm into Strategic Business Units (SBUs). These SBUs must be
autonomous for strategic decision making which allows for visibility of how decisions
will affect the value chain overall. This does not have to stop at the borders of the
company, particularly where suppliers are responsible for delivering customer value;
2. Identifying critical activities. The starting point for this is the generic model by Porter
(1985) using this to assign activities to the Porter general sub-headings shown in
Figure 1. However, this task will extend the analysis beyond the generic model into a
customised set of activities. The critical activities, which have a large impact on
competitive advantage are identified;
3. Defining product and cost information and apportioning this cost information for each
product group;
4. Identify linkages. Performing a specific activity will influence the way in which others
are completed. This is the same for both internal and external linkages and the
analysis should highlight the tools and mechanisms used to manage these linkages;
and
5. Identifying value cost drivers. This stage identifies the activities that are a source of
competitive advantage by understanding of how value is created by each activity.
Porter’s cost drivers are shown in Figure 13. These are described as potential leverage
points for achieving competitive advantage through active control and management.
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Figure 13. Cost drivers (taken from Hergert & Morris, 1989)
Loosely, the five stages highlighted by Hergert & Morris (1989) can be rearranged into three
focus areas – a visualisation phase where the reasons and locations of competitive
advantage are identified and displayed through conceptual mapping techniques, an
investigation phase where the financial information and detail of the relationship is added to
the value chain model, and an improvement phase. These first two stages are defined by
Stabell & Fjelsted (1998) as a first order analysis where costs and assets are assigned to
value activities. This stage is very useful as it asks the correct questions - what is the firms
competitive position and how can it be sustained and improved. Stabell & Fjelsted (1998)
also refer to a second order analysis - an improvement phase looking to optimise the value
chain should be added. Value chain optimisation involves determining the processes and
activities that are truly essential to the company’s strategy; these are termed core capabilities
and making the right choice of partners to provide the rest (AT Kearney, 2004).
The framework described above has extensive data requirements. Traditional accounting
data may not be collected or reported in a fashion consistent with the needs of a value chain
analysis (Hergert & Morris, 1989). It may be for this reason that the literature does not have
many examples of a detailed value chain analysis. The examples available often stop at the
visualisation stage (Stabell & Fjeldstad, 1998). Examples of a qualitative value chain analysis
are provided by Dahlstom & Elkins (2005) and Shank et al (1992). An example from
Dahlstom & Elkins (2005) example of the the UK iron and steel value chain is shown in
Figure 14.
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Figure 14. UK iron and steel value chain (Dalhstrom & Ekins, 2005)
This mapping exercise focussed on financial flows at the industry level. Data was extracted
from a variety of industrial trade publications, government surveys and company websites. In
the example two main insights were gained: the high cost of ‘end of life’ scrap; and the high
costs of sending steel scrap to landfill (Dalhstrom & Ekins, 2005). The work only looked at
value in terms of financial cost. It is likely that an analysis will be more difficult if the exercise
was repeated using customer perceived value.
In the objectives of a value chain model set out at the beginning of this section, Porter (1985)
identifies that an important part of the value chain approach is an understanding of
competitive advantage relative to the competitor. This implies some form of benchmarking
activity demonstrating how the value chain compares to competitors and other industries,
thereby highlighting opportunities for improvement. Little evidence of companies carrying out
this type of analysis could be found in the literature.
Despite the apparent synergies with modern business thinking, some authors have argued
that using the value chain model to achieve competitive advantage is largely superfluous.
Managing the value chain is simply part of good management which should be evident
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through everyday practice (Lord, 1996). Lord (1996) concludes that any results associated
with developing a value chain model are nothing more than the logical consequences of
effective management process. The title of the paper clearly defines the thought patterns –
“Strategic management accounting: the emperor’s new clothes”. Therefore, it is argued that
when firms focus on cooperative relationships with suppliers and collaboration, they
automatically will reap the benefits of exploiting their linkages and no formal value chain
exercise needs to be done (Lord, 1996). This is an interesting take on the subject, and given
the lack of formal completed value chain models published in academic literature, contrasted
with the propensity for outsourcing and collaboration within industry suggests this may have
some validity.
4. INDUSTRY ADOPTION
This section highlights evidence of improved financial performance of companies apparently
adopting value chain principles.
4.1.
COMPETITIVE ADVANTAGE EXAMPLES ACHIEVED THROUGH VALUE CHAIN
ANALYSIS
Regardless of the benefits of value chain modelling the physical the value chain represents
the fundamental foundations of the organisational operating structure. As discussed earlier in
the document (Figure 5) it may be considered that business strategy and the business model
adopted ‘are all variations on a generic value chain underlying business’ (Magretta, 2002).
This means that the way in which a business chooses to generate revenue (the business
model) and the type and nature of the inter-linking of value chain operations are closely
related and hence, when these are out of synchronisation the chances of failure or achieving
lower competitive advantage are higher. If this is true, evidence of value chain excellence
should be seen in the performance of the business, and this should also go someway to
answering the concerns of Lord (1996) with regard to the benefits of adopting a value chain
modelling approach.
Contributing to this discussion, Deloitte have conducted research into international value
chains. The Deloitte survey (Deloitte, 2004) identified that companies which could be
classified as ‘value chain complexity masters’ (Deloitte, 2004), were distinctly more profitable
that other companies surveyed, on average 73% more profitable (profitability is defined as
profits after tax, expressed in US$). The analysis is based on 300 survey respondents, each
with annual revenues of at least US$200 million. Value chain complexity masters were
identified by value chain capability factors (product innovation, time to market, sourcing
effectiveness, product quality, manufacturing flexibility, manufacturing productivity and cost
effectiveness, customer service and supply chain cost structure) and value chain complexity
factors (global dispersion of value chain functions – sourcing, manufacturing, engineering,
and marketing & sales). Where the company had high complexity and high capability they
were classed as a ‘complexity master’. The results of the survey are shown in Figure 15
(Koudal & Coleman, 2005).
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Figure 15. Comparative positions & profitability of value chains (taken from Deloitte, 2004)
Importantly, the authors noted that the strategies of this group of companies had been
synchronised across the extended enterprises avoiding a sub-optimal solution (Deloitte,
2004) and meeting the requirements described by Bititci et al (2004) in Figure 12.
Compared to other companies in the survey, complexity masters had developed superior
capabilities in (Deloitte, 2004):
• Customer related operations - extensive investment in customer collaboration projects
and customer relationship management.
• Product related operation - improvements in R&D through better process integration
and investments in product data management systems and product lifecycle
management systems.
• Supply chain operations - characterised by performance improvement initiatives such
as quality management, quick change-over, lean manufacturing, and had also invest
heavily in technologies such as advanced planning and scheduling software,
warehouse management and transportation systems.
Although not published in the peer-reviewed academic literature, this research confirms that
the value chain model is important in achieving competitive advantage. It demonstrates that
where best practice is found, superior financial performance is also found. This disputes the
assertion of Lord (1996) and makes the case for continuing value chain research within the
VIVACE project.
The Deloitte survey identifies the apparent advantages of the value chain approach, research
by another consultancy - AT Kearney (2005) - suggests that value chain best practice is not
well known or applied within industry. AT Kearney (2005) found that in the key area of
product design (where through integrating and collaborating with suppliers and through the
inclusion of supplier knowledge, core capabilities can be leveraged to achieve competitive
advantage) only 25% of top performing companies were actively involving suppliers. Figure
16 indicates where leading companies choose to involve suppliers in operations.
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Figure 16. Supplier involvement in collaborative projects (AT Kearney, 2005)
The AT Kearney (2005) study also confirms the Deloitte (2004) study by demonstrating the
benefits available through one aspect of the value chain principle – vertical linkages. The
report summarises that collaboration is still mainly driven by the desire to cut costs (one of
Porters competitive advantage cost drivers) with 89% of firms referring to reducing operating
costs as a driver for outsourcing and collaboration, with only 22% using the value chain to
gain access to new markets (value chain positioning).
The automotive and aerospace industries are both characterised by having market pressures
from customers in terms of innovation, green pressures, new technology and a growing
differentiated global market, whilst at the same time having to cope with increasing raw
material costs caused through increasing demand in developing nations. An example of the
changes in the global automotive market place can be seen in comparing the growth in
production rates with the growth in automotive consumption rates (Humphrey, 2003). The
market grew by 230 thousand in western nations and by 3800 thousand in developing
nations in the period 1990 to 1997. This significant growth has been met by the established
group of manufacturers, predominantly by opening new manufacturing plants - at the same
time production in the west rose by 1700 thousand cars and by 5100 thousand in developing
nations with an additional sixty eight manufacturing sites opening in developing nations
during that seven year period (Humphrey, 2003). Therefore, the increasing market demand in
geographically ‘new’ locations is being met by existing companies by developing new
overseas operations. These changes are likely to increase value chain complexity.
For collaboration within the automotive sector, the approach adopted appears to be
competitor collaboration, rather than collaborations within and across value chains. Examples
include the Peugeot / Renault / Volvo alliance set up in 1971 for a new engine (Dussauge et
al, 2004) and the Toyota and General Motors joint cooperation programme to manufacture
small cars to exploit a growing US market in the mid 1980s (the Toyota / General Motors joint
venture is known as New United Motor Manufacturing Incorporated (NUMMI)) (Weiss, 1987).
Dussauge et al (2004) has looked to confirm the structural characteristics of automotive
collaboration. The author demonstrates that the dominant collaboration style was by link
alliance. Link alliances are characterised by companies of equal leverage but operating in
different markets exploiting core capabilities by joining forces for mutual benefit. The author
also notes that value chain collaboration is still relatively rare (Dussauge et al, 2004).
Figure 17 represents the assessment of the value chains for 32 European automotive
manufactures (Childerhouse, 2004). The analysis is more detailed than the work of Dussage
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et al (2004), analysing the characteristics of individual value chains and the processes and
operations management techniques used by collaborating firms. Figure 17 demonstrates that
only 10% of the manufacturers included in the survey could be classed as applying best
practice value chain methodologies. This is supported further by Lyons (2004) who notes that
examples of integrations across the whole of an automotive supply chain are rare. The focus
of integration is often downstream (close to market) through paradigms such as lean
manufacture (Lyons et al, 2004).
Figure 17. Results of audit of 32 European automotive value chain (Childerhouse, 2004)
These three papers suggest that despite the evident benefits a value chain modelling
approach can deliver, its explicit adoption in the automotive sector has been relatively limited.
Similar work has also been conducted in the semi-conductor industry by Macher et al (2002).
The value chain for this industry is shown in Figure 18. This work analysed the structural
changes and geographic evolution of semi-conductor value chains.
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Figure 18. Semiconductor industry value chain (Macher et al, 2002)
Macher et al (2002) note that the semiconductor industry is characterised by rapid rates of
technological change involving frequent new product introductions, whilst business managers
also have to deal with rising costs for production and capacity. Figure 19 shows the
geographic dispersion of semiconductor fabrication (manufacture) since 1980 and shows a
significant shift away from manufacture in the North America and Japan with production
rapidly increasing in Southeast Asia.
Figure 19. Geographic changes in the semiconductor manufacture (Macher et al, 2002)
Despite the trend shown in Figure 19, this has not led to a general decline in the financial
health of the semiconductor industry as a whole in North America, with the decrease in North
American manufacturing representing the development of regional specialisations. This trend
is a significant change in the structure of the industry. This process is termed vertical
specialisation by the authors. Interpreting this in Porter’s value chain model, it could perhaps
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be termed as focussing on core capabilities. The industry has evolved from large integrated
companies (AT&T / IBM) that provided all processes involved in the semiconductor industry
(including design, manufacture and service and even electronic equipment manufacture) to a
vertical disintegrated module, with North American companies focussing on the design and
marketing of chips, and specialist chip foundries being established in more appropriate
geographic locations to exploit opportunities for cost savings.
The authors note that, although not the catalyst for this change, improvements in
communications technology and specifically the use of the internet for data exchange have
accelerated this process (Macher et al, 2002). In the main the implementation of this
technology is focussed on the vertical linkage between the design and manufacturing
aspects of the value chain.
Macher et al (2002) suggest that the effects of these changes will be to reduce the barriers to
entry in the marketplace, and increase the competitive pressures on the existing
manufacturers. A particularly interesting point noted in the paper is the competitive strategy
of the small, relatively recently established highly specialised firms. These firms are
responding to the competitive strategies of the larger semiconductor manufacturers by using
virtual integration strategies to develop a more integrated and more complete product
offering to the customer. Hence, the product offering of the integrated firms is being
replicated, whilst by maintaining the virtual enterprise form, and hence their independent, the
smaller firms still have the advantage of flexibility and the ability rapidly adapt to adapt rapidly
to the demands of the market (Macher, 2002).
4.2.
THE AERO-ENGINE INDUSTRY SECTOR
The purpose of this section is to consider specific questions and issues that relate to the
value chain in the aerospace sector.
A recurring theme through this document is collaboration, and based on the work of Deloitte
(2004) and AT Kearney (2005) it is reasonable to suggest that a clear and defined
collaboration strategy is evidence of value chain thinking. Collaboration is not a new concept
to the aerospace sector. In the period 1950 to 1990, Dussauge & Garrette (1995) identified
63 international collaboration agreements for various segments of the aerospace industry.
This study looked at both commercial and defence contracts and was based on information
in the public domain. This suggests that collaboration is not a new concept to aerospace and
therefore value chain understanding is likely to be evident within decisions made, and the
relationships formed. The Dussauge & Garrette (1995) paper classified the style of
collaboration within the aerospace sector. The output of their paper is a taxonomy of
collaboration types, and indications of which types have performed the best historically.
Dussage & Garrette (1995) concluded that there were four types of collaboration evident:
• R&D Agreements – the most frequently occurring.
• Unstructured co-ordination projects - greater in scope than the R&D agreement with
more activities being included and coordinated between the partners. One of the
characteristics of this business model is the fact that regardless of the level of
collaboration within design and manufacture, the sale of the product is performed
independently, i.e. all companies may choose to sell the product branded under their
name.
• Semi-structured projects - co-operative projects in which the majority of tasks are
distributed to partner companies. However, the sales and marketing function is
carried out by an independent joint venture. These are frequently characterised by all
partner equity participation in the project.
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•
Business based joint ventures. This is described as the highest level of collaboration,
with the joint venture taken on legal permanency. It is often dominated by one lead
firm.
Due to the inherent significant structural differences in the taxonomy, the assessment of
which performed the best was difficult. The authors noted that R&D agreements didn’t fare
particularly well and suggested that these are used early in a project. If the project looks
likely to be successful then one of the more enhanced forms of collaboration is adopted. The
best performing collaboration type was the semi-structured approach. Dussauge & Garrette
(1995) comment that the evolution of collaborations will tend to the business based joint
venture as this should theoretically provide the best performance. However, this progress is
restricted in the aerospace sector by political constraints which limit freedom to make the
‘best’ decision regarding collaboration style and partner selection across international
borders.
One of the more modern collaboration mechanisms used by Rolls-Royce is the risk and
revenue sharing partnership (RRSP). In Dussauge & Garrette taxonomy this would be
classed as a semi-structured project and as such should perform well in the market place
(Dussauge & Garrette, 1995). These agreements tend to be in place for the delivery of the
major subsystems of each engine project, the risk aspect relates to development costs,
where the collaborating suppliers are expected to contribute to start-up project (design &
development) costs, but share the rewards and revenue with every sale made to a customer.
Key issues from a value chain perspective with such arrangements are:
• When should a RRSP agreement be let as a preference to a long term supply
contract?
• How are the decisions made regarding who to partner with?
• How do the suppliers manage the increased risk at a lower level of the value chain?
These decisions are perhaps further complicated by low supplier capability for technically
complex products, i.e. there may only be a small number of suppliers with the manufacturing
and technology know-how that can be considered as potential partners. There are also
competition issues – if a supplier has entered a risk and revenue sharing agreement with
another major OEM, how does this affect the relationship with Rolls-Royce in other projects
or parts supply contracts?
Therefore, it may be said that the aero-engine sector has a collaborative strategy and this
may indicate value chain thinking. The exact degree of performance is not known at this time
but will form part of the future work under VIVACE. A key point made earlier concerns the link
between the value chain and the business model. The business model is an area of change
within the aero-engine sector with the preferred business model from the manufacture of
engines and spares, towards an holistic product and service offering, such as that offered by
Rolls-Royce under the ‘TotalCare’ brand. The principal business model changes are
simplified and shown in Figure 20 which has been developed to illustrating the changing
business model. The diagram presents the extreme ends of current business models and
there are potentially a number of implementations in between these. TotalCare involves
selling a bundled product offering of the engine and servicing over the lifecycle of the engine
with revenue being received as the engine is used through the lifetime of the engine. The
traditional model is for the sale of the engine, and then selling servicing in addition to the cost
of the engine. This change has a significant effect on revenue flows. In the former
environment the aftermarket was an independent trading environment with revenue paid
directly to supplier from the airlines depending on the nature of the service requirement. In
the new paradigm however, they are intrinsically linked with the TotalCare service provider
and the usage of the engine.
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These changes place pressure upon the nature of the collaborative relationship and vertical
value chain linkages in place. The value chain is now distinctly larger and far more complex
than the simple manufacturing examples discussed by Porter. Complexity in terms of risk
sharing, revenue streams and business models have all been recently introduced. With the
success of the business model being significantly influenced and enabled by the value chain
(Magretta, 2002) it is essential that the value chain in place and the value chain strategies
used are suitable for these new requirements. In reality is may be likely that the business
model has evolved without consideration of the supporting value chain. This is a key area of
interest for the VIVACE project.
Figure 20. Simplified changes in business model for the aero-engine sector
The lack of applicability of Porter’s value chain has been noted in previous literature and
attempts have been made to accommodate this with the design of value chains models with
greater scope. An example is Figure 21 (Browne & Zhang, 1999).
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Figure 21. A ‘new’ value chain model of primary activities (Browne & Zhang, 1999)
This model is still not sufficient to account for all aspects of the aftermarket support and
supply required by the Rolls-Royce TotalCare model, but it demonstrates how the value
chain model can be augmented to provide insights even where applicability of the traditional
model is limited. Although different in shape, the Browne & Zhang (1999) model is similar to
Figure 22, a value chain model proposed by Rolls-Royce describing the value chain at the
industry level.
Figure 22. Rolls-Royce aerospace value chain (provided by Doug Scott, Rolls-Royce)
These value chain diagrams can be used as starting points by the VIVACE project. Core
(value) activities can be identified and mapped as part of a formal value chain modelling
exercise which could be used to understand the effects of the increased complexity of the
Rolls-Royce preferred business model with respect to current and future industry practice.
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5. VALUE CHAIN MAPPING – METHODS, TOOLS AND TECHNIQUES
Section 5 describes examples of tools used to facilitate value chain investigation.
5.1.
INTRODUCTION
Some of the complexities and issues that arise when using the value chain model have been
discussed within this document and suggestions made by value chain authors have been
described to demonstrate how to further develop the value chain model. For examples see
the work of Stabell and Fjelsted (1998) and Hergert & Morris (1989). In addition to these
complete approaches, authors have developed or applied existing operations management
tools to help in specific aspects of undertaking a value chain analysis.
The objective of a tool is to facilitate an analysis in an effective manner. Therefore it should
be simply enough to be applied whilst providing sufficiently useful results to be used in
decision making. Establishing such a toolkit is the key to enable knowledge transfer from
academic theory to significant practitioner implementation.
Porter’s model for competitive analysis has generally found acceptance amongst both
academics and industrial practitioners as a conceptual strategy model. However, the current
toolkit for value chain analysis at the first order and particularly the second order level that
take it beyond the conceptual level, is frequently described as being deficient for use in
today’s environment (Hergert & Morris, 1989; Stabell & Fjeldstad, 1998). Dekker (2003) and
Hines & Rich (1997) have both identified problems in the general approach of the value chain
model:
• The exchange of sensitive information is difficult to manage;
• A fair division of the cost and benefits may be desirable, but how can this be
objectively decided and what if this impact negatively on one of the partner firms;
• Participants fear that information abuse could be a big problem; and
• Lack of tools appropriate for creating visibility to enable any analysis to be
undertaken.
When choosing tools it is important that consideration is given to these problems. In terms of
the analytical requirements for the value chain tools, developing a value chain model requires
methodologies and tools that provide:
1. A descriptive model that can show the structure of the value chain;
2. An understanding of value and what is valuable to the customer;
3. An indication of where value accrues in the value chain, and how this matches with
the cost structure;
4. An Identification and description the internal and vertical linkages;
5. The possibility of comparison through benchmarking and gap analysis both with
competitors and other industries;
6. Strategic insights that can be used to optimise the value chain
7. The ability to test the value chain under a range of business models;
8. Insights at the formation stage to help choose partners.
5.2.
OVERVIEW OF TOOLS
The following section presents an overview of techniques that have been presented and
discussed in previous literature. It should be noted that there many operations management
tools which could be used for value chain analysis, and as such, only a sample with specific
published examples have been chosen for review. The section is loosely organised into the
three aggregate phases for a value chain analysis discussed in section 3.3.3 – tools for
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visualisation and mapping; tools for analysis and investigation; and tools for improvement
and optimisation. Some tools may provide functionality in more than one area.
5.2.1.
Visualisation tools
These tools are used to conceptualise the origin of competitive advantage within the value
chain and to provide insights in value chain positioning.
5.2.1.1.
VALUE NETWORK ANALYSIS (ALLEE, 2000)
This approach maps value exchanges as a flow diagram showing goods, services, revenue,
knowledge flow, and intangible value. An example diagram is shown in Figure 23 (Allee,
2000) that attempts to capture the value generated within a drug development process.
Figure 23. A value network analysis diagram (Allee, 2000)
By including knowledge and intangible flows as a source of currency that can be exchanged,
the value network analysis helps visualise the origins of decisions and the factors included to
make them. Relating this back to the requirements for the value chain tool, the value network
analysis creates opportunities to understand the context of decisions where the decision is
not made purely for financial reasons i.e. it is analysing value more than purely financial
metrics. As such this has the potential to be applied in the visualisation phase. However, it
does not address how value is understood from the customer perspective and could
therefore create a bias in the analysis.
5.2.1.2.
THE VALUE NET (NALEBUFF & BRANDENBURGER, 1995)
The value net approach uses the conceptual principles of game theory to describe ‘players’
in the business game, with the rules of the game being the structure of the interactions
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between the players. This is termed the value net and is shown in Figure 24 (Nalebuff &
Brandenburger, 1995).
Figure 24. The value net (Nalebuff & Brandenburger, 1995)
It focuses on how competitive advantage can be achieved though knowledge of the
interactions between these ‘players’. This tool does not explicitly undertake a value chain
analysis. However, it provides a mechanism to visualise many of the basic principles of
competitive advantage and how this can be achieved through different interactions with the
market place. In terms of the value chain, this contributes by providing insight into the
position of the company in relation to the competitor and suppliers. This allows for alternative
scenarios of value chain formation and positioning to be easily presented and discussed.
Alves & Roque (2005) prefer use of the value net approach over Porter’s traditional model as
it performs better where there are complex networks of value flows and forms of value
creation. In Figure 25, the value net model allows for the immediate comparison between
competitors’ value chain configurations. The example is for an internet gaming business.
Alternative 1 – Traditional consumption model
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Alternative 2 – Higher level of collaboration and vertical dis-integration
Figure 25. The value net approach to value chain configuration (taken from Alves & Roque,
2005)
The value net model is further exploited in terms of value chain strategy by Teng (2003). In
this paper the author uses the value net to demonstrate that competitive advantage is
dynamic in terms of competitors and customers. Hence, the value chain can be used to
manipulate competitive advantage of competitors or prevent entry into the market place. This
demonstrates that increasing ones own competitive advantage is not the only strategy that
can be used and is a valuable insight by itself. This process is described in Figure 26 (Teng
2003) but was originally discussed by Porter (1985) as one of the advantages of adopting the
value chain model over other strategy techniques.
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Figure 26. Competitive advantage through various alliance types (Teng, 2003)
Therefore, in terms of our requirement list, this tools appears to be effective for positioning
and discussing potential strategies for manipulating the value chain for competitive
advantage. However, this analysis has no quantitative element and as such the value net is
good as a discussion tool but does not fully address the requirements for a first order
analysis.
5.2.1.3.
SYSTEM DYNAMICS
System Dynamics is a perspective and set of simulation tools that enables insights into the
structure and dynamics (specifically feedback mechanisms) of complex systems (Sterman,
2000). Seng (1994) states that system dynamics is a conceptual model to facilitate the
understanding of complex problems. As such, the approach has particular use to value chain
analysis as it has the ability to deal with how systems interact and influence each other.
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An interesting approach to developing a value chain model using system dynamics is
discussed by Rabelo & Speller (2005). This paper specifically looks at the vertical linkages
within the value chain. The authors used System Dynamics to explore how the relationship
and value creation could change under a variety of collaborative strategies and successfully
demonstrated the benefits to competitive advantage from the use of one collaboration style
over another.
This approach offers real benefits in a value chain model and specifically for VIVACE could
provide insights into the issue of when and how to structure collaboration.
5.2.2.
Analysis and investigation tools
The analysis and investigation phase is described by Stabell & Fjeldstad (1998) as a first
order analysis where costs are traced to activities and customer value is mapped to value
creating activities.
5.2.2.1.
VALUE CREATION INDEX (KALAFUT & LOW, 2001)
The value creation index has been developed by Ernst & Young Consulting to provide an
alternative system for predicting the financial performance of companies based on nonfinancial indicators. The value creation index uses intangible factors to assess competitive
advantage. These intangible factors have been researched by Cap Gemini using internet
surveys, industry literature and industry research to provide a list of non-financial
performance factors that are associated with value creation (Kalafut & Low, 2001) and can
therefore be used as a good predictor of company performance. The factors highlighted are:
1. Innovation;
2. Quality
3. Customer relations;
4. Management capabilities;
5. Alliances;
6. Technology;
7. Brand value;
8. Employee relations;
9. Environmental & community issues.
Through reliability testing, Ernst & Young are confident that this methodology is reliable as a
non-financial indicator of performance and company potential. This tool could be used as part
of a value chain analysis for benchmarking.
5.2.2.2.
RESOURCE ACTIVITY MAPPING (ARMISTEAD & CLARK, 1993)
The resource activity mapping approach was suggested by Armistead & Clark (1993) to
address some of the problems that they felt were apparent when applying the value chain
methodology to service-orientated operations. The technique aims to link the service delivery
strategy of a company with the operational tasks involved in delivering that service.
The resource activity map is used to highlight the contributions made at each stage by each
aspect of the operations task. A completed example of a resource activity map for a UK
burglar alarm company is shown in Figure 27.
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Figure 27. Example resource activity map (Armistead & Clark 1993)
With the activity map developed, three analysis phases are then undertaken with the results
incorporated into the original resource activity map:
• The first stage involves identifying how each of the resource activities contributes to
customer perceived value. These are then classified as critical (C) and hygiene (H).
Critical dimensions build the value and hygiene factors are those expected to be
present (minimum levels).
• Cost identification is the second stage, starting with the C factors.
• The final stage is to identify the revenue streams for each of the primary activities.
The resulting completed resource activity map is shown in Figure 28. The matrix
characterises the current state and improvements to be identified. By interpreting value
purely as a descriptive interpretation of customer perceived value, this analysis ensures that
tacit elements are included in the analysis.
Figure 28. A completed resource activity map (Armistead & Clark 1993)
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This tool seems to provide an excellent method to identify core (value) activities and cost
information, although the mechanism for identifying the required cost information still lies
within the traditional business cost tracking systems and therefore could encounter significant
problems.
5.2.2.3.
ACTIVITY BASED COSTING
Porter’s original proposal for value chain analysis involves access to detailed costing
information in order to assess the cost aspect of competitive advantage (Porter, 1985).
Problems associated with this are discussed by Hergert & Morris (1989). One of the key
objections raised is that traditional cost systems are not designed to track cost data in the
appropriate format for value chain analysis. Identifying cost drivers can be difficult. As a
result Dekker (2003) proposes activity based costing as a solution for value chain analysis.
Activity based costing is discussed frequently as a preferable alternative to traditional costing
methods when being used for operational decision making (Cooper & Kaplan 1991) and
works by:
• Identifying the activities performed by the organisational resource;
• Determines the cost of performing these organisational activities and business
processes; and
• Determines how much of the output of each activity is required for the organisations
products, services and customers.
It differs from a traditional costing system as it attempts to trace cost drivers within services
and products to source. It is this practice of creating cost visibility which means that it could
address some of the data access and interpretation problems discussed.
Dekker (2003) presents an account of a case study at the UK supermarket retailer,
Sainsburys. They used value chain analysis with the larger suppliers within the supply chain.
The technique was not applied across the whole business and contributing supply network.
Although not comprehensive, the technique was successful in identifying the appropriate
information to conduct a value chain analysis and was able to deliver benefits to both
suppliers and Sainsburys through increased collaboration. This had not been possible due to
resistance by the suppliers prior to the implementation of the value chain approach.
5.2.2.4.
VALSAT
Hines & Rich (1997) developed the VALSAT toolkit to address the problem of having no real
framework or set of tools available for undertaking a value stream analysis. The work of
Hines & Rich is focussed on the value stream, which as discussed within this document is at
a lower level of the company structure. ValSat is an analysis and decision making tool which
can be used for both tacit and explicit knowledge. The aim of this tool is to create the right
environment for increased intra- and inter-company coordination at the operational level - the
tool is based upon analysis of the ‘seven wastes’ (Slack et al, 2004) – Defects;
Overproduction; Transportation; Waiting; Inventory; Motion; Processing. Hence the focus is
on the operational level of a business. Data is primarily gathered through a series of
preliminary interviews.
The tool is made up of 7 individual techniques to be used in combination to evaluate a
company. The tools suggested by Hines & Rich (1997) are:
• Process mapping;
• Supply chain response matrix;
• Production variety funnel;
• Quality filter mapping;
• Demand amplification mapping;
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• Decision point mapping; and
• Physical structure.
Figure 29 demonstrates how each of these tools provides insight and knowledge for the
purposes of an investigation.
Figure 29. Core uses for the VALSAT tools (Hines & Rich, 1997)
There is evidence that ValSat and similar tools have been applied in industry (Seth & Gupta,
2005), demonstrating they do have operational value. However, it should be noted that the
applications are mainly focussed on a single company operation and, although
communication with suppliers is discussed, optimisation is for the purposes of the ‘prime’
company and individual processes rather than developing a collaborative value chain.
5.2.2.5.
TARGET COST CURVE (PIRTTILA, 2003)
Value chain cost analysis provides the relative cost position of the product and the reasons
underlying it. An example of the cumulative cost curve analysis is shown in Figure 30. This
shows how cost and profits are accumulated through the value chain.
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Figure 30. Example target cost curve (taken from Pirttila, 2003)
Undertaking this requires much co-operation from value chain members to gather the
appropriate cost information and therefore suffers from similar problems to activity based
costing, although as it is at a less detailed level, it may be easier to obtain.
The applicability of this approach can be extended by inclusion of a second stage in which a
Competitiveness Matrix is developed. The Competitiveness Matrix shows the competitive
position of a product or service from the perception of the customer. It is constructed by
assessment of criteria that the customer then uses to rate the product or service in
comparison with other offerings in the marketplace, based on an understanding of customer
wants and desires.
Pirttila (2003) adopted this tandem approach recognising that value chain research which
focuses purely on cost analysis fails to account for tacit value offerings. The inclusion of the
customer-centric Competitiveness Matrix addresses this issue and therefore delivers a more
balanced interpretation of the value chain and also assesses value from the perception of the
customer.
This two stage approach is interesting as it provides an opportunity to assess the product’s
position in comparison to competitors. This is an important strategic consideration, previously
highlighted in the work of Brandenburg and Nalebuff (1996) but not covered well by other
techniques discussed.
5.2.3.
Optimisation and improvement tools
The final stage involves applying knowledge of value, cost and collaboration structure to
develop a solution that enhances competitive advantage or lowers the cost position of the
enterprise. This stage is particularly poorly covered in the literature, with relatively few
examples, typically confined to the application of linear programming and related
technologies.
5.2.3.1.
DATA ENVELOPMENT ANALYSIS
When used on the value chain context the aim of Data Envelopment Analysis (DEA) is to
choose the optimum combination of suppliers. It is a mathematical programming technique
that calculates the relative efficiencies of producers (essentially a company but known as
decision-making units (DMUs) in DEA) based on sets of inputs and outputs that are used to
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assess or rate the performance of the DMU. DEA then measures the relative efficiency of
each producer in comparison to the other options, producing the optimum selection of DMUs.
Liu et al (2000) presents an example of using DEA for supplier selection. This has
applicability as it demonstrates a possible approach to the ‘how to form a value chain’
question raised in Section 4.2. Figure 31 demonstrates the range of input criteria that this
DEA application used.
Figure 31. DEA Ratings (Ling et al, 2000)
Figure 31 shows variables that correlate well with those expected for vendor selection
criteria. The mean average rating is the score for that supplier. The aim is to ensure that an
optimal combination of partners is chosen. The model developed in the Ling paper looked to
rationalise the supplier base prior to the company introducing a partnership approach with
the remaining suppliers. By adopting a mathematical approach to the optimum choice
question, DEA requires all the decision factors to be converted to numerical values. This
raises the issue discussed in Section 3.3.1 regarding tacit aspects of value. With DEA it
would be required to convert these into quantifiable factors which may bias the outcome.
5.2.3.2.
BUSINESS PROCESS REENGINEERING
Business Process Reengineering (BPR) simultaneously pursues multiple improvement goals
such as quality, cost, lead time, flexibility, innovation and accuracy. BPR is defined as ‘the
fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in critical contemporary measures of performance such as cost, quality,
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service and speed’ (Hammer & Champy, 1995). Major BPR efforts are shown in redesigning
internal organisational processes, changing fundamental product delivery and customer
service procedures, and re-examining and repositioning corporate strategy. A conceptual
framework for the techniques that may be applied within a BPR project is shown in Figure 32.
Figure 32. Components of a BPR project (Al-Ahmari & Ridgway, 1999)
It may seem slightly unusual to include BPR as a tool for value chain analysis. However, the
objective of BPR is often stated as “a basic organizational redesign and behavioural change,
with its accompanying structure (principles, process, tools and methods) and information
technology…” (Al-Ahmari & Ridgway, 1999). Therefore, whether explicitly considered or not,
BPR is used to improve performance, and may have considerable effect on value chain
partners.
An important part of the BPR toolset described by Al-Ahmari & Ridgway (1999), particularly
for value chain analysis, is the IDEF tool. The IDEF (function modelling method) is designed
to model the decisions, actions, and activities of a manufacturing organisation or system in a
structured graphical form. IDEF tools are used for reengineering of design and manufacturing
processes and are particularly useful to support enterprise integration (Kim & Jang, 2002).
IDEF is a qualitative model of relationship hierarchies, and as such, is not a mathematical
representation of the system structure. The basic form of the IDEF syntax is shown in Figure
33, with the final model being a hierarchical decomposition of activities, developing multilayer models. IDEF presents the system functions as boxes and data (or object) interfaces as
arrows (Al-Ahmari & Ridgway, 1999).
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Figure 33. IDEF syntax (Taken from Al-Ahmari & Ridgeway, 1999)
Figure 33 is an individual function or process. It does not represent a value chain component
or company. However, by grouping activities, as shown in Figure 34, this can be used to
highlight value chain relevance of the IDEF model.
Figure 34. IDEF model demonstrating ‘grouped’ activities (Taken from Al-Ahmari &
Ridgeway, 1999)
Sinha et al (2004) demonstrates how the technique could be used to model the supplier risk
associated with collaborative partnerships in the aerospace industry. This indicates that it
may be a valid tool for describing and recognising strategy conflict that may increase risk
within the value chain (Sinha et al 2004).
5.3.
TOOL SUMMARY
The aim of assessing these techniques was to identify how a set of possible techniques
could perform a valid and detailed value chain analysis in the aerospace sector.
Table 1 provides a brief summary of the key characteristics and suitability to the aerospace
environment for the tools and techniques discussed. The assessment criterion in table 1
refers to the factors identified in section 5.1.
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Table 1.Value chain analysis tool summary
As this summary shows, there are a range of tools available that may be applicable to the
value chain in the aerospace sector. However, some have drawbacks. For example, activity
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based costing obviously has applicability for the VIVACE project as it can clearly define the
costs associated with the linkages in the value chain and therefore quantify some of the
benefits from undertaking collaboration within the value chain. What it does not account for
are the tacit and political factors that are essential in an aerospace value chain decision.
The VALSAT tool provides a range of techniques which cover a wide range of problems and
requirements within the value stream. However these focus on the detail level and are less
helpful at the inter-company level. By focussing on the 7 wastes, this work is too
operationally focussed and is likely to fail to provide answers to strategic decisions in value
chain formation.
The tools have generally been developed for a specific use, and are difficult to apply to
general use. As such, this creates a barrier to entry which is detrimental to the uptake of the
philosophy (Hines & Rich, 1997). The most useful examples are where tools are used
together or as a set.
This suggests that it is currently not possible to immediately apply an existing set of tools to
the aerospace industry. Developing a value chain model needs a tailored approach to
understanding both the general and bespoke requirements of the industry sector. This links
with the proposed fieldwork described in Chapter 7. It is hoped that it will be possible to
develop a toolkit for full Value Chain Analysis at the strategic and collaborative level which
can assist in the value chain modelling work.
6. THE VALUE GRID
The value grid is a proposal, by the authors, for a new technique that can be applied during
the value chain formation stage. The previous chapters showed that a readily available toolkit
of methods does not exist for visualising, analysing and improving value chains in the
aerospace sector. Rather there are a collection of approaches with different potential levels
of applicability.
As noted the original value chain concept, as presented by Porter (1985) has limitations with
respect to the modern aerospace business environment. For an extended enterprise, it is
likely that any diagram of the value chain would be more complex than Porter’s (1985)
fundamental concept (as shown in Figure 1). Producing complex systems, requiring a costly
design and development phase, the aerospace industry has increasingly moved towards an
extended enterprise. This organisational approach is selected in an effort to reduce project
risk sufficiently to allow the substantial resources required in the development of nextgeneration aerospace systems to be deployed.
This complexity arises because it becomes possible to select a team of value chain partners,
all of whom contribute value-adding activities. Thus, there may be a string of businesses, all
of whom perform primary activities such as ‘operations’. One company may be mining an ore,
another smelting the raw material, a third casting it, a fourth machining it, a fifth performing
surface treatment, and so on. While Henry Ford pursued a strategy of vertical integration
(bringing as much as possible in-house where it could be controlled), modern manufacturing
will typically involve more partnerships, and there is a consequent need for a value chain
modelling methodology that can support informed decisions at the extended enterprise level.
While an extended enterprise would typically be represented by a longer value chain
diagram, it may also need to be fatter, showing the alternative sources of supply that exist at
various stages. It is possible that a new product or project may spawn an entirely new
company: a ‘virtual enterprise’. At such a time, potential suppliers may be invited to join the
value chain, based upon a complex set of criteria. Figure 35 offers an example, showing how
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the capabilities of a number of different businesses might be harnessed, to produce a
competitive product.
Figure 35. Multiple suppliers, offering a variety of value chain combinations
This, in essence, is the Value Grid: a two-dimensional array plotting the activities of the
extended enterprise (which may be related to the physical supply chain, or less tangible, as
in this case where a sequence of development activities is shown) against the alternative
sources of supply. In the figure, the capabilities of four different potential suppliers
(companies or business units within a parent company) are mapped, showing the offerings of
each, represented by a stylised ‘value chain’ arrow shape. Thus, to advance the project, the
prime contractor must select a suppler at each phase. (In the example, no one company can
offer every service required.) Furthermore, the long shapes on the top and bottom rows
indicate that:
•
Supplier ‘A’ is not prepared to bid for detailed design and/or prototyping work
separately, but has a combined offering
•
Supplier ‘D’ is likewise not interested in prototyping business without also being
awarded the testing work, and vice-versa.
Specific information relating to each offering must be examined before the ‘best’ route
through the map can be determined. Even at this first stage, though, the Value Grid may be
useful in formalising the information capture process, reducing the chance that a potential
source of supply is overlooked.
6.1.
SUPPORT DURING VALUE CHAIN FORMATION
While it is true that businesses exist to produce a return on investment (i.e. to make money,
or generate shareholder value), it would be far too simplistic to state that financial
considerations alone can be allowed to drive the formation of a value chain, as highlighted in
section 3.3.2. While low prices from suppliers ought to allow greater profits to be made,
strategic issues may be at stake, such as wishing to award business to those who are
trusted, or wishing to retain capacity (and thereby achieve a contribution towards overheads)
within the parent business, etc.
The choice of ‘route’ through a Value Grid must be an informed one, taking account of both
quantitative and qualitative influences. As such, the Value Grid is a hybrid approach, allowing
information to be captured, and comparisons to be made.
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Concurrent Engineering theory, as presented by authors such as Boothroyd et al [1994]
suggests that designers can make engineering decisions that subsequently have a
substantial impact upon operations further downstream, far outweighing the actual cost of the
design activity itself. It must similarly be recognised that the early stages of extended
enterprise formation have a similar potential to cause harm, unless the whole lifecycle of the
project can be considered. Thus, although it is relatively simple to gather price and
availability information from potential suppliers, a more thorough assessment will yield
benefits. This is, after all, a model of a value chain rather than a supply chain. As such, it
should embody the values of those involved in the decision-making process, allowing less
tangible concerns (such as reputation, confidence, risk, future-proofing and opportunities) to
play a part in the supplier selection process.
With regard to the review of existing tools for value chain analysis, summarised in Section
5.3, the Value Grid supports the following activities:
•
Conceptual and descriptive modelling: the approach aids visualisation of the structure
of proposed value chains
• Cost analysis: the approach allows explicit cost and lead time information to be
recorded, allowing direct comparisons
• Linkage analysis: any chosen ‘route’ through the alternatives shown in the Value Grid
is shown as a series of links between stages and selected providers
• Benchmarking: this requirement is supported in that all tenders can be compared
directly, appearing in the same column of the Value Grid.
• Testing of the value chain under alternative business models: representations of this
kind could take the form of conditional prices or lead times (since some business
models will accrue costs and generate profits at different stages) and this can be
represented relatively easily, by identifying alternative options, where available, as if
they were alternative sources of supply. Similarly, businesses that choose to
concentrate upon certain activities (such as new-build, with no activity in the
aftermarket) can clearly be seen in the pattern of the Value Grid.
• Insights at the formation stage to help choose partners: this is the primary strength of
the Value Grid. It is for planning, not control.
The Value Grid is less effective at bringing about an understanding of what is of value to the
customer. This should ideally have been determined before the potential suppliers are invited
to tender, and thus before the Value Grid methodology is applied. Similarly, this approach
does not produce strategic insights that can be used to optimise the value chain. This activity
is left to the skill of company planners, who will have a broader and deeper understanding of
their industry than can be reflected by the information within any one model. Having
produced the Value Grid, however, those planners may be better informed, since the
methodology introduces a degree of consistency to the partner selection process that allows
best practice to be identified.
6.2.
VALUE CHAIN METRICS
Having identified the need for an hybrid approach to value chain modelling approach that
allows both ‘hard’ and ‘soft’ issues to be recorded, it remained necessary to identify the
metrics that might be included. Cost and lead time suggest themselves as easily quantifiable
influences, but even these are by no means simple. Cost, for example, must be considered in
the context of one-off costs versus per-unit costs. Depending on the volume required, a
different offering may be the most cost competitive. Discounts for ordering in quantity may
further complicate matters, as will the rate at which cost is committed, and the assets
acquired as investments are made. Similarly, although average lead time offers an easily
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understood and measured metric, some companies may wish to select a supplier that has a
longer average lead time, but a greater consistency of performance.
It can therefore be argued that even the quantifiable metrics employed in some earlier value
chain analysis techniques should not become the subject of a purely mathematical based
supplier selection process. Nonetheless, where sufficient information exists it is possible to
examine alternative routes through the Value grid in terms of the total cost and total lead time
for any value chain proposition. Ultimately, each bid shown as an arrow on the Value Grid
would probably refer to a growing dossier of information, detailing ‘hard’ information such as
the quotations and various offers that may have been made during negotiations, plus freeform comments from decision-makers recording anything felt to be relevant, such as spin-off
benefits or anticipated threats.
Although the ‘hard’ metrics are more easily recorded, it remains necessary to consider the
qualitative issues. Decisions based upon these criteria are much less easy for an outsider to
understand. For example, the decision-maker might be influenced by the desire to award
business to a certain supplier, in order to prevent that supplier from using their (limited)
capacity to the benefit of a competitor. Alternatively, a potential supplier might be rejected on
the grounds that they have been awarded a good amount of business already, and that any
increase would raise the overall level of risk for the extended enterprise. The desire to keep
certain activities in-house may also play a part (unless cost and lead time performance is
much worse than that of a competitor). Furthermore, there is the question of the plausibility of
each tender. With these, and other issues considered, a route through the Value Grid may be
proposed (Figure 36).
Figure 36. Selection of an extended enterprise value chain, for further investigation.
The example presented in Figure 36 offers neither the quickest nor cheapest set of
alternatives, but some compromise between these issues and many more, such as
anticipated quality, risk and long-term threat level. Any issue that is discussed by the
decision-makers should be recorded. This allows knowledge capture to take place, and is a
key benefit of the Value Grid activity. Comments such as “price felt to be unrealistic –
consider the cost overruns on the XZ450 product” can be written directly on the appropriate
part of the Value Grid, allowing anybody looking at the Grid in the future to understand the
thinking behind a supplier choice. All knowledge of this kind generated during the process
ought to be retained for future reference. If, for example, the decision-makers must disregard
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an otherwise competitive tender from a potential supplier on ethical grounds, the obstacle
may subsequently disappear due to regime change. Only by recording these influences at
the time can the maximum benefit be derived from the activity in the future. This knowledge
capture stage is particularly important since the participants in a value chain may change
over time, as volumes vary or due to the failure of a partner. (At such times, the Value Grid
may be particularly useful, providing a quick-reference representation showing alternative
sources of supply.)
6.3.
FURTHER WORK
The Value Grid methodology has been presented to the project partners. In the period up to
M30, a validation exercise will be conducted through the application of the method, in an
aerospace context.
It is further desired that the Value Grid methodology should be made scaleable; capable of
being applied on a company level (looking at make or buy decisions for each activity or
department), and on an enterprise level (choosing between potential suppliers) with that
enterprise also involved in service activities, where appropriate.
When the value chain formation phase is complete, it remains necessary for its performance
to be measured. In an innovative industry, many of the quotes and estimates offered by
potential suppliers may prove to be inaccurate. It may be necessary to establish a means by
which the ‘health’ of the value chain may be monitored, and room for improvement identified
– without losing sight of the diverse mixture of influences that determine value. This will be
particularly important in the aftermarket context, since the support of products in service
bears relatively little resemblance to metrics now in use for supply chain performance
measurement.
7. PLANNED FIELD WORK
From the work undertaken in producing this document, it is evident that all value chain
exercises start with a thorough understanding of what the customer values, the value
creating activities and where these are produced within the complex structure of collaborating
companies. Primarily, this may be described as defining the value chain. For the aerospace
sector, this may be of particular importance and difficulty bearing in mind the work of
Dussage & Garrettee (1995). Therefore, it is planned that the work on value chain analysis
and value chain modelling will be informed by fieldwork with some of the industrial partners in
VIVIACE.
The proposal for the field study has both short and long term objectives.
In the short term, the fieldwork should develop an initial understanding of the value chain
concept, gain an understanding of how and where value is perceived within the partnership,
and provide an understanding of the level and style of collaboration. To achieve this, a series
of open-ended interviews will be conducted on site with key individuals.
In the longer term, this initial study will define the framework for a series of structured
focussed interviews on key selected points, as well as highlighting potential subjects for
surveys that could be used to gather a broader set of data. The long term objective for this
work is to develop a value chain model which can be used to understand performance and
the effects on collaborative partners of different business models. At the time of writing, a first
step in the fieldwork has been completed at Volvo and the equivalent interviews are planned
for early 2005 at Rolls-Royce. No initial discussion of results can be included at this stage.
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7.1.
STUDY QUESTIONS
The study questions are as follows:
• Long term
o To identify customer perceived value in the aero-engine extended enterprise
o To map where customer value is created within the extended enterprise
o To develop a value chain model including both the primary (value) activities
and supporting activities.
• Short / medium term
o To identify the core (value) activities in the aerospace value chain and trace
these to the companies currently operating with the prime OEM
ƒ Under Risk and Revenue sharing arrangements
ƒ Under TotalCare
ƒ Under other business models
ƒ Which business model works better?
• What are the negative aspects of TotalCare?
• What are the drawbacks?
o To gauge understanding of value and customer value within the chain
ƒ Where are the most ‘valuable’ processes
o To define the nature of collaboration within the value chain:
ƒ Under Risk and Revenue sharing arrangements
ƒ With a long term partner
ƒ With a traditional supply arrangement
7.2.
PROPOSITIONS
The RRSP business model must improve the level of trust and collaboration to achieve winwin for both parties. This should be evident at the strategy level, in terms of an improved
product and also at the operational level, better cash flow, more profitable work, and at the
relationship level, higher levels of trust. The total care business model should provide a
better revenue stream for the partners and suppliers.
7.3.
UNIT OF ANALYSIS
To achieve the above, the relationship at various levels of the partnership will be assessed
requiring equivalent interviewees within both businesses (VAC and RR). As agreements
change with each new programme, this assessment will be based upon a specific engine
programme – the suggested engine programme is the Trent 900.
7.4.
CRITERIA FOR INTERPRETING THE FINDINGS
In analysing the nature of the collaboration, evidence of the following factors will be looked
for within the interview transcripts. This builds on the work of Dussauge & Garrette (1995) in
their analysis of partnership types within the aerospace sector.
• Nature of the relationship
o Number of partner firms;
o Legal form;
o Equity participation;
• Relative competitive position of partner firms
o Dominant partnership
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Balance partnership. None of the partner firms has domination of the value
chain.
Entry into business;
o New. one or several partner firms enter the business by joining the alliance;
o No new entrants. All partner firms were previously competitors in the business.
Scope of alliance;
o R&D: the scope of the alliance is limited to R&D
o All: alliance covers all functions.
Organisation of R&D and subsystem manufacturing;
o Distributed R&D: each partner is responsible for a particular R&D;
o R&D carried out jointly: companies carry out R&D by jointly owned assets.
Organisation of final assembly;
o Duplicated final assembly;
o No duplication of final assembly.
Marketing & Sales;
o Split marketing: aspects are allocated to the various partner firms;
o Joint marketing: a single joint organisation handles the market aspect;
o No marketing: the collaborative project does not include marketing.
o
•
•
•
•
•
In this way it is hoped to model the key characteristics of an aerospace value chain,
illustrating by example how the activities of an extended enterprise might better be
understood and managed under a value chain approach. This model can then be used to
explore some of the more complex short term objectives of the fieldwork.
8. CONCLUSIONS
This report has looked broadly at the value chain concept and tried to illustrate the potential
benefits that can be gained from understanding how value is generated in the aerospace
sector and from analysing and improving the value chain. It has also investigated the tools
that can aid value chain decision-making.
The value chain concept was first proposed by Porter (1985) as a business strategy tool. The
focus of the work is on how activities create value for the customer and how managing
activities can create competitive advantage. At the core of Porter’s (1985) work is the idea of
linkages, the boundary between one activity and the next. Porter considers that as a part of a
business strategy, active management and improvement of these linkages is important as
costs can be removed and partner synchronisation improved. These both create the
opportunity for competitive advantage. The value chain is the delivery mechanism in place to
provide the value creating activities and create competitive advantage. It describes the
companies involved and the style adopted for linking and co-ordinating activities in value
creation.
Subsequent to Porter, the value chain thinking has focussed on this linkage concept,
specifically using the value chain to investigate the effects of collaboration and partnerships
and how the value chain can support the different business models (Magretta, 2002). This
focus on collaboration may be explained somewhat by the rise of the new economy (Walters,
2004) as companies adapt to managing a business with operations dispersed in the global
economy.
In studying the uptake of value chain thinking, it is evident that industries show signs of
adopting value chain concepts and best practice (Dussage & Garrettee, 1995; Dussage et al,
2004) although this may be implicit and not part of a planned strategy. The report has
highlighted that where it is adopted, the value chain approach can yield considerable benefits
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(e.g. Deloitte, 2004). Despite this, there is relatively limited evidence of explicit adoption and
the examples available of a value chain model often stop at the conceptual stage (Herbert &
Morris, 1989). Much more evidence is implicit in how organisations have developed and
changed to meet new circumstances.
The analysis of the tools available for value chain research indicates that no single
methodology has emerged in a pre-eminent position. Structured ways of considering the
creation and presentation of value range from the highly formulaic (such as those based on
linear programming or activity based costing) to the free-form ‘good management practice’
described by Lord (1996). Since few approaches have been adopted by a broad range of
business type, it is reasonable to assume therefore that the aerospace industry will have
bespoke requirements. The work has highlighted the need for a toolkit of methods for value
chain visualisation, analysis and improvement. The work has shown that there are a
collection of approaches with different potential level of applicability.
As part of the toolkit, a value chain mapping methodology is proposed as a contribution to
understanding the factors currently used within the aerospace sector when forming a value
chain. The Value Grid attempts to support the capture and re-use of both explicit ‘hard’ facts
and implicit ‘softer’ ones.
The report highlights the need for field studies in the sector to augment our understanding of
value chain concepts in contemporary aerospace businesses. The nature of the fieldwork
that is being undertaken to capture a better understanding of the aerospace and in particular
the aero-engine value chain is outlined. It is hoped that in studying the current collaboration
and partnership arrangements it will be possible to define a toolkit for value chain analysis
with wider applications and indicate possible routes for further value chain modelling in the
VIVACE project.
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