Value chain
From Wikipedia, the free encyclopedia
Contents
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1 The Value Chain Model
2 When not to apply The Value Chain
3 Further Developments in Value Chain Research
4 References
5 See also
6 External links
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The Value Chain Model
Popular Visualization
The value chain, also known as value chain analysis, is a concept from
business management that was first described and popularized by Michael Porter
in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior
Performance.
It is important not to mix the concept of the value chain, with the costs occurring
throughout the activities. A diamond cutter can be used as an example of the
difference. The cutting activity may have a low cost, but the activity adds to much
of the value of the end product, since a rough diamond is a lot less valuable than
a cut diamond.
The value chain categorizes the generic value-adding activities of an
organization. The "primary activities" include: inbound logistics, operations
(production), outbound logistics, marketing and sales, and services
(maintenance). The "support activities" include: administrative infrastructure
management, human resource management, R&D, and procurement. The costs
and value drivers are identified for each value activity. The value chain framework
quickly made its way to the forefront of management thought as a powerful
analysis tool for strategic planning. Its ultimate goal is to maximize value creation
while minimizing costs.
The concept has been extended beyond individual organizations. It can apply to
whole supply chains and distribution networks. The delivery of a mix of products
and services to the end customer will mobilize different economic factors, each
managing its own value chain. The industry wide synchronized interactions of
those local value chains create an extended value chain, sometimes global in
extent. Porter terms this larger interconnected system of value chains the "value
system." A value system includes the value chains of a firm's supplier (and their
suppliers all the way back), the firm itself, the firm distribution channels, and the
firm's buyers (and presumably extended to the buyers of their products, and so
on).
Capturing the value generated along the chain is the new approach taken by
many management strategists. For example, a manufacturer might require its
parts suppliers to be located nearby its assembly plant to minimize the cost of
transportation. By exploiting the upstream and downstream information flowing
along the value chain, the firms may try to bypass the intermediaries creating
new business models, or in other ways create improvements in its value system.
The Supply-Chain Council, a global trade consortium in operation with over 700
member companies, governmental, academic, and consulting groups
participating in the last 10 years, manages the de facto universal reference model
for Supply Chain including Planning, Procurement, Manufacturing, Order
Management, Logistics, Returns, and Retail; Product and Service Design
including Design Planning, Research, Prototyping, Integration, Launch and
Revision, and Sales including CRM, Service Support, Sales, and Contract
Management which are congruent to the Porter framework. The "SCOR"
framework has been adopted by hundreds of companies as well as national
entities as a standard for business excellence, and the US DOD has adopted the
newly-launched "DCOR" framework for product design as a standard to use for
managing their development processes. In addition to process elements, these
reference frameworks also maintain a vast database of standard process metrics
aligned to the Porter model, as well as a large and constantly researched
database of prescriptive universal best practices for process execution.
A value chain reference model (VCOR) has been developed by the Value Chain
Group to offer de facto standard for value chain management encompassing one
unified reference framework representing the process domains of product
development, customer relations and supply networks called the Value Chain
Operations Reference model,or VCOR. VCOR is the next generation Business
Process Management that extends the Supply Chain processes of Acquire, Build,
Fulfill and Support to include Market, Research, Develop, Brand, Sell and
Support. The three centers of excellence are product excellence, operations
excellence, and customer excellence.
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When not to apply The Value Chain
Porter's basic model describes an industrial organization buying raw materials
and transforming these into physical products.
In 1985, when Porter introduced the Value Chain, around 60% of most western
economies' workforces were active in service industries. In 2006, most service
industries in western countries employ over 80% of the workforce.
Critique on the Value Chain model and its applicability to services organizations
has since been voiced by both academics and practitioners. See for example
(Peppard and Rylander, 2007) and (Van Middendorp, 2005). Porter's focus on
'either or' strategies and competition as the main driving force in any industry, are
not that well suited to the complexity of most industries today. Collaboration in
addition to competition and differentiation in addition to low cost are common
drivers. Furthermore, Porter is focused on the tangible outcomes of cost,
revenue, margin and basic configuration of business activities. The Value
Network may be the mental model that embraces the linear Value Chain Model
and that adds an extra dimension for those seeking to make sense of complexity
as we see it in organizations and their environment today.
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Further Developments in Value Chain Research
More recently, the term value grid has been developed to highlight the fact that
competition in the value chain has been shifting away from the strict linear view
defined by the traditional 'value chain' model (Pil and Holweg, 2006).
The value chain in its original sense was defined as a sequence of valueenhancing activities. In its simplest form, raw materials are formed into
components, which are assembled into final products, distributed, sold, and
serviced. Frequently, the activities span multiple organizations. This orderly
progression of activities allows managers to formulate profitable strategies and
coordinate operations.
However, it can also put a stranglehold on innovation at a time when the greatest
opportunities for value creation (and the most significant threats to long-term
survival) often originate outside the traditional, linear view. Traditional value
chains may have worked well in landline telecommunications and automobile
production during the last century, but today innovation comes in many shapes
and sizes—and often unexpectedly.
Pil and Holweg hence argue for seeing value creation as multidirectional rather
than linear. Given the constant tension between opportunity and threat, firms
need to explore opportunities for managing risks, gaining additional influence
over customer demand, and generating new ways to create customer value.
Nokia, for example, is legendary for having the foresight to lock in critical
components that were in short supply, allowing it to achieve significant market
share growth. However, a few years ago it suffered a setback when competitors
used the same strategy to take advantage of shifts in the demand for LCD
displays.
Protection against such fickle reversals calls for a more complex view of value—
one that is based on a grid as opposed to the traditional chain. The grid approach
allows firms to move beyond immediately recognizable opportunities and across
industry lines. This permits managers to identify where other companies—
perhaps even those engaged in entirely different value chains—obtain value, line
up critical resources, or influence customer demand. The new paths can be
vertical; horizontal; and even diagonal. Successful managers need to learn how
to assemble multi-faceted value grids that leverage new opportunities and
respond to new threats.
Porter generic strategies
From Wikipedia, the free encyclopedia
Michael Porter has described a category scheme consisting of three general
types of strategies that are commonly used by businesses. These three generic
strategies are defined along two dimensions: strategic scope and strategic
strength. Strategic scope is a demand-side dimension (Porter was originally an
engineer, then an economist before he specialized in strategy) and looks at the
size and composition of the market you intend to target. Strategic strength is a
supply-side dimension and looks at the strength or core competency of the firm.
In particular he identified two competencies that he felt were most important:
product differentiation and product cost (efficiency).
He originally ranked each of the three dimensions (level of differentiation, relative
product cost, and scope of target market) as either low, medium, or high, and
juxtaposed them in a three dimensional matrix. That is, the category scheme was
displayed as a 3 by 3 by 3 cube. But most of the 27 combinations were not
viable.
Porter's Generic Strategies
page1
In his 1980 classic Competitive Strategy: Techniques for Analysing Industries and
Competitors, Porter simplifies the scheme by reducing it down to the three best
strategies. They are cost leadership, differentiation, and market segmentation (or
focus). Market segmentation is narrow in scope while both cost leadership and
differentiation are relatively broad in market scope.
Empirical research on the profit impact of marketing strategy indicated that firms
with a high market share were often quite profitable, but so were many firms with
low market share. The least profitable firms were those with moderate market
share. This was sometimes referred to as the hole in the middle problem. Porter’s
explanation of this is that firms with high market share were successful because
they pursued a cost leadership strategy and firms with low market share were
successful because they used market segmentation to focus on a small but
profitable market niche. Firms in the middle were less profitable because they did
not have a viable generic strategy.
Combining multiple strategies is successful in only one case. Combining a market
segmentation strategy with a product differentiation strategy is an effective way of
matching your firm’s product strategy (supply side) to the characteristics of your
target market segments (demand side). But combinations like cost leadership
with product differentiation are hard (but not impossible) to implement due to the
potential for conflict between cost minimization and the additional cost of valueadded differentiation.
Since that time, some commentators have made a distinction between cost
leadership, that is, low cost strategies, and best cost strategies. They claim that a
low cost strategy is rarely able to provide a sustainable competitive advantage. In
most cases firms end up in price wars. Instead, they claim a best cost strategy is
preferred. This involves providing the best value for a relatively low price.
Contents
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1 Cost Leadership Strategy
2 Differentiation Strategy
3 Segmentation Strategy
4 Recent developments
5 Criticisms of generic strategies
6 References
7 External links
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Cost Leadership Strategy
This strategy emphasizes efficiency. By producing high volumes of standardized
products, the firm hopes to take advantage of economies of scale and experience
curve effects. The product is often a basic no-frills product that is produced at a
relatively low cost and made available to a very large customer base. Maintaining
this strategy requires a continuous search for cost reductions in all aspects of the
business. The associated distribution strategy is to obtain the most extensive
distribution possible. Promotional strategy often involves trying to make a virtue
out of low cost product features.
To be successful, this strategy usually requires a considerable market share
advantage or preferential access to raw materials, components, labour, or some
other important input. Without one or more of these advantages, the strategy can
easily be mimicked by competitors. Successful implementation also benefits
from:
process engineering skills
products designed for ease of manufacture
sustained access to inexpensive capital
close supervision of labour
tight cost control
incentives based on quantitative targets.
Examples include low-cost airlines such as EasyJet and Southwest Airlines, and
supermarkets such as KwikSave.
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Differentiation Strategy
Differentiation involves creating a product that is perceived as unique. The unique
features or benefits should provide superior value for the customer if this strategy
is to be successful. Because customers see the product as unrivaled and
unequaled, the price elasticity of demand tends to be reduced and customers
tend to be more brand loyal. This can provide considerable insulation from
competition. However there are usually additional costs associated with the
differentiating product features and this could require a premium pricing strategy.
To maintain this strategy the firm should have:
strong research and development skills
strong product engineering skills
strong creativity skills
good cooperation with distribution channels
strong marketing skills
incentives based on subjective measures
be able to communicate the importance of the differentiating product
characteristics
stress continuous improvement and innovation
attract highly skilled, creative people
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Segmentation Strategy
In this strategy the firm concentrates on a select few target markets. It is also
called a focus strategy or niche strategy. It is hoped that by focusing your
marketing efforts on one or two narrow market segments and tailoring your
marketing mix to these specialized markets, you can better meet the needs of
that target market. The firm typically looks to gain a competitive advantage
through effectiveness rather than efficiency. It is most suitable for relatively small
firms but can be used by any company. As a focus strategy it may be used to
select targets that are less vulnerable to substitutes or where a competition is
weakest to earn above-average return on investments.
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Recent developments
Michael Treacy and Fred Wiersma (1993) have modified Porter's three strategies
to describe three basic "value disciplines" that can create customer value and
provide a competitive advantage. They are operational excellence, product
innovation, and customer intimacy.
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Criticisms of generic strategies
Several commentators have questioned the use of generic strategies claiming
they lack specificity, lack flexibility, and are limiting. In many cases trying to apply
generic strategies is like trying to fit a round peg into one of three square holes:
You might get the peg into one of the holes, but it will not be a good fit.
In particular, Millar (1992) questions the notion of being "caught in the middle".
He claims that there is a viable middle ground between strategies. Many
companies, for example, have entered a market as a niche player and gradually
expanded. According to Baden-Fuller and Stopford (1992) the most successful
companies are the ones that can resolve what they call "the dilemma of
opposites".
The purpose of a business
Some would argue that the main purpose of a business is to maximize profits for
its owners, or in the case of a publicly-traded company, its stockholders. The late
economist Milton Friedman was a proponent of this view and many bottom-line
fundamentalists used his 1970 historic statement to this effect to justify a
"Darwinomics" approach to doing business.
Others would say that its principal purpose is to serve the interests of a larger
group of stakeholders, including employees, customers, and even society as a
whole. Most philosophers would agree, however, that business activities ought to
comport with legal and moral strictures. One proponent of this philosophy has
been U.S. businessman-turned-futurist John Renesch [1] who writes,
"Corporations are human-made organisms, associations of human beings. To
see this association as having one solitary purpose and responsibility, to grow
only in economic terms, is such an extreme view that implosions like what
happened to Enron, WorldCom and other corporate collapses will become more
and more commonplace."
Anu Agha, ex-chairperson of Thermax Limited, once said, "We survive by
breathing but we can't say we live to breathe. Likewise, making money is very
important for a business to survive, but money alone cannot be the reason for
business to exist". Profit maximization is extremely relevant when top
management is mandated with the job of selecting the right strategy for the
business. According to Michael Porter, the primary goal for any business strategy
exercise must be that of maximizing profitability.
Peter Drucker defined the very purpose of business as creating a satisfied
customer. This definition is also useful in evaluating to what extent a business is
succeeding in fulfilling its stated purpose.
Many observers would hold that concepts such as economic value added (EVA)
are useful in balancing profit-making objectives with other ends. They argue that
sustainable financial returns are not possible without taking into account the
aspirations and interests of other stakeholders (customers, employees, society,
environment). This conception suggests that a principal challenge for a business
is to balance the interests of parties affected by the business, interests that are
sometimes in conflict with one another.
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Contract theory
Advocates of business contract theory believe that a business is a community of
participants organized around a common purpose. These participants have
legitimate interests in how the business is conducted and, therefore, they have
legitimate rights over its affairs. Most contract theorists see the enterprise being
run by employees and managers as a kind of representative democracy.
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Stakeholder theory
Stakeholder theorists believe that people who have legitimate interests in a
business also ought to have voice in how it is run, notwithstanding the fact that
they do not have ownership in the business. The obvious non-owner,
stakeholders are the employees. However, stakeholder theorists take contract
theory a step further, maintaining that people outside of the business enterprise
ought to have a say in how the business operates. Thus, for example,
consumers, even community members who could be affected by what the
business does, for example, by the pollutants of a factory, ought to have some
control over the business