the value chain by vishnu (asom)

8/14/2019 The Value Chain by Vishnu (Asom)

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A

REPORT

ON

VALUE CHAIN ANALYSIS

BY

VISHNU TAMRAKAR

(ASIAN SCHOOL OF MANAGEMENT)


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Introduction

The value chain , also known as value chain analysis ,is a concept from business management that was firstdescribed and popularized by Michael Porter in his 1985best-seller, Competitive Advantage: Creating and Sustaining Superior Performance .

The value chain categorizes the generic value-addingactivities of an organization. The "primary activities"include: inbound logistics, operations (production),outbound logistics, marketing and sales (demand), and


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services (maintenance). The "support activities" include:administrative infrastructure management, humanresource management, technology (R&D),

and procurement. The costs and value drivers areidentified for each value activity. The value chainframework quickly made its way to the forefront of management thought as a powerful analysis toolfor strategic planning. The simpler concept of valuestreams, a cross-functional process which wasdeveloped over the next decade, had some success inthe early 1990s.

The value-chain concept has been extended beyondindividual organizations. It can apply to whole supplychains and distribution networks. The delivery of a mixof products and services to the end customer willmobilize different economic factors, each managing itsown value chain. The industry wide synchronized

interactions of those local value chains create anextended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chainsthe "value system." A value system includes the valuechains of a firm's supplier (and their suppliers all the wayback), the firm itself, the firm distribution channels, andthe firm's buyers (and presumably extended to the buyersof their products, and so on).

A value chain is a chain of activities. Products passthrough all activities of the chain in order and at eachactivity the product gains some value. The chain of activities gives the products more added value than the


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sum of added values of all activities. It is important not tomix the concept of the value chain with the costsoccurring throughout the activities. A diamond cutter can

be used as an example of the difference. The cuttingactivity may have a low cost, but the activity adds muchof the value to the end product, since a rough diamond issignificantly less valuable than a cut diamond.

Value chain analysis

Michael Porter in 1985 introduced in his book TheCompetitive Advantage the concept of the Value Chain.He suggested that activities within the organization addvalue to the service and products that the organization

produces, and all these activities should be run atoptimum level if the organization is to gain any realcompetitive advantage. If they are run efficiently thevalue obtained should exceed the costs of running themi.e. customers should return to the organization and


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transact freely and willingly. Michael Porter suggestedthat the organization is split into primary activities andsupport activities.

Fig. 1

Primary activities

Inbound logistics: Refers to goods being obtained fromthe organisations suppliers ready to be used for producing the end product.

Operations: The raw materials and goods obtained aremanufactured into the final product. Value is added to theproduct at this stage as it moves through the productionline.


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Outbound logistics: Once the products have beenmanufactured they are ready to be distributed todistribution centers, wholesalers, retailers or customers.

Marketing and Sales: Marketing must make sure thatthe product is targeted towards the correct customer group. The marketing mix is used to establish aneffective strategy; any competitive advantage is clearlycommunicated to the target group by the use of thepromotional mix.

Services : After the product/service has been sold whatsupport services does the organization have to offer. Thismay come in the form of after sales training, guaranteesand warranties.

With the above activities, any or a combination of them,maybe essential for the firm to develop the competitiveadvantage which Porter talks about in his book.

Support Activities

The support activities assist the primary activities inhelping the organization achieve its competitiveadvantage. They include:

Procurement : This department must source rawmaterials for the organization and obtain the best pricefor doing so. For the price they must obtain the bestpossible quality


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Technology development: The use of technology toobtain a competitive advantage within the organization.This is very important in todays technological driven

environment. Technology can be used in production toreduce cost thus add value, or in research anddevelopment to develop new products, or via the use of the internet so customers have access to online facilities.

Human resource management: The organization willhave to recruit, train and develop the correct people for the organization if they are to succeed in their objectives.

Staff will have to be motivated and paid the market rateif they are to stay with the organization and add value toit over their duration of employment. Within the servicesector e.g. airlines it is the staff who may offer thecompetitive advantage that is needed within the field.

Firm infrastructure : Every organization needs to ensurethat their finances, legal structure and managementstructure works efficiently and helps drive theorganization forward.

As you can see the value chain encompasses the wholeorganization and looks at how primary and supportactivities can work together effectively and efficiently tohelp gain the organization a superior competitiveadvantage.


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Figure 2 shows the example of a company which isdealing financial services and ERP. Figure explains theprimary and secondary activity of company and their interconnection with each other how they add values tofinal product.

Figure 2 eg. Of finance solutoin providing company.


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Purpose of Value Chain Analysis


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Value Chain Analysis is central to an upgrading project. It

helps to identify Strengths and Weaknesses of a sector,new opportunities for upgrading, and potential threats(SWOT) all this with a focus on vertical integration intoglobal markets. Good research and analysis is also thebasis for bringing together stakeholders and facilitate thefinding of upgrading solutions. The degree and complexity of the analysis will varyaccording to context and the stage of the project. In somecircumstances it might be necessary to carry outrelatively complex mapping of a value chain, and adescription of its dynamics, accompanied by a diagnosisof main trends, opportunities and difficulties for smallenterprises wishing to access new markets. Further, thefocus might cross international boundaries.

In other circumstances, the research required might bemore focused and relatively simple, such as where it isregarded to be beneficial to enquire a particular group of buyers whether and under what circumstances theywould be prepared to source from a particular group of suppliers.

How to use the tool:


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Value Chain Analysis is a three-step process:1. Activity Analysis: First, you identify the activities

you undertake to deliver your product or service;2.

Value Analysis: Second, for each activity, you thinkthrough what you would do to add the greatest valuefor your customer; and

3. Evaluation and Planning: Thirdly, you evaluatewhether it is worth making changes, and then planfor action.

We follow these through one-by-one:-

Step 1 - Activity Analysis

The first step to take is to brainstorm the activities thatyou, your team or your company undertakes that in someway contribute towards your customer's experience.

At an organizational level, this will include the step-by-

step business processes that you use to serve thecustomer. These will include marketing of your productsor services; sales and order-taking; operationalprocesses; delivery; support; and so on (this may alsoinvolve many other steps or processes specific to your industry).

At a personal or team level, it will involve the step-by-stepflow of work that you carry out.

But this will also involve other things as well. For example:


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How you recruit people with the skills to give the bestservice.

How you motivate yourself or your team to perform

well. How you keep up-to-date with the most efficient andeffective techniques.

How you select and develop the technologies thatgive you the edge.

How you get feedback from your customer on howyou're doing, and how you can improve further.

Once you've brainstormed the activities which add valuefor your company, list them. A useful way of doing this isto lay them out as a simplified flow chart running downthe page - this gives a good visual representation of your "value chain". You can see an example of this in Figure 1below.

Step 2 - Value Analysis

Now, for each activity you've identified, list the "ValueFactors" - the things that your customers' value in theway that each activity is conducted.

For example, if you're thinking about a telephone order-taking process, your customer will value a quick answer to his or her call; a polite manner; efficient taking of order details; fast and knowledgeable answering of questions;and an efficient and quick resolution to any problems thatarise.


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If you're thinking about delivery of a professional service,your customer will most likely value an accurate and

correct solution; a solution based on completely up-to-date information; a solution that is clearly expressed andeasily actionable; and so on.

Next to each activity you've identified, write down theseValue Factors.

And next to these, write down what needs to be done or changed to provide great value for each Value Factor.

Step 3 - Evaluate Changes and Plan for Action

By the time you've completed your Value Analysis, you'llprobably be fired up for action: you'll have generatedplenty of ideas for increasing the value you deliver to

customers. And if you could deliver all of these, your service could be fabulous!

Now be a bit careful at this stage: you could easily fritter your energy away on a hundred different jobs, and never really complete any of them.

So firstly, pick out the quick, easy, cheap wins - go for some of these, as this will improve your team's spirits noend.

Then screen the more difficult changes. Some may beimpractical. Others will deliver only marginal


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improvements, but at great cost. Drop these.

And then prioritize the remaining tasks and plan to tackle

them in an achievable, step-by-step way that deliverssteady improvement at the same time that it keeps your team's enthusiasm going.

Key points:

Value Chain Analysis is a useful way of thinking throughthe ways in which you deliver value to your customers,and reviewing all of the things you can do to maximizethat value.

It takes place as a three stage process:

Activity Analysis , where you identify the activities

that contribute to the delivery of your product or service. Value Analysis , where you identify the things that

your customers value in the way you conduct eachactivity, and then work out the changes that areneeded.

Evaluation and Planning , where you decide whatchanges to make and plan how you will make them.

By using Value Chain Analysis and by following it throughto action, you can achieve excellence in the things thatreally matter to your customers.


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Example:

Lakshmi is a software development manager for asoftware house. She and her team handle short softwareenhancements for many clients. As part of a teamdevelopment day, she and her team use Value ChainAnalysis to think about how they can deliver excellentservice to their clients.

During the Activity Analysis part of the session, theyidentify the following activities that create value for

clients: Order taking Enhancement specification Scheduling Software development Programmer testing Secondary testing Delivery Support

Lakshmi also identifies the following non-client-facingactivities as being important:

Recruitment: Choosing people who will work wellwith the team

Training: Helping new team members becomeeffective as quickly as possible, and helping teammembers learn about new software, techniques andtechnologies as they are developed.


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Lakshmi marks these out in a vertical value chain on her whiteboard (you can see the first three client-facingactivities shown in the "Step 1: Activity Analysis" box in

Figure 1 below):

Next, she and her team focus on the Order Taking

process, and identify the factors that will give the greatestvalue to customers as part of this process. They identifythe following Value Factors:

Giving a quick answer to incoming phone calls; Having a good knowledge of the customer's

business, situation and system, so that they do notwaste the customer's time with unnecessary

explanation. Asking all the right questions, and getting a full and

accurate understanding of the customer's needs.


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Explaining the development process to the customer and managing his or her expectations as to the likelytimetable for delivery.

You can see these in the "Value Factors" column of figure1.

They then look at what they need to do to deliver themaximum value to the customer. These things are shownin the Figure 1's "Changes Needed" column.

They then look at what they need to do to deliver themaximum value to the customer. These things are shownin the Figure 1's "Changes Needed" column.

They then do the same for all other processes.

Once all brainstorming is complete, Lakshmi and her

team may be able to identify quick wins, reject low yieldor high cost options, and agree their priorities for implementation.


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Value Chain Analysis Challenges

There are several challenges in using value chainanalysis. First, traditional accounting systems are notdesigned for classifying costs by value activities. But withnewer accounting systems, such as those based upon activity-based costing, this type of cost classificationproblem can be solved. Furthermore, some onlinelearning institutions may have very complex value chains,a fact that makes the analysis difficult. Some would evenargue that strategic management is unsuitable for

knowledge-based organizations (Moran, 1998). Weargue that online learning institutions possesscharacteristics very similar to those of industrialorganizations, and that, therefore, strategic planning isessential to their operations and their survival. Valuechain analysis is an important tool for strategicmanagement, and when competition is intense,

companies must manage activities and costsstrategically, or they will lose their competitive advantage.

The model presented in this chapter originated fromstrategic management theory and has been proven veryeffective in the corporate world. The industry of onlinelearning is an open market for both for-profit and not-for-profit organizations. According to Michael Brennen

(2002), Online Learning Research Manager atInternational Data Corporation, spending on onlinelearning within corporations will jump from $3.65 billion to$12.98 billion by 2005.


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Sensing a market opportunity, for-profit universities,such as the University of Phoenix and Capella University,also target working adult students with online programs.

Added to this mix of providers are the technologycompanies that offer Web-based continuing education,and traditional publishers that offer product certificationcourses, and Web-portal companies that aggregatecourse content from other content sources. A potentiallylucrative and very competitive market has emerged.

In this environment, not-for-profit universities have little

choice but to play by the same rules that govern for-profituniversities. Value chain analysis may play a significantrole in enabling them to do so. A not-for-profit universitymust satisfy funding authorities, political leaders, and thegeneral public as to its effectiveness and efficiency.Value chain analysis can be used for determining at whatpoint costs can be reduced or value added in the

organization's value chain. A not-for profit organizationmust continually prove that it is serving specific publicneeds identified in its mission statement. Theorganization must also develop its various resources, anduse them effectively and efficiently, and to demonstrateits ability to manage its operating systems successfullyby delivering a quality service to the public served. Thevalue chain analysis is a useful framework to facilitatethese requirements.

the value chain by vishnu (asom)

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