Innovative Value Chain Management: A three tiers model

Fadi N. Al-Abbadi
Industrial Engineering Department
Faculty of Engineering and Technology, University Of Jordan
E-mail: Fadi_ju@yahoo.com

ABSTRACT

This paper proposes a powerful model for managing the value chain; a three tiers model is generated to
overcome the deficiencies that exist in the value chain activities; and specifically in the human resources
management activities and marketing and sales activities as well. The resulted model is built with large
dependency on porter’s generic model.

INTRODUCTION

The value chain is a model developed by Porter, focusing on cross-functional orientation in the company.
Porter’s value chain model is structured by primary activities such as service, marketing and sales,
operations, and outbound and inbound logistics and support activities such as procurement, technology
development, human resource management and company infrastructure.

Value chain management (VCM) is the integration of all resources starting with the vendor's vendor. It
integrates information, materials, labor, facilities, logistics, etc. into a time-responsive, capacity-managed
solution that maximizes financial resources and minimizes waste. In other words, efficient and effective
value chain management optimizes value for the customers' customer.

BACKGROUND AND LITERATURE REVIEW

During the past decades, the importance of the value chain and supply chain were arose, for the fact that
firms are facing a strong competition locally and internationally, which force the firms to adopt a suitable
model for increasing the pertained value and reducing the cost for the value chain activities.

(Brown, 1997) has offered a concise definition of the value chain: “The value chain is a tool to
disaggregate a business into strategically relevant activities. This enables identification of the source of
competitive advantage by performing these activities more cheaply or better than its competitors. Its value
chain is part of a larger stream of activities carried out by other members of the channel-suppliers,
distributors and customers”.

A ``customer-centric'' approach was used by (Slywotzky and Morrison, 1997) to propose a modern value
chain in which the customer is the first link to all that follows. The task of management is to identify:

• Customer needs and priorities

• The channels that can satisfy those needs and priorities
• The services and products best suited to flow through those channels
• The inputs and raw materials required to create the products and services
• The assets and core competencies essential to the inputs and raw materials

Slywotzky and Morrison concluded that, the value of any product or service is the result of its ability to
meet a customer's priorities. Customer priorities are simply the things that are so important to customers
that they will pay a premium for them or, when they can't get them, they will switch suppliers.
It follows that value opportunities are distinguished by understanding customers' priorities and producing,
communicating and delivering the identified value. A value perspective of strategy follows:
Strategy is the art of creating value, the way the company defines its business and links together with the
only two resources that really matter in today's economy knowledge and relationships on an organization’s
competencies and customers (Normann and Ramirez, 1993).

Value production and coordination is based on the argument (Walters and Lancaster, 1999a, 1999b) in
which they suggested that value is created by identifying and understanding customer benefits and costs
and the combinations of organizational knowledge and learning, together with organizational structures that
facilitate response and delivery.

A modern value chain definitions were proposed by (Walters and Lancaster, 2000), in terms of it being a
business system that creates end-user satisfaction and realizes the objectives of other member stakeholders.
Comparisons are drawn with the current notion of supply chain management and an explanation is given as
to how the supply chain fits into the wider perspective put forward. Ideas are advanced in relation to value
chain relationships and options. Models are then suggested relating to a number of well-known
international companies, where the authors have researched, at primary or secondary level.

(Graham and Ahmed, 2000) examine the peculiar nature of buyer-supplier relations from a value chain
perspective in the UK aerospace sector. A detailed examination is made of buyer strategies in terms of
acquisition, management and exploitation of supplier product, process and marketing technologies. Porter's
value chain framework was evaluated and subsequently found to be the most useful one for structuring the
initial stage of data collection.

One of the most useful and structured studies that covered the key elements in value chain uncertainty was
introduced by (McGuffog, 1997) who stated that the key elements in value chain uncertainty are best
analyzed in terms of how they contribute to inefficiencies in both demand and supply.

Accordingly, the aim of Value chain management is to systematically reduce these sources of uncertainty
through the active co-operation of the key players in each value chain. By reducing uncertainty, total
service is improved and overall cost is reduced (McGuffog, 1999).

The efforts were continued in an attempt to get rid of the inherited complexity and the waste within the
value chain as shown by (Schulz et al. 2007), who concluded that companies used to concentrate on the
management within the individual functions instead of focusing on cross-functional value chain
optimization. Therefore, value chain management focuses on optimizing volumes and values based on
cross-functional management concepts and integrated decision making throughout the value chain.

PORTERS’s GENERIC MODEL

To better understand the activities through which a firm develops a competitive advantage and creates
shareholder value, it is useful to separate the business system into a series of value-generating activities
referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a
generic value chain model that comprises a sequence of activities found to be common to a wide range of
firms. Porter identified primary and support activities as shown in the following diagram:
 Inbound Operations Outbound Marketing Services
Logistics Logistics and Sales

Margin
Firm Infrastructure

HR Management

Technology Development

Procurement

Figure 1

The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities,
thereby resulting in a profit margin. The primary value chain activities are:

1. Inbound Logistics: the receiving and warehousing of raw materials and their distribution to
manufacturing as they are required.
2. Operations: the processes of transforming inputs into finished products and services.
3. Outbound Logistics: the warehousing and distribution of finished goods.
4. Marketing & Sales: the identification of customer needs and the generation of sales.
5. Service: the support of customers after the products and services are sold to them.

These primary activities are supported by:

1. The infrastructure of the firm: organizational structure, control systems, company culture, etc.
2. Human resource management: employee recruiting, hiring, training, development, and
compensation.
3. Technology development: technologies to support value-creating activities.
4. Procurement: purchasing inputs such as materials, supplies, and equipment.

The term ‚ Margin implies that organizations realize a profit margin that depends on their ability to manage
the linkages between all activities in the value chain. In other words, the organization is able to deliver a
product / service for which the customer is willing to pay more than the sum of the costs of all activities in
the value chain.

THE THREE TIERS MODEL

It was noticed that porter’s generic model is a well structured model that covers the whole enterprise
activities, and at the same time some concerns were arose through the implementation of the conventional
value chain management, leaving a room for further improvements and enhancements.

The most obvious deficiencies in managing the value chain activities are clear in:

1. Marketing and Sales activities

2. HR management activities
To get rid of those deficiencies, enhance the performance of the value chain and to manage it properly, a
three tiers model is proposed; this model is an attempt to reconfigure the value chain activities in order to
create uniqueness and excellence in managing the value chain.

The proposed model consists basically of the following three tiers:

1. Generic tier: the activities that already exist in porter’s generic model
2. Intellectual capital tier : a tier that focuses on the knowledge of the human beings within the value
chain
3. Marketing excellence tier: a tier that ensures the excellence of the chain in conceiving the
internal/external customers’ needs and providing them with an outstanding output

Marketing Excellence

Inbound Operations Outbound Marketing Services

Logistics Logistics and Sales

Margin
Firm Infrastructure

HR Management

Technology Development

Procurement

Intellectual Capital

Figure 2

The power of this model appears in consolidating the effect of the HR management and the marketing and
sales activities that already exist in the generic tier with the intellectual capital and marketing excellence
tiers, which will emphasize there effects on managing the value chain.

Intellectual capital is knowledge that can be exploited; the term combines the idea of the intellect or brain-
power with the economic concept of capital, the saving of entitled benefits so that they can be invested in
enriching the value chain by generating an excellent output.

Intellectual capital can include the skills and the knowledge that an enterprise has developed about how to
make its goods or services; individual employees or groups of employees whose knowledge is deemed
critical to a firm's continued success; and its aggregation of documents about processes, customers,
research results, and other information.

The intellectual capital tier will assist in cumulating people’s knowledge within the value chain ensuring
the consistency of the activities through over the value chain, proper transferring for the knowledge among
the value chain players and effective learning.
Marketing basic idea is to align the company with market needs, and is applied at most companies across
industries. Markets and customers are constantly evolving, which forces companies to review their goals
and strategies on a regular basis. Companies must therefore create suitable structures, processes and tools
and be able to implement new strategies. This is where many companies often run into trouble – and where
marketing excellence can play a significant role.

The marketing excellence tier will ensure the excellence of the value chain by offering approaches and
tools to optimize all relevant marketing issues. These range from marketing target setting, marketing
strategy, marketing organization and processes to overall marketing and brand management and support
processes.

CONCLUSIONS

In this paper, porter’s generic model for managing the value chain was introduced and discussed, and
accordingly a three tiers model was proposed to overcome the inherited deficiencies within the value chain
activities; specifically the HR management activities and marketing and sales activities. This model can
play a significant role in improving the value chain management practice through reducing the waste within
the value chain and the cost as well. This privilege is enabled by giving some attention to the employees
within the value chain, and adopting marketing excellence strategies that bring excellence to the value
chain.

REFERENCES

Brown, L (1997), Competitive Marketing Strategy, Nelson, Melbourne.

Graham, G and Ahmed, P (2000), “Buyer supplier management in the aerospace value chain”, integrated
manufacturing systems, pp. 462-468

McGuffog, T. (1997), Managing the Supply Chain with Speed and Certainty, Article Number Association.

McGuffog, T. (1999), ``K.I.S.S. - Keep It Simple, Standard, Speedy and Certain - The principles of value
chain management and electronic commerce'', e-centreuk.

Normann, R. and Ramirez, R. (1993), ``From value chain to value constellation: designing interactive
strategy'', Harvard Business Review, July/August.

Schulz O, Kannegiesser M, Disteldorf H (2007) Supply chain management – what’s next?

Value chain management is turning into a key lever to boost profitability. A.T. Kearney Executive Brief.
Düsseldorf

Slywotzky, A.J. and Morrison, D.J. (1997), The Profit Zone, Wiley, New York, NY.

Walters, D. and Lancaster, G. (1999a), ``Value based marketing and its usefulness to customers'',
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Walters, D. and Lancaster, G. (1999b), ``Value and information - concepts and issues for management'',
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Walters, D. and Lancaster, G. (2000), ``Implementing value strategy through the value chain'', Management
Decision, Vol. 38 No. 3, pp. 160-178.