Value Chain

Raj Sharman

Sources

Value Chain Resource Planning: Adding Vaue with Systems Beyond the Enterprise; Authors: Elliot Bendoly, Ashok Soni and M. A.
Venkatramanan; Business Horizons, March 2004.

Internal-Business-Process Perspective, Harvard Business School Publishing, 2006, Chapter 5 on the Balanced Scorecard: Translating Strategy
into Action
 Value Chain
Value Chain framework is a
model that views firms by sets of
activities that firms use to create
value and competitive advantage.
Value Chain
 Value Chain models the firm as a chain of
value-creating activities.

 Its ultimate goal is to maximize value creation

while minimizing costs.

 The value chain framework is a powerful

analysis tool for strategic planning.

The concept of Value Chain popularized by Michael Porter (Harvard University)

 Inbound Outbound
Operations
Logistics Logistics

Value Chain
Marketing
and sales
The value chain categorizes the generic value-adding activities of an organization.

 It describes the activities within and around an organization, and relates them to an
analysis of the competitive strength of the organization.

 it evaluates which value each particular activity adds to the organizations products or
services Service

 Only if these things are arranged into systems and systematic activates will it become
possible to produce something for which customers are willing to pay a price.

 The ability to perform particular activities and to manage the linkages between these
activities is a source of competitive advantage
 Inbound Outbound

Value Chain
Operations
Logistics Logistics

The “support activities" identified by

The "primary activities" Michael Porter include:
Marketing
identified by Michael  Procurement (Purchasing, sourcing,
and sales

Porter include: etc.)

 Technology Development
(Information systems, etc.)
 Inbound logistics  Human Resource Management Service

 operations (employee benefits, compensation,

etc.)
(production),  Infrastructure Management (finance,
 outbound logistics, legal, etc.)
 marketing and sales,
and
 services
(maintenance).
Porter’s View

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.
Value System
Value Chain can extend beyond the boundaries of an
enterprise -- Value Systems according to M. Porter.

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).
 Value System - Example

Source: E. Bendoly et al. Value chain resource planning: Adding value with systems beyond the enterprise;
Business Horizons 47/2 March-April 2004 (79-86)
ERP
 Enterprise systems are designed to plan and integrate
processes, enforce data integrity, and better manage resources.

 The best known are Enterprise Resource Planning (ERP)

systems, which are predominantly intra-firm focused and provide,
at least in theory, seamless integration of processes across
functional areas with improved work flow, standardization of
various business practices, improved order management,
accurate accounting of inventory, and up-to-date operational
data.
Seamlessness

????
Implication
The Internal - Business - Process Perspective
 Each business has a unique set of processes for creating
value for customers and producing financial results.

 The internal-business-process value Chain encompasses

three principal business processes:

 Innovation
 Operations
 Postsale service
 The Internal - Business - Process Perspective

Innovation was a critical internal process.

So is Postsale Service
Processes
 Innovation process
 the business unit researches the emerging or latent needs of customers,
and then creates the products or services that will meet these needs.

 Operations process,
 the generic internal value chain, is where existing products and services
are produced and delivered to customers.

 Postsale process
 includes warranty and repair activities, treatment of defects and returns,
and the processing of payments, such as credit card administration
Metrics - Innovation Process
MEASURES FOR BASIC AND APPLIED RESEARCH

1. The number of entirely new products and services

developed
2. Performance measures for product design and
development processes.
3. Percentage of sales from new products
4. Percentage of sales from proprietary products
5. New product introduction versus competitors’
6. New product introduction versus plan
7. Time to develop next generation of products
Metrics - Innovation Process

MEASURES FOR PRODUCT DEVELOPMENT

1. The percentage of products for which the first

design of a device fully met the customer’s
functional specification
2. The number of times the design needed to be
modified, even slightly, before it was released for
production.
Metrics - Innovation Process
General

 Market share in selected categories

 Brand recognition (from market research)
 New accounts opened per year
Metrics - Innovation Process
ANOTHER MEASURE FOR PRODUCT DEVELOPMENT

 Hewlett-Packard engineers developed a metric called

break-even time (BET) to measure the effectiveness
of its product development cycle

BET measures the time from the beginning of product

development work until the product has been introduced
and has generated enough profit to pay back the
investment originally made in its development
BET
Metrics -- BET
1. BET incorporates not only the outcome from the product
development process but also the cost of the process.

2. BET stresses profitability.

3. BET is denominated in time: it encourages the launch of new

products faster than the competition so that higher sales can be
earned faster to repay the product development investment.

BET is a measure to signal desired behavior than as an outcome

measure
Metrics - Postsale Process
 Cycle times from customer request to ultimate resolution of
the problem
 measure the speed of response to failures.

 Cost metrics can evaluate the efficiency

 the cost of resources used for postsale service processes

 Yield
 Percentage of customer requests handled with a single service
call, rather than requiring multiple calls to resolve the
problem.

 Defects
 They recorded the percentage of items that could not be offered
to customers because of quality-related defects.
Metrics – End to End
Length of the time between project
completion and final cash payment by
the customer
 Metrics – Vendor
(Remember Value
System)
Vendor scorecard that evaluated
suppliers along dimensions of
quality, price, lead time, and input
into fashion decisions.
Example
 Questions?
Why study the Internal - Business -
Process Perspective?