CHAPTER 2:

VALUE CHAIN
LEARNING OUTCOMES
1. Explainthe concept of value and how it can be
increased.
2. Describea value chain and the two major
perspectives that characterized it.
3. Discuss key value chain decisions.
4. Explain offshoring and the key issues associated
with it.
5. Identifyimportant issues associated with value
chains in a global business environment.
VALUE CHAIN
 Is a network of facilities and processes that
describes the flow of goods, services,
information, and financial transactions
from suppliers through the facilities and
processes that create goods and services
and deliver the to the customer.
A value chain is a set of activities a firm
operating in a specific industry performs in
order to deliver a valuable product or service
for the market;
 Itis a set of activities that an organization
carries out to create value for its customers;
 The concept comes from business
management and was first described and
popularized by Michael Porter in his 1985
best-seller, Competitive Advantage Creating
and Sustaining Superior Performance;
 The idea of the value chain is based on the process
view of organizations, the idea of seeing a
manufacturing (or service) organization as a
system, made up of subsystems each with inputs,
transformation processes and outputs;
 Inputs, transformation processes, and outputs
involve the acquisition and consumption of
resources– money, labor, materials, equipment
building, land administration and management;
 How value chain activities are carried out
determines costs and affects profits.
 The advances in transportation and information
technology have made the world a much smaller
place and have created a significantly more
intense competitive business environment,
resulting in value chains that span across the
globe.

 Today’s managers face difficult decision in

balancing cost, quality, and service objectives to
create value for their customers and
stakeholders.
 As a result, many companies have reconfigured
their value chains.

 In addition, today’s operations managers

increasingly deliver goods and services to
multiple markets and operate in a shrinking
global business environment.

 Thus, we emphasize the importance of

understanding the global business environment
and local culture, and their impact on value chain
design and operations.
THE CONCEPT OF VALUE
VALUE
-is the perception of the benefits associated with a good,
service, or bundle of goods and services (i,e., the customer
benefit package) in relation to what buyers are willing to
pay for them.

The decision to purchase a good or service or a customer

benefit package is based on an assessment by the customer
of the perceived benefits in relation to its price. The
customer’s cumulative judgement of the perceived benefits
leads to either satisfaction or dissatisfaction.
 HOW TO INCREASE VALUE?
To increase value, an organization must:
a) Increase perceived benefits while holding price or cost
constant;
b) Increase perceived benefits while reducing price or cost; or
c) Decrease price or cost while holding perceived benefits
constant.

In addition, proportional increases or decreases in perceived

benefits as well as price results in no net change in value.
Management must determine how to maximize value by
designing processes and systems that create and deliver the
appropriate goods and services customers want to use, pay for,
and experience.
VALUE PROPOSITION
A competitively dominant customer experience is
often called a “value proposition”.

The focus on value has forced many traditional goods-

producing companies to add services to their customer
benefit packages. If the quality or features of goods
cannot be improved at a reasonable cost and prices
cannot be lowered, then enhanced or additional services
may be provided better total value to customers.
 VALUE CHAIN PERSPECTIVES
A value chain is a “cradle-to-grave” input/output
model of the operations function. The value chain
begins with suppliers who provide inputs to a goods-
producing or service-providing process or network of
processes.

 Suppliers might be retail stores, distributors,

employment agencies, dealers, financing and leasing
agents, information and internet companies, field
maintenance and repair services, architectural and
engineering design firm, and contractors as well as
manufacturers of materials and components.
VALUE CHAIN PERSPECTIVES
 The inputs they provide might be physical goods.
 Inputsare transformed into value-added goods
and services through processes or networks of
work activities, which are supported by such
resources as land, labor, money, and information.
 The value chain outputs-goods and services- are
delivered or provided to customers and targeted
market segments.
GOODS-PRODUCING & SERVICE-PROVIDING VALUE
CHAINS
EXHIBIT 2.2

Note that what

is being
transformed
can be almost
everything.
(people, goods,
information &
entertainment.
PRE- AND POST-SERVICE OF THE VALUE CHAIN
Pre and postproduction services complete the ownership cycle
for the good or service.

 Preproduction services include customized and team-oriented product design,

consulting services, contract negotiations, product and service guarantees, customer
financing to help purchase the product, training customer to use and maintain the
product, purchasing and supplier services, and other types of front-end services. The
focus here is “gaining a customer”.

 Postproduction services include on-site installation or application services,

maintenance and repair in the field, servicing loans and financing, warranty and claim
services, warehouse and inventory management for your company and sometimes for
your customers, training telephone service centers, transportation delivery services,
post sale, visit to the customer’s facility by knowledgeable sales and technical- support
people, recycling and remanufacturing initiatives, and other back-end services. The
focus here is on “keeping the customer”.
“The success of the entire value chain depends on
the design and management of all aspects of the
value chain (supplier, inputs, processes, outputs, or
outcomes) including both short- and long term
decisions”.
SUPPLY CHAIN
 Is the portion of the value chain that
focuses primarily on the physical movement
of goods and materials, and supporting
flows of information and financial
transactions through the supply,
production, and distribution processes.
PROCTER & GAMBLE’S CONCEPTUAL MODEL OF
A SUPPLY CHAIN FOR PAPER PRODUCTS
VALUE AND SUPPLY CHAIN INTEGRATION

 Is the process of managing information, physical goods, and

services to ensure their availability at the right place, at the
right time, at the right cost, at the right quantity, and with
the highest attention quality.
A focus solely on coordinating the physical flow of materials
to ensure that the right parts are available at various stages of
the supply chain, such as manufacturing and assembly plants
is commonly.
 Value chain integration includes improving internal processes
for the client as well as external processes that tie together
suppliers, manufacturers, distributors, and customers.
OFFSHORING

Is the building, acquiring, or moving of

process capabilities from a domestic
location to another country location
while maintaining ownership and
control.
VALUE CHAIN IN A GLOBAL BUSINESS
ENVIRONMENT
 Multinational Enterprise- is an organization that sources,
markets, and produces its goods and services in several countries
to minimize costs, and to maximize profit, customer satisfaction,
and social welfare.

Example of multinational companies:

 British Petroleum
 General Electric (GE)
 Siemens
 Procter & Gamble (P&G)
 Toyota
 ISSUES IN GLOBAL VALUE CHAIN DECISIONS
 Global supply chains face higher level of risk and uncertainty,
requiring more inventory and day-to-day monitoring to prevent
product shortages.
 Transportation is more complex
 The transportation infrastructure may vary considerably in foreign
countries
 Global purchasing can be a difficult process to manage when
sources of supply, regional economies, and even governments
change.
 International purchasing can lead to disputes and legal changes
relating to such things as price fixing and quality defects.
VALUE CHAIN AND LOCAL CULTURE
 Global organization must balance the risk of designing
and managing global value chains against the potential
benefits of emerging markets. Each country has certain
skills and resources as well as marketplace potential.
 To build an effective global supply chain, organization
must not only know their own processes, resources, and
capabilities, but also those of the countries where the
firm’s resources are located.
 To extend the firm’s value chain to other nations
requires an understanding of national culture and
practices.
 Thank you!

Reference: Operations Management by Collier & Evans