Value-Chain 

A critical concept for International Business .  see also; supply chain,  strategy

 

 

Global Value Chains

A commodity chain encompasses the whole range of activities involved in the design, production, and marketing of a product.

 

The value chain, also called the commodity chain and production-consumption chain, is described as a comprehensive set of activities that are required to bring a product from a concept stage to marketing and consumption of end products (Gereffi1999). It involves a series of components that begin with product design and the selection and purchase of raw materials and intermediate inputs and go through processing, marketing and distribution. The chain continues with the operation of sales of intermediate and end products. The last component of the chain is the consumption of final goods that is regulated by internal and external demands.

 

The process of globalization has promoted two types of chains through which global production networks manage and operate: the producer-driven and the buyer-driven commodity chains. The first type is characteristic of capital-intensive industries such as automobiles, aircraft, computers, and other advanced technology industrial activities. The buyer-driven commodity chains are organized around labour -intensive industries such as fashion industry and shoe industry in which the marketing and manufacturing agents (retailers, branded marketing agencies and branded manufacturers) set up global production networks, principally in developing countries.

 

Enterprises in exporting, developing countries produce the finished goods under contract following the specifications, guidelines and technical advice provided by the purchasing agents. Successful examples of buyer driven commodity chains were Japanese in the 50s and 60s, Asian in the 70s and 80s and Chinese in the 90s (Gereffi 1999).

 

 

Table of Contents

Value-Chain  How it Works: for International Business Value Chain - global When not to apply The Value Chain Further Developments in Value Chain Research Example:  Blue Jeans supply chain:

 

 

 

How it Works: for International Business

 

Divide up the value chain and then locating each component of that value chain in the country / region that offers the lowest mix of cost-factors that are most important to that function. I am fascinated by the concept that one location has a comparative advantage over others, and that this explains why certain activities occur in certain locations, and not in others. For example, if you divide the value chain into areas such as operations, R&D, sales, marketing, customer service, and purchasing, you find transnational companies locating each of these activities in an area that gives them the largest competitive advantage, and lowest costs for each individual function. Manufacturing, for example, might be placed in the location with the lowest factor input costs related to labor, but R&D might be located in a place which has advanced education, a history of innovation, or a developed and highly competitive consumer market. It is best to allow each asset to be specialized and to use the location that has the best mix of factor costs that are important to that function. For example, the USA might be selected for design, China for manufacturing, UK for research, and India for call center outsourcing or software design, creating many “centers of excellence” across the globe, which are all globally linked together through the value chain. Michael Porter's “Diamond” analysis tool is very helpful for conducting this comparative analysis.

 

 

The nine activities involved in Michael Porter value chain were: sales, marketing, production, product design, procurement, customer support, administration and R&D.

 

Example:

 

A company might look at the value chain as a flow, with downstream activities that are closer to the consumer such as sales and marketing, and may choose to locate those functions in the country that they are serving. On the other hand, the upstream functions such as product development or production may want to be centralized like what Toyota has done (initially, at least) with centrally locating their main production facilities, and then using a high level of coordination to access global markets. Porter suggested that each function along the value chain should be looked at to evaluate the proper level of coordination and configuration based on the industry. A good example of this would be a company that located its product innovation in the USA to take advantage of the local innovation here, but put its research scientists in England to take advantage of the high skill but relatively good prices of research, and might place its production facilities in Eastern Europe to take advantage of lower wage rates, and then place customer service or IT development in India to take advantage of low priced, but skilled labour there.

 

 

 

Reflection / Personal Views:

 

It is interesting that Porter suggests that we should consider dividing up the value chain and that we should consider seeking out particular advantages for each of the elements individually. By doing so, we are able to better understand exactly why companies such as GE place specialized offices or functions all over the world. I think this is the key lesson that I will take from this class, and will try to use this level of analysis in the future as I look for ways sot gain advantage over my competitors in the furniture business. Perhaps in the future we will consider placing our design facilities in New York City to take advantage of the competitive consumer market there, but might place some of our production in China to take advantage of lower wages. We might consider outsourcing some of our website design to Eastern European firms, or customer service to India. But based on our management structure as it is today, I am aware that we are not ready for this level of complexity.

 

 

 

 

 

Value Chain - global

 

The value chain 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 worth 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 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.

 

 

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.

 

 

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 value-enhancing 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.

 

 

References

Pil, F.K. and Holweg, M. (2006) "Evolving from value chain to value grid." MIT Sloan Management Review, 47(4): 72-80

 

Rolf G. Poluha: Application of the SCOR Model in Supply Chain Management. Youngstown, NY 2006, ISBN 1-934043-10-9.

 

Michael E. Porter (1985) Competitive advantage: creating and sustaining superior performanceP33 The Free Press

 

www.wikipedia.com

 

 

 

Example:  Blue Jeans supply chain: