Question

Summarize the Kim et al. reading on the Value Chain concept. Be sure to include the key aspects of each article with a final paragraph of what you learned and how you can apply it in the workplace or your personal life

Answer 1

The Value Chain Analysis:

Value chain analysis has been widely used as a means of describing the activities within and around an organization, and relating them to an assessment of the competitive strength of an organization (or its ability to provide value-for money products or services). Value chain analysis was originally introduced as an accounting analysis to shed light on the value added of separate steps in complex manufacturing processes, in order to determine where cost improvements could be made and/or value creation improved. These two basic steps of identifying separate activities and assessing the value added from each were linked to an analysis of an organization's competitive advantage by Michael Porter.

One of the key aspects of value chain analysis is the recognition that organizations are much more than a random collection of machines, money and people. These resources are of no value unless deployed into activities and organized into routines and systems which ensure that products or services are produced which are valued by the final consumer/user. In other words, it is these competences to perform particular activities and the ability to manage linkages between activities which are the source of competitive advantage for organizations. Porter argued that an understanding of strategic capability must start with an identification of these separate value activities.

The primary activities of the organization are grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service.

• Inbound logistics are the activities concerned with receiving, storing and distributing the inputs to the product/service. This includes materials handling, stock control, transport etc.
• Operations transform these various inputs into the final product or service: machining, packaging, assembly, testing etc.
• Outbound logistics collect, store and distribute the product to customers. For tangible products this would be warehousing, materials handling, transport, etc. In the case of services, it may be more concerned with arrangements for bringing customers to the service if it is a fixed location (e.g. sports events)
• v Marketing and sales provide the means whereby consumers/users are made aware of the product/service and are able to purchase it. This would include sales administration, advertising selling and so on. In public services, communication networks which help users access a particular service are often important.
• Service is all those activities, which enhance or maintain the value of a product/service such as installation, repair, training and spares.

Each of these groups of primary activities is linked to support activities. These can be divided into four areas;

Procurement: This refers to the processes for acquiring the various resource inputs to the primary activities (not to the resources themselves) as such, it occurs in many parts of the organization.

Technology development All value activities have a 'technology', even if it is simply know-how. The key technologies may be concerned directly with the product (e.g. R&D product design) or with processes (e.g. process development) or with a particular resource (e.g., raw materials improvements)

Human resource management. This is a particularly important area which transcends all primary activities. It is concerned with those activities involved in recruiting, managing, training, developing and rewarding people within the organization

Infrastructure: The systems of planning, finance, quality control information management, etc. are crucially important to an organization's performance in its primary activities. Infrastructure also consists of the structures and routines of the organization which sustain its culture.

Identifying Core Competences: Value chain analysis is useful in describing the separate activities which are necessary to underpin an organization's strategies and how they link together both inside and outside the organization

Although a threshold competence in all of these activities is necessary to the organization's successful operation, it is important to identify those competences which critically underpin the organization's competitive advantage. These are known as the core competences and will differ from one organization to another depending on how the company is positioned and the strategies it is pursuing. For example, consider how small shops compete with supermarkets in grocery retailing. All shops need to have a threshold competence in the basic activities of purchasing, stocking, display, etc. However, the major supermarkets are pursuing strategies which provide lower prices to consumers through their core competences in merchandising, securing lower cost supplies and managing in-store activities more efficiently. This gives a supermarket competitive advantage over small shops: it is difficult for small shops to imitate these competences since they are underpinned by key resources such as computerized stock/ordering systems and own brand labels, So the typical comer shop grocery store gains competitive advantage over supermarkets by concentrating more on convenience and service through different core competences the personal service to customers, extended opening hours, informal credit, home deliveries, etc. The key resources for the successful corner shop are the style of the owner and the choice of location. These aspects of service are valued by some consumers and are difficult for the supermarkets to imitate without substantially increasing their costs.

It is also important to understand that those unique resources and core competences which allow supermarkets to gain competitive advantage over corner shops are not unique resources or core competences in the competitive rivalry between supermarkets. They are necessary resources and threshold competences to survive as a supermarket. The competitive rivalry between supermarkets is therefore achieved through other unique resources (perhaps a key site) or core competences (perhaps in the management of own brand supply). In this industry experience shows that these tend to be easily imitated. So long term competitive advantage needs to be secured by continually shifting the ground of competition.

The development of global competition in the automobile industry over recent decades also illustrates this issue well. During the 1950s and 1960s, the US giants such as Ford and GM dominated the global market through their market access core competences of establishing dealer networks and later overseas production plants. Meanwhile, Japanese manufacturers were developing competences in defect-free manufacture. By the mid-1970s they were significantly outperforming Ford on quality and reliability - which became critical success factors in allowing them to achieve global sales. By the mid-1980s, both Ford and the major Japanese companies had achieved similar competence in these two areas of global networks and quality. Although maintaining a global network was a critical success factor which continued to distinguish Ford and the Japanese from many European companies such as Peugeot, the production and supplier management activities underpinning quality (reliability) were becoming threshold competences. The competitive arena then switched to competences which would create some uniqueness of product in an increasingly 'commodity-like' industry. The new core competences became the ability to provide unique product designs/features at low volumes of manufacture - the so-called 'lifestyle niche' was produced by companies like Mazda. This agility in design and manufacturing techniques became a new and important core competence in the global competition.

It is important to identify an organization's core competences not only for reasons of ensuring or continuing good 'fit' between these core competences and the changing nature of the markets or environment, as illustrated in this example. Core competences may also be the basis on which the organization stretches into new opportunities. So, in deciding which competences are core, this is another criterion which should be used - the ability to exploit the competence in more than one market or arena. The development of 'added value' services and/or geographical spread of markets are two typical ways in which core competences can be exploited to maintain progress once traditional markets are mature or saturated.

Value chain analysis is a reminder that the long-term competitive position of an organization is concerned with its ability to sustain value for money products or services, and it can be helpful in identifying those activities which the organization must undertake at a threshold level of competence and those which represent the core competences of the organization. However, in order to do this, it is necessary to identify the basis on which an organization has gained competitive advantage and hence which are the core competences in sustaining this advantage. The subsections which follow look at how different bases of organizational competences can be analyzed and understood.

Managing linkages:

Core competences in separate activities may provide competitive advantage for an organization, but nevertheless over time may be imitated by competitors Core competences are likely to be more robust and difficult to imitate if they relate to the management of linkages within the organization's value chain and linkages into the supply and distribution chains. It is the management of these linkages which provides leverage' and levels of performance which are difficult to match.

The ability to co-ordinate the activities of specialist teams or departments may create competitive advantage through improving value for money in the product or service Specialization of roles and responsibilities is common in most organizations and is one way in which high levels of competence in separate activities is achieved. However, it often results in a set of activities which are incompatible - different departments pulling in different directions adding overall cost and/or diminishing value in the product or service.

This management of internal linkages in the value chain could create competitive advantage in a number of ways:

• There may be important linkages between the primary activities. For example, a decision to hold high levels of finished stock might ease production scheduling problems and provide for a faster response time to the customer. However, it will probably add to the overall cost of operations. An assessment needs to be made of whether the value added to the customer by this faster response through holding stocks is greater than the added cost.

• it is easy to miss this issue of managing linkages between primary activities in an analysis it for example, the organization's competences in marketing activities and operations are absented separately. The operations may look good because they are geared to high-volume, low variety, low unit-cost production. However, at the same time, the marketing team may be selling speed, flexibility and variety to the customers. So high levels of competence in separate activities are not enough if, as here, the competences are incompatible that is, they are not related to the same view of what value for money means to the customer.

• The management of the linkages between a primary activity and a support activity may be the basis of a core competence. It may be key investments in systems or infrastructure which provides the basis on which the company outperforms competition Computer-based systems has been exploited in many different types of service organization and has fundamentally transformed the customer experience. Travel bookings and hotel reservation systems are examples which other services would do well to emulate. They have created within these organizations the competence to provide both a better service and a service at reduced cost. They have allowed the organizations to create genuinely new services from these core competences or to expand rapidly into new markets.

• Linkages between different support activities may also be the basis of core competences For example; the extent to which human resource development is in tune with new technologies has been a key feature in the implementation of new production and office technologies. Many companies have failed become competent in managing this linkage properly and have lost out competitively

In addition to the management of internal linkage, competitive advantage may also be gained by the ability to complement co-ordinate the organization's own activities with those of suppliers channels of customers Again this could occur in a number of different ways;

• Vertical integration attempts to improve performance through ownership of more parts of the value system, making more linkages internal to the organization. However, the practical difficulties and costs of co-coordinating a wider range of internal activities can outweigh the theoretical benefits

• Within manufacturing industry the competence in closely specifying requirements and controlling the performance of suppliers (sometimes linked to quality checking and/or penalties for poor performance) can be critical to both quality enhancement and cost reduction

• A more recent philosophy has been total quality management, which seeks to improve performance through closer working relationships between the specialists within the value system. For example, many manufacturers will now involve their suppliers and distributors at the design stage of a product or project.

• The merchandising activities which manufacturers undertake with their distributors are now much improved and are an important