Demonstrate a graduate level understanding of the direct correlation between the elements comprising the Contemporary Value Chain and the customer’s purchase experience.
The purpose of the assignment is for you to demonstrate a graduate level understanding of the direct correlation between the elements comprising the Contemporary Value Chain and the customer’s purchase experience.
Directions
Use the already APA formatted template in Course Documents titled “Unit 1 Assignment Template Contemporary Value Chain” as your starting point for this assignment. Download the template and save it as your own document, for example, YourNameUnit1GB570.docx.
Think about a horrible purchase experience — one you will never forget and perhaps because of which you will never buy anything from that brand ever again. Perhaps you told other people how shockingly bad this purchase experience was. In your paper you will describe the experience using the directions included within the Unit 1 Assignment template.
Internet references are not accepted for this assignment, although you may use Internet research for your own learning. Articles must be peer reviewed. At least two different sources are required to be used as references for this assignment, one from the textbook and at least one article from the Library.
Think about what the (brand name) company could/should have implemented within their value chain to have ensured your experience was not bad, but instead left you with surpassed expectations (a delighted customer).
In the essay apply at least four of the elements in the Contemporary Value Chain Model and suggest how the company can improve the customer experience by fixing value chain elements. This is your opportunity not only to see where the brand’s value chain was not working properly, but to recommend what needs to be done so future customers have delightful experiences.
Write your paper using first person perspective.
Include a conclusion summarizing the paper’s content without introducing any new information.
Support your response’s content with at least two separate sources, applied and cited references from a Library article and your textbook. Apply and cite no more than one referenced sentence per paragraph. Internet references are not accepted for this Unit 1 Assignment. Use APA in-text citations within the response and list the applied reference(s) at the end of the response using APA formatting. APA formatting resources are available in the Academic Resources area titled, “APA Style Central.”
APA 7th edition
Unit chapters attached
Peer reviewed
template attached
Requirements: 5 pages
CHAPTER 1The Value Chain RevisitedKey Points• A new value chain model that rests on a solid foundation of leadership, culture and people, appropriate infrastructure, and strategy• The difference between the value chain and the supply chain• Identifying external resources like an organization’s suppliers as a key component of the value chainIntroductionMichael Porter’s seminal 1985 book, Competitive Advantage, introduced the concept of the value chain as a tool for analyzing organizations.1 It was a breakthrough contribution to management thought because it stressed the importance of looking at the discrete activities a firm performs and how they interact to deliver value to the marketplace as a source of com-petitive advantage. Porter’s generic value chain is very clear and straight-forward. It has made a significant contribution to our understanding of how organizations ought to work to create competitive advantage. It con-tinues to be influential in the academic and business literature. However, it was published in 1985 and has not been revised since then. What we propose is a value chain model that reflects the changes in the business environment over the past 28 years. We begin by providing a concise overview of the essence of Porter’s generic value chain, identifying areas that we believe need to be revised. We then introduce a Contemporary Value Chain model that addresses fundamental areas of concern not addressed by Porter. The Contempo-rary model is designed to integrate existing thinking from various fields. Therefore, it exhibits the same concept of integration that the value chain
2 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN itself requires to deliver competitive advantage. We identify key contribu-tions of the Contemporary model and why we believe those contributions are important and consistent with the 21st-century business environment. The Porter ModelPorter’s value chain identifies nine generic activities broken down into four support activities and five primary activities (see Figure 1.1). The support activities include a firm’s infrastructure, human resource management, technology development, and procurement. The primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and customer service. A firm needs to realize a suitable margin from the activities it undertakes to deliver the product or service to the customer.In addition, Porter set a firm’s value chain as one (although key) element of a larger value system that includes the value chains of suppliers, distribution channel members, and customers. His value chain concept emphasizes the importance of linkages, horizontally among a firm’s inter-nal activities, and vertically among suppliers, channel members, and customers. He notes:The value chain is not a collection of independent activities but a system of interdependent activities. Value activities are related by linkages within the value chain. Linkages are relationships between the way one value activity is performed and the cost or performance of another.2InfrastructureHuman resources managementTechnology developmentProcurementInboundlogistics OperationsOutboundlogistics Marketingand sales ServiceSupportingactivitiesPrimaryactivitiesMarginFigure 1.1. Michael Porter’s value chain.
tHE VALUE CHAIN rEVISItED 3While that observation is on target, what is missing is the anteced-ent requirement of corporate culture that encourages, nourishes, and rewards the type of collaborative behavior that will promote value-creating linkages. This issue must be a fundamental consideration in establishing a highly effective value chain. Corporate culture underlies the human resource practices that Porter defines as a support activity in his model.The Limitations of the Porter Model The absence of a “culture” component is one limitation of the Porter model. There are some others. Since the mid-1980s, there have been radi-cal changes in business thinking that have significant implications for any value chain model. For example, he identifies procurement as a “support activity” in his generic value chain. He notes:A given procurement activity can normally be associated with a specific value activity or activities which it supports, though often a purchasing department serves many value activities and purchas-ing policies firm-wide.3With the development of the concept of supply chain management over the past decade, procurement, now more descriptively called supply management, is much more than a support activity. Rather, businesses look at supply management, through which more than 50% of their sales revenues flow in a goods-producing environment, as critical to competi-tive and financial success.Sourcing decisions and total cost of ownership analyses are just two of the important activities in the field of supply management that will have a direct and significant impact on the firm’s competitiveness and profitability. Therefore, rather than a support activity, supply manage-ment has transitioned over the past 15 years to be more properly viewed as a primary activity in a firm’s value chain having a direct impact on the firm’s ability to deliver value to the market. Several supply management
4 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN experts have noted, “The discipline of acquiring and moving materials has become a key strategic advantage.”4 Similarly, there are elements related to the other support activities that Porter identifies—technology development, human resource man-agement, and infrastructure—that need to be viewed from a more robust perspective in a revised value chain model if it is to reflect contemporary reality.More fundamental is the need to include the critical role of effective leadership as the foundation for effective value chain management and the need to identify the primacy of the customer, both not part of Porter’s generic model. It is effective leadership that creates the culture of col-laboration on which effective value chain management depends. Today, with shortened product life-cycle times, increasing global competition, and more demanding customers, the role of the customer needs to be made explicit in a Contemporary Value Chain model. Finally, when one looks at the primary activities that Porter identi-fies in his model, they define what we now call the supply chain. The supply chain is an important component of the value chain but is not synonymous with it. Therefore, a newer model needs to reflect that fact of contemporary business.The Contemporary Value Chain ModelThe discussion that follows will explain our rationale and elements of a revised value chain model, one we believe is more consistent with the demands and challenges of business as we begin our journey into the 21st century. The model is designed to integrate existing thinking from various fields and to fill in the gaps we see in the Porter model (see Figure 1.2).LeadershipWe begin the discussion at the base of the value chain and work our way upward. Problems that firms experience in the marketplace result not so much from flawed strategies but from poor execution of those strategies.5 The value chain, by virtue of the activities that it contains, is fundamental to effective execution.
tHE VALUE CHAIN rEVISItED 5Goals and strategyCulture and peopleIdeagenerationProductdevelopmentSupply chainmanagementInfrastructureCustomer valueLeadershipInformation managementBudgeting and financial supportExternal resourcesCustomer needFigure 1.2. The Contemporary Value Chain.Given the scope and linkages involved in the value chain, leaders must be able to grasp the value chain as a totality and understand how the interactions within it create value for customers. Mary Parker Follett, an important management thinker of the early 20th century, wrote about this important element of leadership. Of the greatest importance is the ability to grasp a total situa-tion … Out of the welter of facts, experience, desires, aims, the leader must find the unifying thread. He must see a whole, not a mere kaleidoscope of pieces. He must see the relation between all the different factors in a situation … My only thesis is that in the more progressively managed businesses there is a tendency for the control of a particular situation to go to the man with the larg-est knowledge of that situation, to him who can grasp and organ-ize its essential elements, who understands its total significance, who can see it through—who can see length as well as breadth.6Peter Senge’s work on “the learning organization” is also relevant here.
6 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN In part, Senge identifies the role of the leader as someone “helping people see the big picture, promoting understanding of how different parts of the organization interact, and explaining how local actions have longer-term and broader impacts than local actors realize.”7 It is not difficult to see what role leadership plays in managing the value chain for competitive advantage. Follett and Senge, while not writ-ing about leadership as it relates to the value chain, effectively capture the essence of leadership in a firm that is serious about using the value chain concept to gain competitive advantage.However, we do not want to convey the message that there exists an omnipotent individual on whose skills and abilities the functioning of an effective value chain rests. The concept of the value chain requires close collaboration horizontally in the organization and vertically with the firm’s external constituents like suppliers. Therefore, leadership may be expected to be distributed among the participants in the value chain. This notion of leadership is what Mintzberg calls “community-ship.” He notes,There is a need for more of what has been called distributed lead-ership, meaning that the role is fluid, shared by various people in the group according to their capabilities as conditions change.8That is the type of leadership the value chain requires if it is to produce the dynamism essential to enable the firm to compete in an increasingly competitive global economy.Let’s now look at the three pillars built atop the base of effective lead-ership. They provide the support superstructure for an effective value chain. The three pillars include goals and strategies, culture and people, and infrastructure.Goals and StrategiesA firm needs to be clear on how it intends to compete in the mar-ketplace. Take, for example, four well-recognized dimensions of competitiveness—cost, response time, quality, and flexibility. A firm may choose to compete on one or a combination of those dimensions.
tHE VALUE CHAIN rEVISItED 7The dimension or dimensions chosen will dictate the basic design of the value chain.If a firm chooses to compete on the basis of response time to market, then the value chain needs to be structured for speed. On the other hand, if a firm chooses to compete on all four dimensions simultaneously (a fair definition of a world-class competitor), the demands on the value chain are different. For example, Dell Computer Corporation built its reputa-tion by competing on all four dimensions as we will discuss in Chapter 2.Therefore, it is critical that the leadership identify goals that will ena-ble customer need to be satisfied by the value created through the organi-zation. Given these goals, effective strategies and business plans must be designed to achieve the desired results. This requires the leadership team to establish values and metrics that define the culture of the organization.Culture and PeopleThis is perhaps the most important pillar in the foundation of an effective value chain. Without a culture that encourages and nourishes collabora-tion and without people who are comfortable working in a collaborative environment, there is little chance that the “boundarylessness” characteri-zing effective value chain management will occur.9McKinsey and company developed what has come to be known as the 7-S model to demonstrate the influence of corporate cultural values on a firm’s activities. The model’s management molecule establishes “superor-dinate goals” as the heart of the molecule. See Figure 1.3.Those goals are another name for the values to which the company is committed and which impact all of the other elements of the model. For example, a fundamental corporate value that stresses the importance of internal harmony and cooperation will permeate the activities of all of the other elements. Let’s use that value to understand the impact on the role of human resource management, a support activity in Porter’s generic model, but in our model included with culture as one of the pillars of the Contemporary Value Chain model.As the 7-S model indicates, superordinate goals impact the “skills” component of the molecule. The model defines “skills” as “distinctive capabilities of key personnel or the firm as a whole.”10 The corporate value
8 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN of harmony and cooperation is fundamental to developing the linkages among activities essential for the functioning of a highly effective value chain. Therefore, it is incumbent on the human resource function and others involved in recruiting people to the firm that those recruited are predisposed to working collaboratively with their colleagues. Similarly, for those already on board, the human resource activity needs to provide developmental opportunities so that those skills can be acquired. Overall, the issue becomes one of personnel alignment, “getting the right people on the bus and the wrong people off the bus, and the right people in the right seats.”11 The core value of harmony and cooperation will also impact a firm’s systems. For example, the firm’s performance appraisal system needs to include an explicit evaluation of a person’s ability to work as part of a highly functioning team. Those that score well on this element should be rewarded accordingly. The organization needs to avoid what Steven Kerr calls “Rewarding A While Hoping for B.”12 Essentially, don’t emphasize StrategyStaffStructureSkillsSystemsSuper-ordinategoalsStyleFigure 1.3. Applying the 7-S model.Source: Pascale and Athos (1981).
tHE VALUE CHAIN rEVISItED 9the importance of working in teams and then reward on the basis of individual performance measures only, hoping that needed teamwork will automatically occur.The “culture and people” pillar of the Contemporary model is covered in more depth in Chapter 4. InfrastructureInfrastructure means the basic framework of the organization. It is comprised of four primary components that include organization, processes, technology, and facilities. Processes, technology, and facilities are enablers of the value proposition, providing the support to the people to efficiently and effectively execute the goals and strategies of the business. The integration of people, processes, and technology has become a major focus for those looking to improve productivity and service collaboration and virtual teaming.13 The benefits of collaboration on a large scale require careful infrastructure design and maintenance. Strategies regarding infrastructure take on many shapes from those sup-porting stand-alone businesses to virtually integrated business alliances. Aligning the infrastructure to meet the operational needs of the business is essential to success.A prime example of the interoperability of the Contemporary Value Chain model components is the securing of the infrastructure plank to support the rest of the model. Specifically, demands of organizations to manage information for all aspects of modern business are dependent on how well the people, processes, and technologies are integrated. Lacking the proper technology and processes to most effectively meet the custom-er’s value needs can limit the competitiveness of the organization. These factors must also align with and support the organization if the greatest value is to be achieved.Despite prognostications of the “the death of bureaucracy,” most organizations today maintain the bureaucratic form.14 There are indi-vidual departments of specialists, hierarchically formed, to carry on the daily work of the enterprise. Despite the efforts to “delayer” organiza-tions over the past many years, the bureaucratic form remains. Firms have designed ways to ameliorate their rigidity including matrix designs and
10 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN cross-functional teams that are formed and re-formed as the imperatives of the marketplace warrant. Overall, Alfred Chandler in his seminal work, Strategy and Structure, succinctly captured the role of infrastructure: “A company’s strategy in time determines its structure and that the common denominator of structure and strategy has been the application of the enterprise’s existing resources to market demands.”15In today’s environment, how a firm’s value chain is structured is determined by its strategy. In all cases, however, the structure must provide for linkages among functional silos and with the firm’s external resources. That is the necessary characteristic for an effective value chain and one that is delivered through the structure of the firm’s activities. In essence, we are describing a firm that is characterized by a high degree of boundarylessness.An excellent example of this principle relates to the new product development process, one of the first key elements of our new value chain that emanates from customer demands. Boundarylessness helps to drive the design of a firm’s infrastructure. The firm needs to be organized to facilitate cross-functional teaming. This approach to managing work flows from the cultural values of the organization and will depend on the skills and willingness of its people to work in that culture.Figure 1.4 demonstrates the benefit of boundarylessness in the prod-uct development element of the new value chain. Situation A is the typi-cal siloed organization where work is done sequentially. One department or activity completes its work and throws that work over the wall to the Improving response time to market• Reconfiguring the product development activity in the value chainType AType BConceptdevelop.FeasibilitytestingProductdesign Processdevelop.PilotproductionFinalproductionTimeFigure 1.4. The product development process.Source: Adapted from takeuchi and Nonaka (1986).
tHE VALUE CHAIN rEVISItED 11next department. When it gets to the production department for pilot production, only then do questions of manufacturability get raised with the likely result that the design would need to be revisited and reworked with the obvious negative implications on cost and time.Situation B shows the benefits of a boundaryless organization where there is a significant amount of cross-functional involvement in the prod-uct development process from the beginning. The savings in time and cost are obvious. This approach becomes critical if a firm is competing on the basis of response time to market.Fundamentally, the firm’s culture provides the context in which an infrastructure dominated by a great deal of collaboration is both necessary and encouraged. The people, carefully selected to fit the culture, provide the firm with a competitive advantage through a tightly integrated value chain designed for delivering maximum value to the marketplace. A com-petitive advantage based on culture and the skills of the people is difficult for competitors to duplicate. Resting across the three pillars of the Contemporary Value Chain are two important and pervasive beams that directly support the tangible value creating activities that allows a firm to transform “Customer Need” into “Customer Value.” Those support beams are information manage-ment and budgeting and financial support. Information ManagementInformation management is enabled by the people and infrastructure that provides a firm with the wherewithal to effectively and efficiently man-age the value chain. Porter’s generic value chain model recognizes the importance of technology development as a support activity. He explicitly identifies the importance of information management when he notes, “Information systems technology is particularly pervasive in the value chain, since every value activity creates and uses information.”16Porter’s model includes a broad range of products, processes, and information technologies under the support activity of technology development. We choose to more specifically identify information management as a separate case that is pervasive and directly impacts the management of the value chain from suppliers to customers.
12 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN Information strategies that help to support supplier relationship man-agement (SRM), enterprise resource planning (ERP), and customer relationship management (CRM) are clearly fundamental to managing the information needs of the value chain. What is of equal importance is that the interfaces enabled by the technologies provide a seamless inte-gration that is much more common now than when Porter developed his generic model. More common then were technologies that were directed mainly at automating and integrating internally oriented applications for functional departments.Today, with the rapid development of the internet and internet-based technologies, firms can seamlessly integrate internal and external functions through more comprehensive ERP systems and they can use information management and technology to improve existing business processes through business process reengineering efforts and create better relations with suppliers through SRM and customers through CRM. It is this workflow software that has promoted the horizontal col-laboration necessary to effectively manage the value chain. Workflow soft-ware is one of the fundamental flatteners enabling global relationships. As Friedman notes,For the world to get flat, all your internal departments—sales, marketing, manufacturing billing, and inventory—had to become interoperable, no matter what machines or software each of them was running. And for the world to get really flat, all your systems had to be interoperable with all the systems of any other company (suppliers and customers).17As Figure 1.2 indicates, information management lies across the value chain’s foundation pillars, suggesting its pervasiveness across the entire chain and can only effectively deliver value if the elements of the founda-tion permit. Take, for example, a company looking to reduce inventory through a vendor managed inventory (VMI) approach. VMI relies on information management technology to share inventory and sales infor-mation in order to control the flow and levels of inventory with the aid of suppliers. VMI can help overcome many problems related to inven-tory levels, such as poor inventory tracking, leading to higher levels of
tHE VALUE CHAIN rEVISItED 13 inventory, poor forecasting models leading to inventory deficiencies in case of unexpected demand, and a lack of trust between firms and their suppliers.To illustrate, a consulting firm is hired to assess the impact of imple-menting VMI. It finds that the firm could realize significant cost savings. At this point, it is clear that the technology to enable VMI could deliver value for the company and contribute to more effective value chain man-agement. The problem is that the infrastructure and culture were not compatible with what effective information management could deliver. The compensation for the vice president responsible for inventory is based on maintaining higher inventory levels. Regardless of the potential of the new information management system to help the company realize cost savings, this vice president is not willing to implement it.The company is rewarding high levels of inventory while, at the same time, hoping for interdepartmental collaboration to reduce inventory levels to the point that they paid an outside consultant to evaluate the feasibility of VMI, a proven inventory-reducing strategy (a classic case of Kerr’s admonition of “rewarding A while hoping for B”). In essence, the company was displaying one of the symptoms of value chain dysfunction, the suboptimization of organizational goals whereby one of the functions in the value chain puts its own goals ahead of the overall goals of the organization.18 It was also clear that the company’s reward structure was not consistent with an effective value chain management strategy. This issue will be discussed in Chapter 5.Budgeting and Financial SupportPorter considers accounting and finance as part of the infrastructure in his generic model. As noted, earlier, we have defined infrastructure differ-ently. We view budgeting and financial support as we view information management—a pervasive and indispensable force in the management of an effective and efficient value chain. The implication is that the firm’s accounting professionals work closely with those in other disciplines to help facilitate the development and delivery of products and services that meet customer needs at a price the customer is willing to pay. Here the role of management accounting is indispensable. The results of the
14 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN value-boosting actions of management accounting will directly impact resource allocation in the budgeting process.Management accounting is typically viewed as an indispensable part of an organization’s control system. It assesses the value chain’s performance from the perspective of the organization’s objectives. In addition to its assessment role, management accounting has an important role to play in directly managing the value chain starting with the product development and design process.If one assumes that a firm uses market-driven opportunistic pricing, then management accounting will play an important role in assuring that a firm realizes a target profit margin from that pricing. That profit mar-gin will occur if target (allowable) costs are met. In this process, and in the context of the value chain, management accounting identifies vari-ances from the target costs to inform an improvement agenda, not sim-ply to report variances from standard costs. The latter action does not encourage the type of continuous improvement thinking required for the management of a dynamic value chain.Management accounting helps the product designers meet target costs by identifying variances from target, thus forcing redesign efforts through the process of value engineering.19 In essence, for management accounting to be effective in supporting value chain activities, it must rise above the traditional focus on working within existing constraints and support a continuous improvement philosophy that believes there are no limits to improvement. That is a philosophy that all 21st-century value chains must be guided by to assure competitive success. Figure 1.5 captures the essence of this process.Management accounting used in this way helps with the efficient allocation of resources that leads to value creation. For example, product designs may be value-engineered to eliminate unnecessary costs. This pro-cess helps the firm to develop more robust budgets that will not include the need to allocate any more resources than necessary for the product design in question.The Contemporary Value Chain model considers finance to be a real driver of competitive advantage that permeates and enables the entire value chain; thus, its position in the model as a function is directly impacted by the way information is managed across the value chain.
tHE VALUE CHAIN rEVISItED 15Given our ability to collect and analyze data today across business channels because of the advances in information management systems, finance can help us plan our strategic future, manage our operational present, and record our financial past in order to create value. The use of activity-based costing, target costing, and life-cycle costing among others can help a company make decisions and evaluate strategy. These tools will affect how all processes in the company are performed and, ultimately, will enable a company to create the most value possible.Another important role of finance in the value chain is that it allows us to measure our financial success in delivering value to the marketplace. Figure 1.6 illustrates the use of economic value added (EVA) to connect different processes and activities in a company and their impact on the total value created.20Figure 1.6 shows cost measures used in the supply management com-ponent of the supply chain as part of the total costs of supply chain man-agement and, ultimately, a part of the entire company’s costs. Those costs could include requisition costs and all costs associated with the purchase of goods such as receiving costs, invoice-processing costs, and so forth. Selling priceTarget profitTarget costsFocus: Continuously reducing costs to generate as much profit as possibleout of a given price Buyers work with suppliers to help them reduce target costs in a win-winpartnershipProduct designCost estimatesVariance from targetValue engrg/analysisRedesignFigure 1.5. Management accounting and value analysis.
16 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN This model allows us to pick the most important measurements and directly relate them to the overall measures used to understand the value added for the entire company. Two perspectives are promoted here, both focused on value creation from value chain activities. First, an analysis can start at the top and find out where the higher costs are coming from and implement operational policies to control those costs or uncover cultural problems which are leading to those costs, and second, the analysis can start from the opera-tional level to understand the impact of those activities on the total value created in the value chain. A more in-depth example is presented in Chapter 2.Product DevelopmentMoving to the top of the Contemporary Value Chain model, prod-uct development is the transformative process that converts an idea to a product or service that customers value. This process requires the collaboration of a number of constituents including marketing, engineering, production, supply management and suppliers depending SCOR cardlevel 1EVA = Revenue(Costs)AssetsLevel 2Level 3Distributionmanagement% total costTransportmanagement% total costLevel 4Cost ofgoods sold––––––––––––––––Productplanning costs% sm cost Supplierdevelop costs% sm costSupplymanagement% total costTtotal scm cost(7.5% of revenue)Productacquisition cost% sm cost Order placement% productacquisition costReceiving costs% productacquisition costInvoice payment% productacquisition costFigure 1.6. The impact of the supply chain on the cost element of economic value added.
tHE VALUE CHAIN rEVISItED 17on the industry, and actual final offering. Company culture and infra-structure are the two pillars of the model that play a significant role in the process.A supportive culture is the necessary condition that promotes the interdepartmental collaboration essential for the effective product development. The culture, however, is not a sufficient condition. Infra-structure must be in place to facilitate the required collaboration. The siloed infrastructure must be supplanted by one designed to allow for permeability where turf is not protected and ideas flow freely among the relevant constituents. There is, therefore, a link among the product development, infrastructure, and culture components of the model as depicted in Figure 1.4.For example, engineers must be open to recommendations by suppli-ers on basic inputs that may be more cost-effective without jeopardizing functionality. That requires close collaboration between engineering and supply management. In addition, product developers must be open to the design for manufacturability concerns of those in production. This per-vasive collaboration between all relevant constituents in the value chain results in meeting three important dimensions of competitiveness—cost, quality, and response time to market.As the need to revisit designs is eliminated, redundant costs are like-wise eliminated and, as Figure 1.4 demonstrates, the time involved in product design is significantly reduced increasing speed to market. In addition, multiple inputs from various constituents with vested interests in the design (e.g., marketing, engineering, supply management, etc.) allowed by the infrastructure will most likely improve design quality if, by the right quality, we mean a design that allows all involved to meet their objectives, for example, marketing and customer acceptance, engi-neering and performance, supply management, and cost and availability of required materials, etc.Supply Chain ManagementAs noted earlier, the primary activities in the Porter Value Chain model—inbound logistics, operations, outbound logistics, marketing and sales, and customer service—are important components of what we call today
18 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN the supply chain. (Procurement, a support activity in the Porter model, is recognized as an important component of the supply chain on the input end of the Contemporary model and is identified as supply man-agement.) The inbound logistics component of the Porter model is cap-tured through the supply management and transportation components of the Contemporary model. Although Porter separates procurement from inbound logistics in his model, in practice, this is often difficult to do because effective supply management requires the careful planning of the movement of goods from suppliers to the buying company. The outbound logistics component in the Porter model is reflected in the dis-tribution planning and transportation components of the Contemporary model. Once the primary activities are folded into the contemporary con-cept of the supply chain, Porter’s graphic model of the value chain loses much of its conceptual foundation.The Contemporary model takes these primary activities and consoli-dates them in the supply chain component of the model, allowing the model to include other elements fundamental to understanding value chain success, that is, converting customer needs to customer value. We do not show profit (margin in the Porter model) as an explicit element of the model because it is implied in a value chain that delivers customer value through competitive advantage and subsequent increases in market share. Defining the Supply ChainSupply chain management involves proactively managing the two-way movement and coordination of goods, services, information and funds from raw materials through to end user … (requiring) the coordination of activities and flows that extend across boundaries.21The definition of the supply chain begins with the concept of integra-tion, fundamental to the effective management of the supply chain and the greater value chain of which it is a part. The concept of “flow” is also a significant element of the definition.It is important to recognize that the integration of supply chain activi-ties and the flow of materials, products, services, information, and cash
tHE VALUE CHAIN rEVISItED 19takes place among both the firm’s internal supply chain participants and its suppliers, thus the importance of the explicit recognition of “external resources” component of the Contemporary model. Overall, flow extends from a firm’s suppliers to its customers. See Figure 1.7.As Figure 1.7 suggests, the elements of the supply chain represent the “source–make–deliver” sequence required to link suppliers (source) with the internal components of the supply chain (make) ultimately deliver-ing value to a firm’s customers (deliver). All suppliers and customers are included in the “source–make–deliver” sequence. For example, an auto manufacturer may purchase dashboard assemblies from an assembly sup-plier who, in turn, purchases assembly components from its suppliers. The auto manufacturers make the final cars and deliver them to dealer-ships who sell to the final consumer. The “source–make–deliver” sequence applies to all companies either upstream (suppliers) or downstream (distributors) of the firm’s value network.22Any value chain model aspiring to describe the workings of the 21st-century value chain must clearly include a distinct supply chain PlanCustomeInternal orExternal Internal orExternal Your companySupplierSupplier’sSupplierCustomer’sCustomerReturnReturnReturnReturnMakeDeliverSourceSourceSourceMakeMakeDeliverDeliverDeliverSourceSupply chain managementForecastingSupplymanagementDistributionplanningCustomer service &order managementSupplie r’ssupplierCustome r’scustomerMaterial handlingPackagingWarehousing&TransportationSupply chain technologyInformation managementFinished goodsinventory planningReverselogisticsAggregate planningOperationsFigure 1.7. The basic elements of a supply chain.Source: Mawhinney, J. Duquesne University Pittsburgh, PA.
20 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN element. An effectively functioning supply chain should deliver a com-petitive advantage to the firm because competition is no longer simply between companies but between those companies’ supply chains. External ResourcesThe final component in the Contemporary Value Chain model is “exter-nal resources.” While Porter’s concept of the value chain recognizes the importance of vertical linkages, external resources are not an explicit com-ponent of his model.A firm’s competitiveness in the 21st century depends on the qual-ity of its external resources more than ever before. Friedman identifies 10 flatteners fundamental to his concept of the flat world. Four of them— outsourcing, offshoring, supply chaining, and insourcing— leverage external resources to improve a firm’s global competitiveness.23 In essence, a firm’s external resources, a key element of which is its supplier base, is a fundamental part of its value chain.Today, the firms with the best supplier base and who have cultivated productive relationships with those suppliers (developing vertical link-ages according to Porter) will win the competitive race. As firms con-tinue to pursue outsourcing strategies, the supplier base of the value chain becomes increasingly important.Suppliers are not just depended upon to provide material, services, and equipment to support a competitive strategy but to contribute to the product development process. Effectively managed, supplier input at this stage of the value chain can help the buying firm reduce two important dimensions of competitiveness—cost and time—by 15–20%.24Social Responsibility and the 21st-Century Value ChainInherent in the effective management of the 21st-century value chain is the concern for how a firm meets its responsibilities to the society of which it is a part. As concerns about the natural environment and global business practices mount, the success of a company will no longer be measured solely in economic terms, that is, profitability, but through the
tHE VALUE CHAIN rEVISItED 21way it also meets its environmental and social obligations as well in what has come to be called the triple bottom line.25This triple bottom line concern must permeate all activities in the value chain. Most important is that it must be explicitly recognized by the firm’s leadership, permeate the corporate culture, be an important ele-ment of goals and strategies, and finally manifest itself in product devel-opment and actions in the supply chain including the decisions on the choice of suppliers.For example, a major concern in product development should be the impact on the environment and the degree to which a product is recycla-ble through the reverse logistics process.26 In the operations component of the supply chain, the issue should be if a product can be manufactured to minimize environmental impact. Here, if the value chain is being man-aged effectively, the importance of the internal integration between prod-uct development and operations becomes obvious.Regarding suppliers, firms need to assure that social responsibility becomes an important component of the supplier selection process including issues like compliance with environmental regulations and, in the cases of offshore outsouring, child labor issues. In the Contemporary model, social responsibility is not considered a separate component but rather embedded in the very fabric of the value chain itself. We discuss this more in depth in Chapter 6.Contributions and Significance of the Contemporary ModelWe acknowledge Michael Porter’s important and groundbreaking work on the concept of the value chain. Our effort here is to build on it and create a model more attuned to the 21st-century business environment.First, including leadership as an explicit component of the Contem-porary model reflects the fact that leadership matters as Jim Collins estab-lished in his book Good to Great.27 Great leaders set the tone and are the foundation of a great value chain. Leadership is not an embedded feature of the Porter model. It needs to be made explicit that effective value chains just don’t happen. They are effectively led and the tone of that leadership must permeate the organization.
22 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN Second, great leaders establish a corporate culture to allow great things to happen that create sustainable competitive advantage by creat-ing value for the customer. Porter acknowledges the importance of both horizontal and vertical linkages among internal departments and exter-nal resources such as suppliers. However, the integration of functions and collaboration among them and with external resources necessary for effective supply chain management will be influenced positively or nega-tively by the corporate culture. A culture of collaboration is critical to success. It is not sufficient to identify the importance of linkages. Those linkages will only be productive in a culture that promotes values and rewards collaboration.Likewise, Porter’s model does not draw a link between culture and human resource management. He notes that “human resource manage-ment affects competitive advantage in any firm, through its role in deter-mining the skills and motivation of employees and the cost of hiring and training. In some industries it holds the key to competitive advantage.”28However, he does not make a case for the link between culture and human resource management. The organization’s culture will dictate (or should) the kinds of people to be recruited and hired, for example, those comfortable with collaboration. The culture also sets the context for the types of training and development offered and the types of compensation systems used, for example, individual versus group rewards.Third, the dynamism of the 21st-century business environment is leading to ever-shorter product life cycles. Therefore, a more complete value chain model must include idea generation and product develop-ment as key components. Porter is silent on this point although he does discuss the importance of technology development in competitive advan-tage. Today, it is fundamental to competitiveness that the value chain begin with a dynamic idea-generation process and compressed product development cycles. Therefore, we include them in the Contemporary model.Fourth, the Contemporary model calls specific attention to the fact that today’s firm is an extended enterprise that depends on significant contributions from those outside the organization, most specifically sup-pliers, if it is to build a competitive advantage. Porter’s concept of a value system, that is, the value chains of the firm and those of customers, channel
tHE VALUE CHAIN rEVISItED 23members, and suppliers is akin to the notion of the extended enterprise. However, his model does not include a specific external resource compo-nent. Given the growth in outsourcing since his model’s introduction, we believe that an up-to-date model needs to explicitly reflect this key development as an important characteristic of the 21st-century busi-ness environment. The external component lies atop the idea generation, product development, and supply chain components of the Contempo-rary model because firms need to draw on the expertise of suppliers in the early phases of the product development process. In the case of the supply chain, supply management plays an important strategic role in its inter-face with suppliers of materials and services, while logistics collaborates with transportation and distribution providers to execute delivery.Fifth, the Contemporary model’s supply chain component includes the primary activities of the Porter model including inbound logistics, outbound logistics, and operations and one of his supporting activities—procurement. Herein lies one of the most significant differences between the two models as explained earlier.In today’s business environment, with the typical goods-producing firm spending 50% or more of its sales dollars on the purchases of goods and services, and with the dramatic growth in outsourcing, there can be no justification for continuing to identify procurement as a support activity. The term itself does not adequately describe the evolution that has taken place in this increasingly important function in contempo-rary business. With responsibility for building supplier relationships and becoming more deeply involved with the strategy-planning process, pro-curement has evolved into “supply management.” The supply chain com-ponent of the Contemporary Value Chain captures this change. Today, as business practice continues to evolve, the connotation of procurement itself becomes too narrow giving way to the more comprehensive supply management.Sixth, we believe that no value chain model can be complete with-out an explicit recognition of the customer. As Peter Drucker postulated many years ago, “With respect to the definition of business purpose and business mission, there is only one … focus, one starting point. It is the customer. The customer defines the business.”29 Therefore, the Contemporary Value Chain model starts with customer need and ends
24 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN with customer value, denoting that the major purpose of the value chain is to deliver value to the customer.Similarly, we also include goals and strategies as one of the founda-tion pillars of the Contemporary model based on the notion that the “customer defines the business.” Goals and strategies call attention to the fact that elements of the value chain—principally the supply chain component—will need to be configured to serve the demands of a target market by delivering on one or more of the aforementioned dimensions of competitiveness (cost, quality, response time, and flexibility).Although Porter addresses this issue as segment scope, it is not explicitly included in his model. We believe that any contemporary con-figuration of a value chain needs to demonstrate the role goals and strate-gies play because they will drive a value chain configuration to best serve the customer.Finally, unlike the Porter model, we do not include “margin” in the Contemporary model. Porter defines margin as the difference between total value provided and the cost of activities that deliver value, that is, margin is created if what the customer is willing to pay (total value) is greater than the costs of creating that value. While it is obvious that a firm’s value chain must create margin, we believe that it is a consequence of effective value chain leadership and management lying outside the con-struct of the value chain itself. Therefore, it is not included in the Con-temporary model. In essence, we subscribe to Drucker’s explanation of profitability: “Profit is not the explanation, cause, or rationale of business behavior and business decisions, but the test of their validity.”30Implications for PractitionersWe hope the Contemporary model is useful in helping practitioners rec-ognize the antecedents required for managing a value chain that can lead to competitive advantage. Those antecedents include leadership, culture, and in Jim Collins’ words, “getting the right people on the bus.” It is also important for practitioners to appreciate the critical role that exter-nal resources play in delivering customer value. Too often, executive-level management is unaware of the connection between productive supplier relationships and company success. Therefore, they don’t appreciate the
tHE VALUE CHAIN rEVISItED 25value produced by the supply management component of the supply chain that not only contributes to competitive success but may boost profitability as well. Perhaps most fundamentally, the construct of the Contemporary model can help practitioners keep a focus on the customer as the beginning and end of what they do. For as Drucker argued, “any serious attempt to state what our business is must start with the customer, his realities, his situation, his behavior, his expectations, and his values.”31ConclusionThe Contemporary Value Chain model is designed to capture important elements of a firm’s value chain that the Porter model does not. The Con-temporary model builds on the important contribution of the basic idea of the value chain that Porter created 27 years ago.The Contemporary model argues that the effective functioning of the value chain depends fundamentally on the quality of a firm’s leadership, corporate culture, the quality of its people, and the congruence between the firm’s strategy and its infrastructure. The primary activities of the Porter model are consolidated into the supply chain component of the Contemporary model allowing the Contemporary model to include important elements not included in the Porter model, elements critical to an understanding and management of the 21st-century value chain including idea generation, product develop-ment, and an explicit recognition that a value chain cannot create value without collaboration with external resources. Perhaps, most fundamen-tal is the need for a value chain model to include customer need as the driver and customer value as the outcome of value chain activities. This allows the casual observer to understand that the value chain has firm starting and ending points that are customer-focused, a critical consid-eration today for building competitive advantage. One does not get that sense when looking at the Porter model. The model itself has no customer component. It also identifies what we believe to be the fundamental resources necessary for successful value chain management—people, budgeting and finances, information management, and external resources. Porter iden-tifies the first three as support activities (human resource management,
26 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN technology development, and infrastructure). There is no component for external resources in his model. The Contemporary model assumes that all of these resources are so deeply imbedded in the management of value chain activities that identifying them as support activities does not cap-ture the essence of their importance. We have already made the case for including external resources in the Contemporary model. Finally, inherent in the decisions made in the process of managing the Contemporary Value Chain is the pervasive notion of corporate social responsibility, an issue that has become fundamentally important in contemporary business. Overall, we believe the Contemporary Value Chain is a more complete and enabling view of the critical elements of today’s business environment fundamental to delivering customer value and a template for strategic assessment of people, process, and technology integration. This chapter is based on Presutti, W. D., Jr., & Mawhinney, J. R. (2009). The value chain revisited. International Journal of Value Chain Management, 3(2). Used with permission.Suggested Actions• Assure that leadership commands a holistic view of the organization.• Build an organizational culture that emphasizes collaboration among value chain participants.• Recruit into the organization only those who are comfortable working in a collaborative culture.
CHAPTER 2The Value Chain’s Impact on Competitiveness and ProfitabilityKey Points• Deciding on how to compete based on four key dimensions of competitiveness—cost, quality, response time, and flexibility• Value chain design and how it is based on the chosen dimension(s) of competitiveness• The value chain–financial performance link and the impact on economic value added and return on invested capitalIntroductionCompetitiveness and profitability—is anything more important to a business? Competition is more aggressive than ever in today’s flat world.1 It is being defined more as value chain versus value chain than company versus company. If Company A designs its value chain bet-ter than Company B, then Company A’s chances of delivering on the value dimensions that customers demand increase. Customers will be willing to pay more for the value received than it costs for the company to deliver value resulting in heightened profitability. The value chain should be able to deliver sustainable competitive advantage leading to sustained profitability. This chapter will discuss the key dimensions of competitiveness and the issues involved in designing a value chain based on the dimension or dimensions on which companies choose to compete. The impact of
28 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN value chain activities on two significant indicators of financial success— economic value added (EVA) and return on invested capital (ROIC)—will be explained.The Dimensions of Competitiveness An effectively and efficiently managed value chain is a major key to competitive success. That success will ultimately lead to the company’s profitability goals (see Figure 2.1). There are four core dimensions by which companies may choose to compete—cost, quality, response time, and flexibility. A company may choose to focus on one of those dimensions or may choose to compete on a mix or all of the dimensions simultaneously.The first three are self-explanatory. Flexibility refers to the ability of a company to adjust to changes in customer demands. The four dimensions relate to Michael Porter’s generally recognized strategies of cost leader-ship, differentiation, and focus, which serve as the basis for establishing competitive advantage.2As noted, a company may choose to differentiate itself based on being a cost leader, speed to market, quality, flexibility, or any combination thereof. Or it may choose to focus on a market niche that places a high value on one of the core dimensions (beyond cost) for which customers are willing to pay a premium price. World-class companies can compete I. Competitiveness, profitability, and the value chainEffective andefficient valuechainCompetitivenessProfitabilityThe dimension:• Cost• Quality• Response time• FlexibilityFigure 2.1. Value chain management and competitive success.
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 29on all four dimensions. Dell Computer Corporation is a good example. Dell built its early success by:• mass customizing computers based on customer preference (flexibility and quality);• delivering a customized computer quickly (response time);• offering customers superior value (they get to customize their computers) at a competitive cost.Overall, Dell’s value chain delivered value for which customers were willing to pay, helping it address the value equation:V = p/cwhere V = value, p = performance, and c = cost. Value is created for the customer when a company’s value chain can lower a buyer’s cost or raise the buyer’s performance or, ideally, do both simultaneously.A company may decide to pursue a focused strategy addressing the needs of a niche market. Consider this example. A circuit-board manufacturing company discovered that there was a niche market for prototype quantities of boards that were needed by design engineer-ing departments of technology firms. Quantities were 25 units or less, significantly lower than the company’s typical production runs of 500 boards or more. The customers’ design engineering departments wanted high-quality prototypes delivered quickly and were willing to pay a premium price to get them. The circuit-board manufacturer set up a separate prototype production facility to meet this demand, charging customers a 25–50% premium price. The company established a com-petitive advantage based on quality and response time (the dimensions customers valued) and realized a significant increase in its profitability as a result.Value Chain DesignLet us assume that a company sees an opportunity in the market to com-pete on the basis of response time. Today, speed to market is a critical
30 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN competitive weapon. The significant components of the company’s value chain must then be designed for speed. The starting point is at the begin-ning of the chain during the product-development process. That process must be configured (or reconfigured) for speed. As we saw in Figure 1.4 of Chapter 1, Situation A is the siloed organization. Beginning with concept development, each activity passes its work “over the wall” to the next, slowing down the process and extending the completion time. Worse, once the design gets to pilot production, those in charge of production may say “who developed this. We can’t build it given the constraints of our production process.” At that point, the process is essentially restarted while precious time to market gets longer and the basis for competing on response time is eroded.Situation B solves this problem by promoting the use of cross- functional teams that tear down the silo walls. Important feedback is given early on and throughout the process helping to significantly reduce development time. The company needs to review all processes related to delivering fast response time to market eliminating or redesigning the value chain activities that slow down the process. At the same time, the company’s marketing intelligence indicates that with some well-targeted cost-cutting, competing on the basis of cost-leadership may also be possible providing added leverage to a fast response time capability. Attacking cost will enable marketing to use price as a competitive weapon without jeopardizing target profit margins. Therefore, the impediments to cost-cutting must be removed.For example, an impediment may be in the value chain’s supply management (procurement) function. Why? Because, in many cases, there has not been a differentiation between price and cost in the buy-ing process. Those in supply may be predisposed to buy on the basis of low price so that they can report substantial savings at the end of the year to qualify for a bonus or whatever else is offered through the com-pany’s reward system. (Chapter 5 discusses the link between value chain management and a company’s compensation structure.) Or, worse, those in supply do not understand the difference between price and cost. Of course, low price does not always result in low cost. However, in an environment where low price is rewarded, it is risky to pay a higher price for a purchased good because it may be difficult to explain
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 31(or demonstrate) to the uninitiated how the higher-priced product may be the best low-cost solution. Nevertheless, buying on the basis of low cost and not low price must become inherent in the company’s approach to supply management.Eliminating redundancies and inefficiencies improve response time capability. Well-targeted cost-cutting provides the foundation for pricing aggressively. The company is now in a position to boost its competitive position by competing on the basis of response time and cost. This is fully consistent with Porter’s view that “a firm can achieve both cost leadership and differentiation simultaneously.”3Competitive advantage is built by providing value for custom-ers through the company’s impact on the customer’s value chain. That impact is best manifested by recognizing that, as Porter notes, “value is created when a buyer’s costs are lowered or performance raised.”4 In the example of response time and cost leadership, it is clear that a firm with a low-cost structure can offer lower prices to a customer, thus reducing the customer’s cost of doing business while simultaneously getting the product to the customer faster. This allows the customer to respond more quickly and cost effectively to its downstream market—or minimizing on-hand inventory, thus providing additional cost benefits.Overall, choosing the appropriate dimensions of competitiveness that allows the firm to exploit market opportunities is a necessary but an insufficient condition to maximize success. Issues about the capa-bilities of the value chain to deliver on those dimensions are equally important.The Value Chain–Financial Performance LinkThis section explores the critical link between value chain performance and business performance. Specifically, we demonstrate this link by explaining how the metrics of an important component of the value chain, the supply chain, can be coordinated and linked to corporate financial metrics. The supply chain performance metrics used are based on the Supply Chain Operations Reference Model (SCOR) developed by the Supply Chain Council.5 The financial metrics are keyed to EVA, a widely accepted set of financial performance measures developed by the global consulting firm of
32 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN Stern Stewart and Co., and the more traditional ROIC.6 Our conclusion: There is a clear and direct link between how effectively supply chain activi-ties are executed and the financial performance of the business.What the Literature Tells UsOver the past few years, articles in the academic and business press have attempted to address the impact of supply chain management on cor-porate financial performance. Some have described the financial supply chain and the impact of effective supply chain management on a firm’s cash flow. Others have considered the impact of just-in-time operations on financial performance, the relationship between total quality manage-ment practices and business performance, and the effect of supply chain disruptions on wealth. According to one article, “… any management actions must have an impact on key customer service dimensions, and it is this enhanced customer service that then engenders financial perfor-mance. Managers should not expect supply chain integration to directly impact a firm’s financial performance.”7We take a different view. Using the Supply Chain Council’s SCOR model, we propose that supply chain integration and specific related measures of supply chain performance have a direct impact on overall corporate financial performance. The supply chain metrics used by oper-ating personnel focus attention on the day-to-day activities in the supply chain. By paying attention to the collective details of these daily activities, companies can boost their overall supply chain performance. And this, in turn, will be manifested through a positive impact on overall metrics of financial performance.We are not alone in this assessment. A study by Deloitte Consult-ing of 600 companies in 22 countries concluded that the most effective firms have adopted a process view of their supply chains, rather than a functional view. “This end-to-end approach enables them to optimize the supply chain process across the entire organization and generate sig-nificant profit and returns,” the Deloitte study found.8 Put another way, effective supply chain integration has a significant impact on financial performance.
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 33Performance Drivers and OutcomesThe linkage approach incorporating EVA and the SCOR model is really just another way of adopting the “balanced scorecard.”9 This tool identi-fies “performance drivers” and “outcome measures.” The elements of the SCOR model are important supply chain–related performance drivers, while the corporate performance metrics represent important outcomes. Understanding the link between objectives and outcome measures is fun-damental to achieving improved financial performance.With that distinction between performance drivers and outcomes measures in mind, it is helpful to explain EVA and the SCOR model in a bit more detail. EVA is recognized as a comprehensive measure of value creation. In the words of one analyst, EVA “provides a more com-prehensive measure of profitability than traditional measures because it indicates how well a firm has performed in relation to the amount of capital employed. It is expressed as “Net Operating Profit after taxes less the cost of capital.”10EVA emphasizes and isolates activities that help to drive value crea-tion. These activities may be generally categorized as revenue, costs, and assets (see Figure 2.2). By understanding the EVA drivers, managers become more aware of the impact of innovation, cost reductions, tech-nology improvements, and capital base reductions on value creation. As such, the EVA drivers align nicely with the performance drivers in the supply chain.EVAAssets(-)Cost(-)Revenue(+)Value chain strategiesFigure 2.2. Economic value added elements.
34 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN An EVA orientation forces a firm to define its supply chain broadly. Thus, the definition will not only include the traditional activities like purchasing and inventory management with their obvious impacts on costs and assets, but also upstream activities like product design that may impact EVA’s revenue element. Aberdeen Group, for example, found that integrating the firm’s product development efforts with a sup-plier’s engineering department through e-design technology may reduce time-to-market cycles by 10–15%.11 In addition, this real-time collabo-ration may contribute to cost reductions by minimizing redesign time and uncovering opportunities for standardization. Since response time to market and cost control are key factors in market success, effective sup-ply chain management at the input end of the chain may help to boost a firm’s revenue through larger market share while lowering costs—two key elements in improving EVA.The actions that can improve the profitability and value creation in the supply chain are generally under the firm’s control. Better man-agement of the supply chain should have a major impact on revenue growth, cost reduction, and asset turnover. The cost of capital is a differ-ent story, however: It is determined by outside forces and is essentially a given over which management has little control. Therefore, one of the keys to boost EVA is for the firm to efficiently and effectively manage its supply chain.The SCOR ModelThe Supply Chain Council’s SCOR model can bring a measure of organi zation to the supply chain management measurement process and provide the link to overall corporate performance. The model identi-fies the need for corporate-level objectives, strategies, and business plans as the starting point for identifying best practice processes, concepts, and tools as well as selecting appropriate metrics. As such, it helps to overcome the disconnect between the supply chain metrics and overall corporate performance.While the SCOR model is a useful tool through which the direct connection between supply chain management and overall financial performance could be demonstrated, the model itself does not make
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 35that connection. Instead, the SCOR model focuses on the hierarchy of planning and business goals, with requirements for objectives, strategies, and metrics at multiple levels in the business structure.Figure 2.3 contains an important element of the SCOR model—the Level 1 “Strategic Performance Metrics,” which are the strategic supply chain metrics. These metrics include performance attributes that have a direct impact on the customer (customer facing) and the firm (internal facing). SCOR emphasizes the need to continuously focus metrics on the requirements at the next higher level in the process to ensure continuity and support for corporate competitive performance targets.For example, as Figure 2.3 notes, a Level 1 supply chain objective consistent with customer needs is “perfect order fulfillment” (reliabil-ity in delivery performance). Examples of objectives to support “perfect order fulfillment” are “on time delivery in full” and “orders shipped to schedule.” A key performance criterion for industrial buyers is reliable delivery performance. High performance here can help the selling firm establish a competitive advantage leading to increases in revenue by cap-turing market share. As such, this result will have an impact on the rev-enue component of EVA. The internal facing Level 1 metric shown in Figure 2.3 impacts the cost and asset components of EVA. ASSETSCOSTREVENUESCOR level 1–strategicsupply-chain metrics Perfect order fulfillmentOrder fulfillment cycle timeUpside supply-chain flexibilityUpside supply-chain adaptabilityDownside supply-chain adaptabilityFlexibilityCustomer-facingAssetsCostInternal-facingSupply chain management costCost of goods soldCash-to-cash cycle timeReturn on supply chain fixed assetsReturn on working capitalReliabilityResponsivenessPerformance attributesFigure 2.3. Strategic performance metrics.Source: Adapted from the Supply Chain Council.
36 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN Linkages in ActionThe examples that follow demonstrate how the SCOR supply chain met-rics can be coordinated and linked to support EVA. While the political and change management issues associated with internal multi-disciplined or multi-enterprise approaches are not addressed, it is important to rec-ognize that those issues do exist and must be considered. The process described for establishing the SCOR model structure, especially when applied by cross-functional teams, provides for logically sound develop-ment of linked initiatives. This inclusive approach goes a long way toward overcoming resistance from both inside and outside the organization.Using EVA as the measure of overall financial performance, the ties that the SCOR model process provides for linking the supply chain metrics to corporate financial goals are demonstrated. The focus is on the components of EVA typically under the firm’s control—revenue, costs, and assets.The Revenue ComponentStarting with the development of the supply chain management (SCM) objectives and strategies, Figure 2.4 shows the relationship between the SCOR model metrics and the revenue component of EVA for a hypo-thetical company. One strategy for increasing revenue is to improve cus-tomer satisfaction. The SCOR model provides the process to prioritize and select the most significant supply chain support strategies and perfor-mance indicators to achieve this goal. For example, as noted earlier, one of the SCOR model’s key attributes is “perfect order fulfillment.” This attribute is typically a highly ranked customer satisfaction parameter on customer service surveys.Perfect order fulfillment has many components. Therefore, a deci-sion must be made on the appropriate second-level supporting metric. A metric in this sample company is “on-time, in full,” which is critical in industries operating in a just-in-time environment. The number of pro-cesses that support “on-time, in full” can prove to be significant. For illus-tration purposes, let us continue the decomposition process to Level 3 to ensure that the efforts of those who impact the Level 1 perfect order fulfillment goal are properly focused. In these cases, one of the Level 3
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 37performance indicators chosen is “orders shipped to schedule,” an impor-tant component of the perfect order.In addition to identifying the specific SCM measures, companies need to establish goals for each based on the desired level of performance (in this case, 100% performance for on-time, in full and orders shipped to sched-ule). Goal setting at each of the levels of the SCOR model plays a major role in establishing the level of effort and creativity required to achieve the goal through continuous process improvement initiatives.Employees in nonmanagerial roles in the organization (say, shop-floor workers involved in producing a product to schedule or the order picker in a distribution center) may not recognize the ultimate impact of their actions on corporate EVA. This situation, common among US companies, needs to be addressed. The objective is to create a true team-oriented environment where everyone from top to bottom understands the linkages in the model. Overall, properly selected and linked perfor-mance measures will focus resources on contributing to overall corporate performance.The Cost ComponentFigure 2.5 shows how the SCOR model process can be linked to metrics in support of the cost component of EVA. In the example, The SCOR CostsRevenueAssetsPerfect orderfulfillment On-timein fullOrder shippedto scheduleLevel 1Level 2Level 3Figure 2.4. SCOR and revenue.
38 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN model identifies “Total Supply Chain Management Costs” as the Level 1 objective with supporting metrics in Levels 2–4. The “Total Supply Chain Management Cost” objective is the sum of the costs of a number of sig-nificant functional operations. In this example, only three (supply man-agement costs, acquisition costs, and receiving costs) have been listed. The supply chain manager, who must be familiar with the overall corporate measures of success, should select those areas to focus on that have the most significant impact on that measure.In the example shown, supply management is used as the Level 2 performance measure because of the significance of the dollars spent on transaction costs (costs associated with the processing of purchase orders) in the supply management process. In some instances, these costs may be as high as $150 per purchase order. The model focuses management’s attention on supply management if one of the objectives is to reduce supply chain management costs. There is great leverage associated with this metric because a dollar saved on trans-action costs is an additional dollar contribution to profit-boosting EVA, all else equal.CostsTotal supply chainmanagement costs Level 1Level 2Level 3AssetsRevenueSupply management costsas a % of total costsLevel 4Requisition costs as a %of supply management costsReceiving costs as a % ofrequisition costs Figure 2.5. SCOR and costs.
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 39The decomposition of Levels 3 and 4 isolates supply management–related activities that are not included in the actual expenditures of goods and services. The example shows product acquisition costs as a Level 3 metric. Those costs include salaries for all those involved in the purchas-ing process and other transaction costs. For example, one of those costs relates to receiving activities, a component of acquisition costs. This is a Level 4 metric in the model.Let us assume that a firm buys $1,000,000 in goods and services from suppliers and spends a total of $75,000 on acquisition costs (7.5% of pur-chases). The firm’s research shows that the industry average for those costs is 3.5%, suggesting that significant cost-reduction opportunities exist in this area. Management may decide to begin by focusing on receiving costs because a cost analysis shows that they make up a large portion of over-all acquisition costs. There is a link, therefore, between actions taken to reduce costs in receiving at Level 4 and the effort to reduce total supply chain management costs at Level 1.Peeling away each layer of the supply chain process for every function would produce a very complex network of linked process metrics. That is why it is important to prioritize the opportunities. The goal is to focus on those factors that will most effectively support the improvement in the EVA cost element.The Asset ComponentA number of factors can impact the level of assets a firm employs to deliver value to the market. To have a positive impact on EVA, the firm needs to minimize the asset levels used to deliver that value. Factors such as capital utilization, cash velocity, inventory turns, and cycle time reduction will impact how effectively the firm is managing its assets.The planning level of the SCOR model focuses on identifying a bal-ance of supply chain resources necessary to meet supply chain require-ments. One of the model’s key performance attributes is asset level. The goal here is to provide just the right amount of assets to meet require-ments. This balance will improve the model’s “cash-to-cash cycle time” metric of the model.
40 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN Figure 2.6 identifies cash-to-cash cycle time as a Level 1 metric. This metric represents the average number of days that elapse between paying for raw materials from suppliers and receiving payment for the final prod-uct from customers.Cash-to-cash cycle time is, in turn, directly impacted by asset turnover (e.g., raw material inventory) at Level 2, which itself is impacted by the days of supply in inventory at Level 3. Management intent on improving EVA through the asset component can use the cash-to-cash cycle time metric to force attention on asset turnover by setting objectives for days of supply in inventory. A reduction in inventory should increase turnover at a consistent level of sales. Ultimately, these actions are reflected in a reduction in cash-to-cash cycle time. In the end, the asset component of EVA is reduced assuming no increases in overall asset levels. Thus, as with the first two EVA components, the asset component is clearly linked to the overall measure of corporate financial performance.The benefits of the hierarchical mapping process described for the revenue, cost, and asset components of EVA are significant. The process helps to tie the goals and strategies at the operational level to a measure of overall organizational performance that demonstrates the impact on shareholder value. The SCOR model provides the hierarchical framework. The overall performance measure of EVA provides the link to shareholder value. An attempt was made here to demonstrate the link between the CostsCash to cash cycle timeLevel 1Level 2Level 3AssetsRevenueAsset turnoverDays of supplyin inventoryFigure 2.6. SCOR and assets.
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 41SCOR model performance attributes and metrics and overall corporate performance.Return on Invested CapitalEffectively and efficiently managing the value chain will have a positive impact on ROIC. Effectiveness in managing assets and efficiency in man-aging costs can impact ROIC dramatically. The impact may be substantial because value chain–related decisions will result in significant reductions in operating costs and the level of the firm’s total assets. Figure 2.7 dem-onstrates how better cost controls and asset management will lead to a dramatic improvement in ROIC. Figure 2.7, typically referred to as the “DuPont Model,” assumes that costs and assets are reduced by a modest 5%. The specific impact is on material costs and inventory levels. The result is an increase in operating income from 8% to 10.3%, while the decline in inventory reduces the firm’s total asset base leading to an increase in asset turnover from 1.25 to 1.26. (The level of sales is unchanged.) The resulting ROIC (profit margin A graphic view of the relationships of basic elements which influence return on investment($2,185,000)($3,685,000)Plus(10.3%)(13.0%)($475,000)($3,975,000)(1.26)Return oninvestment10.0%AssetsInventories$500,000Accountsreceivable$300,000Cash$300,000Current assets$1,100,000Fixed assets$2,900,000Sales$5,000,000Total assets$4,000,000Assetturnoverrate 1.25Divided byMultiply($515,000)Dividedby($1,075,000)PlusOperating cost elementsLabor$700,000Materials$2,300,000Overhead$800,00Sales$5,000,000Cost of sales$3,800,000Sales$5,000,000Operatingincome$400,000Profitmargin8%MinusOther cost$800,000sFigure 2.7. The value chain and return on invested capital.Source: Dobler, Burt, and Starling (2002 World class supply management).Note: the figures in parentheses reflect a 5% reduction in the cost of materials.
42 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN x asset turnover) increases a full 3 percentage points from 10% to 13% or 30%.Activities in the supply chain component of the value chain—supply management and inventory management in this example—can generate the level of impact demonstrated if they effectively manage the appropriate linkages. Tightening the linkages between the firm and its external suppli-ers can help reduce material costs. At the same time, close internal link-ages between supply management and inventory management can lead to significant cuts in inventory levels, especially if the firm is adopting just-in-time principles. (Note: In some organizations, inventory management is the responsibility of the supply manager. Here we assume it is not.) We also assume tighter linkages among supply, inventory management, and operations because of the synergies among them. Supply and inven-tory management depend on information from operations to plan for the proper purchasing volume and effective inventory management to assure continuity of operations, all of this, of course, aimed at satisfying customer demands.A Call to ActionOrganizations can take several important steps to help establish the link between the effective management of the supply chain—a critical com-ponent of the value chain—and improved financial performance. First, top management must commit to developing an understanding of how supply chain performance can impact financial performance—no matter what financial metrics are used. Supply chain professionals, for their part, can assume a lead role in facilitating that understanding.Next, everyone responsible for managing supply chain activities must be made aware of the financial performance metrics so that decisions made at the operational level are tied to expected outcomes. Finally—and this important step is often overlooked—a process must be established to educate those in nonmanagement, operational roles on the impact of their daily actions on the firm’s overall performance. Using the SCOR model construct to show where each individual’s efforts make a contribu-tion can help establish the context for performance. At the same time, it is important to establish a variable component to the compensation
VALUE CHAIN’S IMPACt ON COMPEtItIVENESS AND PrOFItABILItY 43 structure (e.g., bonuses) based on the firm’s overall performance. This serves to reinforce the connection between the actions taken at the daily activity level and overall financial performance. (We take a more in-depth look at this issue in Chapter 5).Industry leaders today must develop an understanding of how the day-to-day activities of managing the supply chain relate to corporate financial performance. Yet, in all too many instances, that fundamental understanding is lacking. Supply chain managers get so caught up with managing those activities under their control that they fail to make any connection to overall corporate performance.For this to change, several things need to happen. As noted earlier, top management needs to develop an appreciation of how an effectively man-aged supply chain contributes to overall financial performance. At the same time, managers involved in the day-to-day supply chain operations need to become conversant with the language of top management. With that capability, they can then put in place a process for demonstrating the significant impact of a well-managed supply chain on overall corporate performance. Through the use of two important metrics of an organization’s finan-cial performance—EVA and ROIC—an attempt has been made to dem-onstrate the link between the supply chain component of the value chain and financial performance. There is little doubt that effectively and effi-ciently managed activities in the value chain and the management of the linkages that exist both internally and externally will have a major impact on the financial success of the firm.ConclusionThis chapter explained the connection between the value chain, its ability to help deliver on the four dimensions of competitiveness, and the result-ant impact on profitability. A firm can lower costs to help marketing use price as a competitive weapon to expand market share. It may also charge premium prices in the market if the value chain delivers a value proposi-tion (e.g., speed to market) for which a customer is willing to pay. All of this will have a positive impact on the firm’s financial performance as measured by EVA or ROIC.
44 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN *A portion of this chapter is based on Presutti, W. D., & Mawhinney, J. R. (2007). The supply chain-finance link. Supply Chain Management Review, September 2007. Used with permission.Suggested Actions• Design the value chain based on the organization’s competitive dimensions. If speed to market is key, then all value chain activities should be designed to deliver on that dimension, and the like.• Develop an understanding of how supply chain performance—an important component of the value chain—impacts the financial performance of the organization.• Educate everyone responsible for managing and carrying out value chain activities on the organization’s financial performance metrics.
CHAPTER 3Boundarylessness and the Value ChainKey Points• The meaning of the boundaryless organization and its implications for competitiveness• The limitations of bureaucracy and the bounded mentality• Typical dysfunctions in a bureaucratic form of organization• Important keys to minimize dysfunctions to move the value chain closer to a state of boundarylessnessIntroductionThe effective and efficient management of the value chain is key to a firm’s competitiveness and profitability. Getting there requires that leaders and managers create a boundaryless organization, a fundamental foundation on which value chain management rests and one absent the silo mentality that creates roadblocks to building internal cooperation among functions and external relations with customers and suppliers.This chapter will define the boundaryless organization, identify symp-toms of dysfunctional organizational boundaries, demonstrate the impact of those dysfunctions on value chain management, and recommend an organizational design that may help to overcome the dysfunctions and build a boundaryless value chain.The Boundaryless OrganizationJack Welch, the former and high-profile chairman of the General Electric Company, is credited with introducing the term “boundaryless” to the
46 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN lexicon of American business. He saw vertical and horizontal boundaries within a company and the barriers between the company and its custom-ers and suppliers as limiting factors to overall competitive success. The boundaryless organization is not defined by, or limited to, the horizontal, vertical, or external boundaries established in a traditional organizational structure.1The Traditional OrganizationThe defining characteristics of the traditional organization is embodied in the organizational chart with its boxes containing the typical corporate functions such as accounting, marketing, production, engineering, pur-chasing, and so forth. This development was a manifestation of Adam Smith’s idea of task specialization put forth in his 1776 book, The Wealth of Nations.2 As it turned out, task specialization was a convenient guide to create the organizations necessary to accommodate the explosive growth in capitalist enterprises in the late 19th and early 20th centuries. Organizing by the vast array of specialized knowledge required by the organization to operate made management of those growing enterprises more efficient.During this period, the writings of sociologist, political scientist, and economist Max Weber addressed the issue of “legitimate authority and bureaucracy,” solidifying the belief that bureaucracy was indeed the best form of organization. Weber’s idealized bureaucracy contained several fea-tures including:• a continuous organization of official functions bound by rules• organizing through a clearly defined hierarchy of offices• offices that have a clearly defined sphere of competence• offices that possess special knowledge of acts and a store of documents peculiar to themselves• the ability to make rapid, clear decisions free of the necessity of compromise between different opinions3The first four features create bureaucracy’s bounded mentality where each major function rests comfortably inside the boxes on the
BOUNDArYLESSNESS AND tHE VALUE CHAIN 47 organizational chart. However, it is the fifth feature that is especially egregious limiting the inclination of those working in various functions to build the boundaryless organization. The notion that those residing inside Weber’s boxes can make fast decisions because they are unencum-bered of the necessity to compromise or consider others’ opinions is a root cause of the dysfunctions in most organizations.The Dysfunctions of the Bureaucratic FormWhile the rules of the bureaucratic form of organization may have been useful in managing the emerging large and dominant businesses of the late 19th and early 20th centuries, they are impediments to managing the value chains in the 21st century. Today, speed and flexibility, two of the gener-ally recognized dimensions of competitiveness presented in Chapter 2, are absolutely essential for success in the global marketplace. Unfortunately, the bureaucratic form allows for neither. Instead, it creates dysfunctions that preclude even a modicum of effectiveness in value chain management, lim-iting a firm’s ability to compete on the dimensions of speed and flexibility.The dysfunctions are so common that they become a part of the accepted culture in most organizations. Although there may be many ways to describe those dysfunctions, Askenas et al. succinctly captures them as follows:• slow, sequential cycle times• protected turf• suboptimization of organizational goals• the enemy within syndrome.4It is the rare organization that is not afflicted by one or more of these dysfunctions.Defining the DysfunctionsSlow, sequential cycle times is the handoff—a piece of the overall work is done by one function and then passed on to the next function to complete its part of the work, each function sitting comfortably within its box. Each
48 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN work unit addresses issues it believes relevant to getting its part of the job done without considering the impact of its decisions on the work of the surrounding work units. This dysfunction is the tangible manifestation of Weber’s assertion that bureaucracy provides the “ability to make, rapid, clear decisions free of the necessity of compromise between different opinions.” Decisions may be made rapidly within a function but if those decisions cause friction with other work units dependent on its work, those “rapid deci-sions” are of little value in minimizing the cycle time for an entire process.Protected turf reinforces the functional boundaries causing people to protect the perceived power and prestige of that particular function and to protect the interests of the individuals in that function. People working in a particular function may develop great pride in their expertise and are, in fact, compensated on the accomplishment of individual goals achieved within that function. A challenge by an outsider is rebuffed. If the chal-lenger persists, that very well may create another of the dysfunctions—the enemy within who is to be resisted at all costs.Turf protection may also create the suboptimization of organiza-tional goals. The focus is working on the goals and objectives that are the priority for a specific function without regard to the impact on the goals and objectives of the overall organization. In a perfect world, the func-tional goals and objectives ought to align with the organization’s goals and objectives but it does not always work out that way. One of the funda-mental causes of this dysfunction is built into the organization’s compen-sation system. We discuss that issue in Chapter 5.The Dysfunctions on DisplayTo demonstrate how the dysfunctions manifest themselves, let’s consider the specification development process in a goods-producing environ-ment. The engineering department needs to develop a specification for a component that will be needed in the production of the company’s final product. Ideally, the “good specification” will consider the needs of all of the departments that have a direct interest in the final specification. For example, it should consider, at a minimum, the concerns of the marketing, production, and supply management (purchasing) departments in addi-tion to its own concerns.
BOUNDArYLESSNESS AND tHE VALUE CHAIN 49Marketing is concerned about delivering a quality product to the customer on time at a profitable price. Production focuses on the ease of use of the component in the manufacturing process, that is, the “ease of manufacturability.” Purchasing wants to be able to use the forces of competition in the marketplace to get the component at the lowest cost and to assure its availability to avoid possible supply dis-ruptions. Engineering, of course, is concerned about the component’s performance. The component in question is wiring for a commercial aircraft.5 The engineering department developed a specification for an industry standard wire but with a ceramic outer coating. After the specification was released for purchase to the supply management department, the responsible buyer saw an immediate problem. The stipulation for a ceramic outer coating converted a standard wire available from multi-ple sources to a nonstandard wire available from only one source. That source was identified in the specification. The specification as written would not only increase the cost of the wire but would force a single-source situation possibly jeopardizing ready availability and creating supply disruption.The buyer, a conscientious professional, challenged the specification because established company policy requires that competitive bidding be used when possible and the multiple sourcing (at least two sources) for all critical components. The buyer asked the responsible engineer if the ceramic coating was essential. The engineer was adamant that it was and dismissed the buyer’s request that other standard wires without ceramic coating be tested. The buyer, recognizing the potential cost and avail-ability ramifications of the specification, then requested samples of the standard wire without the ceramic coating from five leading wire suppli-ers. The samples were sent to the production laboratory for testing. All of the samples passed the performance requirements established by the engineering department. The only sample that failed was the ceramic wire from the supplier identified in the specification. It was found to be highly susceptible to abrasion, making it difficult to work with in production. When the buyer sent the production laboratory results to the engineering
50 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN department, the responsible engineer was unconvinced and refused to change the specification.So, here we have a series of actions that have seriously slowed down the process cycle time. In essence, a reverse handoff was initiated from the supply management department back to engineering and then back again to the supply management department. Here was the engineering department vigorously protecting its turf. The buyer did not give up. After additional discussion with the engineer, he discovered that the engineering department did not trust the work of the production labo-ratory, viewing it as illegitimate and an enemy to be on guard against at all times.This allowed the buyer to try a different strategy. He asked if the engineers would test all of the sample wires themselves and, if the standard wires met the performance requirements, would they then change the specification to make the buying process more effective. The engineers agreed, tested the sample wires, were satisfied with the results, and changed the specification, freeing the buyer to bid the requirement competitively, thus allowing for a more cost-effective buy and increasing availability to assure that stock-out situations did not occur.Fortunately, in this situation, the buyer used his well-developed level of emotional intelligence to empathize with the engineer’s position, to see the issue from the engineer’s perspective to get to a more optimal solu-tion. However, it slowed the process and uncovered serious turf protec-tion and enemy-within problems.6If the engineering specification was allowed to stand, it would cre-ate the dysfunction of the “suboptimization of organizational goals.” The original specification for the ceramic wire was not a “good spec.” It cre-ated cost and availability issues for supply management because it speci-fied a single source of a nonstandard component. It also created problems for the production department because its susceptibility to abrasion made it difficult to handle. And, it created a problem with marketing because the ceramic-coated wire was heavier than the standard wire contribut-ing unnecessary weight to the airplane. Customers wanted as light an airplane as possible to make it possible to maximize payload (fare-paying passengers). In the end, only the engineering department’s performance
BOUNDArYLESSNESS AND tHE VALUE CHAIN 51 requirements would have been met at the expense of a more optimal solution across multiple functions.Minimizing Dysfunctions—A Theoretical FoundationMinimizing the negative effects of organizational dysfunctions requires the escape from the bounded mentality manifested in the design of the typical organization chart and the bureaucratic form. As we saw in the example of the process of developing the wire specification, this bounded mentality leads to intraorganizational conflict that must be minimized to effectively manage the value chain. Only in what Senge calls the “learning organization” is this escape possible. The key char-acteristic of the learning organization is systems thinking where the emphasis is on understanding how the individual parts of the organiza-tion fit together rather than solely on the individual parts themselves. Leaders in the learning organization help everyone see the big picture and emphasize the importance of understanding how and why the vari-ous functions interact.7The importance of this systems, or holistic, thinking is not new. Mary Parker Follett, one of America’s greatest management theorists of the early 20th century introduced in Chapter 1, developed ideas like the holistic nature of communities, the importance of reciprocal relationships, win–win solutions, and a focus on process, all of which are key to transcending the bounded mentality of the bureaucratic form.8Follett thought it important to get people to transcend their indi-vidual or departmental interests to what is good for the organization. She stressed the importance of seeing the organization as a functional whole for which the participants have joint responsibility. This would work to minimize intraorganizational conflict. She considered several ways through which conflicts may be resolved. They included the volun-tary submission of one side to the other, victory of one side over the other (domination), and compromise. She rejected all three, the first two for obvious reasons. However, it is surprising that she did not see compromise as a solu-tion to resolving conflicts. It is generally accepted that conflicting views are best settled by compromise. Follett’s view was that compromise leaves
52 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN both sides unsatisfied. Agreement may be reached but commitment to the result may not be strong. The key is finding a solution without compro-mise or domination. Thus was born her concept of integration, which has come to underlie the rationale for the boundaryless organization. In her words, “Integra-tion involves invention and the clever thing is to recognize it and not let one’s thinking stay within the boundaries of two alternatives which are mutually exclusive.” In essence, she is advocating using her ideas about reciprocal relationships to pursue the “out of the box” thinking funda-mental to getting to win–win solutions that minimize organizational dys-functions and promote the boundarylessness that effective value chain management requires.Follett, like Senge, stressed the importance of leadership, that it is important for leaders to view the organization holistically before they can help their subordinates do the same. This holistic view is fundamental to effectively putting into practice the concept of integration. The challenge, then, is how to get there.Promoting Integration to Minimize DysfunctionPursuing integration requires a process view of the organization’s work, a perspective also promoted by Follett. Building on her work, many dec-ades later, Ashkenas et al. argued that management must view the organization not as a set of functional boxes but as a set of shared resources and competencies that collectively define the organization’s range of activities … arrayed across the horizontal spectrum to create value for customers.9While the process view will help to loosen rigid horizontal bound-aries, it will not, by itself, lead to effective integration. The shared resources and competencies need to be focused on what Senge describes as a “commonality of purpose, a shared vision, and understanding of how to complement one another’s efforts.”10
BOUNDArYLESSNESS AND tHE VALUE CHAIN 53Senge’s observation relates to one of the important characteristics of the learning organization—team learning. And it is through teams, the efforts of which are aligned to a commonality of purpose, that true integration leading to the boundaryless organization is realized.Turf wars and the enemy-within syndrome—two of the more devas-tating dysfunctions in organizations—are born of distrust. It is through shared vision and commonality of purpose that allows those who mistrust each other to begin to work together. The shared vision and commonality of purpose create alignment where, as Senge describes it, “a commonality of direction emerges and individuals’ energies harmonize.”11Too often, teams become dysfunctional because there is no common-ality of purpose which causes individual team members to pull in differ-ent directions often dictated by the concerns for their specific functions. In that case, alignment is missing and the individual team members are working at cross-purposes. As Senge observes, “The fundamental char-acteristic of the unaligned team is wasted energy. Individuals may work extraordinarily hard, but their efforts do not translate to team effort.”12What, then, becomes the focus of the shared vision, the commonality of purpose that creates team alignment?Focus on the CustomerIn his landmark 1973 book, Management, Peter Drucker, perhaps the most renowned management scholar of the 20th century, clearly and suc-cinctly stated the purpose of a business: There is only one valid definition of business purpose: to create a customer … What the customer thinks he is buying, what he considers value, is decisive—it determines what a business is, what it produces, and whether it will prosper.13 Ashkenas et al., in their principles for minimizing horizontal dysfunctions, like Drucker, recommend keeping the focus on the customer. They note, “The boundaryless horizontal organization is effective when all employees understand and feel the needs of the
54 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN customer and all internal processes aim to form and strengthen exter-nal customer relationships.”14Serving the customer should be the focus for everyone in the organi-zation. This may not be intuitively obvious. Should a buyer in the supply department be concerned with the customer? Should the technician on the production floor be concerned with the customer? Should the picker and packer in a distribution center be concerned with the customer? Isn’t it the responsibility of marketing to worry about the customer? The answers are yes, yes, yes, and not solely.Let’s use the wire specification development process example cited earlier. As we saw, four functional departments were involved—market-ing, engineering, production, and supply. Each of these departments had its own concerns about the specification—engineering with performance, supply with cost and availability, and production with ease of manufac-turability. Marketing’s concern was to be able to deliver a finished airplane acceptable to the customer.As Drucker noted, what the customer considers value is decisive. In Chapter 2, we offered the performance-to-cost ratio as a measure of value. If the company had organized a cross-functional team—one focused on what the customer valued—the efforts of each individual team members would have been aligned to develop a good specification, one that helped to promote customer value. The customer wanted a high-performance airplane that minimized its costs of operation. There-fore, the wire specification had to help the customer get there with a wire that promoted high performance while minimizing costs of acqui-sition and production.A very useful yet too often overlooked tool to help focus a team’s efforts is value engineering, also commonly known as value analysis or value methodology, developed by Larry Miles at General Electric during World War II. It is defined as “a systematic approach that seeks to improve the value of a project, product, or service by providing the necessary func-tion to meet the required performance at the lowest overall cost.” Miles expressed the heart of the concept: “Instead of thinking and talking in terms of things, value analysis changes the thinking process to function.”15The value methodology is a team-based, organized approach to improve the value proposition. It allows different perspectives of the team
BOUNDArYLESSNESS AND tHE VALUE CHAIN 55members to be presented in brainstorming sessions that keeps a clear eye on the function that a product must perform and to get it performed at the lowest cost without compromising on quality. As such, it can be an effective way to promote team alignment.The Starting PointTrying to achieve cross-functional integration and team alignment for an entire organization may appear to be a daunting challenge. A focus on the customer is the most straightforward and simplest way to get there if management makes sure that everyone in the organization understands what the customer wants and that all processes need to be focused on providing customer value. Starting small can help move the organization forward.Learning at the team level provides a foundation for organizational learning. It is organizational learning that is a necessary condition for promoting integration. As Senge notes, Individuals learn all the time and yet there is not organizational learning. But if teams learn, they become a microcosm for learn-ing throughout the organization … The team’s accomplishment can set the tone and establish a standard for learning together for the larger organization.16Another of the important principles put forth by Ashkenas et al. to help minimize horizontal dysfunction, in addition to keeping the focus on the customer, is to “share learning across (teams) … To avoid losing critical ideas, information, insights, and competencies, the organization must establish mechanisms by which teams and other groups share best practices and learnings.”17 A fundamental issue, then, is what kinds of mechanisms may be put in place to facilitate this sharing of learning.We can get some guidance from the work of Rensis Likert, a promi-nent management scholar of the mid-to-late 20th century who developed what he termed an “integrating principle.” A key element of that principle is the “linking pin.” In Likert’s view, the linking pin is a member of two groups—his or her own and the group one step above in the hierarchy. For example, a production manager has the responsibility for all activities
56 UNDErStANDING tHE DYNAMICS OF tHE VALUE CHAIN and people related to production. At the same time, he or she serves as a member of the company’s management team composed of the manag-ers of the other major functions. In this role, the production manager is expected to represent the production perspective on the management team and share experiences which may benefit other functions and the entire organization. Figure 3.1 provides details of what Likert called “the overlapping group form of organization.”18There is, however, a limitation to Likert’s linking pin function. It does not recognize horizontal links where one does not depend only on the supervisor for the linking pin role. Nonsupervisory members of one team may, as needs demand, serve as members of other teams. Lessons learned Figure 3.2. Overlapping group form of organization with vertical and horizontal linkages.Work groups vary in size as circumstances requirealthough shown here as consisting of four persons.Figure 3.1. Overlapping form organization with vertical linkages.Source: Likert (1961).
BOUNDArYLESSNESS AND tHE VALUE CHAIN 57from highly functioning teams aligned for a common purpose may then be distributed to other teams throughout the organization. The team members from the highly functioning teams may serve as mentors for other less-aligned teams. See Figure 3.2.The importance of this experience sharing is a central theme of Nonaka and Takeuchi in their groundbreaking book, The Knowledge Creating Company, in which they stress the importance of disseminating an individual’s knowledge in order to promote organizational learning. Firms must focus on assuring that newly created knowledge is transferred from a specific team to other teams within the organization. It is impor-tant that people share their experiences beyond their specific teams. Thus, a system of tightly linked cross-functional teams is the best mechanism to assure that shared learning takes place throughout the value chain.19ConclusionEffective value chain management requires a boundaryless organization. The traditional bureaucratic form of organization, with its bounded mentality, leads to several dysfunctions that can be destructive to a firm’s competitiveness. Viewing the firm as a learning organization where team learning is emphasized can help create the necessary organization-wide integration fundamental to a boundaryless state where commonality of purpose prevails and the dysfunctions are minimized.Focusing on the customer as the common purpose for everyone in the organization is straightforward and powerful, significantly reducing the challenge of getting to integration across the entire organization. An effective approach is to start small, at the team level, where members’ objectives are aligned by common purpose and knowledge and experience are transferred to other teams to promote shared learning across the value chain. Here the linking pin concept may be especially useful.Suggested Actions• Keep everyone focused on the customer.• Create a learning organization.• Start small promoting learning at the team level.
CHAPTER 4Enablers of Effective Value Chain ManagementKey Points• Strategic success requires understanding the benefits of an integrated value chain • Addressing the enabling factors of enterprise value chain management is essential before addressing the extended value chain• Leadership direction through strategic plans drives business culture• The individual members of the organization control the processes and technology—focus on their knowledge, skills, and beliefs• Affecting the extended value chain can be challenging due to the lack of control/influence, but will provide a competitive advantage• Trust is a critical common denominator to enterprise value chain and extended value chain successIntroductionThe value chain is not a static entity easily depicted by an organization chart, but rather a living and dynamic business ecosystem that must be nurtured to produce the desired results. As with biological ecosystems, the value chain requires balancing a number of elements to provide reli-able results while remaining responsive to the continuous changes in the business and economic environments in which it functions. A great deal of effort is put forth today in developing processes, often enabled
Unit 1 Assignment: The Contemporary Value Chain in Action
Student Name
Managing the Value Chain
Professor Name
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Unit 1 Assignment: The Contemporary Value Chain in Action
This first paragraph is an introduction to the paper. APA does not use a section header called “introduction” as it is assumed that the first paragraph after the main header is the introduction. APA 7 accepts either an 11-pt. or 12-pt. font although the GB570 templates all use a 12-pt. font to support your achievement to meet minimum page length requirements. APA 7 formatting uses only a page number in the top right hand corner; there is no other content in the page header area. The main header above uses a bold font and is the same name as the title page’s title. Use section headers as shown in this template; they are APA 7 formatted. This paper should be at least 4-pages in length, not including the title and reference page. Before you submit your assignment for grading review, be sure to remove any red font in the paper. Address all of the assignment’s requirements to ensure full completion of all required rubric grading criteria items.
This Unit 1 Assignment requires a minimum in length of 4-full pages, not including title and reference pages, applying at least four of the elements in the Contemporary Value Chain Model. You will suggest how the company can improve the customer experience by fixing value chain elements. This is your opportunity not only to see where the brand’s value chain was not working properly, but to recommend what needs to be done by applying Contemporary Value Chain Model elements, so future customers have delightful experiences. This assignment is an opportunity for you to relate what you learned about the Contemporary Value Chain Model to your own knowledge and experience. The purpose of the assignment is for you to demonstrate a graduate level understanding of the direct correlation between the elements comprising the Contemporary Value Chain and your purchase experience.
Write your paper using first person (“I,” “me”) perspective. This template is already APA 7 formatted: 1” margins, ½” new paragraph indents, 12-pt. Arial font, title page, one-line page headers with page numbers, double line spaced, and a separate references page. When you use references in your paper to support your content, be sure to apply the APA 7 in-text reference citation format. Any item listed on the references page must also be applied and cited within the paper. If you use verbatim quotes, place the words within quotation marks, cite the reference, and include a page number. If the quote ends a sentence, place the period after (and not before) the in-text reference citation parentheses.
Description
In this section, describe a horrible purchase experience (product or service), one you will never forget and perhaps because of it you will never buy anything from that brand ever again. Perhaps you told other people how shockingly bad this purchase experience was. Describe this purchase experience; include where, when, why, the product, the brand name, and explain the details of this bad, sadly memorable purchase from the beginning, from when you first considered the purchase, to the eventual purchase transaction and outcome. Do you think you were a target market customer? Why or why not? Why did you choose their product? Be specific.
If you use sub-section headers, they should be left justified, bolded but not italicized and not underlined. Paragraph content in the sub-sections should remain the same (1” margins, left justified, with ½” new paragraph indentations). Refer to the Purdue Global Writing Center for additional information related to using APA 7.
Recommendations
Consider your Library research from the Unit 1 Discussion and Chapter 1 of your textbook. Internet references are not accepted for this Unit 1 Assignment, although you may use Internet research for your own learning. At least two different sources are required to be used as references for this assignment, one from the textbook and at least one from a Purdue Global Library article.
In this section, recommend what the (brand name) company could/should have implemented within their value chain to have ensured your experience was not bad, but instead left you with surpassed expectations (a delighted customer). Be specific and identify the chosen Contemporary Value Chain Model by name. There are 21 elements from which you are to choose and explain at least four of them.
If you use sub-section headers, they should be left justified, bolded but not italicized and not underlined.
Your recommendations will describe Contemporary Value Chain Model related aspects you believe the company (brand) should have implemented in order to make sure your purchase experience was delightful (surpassed expectation and perhaps made you brand loyal).
Conclusion
In this section, summarize the paper’s content without introducing any new information. This is the last section of the paper. There is a subsequent page break included so the next page appears as a new page listing the applied and cited references. Be sure to thoroughly proofread your paper. There should be no remaining red font (directions) words remaining in the final version of the paper.
References
Presutti, Jr., W.D., & Mawhinney, J. R. (2013). Understanding the dynamics of the value chain. Business Expert Press, LLC.
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Note: At least two different sources are required to be used as references for this Unit 1 Assignment, one from the textbook and at least one from a Purdue Global Library article. Internet references are not accepted for this Unit 1 Assignment, although you may use Internet research for your own learning.
Note: References should be listed in alphabetical order. Any reference listed on the References page must be cited within the body of the paper.
Note: When you include more than one reference, do not add an extra line space between the references.
Note: The formatting for margins on this page indents the word wrap ½ inch.
Note: All APA line spacing for all content of all papers must be set as follows:
Go to Page Layout
Go to “Spacing”
See the settings area:
Before = 0
After = 0
Check the box “Don’t add space between paragraphs of the same style”
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Delete all of the red font and the directions included within this template before you submit your own paper to the Dropbox. Be sure to run spell check, grammar check, and proofread your paper.
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