Value chain
Encyclopedia
The value chain, is a concept from business management that was first described and popularized by Michael Porter
in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.
Investment in information technology;
Changes in organizational processes;
Committed leadership;
Flexible jobs and adaptable, capable employees;
A supportive organizational culture and attitudes;
Flintstone Example:
Without the dinosaur, Fred couldn't complete his daily tasks quickly. This was because the dinosaurs had more strength than poor Freddy, therefore, making the process more efficient, which added value to the final result.
value
-adding activities of an organization. The "primary activities" include: inbound logistics
, operations (production), outbound logistics
, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement
. The costs and value drivers are identified for each value activity.
). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The French Physiocrat's Tableau économique is one of the earliest examples of a value chain. Wasilly Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.
. The simpler concept of value streams, a cross-functional process which was developed over the next decade, had some success in the early 1990s.
The value-chain concept has been extended beyond individual firms. It can apply to whole supply chain
s and distribution
networks. The delivery of a mix of products
and services
to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).
Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business model
s, or in other ways create improvements in its value system.
Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered as elements of chains) help drive Lean approaches to Maintenance. The Maintenance Value Chain approach is particularly successful when used as a tool for helping Change Management as it is seen as more user friendly than other business process tools.
Value chain approach could also offer a meaningful alternative to valuate private or public companies when there is a lack of publically known data from direct competition, where the subject company is compared with, for example, a known downstream industry to have a good feel of its value by building useful correlations with its downstream companies.
Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain. Although commonly associated with export-oriented trade, development practitioners have begun to highlight the importance of developing national and intra-regional chains in addition to international ones.
(SCOR), the de facto universal reference model for Supply Chain
including Planning, Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research, Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support, Sales, and Contract Management which are congruent to the Porter framework. The SCOR framework has been adopted by hundreds of companies as well as national entities as a standard for business excellence, and the US DOD has adopted the newly-launched Design-Chain Operations Reference (DCOR) framework for product design as a standard to use for managing their development processes. In addition to process elements, these reference frameworks also maintain a vast database of standard process metrics aligned to the Porter model, as well as a large and constantly researched database of prescriptive universal best practices for process execution.
offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks.
The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business.
The Value Chain Group claims VRM to be next generation Business Process Management
that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence.
Six business functions of the Value Chain:
This guide to the right provides the levels 1-3 basic building blocks for value chain configurations. All Level 3 processes in VRM have input/output dependencies, metrics and practices. The VRM can be extended to levels 4-6 via the Extensible Reference Model schema.
Michael Porter
Michael Eugene Porter is the Bishop William Lawrence University Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally...
in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.
Firm Level
A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activities' values. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter, as a profession, can be used to illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.Requirements of value chain
Coordination and collaboration;Investment in information technology;
Changes in organizational processes;
Committed leadership;
Flexible jobs and adaptable, capable employees;
A supportive organizational culture and attitudes;
Flintstone Example:
Without the dinosaur, Fred couldn't complete his daily tasks quickly. This was because the dinosaurs had more strength than poor Freddy, therefore, making the process more efficient, which added value to the final result.
Activities
The value chain categorizes the genericGeneric
Generic or Generics may refer to:* Generic mood, a grammatical mood used to make generalized statements like Snow is white* Generic antecedents, referents in linguistic contexts, which are classes...
value
Value theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
-adding activities of an organization. The "primary activities" include: inbound logistics
Logistics
Logistics is the management of the flow of goods between the point of origin and the point of destination in order to meet the requirements of customers or corporations. Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and...
, operations (production), outbound logistics
Logistics
Logistics is the management of the flow of goods between the point of origin and the point of destination in order to meet the requirements of customers or corporations. Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and...
, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement
Procurement
Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
. The costs and value drivers are identified for each value activity.
Industry Level
An industry value chain is a physical representation of the various processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chainSupply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The French Physiocrat's Tableau économique is one of the earliest examples of a value chain. Wasilly Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.
Significance
The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planningStrategic planning
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues...
. The simpler concept of value streams, a cross-functional process which was developed over the next decade, had some success in the early 1990s.
The value-chain concept has been extended beyond individual firms. It can apply to whole supply chain
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
s and distribution
Distribution (business)
Product distribution is one of the four elements of the marketing mix. An organization or set of organizations involved in the process of making a product or service available for use or consumption by a consumer or business user.The other three parts of the marketing mix are product, pricing,...
networks. The delivery of a mix of products
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
and services
Customer service
Customer service is the provision of service to customers before, during and after a purchase.According to Turban et al. , “Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer...
to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).
Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
s, or in other ways create improvements in its value system.
Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered as elements of chains) help drive Lean approaches to Maintenance. The Maintenance Value Chain approach is particularly successful when used as a tool for helping Change Management as it is seen as more user friendly than other business process tools.
Value chain approach could also offer a meaningful alternative to valuate private or public companies when there is a lack of publically known data from direct competition, where the subject company is compared with, for example, a known downstream industry to have a good feel of its value by building useful correlations with its downstream companies.
Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain. Although commonly associated with export-oriented trade, development practitioners have begun to highlight the importance of developing national and intra-regional chains in addition to international ones.
SCOR
The Supply-Chain Council, a global trade consortium in operation with over 700 member companies, governmental, academic, and consulting groups participating in the last 10 years, manages the Supply-Chain Operations ReferenceSupply-Chain Operations Reference
Supply-chain operations reference-model is a process reference model developed by the management consulting firm PRTM and endorsed by the Supply-Chain Council as the cross-industry de-facto standard diagnostic tool for supply chain management...
(SCOR), the de facto universal reference model for Supply Chain
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
including Planning, Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research, Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support, Sales, and Contract Management which are congruent to the Porter framework. The SCOR framework has been adopted by hundreds of companies as well as national entities as a standard for business excellence, and the US DOD has adopted the newly-launched Design-Chain Operations Reference (DCOR) framework for product design as a standard to use for managing their development processes. In addition to process elements, these reference frameworks also maintain a vast database of standard process metrics aligned to the Porter model, as well as a large and constantly researched database of prescriptive universal best practices for process execution.
Value Reference Model
A Value Reference Model (VRM) developed by the trade consortium Value Chain GroupValue-Chain Group
The Value Chain Group is a global trade consortium which provides a standardized framework and toolsets for business transformation. VCG builds unified business processes within organizations and across the extended value chain...
offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks.
The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business.
The Value Chain Group claims VRM to be next generation Business Process Management
Business process management
Business process management is a holistic management approach focused on aligning all aspects of an organization with the wants and needs of clients. It promotes business effectiveness and efficiency while striving for innovation, flexibility, and integration with technology. BPM attempts to...
that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence.
Six business functions of the Value Chain:
- Research and Development
- Design of Products, Services, or Processes
- Production
- Marketing & Sales
- Distribution
- Customer Service
This guide to the right provides the levels 1-3 basic building blocks for value chain configurations. All Level 3 processes in VRM have input/output dependencies, metrics and practices. The VRM can be extended to levels 4-6 via the Extensible Reference Model schema.
See also
- BeneficiationBeneficiationIn mining, beneficiation is a variety of processes whereby extracted ore from mining is separated into mineral and gangue, the former suitable for further processing or direct use....
- Business unit
- BuzzwordBuzzwordA buzzword is a term of art, salesmanship, politics, or technical jargon that is used in the media and wider society outside of its originally narrow technical context....
- Calculating Demand Forecast AccuracyCalculating Demand Forecast AccuracyCalculating demand forecast accuracy is the process of determining the accuracy of forecasts made regarding customer demand for a product.-Importance of forecasts:...
- Delta ModelDelta ModelDelta model is a customer-based approach to strategic management. Compared to a philosophical focus on the characteristics of a product , the model is based on customer economics...
- Demand chainDemand chain-Concept:Analysing the firm's activities as a linked chain is a tried and tested way of revealing value creation opportunities. The business economist Michael Porter of Harvard Business School pioneered this value chain approach: "the value chain disaggregates the firm into its strategically...
- Industry informationIndustry informationIndustry classification or industry taxonomy organizes companies into industrial groupings based on similar production processes, similar products, or similar behavior in financial markets....
- Marketing strategyMarketing strategyMarketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.-Developing a marketing strategy:...
- Porter 5 forces analysisPorter 5 forces analysisPorter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization economics to derive five forces that determine the competitive intensity and therefore...
- Porter generic strategiesPorter generic strategiesMichael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope...
- Strategic managementStrategic managementStrategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
- Value gridValue gridThe value grid model was proposed by Pil and Holweg as a means to show that the way firms compete has shifted away from the linear value chain way management theory has traditionally thought about value chain management....
- ValueValue theoryValue theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
- Value migrationValue migrationIn marketing, value migration is the shifting of value-creating forces. Value migrates from outmoded business models to business designs that are better able to satisfy customers' priorities....
- Value networkValue networkA value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people . The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the...
- Value shopValue shopThe value shop was first conceptualized by Thompson in 1967. A value shop is an organization designed to solve customer or client problems rather than creating value by producing output from an input of raw materials....
External links
- http://www.brighthub.com/office/project-management/articles/51759.aspx