THE VALUE CHAIN BASIC INFORMATION AND TUTORIALS

Harvard’s Michael Porter has proposed the value chain as a tool for identifying ways to create more customer value. According to this model, every firm is a synthesis of activities performed to design, produce, market, deliver, and support its product.

The value chain identifies nine strategically relevant activities—five primary and four support activities —that create value and cost in a specific business.

The primary activities are (1) inbound logistics, or bringing materials into the business; (2) operations, or converting materials into final products; (3) outbound logistics, or shipping out final products; (4) marketing, which includes sales; and (5) service. Specialized departments handle the support activities —(1) procurement, (2) technology development, (3) human resource management, and (4) firm infrastructure. (Infrastructure covers the costs of general management, planning, finance, accounting, legal, and government affairs.)

The firm’s task is to examine its costs and performance in each value-creating activity and look for ways to improve it. Managers should estimate competitors’ costs and performances as benchmarks against which to compare their own. And they should go further and study the “best of class” practices of the world’s best companies.

We can identify best-practice companies by consulting customers, suppliers, distributors, financial analysts, trade associations, and magazines to see whom they rate as doing the best job. Even the best companies can benchmark, against other industries if necessary, to improve their performance. To support its corporate goal to be more innovative, GE has benchmarked against P&G as well as developing its own best practices.

The firm’s success depends not only on how well each department performs its work, but also on how well the company coordinates departmental activities to conduct core business processes.5

These processes include:

• The market-sensing process. All the activities in gathering and acting upon information about the market

• The new-offering realization process. All the activities in researching, developing, and launching new high-quality offerings quickly and within budget

• The customer acquisition process. All the activities in defining target markets and prospecting for new customers

• The customer relationship management process. All the activities in building deeper understanding, relationships, and offerings to individual customers

• The fulfillment management process. All the activities in receiving and approving orders, shipping the goods on time, and collecting payment.

Strong companies are reengineering their work flows and building cross-functional teams to be responsible for each process. At Xerox, a Customer Operations Group links sales, shipping, installation, service, and billing so these activities flow smoothly into one another.

Winning companies excel at managing core business processes through cross-functional teams. AT&T, LexisNexis, and Pratt & Whitney have reorganized their employees into cross-functional teams; cross functional teams exist in nonprofit and government organizations as well.

To be successful, a firm also needs to look for competitive advantages beyond its own operations, into the value chains of suppliers, distributors, and customers. Many companies today have partnered with = specific suppliers and distributors to create a superior value delivery network, also called a supply chain.