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"Understanding Value Chain Management"

"Understanding Value Chain Management"


How does this topic relate to the field of management? Define the topic and discuss how it is used in an organization. - 5 pts.

Business management is as much a science as it is an art. Traditional business models rely on a supply chain to provide and process the required materials that will ultimately be converted on a certain product. Such conception is somewhat linear, much like baking a cake by following the recipe in a cookbook to the minute. By contrast, value chain management is an innovative and arguably more dynamic interpretation of the supply chain, where the main objective is not merely to replicate the recipe in the cookbook, but rather making the best possible cake; by experimenting with different ingredients and constantly, thoroughly optimizing the process.

The concept of the value chain was first introduced by author Michael Porter in the popular book "Competitive Advantage: Creating and Sustaining Superior Performance". (1985) Quite roughly, its general purpose can be ascertained from the book's title. Value chain management deals with the optimization of the production and maintenance activities, within a given organization, supply chain or distribution network. Such optimization has the main purpose of maximizing value while minimizing costs. For example, should a manufacturer try to establish its assembly plant in a location near the parts suppliers, the transportation costs will be greatly minimized, and the overall process will be more efficient.

Value chain management is about trying to maximize the value generated along a production chain, trough every possible managerial strategy. By creatively adapting the flow of information and materials along the value chain, new business models can be developed which can provide optimum efficiency; certain intermediaries may be bypassed altogether, and the entire production can be optimized in a number of ways. Effective value chain management does not fail to regard the least detail intently; from the raw materials, to the customers and the user, up to the disposing of the packaging. Further, it extends down the production networks, by considering the efficiency of the processes within the suppliers as well (and also their own suppliers, possibly).

The primary value-adding activities within an organization include all processes within the production and distribution of the product: "inbound logistics, operations, outbound logistics, marketing and sales, and services (maintenance)" (wiki: value chain). Secondary, or "support" activities would be all activities from the managerial standpoint: administrative infrastructure, human resources, procurement and R&D. The value chain is thus an analysis tools for optimum strategic planning. Should the baking metaphor be considered, value chain is not simply about adapting a cake recipe that suits the needs of the baker; it's about developing strategies to create the highest amount of cakes, with the best possible quality, in the least amount of time, and the minimum costs.


What are emerging trends in this area? Who are some leading pioneers in this area? What contributions have they made? - 5 pts.

In the fascinating article by Bowersox and Closs, the authors suggest that the conversion of the traditional supply chain to the value chain is an indicator of the transition from an "industrial to an information technology driven society", which requires a greater deal of flexibility. The authors have thus identified ten "mega-trends" in the reshaping of the relationship between supply chain partners, as they try to come up with "efficient, effective and relevant product/service solutions for end-costumer". Some of the trends which the authors refer to in their discussion are : "Customer Service to Relationship Management, Forecast to Endcast, Experience to Transition Strategy, Absolute to Relative Value" and "Functional to Process Integration". All of these concepts converge in the idea of a paradigm shift, where the end-user provides the focus for the entire production.

Rayport and Sviokla add to this notion of a paradigm shift, as they oppose the traditional notion of marketplace with the contemporary concept of "marketspace". According to the authors, every business presently competes in both realities, "a physical world of resources that managers can see and touch, and a virtual world made of information". The former reality has been instrumental to the rise of electronic commerce, and the leading pioneers in the new electronic realities have earned the lead on the new world of digital information; pioneers such as Bill Gates, who have been visionaries in their own time. Such visionaries have helped create such influent companies such as Microsoft and IBM, who have gained insight that the future would require new ways of conceiving business, well ahead of their time. Such vision has definitely earned the pioneers the upper hand in the thriving "marketspace".

Within an early document (1985) where Porter and Miller discuss the strategic significance of value chain management, the authors provide a succinct definition of the concept. They define the value which is created by a company as measured by the amount that buyers will pay for a certain product or service. Further, they establish that in order to remain competitive over its rivals, a company must either reduce the cost of operations, or increase their value, by performing them "in a way that leads to differentiation and a premium price (more value)". Granted, everyone who uses a PC computer with Microsoft Windows can easily understand how Microsoft learned to take advantage of this concept, well ahead of everyone else; consequently, the company grew exponentially in little over two decades. It may look somewhat like an obvious example; still it provides a clear illustration of the advantage a company can access trough value chain management.


Identify at least one corporation that has successfully mastered the topic. How did they do it? Why did they decide to do it? What are its future plans in this area? - 5 pts.

IBM electronics is an illustrative example of a firm which has long mastered the value chain management. According to the company's website "The average lifecycle of an electronics product is six months. Profit is usually made in the first two months of that cycle. That means every delay costs you money". IBM has long realized that the nature of the industry they operate upon requires a dynamic approach to the supply chain, considering that it's an industry based on continuous technological developments, where parts become obsolete very quickly. By adopting electronics VCM, the company's aim is to make every link in the production chain as flexible, reliable and responsible as possible.

Furthermore, IBM has adopted the strategy of providing consulting services to their own costumers, where they help "address the processes, technology and governance necessary to streamline functional areas" (IBM) Such approach makes it clear that trough extended and dynamic collaboration among companies, every one involved in the process can benefit from more efficient streamline profit, as well as optimum production levels.






Works Cited:

"IBM electronics solutions for value chain management". Accessed on-line 01/30/07 at http://www-03.ibm.com/industries/electronics/doc/jsp/indseg/all/index.jsp?P_SolutionArea=120878812

"Value Chain" at Wikipedia, the Free Encyclopedia. Accessed on-line 01/30/07 at

Bowersox and Closs; "Ten Mega-Trends that will revolutionize the supply chain logistics; JOURNAL OF BUSINESS LOGISTICS, Vol. 21, No. 2, 2000

Rayport and Sviokla; "Exploiting the Virtual Value Chain"
The McKinsey Quarterly, No. 1, 1996

Porter and Millar, "How information gives you competitive advantage ";Harvard Business Review, 1985
Porter, M; "Competitive Advantage: Creating and Sustaining Superior Performance"; New York : Free Press. 1985
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Posted by: Jeffrey J. Thomson

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