Basically the value chain concept describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:
Primary Activities – those that are directly concerned with creating and delivering a product (e.g. component assembly)
Support Activities – which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others (“out sourced”).
What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.
The primary value chain activities are:
Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required.
Operations: the processes of transforming inputs into finished products and services.
Outbound Logistics: the warehousing and distribution of finished goods.
Marketing & Sales: the identification of customer needs and the generation of sales.
Service: the support of customers after the products and services are sold to them.
Support activities often are viewed as “overhead”, but some firms successfully have used them to develop a competitive advantage, for example, to develop a cost advantage through innovative management of information systems. The primary value chain activities described above are facilitated by support activities.
The above activities are supported by:
The infrastructure of the firm: organizational structure, control systems, company culture, etc.
Human resource management: employee recruiting, hiring, training, development, and compensation.
Technology development: technologies to support value-creating activities.
Procurement: purchasing inputs such as materials, supplies, and equipment.
Below you can see the basic model of Porters Value Chain
A typical value chain analysis can be performed in the following steps:
Analysis of own value chain – which costs are related to every single activity
Analysis of customers value chains – how does our product fit into their value chain
Identification of potential cost advantages in comparison with competitors
Identification of potential value added for the customer – how can our product add value to the customers value chain (e.g. lower costs or higher performance) – where does the customer see such potential
The advantage for organizations by using this approach of analyzing value
chains is that the performance of their activities could be identified.
This could mean outsourcing of activities in which the organization is not good at to gain competitive advantage. Therefore, managers examine cost and value of activities.
All in all, the result of the linkage of all these activities is the profit margin.
The more efficient the value chain of an organization is, the cheaper the creation of the product or service is and therefore a better profit margin is possible. Because it is unusual that organizations do every single activity of adding value to their product
in-house, Michael Porter came up with value networks, which are also called wider value systems.
These networks connect different value chains (inter-organizational) and build relations between them. By linking value chains from suppliers to organizations and finally to customers, the product or service (the value) is created.
Below you can see an example of a wider value system (value network).
All the value chains linked together to a value network are important to
the competitive advantage of an organization. That means that not only the internal value chain influences the profit margin of a product or service. Therefore, organizations have to analyze and evaluate their whole value network.
How IT/IS (SAP) can be used to support value chain activities
Procter & Gamble Company
The Procter & Gamble Company (P&G) is one of the world’s premier consumer product companies, with one of the largest and strongest portfolios of trusted brands. Three billion times a day, P&G brands touch the lives of people around the world. P&G runs its business using SAP software. Like any other company, P&G considers the processes surrounding sales orders vital to maintaining customer satisfaction and strong revenues. But sales order processing is complex. Before committing to delivery dates, users may face availability-to-promise and allocation issues. Expediting order
delivery while maintaining efficient logistics often requires finding products in the distribution network, checking customer credit limits, obtaining sales approvals, moving materials to new locations as a mass change, and much more. To improve productivity for everyone involved in sales order-related processes, P&G conceived the notion of a sales order cockpit – a single monitor that supports the everyday activities related to sales orders.
P&G wanted to create such a tool and tailor it to the company’s precise needs without performing custom application development. So P&G approached SAP to find a way to accomplish this while retaining coverage under its standard SAP maintenance contract and without incurring substantial costs. SAP explained the concept of its Enterprise Services Community (ES Community) program, a gathering of customers and partners that together comprise a force capable of helping firms like P&G achieve their goals.
Through a forum called a community definition group (CDG), customer ES
Community members contribute their extensive experience to aid in requirements definition for an application, such as the sales order cockpit, while partners provide their SAP-certified applications that fulfill roles in its construction. Finally, SAP provides the key ingredients: a set of enterprise services that glue together SAP software and partner applications to form the ultimate composite application.
Since all these contributions are built using standard SAP software, the final solution is fully compliant with the provisions of standard SAP maintenance contracts, relieving customers like P&G from concern about ongoing support.
P&G was excited about the idea and allied in forming CDGs to turn the sales order cockpit concept into a reality. Together, the companies recruited five other consumer products firms with needs similar to P&G’s, along with three software suppliers with relevant SAP certified offerings to provide important functionality.
Results of this cooperation
Over the course of 15 months, the team launched and completed seven CDGs
that employed more than 20 enterprise services built on the SAP ERP and SAP
Supply Chain Management applications to create the sales order cockpit. The
solution can be readily extended by P&G for additional purposes, such as truck
load optimization. Other end users can tailor it for differences in their
own environments. P&G and others in the CDGs plan to begin pilot production
use shortly and are already planning further business innovations to take advantage
of SAP collaboration platforms and the SAP partner ecosystem that contributed so much on the sales order cockpit.
How IT/IS (NET SUITE) can be used to support value chain activities
With over 1,800 restaurants worldwide and almost 200 new stores opening each year,
Jollibee has enjoyed dramatic growth since its humble beginnings as two Filipino ice cream parlors back in 1975. Such dramatic growth came at a price, however, as the pace of expansion outran the coverage of the company’s core ERP solution.
Jollibee’s corporate headquarters uses Oracle for financial management and reporting, while the company’s broader business interests relied on a patchwork of legacy systems with no real integration. Reporting and consolidation were managed over e-mail, making timely and informed decisions difficult. Processes were opaque, keeping Jollibee from acting as a truly coordinated international entity. “The lack of integration meant we had to rely on email for our financial reports, making it difficult to easily obtain the data we need to make informed decisions,” Baysa says.
Recognizing the risks and inefficiencies of this arrangement, the company explored the
possibility of standardizing its entire global network on the central ERP system. Jollibee quickly found that expanding Oracle to its international operations would be too costly and resource-intensive.
Seeking a solution with world-class capabilities, rapid deployment, and proven integration, Jollibee turned to NetSuite. NetSuite OneWorld gives Jollibee a fast and cost-effective way to automate reporting, perform real-time analytics, conduct audit trail analysis, operate an international supply chain, consolidate international financials, and enforce corporate governance standards.
Strengthened by the success of the Vietnamese pilot program, Jollibee plans to roll out
NetSuite OneWorld across its Chinese operation before the end of the year, followed by Taiwan, the United States and other Asian markets. “NetSuite OneWorld gives us a way to deliver a standard platform across the organization in a timeframe and at a cost that supports our continued growth and development.”
Results of this cooperation
Jollibee selected its ten-store Vietnamese market as the first candidate for integration.
NetSuite was fully deployed into this territory in just two months. Because NetSuite
OneWorld integrates seamlessly with Oracle, Jollibee’s Manila headquarters now enjoys real-time visibility into every aspect of the Vietnamese operation, including granular performance analysis, consolidated reporting and a complete audit trail. Online supply ordering enables the international group to restock from Jollibee’s factory in a more efficient and cost-effective manner than the previous, manual supply process. Significantly, NetSuite delivered these benefits faster and at a lower cost than a comparable expansion of Jollibee’s Oracle platform into Vietnam. “If we used a platform like Oracle worldwide, it would require significant capital investment and a lot of resources, including a large IT team to implement and maintain the system in each country,” says Ysmael Baysa, Jollibee CFO. “NetSuite provides all the capabilities we need internationally, in a timeframe and at a cost that supports our continued growth and development.”