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Sunday, May 6, 2012

Value Chain Framework

Value Chain Framework

This is the framework most commonly used to guide analysis of any firm’s strengths and weaknesses. In this framework, any business is seen as a number of linked activities, each producing value for the customer. By creating additional value, the firm may charge more or is able to deliver same value at a lower cost, either of this leading to a higher profit margin. This ultimately adds to the organization’s financial performance.

Figure-I : Value Chain Framework


The value chain framework as shown in Figure-I  is a typical value chain within an organization. Using this framework, it is possible to analyze the organization’s contributions of individual activities in a business and how they add up to the overall level of customer value, the firm produces. It is divided into two parts i.e. primary activities and support activities. The primary activities constitute of the following:

a) Inbound Logistics are activities concerned with receiving, storing and

distributing the inputs to the product or service. They include materials handling, stock control, transport etc.

b) Operations Transform these various inputs into the final product or service – machining, packaging, assembly testing etc.

c) Outbound Logistics collect, store and distribute the product to customers. For tangible products this would be warehousing, materials handling, transportation etc. In the case of services they may be more concerned with arrangements for bringing customers to the service if it is a fixed location (e.g. entertainment show).

d) Marketing and Sales makes consumers/ users aware of the product or service so that they are able to purchase it. This includes sales administration, advertising, selling and so on.

e) Services activities helps improving the effectiveness or efficiency of primary activities.

Each of the groups of primary activities is linked to support activities which are as follows:

a) Procurement: This is a process for acquiring the various resource inputs to the primary activities and this is present in many parts of the organization.

b) Technology Development: There are key technologies attached to different activities which may be directly linked with the product or with processes or with resource inputs.

c) Human Resource Management: This is an area involved with recruiting, managing, training, developing and rewarding people within the organization. This categorization of the activities as primary or support may be found true for organizations in general, however it is always better to have one’s own judgment in identifying activities for particular firms in consideration.

Exhibit 1: Select guiding points for evaluating primary activities :

a) Inbound Logistics

  • Soundness of material and inventory control systems
  • Efficiency of raw material warehousing activities
b) Operations
  • Productivity of equipment compared to that of key competitors
  • Appropriate automation of production processes
  • Effectiveness of control systems to improve quality and reduce cost
  • Efficiency of plant layout and work flow design

c) Outbound Logistics
  • Timeliness and efficiency of delivery of finished goods and services
  • Efficiency of finished goods warehousing activities

d) Marketing and Sales

  • Effectiveness of market research to identify customer segments and needs
  • Innovation in sales promotion and advertising
  • Evaluation of alternate distribution channels
  • Motivation and competence of sales force
  • Development of an image of quality and a favourite reputation
  • Extent of market dominance within the market segment or overall market 

e) Customer Service
  • Means to solicit customer input for product improvements
  • Promptness of attention to customer complaints
  • Appropriateness of warranty and guarantee policies
  • Ability to provide replacement parts and repair services

Exhibit 2: Select guiding points for evaluating Support activities:
A.   Firm Infrastructure

  • Coordination and integration
  • Level of Information system
  • Quality of planning system
  • Timely and accurate information on environment 

B.   Human Resource Management

  • Effectiveness of recruitment, training procedures
  • Appropriateness of reward systems
  • Relationship with trade unions
  • Level of employee motivation and job satisfaction

C.   Technology Development

  • Success of R & D environment
  • Quality of laboratories and other facilities
  • Ability of work environment
  • Qualification and experience of technical hands

D.   Procurement

  • Sources of raw material – time, cost, quality
  • Procedures for procurements
  • Relationships with reliable suppliers

With the indicative guiding points, we have  realized how with the Value Chain Framework, organizations can use these indicators as a reference point in order to improve its overall ability to create value. Miller suggests that the value chain framework can also be useful in a broader sense while deciding in what and where to specialize in the value activities from product design to the delivery of the final product or service to the final consumer.


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