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Value Chain and Value System

Value Chain framework is a model that views firms by sets of activities that firms use to create value and competitive advantage.

Value Chain
Models the firm as a chain of value-creating activities. Its ultimate goal is to maximize value creation while minimizing costs.

The value chain framework is a powerful analysis tool for strategic planning.
The concept of Value Chain popularized by Michael Porter (Harvard University)

Value Chain
Inbound Logistics Operations Outbound Logistics

Marketing and sales


The value chain categorizes the generic value-adding activities of an organization. It describes the activities within and around an organization. Relates them to an analysis of the competitive strength of the organization.

It evaluates which value each particular activity adds to the organizations products or services
Only systematic things and activities will make customers willing to a pay a price for the product. Operational Effectiveness as a tool for Competitive Advantage.

Porters View

The term Margin implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain.

The "primary activities" :

Inbound logistics operations (production), outbound logistics, marketing and sales, and services (maintenance).

The support activities"

Procurement (Purchasing, sourcing, etc.) Technology Development (Information systems, etc.) Human Resource Management (employee benefits, compensation, etc.) Infrastructure Management (finance, legal, etc.)

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).
Value System can extend beyond the boundaries of an enterprise -- Value Systems according to M. Porter.

Value System - Example

Source: Value chain resource planning: Adding value with systems beyond the enterprise; Business Horizons 47/2 March-April 2004 (79-86)

Enterprise systems are designed to plan and integrate processes, enforce data integrity, and better manage resources. The best known are Enterprise Resource Planning (ERP) systems, which are predominantly intra-firm focused and provide, at least in theory, seamless integration of processes across functional areas with improved work flow, standardization of various business practices, improved order management, accurate accounting of inventory, and up-todate operational data.

Supply chain management (SCM) applications developed by such firms as i2, Manugistics, and ORTEC, have provided capabilities for firms to manage their fleet resources more efficiently and develop more appropriate production schedules, ordering protocols, and postponement strategies.

Contract monitoring programs, available through CRM and supplier relationship management (SRM) vendors such as Oracle, Siebel, RiverOne, and Supplyworks, continuously monitor the fulfillment of contracts to ensure quality and long-term reliability.

The Internal - Business - Process Perspective

Each business has a unique set of processes for creating value for customers and producing financial results.

The internal-business-process value Chain encompasses three principal business processes:

Innovation Operations Postsale service

The Internal - Business - Process Perspective

Innovation is a critical internal process. So is Postsale Service

Innovation process the business unit researches the emerging or latent needs of customers, and then creates the products or services that will meet these needs. Operations process, the generic internal value chain, is where existing products and services are produced and delivered to customers. Postsale process includes warranty and repair activities, treatment of defects and returns, and the processing of payments, such as credit card administration

Metrics - Innovation Process




The percentage of products for which the first design of a device fully met the customers functional specification The number of times the design needed to be modified, even slightly, before it was released for production.

Metrics - Innovation Process


Hewlett-Packard engineers developed a metric called break-even time (BET) to measure the effectiveness of its product development cycle
BET measures the time from the beginning of product development work until the product has been introduced and has generated enough profit to pay back the investment originally made in its development

Metrics - Postsale Process

Cycle times from customer request to ultimate resolution of the problem measure the speed of response to failures. Cost metrics can evaluate the efficiency the cost of resources used for postsale service processes Yield Percentage of customer requests handled with a single service call, rather than requiring multiple calls to resolve the problem. Defects They recorded the percentage of items that could not be offered to customers because of quality-related defects.

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