Introduction to Value-Chain

            The Value-Chain was conceptualized and popularized by Porter in 1985 through

his book, a best-seller, Competitive Advantage: Creating and Sustaining Superior

Performance. The main thrust of “the value-chain” is to categorize the generic “value-

adding activities” of an organization. The value-chain management tool recognizes two

value-adding activities in an organization, the “primary activity” and the “support

activity”. The primary activities includes the following, inbound logistics, production,

outbound logistics, sales and marketing, and maintenance. Support activities include

administrative infrastructure management, human resources management, research

and development team and procurement (2003). According to  (1985) a firm's value

chain is embedded in a larger stream of activities that he termed the value system.

Suppliers have value chains (upstream value) that create and deliver the purchased

inputs used in a firm's chain. Suppliers not only deliver a product but also can influence

a firm's performance in many other ways. In addition, many products pass through the

value chains of channels (channels value) on their way to the buyer. Channels perform

additional activities that affect the buyer, as well as influence the firm's own activities. A

firm's product eventually becomes part of the buyer's value chain. The ultimate basis for

differentiation is a firm and its product's role in the buyer's value chain, which

determines buyer's needs. Gaining and sustaining competitive advantage depends on

understanding not only a firm's value chain but how the firm fits in the overall value

system ( 2003).

Simply, the value chain is a model that describes a series of value-adding

activities connecting a company's supply side (raw materials, inbound logistics, and

production processes) with its demand side (outbound logistics, marketing, and sales).

By analyzing the stages of a value chain, managers have been able to redesign their

internal and external processes to improve efficiency and effectiveness (1996).

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HR MANAGEMENT

FIRM INFRASTRUCTURE

Porter’s Generic Value Chain

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The paramount aim of every organization is to achieve optimization of each

element of the value chain. In analyzing various elements, for example, inbound

logistics (material handling, inspection, just-in-time delivery), outbound logistics (order

processes, transport), marketing and sales (product development, pricing, promotion,

distribution), service (on-site and off-site service, spare parts, customer care),

organizations ought to gain insight not only into their own potentialities but also of their

competitors' capabilities and competencies.

The costs and value drivers of an organization are distinguished for each value

activity. The value chain framework quickly made its way to the cutting edge of

management zeitgeist as a powerful analysis tool for strategic planning. Its ultimate goal

is to maximize value creation while minimizing costs.

The Primary Value-Chain Activities

 Inbound logistics: the receiving and warehousing of raw materials, and theirs

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 products.

 Marketing and 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.

These primary activities are supported by:

 The infrastructure of the firm: organizational structure, corporate culture,

control systems, etc.

 Human resource management: employee recruiting, hiring, training,

development and compensation.

 Technology and development: technologies that can support value-creating

activities.

 Procurement: purchasing inputs such as materials, supplies and equipments.

Value Chains Generic Strategies

            The firms profit potential depends on its effectiveness in performing these

activities efficiently. By doing so, the amount that the customer is willing to pay for the

product exceeds the cost of the activities in the value chain. It is through this activity that

the firm can gain the opportunity to generate superior value. A competitive advantage
can then be achieved by reconfiguring the value chain to provide lower cost or better

differentiation. The value-chain model is a useful analysis tool for defining a firm’s core

competencies and the activities in which it can pursue a competitive advantage.

 Cost Leadership

An organization always aims to be the low-cost producer in its industry. If an

organization can attain and maintain overall cost leadership then it will reach superior

performance. Cost leadership can be obtained by focusing on key accounts, reaping

economies of scale, controlling costs.

 A differentiation strategy

This strategy would demand an organization in offering something unique to its

target customers. The uniqueness can be concerned to products, the way it delivers its

goods and services, the way it markets its products or anything that shapes a

customer's perception in relation to differentiation. This could be the way products and

services are branded or designed and the customers perceive such offerings as unique.

 Focus strategy

This strategy involves an organization being selective in terms of the segments it

wants to serve and focusing on these segments to the exclusion of other segments. The

focus strategy can either be cost focus or differentiation focus. If an organization does

not choose generic strategies it wants to focus on then, it will be bewildered and far

from its goals. The degree to which a generic strategy can be sustainable will reckon on
competitors' behavior and action. The organization constantly has to be a step ahead of

its competitors.

Generic strategies affect the following elements of marketing namely (1) costs

and pricing, (2) product design, (3) marketing mix, (4) channels of distributions, (5)

promotion, (6) segmentation, (7) branding, (8) marketing information, (9) marketing

communication and lastly (10) profitability.

Cost Leadership and the Value-Chain

A firm may create a cost advantage either by reducing the cost of the individual

value chain of activities or as what have been said before reconfiguring the value chain

to suit lower production costs. Once the value chain is defined, a cost analysis can be

performed by assigning costs to the value chain activities. The costs obtained from the

accounting report may need to be modified in order to allocate them properly to the

value creating activity. In this way cost leadership is achieved by the firm in the Industry

it is operating. Cost leadership would then affect cost and pricing of the firms’ product

and the more logical strategy that the firm would employ is to lower its product price due

to lower cost of production. By doing so, they are gaining comparative advantage with

its competitor. Reconfiguration of the value chain also means an innovative structural

change with in the organization like for example a new distribution channel, or a

different marketing and sales approach.

 Differentiation Strategy and the Value-Chain

            A differentiation advantage can arise from any part of the value chain. A

procurement of technology, information, marketing strategy or input that are unique and

not widely available to competitors create differentiation. The concept of differentiation

stems from uniqueness or brand recognition. This advantage may be achieved either by

changing individual value chain activities to increase uniqueness in the final product.

Important factors are identified that leads to differentiation advantage. Policies and

decisions of the organization is one. Learning curve or mastery of the employees in

creating quality products is also one (1985). There are several ways in which a firm can

reconfigure its value chain in order to take advantage of differentiation strategy, Dell for

example implemented new distribution channels or strategy to be unique.

Technology and the Value-Chain

Technology also plays a vital role for the firm to gain competitive advantage over

its competitor in the industry.  Almost if not all modern firms employ technology in all its

value creating activity. Technologies have a very significant role in the organization,

changes in technology can impact competitive advantage by incrementally changing the

activities themselves or by making new possible configurations in the value chain. There

are various types of technologies used in both primary activities and support activities.

There is the inbound logistic technology which involves transportation, handling, storage

communications etc. Technologies that are used in the production of the products and

services are labeled as operations technologies. Production process, materials,

machine tools used, packaging and maintenance are examples of production stages
that employ technology. If there is an inbound logistics technology, there is also an

outbound logistics technology. Outbound logistics refer to as the delivering of the

product from the production area to the market or to the buyer itself. Outbound logistics

employ almost the same technology used by the inbound logistics, it also requires

transportation technologies, the handling, packaging, communication and information

systems. Marketing the product and selling it to the market also requires technology

through the use of media and information systems. The role of the firm usually do not

stop after a consumer purchased a firm’s product, after-purchase services are important

and product innovation is a constant process if the firm is aiming to stay at a competitive

advantage from its competitors. After-purchase services and product innovation also

requires the use of technologies. Because of technologies, innovation and creation of

new products to suit customer satisfaction are made faster. We can note that

technology is widely used across the value chain, and to the extent that technology

affects uniqueness of the product, and this leads to competitive advantage.

 
The DELL Computers and its Value-Chain

            As of July 2002, Dell Computer Corporation (Dell) was the world’s largest direct

selling computer company, with 34,800 employees in more than 30 countries and

customers in more than 170 countries. Headquartered in Austin, Texas, Dell had gained

a reputation as one of the world’s most preferred computer systems companies and a

premier provider of products and services that customers worldwide needed to build

their information-technology and Internet infrastructures. Dell’s climb to market

leadership was the result of a persistent focus on delivering the best possible customer

experience. Direct selling, from manufacturer to consumer, was a key component of its

strategy (2002).

The company was based on a simple concept: that Dell could best understand

consumer needs and efficiently provide the most effective computing solutions to meet

those needs by selling computer systems directly to customers. This direct business

model eliminated retailers, who added unnecessary time and cost, and also allowed the

company to build every system to order, offering customers powerful, richly configured

systems at competitive prices. Dell introduced the latest relevant technology much more

quickly than companies with slow-moving, indirect distribution channels, turning over

inventory an average of every four days. In less than two decades, Dell became the

number-one retailer of personal computers, outselling IBM, Hewlett-Packard, and

Compaq (2002).
 The traditional value chain in the personal computer industry was characterized

as “build-to-stock.” Computer manufacturers, such as IBM, Compaq, and Hewlett-

Packard, designed and built their products with preconfigured options based on market

forecasts. Products were first stored in company warehouses and later dispatched to

resellers, retailers, and other intermediaries who typically added a 20–30 percent

markup before selling to their customers (1999).

Computer manufacturers commanded the upstream part of the value chain, while

giving the downstream part to middlemen (resellers, retailers and other intermediaries).

Retailers justified their profit margins by reasons that they also give free several benefits

to customers: easily accessed locations selection across multiple brands, opportunity to

see and test products before purchasing, and knowledgeable salespeople who could

educate customers about their choices.

The 1980’s saw two trends that allowed Dell, of Dell Computers to radically

engineer the personal computer industry value chain. First, it was the decade that

corporate consumers were becoming increasingly sophisticated and advanced therefore

did not require intense personal selling by salespeople. Its individual consumers,

especially those buying their second or third computers had also become

knowledgeable, computer savvy and experienced technology users. Second, different

components or parts of the personal computer like the monitor, keyboard, memory, disk

drive, software, and so on become standard modules. This standardization of basic

parts of personal computers permitted the mass customization in personal computer

system configuration (1998).

 Part of Dell Computer’s strength in its company’s SWOT analysis is its unique

direct to customer model.  The creation of the model was the major reconfiguration of

the traditional personal computer value chain, which computer manufacturers and Dell

competitor are using. By employing the model, the company outsourced all components

but it still performed the assembly. In the process this eliminated retailers and directly

shipped the computers from its factories to end customers. This action leads Dell into

Cost leadership among the players in the industry. By eliminating the retailers,

consumers were buying consumers from Dell with out the extra payment for retailers’

margin. This in turn leads to cheaper computers from Dell compared to its competitors.

As the Internet is becoming more integrated into daily life, businesses rely on the

Internet for commerce and real-time information exchange; customers go online to

shop, bank and conduct personal correspondence. Because of this Dell began to take

customized orders for hardware and software over the phone or via the Internet. And it

designed an integrated supply chain linking Dell’s suppliers very closely to its assembly

factories and order-intake system. With the industry's most efficient procurement,

manufacturing and distribution process, Dell offers its customers powerful, richly

configured systems at competitive prices. Every Dell system is built to order. Customers

are getting exactly what they want. Dell uses knowledge gained from direct customer

contact before and after the sale to provide award-winning reliability and tailored

customer service.

            By reconfiguring the traditional “build-to stock” value chain model of computer

manufacturers, Dell Computers defined its biggest core competency and the activity in
which it can pursue its competitive advantage. First Dell gained cost advantage from its

competitors by understanding cost drivers (retailers) in its production and squeezing

them out. The implementation of the direct to consumer model solved the problem of

expensive computer born out of the margins asked by the middlemen. Dell Computers

also realized the differentiation advantage by focusing on their efficient model as its

core competency which resulted to Dell outperforming its competitors.

            Another part of Dell’s strength in its SWOT analysis is its better access to

technology compared to its competitors. Dell introduces the latest relevant technology

much more quickly than companies with slow-moving indirect distribution channels.

Currently Dell’s initiatives include moving even greater volumes of product sales,

service and support to the Internet; using the Internet to improve the efficiency of Dell's

procurement, manufacturing and distribution process and further expanding an already

broad range of value-added services. By taking its direct business model and its

associated customer experience to even higher levels, through the Internet.

Dell’s Management Systems

            In August 1993, Dell engaged Bain & Company, Inc., a global business

consultancy, to help it develop a set of metrics to judge business-unit performance.

Thinking over on that experience, Dell said in an interview with (1998), “It was all about

assigning responsibility and accountability to the managers”. Dell wanted the use of

data and facts to be incorporated as the cornerstone in every Dell’s manager’s daily

decision making. There were some managers who actually resisted the new

management style of Dell and some did eventually left. But for the most part of the
organization, people were energized by the change. Dell carefully communicated this

management move as to what this meant to the future of Dell Computers employee, to

the consumers and to its shareholders. It was received by an overwhelming response,

“Facts are your friend” become a common phrase in Dell Computers culture. “We are

still the same company, marked by the same Dell drive and spirit, but we are better

armed to make important decisions” said Dell to conclude his interview.

            Dell recognized ahead of time the need for speed, or velocity, quickening the

pace at every step of business. The company learned that the more workers handled, or

touched, the product along the assembly process, the longer the process took and the

greater the probability of quality concerns (2002). Dell began to track and systematically

scale down the number of “touches” along the line, even driving it to zero. The company

took orders from customers and accomplished them by buying and assembling the

needed components. Customers got exactly the configuration they desired, and Dell

foreshortened its need for plants, equipment, and research and development

department. As a result, Dell turned a product business into a service industry.

            The chief financial objective that steered managerial evaluation at Dell was

return on invested capital (ROIC). Dell’s scorecard included both financial measures

(ROIC, average selling price, component purchasing costs, selling and administration

costs, and margins) and non financial measures (component inventory, finished goods

inventory, accounts receivable days, accounts payable days, cash-conversion cycle,

stock outs, and accuracy of forecast demand). The scorecard was returned on a real-
time basis, and related performance measures were broken down by customer

segment, product category, and country (2001).

            Dell Computers was fortunate to have a leader like Dell who was a visionary and

a dynamic catalyst. Dell says his most important leadership responsibility is looking for

“value shifts” in his company’s customer base. To identify the shifting needs of

customers, he has to stay in close contact with them. To build customer intimacy and

loyalty, Dell leverages its customers’ knowledge of their own unmet needs. Dell’s brand

image was and is shaped by customer feedback.

Summary of Dell Computers Value Chain Analysis

Primary Activities

Inbound Logistics

Here goods are received from a company's suppliers. They are stored until they are

needed on the production/assembly line. Goods are moved around the organization.

Dell relies mostly on its highly reliable supplier, where Dell streamlines its operation and

relies on its computer monitor supplier to ship directly to the customer. As long as its

supplier retains its leadership position, Dell would collaborate with it to achieve mutual

success.

Operations

This is where goods are manufactured or assembled. Every Dell system is built to order.

Customers get exactly what they want. Dell uses knowledge gained from direct
customer contact before and after the sale to provide award-winning reliability and

tailored customer service.

Outbound Logistics

When Dell introduced the direct model, its competitors were selling computers to end

consumers via distributors. Dell, on the other hand, sells directly to consumers and is

continuously communicating with them and benefiting, especially in two areas, seeing

sales trends and learning about unmet customer needs. The company also relies on

customers’ knowledge of what they want to purchase and when they want to complete

the transaction to drive the direct business model. Dell leverages this source of

customer knowledge by making it as easy as possible for a customer to place a

customized order electronically.

Marketing and Sales

Dells direct to customer model solve the problem for additional capital for marketing and

sales. By selling directly to consumer it eliminated retailers along the way. One

advantage of this kind of system is that the firm is continuously in contact with its

customers and they are benefiting in two areas concerning sales and marketing, seeing

sales trends and learning about unmet costumer demands.

Service
Dell spent dollars training well-educated business segment managers provide state-of-

the art advice to customers. The company also initiated a collaborative customer-

solution teams that collaborate with customers to fulfill any unmet customer needs.

Because of the nature of work of Dell’s employees they are continually being inspired to

stay abreast of technology threats and opportunities that may alter the competitive

landscape in the future.

Support Activities

Procurement

It is on this activity that Dell is weak because Dell do not enjoy protected by trademark

or patent or copyright technology. The technology being used in the industry is shared

by all industry players.

Technology Development

Technology is an important source of competitive advantage. And here is one strength

of Dell for the firm enjoys better access to technology. Dell introduces the latest relevant

technology much more quickly than companies with slow-moving indirect distribution

channels.
Human Resource Management (HRM)

Dell’s mission statement is “to be the most successful computer company in the world at

delivering the best customer experience in markets we serve”. Dell employees, direct

salespeople, help-desk operators, engineers, and the like all have to be knowledgeable

and customer focused to ensure Dell’s continued competitiveness.

Firm Infrastructure

Dell revolutionized the traditional value chain of computer manufacturing industry by

introducing the direct to customer model. Dell also employed a global business

consultancy, to help it develop a set of metrics to judge business-unit performance. By

doing so, daily decision making were more efficient. The chief financial objective that

steered managerial evaluation at Dell was return on invested capital (ROIC). Which

leads to no inventory build-up, Dell turns over inventory every six days on average,

keeping related costs low.