MANAGING INFORMATION SYSTEM

LESSON 5: VALUE CHAIN

Objective
In the first chapter we stressed on understanding the concept of system, information systems and why information system are so important for an organization. The objectives of this lesson is to give an insight into

Value Chain Activities

The value chain classifies each firms activities into two broad categories: Primary Activities and Support Activities.

Primary Activities
These activities point directly to actual creation, development, manufacture, distribution, sale, or services offered to the firms customer. These activities represent the key tasks a firm performs to produce and deliver a produce or service to a customer. These include outbound logistics, inbound logistics, operations, marketing and sales, and service.

The concepts of value chain model Activities involved in value chain model Increasing the company profits by using value chai Understand the concept of process

Value Chain Model

Definition: The value chain model is a model that highlights the primary or support activities that add a margin of value to a firms products or services where information system can best be applied to achieve a competitive advantage. Porter has given this definition in 1985. Lets understand this definition first and then we will proceed further. We are quite sure that information system works as a fuel for companies now days. But how many companies are able to get benefits from using information system ? Well we think that almost every. But answer is very few. Actually we always forget to add the initial cost that is required to set up the information system. So definitely if we want to use information system in a productive way to increase our quality or value of our products or services, then we need to do some activities. Now the question is which activities? Well these primary and support activities are provided by value chain model. This model views the firm as a series or chain of basic activities that add a margin of value to a firms products or services. These activities can be categorized as either primary activities or support activities. It is the starting point to help firms identify their strengths and weak-nesses. To understand how a firm builds its capabilities to compete, one must identify the specific types of activities that make up the firms competitive posture. Every firm engages in a numerous activities that, in sum, determine its competitiveness in serving customers in the marketplace. These activities create economic value. A useful analytical tool for portraying and analyzing these activities is the value-chain shown in fig.(a). The value chain describes all of the activities that make up the economic performance and capabilities of the firm. It portrays activities required to create value for customers of a given product or service. As such, the value chain is an excellent framework by which managers can determine the strengths and weaknesses of each activity seeing the firms competitors.

Support Activities
These activities refer those tasks that contribute to or assist the firms primary activities. In other words, support activities work to enhance or to help the functioning of primary value-adding activities. Support activity make the delivery of primary activities possible and it consist of organization infrastructure, human resources, technology (improving products and production process) and procurement (Purchasing input). The combination of both primary and support activities determine the firms basis for adding value by breaking up the firms value chain into discrete, isolated centers of activity, managers can assess whether they are performing each activity in a way that are better than that of their competitors (e.g. lower cost, better quality, faster delivery). In other words, it is not enough to say that one firm is better than another in some over all way. Organizations have competitive advantage when they provide more value to their customers or when they provide the same value to their customers at large a lower price. There exist another perspective of value chain that looks value chain as Upstream Activities and Downstream Activities.

Upstream Activities
These are economic activities that occur close to the firms suppliers but far away from the consumer. In other words, upstream activities are performed in the early stages of the value adding process. These include inbound logistics, procurement, manufacturing and operations.

Downstream Activities
These are economic activities that occur closer to the customer but far away from the firms supplier. Downstream activities add value to those inputs that were processed through earlier upstream value-adding activities. These include outbound logistics, distribution, marketing sales and service.

Survey 1:
a. With the advent of food chains (Mc Donald, Wimpy Pizza Hut etc.) in India the eating habits of a large portion of young generation has gone severely changed. Even after

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capturing a substantial market share by each outlet, they are struggling with new competitors coming in the market. You have to draft the working way for these outlets, so that they can retain there market share as well as to increase the market percentage also, you have to choose a particular outlet and find out the primary and secondary activities along with the upstream and downstream activities You will be working in a group of eight and will submit your report in front of the class. The time period is seven days.

Linking Value Chain

Value chain Analysis for Competitive Advantage.
You all will agree that gathering information is not just enough for increasing the efficiency. We somehow have to apply the information into real world to get the maximum out of the tasks for which we have gathered the information.

firms suppliers. The typical operational procedure and tasks surrounding inbound logistics include warehousing, storage, and control of raw materials or managing component flow from different suppliers. Inbound logistics are considered a primary activity because they represent the beginning of the firms value- adding conversion of inputs. Inbound logistics represent a major source of direct costs to the firm; this new techniques and improvements in inventory control, storage and material handling can dramatically improve a firms cost position in this activity. For example, a reduction in inventory and storage costs overtime can have a major positive impact on a firms cost position. Differences in storage and inventory costs relative to ones competitors can add up to a significant competitive strength or weakness. In many firms, inbound logistics require significant capital investment. The location and management of warehouses, and the inventory held in them, are important areas in which to focus cost control and efficiency. Many manufacturers around the world have taken numerous steps in recent years to improve the efficiency and reduce costs involved with inbound logistics activities. At General Electric, for example, the huge major appliances (dish washers, refrigerators) plant at Louisville, Kentucky, uses highly automated bar coding, sorting, and inventory checking systems that enable GE to move components and parts quickly from the railhead to its factory. Parts and components do not sit idle in warehouses for long. Fast movement of components and inventory greatly reduces the operating costs for the entire Major Home Appliance Group business.

INFORMATION SYSTEM

Achieving Competitive Advantage

What activities a business undertake is directly linked to achieving competitive advantage. For example, a business, which wants 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.

Primary Activities
The sequence of activities through which raw materials are transformed into benefits enjoyed by customers is called primary activities. As discussed before five major activities make up this sequence: inbound logistics, operations, outbound logistics, marketing/sales, and services. Working together, these five activities determine the key operational tasks surrounding the product or service.

Operations
Operations are the activities and procedures that transform raw materials, components and other inputs into finished end products. In other words, an operation concerns itself with the generation manufacture and/or production of products and services. Specific task activities in the operations realm include stamping machining testing, fabrication, and assembly in manufacturing-based settings. In a broader sense, any type of processing activity that results in or service is the heart of the firms operations. Operations also represent the dominant upstream activity in many firms. Success in managing and improving upstream operations over time represents a critical source of leverage in building or reinforcing a firms ability to compete in a sustained manner. Differences between firms conducting similar types of operations may result from relative age of equipment, type of technology used, size of plant, economies of scale, degree of automation, productivity levels and gains, wage rates, and possible improvements resulting from longer experience. For many service businesses, operations are concerned directly with the provisioning of service to its customers. For telecommunications firms, operations are focused on a man-aging and updating the vast net work of routers, switches and other gear that is at the back-bone of communications and the internet. For health care providers, an operation represents a multifaceted set of activities, ranging from emergency room care to surgery, to postoperative care and to direct personal care of patients. Operations in a financial services firm could relate to check clearing and automated teller machines (ATM) for banks,

Primary Activity Description

Inbound logistics All these activities concerned with receiving and storing externally sourced material. The manufacture of products and services the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) All these activities associated with getting finished goods and services to buyers. Essentially an information activity informing buyers and consumers about products and services (benefits, use, price etc.,) All those activities associated with maintaining produce performance after the product has been sold.

Operations

Outbound logistics

Marketing and sales

Service

Lets see each of them in detail

Inbound logistics: As the words imply, inbound logistics deal with the handling of materials and inventory received from the
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trading securities for brokerages, and transmitting funds and clearing credit transactions for banks and credit card processors.

Outbound Logistics
Outbound logistics refers to the transfer of finished end product to the distribution channels. The focus in outbound logistics is on managing the flow and distribution of products to the firms immediate buyers, such as wholesalers and retailers. Activities and procedures associated with outbound logistics include inventory control, warehousing, storage and transport of finished products. As is the case with inbound logistics and operations, improvements in efficiency and responsiveness of outbound logistics can greatly aid the firms competitive posture. Firms can build competitive strengths based on their ability to lower the costs of outbound distribution and to enhance responsiveness. Procter & Gamble (P & G) over the past several years has made major efforts to improve the efficiency and turnaround of its outbound logistics activities. By linking up more closely with key wholesalers and retailers (e.g, Wal-Mart Stores), P.G has accelerated the timely delivery of goods that retailers have trouble stocking. By making extensive use of bar-coding technology, P & G and its key buyers balance the flow of inventory and goods between P & Gs warehouses and the retailers store shelves. The responsive distribution system becomes an overwhelming competitive strength for P & G and helps the company track that products are in particularly high demand. Conversely, a close understanding of how its products are distributed gives P & G a better understanding of how to work with its buyers to improve everyones margin over time. Marketing and Sales Marketing and sales activities include advertising, promotion, product mix, pricing, specific distribution channels, working with wholesalers, and sales force issues. Marketing is vital in helping the firm determine the competitive scope of its value-adding activities. For example: some firms may decide to concentrate their efforts on a specific market segment while other firms may want to pursue a more broad line product strategy. Thus, marketing becomes a vehicle by which the firm can develop specific competitive postures and strategies to serve a variety of segments within the industry. Marketing activities deal extensively with pricing issues as well. The price of a firms product can be an important signal or indicator of the firms value creating capabilities; a products price becomes a surrogate measure of what value the firm is delivering to the market. Marketing activities also represent a central part of the firms downstream valueadding activities; planning in these activities is oriented toward meeting the needs of immediate buyers and the final consumer. Service Customer service is a central value adding activity that a firm can seek to improve over time. During the 1990s, an increasing number of companies began redefining the way they manage their customer service activities. Value is more often defined in the eyes of the customer rather than by what the firm thinks it has created. Thus, customer service includes such activities and procedures as warranty, repair, installation, customer support, product adjustment and modification, and immediate response to customer needs.

Customer service is so important as a competitive weapon because it enables a firm to create value immediately before the customers eyes. How well the firm conducts these tasks will strongly impact the customers preference for buying from the firm again in the future. Both FedEx and Ups thrive in the overnight delivery business because of their superior approaches to customer service. Both firms also allow and even encourage customers to track the starts of their packages and deliveries through the Internet. Conversely, the U.S postal service, which offers a similar overnight delivery service, has only just begun to match what FedEX and UPS can offer in terms of Internet-based tracking systems. Despite the enormous size and reach of the postal system, many business customers still prefer to rely on FedEX and UPS for managing their critical deliveries and urgent package shipments. Value chain can also be used to strategically position a companys Internet-based applications to gain competitive advantage. For example, company managed internet news groups chat rooms and electronic commerce websites are powerful tools for market research and product development, direct sales, and customer feedback and support.

Support Activities
The remaining activities of the value chain are undertaken to support primary activities. They are therefore referred to as support activities. Support activities help the firm improve coordination across and achieve efficiency within the firms primary value-adding activities. Support activities include procurement, technology development, human resource management and firm level infrastructure. Since each primary activity generally requires assistance in each of these four areas, the value chain includes four cells above each primary activity. Let us examine how each of these four support activities contributes to building the firms capabilities.

Procurement: Inputs are secured for primary activities. Technology development: Methods of performing primary activities are improved Human resource management: Employees who will carryout primary activities are recruited, trained, motivated, and supervised. Infrastructure: Activities such as accounting, finance, legal affairs, and regulatory compliance are carried out to provide ancillary support for primary activities.

Let Us See Each of These Activities in Detail

Procurement: Procurement refers to purchasing the necessary inputs, resources, or components for the firms primary valueadding activity. The purchasing function involves specific procedures such as billing systems, methods for dealing with suppliers and vendors, and information systems about different components and parts. Even though it is a support activity, the purchasing function can significantly enhance the firms cost position relative to its competitors. Improved procurement practices enable the firm to gain significant economics of scale and higher bargaining power over suppliers

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if the firm coordinates its procurement across different functions and even business. Technology Development: Technology is found in every value-adding activity within the firm. Given the rapid technological changes that are almost every industry (e.g new forms of communications, software, internet) this support activity has assumed enormous importance in every firm. Technology in firms today transcends the conventional wisdom that it is primarily focused on reach and development (R & D) although most firms still have engineering and R & D staffs devoted to exploring and using new sources of technology, in practice, technology is developed and used in countless ways throughout the firm. It can be the software found in computers, the standard operating procedures used to manage a factory, the human know-how employed in developing manufacturing and selling products, the layout of the factory, the sophisticated nature of the firms internet capabilities, and the laboratory equipment involved in the firms value-adding activities. Technology is pervasive in both upstream and downstream activities of the firm. Technology is concerned with both product development and process development. Product development refers to the conception, design, and commercialization of new products. For example, the design of new aircraft, more sophisticated microchips, better tasting potato chips, and faster-heating microwave-oriented convenience foods all represent different types of product development. Even though the end products are completely different they are all based on the firms ability to conceive and design new product ideas. Process development, on the other hand, refers to the development and use of new factory layouts to reduce work-in-process (WIP) the creation of a new medium to deliver advertising, and the improvement of inventory tracking systems represent some different ways to conduct process development. The aim of process development is to adapt new techniques or to improve existing methods of conducting value-adding activities. Many companies have refocused efforts on technology development to improve their value-adding activities. |For example, Allen-Bradley (a unit of Rock well international), a leading U.S producer of motor controls, has developed new techniques to use factory automation that have dramatically reduced the unit costs of new motor components. Like-wise, competitors in the pizza business are investigating new types of pizzas that they can offer their customers; they are also looking at investing in faster, state-of-the art ovens to improve consistency. General Electric has invested large sums to introduce new forms of flexible automation and materials handling that lower the production costs and improve the quality of its dishwashers and refrigerators. These firms are investing steadily in technology product and process to find new sources of competitive strength.. Human resource management: Human resource management refers to working with people throughout the firm. These activities focus on recruiting, hiring, compensating and training people to perform their jobs within the firm. As with technology development, human resource management receives considerable attention from top management because of its

strategic role in helping the firm learns and build new types of competitive skills. Human resource management activities thus affect every aspect of the firms value-adding activities. When conducted properly, human resource management enables the firm to cultivate the skills necessary for competitive success. Although managers typically tend to think of investments in terms of capital budgets and physical, durable assets, continuous investment in the firms people represents a more enduring way to build the firms capabilities. Managers and employees are the most flexible and capable assets firms have. By providing the right levels of training, firms can assign people to perform different tasks, this enhancing job satisfaction, efficiency, and quality. However, assessing the direct costs of the investing in human resource activities is often difficult since factors such as employees turnover and morale are hard to measure. Successful human resource management is often a key factor in determining a firms competitive strengths. As a result, hotels and restaurants need to ensure that their employees are well trained and know the correct procedures for treating guests. Direct customer service activities in particular require extensive training. Professional service firms, such as accounting, architecture, management consulting, and legal firms, depend heavily on the human resource function to recruit, select, and hire the right people that make up the workforce. Firm Infrastructure: Infrastructure includes such activities as finance, accounting legal affairs, information systems, and payrolls. These activities assist all of a firms value-adding functions. So it is difficult to put an accurate dollar figure on their worth to the firm. Since infrastructure costs are hard to isolate, they are often called overheads,. Although, many firms seek to cut infrastructure expense during business downturns, such activities can import source of competitive strength. For example, in highly regulated industry environment such as electric utilities, telecommunications, financial services, and pharmaceuticals, the firms legal department can be as critical to success as operations, outbound logistics, marketing, or technology development activities. Understanding legislation and government regulations may be just as important as designing new types of drugs or pricing long-distance telephone calls. Thus, infrastructure activities cannot be ignored when formulating competitive strategies.

INFORMATION SYSTEM

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