What Is Meant by a Value Chain - Coursework Example

? 'Define and explain what is meant by a value chain. Using two different organisational-based examples, examine how organizations construct their value chains to underpin and strengthen their business strategy. Evaluate, using the VRIN criteria, which aspects of their value chains are critical to the organization’s competitive advantage’ – The cases of Toyota and Sony. 'Define and explain what is meant by a value chain. Using two different organisational-based examples, examine how organizations construct their value chains to underpin and strengthen their business strategy. Evaluate, using the VRIN criteria, which aspects of their value chains are critical to the organization’s competitive advantage’ – The cases of Toyota and Sony. 1. Introduction The survival of organizations in the global market is a challenging task, especially during periods of high uncertainty, as currently. In such environment, the need for innovative business strategies becomes emergent especially when the competition is strong. There are certain strategies that help organizations to strengthen their market position avoiding excessive risks. For example, in many organizations the restructuring of value chain has been proposed as a strategy for increasing performance without setting existing operations in risk. The role of value chain in developing and strengthening business strategy is reviewed in this paper. Particular reference is made to the elements of value chain, as a concept developed within different fields. The strategies of two well-known firms, Toyota and Sony, in regard to the management of value chain are presented and compared, aiming to show the terms under which value chain can significantly support the improvement of existing business strategies. At this point, the VRIN criteria have been used for identifying which aspects of the two organizations’ value chains are most critical to the organizations’ competitive advantage. It is made clear that the strategies used by organizations for managing their value chain can be differentiated, under the influence of the internal and the external environment but also of the organization’s aims and culture. For this reason, the level at which the value chain can help to the increase of a firm’s competitiveness is not standardized, as revealed through the effects of value chain management on the two firms’ performance, as analyzed below. 2. Value chain in the organizational environment 2.1 Value chain – characteristics and role The term value chain is extensively used in order to explain two different concepts: the price of a product/ service and the availability of this product/ service in a particular sector. The specific term does not refer only to business activities, even if its use in business is extensive, compared to other sectors; for example, in the social services sector, where the term value chain is used for describing the value of food and other similar material (for instance, drugs), provided to people in need (Kannegiesser 2008). The most common definition of value chain is based on sales and prices as related to specific products/ services (Kannegiesser 2008, p.40). Vallespir (2010) also supports that value chain reflects the balance between costs and benefits in regard to specific products or services. He further explains that the value chain can help to develop effective strategies not just for promoting specific products/ services but also for keeping the quality of products/ services at high level. Reference is made in particular to the health sector where value chain offers valuable information on ‘the costs of products/ services but also on their benefits for patients’ (Vallespir 2010, p.612). In this way, strategy makers can identify effective plans for’ increasing customer satisfaction, meeting customer expectations’ (Vallespir 2010, p.612), meaning in particular the need of patients for health recovery, at the highest possible level, after investing on particular health products/ services. Harper (2010) notes that value chains can significantly help to the development of effective strategies, not just in the business sector, under the following two terms: a) that they are independent, at least initially, from other activities, and b) that ‘they are profitable for all parties’ (Harper 2010, p.279). In other words, value chains cannot help to improve existing strategies unless they result to benefits for all parties involved; when they are related to the interests of just one party, then value chains lead to the limitation of competition and the development of inequalities within the sector involved (Harper 2010). 2.2 Value chain and business strategy As part of the business environment, the term value chain can incorporate different elements. According to Kannegiesser (2008) in business the term value chain usually refers to sales and prices of products and services, as already mentioned above. However, it can also refer to the ‘competence cells’ (Kannegiesser 2008, p.40) that differentiate a business from its rivals. In other words, value chain can be considered as an organization’s competitive advantage. In the past, the power of value chains on business strategies has been limited, at least compared to the modern market, where value chains can highly affect the strategies and the performance of organizations in all industries. According to Schmitz (2005) the increase of the power of value chains in the business environment has been resulted because of the following two facts: a) the ‘product definition’ (Schmitz 2005, p.5); the expansion of brands and of products of specific characteristics/ qualities have led to the differentiation of consumer preferences worldwide. Indeed, consumers are likely to prefer products of specific design or qualities, a fact that oblige suppliers to increase their efforts for responding to the buyers’ demands (Schmitz 2005, p.5), b) ‘the risk of supplier failure’ (Schmitz 2005,p.5); today, the risks for failures in products has been increased mostly because of the increase in demand, i.e. consumption, worldwide. Suppliers have to try to meet deadlines applying the safety and quality standards related to each product (Schmitz 2005, p.5). In other words, in the context of modern market, suppliers need to be able to provide products that have specific characteristics and which are fully aligned with the safety and quality rules related to the particular sector. In business, the elements of value chain are differentiated, being aligned with the needs of the organizations involved. For example, in the retail industry, a value chain incorporates the following elements: ‘inbound and outbound logistics, operations, marketing and sales, service, procurement, technology development and human resources management’ (Pradhan 2006, p.125). The above elements of value chain have been first highlighted in the study of Porter on competitive advantage (Pradhan 2006, p.125). Porter tried to identify which elements of each organization are most likely to affect its position towards the competitors, meaning that the improvement of these elements would help the organization to increase its competitiveness (Pradhan 2006, p.125). When related to the business environment, value chain can be characterized as ‘a high – level model of how businesses receive raw materials as input, add value to them, and then sell the finished product to customers’ (ABC Technologies and Value Chain Authority, cited by Lan and Unhelkar 2006, p.159). According to the above view, value can be added to a product continuously, through all the processes, which are used for transforming the product so that it serves a particular consumer need (Lan and Unhelkar 2006, p.159). In other words, the value of products is continuously alternated in the case that products are part of an organization’s production line. In this way, the relationship between the value chain and the business strategy is made clear: business strategies need necessarily to refer to value chain, meaning that they have to incorporate provisions for effective value chain management in order to ensure the competitiveness of the finished product in the market. In order to understand the significance of value chain for modern businesses it would be necessary to refer to value chain management practices, as developed by firms operating in modern market. Toyota and Sony have been chosen for evaluating the role of value chain in developing effective business strategies. In this context, value chain analysis, as related to Toyota and Sony, can be used for identifying the level at which value chain can affect business planning and performance. Bocij et al. (2006) note that value chain analysis, in its traditional form, is divided into two major parts: the primary activities, i.e. those activities that are necessary for providing the finished product to the customer, for example,’ inbound logistics, manufacturing, support services and so on’ (Bocij et al. 2006, p.60), and the support activities, that influence only partially the delivery of the product to the customer, as for example, ‘the finance and HRM’ (Bocij et al. 2006, p.60). Such value chain analysis will be used in the sections that follow in order to show the level at which value chain has affected the strategies of the organizations chosen and to make clear whether value chain has helped these organizations to increase their competitiveness or not. The VRIN criteria (Sehgal 2011) are employed for identifying the involvement of value chain in the development of competitive advantage in Toyota and Sony. It should be noted that the primary activities of each firm, as these activities are part of each firm’s value chain, would be also evaluated by referring to the value margin, i.e. the total cost of these activities, as differentiated from their total value (Moon 2009, p.11), in order to check whether the actual cost of primary activities has been higher or not from their value; in this way, the necessity of these activities but also their success in supporting organizational growth will be evaluated. 2.2.1 Value chain in Toyota The value chain analysis of Toyota could be developed as follows (as derived by the analysis included in the study of Moon 2009, p.12): 1. Primary activities a) Inbound logistics; in Toyota, inventory is handled locally, in each plant (Figure 1a), meaning that the firm is continuously aware of the availability of equipment and the time required for completing an order; the ‘just-in-time inventory system’, a unique strategy used in Toyota for handling inventory ensures that each part used in the production line is immediately replaced by another part so no gaps exist in inventory (Hill & Jones 2009). b) Operations; the material and equipment used in the firm’s vehicles is manufactured by Toyota, in the context of the firm’s ‘lean production system’ (Hill & Jones 2009, p.75); in this way, the production costs are kept low. c) Outbound logistics; the time required for the delivery of the product to the customer is quite limited in Toyota, compared to other car manufacturers. For example, in the firm’s plant in North America, ‘the average time for the assembly of a car it is estimated to 30.37 hours, compared to 32.29 of its competitor, GM’ (Hill & Jones 2009, p.80). d) Sales and marketing; the price of the firm’s product is kept low, compared to those of its competitors (Hill & Jones 2009); this fact has not affected the firm’s profits which are high because of the limitation of costs in production (Hill & Jones 2009). From January 2010 to May 2010 Toyota was ranked first, in terms of sales in the USA market (Sehgal 2011, p.73). The firm employs a range of marketing initiatives, such as advertisements in the press and media, but also through the WWW, in order to keep its customers informed on its products and to attract new customers (Hino 2006). e) Support services; the firm offers to its customer continuous support to its products, offering free support services for quite a long period, a fact that helps the firm to secure customer loyalty (Sehgal 2011). 2. Support activities a) Infrastructure; the firm’s units are dispersed worldwide; production plants have been established in many countries so that time is saved for the completion of car assembly process (Hino 2006). b) HRM; Toyota highly emphasizes on its employees. In fact, the firm promotes team working, ensuring that employees cooperate in regard to all organizational tasks; initiatives are also welcomed but they should be developed collectively at the level of the team (Hino 2006). c) Technology advances; Toyota continuously updates the technology used in its cars, being among the key competitors, in terms of quality, in the global automotive industry (Sehgal 2011); the firm’s R&D department ensures the continuous update of technology used in the firm’s manufacturing and assembly processes (Toyota, Research and Development 2012). d) Procurement; in the context of ‘Toyota’s lean manufacturing philosophy, known also as muda’ (Sehgal 2011, p.56), waste is eliminated in all production processes; at the same time, cars are delivered to the shortest possible date, since the assembly process is developed quickly, due to the continuous availability of equipment through the just – in – time inventory system. According to Ireland, Hoskisson & Hitt (2008), the value chain analysis helps organizations to identify those activities that most contribute in business growth. A the next level, the value chain analysis helps to estimate the costs of these activities, as these costs can be compared to the value of the activities in order to check their success in promoting business growth or not. Barnes (2001) noted that the value chain analysis can help organizations not only to identify a competitive advantage but also to retain it (Barnes 2001, p.65). Moreover, the VRIN criteria refer to the following characteristics/ qualities of organizational activities: ‘a) Valuable, b) Rare, c) Inimitable and d) Nonsubstitutable’ (Sehgal 2011, p.43). These criteria can be used in the context of value chain analysis for identifying the level at which business strategies can lead to competitive advantage. Using the VRIN criteria, the firm’s value chain, as described above, could be evaluated as follows: Inbound logistics, Operations and Outbound Logistics could be characterized as Inimitable; the sales/ marketing and support services can be characterized as Valuable. Moreover, Infrastructure and Technology advances could be characterized as valuable, while HRM and Procurement could be also characterized as Inimitable, even for certain of their elements; in any case, HRM and Procurement in Toyota are valuable, as elements of the organization’s value chain. Moreover, it seems that the balance between the value and the costs of the firm’s primary activities is kept at satisfactory levels, as revealed through the graph in Figure 1b; it is clear that despite the recession of 2008 the firm’s profitability is kept at high levels, with a trend of increase in 2011, compared to 2010. Figure 1a – Toyota production globally Figure 1b – Toyota net income for the years 2007-2011 (Source: Toyota, Investors – Financial Highlights) 2.2.2 Value chain in Sony Sony, a firm which has been popular for its performance in the electronics market, has been expanded in the global market entering a wide range of sectors, including video games, financial services and music, Figure 2a below). For Sony, the value chain analysis would be developed using the same categories, as follows: 1. Primary activities a) Inbound logistics; the products of the firm are manufactured out of the organization; at this point, suppliers have a key role in the successful completion of orders (Sony Corporate info 2012); the products are delivered to each store according to the orders made, but provisions exist so that stock is in place for covering emergent customer needs (Gershon 2008, p.34). b) Operations; the products of the organization are ordered either in its units or online and are delivered according to the customer’s instructions. The firm operates globally (Figure 2a below) in different sectors, a fact that increases the risk in regard to the success of its operations. Today, Sony ‘is the only company operating simultaneously in consumer electronics and entertainment’ (Moon 2009, p.113). c) Outbound logistics; the time required for the delivery of the product to the customer is minimized; in fact, the firm’s products are available either instantly, in stores, or after a short period, if the order is made online. d) Sales and marketing; the performance of Sony in the global market has been kept high for the years 2009-2011 (Figure 2b below), a fact proving the potential of the firm to face strong market turbulences. In terms of marketing, the promotion of the firm’s products worldwide is significant, especially since the firm operates in many different sectors (Figure 2a). Sony has traditionally emphasized on its communication with customers; for this reason, ‘in 1960 the firm became the first to open a store in USA for improving its relationship with its customers in USA’ (Strebel 2005, p.74). e) Support services; Sony’s customer support services are quite satisfactory; online help is available to customers for making complaints or seeking for advice (Sony Support/ services 2012). 2. Support activities a) Infrastructure; The infrastructure of the organization can be characterized as quite satisfactory, being continuously improved using the information provided by the Research and Development Department (Sony Corporate info 2012). b) HRM; Sony uses a common framework for hiring and supporting employees (Sony, Careers 2012). No particular schemes are in place for enhancing employee motivation or ensuring personal development of employees (Sony, Careers 2012). c) Technology advances; Sony continuously updates the technology used in its product; in fact, Sony uses technology in order to gain competitive advantage towards its rivals, a fact made clear in the television sector, where Sony tries to compete Samsung, its major competitor in this industry, by continuously improving the technology of its products (Haberberg and Rieple 2008, p.508). d) Procurement; Sony has developed a Corporate Social Responsibility framework applied in Procurement; in the context of this framework, emphasis is given on ‘fair business practice, transparency and equal opportunity’ (Sony, Corporation Info, Procurement 2012). At the same time, emphasis is given on the continuous update of technology used by suppliers, so that the products delivered to customers are of exceptional quality (Sony, Corporation Info, Procurement 2012). The role of value chain analysis in identifying effective business strategies is proved through the following approach: value is ‘the price that a customer is prepared to pay for an offering’ (Porter, M., cited by Sekhar 2009, p.115). Therefore, the analysis of value chain allows the identification of those activities that most support business growth, these are the activities the costs of which is low compared to their total value (Sekhar 2009, p.115). In the case of Sony also, like in Toyota earlier, the VRIN criteria can be used for checking whether the firm’s business strategies can lead to competitive advantage. Figure 2a – Sales of Sony by sectors (Source: Sony, Corporate info 2012) Figure 2b – Sony, sales and operating revenue for the years 2009-2011 (Source: Sony, Corporate info 2012) Using the VRIN criteria, the firm’s inbound/ outbound logistics, sales/ marketing and support services can be characterized as Valuable. However, the firm’s Operations can be characterized as Rare, being ‘the only firm operating simultaneously in electronics and entertainment industry’ (Moon 2009, p.113), as explained previously. As for the firm’s support activities, such as infrastructure, technology advances, HRM and Procurement, these could be characterized by valuable, but not Rare, since they are common, meaning that similar strategies are likely to be developed by many firms internationally. If the firm’s strategies are evaluated by referring to its market performance, then a similar assumption can be made; the firm’s profits are kept at high level during the last three years (Figure 2b), showing the flexibility and effectiveness of critical business strategies. 3. Conclusions and Recommendations The effective management of value chains is a challenging task. In the business sector, the failures in managing value chains can result to severe losses, both in the short and the long term. Of course, the effects of value chains on business performance are different among organizations, depending on the organizational structure and culture, the leadership style and the market conditions (Barnes 2001). For this reason, when evaluating the effectiveness of value chain management in regard to a particular organization, it would be necessary to review all its aspects, referring also to the organization’s capability to face unexpected market turbulences and to compete rivals. Toyota and Sony are well established in the global market. Each of these firms has established different criteria for managing its value chain, as revealed through the analysis developed above. Moreover, it seems that each of these firms is likely to deploy different strategies when having to handle critical business problems, such as the limitation of sales, the failures in products, the strengthening of competition and so on. For this reason, each firm performs well in different aspects of value chain management: Toyota is more capable in managing operations, marketing and sales, which Sony has achieved to develop a stable framework for managing inbound and outbound logistics and service. Also, Toyota, because of its culture, can be characterized as more effective in regard to the HRM policies; as for the level of technology development, the advantage of Toyota is clear despite the fact that Sony’s efforts in updating the technology used in its products cannot be ignored. Probably, the ability of the two firms to respond to the continuous changing preferences of customers is different due to the significant difference in their volume of sales. In the long term, the weaknesses of the above organizations in managing their value chain would result to severe failures and losses. For this reason, it would be necessary for both firms to take specific measures in advance for limiting the negative effects of failures in value chain management. Toyota should try to update its manufacturing processes, emphasizing more on innovation and quality compared to in-time delivery. Also, the firm should try to improve its customer support services, so that failures are handled with no delay, a fact that would help to the improvement of the firm’s image in the global market. As for Sony, the organization needs to emphasize more on technology development and human resources management; existing strategies for promoting innovation, as described above, can be characterized as satisfactory, but they should be further improved, increasing the firm’s competitiveness in its industry. 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(2005) Trajectory Management: Leading a Business Over Time. Hoboken: ohn Wiley & Sons. Toyota Motor Corporation (2012) Company profile. Retrieved March 24, 2012 from http://www.toyota-global.com/company/profile/ Vallespir, B. (2010) Advances in Production Management Systems: New Challenges, New Approaches: International Ifip Wg 5.7 Conference, Apms 2009, Bordeaux, France, September 21-23, 2009, Revised Selected Papers. New York: Springer. Read More