Principles of Value Chain Analysis and the Key Account Management - Coursework Example

How critical are the Value chain & KAM to delivering successful customer value? 1. Introduction In today’s dynamic and intensely competitive business environment, the challenge of creating and delivering successful customer value will lie in how well the organization manages its internal processes and how effective they are in building customer loyalty with a long term orientation to the customer interactions. Among many alternative strategic management tools, Value Chain Analysis (VCA) stands out in terms of usefulness in identifying key value creation activities of the company and how to maximize the created value. Another key management concept that facilitates successful value delivery to the customer is the Key Account Management (KAM) where effort is to develop long term business relationships with the key customers of the company. This paper will assess the principles of Value Chain Analysis and the Key Account Management and their usefulness as management tools in delivering customer value successfully. 2. Overview of Value Chain Analysis “The Value Chain Analysis identifies separate activities, function and business processes that are performed in designing, producing, marketing, delivering and supporting product or a service” (Porter 1985). The chain of interlinked activities, which comes together to finally meet a customer need in the form of a product or a service includes raw material sourcing, logistics, production, sales & marketing as well as other support services. There are generic activities as well as ancillary activities in the value chain. At each stage, the business objective is to create and add value and generate a component of the final profit so that the value generated at each point is greater than the cost incurred in performing that particular activity. By analyzing a company’s value chain, the cost components being incurred at each stage as well as the capital being tied up to each function is highlighted, allowing strategic decisions to be made in terms of cost management. It also allows the company to identify its strengths and weaknesses at each stage of the operation (Thompson & Strickland 2003). This facilitates a company to identify the key areas, which needs its focus in terms of competency building and weaknesses against which contingency planning has to be in place. It also identifies areas of strengths, which can be highlighted in its positioning strategies. 3. Key Elements of a Value Chain Inbound Logistics is one of the primary activities of a company and some companies tend to combine the procurement and inbound logistics under one unit for the value chain analysis. Here the focus in on activities such as receiving goods, raw-materials and other supplies from vendors, quality inspections, storing, and inventory management (Thomson & Strickland 2003). In a bid to capture the value down the supply chain, some companies use strategies such as locating their key suppliers closer to their warehouse or manufacturing facilities. Use of modern Information Technology systems to streamline and manage the process and by employing high caliber logistic personnel this value activity is further strengthened. Operations segment of a company value chain includes all activities associated with converting inputs in to final product form which may involve production, assembly, packing, equipment maintenance, facilities and operations such as retailing (Thomson & Strickland 2003). Use of quality management programs will enhance the operations output and measures geared towards improving productivity will benefit the cost reduction aspects. Use of ERP and other decision support systems will facilitate better resource optimization and high level of business responsiveness based on quality and timely management information. Depending on the field of business, the value addition within the operations segment of the value chain will differ. For a manufacturing company the transformation process of inputs to outputs will differ markedly from that of a service organization. Outbound Logistics of the Value Chain represent all activities that are associated with the physical distribution of goods to the buyers or retail centers. These may include order processing, order picking and packing, loading, shipping and delivery vehicle operations, dealings with carriers and distribution companies etc. (Perkins 2007). Some of the strengths within outbound logistics is the availability of strategically located large and well-equipped distribution centers, utilization of modern IT facilities for managing logistics and supply chain problems, effective fleet management systems and reliable and low cost distribution systems. 3.4 Marketing and Sales element of the Value chain represents activities related to sales force effort, advertising and promotional activities, sponsorships and public relations, market research and planning as well as dealer and distribution support (Perkins 2007). The strength of a good brand name can be one of the biggest value creating elements. Use of media and other forms of advertising and promotional tools to create value through developing product or service image as well as company image is important within this stage of the value chain. The sales force activities, marketing research, interactive company websites and public relations activities are some of the other means of generating value within the Sales and Marketing functions of the value chain. 3.5 Service element of the value chain represents activities associated with assisting customers, after sales services, handling buyer inquiries and complaints as well as other support services (Thompson & Strickland 2003). This element can be used to restore customer confidence and value disruptions through excellent after sales services and customer care. A good Service recovery encounter can actually enhance customer value even if a mistake has occurred at the operations level of the value chain, and this is why all elements of the value chain needs to be interlinked to deliver cohesive and integrated value to the end user rather than operate as independent value and cost centers. 3.6 Ancillary or Support Activities In addition to the generic or key activities, there are also a host of support activities which are linked to the main value chain. These include the management, HRM, finance and IT as well as procurement functions. To ensure excellent value delivery to customers, these support functions also need to be well integrated to the main value chain so that cost efficiencies of the whole chain are in perspective (Perkins 2007). Figure 1 in Annexure 1 illustrates a value chain developed for a fashion retailer – Gucci Group. 4. Importance of Value Chain in Delivering Successful Customer Value Having reviewed what entails the company value chain, it is now the task to assess the importance of the Value Chain analysis in creating and delivering successful customer value. “Value is delivered to customers by helping them lower costs or raise performance” (Perkins 2007). The value chain analysis allows the company to reduce costs associated with each key value activity as well as enhance value generated by strengthening each element of the value chain. Since the VCA allows identification of strengths and weaknesses within each value action, competencies can be developed to counter the weaknesses while optimizing strengths which finally contribute to enhancing the delivered customer value. As the VCA aligns the company’s internal processes towards the achievement of company’s key objectives, the result is an agile and well integrated business operation that optimizes resources and work cost effectively to generate superior customer value. Such an operation can offer better customer value than an operation that is fragmented, concentrated on individual operations without an integrated cohesion and a link to overall company objective (Thomson & Strickland 2003). By constructing the value chain of a business, deep insight in to how value is created and where it is created can be gained. Analysis of the value chain may indicate duplication, low resource optimization or new avenues of value creation within the value chain. “Each discrete activity performed by a firm can contribute to its relative cost position and/or create a basis for differentiation” (Perkins 2007). Therefore the company can gain a competitive edge through performing its key activities more cost effectively or with differentiation than its competitors, thereby delivering successful value to customers. The Value Chain methodology should be applied not only to assess the internal operations but to place the company’s representation within the Buyer or customer’s Value Chain. If a company’s product or service represents an input in another firm’s value chain, superior value can be delivered to the customer by creating unique and differentiated linkages to the customer value chain (Perkins 2007). Such insight in to the significance and impact of the vendors and intermediaries value chain on the customers value chain is critical. It allows to identify how their activities will directly and indirectly affect the customer’s performance and competitiveness. This allows the companies to offer superior value to customers. through coordinated efforts in cost reductions, new material development and other differentiations such as lower lead times and superiority and innovation in product development etc. Such significance of the Value Chain Analysis in the delivery of successful customer value makes the VCA a critical tool in the management ammunition arsenal to stay strategically competitive. . 5. Over View of Key Account Management (KAM) Digg Del.icio.us RSS As discussed within the VCA as well, it is critical to establish close and long term relationships with the customers in order to understand their needs and tailor your offering to suit them in order to maximize the delivered value. Key Account Management (KAM) is a management concept which focuses on managing the Key customers of the company with specialized attention. The objective is to build a portfolio of clientele with long-term orientation to the relationship. Increased business pressures in the market have heightened the importance of developing long-term sales relationship with large-scale buyers for marketers to stay competitive (Schultz and Evans 2002). While the success of the KAM effort lies partially in the hand of the supplying company, the “strategic importance to the customers of what is being supplied and the level of receptivity demonstrated by the customer to a partnership approach” also plays a key role (Homburg et. al. 2002). The selection of “Key” accounts will depend on different evaluation factors such as business volume, potential for profit and the associated status and image benefits. While business volumes remain the most important deciding factor of “key account” status, the profitability potential of some small scale customers may be higher, making them also an important part of the KAM portfolio. There are some customers who may not match either of above criteria but hold image status that enhance supplier credibility, image and status and bring in other indirect sales. Such customers too will need to be nurtured with KAM principles to enhance the overall client portfolio of the company (Hunter 2007). 5.1 .Main Elements of Key Account Management Principle of KAM hinges upon three basic elements essential to the relationship building process. These include communication and information sharing; commitment and trust; and problem identification and resolution. . “Communication represents an important tool in managing key accounts” (Millman, & Wilson 1999). These communications can be mainly collaborative to facilitate better understanding of the customer needs and the relationship building process. Openness in information sharing process can lead to increased trust which is another key element in the KAM process. The effectiveness of the communication and information sharing within KAM can be enhanced by formal meetings such as “joint planning exercises, performance review meetings, joint product development, and regular exchanges of commercial/technical information” (McDonald et. al. 1997) Building trust and commitment is another key element within the KAM process. Once buyer and seller trust is established, control mechanisms become unimportant and self regulation for mutual benefit becomes more applicable. “Feeling of trust creates a favorable atmosphere in the relationship and contributes to relationship longevity” (Hunter 2007). The other key element with the KAM process is the Problem Identification and Resolution with an aim to find out exact customer needs which the supplier or the vendor company can effectively meet through delivery of differentiated value. To strengthen this element of the KAM, all personnel involved in serving the Key Account needs to be trained and geared with a mind set to identify potential problems within their buyer contact sphere. Merely having a competent Key Account Manager will not be sufficient to problem identification and resolution process. The resolution process should focus on achieving a win-win outcome. Through proper management of these three key elements, the effectiveness of the KAM process can be greatly enhanced and companies can identify the correct personnel to be allocated to handle the KAM responsibilities, based upon their personality strengths and skill compatibility with these three key elements. 5.3 Significance of KAM for Delivery of Successful Customer Value Having discussed the KAM process and its essential elements, the importance of it in delivering successful customer value needs to be assessed. “Suppliers are required to continuously add value through the exchange process” (Hunter 2007). The key expectations of the customers include high quality of goods; reliability and availability of stocks as well as the easy access and openness to supply agreements. In addition to these, the customer value can be enhances by different forms of value addition such as special payment terms, promotional support, free training and installations as well as better margins. Within the KAM process, opportunity for the company to offer these value additions are high as the benefits are only for key customers and thus the KAM process benefits the delivery of successful customer value. Key account management requires different customers and customer groups, to be approached on a special basis. “This requires the supplier organization to have the right customer orientation and service mentality” (Hunter 2007). Effective KAM involves understanding not only the needs of the customer organization but also the culture of it so that compatibility can be developed for long-term success of the relationship. Such compatibility will facilitate higher level of value delivery to the customer through reduced conflicts, better understanding of each other’s objectives and mutual commitment. KAM also induce high level of interdependence between vendor and customer, creating a working relationship similar to that of a strategic alliance where cooperation and collaborations takes place with an aim to maximize customer benefits. As a result of increased cooperation and dependence, superior value may be delivered through activities such as “joint product development, financing services, or consulting services” (Homburg et. al. 2002). Opportunities for such intimate business relationships are not present in usual customer –vendor relationships which highlights the significance of KAM in delivering superior value to customers. KAM also promotes the development of special programs for Key customers to maximize customer satisfaction (Pardo 1997). Through the long term relationships nurtured through KAM process, “suppliers become knowledgeable about customer’s special needs and requirements (Ojasalo 2002), thereby being able to provide differentiated and relevant benefits to match different customer needs. Such long term relations also allow the suppliers to be aware of changing needs of customers as they evolve in response to changes in the business environment. Thus tailor made value addition is only possible through intimate knowledge of the customer gained over a long term relationship that operates on a high trust and commitment platform. This is why KAM is a critical management tool to deliver high level of customer value. In conclusion, it is evident that both Value Chain Analysis and Key Account Management are management tools that hold critical value for the organizations that wishes to deliver superior value to its customers, through which they can establish their competitiveness. While the two concepts individually offer much scope for enhancing value delivery to customer, in combination the VCA and KAM can offer even stronger benefits. VCA streamline the internal processes of the company towards one cohesive objective of delivering high value at low cost while the KAM aims to deliver the generated value effectively to the customer. KAM also acts as a feedback mechanism between the customer and supplier where the main elements of KAM which includes, communication, commitment and trust as well as problem identification and resolution facilitates the identification of customer needs which the supplier value can be directed to fulfill. Thus both KAM and Value Chain Analysis are critical tools that can enhance the delivery of successful customer value. References: Hunter, S. (2007) “Key Account Management” Associated Content. Retrieved on 03.09.2008 from http://www.associatedcontent.com/article/181194/key_account_management_.html?cat=3 Homburg, C. et al (2002)”A configurational perspective on key account management.” Journal of Marketing, 66(2), p. 63-98. McDonald, M. et al (1997) “Key account management: theory, practice and challenges.” Journal of Marketing Management, 13 (November), p. 737-757. Millman, T. and Wilson, K. (1999) “Processual issues in key account management: underpinning the customer-facing organization”. Journal of Business & Industrial Marketing, 14(4), p. 328-337. Ojasalo, J. (2002) “Customer commitment in key account management”. The Marketing Review, 2, p. 301-318. Pardo, C. (1999) “Key account management in the business-to-business field: a French overview”. Journal of Business s& Industrial Marketing, 14(4), p. 276-290. Perkins, D. L. (2007) “The value chain: does yours help you compete and win?” The Business Owner • May-June. Retrieved on 02.09.08 from http://www.entrepreneur.com/tradejournals/article/165971669.html Porter, M. (1985) Competitive Advantage. New York : Free Press. Schultz, R. J. and Evans, K. R. (2002) “Strategic collaborative communication by key account representatives”. Journal of Personal Selling & Selling Management, 22(1), p. 23-31. Thomson, A. A. Jr. & Strickland, A. J. Strategic Management Concepts and Cases. 3th ed. New York: McGraw-Hill Publishing Company Ltd. 2003. Annexure I Figure 1 - Company Value Chain Analysis for Gucci Group Read More