Research Korner: Value Chain Analysis of Production

VALUE-CHAIN   (DELL COMPUTERS INC.)     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).         Porter’s Generic Value Chain             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 <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Inbound logistics: the receiving and warehousing of raw materials, and theirs distribution to manufacturing as they are required. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Operations: the processes of transforming inputs into finished products and services. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Outbound logistics: the warehousing and distribution of finished products. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Marketing and sales: the identification of customer needs and the generation of sales. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Service: the support of customers after the products and services are sold to them. </li> </ul> These primary activities are supported by: <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> The infrastructure of the firm: organizational structure, corporate culture, control systems, etc. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Human resource management: employee recruiting, hiring, training, development and compensation. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Technology and development: technologies that can support value-creating activities. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Procurement: purchasing inputs such as materials, supplies and equipments. </li> </ul>   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. <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Cost Leadership </li> </ul> 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. <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal"> A differentiation strategy </li> </ul> 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. <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal"> Focus strategy </li> </ul> 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.

VALUE-CHAIN (DELL COMPUTERS INC.)

VALUE-CHAIN (DELL COMPUTERS INC.) Introduction to Value-Chain The Value-Chain was conceptualized and popular...