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4.3. RESOURCE ANALYSIS AND ADDING VALUE The fundamental role of resources in an organization is to add value. All organizations need to ensure that do not consistently lose value in the long term or they will not survive. For commercial organization, adding value is essential for their future. For non-profit organizations, adding value may only be a minor part of the reason for their existence, other purposes being centred on social, charitable or other goals. Resources add value by working on the raw materials that enter the factory gate and turning into a finished product. Added value can be defined as the difference between the market value of the output of an organization and the cost of its inputs. The concept is basically an economic one and is outlined, using GSK as an example, in Figure 4.5. for non-profit organizations, the concept of adding value can still be applied. The inputs to the organization may be similar to those of commercial organization electricity, telephones, etc.-and may be very different, particularly voluntary labour, which has a zero cost. Equally, the outputs may be difficult to define and measure-service to the community, help for sick people, etc. But the value added is real enough, just difficult to quantify. To explore the basic concepts, commercial explanations only are examined in this section. From the above definition of value added (i.e. outputs minus inputs), it follows that value can be added in an organizations: either by raising the value of outputs (sales) delivered to the customer; or by lowering the costs of its inputs (wages and salaries, capital and materials costs) into the company.

Alternatively, both routes could be used simultaneously. Strategies therefore need to address these two areas. Raising the value of outputs may mean raising the level of sales, either by raising the volume of sales or by raising the unit price. Both these methods are easy to state and more difficult to achieve. Each will involve costs for example, the cost of advertising to stimulate sales-which need to set against the gains made. Lowering the cost of inputs may require investment-for example, in new machinery to replace workers-at the same time as seeking the cost reduction. These two strategic routes need to be examined in detail. Outputs have already been covered in Chapter 3; inputs are considered later in this chapter. Figure 4.5 Value added by a pharmaceutical company such as GSK

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[TRANSLATE VIETNAMESE] Organizations resources 1.Invests and patents new drugs 2.Manufactures its products and packs them 3.Markets them to doctors and health authorities Organization adds Its value here Outputs Range of drugs sent to distributions for onward distribution to customers

Input to organization Raw materials delivered to the factory gate e.g basic chemicals, electricity, water, steel piping, plastic packaging, advertising agency, accountancy audit

A strategic analysis of value added needs to take place at the market or industry level of the organization, not at a corporate or holding company level. If this analysis were to be undertaken at the general level, the performance of individual parts of the business would be masked. Value added is therefore calculated at the level of individual product groups. Key strategic principles The added value of a commercial organization is the difference between the market value of its output and the costs of its inputs. The value added of a not-for-profit organization is the difference between the service provided and the costs of the inputs, some of which may be voluntary and have zero cost. All organizations need to ensure that they do not consistently lose value in the long term or they will not survive. For commercial organizations, adding value is essential for their future. For non-profit organizations, adding value may only be a minor part of the reason for their existence, other purposes being centred on social, charitable or other goals. In principle, there are only two strategies to raise value added in a commercial organization, increase the value of its outputs (sales) or lower the value of its inputs (the costs of labour, capital and materials). In practice, this implies detailed analysis of every aspect of sales and costs. In companies with more than one product range, added value is best analysed by considering each group separately. Some groups may subsidise others in terms of added value. Not all groups are likely to perform equally.Page 2


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4.4. ADDING VALUE: THE VALUE CHAIN AND THE VALUE SYSTEM THE CONTRIBUTION OF PORTER The concept of value added can be used to develop the organisations sustainable competitive advantage. There are two main routes the value chain and the value system. Much of this approach was developed in the 1980s by Professor Michael Porter of the Harvard Business School. Every organisation consists of activities that link together to develop the value of the business: purchasing supplies, manufacturing, distribution and marketing of its goods and services. These activities taken together form its value chain. The value chain identifies where the value is added in an organization and links the process with the main functional parts of the organisation. It is used for developing competitive advantage because such chains tend to be unique to an organisation. When organisations supply, distribute, buy from or compete with each other, they form a broader group of value generation: the value system. The value system shows the wider routes in an industry that add value to incoming supplies and outgoing distributors and customers. It links the industry value chain to that of other industries. Again, it is used to identify and develop competitive advantage because such systems tend to be unique to companies. The contributions of the value chain and value system to the development of competitive advantage, and the links between the two areas, which may also deliver competitive advantage, are explored in this section. 4.4.1. The value chain The value chain links the value of activities of an organisation with its main functional parts. It then attempts to make an assessment of the contribution that it part make to the overall added value of the bussiness. The concept was used in acounting analysis for some years before Professor Micheal Porter suggeted that it could be applied to trategic analysis. Essentially, he links two areas together: the added value that each part of the organisation contribute to the whole organisation and the contribution to the competitive adventage of the whole oganisation that each of these parts might then make.

In a company with more than one product area, he said that the analysis should be conducted at the level of product groups, not of the level of company headquaters. The company is then spit into the primary activities of production, such as the productionNHM 7 Page 3

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process itself, and the support activities, such as human resources management, that give the necessary background to the running of the company but cant be identified with any individual part. The analysis then examines how each part might be considered to contribute towards the generation of value in the company and how this differs from competitors. Porters outline process is shown in Figure 4.6. He used the worg margin in the diagram to indicate what we defined as added value in section 4.4: margin is the different between the total value and the collective cost of performing the value activities. According to the Porter, The primary activities of the company are: Inbound logistics: these are the areas concerned witn receiving the goods from suppliers, storing them until required by operations, handing and tranporting them within the company. Operations: this is a production area of the company. In some companies, this might be spit into further department- for example, paint spraying, engine assembly, etc, in a car company; reception, room, service, restaurant, etc, in a hotel. Outbound logistics: these distribute the final product to the customer. They would clearly include transport and warehousing but might also include selecting and wrapping combinations of products in a multiproduct company. For a hotel or other service company, this activity would be reconfigured to cover the means of bringing customers to the hotel or service. Figure 4.6 The value chain


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Marketing and sales: This function analyses customers wants and needs and brings to the attention of customers the products or services the company has for sale. Advertising and promotions fall within this area. Service: Before or after a product or service has been sold, there is often a need for pre-installation or after-sales service. There may also be a requirement for training, answering customer queries, etc.

Each of the above categories will add value to the organisation in its own way. They may undertake this task better or worse than competitors: for example, with higher standards of service, lower production costs, faster and cheaper outbound delivery and so on. By this means, they provide the areas of competitive advantage of the organisation. The support activities are: Producement: In many companies, there will be a separate department (or group of managers) responsible for purchasing goods and materials that are then used in the operations of the company. The departments function is to obtain the lowest prices and highest quality of goods for the activities of the company, but it is only responsible for purchasing, not for the subsequent production os the goods. Technology development: This may be an important area for new products in t