inventory management erp 2.1 based on tally

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PapersonValuechainanalysis;ReportsonDifferentCompanies

ThearticlefocusesonthemainaspectsofValuechainanalysis.Theactivitiesentailedintheframeworkarediscussedindetail,withrespecttocompetitivestrategiesandvaluetothecustomer.ThearticleincludestipsforstudentsandanalystsonhowtowriteagoodValuechainanalysisforafirm.Moreover,sourcesoffindingsinformationforvaluechainanalysishavebeendiscussed.ThelimitationsofValueChainanalysisasamodelhavealsobeendiscussed.

IntroductionThevaluechainapproachwasdevelopedbyMichaelPorterinthe1980sinhisbookCompetitiveAdvantage:CreatingandSustainingSuperiorPerformance(Porter,1985).Theconceptofvalueadded,intheformofthevaluechain,canbeutilisedtodevelopanorganisationssustainablecompetitiveadvantageinthebusinessarenaofthe21stC.Allorganisationsconsistofactivitiesthatlinktogethertodevelopthevalueofthebusiness,andtogethertheseactivitiesformtheorganisationsvaluechain.Suchactivitiesmayincludepurchasingactivities,manufacturingtheproducts,distributionandmarketingofthecompanysproductsandactivities(Lynch,2003).Thevaluechainframeworkhasbeenusedasapowerfulanalysistoolforthestrategicplanningofanorganisationfornearlytwodecades.Theaimofthevaluechainframeworkistomaximisevaluecreationwhileminimisingcosts(www.wikipedia.org).

MainaspectsofValueChainAnalysis

Valuechainanalysisisapowerfultoolformanagerstoidentifythekeyactivitieswithinthefirmwhichformthevaluechainforthatorganisation,andhavethepotentialofasustainablecompetitiveadvantageforacompany.Therein,competitiveadvantageofanorganisationliesinitsabilitytoperformcrucialactivitiesalongthevaluechainbetterthanitscompetitors.

ThevaluechainframeworkofPorter(1990)isaninterdependentsystemornetworkofactivities,connectedbylinkages(p.41).Whenthesystemismanagedcarefully,thelinkagescanbeavitalsourceofcompetitiveadvantage(Pathania-Jain,2001).Thevaluechainanalysisessentiallyentailsthelinkageoftwoareas.Firstly,thevaluechainlinksthevalueoftheorganisationsactivitieswithitsmainfunctionalparts.Thentheassessmentofthecontributionofeachpartintheoveralladdedvalueofthebusinessismade(Lynch,2003).Inordertoconduct

thevaluechainanalysis,thecompanyissplitintoprimaryandsupportactivities(Figure1).Primaryactivitiesarethosethatarerelatedwithproduction,whilesupportactivitiesarethosethatprovidethebackgroundnecessaryfortheeffectivenessandefficiencyofthefirm,suchashumanresourcemanagement.Theprimaryandsecondaryactivitiesofthefirmarediscussedindetailbelow.

PrimaryactivitiesTheprimaryactivities(Porter,1985)ofthecompanyincludethefollowing:

InboundlogisticsThesearetheactivitiesconcernedwithreceivingthematerialsfromsuppliers,storingtheseexternallysourcedmaterials,andhandlingthemwithinthefirm.

OperationsThesearetheactivitiesrelatedtotheproductionofproductsandservices.Thisareacanbesplitintomoredepartmentsincertaincompanies.Forexample,theoperationsincaseofahotelwouldincludereception,roomserviceetc.OutboundlogisticsThesearealltheactivitiesconcernedwithdistributingthefinalproductand/orservicetothecustomers.Forexample,incaseofahotelthisactivitywouldentailthewaysofbringingcustomerstothehotel.MarketingandsalesThisfunctionalareaessentiallyanalysestheneedsandwantsofcustomersa


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ndisresponsibleforcreatingawarenessamongthetargetaudienceofthecompanyaboutthefirmsproductsandservices.Companiesmakeuseofmarketingcommunicationstoolslikeadvertising,salespromotionsetc.toattractcustomerstotheirproducts.ServiceThereisoftenaneedtoprovideserviceslikepre-installationorafter-salesservicebeforeorafterthesaleoftheproductorservice.

SupportactivitiesThesupportactivitiesofacompanyincludethefollowing:

ProcurementThisfunctionisresponsibleforpurchasingthematerialsthatarenecessaryforthecompanysoperations.Anefficientprocurementdepartmentshouldbeabletoobtainthehighestqualitygoodsatthelowestprices.HumanResourceManagementThisisafunctionconcernedwithrecruiting,training,motivatingandrewardingtheworkforceofthecompany.Humanresourcesareincreasinglybecominganimportantwayofattainingsustainablecompetitiveadvantage.TechnologyDevelopmentThisisanareathatisconcernedwithtechnologicalinnovation,trainingandknowledgethatiscrucialformostcompaniestodayinordertosurvive.FirmInfrastructureThisincludesplanningandcontrolsystems,suchasfinance,accounting,and

corporatestrategyetc.(Lynch,2003).

Figure1:TheValueChain:Source:Porter(1985)Figure1

Porterusedthewordmarginforthedifferencebetweenthetotalvalueandthecostofperformingthevalueactivities(Figure1).Here,valueisreferredtoasthepricethatthecustomeriswillingtopayforacertainoffering(Macmillanetal,2000).Otherscholarshaveusedthewordaddedvalueinsteadofmargininordertodescribethesame(Lynch,2003).Theanalysisentailsathoroughexaminationofhoweachpartmightcontributetowardsaddedvalueinthecompanyandhowthismaydifferfromthecompetition.InastudyofSaudicompanies,Ghamdi(2005)foundthat22%ofthecompaniesinthestudyusedvaluechainfrequently,wh

ile17%reportedthattheysomewhatusedit,and42%didnotusethetoolatall.Aninterestingfindingofthestudywasthatthemanufacturingfirmswerefrequentusersofthetoolcomparedtotheirservicecounterparts(Ghamdi,2005).

HowtowriteaGoodValueChainAnalysisTheabilityofacompanytounderstanditsowncapabilitiesandtheneedsofthecustomersiscrucialforacompetitivestrategytobesuccessful.Theprofitabilityofafirmdependstoalargeextentonhoweffectivelyitmanagesthevariousactivitiesinthevaluechain,suchthatthepricethatthecustomeriswillingtopayforthecompanysproductsandservicesexceedstherelativecostsofthevaluechainactivities.Itisimportanttobearinmindthatwhilethevaluechainanalysismayappearassimpleintheory,itisquitetime-consuminginpractice.Thelogicandvalidityoftheproventechniqueofvaluechainanalysishas

beenrigorouslytested,therefore,itdoesnotrequiretheusertohavethesamein-depthknowledgeastheoriginatorofthemodel(Macmillanetal,2000).Thefirststepinconductingthevaluechainanalysisistobreakdownthekeyactivitiesofthecompanyaccordingtotheactivitiesentailedintheframework.Thenextstepistoassessthepotentialforaddingvaluethroughthemeansofcostadvantageordifferentiation.Finally,itisimperativefortheanalysttodeterminestrategiesthatfocusonthoseactivitiesthatwouldenablethecompanytoattainsustainablecompetitiveadvantage.

Itisimportantforanalyststoremembertousethevaluechainasasimplechec


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klisttoanalyseeachactivityinthebusinesswithsomedepth(Pearson,1999).Thevaluechainshouldbeanalysedwiththecorecompetenceofthecompanyatitsveryheart(Macmillanetal,2003).Thevaluechainframeworkisahandytoolforanalysingtheactivitiesinwhichthefirmcanpursueitsdistinctivecorecompetencies,intheformofalowcoststrategyoradifferentiationstrategy.Itistobenotedthatthevaluechainanalysis,whenusedappropriately,makestheimplementationofcompetitivestrategiesmoresystematicoverall.Analystsshouldusethevaluechainanalysistoidentifyhoweachbusinessactivitycontributestoaparticularcompetitivestrategy.Acompanymaybenefitfromcostadvantagesifiteitherreducesthecostofindividualactivitiesinthevaluechainorthevaluechainisessentiallyreconfigured,throughstructuralchangesintheactivities.Oneoftheproblematicareasofthevaluechainmodel,however,isthatthecostsofthedifferentactivitiesofthevaluechainneedtobeattributedtoanactivity.Therearefewcostingsystemsthatcontaindetailedactivitylevelcosting,unlessanActivityBasedCosting(ABC)systemisinplaceinthecompany(Macmillanetal,2003).Anotherrelevantareaofconcernthatanalystsmustpayparticularattentiontoisthecustomersviewpointofvalue.Thecustomersofthefirmmayviewvalueinagenericway,therebymakingtheprocessofevaluatingtheactivitiesinthevaluechaininrelationwiththetotalpriceincreasinglydifficult.Itisimperativeforanalyststonotethattheoveralldifferentiationadvantagemayresultfromanyactivityinthevaluechain.Adifferentiationadvantagemaybeachievedeitherbychangingindividualvaluechainactivitiestoincreaseuniquenessinthefinalproductorserviceofthecompany,orbyreconfiguringthecompanysvaluechain.

Thedifferencebetweenalowcoststrategyanddifferentiationinpracticeisunliketherigiditythatisprovidedregardingthesameintheory.Analystsmustnotethatthedifferencebetweenthesetwostrategiesisoneoftheshadesofgreyinreallifecomparedtotheblackandwhitethatisofferedintheory.Forexample,EmersonElectric,whichisacostleader,hasqualityasastrategicconcerninachievingitsbestcostsstrategy(Pearson,1999).IvorySoap,aleadingproductofP&G,isabroaddifferentiatorthatturnedintoacostleader.QualityisastrategicconcernformanagersofIvorySoap,alongwithdeliveringahighvalueproductconsistently.

Notethatinacompanywithmorethanoneproductarea,itisappropriatetoconductthevaluechainanalysisattheproductgrouplevel,andnotatthecorpora

testrategylevel.Itiscrucialforcompaniestohavetheabilitytocontrolandmakemostoftheircapabilities.Intheadventofoutsourcing,progressivecompaniesareincreasinglymakingtheirvaluechainsmoreelasticandtheirorganisationsinherentlymoreflexible(Gottfredsonetal,2005).Theimportantquestionistoseehowthecompaniesaresourcingeveryactivityinthevaluechain.Asystematicanalysisofthevaluechaincanfacilitateeffectiveoutsourcingdecisions.Therefore,itisimportanttohaveanin-depthunderstandingofthecompanysstrengthsandweaknessesineachactivityintermsofcostanddifferentiationfactors.

ThestrategyofWal-Martworkedwhenthecompanyimproveditsbusinessthroughinnovativepracticesinactivitiessuchaspurchasing,logistics,andinformationmanagement,whichresultedinthevalueofferingofeverydaylowprices(Magretta

,2002).Itisimportanttonotethatrefiningbusinessmodelsonaconstantbasisisascriticaltothesuccessofthecompanyasitsbusinessstrategy.Notably,boththestrategyandbusinessmodelofanorganisationarecrucialfortherobustnessoftheoverallvaluechain.

Forexample,7-Elevenhadbeenverticallyintegrated,controllingmostactivitiesinthevaluechainbyitself.ThecompanyhasnowoutsourcedmanypartsofitsbusinessincludingfunctionslikeHR,ITmanagement,finance,logistics,distribution,productdevelopment,andpackaging.AccordingtoGottfredsonetal(2005),thevaluechaindecisionsofcompanieswillincreasinglyshapetheiroverall


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organisationalstructure.Moreover,thevaluechaindecisionswillplayaroleindeterminingthetypeofmanagementskillsthatcompaniesmayneedtodeveloporacquiretosurviveinfiercelycompetitivebusinessmarkets.

TheApplepodcastingvaluechainiscomprisedofninestepsthatessentiallymovefromrawcontenttothelistener.Allthestepsofthevaluechainincludecontent,advertising,production,publishing,hosting/bandwidth,promotion,searching,catching,andlistening.Itisimportanttonotethateachstepinthevaluechainaddsvaluetothepodcastindistinctiveways,hasitsownsetsofchallengesandopportunities.

Itisimportanttonotethatthenatureofvaluechainactivitiesdiffersgreatlyinaccordancewiththetypesofcompaniesandindustries.ForcompanieswithcomplexsystemslikeIBM,AccentureandCiscoetc.,itisnotpossibleforonememberofthevaluechaintoprovidealltheproductsandservicesfromstarttofinish.Themarketingfunctioninsuchcompaniesfocusesonaligningwithkeypartnersandalliesthatmustcollaboratewitheachother.Forexample,installingSAP sERPsystemrequiresdirectinvolvementfromcompanieslikeHP,Oracle,andAccenture,alongwithindirectinvolvementofcompanieslikeEMC,Cisco,andMicrosoft,andcollaborationbetweenmanydepartmentswithinthecompany.Themarketassetscontraststarklybetweenthecompanieswithcomplexsystemsandthosethataredrivenbyvolumeoperations.Forexample,incaseofApplesleadingproductslikeMacintoshandtheiPod,theentireofferisinsideapackage,andtheentirevaluechainispreassembled.ThechangeofsupplierfortheMacintoshfro

mIBM,toIntel,improvedthesystemperformancewhileretainingthevalueintermsofpricetotheconsumer.TheonlyvariabletomanageinApplescaseistheconsumerspreferences.Theroleofcreatingdifferentiationthroughuniquequalityfeatures,alongwithpromotioninordertocreatebrandawareness,imageandeventuallybrandequitybecomesimperativeforvolumeoperationsdrivencompanieslikeApple(Moore,2005).

Itisimperativetonotethatthevaluechainsofcompanieshaveundergonemanychangesoverthelasttwodecades,duetotherapidlychangingbusinessenvironment.InformationtechnologyandtheInternethaveplayedafundamentalroleintransformingcertainpartsandtheinterlinkagesbetweenpartsofthevaluechainsofcompaniestoday.MoreoverHRMisincreasinglybecomingavitalassetinthevaluechainthatcontributestocompetitiveadvantage.Strategicalliancesare

alsobecominganintegralpartofthevaluechains.Forexample,IBMonceenjoyedbackwardverticalintegrationintothediskdriveindustryandforwardverticalintegrationintotheconsultingservicesandcomputersoftwareindustries(Hilletal,2007).Accordingtothechangingbusinessenvironment,IBMhadmorethan400strategicalliancesasof2003(Thompsonetal,2003).Herein,thevaluechainanalysisisusefulinprovidingaframeworktoexaminetheadvantagesthatpartnerscangivetoeachother(Pathania-Jain,2001).Itisimportanttonotethesourceofcompetitiveadvantageofacompanyforthevaluechainanalysis.ThecompetitiveadvantageforIBM,forexample,liesindepth,breadthandthegeographicspreadofitsglobaloperations(Rai,2006)andtheloyaltythatthebigblueenjoysfromitsclientele.

Lastly,analystsshouldlookforthemanagerialimplicationsthattheneweraof

capabilityoutsourcingmaybring.Thevaluechaindecisionsofcompanieswillincreasinglyshapetheirorganisationalstructure.Furthermorethesedecisionswilldeterminethetypesofmanagerialskillsthatcompaniesmayneedtodeveloptosurviveinanincreasinglycompetitivebusinessenvironment.

WheretofindinformationforValueChainAnalysisAnalystscanexplorevarioussourcestofindinformationnecessaryforconductingthevaluechainanalysis.Uptothreeyearsofannualreportsofthecompanycanbeanalysedtoseehowthecostingoftheactivitiesarechangingovertheperiodandwhethertheyareinunisonwiththecompetitivestrategyofthefirm.T


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heseannualreportsofthecompanycanbecomparedtotheannualreportsofthekeycompetitorsinordertoseehowcompetitivestrategiesdifferbetweenthecompanies,alongwithfindingthedifferenceinthecontributionofactivitiestothecompanysprofitability.

Inordertogainknowledgeaboutthecorecompetenceofthecompany,analystscanlookatthecompanyandcompetitorwebsites.SWOTanalysisofthecompaniesdonebycompanieslikeDatamonitoretc.canhelptheanalysttounderstandthekeystrengthsandweaknessesofthecompanyandhowthefirmdiffersfromitscompetitors.Furthermore,journalarticles,tradepublicationsandmagazinesareusefulsourcesofinformationtoidentifyhowvalueiscreatedintheparticularindustryinwhichthecompanyoperatesandwhichactivitiesplayakeyroleinthegenerationofthatvalue.

LimitationsofValueChainAnalysisOneofthelimitationsofthevaluechainmodelisthatitdescribesanindustrialorganizationwhichessentiallybuysrawmaterialsandtransformstheseintophysicalproducts.Notably,atthetimewhenthemodelwasintroduced(Porter,1985),serviceindustriesinthewesterncountriesemployedlesserworkforcecomparedtotodaysstatisticsofthesame(www.wikipedia.org).Academicsandpractitionersalikehavecritiquedthemodelanditsapplicabilityinthecontextofserviceorganisations.Partnerships,alliancesandcollaborationalongwithdifferentiationandlowcostsarecommondriversofvaluetoday.

Thelimitationsofthemodelincludethefactthatvalueforthefinalcustomeristhevalueonlyinitstheoreticalcontext(Svensson,2003),andnotpracticalterms.Therealvalueoftheproductisassessedwhentheproductreachesthefinalcustomer,andanyassessmentofthatvaluebeforethatmomentisonlysomethingthatistrueintheory.Despitethislimitation,analystscaneffectivelyusethevaluechainmodeltodeterminethevaluetothefinalcustomersinatheoreticalway.UseofotherplanningtoolsandtechniqueslikePortersgenericstrategies,analysisofcriticalsuccessfactorsetc.isrecommendedinconjunctionwiththevaluechainframeworkforamorecomprehensiveanalysisofacompanysstrategyandplanning.

ConclusionThevaluechainframeworkhasbeenusedasapowerfulanalysistoolfororganisa

tionalstrategicplanningfornearlytwodecadesnow.Thevaluechainframeworkshowsthatthevaluechainofacompanymaybeusefulinidentifyingandunderstandingcrucialaspectstoachievecompetitivestrengthsandcorecompetenciesinthemarketplace.Themodelalsorevealshowthevaluechainactivitiesaretiedtogethertoultimatelycreatevaluefortheconsumer.Thefiveprimaryactivitiesandfoursupportactivitiesformaninterdependentsystemthatisconnectedbylinkages.Analystsconductingthevaluechainanalysisshouldbreakdownthekeyactivitiesofthecompanyaccordingtotheactivitiesentailedintheframework,andassessthepotentialforaddingvaluethroughthemeansofcostadvantageordifferentiation.Finally,itisimportanttodeterminestrategiesthatfocusonthoseactivitiesthatwouldenablethecompanytoattainsustainablecompetitiveadvantage.

Itisimportanttoanalysethevaluechainofacompanywiththecorecompetenceatitsveryheart.Thenatureofvaluechainactivitiesdiffersgreatlyinaccordancewiththetypesofcompaniesandindustries.Thevaluechainsofcompanieshaveundergonemanychangesinthelasttwodecadesduetoadvancementsintechnologyfacilitatingchangeataveryrapidpaceinthebusinessenvironment.Outsourcingwillcausemajorchangesinorganisationsandtheirvaluechains,withsignificantmanagerialimplications.

Sourcesforfindinginformationonvaluechainanalysisincludethreeyearsannualreportsoftheparticularcompanyanditskeycompetitors,companywebsites,


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journalarticles,andotherreputedtrademagazinesetc.UseofotherplanningtoolsandtechniqueslikePortersgenericstrategies,analysisofcriticalsuccessfactorsetc.issuggestedinconjunctionwiththevaluechainframeworkforamorecomprehensiveanalysisofacompanysstrategicplanning.

Ifyoufoundthisarticleusefulpleasehavealookattheotherarticleswehavewritten:Ansoffanalysis,McKinsey7SFramework,SWOTanalysis,ScenarioPlanning,Porter

s5Forcesanalysis,ProductLifeCycle,BCGGrowth-ShareMatrix,PestAnalysis,BalancedScorecard,CompetitorAnalysis,CriticalSuccessFactors,IndustryLifecycle,MarketingMixandPorter

sGenericStrategies.

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