Value-Chain and Supply-Chain Analysis and Key Success Factors

Learning Objective 3 Describe the set of business functions in the value chain and identify the dimensions of performance that customers are expecting of companies

• R&D, design, production, marketing, distribution, and customer service supported by administration to achieve cost and efficiency, quality, time, and innovation

Customers demand much more than just a fair price; they expect quality products (goods or services) delivered in a timely way. The entire customer experience determines the value a customer derives from a product. In this section, we explore how companies create this value.

Value-Chain Analysis

The value chain is the sequence of business functions by which a product (including a service) is made progressively more useful to customers. Exhibit 1-2 shows six primary business functions: research and development, design of products and processes, production, marketing, distribution, and customer service. We illustrate these business functions with Sony Corporation’s television division.

1. Research and development (R&D)—generating and experimenting with ideas related to new products, services, or processes. At Sony, this function includes research on alternative television signal transmission and on the picture quality of different shapes and thicknesses of television screens.
2. Design of products and processes—detailed planning, engineering, and testing of products and processes. Design at Sony includes deciding on the component parts in a television set and determining the effect alternative product designs will have on the set’s quality and manufacturing costs. Some representations of the value chain collectively refer to the first two steps as technology development.^*
3. Production—procuring, transporting, and storing (“inbound logistics”) and coordinating and assembling (“operations”) resources to produce a product or deliver a service. The production of a Sony television set includes the procurement and assembly of the electronic parts, the screen and the packaging used for shipping.
4. Marketing (including sales)—promoting and selling products or services to customers or prospective customers. Sony markets its televisions at tradeshows, via advertisements in newspapers and magazines, on the Internet, and through its sales force.
5. Distribution—processing orders and shipping products or delivering services to customers (“outbound logistics”). Distribution for Sony includes shipping to retail outlets, catalog vendors, direct sales via the Internet, and other channels through which customers purchase new televisions.
6. Customer service—providing after-sales service to customers. Sony provides customer service on its televisions in the form of customer-help telephone lines, support on the Internet, and warranty repair work.

In addition to the six primary business functions, Exhibit 1-2 shows an administration function, which includes accounting and finance, human resource management, and information technology and supports the six primary business functions. When discussing the value chain in subsequent chapters of this text, we include the administration function within the primary functions. For example, included in the marketing function is the function of analyzing, reporting, and accounting for resources spent in different marketing channels, whereas the production function includes the human resource management function of training frontline workers. Each of these business functions is essential to companies satisfying their customers and keeping them satisfied (and loyal) over time.

To implement their corporate strategies, companies such as Sony and Procter & Gamble use customer relationship management (CRM), a strategy that integrates people and technology in all business functions to deepen relationships with customers, partners, and distributors. CRM initiatives use technology to coordinate all customer-facing activities (such as marketing, sales calls, distribution, and after-sales support) and the design and production activities necessary to get products and services to customers.

Different companies create value in different ways. As a result, at different times and in different industries, one or more of the value-chain functions are more critical than others. For example, a company such as the biotech and pharmaceutical company Roche emphasizes R&D and the design of products and processes. In contrast, the Italian apparel company, Gucci, focuses on marketing, distribution, and customer service to build its brand.

Exhibit 1-2 depicts the usual order in which different business-function activities physically occur. Do not, however, interpret Exhibit 1-2 to mean that managers should proceed sequentially through the value chain when planning and managing their activities. Companies gain (in terms of cost, quality, and the speed with which new products are developed) if two or more of the individual business functions of the value chain work concurrently as a team. For example, a company’s production, marketing, distribution, and customer service personnel can often reduce a company’s total costs by providing input for design decisions.

Managers track costs incurred in each value-chain category. Their goal is to reduce costs to improve efficiency or to spend more money to generate even greater revenues. Management accounting information helps managers make cost–benefit tradeoffs. For example, is it cheaper to buy products from a vendor or produce them in-house? How does investing resources in design and manufacturing increase revenues or reduce costs of marketing and customer service?