Allied Academies International Conference

page 8 Allied Academies International Conference
Las Vegas, 2009 Proceedings of the Academy of Strategic Management, Volume 8, Number 2
MANAGING VALUE CHAIN STRATEGY
Peter H. Antoniou, California State University San Marcos
Catherine E. Levitt, California State University at Los Angeles
Cynthia Schreihans, California State University San Bernardino
ABSTRACT
The urgency and immediacy of the current financial crisis that burst into American
consciousness in the 4th quarter of 2008 has left companies around the world gasping for air. The
question of strategic success for large and small firms has shifted from one of based on profit
growth to one of survival. This presents a need to review the meaning of sustainability in an
increasingly turbulent environment. This paper seeks to present a working model for evaluating the
impact of autonomous and non-autonomous elements of the value chain on the corporate strategy
of small and medium sized enterprises engaged in outsourcing toward better utilization and better
management of the components of the value chain under turbulent economic conditions.
CONCEPT INTRODUCTION
While there is much discussion, both academic and practical, about the strategic advantage
sought through outsourcing and, equal discussion about the process of making the decision to
outsource, little has been done to examine how best to manage the outsourced value chain. Both
successful and poor outcomes of these outsourced processes have been reported, but no model has
been developed to improve the possibility of surviving the crisis and replicating success. This model
seeks to fill that void.
With this model, the channels of information, communication, authority and factor resources
which structure the value chain are examined. The differences in flows through each component
may be evaluated so that the relationships between components (and between the components and
the enterprise) are more clearly seen. The balance between competition and collaboration within the
chain is calibrated for external turbulence and internal aggressiveness producing affects, which then
are aligned with the strategic position of the enterprise. With this alignment, the fragmentation of
the applications of strategy is reduced, relationships between components become more transparent
and the possibility of replicating or innovating successful practice is increased, even in the throes
of this current crisis.
Use of this model in the strategic process should enable the small or medium-sized enterprise
to answer the following questions:
• Are the participants in the value chain part of our strategy design and application?
• Are we participants in their value chain?
• Are we treating the value chain participants as SBU’s or SBA’s?
• Do our value chain participants affect our encounter with the external environment?
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Proceedings of the Academy of Strategic Management, Volume 8, Number 2 Las Vegas, 2009
• How do we affect theirs?
• Does participating in this value chain change our organizational structure and decision
making?
• How should the value chain be managed and by whom?
And, perhaps most important of all,
• Are we responsible for the value chain or dependent on it?
VALUE CHAIN
The value chain is a systematic approach to examining the development of competitive
advantage was created by M. E. Porter in his book, Competitive Advantage (1980). The chain
consists of a series of activities that create and build value. They culminate in the total value
delivered by an organization.
The ‘margin’ depicted in the diagram is the same as value added. The organization is split
into ‘primary activities’ and ‘support activities.’
Essentially, this was a way of examining the value added by both direct and indirect
departments or by both cost and profit centers.
Current texts for Strategic Management explain that 20 years after the conception of value
chain analysis, US firms faced increased competition at all levels while in the 80’s no two companies
were at the same level of competition. Where the original motive of firms was increased production,
by the change of millennium, the main motive had become customer service. Products were
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Las Vegas, 2009 Proceedings of the Academy of Strategic Management, Volume 8, Number 2
increasingly differentiated closer and closer to customer. The original reactive approach of
industries was replaced by an active/proactive approach.
Customers, also, evolved during these 20 plus years. Where customers had had relatively
little market power and limited interest in product specifications, by the beginning of the 21st
century, customers had become increasingly sophisticated, increasingly interested in specifications,
and more powerful.
Expansion of the Relevant
Environment
FIRM FIRM
Competitors Competitors
Customers Customers
Labour
Government
1900-1950
• Single Industry
• National Firm
FIRM FIRM
Competitors Competitors
Customers Customers
Labour
Government
POST INDUSTRIAL ERA
1950-2020
• Multi-Industry
• Many-Nation Firm
Foreign
Foreign Labour
Government
Militant
consumers
Foreign
customers
Environmentalist
New
Technologies New Economic
Climate
Foreign
competitors
Suppliers
New Social
Values
TURBULENT GROWTH
• Rapidity of Demand
• Unpredictability of Events/Outcom es
• Novelty of Challenges
• Discontinuity of Trends
• Instability of Key S uccess Factors
TURBULENT GROWTH
• Rapidity of Demand
• Unpredictability of Events/Outcom es
• Novelty of Challenges
• Discontinuity of Trends
• Instability of Key Success Factors
This expanded understanding of companies and markets through value chain analysis led to
the increasing use of outsourcing in both the primary and support and primary activities. This was
intended increase value to this increasingly important and powerful customer while decreasing the
costs to the organization. By 1999 Charles Leadbetter’s Living on Thin Air suggests that ideas
rather than products were the sole and central generation of value. At the same time, there was an
increasing assumption that products needed to be inexpensive to be valuable, but that idea
generation (Human Capital inputs…labor, entrepreneurship and knowledge) should be highly
rewarded. This was possible as long as development funding was readily available through a
combination of debt and equity financing. The relative ease of attracting financing and the rewards
for outsourcing again changed the weight that value chain analysis held and the way it was done.
By 2005, Strategic Management texts were carrying a caveat that value chain analysis was
useful and accurate when applied to production based organization but less accurate and less than
effective in examining service producers and idea generating firms.
The current financial crisis and the failure of firms to recognize its advent, demands that a
new look be taken at the generation of value. Value chain analysis and evaluation offers a starting
point.
“A recent survey of the main usages of the term “value” in economics, marketing, strategy
and operations fields indicates that the notion of value chain may be a misnomer, although a widely
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Proceedings of the Academy of Strategic Management, Volume 8, Number 2 Las Vegas, 2009
used one. According to this analysis, only resources move along the chain of linkages between firms
– supplies going one way and money going the other…Therefore, value chains can be thought to
operate in both directions, with suppliers accruing value from financial resources, payment terms,
stability and future order cover that their customers provide, while customers derive value from
delivered products and services.” (Feller, A., Shunk,D. and Callerman, T., pg. 4)
In other words, the traditional value chain tends to be seen as a synchronization of a demand
chain with the supply chain, leaving unaddressed the metaphysical sense of “value” associated with
benefits that occur at various exchange points.
Changes in the channels and flows of: Information, Authority/Power, Communication,
Resources (especially capital) have forced changes throughout the Value Chain matrix since these
have changed the exchange points.
• Information channels and flows have changed in terms of availability, access, openness and
transparency.
• Authority/Power channels and flows have changed in terms of decision and control as well
as input and out put autonomy.
• Communication channels and flows have changed with the link of internal and external
networks, and the virtualization of production.
• Human and Financial Capital channels and flows have changed in both in sources and uses.
It has long been recognized that Value Chain management requires rigorous management
of the outcomes with awareness of inputs, rigorous management of the channels and flows, and
rigorous management of the relationships: internal components/partner/customer. What has not
been examined is the responsibility/dependency/independence within and among the value chain
participants.
Traditionally, Value Chain participants have been evaluated on the following criteria:
Pricing, Capital Intensity, Talent Leverage, Structural Fit, Workflow and Specialization, Customer
Acquisition. It is important to note that these criteria all address functional level activities with
accepted measurement dimensions that provide for the appearance of objectivity.
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Las Vegas, 2009 Proceedings of the Academy of Strategic Management, Volume 8, Number 2
Evaluating Value Chain
Components
Capital Intensity
Customer Acquisition Talent Leverage
Values and Structure
Workflow
Specialization
Pricing
What has not been evaluated is Capital Sourcing, Talent Sourcing, Dependency on the Value
Chain, and Impact of External Economic Changes. It is important to note, that these criteria do not
lend themselves to objective measurement. It is important to note, that these criteria:
• do not lend themselves to objective measurement,
• are not within, but among participants in the value chain.
These criteria fall in the grayer area of decision-making and governance which addresses the
commonality of the perception and communication of value between and among participants in the
value chain. Value, thus, surrounds the movement of resources through the transaction process.
The Value Chain and Evaluation Models suggested in this paper intend to provide a more
comprehensive assessment of components and participants within the chain. It also address the
perceived value that surrounds the synchronized movements of resources and which should accrue
to all parties in the transaction.
They fall in the grayer area of decision-making and governance which addresses the
commonality of the perception and communication of value between and among participants in the
value chain.
The Value Chain and Evaluation Models suggested in this paper intend to provide a more
comprehensive assessment of components and participants within the chain. It also address the
perceived value that surrounds the synchronized movements of resources and which should accrue
to all parties in the transaction.
From this Model we have derived the following rubric:
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Proceedings of the Academy of Strategic Management, Volume 8, Number 2 Las Vegas, 2009
Information
Transparency
Communicatio
n
Capital Power Responsibility/
Dependancy
Scalability
Price Performance
Quality
Process Maturity
Turbulence
Evaluation of the Value Chain through use of this Model should:
• Mitigate Risk
• Leverage Vision
• Allow for the Embrace of Complexity
• Create Commitment
• Facilitate Articulation
• Change Customers to Partners
• Increase the Global Footprint
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Las Vegas, 2009 Proceedings of the Academy of Strategic Management, Volume 8, Number 2
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