Value Chain Management :

(Functional Strategies for Competitive Advantages)

Functional Strategies, the value chain and competitive advantage

Managers can use two basic business-level strategies to add value to an organization's
products and achieve competitive advantage over industry rivals
1. Low cost strategy: Lower the cost of creating value to attract consumers by keeping
product prices low as or lower than competitors’ prices
2. Differentiation: Add value to a products by finding ways to make it superior in some
way to the product of other companies

Four ways to create a competitive advantage

1. Achieve superior efficiency: Efficiency measures the inputs required to produce a

given amount of outputs. The fewer the inputs to produce a given output, the higher
the efficiency and the lower the cost of outputs
2. Achieve superior quality: Quality means producing goods and services that have
attributes such as design, styling, performance, and reliability - that customers
perceive as being superior to those found in competing products. Providing high-
quality products creates a name-brand reputation for an organization’s products and
this enhanced reputation allows it to charge higher prices
3. Achieve superior innovation, speed and flexibility: Anything new or better about the
way an organization operates or the goods and services it produces is the result of
innovation. Successful innovation gives an organization something unique and
different about its products that rivals lack. Innovation adds value to products and
 allows the organization to further differentiate itself from rivals and attract
customers who are often willing to pay a premium price for unique products
4. Attain superior responsiveness to customers: An organization that is responsive to
customers tries to satisfy their needs and give them what they want. When they
treat customers better than their rivals this also provides a valuable service some
customers may be willing to pay a higher price for. Managers can increase
responsiveness by providing excellent after-sales service and support by working to
provide improved products or services in the future

Functional strategies and value chain management

Functional level strategy is a plan of action to improve the ability of each of an

organizations functions or departments (such as manufacturing or marketing) to perform
its task-specific activities in ways that add value to an organization’s goods and services

Value chain is the coordinated series or sequence of functional activities necessary to

transform inputs into the finished goods or services customers value and want to buy.
Each function activity along the chain adds value to the product’s differentiated
qualities that increase the price a company can charge for it
 Search for new and improved products that will better appeal
Product
to customers. This is the engineering and scientific research
Development
activities involved in innovating new and improved products

Conducting research to discover unmeet customer products to

Marketing satisfy customer needs. Marketing then represents its
suggestion to product development.

Controlling the movement of physical materials from the

Materials procurement of inputs through production and to distribution
management and delivery to the customer. The efficiency with which this is
carried out can lower costs and create more value

Creates, assembles and provides a good or service - for

transforming inputs into outputs. For physical products, when
Production
we talk about production we generally mean manufacturing
and assembly

Locates the customers and then informs and persuades them to

Sales
buying the offering

Provides after-sales service and support. This function creates a

perception of superior value in the minds of customers by
Customer Service
solving problems and supporting customers after they have
made a purchase

Improving Responsiveness to Customers

What Do Customers Want?

1. A lower price to a higher price
2. High-quality products to low-quality products
3. Quick service and good after-sales service to slow service and poor after-sales support
4. Products with many useful or valuable features to products with few features
5. Products that are, as far as possible, customized to their unique needs

The more desired product attributes a company’s value chain builds into its products, the higher the price that
must be charged to cover the costs of developing and making the product.

Try to develop functional strategies that allow the organization’s value chain to deliver to customers either more
desired product attributes for the same price or the same product attributes for a lower price
Managing the Value Chain to Increase Responsiveness to Customers

Because satisfying customers is so important managers try to design and improve the way their value
chains operate so they can supply products that have the desired attributes - quality, costs, and
features.

Customer Relationship Management

One functional strategy managers can use to get close to customers and understand their needs is
customer relationship management (CRM).

CRM - A technique that uses IT to develop an ongoing relationship with customers to maximize the value
an organization can deliver to them over time.

CRM IT monitors, controls, and links each of the functional activities involved in marketing, selling,
and delivering products to customers, such as monitoring the delivery of products through the
distribution channel, monitoring salespeople’s selling activities, setting product pricing, and
coordinating after-sales service
Sales and selling, after-sales service and support, and marketing
CRM system can also identify the top 10 reasons for customer complaints
CRM system processes information about changing customer needs, this improves marketing in many
ways
Traditional CRM systems were organized by having salespeople input customer information. Now
social CRM systems can track customers on social media and put them on a company’s radar
CRM system can bring the user to the attention of the company as an important connection or a
potential customer
It is a comprehensive method of gathering crucial information about how customers respond to a
company’s products. It is a powerful functional strategy used to align a company’s products with
customer needs

Improving Quality

Quality is a concept that can be applied to the products of both manufacturing and service organizations

1 - So an organization able to provide, for the same price, a product of higher quality than a competitor’s product
is serving its customers better - it is being more responsive to its customers

This enhanced reputation may allow the organization to charge more for its product than its competitors can
charge, and thus it makes greater profits
2 - Higher product quality can increase efficiency and thereby lower operating costs and boost profits, Achieving
high quality lowers operating costs because of the effect of quality on employee productivity: Higher product
quality means less employee time is wasted in making defective products that must be discarded or in providing
substandard services: thus, less time has to be spent fixing mistakes. This translates into higher employee
productivity , which also means lower costs.

Total Quality Management

Total quality management is a management technique that focuses on improving the quality of an
organization’s products and services.

1. Build organizational commitment to quality: TQM will do little to improve the performance of an
organization unless all employees embrace it, and this often requires a change in an organization’s
culture
2. Focus on the customer: According to TQM philosophy, the customer, not the manager in quality
control or engineering, defines what quality is. The challenge is fourfold:
3. Find a way to measure quality: Another crucial element of TQM is the development of a measuring
system that managers can use to evaluate quality, Devising appropriate measures is relatively easy in
manufacturing companies, where quality can be measured by criteria such as defects per million
parts. It is more difficult in service companies, where outputs are less tangible.
4. Set goals and create incentives: Once a measure has been devised, managers’ next step is to set a
challenging quality goal and to create incentives for reaching that goal
5. Solicit input from employees: Employees are major sources of information about the cause of poor
quality, so managers must establish a system for soliciting employee suggestions about improvements
that can be made
6. Identify defects and trace them to their source: A major source of product defects is the production system; a
major source of service defects is poor customer service procedures. TQM preaches the need for managers to
identify defects in the work process, trace those defects back to their source, find out why they occurred, and
make corrections so they do not occur again
7. Introduce just-in-time systems: When the materials management function designs a JIT inventory system
(A system in which parts or supplies arrive at an organization when they are needed, not before). Also,
under a JIT inventory system, defective parts enter an organization’s operating system immediately; they
are not warehoused for months before use. This means defective inputs can be quickly spotted
8. Work closely with suppliers: A major cause of poor-quality finished goods is poor-quality parts. To
decrease product defects, materials managers must work closely with suppliers to improve the quality of the
parts they supply
9. Design for ease of production: The more steps required to assemble a product or provide a service, the
more opportunities there are opportunities there are for making a mistake. It follows that
designing products that have fewer parts or finding ways to simplify providing a service should be
linked to fewer defects or customer complaints
10. Break down barriers between functions: Successful implementation of TQM requires substantial
cooperation between the different value chain functions

In essence, to increase quality, all functional managers need to cooperate to develop goals and spell out
exactly how they will be achieved.

Managers should embrace the philosophy that mistakes, defects, and poor quality materials are not
acceptable and should be eliminated.
 Functional managers should spend more time working with employees and providing them with the
tools they need to do the job.
Managers should create an environment in which employees will not be afraid to report problems or
recommend improvements.
Functional managers also need to train employees in new skills to keep pace with changes in the
workplace

Just-In-Time Inventory and Efficiency

Great cost savings can result from increasing inventory turnover and reducing inventory holding costs,
such as warehousing and strange costs and the cost of capital tied up in inventory. Although companies
that manufacture and assemble products can use JIT to great advantage, so can service organizations.

Self-Managed Work Teams and Efficiency

Another functional strategy to increase efficiency is the use of self-managed work teams. Team members
learn all team tasks and move from job to job. The result is a flexible workforce because team members
can fill in for absent coworkers. Moreover, cost-saving arises from eliminating supervisors and creating a
flatter organizational hierarchy, which further increases efficiency.

Process Reengineering and Efficiency

Process reengineering is the fundamental rethinking and radical redesign of business processes to achieve
dramatic improvement in critical measures of performance such as cost, quality, service, and speed.

When a customer’s order is received, many different functional tasks must be performed as necessary to
process the order, and then the ordered goods are delivered to the customer. Process reengineering
boosts efficiency when it reduces the number of order fulfillment tasks that must be performed or
reduces the time they take and so reduces operating costs.

Information Systems, the Internet, and Efficiency

With the rapid spread of computers, growth of the internet and corporate intranet and high-speed
digital internet technology, the information systems function is moving to center stage in the quest for
operating efficiencies and a lower cost structure. The impact of information systems on productivity is
wide-ranging and potentially affects all other activities of a company.

All large companies today use the internet to manage the value chain, feeding real-time information
about order flow to suppliers, which use this information to schedule their own production to provide
components on a just-in-time basis. This approach reduces the company and its suppliers.

Improving Innovation
Technology is involved in all functional activities, and the rapid advance of technology today is
significant factor in managers’ attempts to improve how their value chains innovate new kinds of goods
and services or ways to provide them

Two kinds of innovation

Two principal kinds of innovation can be identified based on the nature of the technological change
that brings them about.

Quantum product innovation - the development of new, often radically different, kinds of fundamental
shifts in technology brought about by pioneering discoveries

The creation of the internet and The World Wide Web have revolutionized the computer, cell phone,
and media/music industries and biotechnology

Quantum product innovation are relatively rare; most managers’ activities focus on incremental product
innovations that result from ongoing technological advances.

Incremental innovation is frequently as important as - or even innovations more important than -

quantum innovation in raising a company’s performance.

The need to speed up innovation and quickly develop new and improved products becomes especially
important when the technology behind the product advances rapidly. The first companies in an industry
to adopt the new technology can develop products that better meet customer needs and gain a “first-
mover” advantage over their rivals

The greater the rate of technological change in the industry, the more important it is for managers to
innovate.

Strategies to Promote Innovation and Speed Product Development

There are several ways in which managers can promote innovation and encourage the development of new
products. Product management is the management of the value chain activities involved in bringing new
or improved goods and services to the market.

A. INVOLVE BOTH CUSTOMERS AND SUPPLIERS

Many new products fail when they reach the marketplace because they were designed with scant
attention to customer needs. Successful product development requires input from more than just an
organization’s members; also needed are inputs from customers and suppliers

B. ESTABLISH A STAGE-GATE DEVELOPMENT FUNNEL

One of the most common mistakes managers make in product development is trying to fund too many
new projects at any one time. This approach spreads the activities of the different value chain
functions too thinly over too many different projects. As a sequence, no single project is given the
functional resources and attention required

A common solution to establish a stage-gate development funnel. The funnel gives functional managers
control over product development and allows them to intervene and take corrective action quickly and
appropriately
STAGE ONE: The development funnel has a wide mouth, so top managers initially can encourage
employees to come up with as many new product ideas as possible. Managers can create incentives for
employees to come up with ideas. Ideas may be submitted by individuals or by groups. Brainstorming is a
technique that managers frequently use to encourage new ideas. Proposals that are consistent with the
strategy of the organization and are judged technically feasible pass through gate 1 and into stage 2.

STAGE TWO: Draft a detailed product development plan. It should include strategic and financial
objectives, an analysis of the products’ n=market potential, a list of desired product features, a list of
technological requirements, a list of financial and human resource requirements, a detailed development
budget, and a timeline that contains specific milestones

Good planning requires a good strategic analysis, and team members must be prepared to spend
considerable time in the field with customers, trying to understand their needs. Drafting a product
development plan generally takes about three months. Once completed, the plan is reviewed by a senior
management committee at gate 2

Senior managers making this review keep in mind all other product development efforts currently being
undertaken by the organizational resources are used to their maximum effect.

STAGE THREE: In some companies, at the beginning of stage 3 top managers and cross-functional team
members sign a contract book.

Signing the contract book is viewed as the symbolic launch of a product development effort, The
contract book is also a document against which actual development progress can be measured.

This stage can last anywhere from six months to ten years, developing on the industry and type of
product

C. ESTABLISH CROSS-FUNCTIONAL TEAMS

A smooth-running cross-functional team also seems to be critical component of successful product
development. Marketing, engineering, and manufacturing personnel are core members (members of a team
who bear primary responsibility for the success of a project and who stay with a project from inception
to completion) of a successful product development team. Other people besides are core members work
on the project when the need, arises.

To be successful, a product development team needs a team leader who can rise above a functional
background and take a cross-functional view. In addition to having effective leadership, successful
cross-functional product development teams have several other key characteristics. Often core members
of successful teams are located close to one another, in the same space, to foster a sense of shared
mission and commitment to a development program. Successful team develop a clear sense of their
objectives and how they will be achieved, the purpose again being to create a sense of shared mission

Managers are required to:

Recognize that successful innovation and product development cut across roles and function and
need high level cooperation
Realize the importance of common values and norms in promoting high levels of cooperation and
cohesiveness necessary to build culture for innovation
Reward successful innovators and make heroes of employees and teams who develop successful new
products
Fully utilize the product development techniques just discussed to guide the process