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Implementing value strategy through the value chain

David Walters Head of Department of Business, Macquarie University, Sydney, Australia Geoff Lancaster Chairman of Durham Associates Group Limited, Castle Eden, Co. Durham UK and Lincoln School of Management and Macquarie University, Sydney, Australia


In our earlier articles in this journal (Walters and Lancaster, 1999a, 1999b) we offered basic This article is a corollary to three definitions for three aspects of value. In articles published earlier in summary these were: Management Decision. More 1 Value is determined by the utility precise definitions of a modern combination of benefits delivered to the value chain are proposed, in terms of it being a business system that customer less the total costs of acquiring creates end-user satisfaction and the delivered benefits. Value is then realises the objectives of other a preferred combination of benefits member stakeholders. Compari(value criteria) compared with acquisition sons are drawn with the current notion of supply chain managecosts. ment and an explanation is given 2 Relative value is the perceived satisfaction as to how the supply chain fits into obtained (or assumed to be available) from the wider perspective put forward alternative value offers. in this paper. Ideas are advanced 3 A value proposition is a statement of in relation to value chain relationships and options. Models how value is to be delivered to are then suggested relating to a customers. It is important both number of well-known internally and externally. Internally, it international companies, where identifies the value drivers it is the authors have researched, at primary or secondary level. attempting to offer a target customer group and the activities involved in producing the value, together with the cost drivers involved in the value-producing activities. Externally it is the means by which the firm positions itself in the minds of customers. Webster (1994) suggests: ``The value proposition should be the firm's single most important organising principle''.

Value chain, Model, Supply chain management


Three important perspectives emerge. First is the emphasis on relationship management between activities (possibly organisations) in the value chain. The second concerns the need for the first to result in competitive advantage. The third identifies the role of information to evaluate the nature of opportunities offered, to identify optional methods for competing and to coordinate the value chain's activities towards successful implementation of the value strategy. Brown's (1997) industry perspective of the value chain raises other issues. These concern the context of supply chain and logistics management within the value chain. We offer the following propositions: Supply chain management is the management of the interface relationships among key stakeholders and enterprise functions that occur in the maximisation of value creation which is driven by customer needs satisfaction and facilitated by efficient logistics management. Logistics management is the management of activities and costs that occur within the supply chain. Slywotzky and Morrison (1997) used a ``customer-centric'' approach to propose a modern value chain in which the customer is the first link to all that follows. The task of management is to identify: . Customer needs and priorities. . The channels that can satisfy those needs and priorities. . The services and products best suited to flow through those channels . The inputs and raw materials required to create the products and services. . The assets and core competencies essential to the inputs and raw materials. They conclude:
The value of any product or service is the result of its ability to meet a customer's priorities. Customer priorities are simply the things that are so important to customers that they will pay a premium for them or, when

Brown (1997) has offered a succinct definition of the value chain:

The value chain is a tool to disaggregate a business into strategically relevant activities. This enables identification of the source of competitive advantage by performing these activities more cheaply or better than its competitors. Its value chain is part of a larger stream of activities carried out by other members of the channel-suppliers, distributors and customers.

Management Decision 38/3 [2000] 160178 # MCB University Press [ISSN 0025-1747]

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they can't get them, they will switch suppliers.

It follows that value opportunities are distinguished by understanding customers' priorities and producing, communicating and delivering the identified value. A value perspective of strategy follows:
Strategy is the art of creating value F F F the way the company defines its business and links together with the only two resources that really matter in today's economy knowledge and relationships on an organisation's competencies and customers (Normann and Ramirez, 1993).

This suggests the value chain as both an analytical and a facilitating concept in which value strategy is:

F F F primarily the art of positioning a company in the right place on the value chain the right business, the right products and market segments, the right value-adding activities (Normann and Ramirez, 1993).

They see strategy as the value-creating system itself in which members work together to create value. A key strategic task is the reconfiguration of value chain roles and relationships in order to ``mobilise the creation of value in new forms and by new players''. The underlying goal is to ``create an ever improving fit between competencies and customers''.

A value chain model

To understand how this may be achieved, requires two models. The first is a model of the value chain itself and the second is one describing value chain structures and processes. Figure 1 is a composition of topics and subcomponents described in our earlier articles. Thus the notion of customer value comprising customer value criteria, less their acquisition costs, is familiar; so, too, will be key success factors and the value proposition. ``Corporate value'' introduces the notion that if the value chain is to be successful it is essential that the individual objectives of all stakeholders are met (or optimised after negotiation) as well as those of the customer. As the model suggests, ``corporate value'' is an integral part of the value strategy and positioning process (another concept defined earlier). Value production and coordination is based on the argument Walters and Lancaster, 1999a, 1999b) in which we suggested that value is created by identifying and understanding customer benefits and costs and the combinations of organisational

knowledge and learning, together with organisational structures that facilitate response and delivery. Essentially this requires management of information and relationships. An important influence is the impact of the value and cost drivers, which in turn are the important strategic and operational relationship criteria influencing value delivery and cost structures. Figure 2 offers a detailed view of the model. ``Corporate value'' is a value chain perspective of profitability, productivity and cash flow objectives. ``Knowledge'' refers to market-based intelligence developed for strategic and operational use within the value chain. ``Information management'' components include; market identification, time, accuracy, relevance and control aspects. ``Relationship management'' comprises the obvious coordination activity together with coproduction (upstream and downstream within the value chain), codestiny (the promotion of interdependence), cost management (to achieve optimal value chain costs for the value added throughout) and cost transparency (the notion that effective cooperation and coordination are only achievable if visibility exists). Organisational structure management is concerned with ensuring maximum use is made of knowledge generated in the value chain and partnerships which lead to effective learning. These activities and topics influence the production and coordination of value delivery through the impact of the value/cost drivers. For example ``time to market'' is suggested as a value/cost driver. Rapid response/delivery may well be critical to the customer and as such minimum delivery times at low/optimal cost may best be achieved by partnership arrangements with specialist logistics services operators. Similarly, after-sales service may be more effectively delivered by centralised specialists (e.g. consumer durables in the UK). Finally, reputation (such as that offered by branding) may be more effectively managed by a strong marketing company coordinating its product design through manufacturing and distribution intermediaries. Not surprisingly, the value/cost drivers influence organisational and operations structure and their management. As Figure 2 infers, both production and logistics are important components of the operations structure which is the other input into value production and coordination. For example, quality may also be important and as such both the production and logistics activities have significant inputs into quality products

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and quality service. They are as their label implies, the drivers of the value chain. We shall offer examples of successful value chains following a review of value chain processes.

the management of activities and costs that occur within the supply chain.

Value chain processes

Sutton (1998) reminds us that Porter (1985) referred `` F F F to the totality surrounding one firm as the `value chain'''. To emphasise that each step can only be justified if it creates more in value to the end user than it consumes as cost and partly to emphasise that an individual firm's competitive position depends on the effectiveness of the chain as an entity, not just its own position as a link in the value chain. Porter's value chain concept was used as a model for supply chain studies. The impact of globalisation (for procurement and marketing purposes) has made the value chain a more useful approach to identifying and evaluating business opportunities. This was inferred in Management Decision (Walters and Lancaster, 1999b, Figure 8). We offer the following composite definition:
A value chain is a business system which creates end-user satisfaction (i.e. value) and realises the objectives of other member stakeholders. Supply chain management is the management of the interface relationships among key stakeholders and enterprise functions that occur in the maximisation of value creation. This is driven by customer needs satisfaction and facilitated by efficient logistics management;

Here we can begin to distinguish between mission (and business scope) strategy and operations. In our definition, the value chain identifies the mission or purpose of the organisation (and any partners it becomes involved with). The supply chain is strategic in that it manages the relationships between stakeholders and enterprise functions/ activities (which are of necessity long term) and logistics management is the operational management of the ``stocks and flows'' within the supply chain. Hence the value chain becomes a design for the business mission, the supply chain offers the strategic direction and organisational vehicle and the operational/ implementation role is assumed by logistics management. Abell (1980) offered a useful model to explore these relationships (and their interrelationships). His three-dimensional/ vector approach to identifying the scope of the business is illustrated in Figure 3. Abell's argument is that the three vectors prescribe the market available either currently or potentially to an organisation. The current activity is in customer group 1, using technology identified as manufacturing and logistics 1, meeting customer applications 1. The overall ``cube'' represents the potential mission or value chain available. Should the organisation wish to pursue expansion the structure of the value chain may need to change. At the firm's current position it may meet the KSFs necessary for successful

Figure 1 A value chain model

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competition in the value chain, owning all of the assets required and having the necessary core competence(ies). Expansion in any context may require the value chain to be restructured if the customer expectations at application 2 are to be met successfully. At this juncture the involvement of specialists may be necessary if the ``maximisation of value creation'' is to be achieved and the stakeholders' objectives realised. Clearly the same decisions may be required concerning shifts in customer groups and ``delivery technology''. Just how these may be achieved within the value chain structure depends on an understanding of the processes within the value chain. A typical view of value chain structure and process is illustrated by Figure 4, the external influences have been omitted to simplify the diagram. Figure 4 expands on the role within the value chain and expands the topics identified in the model described by Figures 1 and 2. It is intuitively obvious, simply by observation, that expansion is unlikely to occur without expansion of assets and core competencies. Consequently, this is a means by which the relationship and information management activities may become more effective by identifying value chain constraints and the activities needed (typically by first review key success factors) to ensure competitive advantage

characteristics necessary for strategic success. This issue is addressed in Figure 5. Here the overall relationships within the value chain are identified. For both current and future perspectives precise details concerning customer expectations of the value created and costs to be added are required. Clearly, current customer satisfaction expectations may change and require an ongoing review of value creation and cost additions. Thus current and future output of the value chain may require the addition of activities only available outwith the value chain. In Figure 5 a notional ``specialist activities'' suggests a generic range of contributions that may be required as the value chain customer base (market opportunity response) expands. It is not surprising that value characteristics (e.g. form, time, location and ownership) do change among an existing customer base or within adjacent segments. Indeed, adjacent segments may only become attractive (and attainable) with the addition of external (at that point in time) specialist activities. Again, the primary mechanisms of relationship and information management are necessary. For effective value chain reconfiguration some structure is required. Sutton (1998) proposes the market mechanism as a means

Figure 2 Value chain components

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to coordinate activities. He suggests the term ``market coordination'' for the situation in which specialism is separate and the value chain comprises a series of sequential individual activities under individual ownership. An alternative model is one in which one or more firms `` F F F seek to combine two or more stages under single control, and rely upon internal management to ensure coordination''. He uses the conventional term ``vertical integration'' for this structure. There are hybrid structures. A firm may act as a contractor to coordinate the other links in the value chain but relies on external agreements rather than internal management. IKEA and Benetton are examples of this structure. Possibly Nike is the extreme example of what may be described as a virtual company. Nike controls (and owns) the key core asset the brand and coordinates manufacturing and marketing logistics together with some retailing outlets. We suggest the use of the term ``vertical coordination'' to describe the

coordination of individually-owned activities. In Figure 6, vertical coordination comprises individual organisations, having specific objectives but shared purpose (customer satisfaction) within the value chain. Examples of vertical coordination are found in fast-moving consumer goods retailing. The relationships established by Marks & Spencer are among the oldest and most successful. Marks & Spencer ``own'' the brand; specify the customer response; use individually-owned manufacturers and logistics companies to provide ``manufacturing and distribution'' into Marks & Spencer owned retail outlets. Recent problems within Marks & Spencer may be examined within the context of the value chain. Reports of uncompetitively high prices may be owing to a need for a review of product quality and specification, together with cost structures. The criticism of style and design may require the company to review its role in this activity and consider the addition of an external specialist activity

Figure 3 Using Abell's customer application/customer segment/technology model to explore value chain opportunities and structures

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as occurs in automotive design. In other words, the company no longer has the expertise (core competence) necessary to address the key success factor of ``an awareness of style/design awareness''. Vertical integration has alternative structural options. Sutton (1998) suggests two: breadth and depth. Breadth occurs in companies who rely on coordination of some activities while assuming ownership of others. Ownership may occur for a number of reasons. Margins may appear attractive. Typically, the reason is based on control of resources or aspects of customer service during the delivery process. He explains the nature of these relationships and implies that hybrid structures usually emerge as the most common arrangements. He illustrates this using the oil industry as an example, suggesting also that brewing has similar hybrid structures. In Figure 6, vertical integration follows Sutton's suggested differentiation: breadth is the extent of coordination with vertical integration and depth the activities that are combined into one activity. Given that the value chain is concerned with value maximisation and cost optimisation (cost minimisation not usually being a feasible option) some mechanism or

method for deciding on structure is required. A number of influences exist. The availability of economies of scale and of scope are important. Within the context of our discussion these relate to the ability to specialise and gain cost advantages and/or to offer a limited range of specialist products and/or services, that have significant impact on customer costs and for which much of the fixed costs are shared. Hence the ability to avoid fixed-cost commitment, or to transfer fixed costs to variable costs, and at the same time, receive or participate in either product/service differentiation and cost efficiencies has major attraction. Here the existence of transactions costs are both important and significant. These include searching (customer and supplier identification); negotiation (trading and its associated activities) and implementation (the successful delivery of customer value, e.g. the ability to meet rigorous delivery schedules and product availability requirements) on an agreed, contractual basis. More complex examples. Readers are directed towards Coase (1937), Williamson (1975, 1985) and North (1990) for a rigorous review of the subject. Clearly, the identification of suppliers, the precise nature of the product/

Figure 4 The value chain process

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service offer and the transaction costs are resolved by the effective use of both information and relationship management. Increasingly, coordination is replacing integration. A number of reasons have created this situation: . The impact of new technology in operations management, e.g. flexible manufacturing systems, just-in-time, lean manufacturing numerical control, etc., have facilitated the offer of differentiation at acceptable cost levels. . Markets have passed through segmentation into fragmentation. . Vertical integration requires capital investment/equity involvement in processes within and outwith the firm, thereby raising risk. . Increasingly, organisations prefer to focus on core competencies and to outsource those activities that may be performed more cost-effectively (or cost-efficiently) elsewhere. This focusses management capacities and capabilities on the core business activity of the business. These trends have resulted in situations whereby strong brands now outsource the majority of the ``production and logistics'' process and focus on developing the brand and products/services which relate to the brand and which may be produced through contract manufacturing facilities.

Sutton (1998) suggests limitations of outsourcing. The first is that based on the principle of comparative advantage any core competency should be retained and strengthened. An evaluation of competencies and their impact on competitive advantage should be regularly conducted. This ensures the effective (strategic) allocation of resources for future development as well as the efficient (operational) allocation of resources for improvement of profitability, productivity and cash flow together with ``knowledge''. A second issue concerns the development of future competencies, necessary for future competitive advantage: extensive outsourcing (recruiting specialist activities into the value chain) may inhibit the growth of competitive advantage for the next generation. The strategic implications for supply chain management are not difficult to project. Typically, procurement managers are required to negotiate low prices with suppliers. Their success in doing so is the major criterion of performance. The value chain approach requires a view to be taken of both costs and value. Often negotiations directed towards enhanced quality (at no cost increases) will add to end-user value satisfaction. Another view would be to consider joint efforts (and possibly investment) to reduce the costs of transaction and negotiation processes. The adoption of

Figure 5 value chain relationships

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EDI (electronic data interchange) and ECR (efficient consumer response) are examples of how costs may be reduced, accuracy improved and customer end-use satisfaction be increased by cooperation within the supply chain. These examples illustrate not simply the need for effective (and efficient) relationship management but perhaps an integrated approach to relationship and information management.

Active value chains

In order to establish the efficacy of the value chain model, a number of company/industry situations have been examined, using interviews and published materials. The examples that follow vary in complexity. They vary in size of enterprise, the complexity of the value chain and the nature of product-markets examined. The first company examined was the Bluegum Group, a contract manufacturer of electronic components. Bluegum is Australia's largest contract electronics component manufacturer. Bluegum is expanding its business in this productmarket as the electronic manufacturers increasingly turns to contract manufacturers owing to decreasing product life-cycles in products such as personal computers. Our review of Bluegum was based on published material (an article by Banaghan, 1999) and using comments derived from interviews within Bluegum. Content was then used to construct a value chain specification. In this example the value chain is simple: dealing with Bluegum and its customers. Bluegum's CEO, Paul Zuber, identified the primary benefits of their offer. Contract

manufacturers offer: ``leading-edge processes and equipment, lower costs, faster time to market and improved return on assets''. Zuber identified: ``A combination of the technical expertise, innovation, cost competitiveness, responsiveness and flexible delivery F F F as: F F F key to the success of contract manufacturers''. And: ``You need to be fast and flexible, but scale is also important F F F To be competitive in global contract manufacturing, a company must respond quickly to its customers' continually changing demands''. Here we have identified the elements of customer value and these are included in Figure 7. The comments also prescribe the key success factors. From the customer value and key success factor statements we can conclude the value proposition statement. Clearly, consistent costs and quality are vitally important. This is confirmed by a comment by Zuber: ``As much as 90 per cent of the cost of electronics products is parts. Hence, since contract manufacturers buy on global contracts that provide the same delivered component cost to any destination, 90 per cent of a particular product cost will be the same anywhere in the world''. The structure of both information and relationship management have an important part to play. Information management should be structured to ensure rapid time response, it should be accurate and have world-wide application. Bluegum recently undertook an extensive upgrade to the company's plants and this included implementation of i2's Rhythm decision-support software. This is expected to increase response to customer order enquiries: ``Before i2, it would take Bluegum days to inform a customer when its

Figure 6 Value chain options

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order could be fulfilled. Now it takes minutes''. The decision-support software is part of a new breed of supply-chain automation tools that use electronic commerce on both an intranet and extranet basis. Zuber comments: ``If you don't have online capabilities across a broad spectrum of what you do, you're just not going to be competitive''. On-line configuration software allows customers to place an order that is automatically sent to Bluegum's factory floor. And: ``They can then follow its progress because we make our supply chain visible to our customers and supplier through intranets''. Zuber suggests that while cost savings are important, time savings can be even more important: ``It does save you money, but more importantly, it frees up your time to really focus a lot more on your customers''. This extends to the role of supply chain and logistics management. A rapid response to customers requires: `` F F F a very strong supply chain and logistics capability''. And: `` F F F you can't do it without suppliers. If they don't know what's coming down the pipeline they can't react quickly enough''. A manufacturing perspective was given by Paul Weiss, the manufacturing director: ``By reducing our decision-making time from days to minutes, it somewhat lessens the

inventory trade-off between responsiveness and level of inventory. We will be able to achieve reduced inventory throughout (authors' italics) our whole pipeline and, most importantly, for our customer, also improve our responsiveness''. The content of the interviews leads to an interpretation of the Bluegum value chain (illustrated in Figure 7). The company's reference to techniques, processes and procedures identifies the components and activities in place and which ensure smooth operation of the value chain process supported by supply chain and logistics management activities. An industry perspective is provided by Figure 8, which constructs a value chain specification for the automotive industry. Information for the analysis came from a number of sources, principally a feature in the International Herald Tribune (1998). The feature identified four competitive challenges confronting the automotive industry: competition, complexity, customisation and capacity in excess of global demand. It was suggested that to be competitive: ``They need to be in every niche of the market to maximise cost efficiencies, and they must be lean, agile and cost conscious''. Complexity is due in part to globalisation of the industry, this has

Figure 7 The Bluegum Group value chain specification

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Figure 8 An automotive industry value chain model

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resulted in a requirement to cope with: `` F F F a variety of locations, government regulations and incentives, distribution patterns and consumer buying habits F F F Buyers are demanding more and more customisation in their cars, especially at the luxury end F F F Very flexible production is needed to handle this''. It is estimated that there is a 20 percent excess capacity in the industry and, furthermore, there is a cyclical nature to demand. We could add ``concentration'' to this list. It is estimated that there will be ten major manufacturers in the not too distant future; the recent Ford/Volvo and Renault/Nissan combinations add currency to this view. The view of a former industry executive is that the manufacturers should: `` F F F provide solutions, not build cars''. Solutions or perhaps ``facilitating influencers'' have been provided by the information industry. Computer-aided design (CAD) shortens development time, and sophisticated links among designers, suppliers and manufacturers lower costs and contribute to competitiveness. Information technology (IT) can resolve some complexity issues. IBM offer ``global embedded and production solutions'' (GEP). IBM identifies a need for GEPs on the premise: ``manufacturing processes are now so complex that nothing else can handle them''. What is obvious is that IT has become essential if activities such as design and manufacturing processes are to be used to facilitate mass-customisation (selective exclusively) thereby: ``tailoring massproduced goods to individuals''. An interesting claim made by IBM is: ``All our technology has an end-user focus because the customer is determinant F F F the business drives the technology and not the other way around''. The extent of industry integration has resulted in a major role of IT management, which has significant implications for relationship marketing: ``The integration of suppliers, designers, manufacturers, dealers and customers calls for information networks operating on a real-time basis''. Audi have introduced a customer specification facility. A number of dealerships, plus five airports, are to be equipped with kiosks that enable customers to ``build'' a vehicle to their own specification. The system uses a standard ``hypertext'' markup language (HTML) so information entered at a kiosk can be used on the Audi Web site. Design developments have been built around a number of IT applications. CAD packages have made strident advances in

recent years. Car designers now use 3-D digital design, having forsaken physical prototypes. This permits shorter production cycles, with lower costs and quicker ``time-tomarket''. CATIA (computer-aided tridimensional interactive application) offers the ability to introduce changes relatively late in the product development cycle, as well as features that bring the final customer closer to the company. CATIA permits ``virtual reality'' test drives or specification configuration in a distributor showroom. CATWeb combines the efficiency of digital prototyping with the collaborative power of the Internet. An Italian vehicle design company is testing CATWeb to distribute design information throughout the company (an intranet application). The experiment suggests considerable time and integration of engineering and development benefits. Chrysler are reported as having made use of CATIA to identify ``part interferences'' prior to production of a physical prototype. The number of physical prototypes was reduced from 50 to 27. Data management systems become essential: effective data management enables the tracking of input and updates of all design, engineering and component supply decisions. Two benefits cited are the increase in design productivity and profitability: `` F F F product life-cycles are shorter than ever. Instead of developing three cars in ten years, today's engineers may produce ten vehicles in two years''. Mercedes and IBM created a fully-integrated, enterprise-wide IT system to support the Mercedes US plant's business processes. There are no warehouses and no inventory. Sequenced production techniques permit customer ordering for specific motor cars. In principle, the system has operated for some time, but not without initial problems. In the new system, a combination of lean production, sequenced production and AutoView (automated line control) customisation becomes a reality. AutoView has quality checks built in, plus easy-tochange features enabling a manufacturer to individualise production based upon customer requirements. A link is planned with Java which will facilitate Internetworking for JIT with suppliers. On-line sales applications are expanding for both new and used vehicles. Networks are being established by manufacturers, distributors and the media. Relationship management becomes essential as distributors' concern over direct sales by manufacturers is seen as a major threat. An independent view suggests Internet customers to differ from ``average'' customers as they (the customers) are well into the

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``sales cycle''. Reports of media success in the used car market suggest the Internet to be significant in reducing purchasers ``search'' costs. After-sales service also has intranet applications. One, IRIS (intranet retail information system) currently being installed by Saab, aims at increasing after sales support to both distributors and customers. IRIS offers a data management system detailing vehicle servicing records as well as vehicle sales and parts availability. Saab plan to expand IRIS to include links to financial institutions, carriers (vehicle transporters) (to notify customers of the arrival of a new vehicle) used car information, calendars for on-line scheduling of service appointments and on-line vehicle purchasing. Returning to the value chain perspective provided by Figure 8, we can identify many of the value chain components raised above. Customer value issues clearly drive the industry and there are equally obvious indications of the important key success factors. The value proposition is a customerled, IT-based response with an increasing use of interactive and on-line information. A number of important issues arise. First is the increasing integration of information management with relationship management aspects. For example, the interaction between designers and engineers within organisations and component suppliers requires new levels of trust and confidence as competitive advantage features become the result of joint R&D programmes. Equally, in times of permanent excess capacity, relationships with distributors become important, if sales volumes are to be maintained. Many of these issues are identified as value/cost drivers, influencing both information and relationship management. Furthermore, many of the value/cost driver characteristics have implications for both distributors and customers and these in turn may require joint manufacturer/distributor initiatives. Relationship management has taken an additional feature with the announcement by Ford that it intends to vertically integrate downstream by purchasing equity holding in a number of its largest distributors. This may be an initiative to reduce risk, make a greater impact with reputation and enhance the value delivered in service aspects. Upstream activities by Ford included (reported) brokering mergers among its suppliers. This was discussed by Sutton (1998). The McKesson corporation was cited by Johnston and Lawrence (1988) as an example of a ``value-adding partnership''. The authors

define a ``value-adding partnership'' as ``a set of individual companies that work closely together to manage the flow of goods and services along the entire value-added chain''. This perspective makes it ideal for research into value chain structures. Having established this, it should be made clear that Johnston and Lawrence shared the view (current at that time, 1988) that the valueadded chain was a micro-economics concept. They defined it as `` F F F the various steps a good or service goes through from raw material to consumption. Economics has traditionally conceived of transactions between steps in the chain as being arm's length relationships or hierarchies of common ownership''. Our perspective is the reverse of this, as the earlier definition suggests, it is concerned with meeting customer expectations which are identified first and then configuring the value chain to meet these and, at the same time, optimise the return to all members of the value chain. Returning to McKesson. The McKesson Corporation is a distributor of drugs, health-care products and other consumer goods. In 1988 its revenues were US$6.67 billion and it was considered successful. It was known for its application of IT to improve customer service and cut order-entry costs. McKesson's activities were initiated as a response to vertically-integrated chain stores. McKesson's future was inextricably tied into that of its independent customers. It introduced a customer-based ordering system that reduced order processing costs by expediting the steps of inventory checking, calling in an order, manually recording the order and eventually packing and delivering it. Management soon extended this ``system'' to specify order packs so they coincided with the merchandise profiles of their customers' shelf plans. This increased the efficiency of shelf merchandising. Other ``innovations'' followed. McKesson managers realised they could use the data generated to help customers set prices and design store layouts to maximise the profits of each particular store. Two other important applications followed. The data were used to produce accounting statements for customers and it was discovered that the system could be used to warn consumers of potentially harmful drug combinations by tracking prescription histories. McKesson's customers, the independent drugstores, received a number of value benefits. They were able to access benefits of computerised systems and data management which reduced their costs as well as increased their efficiency and thus became more price competitive, important in their

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competitive situation. This, together with merchandise management and enhanced customer service, gave ``real'' aspects of competitive advantage when compared with the chains. And, at the same time, they retained their independence and autonomy which permitted local responses to local demands. McKesson also benefited. Sales increased dramatically, the warehouse system was reduced from 130 to 54 and eliminated 500 clerical jobs. Most significant was the strengthening of the customer base; from 20,000 customers averaging $4,000 per month to 15,000 customers averaging $12,000 to $15,000 per month. Shipments were also reduced from an average of two per day to two per week, while lowering its own and customers' inventory costs. The company also recognised the value of its data to its suppliers. The result was improved logistics management with computer-to-computer ordering that resulted in a reduction of buying staff. McKesson also used the computer system to help process health insurance claims and for prescription reimbursement. This move strengthened the ties among insurance companies, consumers and drugstores by accelerating payments and smoothing administrative problems. The McKesson value chain is illustrated in Figure 9. The addition of a distributor level adds few complications. The amount of detail is increased, but this adds to richness of the information available for planning and control purposes. The consumer value characteristics have been assumed by inference. Clearly, the model would be more robust if these were the result of specific research. These in turn lead to key success factors and a value proposition for distributors. Notable here is the need for product relevance and availability, cost competitiveness and service/advice. McKesson is an example of the use of information management to develop strong advantage and reinforced with relationship management. A clear identification of how its information systems were able to improve the independent retailers' performance gave McKesson indicators on how to use the information to strengthen its own performance. The cost efficiencies reinforced by detailed and accurate merchandise planning increased still further the competitive position of the company with the retailers. The inclusion of other stakeholder interests (McKesson suppliers, insurance companies) increased the overall effectiveness of the value chain. Caterpillar is a well-known international brand. While generally assumed to be successful, it admits to feeling the impact of

Japanese competition between 1982 and 1992. Fites (1996) describes Caterpillar's response to the Japanese challenge; his description maps the Caterpillar value chain. While the thrust of Fites' article is aimed at the role played by distributors in the industry, there is sufficient material to be able to construct a value chain. Fites identifies the KSF requirements of a major industry participant in his description of the factors which were used defensively. They are: a strong brand; responsiveness to customers; efficient, flexible operations; strong distributors who are loyal and responsive to the company's leadership and a product that is innovative, of high quality and well supported in the field. Fites identifies the role of distributors as conduits for information to the end user, often acting as ``consultants''. This adds another KSF: investment, in product development and in the distribution network. There are numerous examples of how Caterpillar uses information management and relationship management to construct an effective value chain through the dealer network. Given the commitment to the distributor organisation, many decisions are simplified. For example, product design includes: ``A critical design criterion for our machines is that they can be repaired economically and conveniently, and our highly-integrated manufacturing and distribution systems are designed so that we can replace a part in any machine anywhere in the world within 48 hours''. Fites argues that Caterpillar competitors' customers typically wait four or five days for a part, suggesting: ``One possible reason for the disparity is that few companies have integrated their dealers into their business systems to the degree we have''. Here is an example of making supply chain and logistics management an important component of relationships management. The role of information to create market knowledge comes from the learning aspects of the manufacturer/distributor partnership relationships. Another aspect of information management concerns the productivity of Caterpillar and distributor inventories and customer equipment. The remoteness of many applications implies serious problems when parts of equipment begin to deteriorate. Caterpillar have begun to resolve such problems by installing sensors on each machine that automatically spots a problem which may occur and sends an electronic alert to the local dealer's field technician through his portable computer. The symptoms and diagnosis are validated by a technician who determines the necessary

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Figure 9 The McKesson Corporation value chain

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actions. The computer program identifies exactly the parts and tools required to effect repair. This done, the technician can then use another feature of the program to identify sources of parts, availability and a delivery date. Beyond this, an integrated replenishment program retrieves parts from storage and issues replenishment orders as and when required. The computer program contains best-practice repair procedures and, on completion of the repair, will update the equipment's service record and issue an invoice. It can also handle electronic payments. The supply chain and logistics management implications are major: Caterpillar, in 1996, investing in the expansion of the remote monitoring system and the worldwide sharing of inventories by the company, suppliers and distributors. Already the company maintains 22 parts facilities around the world, within excess of 10 million square feet of storage. Caterpillar services 480,000SKUs, of which 320,000 are stocked. Caterpillar dealers stock between 40,000 and 50,000 items. The remote sensing facility permits the company to deliver a part before a customer realises the need for it. Linkages with both customers and distributors are maintained in order to monitor product performance and, subsequently, product development. Both dealers and customers are involved in programmes on product quality, cost reduction and other manufacturing issues. Measures of the strength of relationships between Caterpillar and its distributors are the actions taken to ensure the longevity of the partnerships during periods of difficulties. During recessions and foreign exchange fluctuations, the company undertakes whatever financial actions are necessary to insulate the dealers from financial difficulties. Dealer support, such as financial assistance for customers' purchases is shared by the company and it supports the dealers with inventory management and control, logistics, equipment management and maintenance programs. Many of these aspects are reinforced by Caterpillar-designed software programs. Dealer staff are trained in technical and managerial techniques and technical literature is constantly updated. Business management programmes to improve profitability, productivity and cash flow ensure dealership performances. The structure of the Caterpillar value chain is shown in Figure 10. It includes both customer and dealer perspectives. Each of the attributes has been derived from the material provided by Fites (Chairman and CEO of Caterpillar, 1996). As with previous

examples, the role of information and relationship management can be seen as influencing the structure and operation of the value chain. The role of integrated supply chain and logistics management has been expressed both explicitly and implicitly. Finally, we review Freedom Furniture. The data used for this analysis is based on interviews with Freedom Furniture and from materials raised from in-house documents. Freedom Furniture is based in Sydney and opened its first store in 1981. It now has 42 retail stores, 22 are company owned and 20 are franchised stores in Australia and New Zealand. Freedom was floated on the Australian Stock Exchange in 1996, and since then has exceeded its prospectus forecast and continues to increase sales, market share and profit. Currently, sales are in excess of A$250 million and market share approximately 7 percent. The company's target market is mainly women with a ``taste and attitude for stylish and value-oriented furniture and home wares, aged 27 to 46-years-old with annual household income in excess of A$30,000. In terms of demographics, this represents young singles, couples, families and young single parent households. During a recent review of strategy the company's core competencies were viewed as: . Idea generation/commercialisation of trends and styles, and new product development. . Strong management with positive attitudes. . Well-proven sourcing ability of domestic and international products. . Effective information systems. . Effective visual merchandising. . Established franchising; strong relationship management. Those requiring strengthening: Store/location development. . ``Time-to-market'' for new products. . Marketing activities; brand strengthening, communications, catalogue development. . Value delivery; ``delivered in full and on time'' (DIFOT). . Retail operations and training.

Freedom Furniture's strategic alternatives appeared to be: . Category dominance. . A ``new'' superior customer proposition, such as assured seven-day delivery. . Brand expansion and/or acquisition(s). . International expansion. . Expanding manufacturing. While strategy and structure development is not a specific topic of this article, there are

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Figure 10 The Caterpillar value chain

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some issues which clearly influence the value chain in its mission to maximise customer value and to optimise stakeholder returns. What emerges are some issues for key success factors. These include: supply chain management (manufacturing, inventory management and ``quick response'' (DIFOT) to direct customers and franchisees); a strong, identifiable brand; category dominance in selected product ranges with strong supporting presence in other ranges; critical mass from which to influence market developments and value chain delivery options (e.g. franchising). The Freedom Furniture value chain is shown in Figure 11. Customer satisfaction/ value criteria were derived from research that the company had undertaken and which the company was addressing with both strategic and operational decisions. Key success factors were comprehensive but there was an indication of the role of specialists and support activities within the value chain. A strong, identifiable brand and critical mass volume was enhanced by franchise operations. Expansion is capital intensive (as well as consuming large

amounts of management capacity in detailed activities) and has commensurate risk. Franchising has enabled the company to expand its volume towards a critical mass volume and to increase brand awareness, often in areas/locations that are not necessarily high on Freedom's store rollout program. The value proposition (product-service attributes) is dominated by product and advice. Product design and choice is very important as is its rapid delivery once a purchase decision has been made. The process of decision making does require support. As well as catalogues, which initiate interest, ``ideas'' are essential and product coordination and advice at the point of sale are essential features of the value proposition. Freedom's information system extends throughout the value chain. The company manufactures much of its range and sources on an international basis. It follows that accurate and timely information is necessary. Relationships extend upstream and downstream and form an important feature of the Freedom Furniture operation.

Figure 11 The Freedom Furniture value chain

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With much of its requirements manufactured in-house, there are internal linkages to be managed and overseas sourcing requires detailed management of reliability of suppliers if customer delivery promises are to be maintained. Potentially more difficult are relationships with franchisees. The franchisees are autonomous in that they may differ with opinions on range plans and stocking and use local knowledge to develop a detailed understanding of local market requirements. But they are also part of the Freedom brand and as such are expected to give visual support to its development and to match this with service, the qualitative aspects of a brand. Organisational structure management reflects the extent of the supply chain. Control of relationships within the company and with suppliers are influenced by a need for innovative product development and commercialisation, its sourcing (from own manufacturing and/or external sources) the logistics of product stocks and flows and cost management. This has resulted in the need for an operations structure that can respond in many directions, volumes and time spans. The fact that almost half of Freedom's outlets

(not in terms of volume) are franchise operations, imposes additional pressures on organisational and operations structures. The conclusion is that the value/cost drivers for the Freedom value chain relate to clear aspects of customer relationships (innovative products, advice and delivery promises that are maintained); volume expansion (through new product categories, market expansion of own and franchised outlets, and possibly acquisitions); effective and efficient supply chain and logistics management, and; brand development.

This article has added to our previous three and it has explored the concepts of value and information in a contemporary context. It has also broken new ground by suggesting that supply chain and logistics management are functions that are supporting activities in the overall value chain. A comprehensive definition of value chain management concludes this series. Value chain management is a coordinating management process in which all of the

Figure 12 Value chain/supply chain/logistics management

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activities (and their suppliers) involved in delivering customer value satisfaction are integrated such that customer satisfaction is maximised and the objectives of the stakeholders involved (the suppliers of activities, processes, facilitating services, etc.) are optimised such that no preferable solution may be found. Supply chain management is the management of the interface relationships among key stakeholders and enterprise functions that occur in the maximisation of value creation. This is driven by customer needs satisfaction and facilitated by efficient logistics management and the management of activities and costs occurring within the supply chain. Successful value chain management requires an identification of customer value criteria and an understanding of the key success factors which are necessary for creating both competitive advantage and resultant success. The value proposition becomes the means by which the customer understands the value offer (typically made explicit as a series of product/service attributes) and by which the value chain enterprise components formulate, evaluate and decide on their value-adding contributions. Two functions manage the value chain: information management and relationship management. It is these that determine the effective organisational structure of the value chain and its efficient operational management. Value/cost drivers are the primary influences of the value chain. They determine how value is identified and made explicit, the assets and core competencies necessary to ``produce'', communicate and deliver value. Figure 12 summarises this proposition.


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Application questions
1 What are the key success factors in your organizations? 2 What implications do the authors' findings have for your organization?

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