International Journal of Physical Distribution & Logistics Management

A framework for operations management: the value chain

Mark Rainbird
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Mark Rainbird, (2004),"A framework for operations management: the value chain", International Journal of
Physical Distribution & Logistics Management, Vol. 34 Iss 3/4 pp. 337 - 345
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A framework for
A framework for operations operations
management: the value chain management
Mark Rainbird
Sydney Graduate School of Management, Sydney, Australia 337
Keywords Operations management, Value chain, Distribution channels, Markets
Abstract Proposes that a broad perspective needs to be taken of operations management, so that
it is no longer seen as the domain of mechanistic functionalism, but rather as the architect and
engineer of the business model driving in turn the firm’s creation of value. Suggests that a value
chain approach provides an appropriate framework for such business model architecture. Draws a
distinction between industry level value chains and value chain analysis at the level of the firm
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where the focus is on business processes. Suggests that mapping one against the other is critical to
business model effectiveness and the creation of value. Finally, notes that a firm’s value chain
should not be seen as necessarily a series of smooth synchronous links, but as dynamic that creates
its own interaction costs. This should not be seen as dysfunctional, but as a source of dynamism
replicating the market environment the firm is operating in. While it does not sit well with the
notions of scientific management so commonly associated with classical operations management,
suggests that this process fusion is a fundamental aspect of the firm’s operations that needs to be
purposefully managed.

Introduction – a focus on business models

The distinction between a firm’s business model and its strategy is an important but
often misunderstood one. As Magretta (2002) points out, the business model is the
“system, how the pieces of a business fit together” , while a firm’s strategy is the
choices made about how to deploy that model in the marketplace. Using the example of
Wal-Mart the author points out that while geographical positioning of its supermarkets
in regional USA was key to that company’s strategy, equally important were the
innovations that Wal-Mart made to the underlying retail business model.
Magretta (2002) goes on to suggest, using the example of American Express and the
invention of the traveller’s cheque in the nineteenth century, that: “a successful
business model represents a better way than the existing alternatives. It may offer
more value to a discrete group of customers. Or it may completely replace the old way
of doing things and become the standard for the next generation of entrepreneurs to
beat”. In particular:
[. . .] all new business models are variations on the generic value chain underlying all
businesses. Broadly speaking, this chain has two parts. Part one includes all the activities
associated with making something: designing it, purchasing raw materials, manufacturing
and so on. Part two includes all the activities associated with selling something: finding and
reaching customers, transacting a sale, distributing the product or delivering the service. A
new business model’s plot may turn on designing a new product for an unmet need . . . Or it
may turn on a process innovation, a better way of making or selling or distributing an already International Journal of Physical
Distribution & Logistics Management
proven product or service. Vol. 34 No. 3/4, 2004
pp. 337-345
It suggested that it is this day-to-day tactical management of the firm’s business model q Emerald Group Publishing Limited
0960-0035
that is just as critical to the firm’s long-term success as its market strategy. DOI 10.1108/09600030410533628
 IJPDLM Business model issues have not always, however, been accorded this degree of
34,3/4 attention and have traditionally been seen as the domain of “operations management”.
There has been a perception, fairly or not, that operations management has been
associated with a narrowly focused emphasis on supply chain efficiency, and in
particular efficiency through cost control and savings. There has been a tendency to
focus on the scientific management of isolated tasks and processes. This is not a
338 perspective that can, or should, persist. Instead it is suggested that operations
management should be seen as the designer and architect of the firm’s business model.
The various versions of business process re-engineering that have become popular
are all important constituents of this new business model architecture, but what seems
to be lacking is some overall context. As a first step it is suggested that the design and
engineering of any business model should be based on a clear understanding both of
the whole and of its constituent parts. This paper argues that the notion of the value
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chain provides such a context and framework and is a useful way of dissecting and
analysing a firm’s business model as a basis for then evaluating and redesigning the
processes that underlie that business model.
Unfortunately the term “value chain” is itself often misused or used interchangeably
with concepts such as the supply chain. This paper suggests that the notion of the
value chain should be seen as operating at two levels – first as a description of the
industry framework within which the firm operates and second, as an analogy for the
way actual processes within the firm itself interact. These two perspectives naturally
intersect. It is suggested that the objective of what might be termed the “new
operations management” then is to maximise the firm’s ability to tailor its activities
and processes to reflect wider migrations of, and changes in, value in the industry
context the firm operates in.
This paper then first examines some of the changes taking place in the emergence of
the new economy and what the implications are for generic business models. Second, at
the micro level of the individual firm it takes a new look at the notion of the value chain
as a framework for analysing business models and suggests that the value chain
should not be seen as a static model but as an inherently dynamic one.

The “new economy” and value migration

The need for some framework for business model architecture and engineering is not a
result of the new economy, but is a requirement for all firms regardless of where or
what market segment they operate in. The new economy has, however, provided an
impetus to change that cannot be ignored. The term “new economy” should not,
however, be confused with the excesses of the dot.com era which has unfortunately
brought the term into some disrepute. The Internet and associated technologies are
important enablers of the new economy, but are not its sum total.
Instead the new economy can best be seen as general changes to the business
landscape that are progressively encompassing the environments which most firms
operate in at the beginning of the new millennia. Several major trends are identifiable.
The first is what has been termed “market turbulence” as described by Glazer (1991),
Pine (1993), Ashkenas et al. (1995) and Day (1999). This turbulence is reflected in
consumer instability, low predictability, uncertainty, increased demand for quality,
“fashion” and service. In addition there are also changes in market structural factors.
These have been identified as a shift in power towards the buyer, highly competitive
 saturated markets, shortening product life cycles with little predictability, high rates of A framework for
technological change, smaller and less predictable customer demand in terms of order operations
volumes and ordering frequency, and an expanding number of distribution channel
alternatives. management
One result is that “value” is migrating in many industries and new “profit pools” are
forming. For example the automotive industry is experiencing a shift in value profile.
Hitherto, the traditional view was that value was maximised in the production process 339
and automobile producers accordingly measured their effectiveness in terms of factory
outputs. Current indications and expectations for the future are that the creation of
value will migrate towards the marketing and service processes (Gadiesh and Gilbert,
1998). See Figure 1 for a graphical description of this notion of value migration.
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Virtual integration
A second important element of the new economy is that the focus is becoming less on
organisations as standalone entities and more on the business networks they operate
in. While customisation, flexible response, and other models based on organisational
efficiencies and interdependencies were concepts of the late 1980s, the more recent
emphasis is on changes in inter-organisational relationship management giving rise to
the concept of the “virtual organisation” and with it “virtual integration”
Drucker (2001) notes that the traditional response to market pressures was vertical
integration on a large scale, citing Standard Oil and Ford as leading examples in the
early twentieth century. In contrast the new successful corporations are adopting
models based on virtual integration, where ownership of the means of production is not
the critical factor, but rather it is access to them via networks and partnerships that is
important. As Drucker (2001) notes the changes to facilitate this are not just sales and
marketing driven, but encompass design and development, and production. Products
and services now have multiple applications and business organisations are redefining
their core capabilities and processes. In other words “value chains “ are competing with
“value chains”. At this macro industry level, value chains can be seen as business
network structures, or confederations, that are developing from traditional
corporations.
While business historians suggest that this notion of the virtual organisation has its
forerunner in the craft and merchant structures of the middle ages, it is interesting that
companies such as Dell Computers now refer to “asset leverage” as possibly the only
option for an effective competitive organisation.
Ashkenas et al. (1995) have compared the critical factors that influenced
organisational success in the recent past with those currently required and likely to
be required in the future and these are shown in Table I.
Arguably if the new structures are to be made effective then a fifth factor is also
necessary – coordination. Normann (2001) describes this as “a new strategic logic”. He
suggests that:
[. . .] managers need to be good at mobilising, managing,and usingresources rather than at
formally acquiringand necessarily owningresources. The ability to reconfigure, to use
resources inside and particularly outside the boundaries of the traditional corporation more
effectively becomes a mandatory skill for managements (Normann, 2001).
 Downloaded by Northumbria University At 20:52 12 January 2016 (PT)

340
34,3/4

Figure 1.
IJPDLM

automobile market
Value migration in the
 A number of authors support this view. Hagel and Singer’s (1999) argument is that as A framework for
the exchange of information and “digestion” increases through electronic networks, operations
then traditional organisation structures will become “unbundled” as the need for
flexible structures becomes an imperative and “specialists” offer more cost-efficient management
strategy options in each of these basic businesses.
The holonic, or virtual, organisation structure is another similar perspective. The
holonic organisation or network is: 341
[. . .] a set of companies that acts integratedly and organically; it is constantly re-configured to
manage each business opportunity a customer presents. Each company in the network
provides a different process capability and is called a holon (McHugh et al., 1995).
Holonic networks are not hierarchical structures. Instead each business within the
structure should be seen as equal to each of the others. The network is in dynamic
equilibrium and it is self-regulating. Access to, and exchange of, information
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throughout the network is open, as is access to and exchange of information across the
network boundaries. The network is evolutionary and is constantly interacting with its
environment. It is a knowledge network, a learning organisation.
Pebler (2000) in describing the development of holonic or virtual organisation
structures in the oil industry offers a prescription for the generic virtual organisation:
The virtual enterprise of the future will be much more dynamic and sensitive to the need for
tuning operational parameters of the enterprise as a whole, including capital spending for
both producers and service companies, optimising the whole chain of value creation. The
future world will be characterised by knowledge management and collaborative
decision-making by way of virtual teams. Virtual enterprises will be empowered by a
willingness to do business in more productive ways and by information technologies that
eliminate barriers between stakeholders and radically improve work processes.

Processes not functions

This leads to the question – how does a traditional business organisation understand
and adapt to these changes and modify its activities to take advantage of emerging
industry value chains and networks? How does a manager understand if activities
within the organisation add value or destroy it, thereby giving a basis for making
sensible decisions about what the firm’s business model should look like?
First the importance of taking a process-based perspective of the organisation needs
to be recognised. This means that the focus is on what activities the firm undertakes,
rather than the department or group of individuals within the firm who is responsible
for them.
Hammer (2001) argues that as businesses become accustomed to the customer
economy “process thinking” becomes essential, so that “In order to achieve the

Old success factors New success factors

Table I.
Size Speed Comparison of the
Role clarity Flexibility critical factors (old and
Specialisation Integration new) influencing
Control Innovation organisational success
 IJPDLM performance levels that customers now demand, businesses must organise and
34,3/4 manage themselves around the axis of process; moreover, they must apply the
discipline of process even to the most creative and heretofore most chaotic aspects of
their operations”. He adds: “. . . processes are what create the results that a company
delivers to its customers” (Hammer, 2001). Hammer continues by providing a customer
economy definition of a process. He offers:
342 [. . .] an organised group of related activities that together create a result of value to
customers’ (Hammer, 2001).
A strategic perspective is taken by Armistead et al. (1999). The authors identify themes
“associated” with business process management. Strategic choice and direction
suggests that an organisation cannot pursue every opportunity. It makes choices, or
trade-offs and these determine the resource patterns of organisations and, eventually
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the development of core competencies. These, in turn, lead to competencies that

influence subsequent strategy. Strategic business process management forces
companies to “examine their form and structure” having an influence on boundaries,
structure and power within organisational design.
An important component of the authors’ model is the market value chains which
“links the stages which add value along a supply chain”. They suggest that within an
organisation the market value chain is taken to be the conceptualisation of the core
processes and activities which represent the organisation in process terms: “They
capture the activities which start and end in the organisation and link with other
organisations in the chain”.
This needs to be understood in the context of designing and engineering a firm’s
business model. The essential point is that such engineering can no longer simply be
driven by seeking to maximise internal efficiencies – “the factory will run better if the
paint shop is at the end”. Instead the interaction of each business process needs to
understood in the external context in which it operates – where it potentially fits in the
web of relationships the firm has with its partners and whether it capitalises on
emerging value shifts in the industry or industry value chains within which the firm
operates.
A good example of this lies in the information technology industry where there has
been a clear long-term value migration from hardware manufacturing and sales to new
“profit pools” based around software and services. In spite of this a company such as
Dell can still successfully build a business model around distributing computer
hardware by designing and adapting its business processes to take advantage of a
virtual integration model built around networks of suppliers.

Mapping the processes – the value chain

The notion that the key processes within the firm form a value chain for that
organisation is not a new idea (Porter, 1985). Indeed the use of the terminology “chain”
is an interesting one and its use by Porter and others, an imaginative way of describing
the concept. It is a very valuable analogy to the extent that it identifies that processes
within the firm are, or should be, interlinked. As will be explored below the analogy
can be further extended so that identifying “weak” and “strong” links in the chain can
be useful in describing or identifying a firm’s competitive advantages or weaknesses.
 Again, however, the terminology of the “value chain” has often been used A framework for
inconsistently and in an overlapping and confused manner. As noted above “value operations
chains” have been used to describe the industry level linkages and networks and to
analyse and describe where value resides at this macro level. As discussed above management
understanding where and how industry value chains form and are structured
particularly in the context of emerging “new economy” tends is a first step to
maximising the individual firm’s business model. Optimally a firm should seek to 343
maximise its place in the industry value chain by positioning itself in that chain based
on its resources and capabilities. The first stage of any business process engineering
therefore should be a clear understanding of the industry value chain context the firm
is operating in.
The second context in which the term “value chain” is used is at the micro level of
the firm in describing the actual business processes that are employed by that
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particular firm. While the industry value chain describes networks and holons, the
micro value chain describes what the firm actually does – its business processes. The
second stage then of business process engineering should be to map and contrast micro
firm level value chain processes with industry value chain opportunities.
This micro firm level view of the chain may, however, be misleading to the extent it
gives the impression such links are as a matter of course neatly sequential – that
inputs are turned into outputs and value created in a necessarily neat and ordered
series of links or events. Just as the industry level value chain is dynamic, so to is its
replicant within the firm. Different processes do not necessarily work in tandem and
may often conflict. Production does not always produce what Sales wants to sell and
R&D does not always formulate what Marketing says the customer wants.
Interestingly Butler et al. (2001) note what they call “Interaction Costs” namely “the
money and time that are expended whenever people and companies exchange goods,
services and ideas . . . In a very real sense, interaction costs are the friction in the
economy”. This same notion can be applied at the micro level of the firm. A firm’s value
chain is not a smooth synchronous link – its has its own friction and its own
interaction costs.
Hagel and Singer’s (1999) description then of “unbundling and rebundling” of
organisational structures as a means to adapt to new market demands is a useful one.
It is suggested that in fact there is, or at least should be, a constant realignment of core
processes going on within any firm on a day-to-day basis as it interacts with its
environment. Such constant realignments should not be seen as a sign of instability or
as a negative force, but rather the ability to manage them pro-actively optimises the
ability to create value, particularly the more dynamic the firm’s environment.

Process fusion
Although it does not sit well with notions of scientific management, the fact that there
is a constant realignment and bundling and unbundling of processes within a firm
should not be seen as an inherent weakness, or a nuisance. It is instead a source of
dynamism and is central to the adaptability of the firm in the face of changing
customer demand. Again borrowing an analogy from economics, the dynamism of the
value chain is similar to that of the market economy compared with a command-driven
economic model.
 IJPDLM In more simple terms a firm will create value when what the customer demands can
34,3/4 be brought into synchronisation with what the firm can supply, minimising friction
and internal interaction costs and maximising the dynamic forces of the interaction.
Where they are not synchronised, value will either not be realised or actually
destroyed. This may sound simple, but the reality of complex organisations is such
that this process fusion is in fact problematic and represents the key tactical task for
344 management on a day-to-day basis. This is illustrated in Figure 2.
The implications for operations management is that what may seem like a series of
tactical issues – how to maximise the effectiveness of individual processes within the
firm – collectively becomes a driving force in the transformation of the traditional
business in the context of the new economy.

Concluding remarks
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A number of changes have occurred in the environment of the new economy. Changes
continue and do so at an increasing rate. Many of the tasks and techniques that
comprised management practice have either disappeared or have changed radically.
Management functions have either been modified, merged, replaced or have
disappeared. Businesses are increasingly becoming a collection of relevant, focussed
processes.
We have identified the development of the value chain and its importance in
forming a structured response to market-led opportunity. Within our discussion we
have suggested and identified examples of an emerging qualification for competitive
advantage – pro-actively managing the fusion of processes to minimise friction and
internal transaction costs enhancing overall value.
In doing this we have identified an expanded role for operations management in the
creation of value in the business. Where, however, does this fit with the firm’s overall
strategy?
As noted above Magretta (2002) draws a distinction between a firm’s business
model and its strategy, citing the example of Wal-Mart who initially adopted a fairly
standard supermarket business model, but prospered by adopting a strategy of
building its supermarkets outside metropolitan areas in rural locations, by

Figure 2.
Process fusion to create
value
 understanding their demand chain. The two notions of business model and strategy A framework for
are, however, clearly linked. As Magretta (2002) acknowledges Wal-Mart only made
their strategy work by improving on the base business model “through innovative
operations
practices in areas such as purchasing, logistics and information management” management
resulting in their offer of “everyday low prices”.
It is proposed that constant refinement of business models is as important to the
success of the firm as its strategy and that both are critical to the integrity of the firm’s 345
overall value chain. This implies a far more important role for operations management
than may have been traditionally recognised.

References
Armistead, C., Pritchard, J.-P. and Machin, S. (1999), “Strategic business process management for
organisational effectiveness”, Long Range Planning, Vol. 32 No. 1, pp. 96-106.
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Ashkenas, R.D., Ulrich, J.T. and Kerr, S. (1995), The Boundaryless Organisation, Jossey-Bass
Publishers, San Francisco, CA.
Butler, P., Hall, T.W., Hanna, A.M., Mendoca, L., Auguste, B., Manyika, J. and Sahay, A. (2001),
“A revolution in interaction”, The McKinsey Quarterly, No. 1.
Day, G. (1999), The Market-Driven Organisation, The Free Press, New York, NY.
Drucker, P. (2001), “Will the corporation survive?”, The Economist, 1 November.
Gadiesh, O. and Gilbert, J.L. (1998), “How to map your industry’s profit pool”, Harvard Business
Review, May/June.
Glazer, R. (1991), “Marketing in an information-intensive environment: strategic implications of
knowledge as an asset”, Journal of Marketing, Vol. 55 No. 4, pp. 1-20.
Hagel, J. III and Singer, M. (1999), “Unbundling the corporation”, Harvard Business Review,
March/April.
Hammer, M. (2001), The Agenda, Crown Publishing Group, New York, NY.
McHugh, P., Merli, G. and Wheeler, G. III (1995), Beyond Business Process Reengineering, Wiley,
Chichester.
Magretta, J. (2002), “Why business models matter”, Harvard Business Review, May.
Normann, R. (2001), Reframing Business, Wiley, Chichester.
Pebler, R.P. (2000), “The virtual oil company: capstone of integration”, Oil & Gas Journal, 6 March.
Pine, B.J. III (1993), Mass Customisation: The New Frontier in Business Competition, Harvard
Business School, Boston, MA.
Porter, M. (1985), Competitive Strategy, The Free Press, New York, NY.

Further reading
Bovet, D. and Martha, J. (2000), Value Nets, Wiley & Sons, New York, NY.
Hagel, J. (2002), “Leveraged growth: expanding sales without sacrificing profits”, Harvard
Business Review, October.
Walters, D. (2002), Operations Strategy, Palgrave, Basingstoke.
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