An essay on Information Systems

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Value Chain Analysis

Many organisations do not achieve the profits they anticipate by using incorrect methods or models to determine the true costs of products and services. This failure to correctly assess the costs associated with business affects the profit margin and the organisations’ competitive advantage. Michael Porter described a method which he called the Value Chain Analysis. The value chain analysis can be a very powerful tool in assessing if the organisation is not failing to realise optimum resource allocation, and in increasing organisation’s competitive advantage; by correctly pricing products and assessing the true costs of materials and labour, organisations can align the improvements in efficiency, quality, and profits with its strategic objectives.

According to Kippenberger (1997) Michael Porter suggests that organisations’ activities can be grouped into two categories: primary activities and supportive activities. Primary activities – those that are directly concerned with creating and delivering the product. These are further grouped into five different areas: inbound and outbound logistics, operations, marketing and sales, and services. Supportive activities – those that are not directly involved in production but are used to support the primary activities. Supportive activities include firm infrastructure, human resource management, technology development and procurement.

Within the value chain, it is important for an organisation to correctly identify how each primary activities category relates to its organisation. The first category is inbound logistics. In a manufacturing environment inbound logistics would involve receiving and warehousing of raw materials and their distribution to manufacturing as they are required. It is important to note, however, that the value chain can be applied to service industries too. For example, in healthcare, the raw materials would be replaced with patients.
Let us assume that the organisation is going to develop a new technology for doctors. The organisation is going to develop a form of wireless PDA that is about the size of a clipboard. Instead of carrying a paper file into every patient appointment, the doctors will have this smart-pad that they can use to input patients’ data. Throughout the day, the doctor connects the smart-pad to his office PC via USB cable and the information is transmitted into the patients’ database. Inbound logistics would include identifying what materials will be needed as well as what software will be needed to support the new technology. Inbound logistics would need to determine what components will be outsourced, which will be built in-house, and what software will be needed to support the new technology.
Once all steps of inbound logistics have been completed, the next step in the value chain is operations. Operations involve the activities used in transforming the raw materials into the final product (Kippenberger, 1997). In the case of the new doctor’s technology, operations would involve those activities necessary to convert the raw materials into the finished products. Operations, in this case, would involve component assembly and software installation, as well as packaging.
Once inbound logistics and operations are complete, the next step is outbound logistics. Outbound logistics “include activities that store and distribute products to buyers (e.g. warehousing, delivery vehicle operations, order processing)” (Kippenberger, 1997). This may be an area where combining more than one methodology may be appropriate. For example, if products are completed and stored in warehouses until orders are received, this could have a negative effect on the organisation’s profit margins. But in analysing the value chain it may have been identified that switching to a just-in-time method of delivery may be more cost effective. The organisation could look at the outsourcing of components and the reliability of suppliers. If the tools and suppliers are able to meet the demands, then the organisation would be able to improve profits by not needing to store as many products. Outbound logistics would also involve distribution of the product to the customers.
Marketing and sales “are the activities that provide the means for the buyer to purchase (e.g. advertising, sales force operations, selection and management of distribution channels)” (Kippenberger, 1997). In the case of doctor’s technology, if the organisation is focusing on sales only to doctors, the organisation may be missing out on substantial profits. In evaluating the value chain the organisation may find that marketing and sales has not aggressively sought out contracts with large managed care organisations. If marketing and sales understands value chain analysis then it would need to be able to show these organisations how this product can improve their own value chains.
The final step in value chain analysis is service. Service can significantly impact on the profits and solvency of the organisation. In the doctor’s technology example, there would need to be technical support for the product and software, as well as possible upgrades and feature enhancements. Customer feedback surveys would be a useful tool in determining customer satisfaction, and in measuring product quality.

References

Kippenberger, T. (1997), The Value Chain: The Original Breakthrough, The Antidote, Vol 2, No5, pp7-10. Retrieved July 20, 2007
Porter, M.E. (2001), Strategy and the Internet, Harvard Business Review, March, pp62-78. Retrieved July 20, 2007
Robson, R., 1997, Strategic Management and Information Systems: am Integrated Approach, Prentice Hall, London.

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point your web browser at http://picccs.mine.nu/pics/infs.pdf

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Alex