The value chain analysis describes the activities the organization performs and links them to the organization's competitive position" (p. 3). According to Porter, the control of the value chain remains an important objective for most types of organizations today. As defined by economists, the value chain is typically comprised of three components: (a) raw materials acquisition, (b) finished goods manufacturing, and - distributors and customers (Burke, 2000).
Today, many foreign manufacturers are using their value chains to become more competitive in an increasingly globalized marketplace by developing seamless networks that provide them with all or most of what they need to accomplish their organizational objectives (Fong & Wonacott, 2004). According to Barner-Rasmussen, Bjorkman, and Li (2004), "Strategy and management scholars now widely agree that globally distributed networks of subsidiaries constitute a potentially important source of competitive advantage for multinational corporations (MNCs). By accessing the knowledge residing in these networks, MNCs can both exploit existing repositories of knowledge and combine these sources of knowledge to explore new issues" (p. 433). Likewise, other authorities suggest that, "The formation of networks can facilitate the flexibility of the individual firms comprising the value chain and reduce the time it takes for them to respond to significant change" (May, Mcintosh & Winter, 2003, p. 450).
The emphasis on effective value chain management is, of course, on ensuring that all of the players recognize what benefits the value chain brings to their own interests and outcomes, and in identifying additional opportunities for ongoing improvement in the chain. In this regard, Abele, Elliott, O'Hara and Roegner (2002) point out that, "Since sourcers come to the negotiating table armed with a detailed understanding of their own and the supplier's economics, the supplier must do the same. That is, it must understand how it makes (and loses) money from its current customers, the key factors that make them buy, and its competitors' blind spots" (p. 117). In fact, just as the major players in a given industry may attempt to improve their competitive position by acquiring smaller competitors and acquiring suppliers of major components and services, timely management of the value chain can help even small businesses improve their competitive edge. In fact, this approach serves to ensure that complacency and routine do not take the place of innovation and improvement.
In this regard, Recklies (2001) emphasizes that:
L]inkages are crucial for corporate success. The linkages are flows of information, goods and services, as well as systems and processes for adjusting activities. In most industries, it is rather unusual that a single company performs all activities from product design, production of components, and final assembly to delivery to the final user by itself. Most often, organizations are elements of a value system or supply chain. Hence, value chain analysis should cover the whole value system in which the organization operates.
Moreover, as noted above, this process is gaining momentum in many foreign countries today. According to Borrus, Ernst and Haggard (2001), "In electronics, textiles and apparel, autos, and other sectors, firms in the region are increasingly linked across borders in complex and ongoing relationships that extend beyond the boundary of the firm and span the entire value-chain in the given activity" (p. 1). The framework that is being developing for these "cross-border production networks" typically focus on the manner in which technology, expertise, resources and control flow across them, and what their implications might be for competition and cooperation in their respective regions (Borrus et al., 2001).
Likewise, May and his colleagues note that although every business is unique, two general types of companies in particular can benefit from improving their value chain management techniques:
Traditional industries composed of many specialist firms that consolidate around a particular market opportunity and then disband after that opportunity has been exhausted; companies competing in the movie industry fit these characteristics because they depend on a number of companies specialized in activities such as financing, editing, and marketing to conduct various value chain activities. Similarly, specialty textiles firms in Northern Italy and Germany's Mittelstand can benefit because these industries are generally small to medium in size and make use of resources contained in a value chain to create prototype products for customers.
This type of company is characterized by the countless Internet startups that depend heavily on specialty companies such as ASPs (Application Service Providers), and logistics companies such as Federal Express who are used on an "as needed basis" to meet the company's ever-changing needs (May et al., 2003).
In reality, though, it would seem that the techniques being used by most foreign manufacturers are not restricted to a given geographic region, but many of them are benefiting from the high concentration of various industries within geographic proximity of each other, such as is taking place in many parts of China today (Fong & Wonacott, 2004), as well as the cumulative expertise that these companies have gained in recent years. A different sort of value chain management is required when there are different countries involved. In fact, Fong and Wonacott note that today, 'Increasingly, companies - especially small-component manufacturers - are facing pressure to move to China. It's almost a do-or-die situation" (p. A2).
In such cross-border settings, the lead company's "cross-border production network" involves both the inter- and intra-firm relationships through which the firm organizes the entire range of its business activities: from research and development (R&D), product definition and design, to supply of inputs, manufacturing (or production of a service), distribution, and support services. Therefore, this type of value chain also includes the entire network of cross-border relationships between a lead firm and its own affiliates and subsidiaries, but also its subcontractors, suppliers, service providers, or other firms participating in cooperative arrangements, such as standards-setting or R&D players (Borrus et al., 2001).
It is not too late for American companies to catch up, though, with the only glaring constraint being the need for ensuring a reliable supply chain for whatever products or services may be required. Like China, many regions of the U.S. enjoy these same levels of high industry concentrations, and the application of information technology resources can eliminate virtually all other obstacles. For example, Hunton (2002) points out that a company can use its internally integrated information systems to monitor inventory balances and movement patterns of its product lines to ensure that distributors have sufficient quantities of products on-hand; should new consumption patterns emerge, the manufacturer can adjust its production and shipping schedules accordingly. Likewise, Burke (2000) notes that, "Numerous advantages and disadvantages have been attributed to organizations that combine subcontracting or outsourcing with the extensive use of information technology. The use of information technologies permit hubs to leverage and integrate specialized knowledge, creative capabilities, and resources across subcontractors and outsourcers" (p. 13). According to Porter (1996), the foregoing considerations mean that most businesses today are confronted with some tough challenges in an increasingly globalized marketplace. As a result, "Companies must be flexible to respond rapidly to competitive and market changes. They must benchmark continuously to achieve best practice. They must outsource aggressively to gain efficiencies. And they must nurture a few core competencies in the race to stay ahead of rivals" (p. 61).
The analysis of a given value chain is as fairly straightforward, step-by-step process; Recklies recommends using the following approach to help virtually any type of company identify opportunities for improvement in its value chain:
Analysis of own value chain - which costs are related to every single activity;
Analysis of customers value chains - how does our product fit into their value chain;
Identification of potential cost advantages in comparison with competitors; and,
Identification of potential value added for the customer - how can our product add value to the customers value chain (e.g. lower costs or higher performance) - where does the customer see such potential (Recklies, 2001).
An analysis of the network linkages that exist in a value chain will also be invaluable because it will provide some insights into the relationships among member organizations. According to Culpan (2002), the relationships in any given linkage can be one-way (aka, asymmetric, or unilateral) or two-way (aka, reciprocal, symmetrical, or bilateral), horizontal or vertical. This author defines "horizontal linkages" as those exchanges that take place between competing firms while the term "vertical linkages" refers to exchanges between organizations at different stages of the value chain (for example, supplying, production, and distribution). "Typical examples of interorganizational linkages include original equipment manufacturer (OEM) supply relations, licensing, franchising, technology transfers or exchanges, joint R&D, joint production, and joint ventures," he adds (Culpan, 2002, p. 29).
Abele, J.M., Elliott, B.R., O'Hara, A.A., & Roegner, E.V. (2002). Fighting for your price: A new kind of professional purchaser bent on getting rock-bottom costs threatens suppliers of basic materials. The McKinsey Quarterly, 117.
Barner-Rasmussen, W., Bjorkman, I., & Li, L. (2004). Managing knowledge transfer in MNCs: The…