Aldona
Frączkiewicz-Wronka[1]
Martyna
Julia Wronka[2]
Prerequisites
to value chain concept as a tool of
effectiveness enhancement in modern public management sector[3]
Every firm is a collection of activities that are performed to design,
produce, market, deliver and support its product. All these activities can be
represented using a value chain (…). The value chain displays total value and
consists of value activities and margin. Value activities are physically and
technologically distinct activities a firm performs. These are the building
blocks by which a firm creates a product valuable to its buyer.
Michael Porter
Introduction
Organisations understood
as groups of people intentionally organized to accomplish an overall common
goal or set of goals, have been existing since ages all over the world.
Nonetheless, they have never before experienced such a level of complexity,
such a universality and such an influence on peoples’ life as it takes place
nowadays. Changeability of environment oblige modern organisation to continuous
taking up adaptation decisions, which results in changing existing processes.
Organisations all over the world are turning to an ever-increasing set of
international standards and models to achieve competence in the processes used
to manage their businesses, increase customer satisfaction, and achieve and
maintain competitive advantage. Nowadays much of an organisation’s value is in
intangibles – the value of customer relationships, the value of the skills and
knowledge of its people, value of information in databases that has reseal
potential and value from intellectual property, such as patents. This fact is
very important in case of public health care units were indeed most of values
are clearly intangible. As every enterprise is a collection of activities that
are performed to design, produce, market, deliver and supports its product all
these activities can be represented using a value chain.
The concept of
value chain
Michael Porter first
developed the concept of value chains in his work on competitive advantage in
eighties as an evaluation tool for business managers who seek for roots of
their business's competitive advantage. They wanted to recognize how they
should position themselves strategically amongst their suppliers, buyers, and
existing or future competitors. He originally designed the analysis to examine
organizational production and support processes and their contributions towards
developing greater competitive advantage[Porter 1985, pp. 36-38]. Porter argued
that competitive advantage could not be understood plainly by looking at a firm
as a whole. It stems from the many activities an enterprise performs in
designing, producing, marketing, delivering, and supporting its product. Value
chain analysis has been used
as a means for describing the activities within and around an organization, and
relating them to an assessment of the competitive strength of an organization.
It was originally introduced as an analysis tool that was designed to shed
light on the “value added” of divide
steps in complex manufacturing processes in order to determine where costs
improvements could be made and/or value creation improved [Rokita 2005, pp.
196-197]. Value chain might be described as the set of activities an
organization performs in order to create and distribute its goods and services,
including primary activities, such as inbound logistics and operations, and
also support activities, such as human resource management and technology
development [Porter 1985, pp. 35]. Each of these activities adds some value to
the product or service. Both competitive conditions and strain in the global
market are forcing companies to look for strategies to make the entire value
chain more efficient. Rising the efficiency of the value chain will increase
the competitiveness of a company. To compete effectively, organizations must
structurally transform their internal and external processes [Pil, Holweg 2006,
pp. 72-73]. Recognition of the fact that organisations are much more than a
random collection of machines, money and people is one of the key features of
value chain analysis. None of these resources is valuable unless arranged into
activities and organized into routines and systems. They in turn should make
sure that products or services are produced which are valued by the finer
customer/user. In other words, it is these competencies to perform particular
activities and the skill to manage linkages between activities, which are the
foundation of competitive advantage for organizations. The understanding of
strategic capability ought to begin with an identification of the value
activities that an organization performs. Figure 1 is a schematic
representation of value chain within an organization where value chains target
competitive advantage. They are a means of modelling the organization in order
to answer question activity by activity. After modelling its own value chain an
organization should seek for answers to the questions that should be asked: can
we improve the value added by that activity?; is there an occasion to decrease
the price of that activity?; is there a chance to get rid of that activity?;
can we use that activity to differentiate the organization?
Figure 1: The Generic Value Chain
Source: Porter, M.E., Competitive Advantage: Creating and
Sustaining Superior Performance New York, Free Press, 1985, pp. 37
To answer these questions the
organization have to revise the primary activities that get the product or
service to the customer and the support activities that facilitate that. What
is more, there are linkages between these activity processes. Increasingly it
is with improvements to these linkages that information systems can present the
most support and help an organization in attaining a competitive advantage.
Value activities can be divided into two broad types, primary activities and support
activities. The primary activities
of the organization are the activities involved in the physical creation of the
product and its sale and transfer to the buyers as well as after sale
assistance [Porter 1985, pp. 38]. They can grouped into five main areas:
inbound logistics, operations, outbound logistics, marketing and sales, and
service [Czakon 2005, pp. 15-16]. Each of primary activities is linked to support activities. Any of this
categories may be vital to competitive advantage depending on the industry as
they all will be present to some degree and play some role here. The support
activities support the primary activities and each other by providing purchased
inputs, technology, human resources and various firm wide functions and can be
divided into four areas: Procurement, Technology Development, Human Resource
Management, and Infrastructure [Czakon 2005, pp. 16-17]. This framework can be
really useful for many enterprises and help them to identify the actual
activities performed by business units; to analyze the value created by these
individual activities; to examine how linkages and flows to external buyers and
suppliers build value as successive processes occur; to map the exchanges of
flows into and out of the organization; to identify activities that are key to
success of strategy; and to understand resource allocations with a view to
allocating resources in accordance with the contributions of the task to
strategic direction [Rokita 2005, pp. 196-2002]. By performing these function,
value chain analysis can then be used to identify and strengthen those
activities which most contribute to overall strategy while constraining
resources allocated and consumed by tasks less critical. It is fair to say that
Porters initial framework provides interesting insights to our ability to
understand relationships between buyers and suppliers, but as he admit it has
its limitations. Porter advises against “applying value chain analysis at too
high a level in an organization.” He disputes an industry will include many
different segments which involve the need for diverse processes and which
engage different economic relationships and dynamics. For that reason, Porter’s
value chain analysis works well to evaluate static relationships connecting
participants. But it might fail in letting us comprehend the dynamics related
to high clock speed industries that constantly redefine their value chain
relationships. Therefore, value chain can be described as a basic tool for
diagnosing competitive advantage and finding ways to create an sustain it.
Nevertheless, the value chain can also play an important role is designing
organisational structure, which brackets together certain activities together
under organisational units, for example logistics or marketing. Logically,
activities that are similar should be grouped and in turn exploited by putting
them together in a department. At the same time departments are separated from other
groups of activities due to their differences. This separation of similar
activities can be called differentiation while integration is the process of
coordination of organisational units. An organisational structure that goes
together with the value chain will develop firm’s capability to create and
sustain competitive advantage and create a value, which is the most important
goal of the enterprise [Porter 1985, pp. 60-61].
The process of creating and adding value
The process of creating
value in the physical world is often described as “links” in a value chain.
Porter sees value chain as a sequence of strategic core and support activities
through which a firm conducts its business. Rayport and Sviokla following
Porter define physical value chain as a “model that describes a series of
value-adding activities connecting a company’s supply side (raw materials,
inbound logistics and production processes) with its demand side (outbound
logistics, marketing and sales)” [Rayport, Sviokla 1996, pp. 22]. The value chain identifies a
complex series of activities that coordinate the contact between supply and
demand. In contrast to economic theory the value chain refers with the various
activities that deal with the demand and supply curves [Nilson 1992, pp. 42].
The complementarity between the motives of buyers and sellers is so clear it is
surprising its essential role in generating market efficiency is largely
understated. According to generally known definition, buyers and sellers enter
the market with different economic and social motives. Buyers enter the market
to acquire and sellers to dispose [Groönroos 1997, pp. 407-411]. So there is a "natural" equilibrium
between the forces which bring both parties into the marketplace. If buyer and
seller are free to communicate, exchange fails to happen only in one situation
- that is, there is an incapability to suit the criteria for value that seller
and buyer bring to the market [Glaser 2006, pp. 442-443]. Higher added value and new values are
obtained as a result of implementation of innovation. Due to this changes
enterprise is able to take advantage of opportunities that are likely to
emerge. Innovations, that should strengthen competitive advantage of an
enterprise, should either deliver fresh values or create higher than value
added so far [Rokita 2005, pp. 194-196]. This process is illustrated below:
Figure 22: Process of creating the added value as a result of innovative changes
Source: Rokita J., „Zarządzanie Strategiczne. Tworzenie i utrzymywanie przewagi
konkurencyjnej” Polskie Wydawnictwo Ekonomiczne, Warszawa 2005, pp. 194-196
The first phase of this
process, that is identification of new opportunities, can be described as
opportunities that emerge on the market as a result of a gap existing between
customers needs and a way of satisfying then by competitors. As there is a need
to evaluate this opportunities the second phase is called evaluation of
opportunities. This evaluations should take into consideration both qualitative
aspect (who is a potential customer? what needs does he have? why those needs
have not been satisfied yet?) as well as quantitative aspect (to what extent
this opportunities are worth using? what should be the scale of investment
connected with those opportunities? what cost are going to be taken?). The next
phase is called designing of innovation such as new products or new services.
The base of this process is an idea how to solve problem that has emerged. The
final phase is described as realization of innovation and is based on delivery
of achieved effect to customers. The whole process is repeatable an its
particular stages are mutually linked [Rokita 2005, pp. 197-198]. The basis of
a whole process is knowledge about technologies, market, competitors and own
organization, that is ability to use this knowledge in innovation processes.
New products or services are satisfying consumer needs creating in turn added
value. At the most elementary level, firms create competitive advantage by
perceiving or discovering new and better ways to compete in an industry and
bringing them to market, which is eventually an act of innovation. Innovations transfer competitive advantage
when rivals either fail to recognize the new way of competing or are reluctant
or incapable to act in response. There can be considerable advantages to early
movers responding to innovations, predominantly in industries with noteworthy
economies of scale or when customers are more troubled about switching suppliers. The most representative motives for
innovations that shift competitive advantage are as follows: new technologies,
new or shifting buyer needs, the emergence of a new industry segment, shifting
input costs or availability and changes in government regulations [Porter 1980,
pp. 30-41].
Interesting is the fact, that value of a firm
is no longer exclusively based on a conventional financial analysis of asset
base and profit margin. The value of the firm in the marketplace now integrates
intangible assets like leadership quality, innovative capability, brand equity,
and competences. In turn definition of ‘‘value’’ can often be converted from
profit margin alone to the sum of net margin plus brand equity and other
intangible assets. If brand equity is added and supplementary factors to the
value equation gives a firm the capability to assess how strategic choices can
have an effect on both ‘‘hard’’ and ‘‘soft’’ assets of the firm, and thus
future competitiveness. This thinking is not necessarily new. An assortment of
activities of the firm have always had the ability to take advantage of a
firm’s intangible assets, but in a time of instantaneous global communications,
firms need to be more conscious of the effect that their choice of activities
can have on their reputation in capital markets if they are to look after the
value of the firm. The strategic choice of precise activities can now be based
on both short-term profitability and a longer-term view of building reputation,
relationships, and brand equity [McPhee, Wheeler 2006, pp. 40-41]
As stated by Porter once: “successful firms are
successful because they have unique resources. They should nurture these
resources to be successful. But what is a unique resource? What makes it
valuable? Why was a firm able to create or acquire it? Why does the original
owner or current holder of the resource not bid the value away? [Porter 1991,
pp. 108]. Barney answers his last question suggesting that, in strategic factor
markets, enterprises struggling for strategic resources have diverse outlooks
on a resource's value [Barney 1986, pp. 1512-1514.]. Consequently, they will be prepared to pay different amounts for the
resource. The “special insights into the future value of strategies” [Barney 1986, pp. 1513], that the bidding firm has, enables
it to acquire valuable resources at low prices: or alternatively, through good
fortune (“luck"), the firm gladly notices that a resource has
significantly more value than expected when it was purchased.
Obviously the concept has changed over the
time. Nowadays not only resources but basically, any person, process, product
or brand that adds value (tangible or intangible) to a product or service
constitutes a value chain. Typical persons that add value to a product-service,
whether new or old, are corporate senior and junior executives, creditors and
shareholders, engineers and employees, suppliers and consultants, customers,
marketers and channel partners. Typical processes involved in the value chain
are process- and product-based technological evolutions, insourcing and
outsourcing, changing domestic and international trade policies and market
forces including competition, government regulations and environmental
imperatives. Typical products that add value are capital, material supplies,
inventions, discoveries and innovations, technologies and licenses, the
physical infrastructure, the communications architecture, the inbound and
outbound logistics that define and control these products, and the persons and
links in the value chain that generate knowledge and relationship assets for
the firm. All processes and products should generate supply and technology
assets for the firm. All the persons, processes, products and brands of a firm
and the human relationships that bind them define both the resource assets of
that firm as well as its value chain and which, in turn, define a firm's
competitive advantage [Srivastava,
Shervani 1998, pp. 12-18].
Assumptions of New Public
Management (NPM) and configuration of
value chain in public sector
With the rise of the welfare state, the public sector
began to be involved in the introduction of a performance measurement systems
and management in a broader sense, is usually connected with the NPM doctrine (A Brief Guide for Performance
Measurement in Local Government). The rise of NPM is often identified with
distrust in government due to low government performance. In result the role of
local government and non-governmental organizations is increasing. We can also
observe increasing need for developing partnership between public, private and
social sector for enhancing effectiveness of actions undertaken by public
sector organizations [Frączkiewicz-Wronka 2006, pp. 56-57]. The underlying
concept is the possibility of application private sector management methods and
tools for the public management [Terry 1998, pp. 226-128]. The
need to enhance efficiency in the public sector and to cut public costs, which
is at the heart of the New Public Management school of thought, has resulted in
a series of measures, including privatization, deregulation, and the
introduction of market-like mechanisms in the public sector. The central ideas
of NPM include:
·
Putting emphasis on outputs and outcomes instead of
inputs and processes,
·
Applying measurement based on performance indicators
and standards,
·
Changes in the structure of organisations that
become leaner, flatter and more autonomous (by the process of service contracts
for example),
·
Introducing market-like mechanisms for the delivery
of public services and products (privatisation, contracting out, accent on
internal markets, etc.),
·
The redefinition of the frontiers of the public
sector and the development of private/public partnerships and proliferation of
hybrid organisations,
·
Shift from equity, security and universalism towards
efficiency and individualism in designing value priorities [Emery, Giauque 2003, pp.
472-474]
·
Orientation towards client and service,
·
Changed relationships with other levels of
government ,
·
Strengthened accountability and control [Governance in
Transition: Public Management Reforms in OECD Countries].
·
Emphasis on improving quality of public services
·
Shift towards devolution and delegation,
·
Understanding the meaning of the appropriate
information systems,
·
Significant role of audits and inspection,
·
Productivity-orientation for work force,
·
Clear implementation of the professional management
role,
·
Managers being given the right to manage [Walsh
1995, pp. 49]
There is no doubt that governments
play significant role in the social and economic growth of the society. The
emphasis on effectiveness became the dominant idea of this reorientation in the
government and its entities as the role of the public sector has been
increasing [Kleer 2005, pp. 76-79]. Issues such as inefficiency, corruption,
civil service professionalism, transparency, overbureaucratization, service
quality in relation to the public sector have become widespread in many
countries in last decades [Barzelay, Fuchtner 2005, pp. 12-15]. In result
actions that aim in reorganisation of public sector have been taken. The number
of functions and the scope of government authority has been increasing
systematically from the 70ies what induced the need for effective management of
the growing stream of public resources [Fukuyama 2005, pp. 21]. Even though public organisations
have been existing since ages, they have never before experienced such a level
of complexity, such a universality and such an influence on peoples’ life as it
takes place at the present time. Unpredictability of environment requires from
modern organisation constant taking up adaptation decisions, which results in
changing existing processes. Also public organisations all over the world are
turning to an ever-increasing set of international standards and models to
achieve competence in the processes used to manage their businesses, increase
customer satisfaction, and achieve and maintain competitive advantage. Constant
development process entails that, regardless of industry, almost all
organisations are operating on faster evolutionary tracks and at greater risks
than at any previous time. Hence, a company's real core capability is its
capability to constantly redesign its value chain and to reorganize its
structural, technological, financial and human assets in order to achieve
maximum competitive advantage. But competitive advantage is, at best, a passing
commodity that must be won again and again. That is, all players in the value
chain producers, suppliers, employees, retail channels, and customers - are
also seeking their own competitive advantage. This competitiveness makes every
value-chain dynamic. Organisations today must repeatedly disintegrate and reintegrate
themselves in order to quickly and continually evaluate which parts of their
value chain are weak, which parts are valid, which corporate alliances make the
most strategic sense and which threats are deadly [Mascarenhas, Kesavan, Bernacchi 2004, pp.486]. Increasing the efficiency of the
value chain will enhance the competitiveness of a company. To compete
effectively, organisations ought to structurally transform their internal and
external processes. Improvement methods are the model elements that help an
organization effect its needed changes and facilitate its technology-transition
process. These methods help the organization overcome the change-management
process, communicate the vision of the future organization, plan and execute
the resulting improvement initiatives, and manage them over time. The
improvement methods also provide guidance for forming organizational
structures, roles, processes, and methods needed to effect change.
Conclusions
Variability of
environment, especially its strong turbulence, requires from contemporary
organisation constant taking up adaptation decisions, which results in changing
existing processes. During the last decades we are witnesses to a series of
management concepts, which step by step has been incorporated by public sector.
They are all offering various solutions for business problems in the conditions
of rapidly changing business and social environment. Without regard to type or
character of changes they require rational and effective change management process,
both in functional and structural dimension. That in turn requires management
methods adequate to specific organisational needs and conditions [Czermiński,
et al. 2001, pp. 500]. Obviously
globalization requires from enterprises a big capacity for lowering expenses,
creation of innovation and resistance to crisis [Lendzion, Stankiewicz-Mróz 2005, pp.165].
To provide efficient and
economic enterprise administration many methods and concepts of management are
proposed. Their common feature is process approach to management and
concentration of the remark on key parts of the management process. Capability
to constantly redesign its value chain and to reorganize its structural,
technological, financial and human assets in order to achieve maximum
competitive advantage is a real core capability of every enterprise. As
increasing the efficiency of the value chain will enhance the competitiveness
of a company, different actions to
increase should be taken up. Some of practices concentrate on perfecting the
value chain of the enterprise in the evolutionary or revolutionary way
(Business Processes Reengineering and Lean Management). The others, like outsourcing
concentrate on its configuration, while further concepts i.e. benchmarking as
learning from the best through being compared with the best helps in searching
for the most effective methods of the given activity to gain competitive
advantage.
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