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Walters, d.  lancaster, g.  1999. Walters, d. lancaster, g. 1999. Document Transcript

  • Value and information ± concepts and issues formanagementDavid WaltersHead of Department of Business, Macquarie University, Sydney, AustraliaGeoff LancasterChairman, Durham Associates Group Limited, Castle Eden, Co Durham andProfessor of Marketing, Macquarie University, Sydney, AustraliaIntroductionValue is a term used frequently and for whichnumerous interpretations exist. Our interestis in its use within the context of all activitiesdesigned for and coordinating customer sa-tisfaction. Customers purchase products andservices for a range of uses and for a range ofreasons: hence value has numerous inter-pretations.Value delivery comprises all those activ-ities involved in delivering the product-service attributes that are considered to benecessary to create customer satisfaction andto maintain an ongoing, long-term relation-ship with customers and in so doing buildcompetitive advantage. Our focus is on thevalue chain rather than on the notion ofvalue added. Value-added analysis is mis-leading. In a traditional accounting contextvalue added is defined as selling price lesscost of raw materials and production activ-ities. In a colloquial context it is used toimply benefits (or attributes) perceived bycustomers; these may be tangible or intangi-ble and are, by definition, often difficult orimpossible to cost. Shank and Govindaragan(1988) suggest:the value chain ± not value added ± is themore meaningful way to explore competitiveadvantage.They suggest value added is misleading forthree reasons. First is that it arbitrarilydistinguishes between raw materials andother purchased inputs such as maintenanceor consulting services which receive differ-ent accounting treatment, but which aresignificant inputs. Second, value added doesnot point out the potential to use the linkagesbetween an organisation and its suppliers, orperhaps between it and its customers with aview to reducing costs or enhancing differ-entiation. Third, competitive advantagecannot be explored without considering theinteraction between purchased raw materialsand other cost elements that may result incost trade-offs.By contrast value chain analysis is exter-nal to the firm and sees each organisation asa component in an overall chain of value-creating activities of which the organisationis but one element. Shank and Govindarajan(1988) focus on the strategic cost managementissues. Our interest is broader. Clearly costmanagement is an important component butjust as important is the management of avalue delivery system that achieves customersatisfaction objectives.It is here where we see an extension of thesupply chain context to be applicable. Thesupply chain comprises the management ofphysical product flows, information flowsand the management of inter- and intra-organisational relationships. We suggest aview of the value chain to incorporate theseactivities but plan to meet both end-use(customer) expectations and the expectationsof stakeholders in the value chain process.This article reviews the concept of valueand contributions to developing a concept ofvalue creation systems ± the value chain. Anumber of approaches are considered rele-vant to the development of a value chainconcept (which is market and customerbased) and are discussed in this context.Value: a perspectiveAs 2000 approaches views concerning valueand customer satisfaction begin to converge.We offer three basic definitions:1 Value is determined by the utility combi-nation of benefits delivered to the custo-mer less the total costs of acquiring thedelivered benefits. Value then is a pre-ferred combination of benefits (valuedrivers) compared with acquisition costs.2 Relative value is the perceived satisfactionobtained (or assumed available) fromalternative value offers.The current issue and full text archive of this journal is available athttp://www.emerald-library.com[ 643 ]Management Decision37/8 [1999] 643±656# MCB University Press[ISSN 0025-1747]KeywordsValue chain, Value analysis,ManagementAbstractThe notion of what is meant by``value is explored and sum-marised in terms of its involve-ment in delivering the product/service attributes, considerednecessary to create customersatisfaction. Investigates thebusiness system in relation to thevalue chain, as well as citing theconflicting views of a number ofauthors upon this topic. A specificcompany is used as a template tobring out many of the notions thathave been put forward. Concludeswith the fact that the traditionalvalue chain begins with the com-panys core competences,whereas evidence suggests thatmodern value chain analysis re-verses this approach and usescustomers as its starting point.
  • 3 A value proposition is a statement of howvalue is to be delivered to customers. It isimportant both internally and externally.Internally it identifies the value drivers itis attempting to offer a target customergroup and the activities involved in pro-ducing the value together with the costdrivers involved in the value producingactivities. Externally it is the means bywhich the firm positions itself in theminds of customers. Webster (1994) sug-gests: ``The value proposition should bethe firms single most important organis-ing principle.Value positioning has implications for mar-keting strategy; it requires some fundamen-tal decisions on segmentation, targetcustomer profiles and the identification oftarget competitors. However, our interest isin exploring the value concept, and how it isbeing interpreted by businesses. Of particu-lar interest is how value can be used to createcompetitive advantage. Webster (1994) states:The conclusion that market share causedprofitability (has) proved to be simplistic ±strategy must be based on analysis of thecompany, the competition, and the customer,identifying those opportunities for the firm todeliver superior value to customers based onits distinctive competencies. The firms valueproposition becomes the primary organisingforce for the busines.It will be recalled that Adam Smith (1776 andreported in 1937) was concerned with thenotion of ``value in use. He argued twoaspects of value. He was of a view that valuewas determined by labour costs (subse-quently, modified to production costs). Smithalso argued that value in use from the userpoint of view is important; it is only whenused that the full costs and benefits of aproduct-service may be identified. A numberof companies use the ``value in use conceptto arrive at pricing decisions. The notion thatan end-user should consider all aspects of aproduct-service purchase, not simply theprice to be paid, enables both vendors andpurchasers to identify all of the elements ofthe procurement-installation-operation-maintenance and replacement continuum.The process encourages both parties to lookfor trade-off situations like high acquisitioncosts, with low operating and maintenancecosts, together with vendor services.Value delivery: process and systemsThe value chain needs no introduction. It isan ideal vehicle particularly when it is usedto identify an organisations strengths andweaknesses and to compare these with theopportunities and threats posed by its ex-ternal environment (i.e. competitors,technology, social change, economic change,political change and the legal environment).The value chain may be used to evaluate``relative position, identify an organisationsdistinctive competence(s) and directions fordeveloping competitive advantage.Both Webster (1994) and Kotler (1994)compare the traditional transaction processwith the increasingly favoured view of mar-keting being based upon value creation anddelivery, and upon developing long-termrelationships with suppliers and customers.Webster (1994) suggests:Our definition of marketing is built aroundthe concept of the value chain. Marketing isthe process of defining, developing and deli-vering value.A model created by Anterasian and Phillips(1988) is highlighted. Webster refers to theincreasing importance of alliances and part-nerships that are involved in the valuedelivery process (ee Figure 1).The business system and the valuechainA number of authors have considered theoverall resource conversion process to be abusiness system grant. Murray andODriscoll (1996) suggest:A business system is the chain of value-adding activities that is undertaken in orderto bring a product or service from rawmaterial to the provision of final customerservice and support.A macro-business system encompasses wholeindustries, while a micro-business systemmaps the input-transformation-output pro-cess at the business level. This is the firmsvalue chain. Figures 2 and 3 are illustrationsof both macro- and micro-business systems.The authors also suggest that the macro-business system is a series of markets, theproduct or service offering of each marketbecoming an input for the next. Thus eachstep becomes a technological or economictransformation. Technological transforma-tions involve manufacturing processeswhereby form utility or value is added to theprevious output. Economic transformationsare distribution activities in which time andplace utility or value added is contributed tothe earlier output activities, typically theseinclude location and product availability.Figure 4 represents forms of market organi-sation and has been modified to illustrate thenotion that value is a derived demand withinthe context of the macro-business system. Thetask of the macro-business system is toidentify end-user value expectations and tocoordinate the individual value contributions[ 644 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • from each firm to meet these competitivelyand cost effectively (i.e. meet competitiveoffers and meet the objectives of individualfirms in the macro-business system). Theactivities include time and location utilities(value) as well as form utility considerationsprescribed by product specification.Murray and ODriscoll (1996) introducevertical integration into their ``markets andsuggest this may occur if the firms coststructures are such that it can competesuccessfully with external suppliers at eachmarket level. Whether or not this will occurwill depend largely upon an analysis of thetransactions costs involved. Williamson(1985) and Dietrich (1994) made interestingand useful contributions towards this issue.These are considered later.Porters work on value chain analysis hasbeen the basis for a number of approaches toanalysing the activities of the firm. Portersapproach is to consider the firms activitiesas comprising primary and support activ-ities. The purpose is to:...disaggregate the firm into its strategicallyrelevant tasks and activities in order tounderstand better their structure and inter-relationships, the behaviour of costs, andFigure 1The marketing value chainFigure 2A macro business systemFigure 3A macro-business system for paper products[ 645 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • existing and potential sources of competitiveadvantage (Murray and ODriscoll 1996).Porters primary and secondary activities aresuggested to be physical and managerialflows whereby physical flows are activitiesinvolved in the physical creation of a productor service.OSullivan and Geringer (1993) remind usof the purpose of value chain analysis. Giventhat the organisation has limited access toresources, value chain analysis has, as itsprimary objective, the purpose of ensuringthat the resources of the enterprise work in acoordinated way such that full advantagemay be taken of market-based opportunities.It follows that the analysis should identifythe optimal configuration of both the macro-and micro-business systems that will max-imise value expectations. Thus the concep-tual concerns of the supply chain and thevalue chain begin to converge.It follows that to take full advantage of thecurrent resources available, three activitiesare involved. First the value expectations ofthe end-user (customer) must be established,then the resources and structures requiredshould be identified and finally the valuedelivery systems required to deliver theexpected value be structured. This mayintroduce alternative structures that includeinputs from other organisations within themacro-business system.Porter (1985) proposed the value chain as ameans by which business actions that trans-form inputs could be identified (i.e. valuechain stages). Furthermore, he proposed thatstages in the value chain be explored forinterrelationships and common characteris-tics. This could (he argued) lead to opportu-nities for cost reduction and differentiation.A more detailed view of the value chain andits efficacy is that its purpose at either level(macro- or micro-business systems) is to:1 identify the business actions (stages)which transform inputs;2 identify relationships (commonalities andinterdependences) between stages for bothsystems. Within the organisation themicro-system is used to identify mean-ingful differentiation characteristicswhich are unique, or exclusive, to theorganisation;3 identify costs and cost profiles within theorganisation together with cost advan-tages that do or could exist;4 choose its competitive positioning:. market segments. customer applications/end-uses. technologies5 identify alternative value chain deliverystructures (ie. interrelationships intern-ally and between business units withinthe industry delivery structure ± themacro-business system).Both macro- and micro-business systemsshould consider the value creation process.More recently the interests of shareholders,suppliers and employees (together with thoseof the community) have been included in abroader view of stakeholder interests andvalue.Brown (1997) pursues a conventional ap-proach to the value chain but does addemphasis to the need for an industryperspective:The value chain is a tool to disaggregate abusiness into strategically relevant activities.This enables identification of the source ofcompetitive advantage by performing theseactivities more cheaply or better than itscompetitors. Its value chain is part of a largerstream of strategic activities carried out byother members of the channel-suppliers, dis-tributors and customers.He introduces two additional perspectives tothe value chain: the emphasis on links orrelationships between activities in the valuechain; and, the firms competitive scope as asource of competitive advantage. Links andrelationships between buyers, suppliers andintermediaries can lower cost or enhancedifferentiation. Competitive scope may con-cern the range of products or customer types(segment scope), the regional coverage (geo-graphic scope), its integration (verticalscope), or its activities across a range ofrelated industries (its industry scope).The changes in, and convergence of, in-formation and communications technologiesare identified as significant issues by BrownFigure 4Hybrid forms of market organization[ 646 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • (1997). He illustrates changes in value chainstructures in newspaper production, videoentertainment and ``branchless banking:The emerging value chains in these examplespromise to restructure those industries andredistribute value among different compo-nents and players in the value chain.The impacts of these changes will be verysignificant, with irrevocable shifts in retail-ing and distribution, the elimination ofintermediaries, shifts in market share andmoves towards mass customisation. Each ofthese views of the value chain start with theorganisation and its industry onto whichcustomer interests are grafted. While theynow include the role of outsourcing toachieve effective value delivery it could beargued that the value chain concept would bemore effective if in fact it is created aroundcustomer value expectations.Scott (1998) takes a strategic managementview. He uses the value chain concept toidentify the tasks necessary to deliver aproduct or service to the market. His ap-proach is to combine segmentation and valuechain analysis and he suggests a number ofquestions:. In which areas of the value chain does thefirm have to be outstanding to succeed ineach customer segment?. What skills or competencies are necessaryto deliver an outstanding result in thoseareas of the value chain?. Are they the same for each segment or dothey differ radically?Scott (1998) argues:All firms, whether industrial or services havea value chain ... each part requires a strategyto ensure that it drives value creation for thefirm overall. For a piece of the value chain tohave a strategy means that the individualmanaging is clear about what capabilities thefirm requires to deliver effective marketimpact.It follows that the firm may not have therelevant competencies to match opportu-nities. Two questions follow:1 Is the structure of the organisation rele-vant and are its managers competent?2 Can the firm compete effectively by form-ing a partnership/alliance with otherfirm(s)?The core elements of Scotts (1998) valuechain comprise seven areas:1 operations strategy;2 marketing, sales and service strategy;3 innovation strategy;4 financial strategy;5 human resource strategy;6 information technology strategy;7 lobbying position with government.Coordination across the value chain isessential and Scott identifies the fact thattraditionally this did not occur. The rela-tionship between a companys value chainand its SBUs (strategic business units) isdiscussed. He suggests that certain parts ofthe value chain are likely to be common to allits SBUs. These include human resources,information technology and large parts of itsfinancial and selling functions. It could beargued that the information requirements ofindividual SBUs might differ and requirespecific services. It could also be argued thatin a market/customer-focussed business (andmost make this claim) the core elements ofthe business should be capable of developingspecific service inputs to ensure competitiveadvantage.Figure 5 illustrates Scotts view of thevalue chain.Slywotzky and Morrison (1997) discuss thevalue chain in the context of ``customer-centric thinking. They suggest the tradi-tional value chain, which begins with thecompanys core competencies and its assetsand then moves to other inputs and rawmaterials, to a product offering, throughmarketing channels and finally to the custo-mer. In customer-centric thinking the mod-ern value chain reverses the approach. Thecustomer becomes the first link and every-thing else follows:...everything else is driven by the customer.Managers should think of:(1) their customers needs and priorities;(2) what channels can satisfy those needs andpriorities;(3) the service and products best suited to flowthrough those channels;(4) the inputs and raw materials required tocreate the products and services;(5) the assets and core competencies essentialto the inputs and raw materials.and:The value of any product or service is theresult of its ability to meet a customerspriorities. Customer priorities are simply thethings that are so important to customers thatthey will pay a premium for them or, whenthey cant get them, they will switch suppli-ers.Slywotzky and Morrison (1997) suggest thatvalue opportunities are distinguished byunderstanding customers priorities andmonitoring priorities for change. They giveexamples: Nicolas Hayek (Swatch) under-stood that a growing segment of consumerswould buy watches based upon taste, emotionand fashion rather than on prestige. JackWelch (General Electric) identified custo-mers who saw less value in the product andmore in services and financing.[ 647 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • This suggests a broad perspective of value,well beyond direct benefits and one thatencompasses the nuances of basic criteria.Basic value criteria are broad characteristicslike security, performance, aesthetics, con-venience, economy and reliability. However,at the next level these may be seen to be wideranging criteria.The approach suggested by the authorswill change the traditional value chain suchthat it takes on a customer-driven perspec-tive. Slywotzky and Morrison (1997) gofurther:In the old economic order, the focus was onthe immediate customer. Today, business nolonger has the luxury of thinking about justthe immediate customer. To find and keepcustomers, our perspective has to be radicallyexpanded. In a value migration world, ourvision must include two, three, or even fourcustomers along the value chain. So, forexample, a component supplier must under-stand the economic motivations of the manu-facturer who buys the components, thedistributor who takes the manufacturersproducts to sell, and the end-use consumer.The organisations value chain becomesmerged with those of other value chainmembers. Figure 6 takes an industry per-spective of the value chain. An importantfeature is the role of information manage-ment that provides a coordinating activity.Other authors have made contributions. Ofparticular interest is that of Normann andRamirez (1993) who suggest:Strategy is the art of creating value..the way acompany defines its business and links to-gether with the only two resources that reallymatter in todays economy: knowledge andrelationships on an organisations competen-cies and customers.They see the value chain as an analytical toolthat facilitates strategy: ... strategy is pri-marily the art of positioning a company inthe right place on the value chain ± the rightbusiness, the right products and marketsegments, the right value-adding activities.They go on to add:Their focus of strategic analysis is not thecompany or even the industry, but the valuecreating system itself, within which differenteconomic actors ± suppliers, business part-ners, allies, customers ± work together to co-produce value. Their key strategic task is thereconfiguration of roles and relationshipsamong this constellation of actors in order tomobilise the creation of value in new formsand by new players ... their underlyingstrategic goal is to create an ever improvingfit between competencies and customers...The value chain has an expanded role. Itbecomes an integral component in the strat-egy process: the evaluation of the companyscore competence and its fit in the overallcreation of value. The questions to be askedare:. What is the combination of value driversrequired by the target customer group?. What are the implications for differentia-tion decisions?. What are the implications for costs: doeconomies of scale or scope exist?. Are there opportunities for trade-offs tooccur between the value creation systempartners?An example of the application of freshthinking is produced by Normann and Ra-mirez (1993). They use IKEA as an example ofa company that epitomises the new logic ofvalue:...any product or service is really the result ofa complicated set of activities: myriad eco-nomic transactions and institutional ar-rangements among suppliers and customers,employees and managers, teams of technicaland organisational specialists ... what weusually think of as prospects or services arereally frozen activities, concrete manifesta-tions of the relationships among actors in avalue creating system.The IKEA example is interesting because thecompany has:systematically redefined the roles, relation-ships and organisational practices in thefurniture business. The result is an inte-grated business system that invents value bymatching the various capabilities ofFigure 5An alternative view of the value chain[ 648 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • participants more efficiently and effectivelythan was ever the case in the past.This approach has been extended into therelationship between IKEA and its custo-mers. Customer relationships are based uponthe customers acceptance of a new view ofthe division of labour in which the customers``agree to undertake key tasks traditionallydone by manufacturers and retailers ± theassembly and delivery of products to custo-mer homes. The value delivered to thecustomer is a well designed, quality ``manu-factured product priced anywhere from 25percent to 50 percent below competitor offers.Using the value creation system we canidentify IKEAs approach. The company hasboth upstream and downstream links (Fig-ures 7 and 8). Figure 8 identifies valuetransfer items that are illustrated in Figure 7.This notion is further developed by Voll-man and Cordon (1999) who explain thederivation of demand management in alogistics context as:Essentially, a company has a ``pipeline ofcapacity which is filled in the short-run withcustomer orders, and in the long-run withforecasts of demand. The point is that orderentry consumes the forecast, and demandmanagement explicitly integrates both ofthese processes.They suggest a more current view to be onethat includes a band of knowledge andexpands this argument to suggest that in amanufacturing context ``knowledge is anunderstanding of precise requirements. Thisis, however, unrealistic for retailing andthere is a basis for developing an argumentconcerning a retail demand-based valuechain. It is suggested that retail collaborationoccur when sales and cost data are exchangedand such collaboration is usually retailer led,based upon their determination to reducecosts and focus more closely on their custo-mers.Normann and Ramirez (1993) suggest thatvalue occurs, not in sequential chains, but inconstellations; the role of business is toinvolve customers in creating value, takingadvantage of the expertise, skills and knowl-edge possessed by each member of the valuecreation system. As value creating systemsbecome complex and varied so do thecomponent transaction relationships neededto produce and deliver the value offer. Acompanys principal task becomes the re-configuration of its relationships and busi-ness systems.It follows that if the key to creating value isto coproduce value offerings then the onlysource of competitive advantage is the abilityto conceive the entire value creation systemand make it work by coordinating theactivities among actors so that actor andactivity are better matched. Hence, this newlogic of value depends upon a dialoguebetween the organisations competencies andits customer base. More specifically, itsknowledge of its customers (effective com-munication) results in a business system(Murray and ODriscoll, 1996) that is recon-figured to maximise coproductivity, in whichan organisations value offer is based uponits primary assets (i.e. its knowledge base(core competencies) and its customer base(or, more specifically, its knowledge of itscustomers).There was considerable comment followingNormann and Ramirezs (1993) paper. Vander Heijden (1993) comments that business/customer interfaces are dynamic, with ac-tivities being divided between suppliers andcustomers. Thus, value creation may be seenas an optimisation problem identifying whateach partner can do best (and most costeffectively) in terms of constructing value.This suggests the process of coproductivity isnot new, but is a process by which activitiescan be (and possibly are) evaluated andnegotiated within the industry value chain.Van der Heijden (1996) suggests that if thevalue creation systems of each party arestable and cost-effective, changes need not befrequent. What is interesting is his commentconcerning new entrants who introduce newmethods (often made possible by new tech-nology) and who make significant impact onmarket volume. What he does not suggest isthat the new entrant initiates responses fromexisting participants and consequently, re-evaluation of relationships; these are:``...shaped by revolutionary advances in in-formation and communication technology.Figure 6A customer-centric value chain[ 649 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • Carroll et al. (1993) suggest that many valuecreation systems are interpreted retrospec-tively and that to do so prospectively pre-sents a number of problems. These includemany role configuration options, the lack ofaccessible systematic information about keyrelationships, the inadequate distribution ofkey strategic knowledge and informationthroughout the organisation as well as theemergent, and somewhat serendipitousnature, of co-produced offerings. This sug-gests that whilst the notion of strategicalliances and partnerships is established,there is not an established infrastructureFigure 7The IKEA coordinated value creation system[ 650 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • with which to evaluate options and planimplementation.Zeithaml et al. (1993) suggest that the mostimportant point that Normann and Ramirezraise is the need to break from the value-chain orientation, in which a companyengages in a series of dyadic relationshipswith individual customers and suppliers. Incontrast, the new kind of company integratesthe best of the value-creating competencies ofall the economic actors to yield a newoffering with new relationships among theplayers. He identifies several issues: addingvalue and reinventing value are not mutuallyexclusive; continuous improvement, change,flexibility and responsiveness are essential ifcompetitive advantage positions are to bemaintained. Reinventing value appears to beeasier to apply in flexible situations such asdistribution and service organisations; bycontrast heavy engineering, with large in-vestment in fixed costs, faces greater chal-lenges.It has been suggested that many argumentsabout creating value are only about customersatisfaction and assume profit may be takenfor granted. However, companies need tothink about their comparative advantages inthe value chain even before they start think-ing about how to reconfigure it for theircustomers. If they do not, they are notmaking strategy; they are simply engaging inbusiness process reengineering.Some interesting issues have arisen. Nor-mann and Ramirez (1993) responded bycommenting that the commentators are ``...yoked to the value chain. They persist withthe view that value chains are no longerbasic building blocks and that ``needs areless useful notions in a service economy thanvalue-creation processes and that product orservice offerings, more than companies,compete for customers.A number of topics now arise. The firstconcerns the status of the value chain as ananalytical tool in developing competitivestrategy. Porters (1980; 1985) arguments werebased upon three generic strategy options:differentiation, cost leadership and focus.Essentially there were two options ± adifferentiated product/service targeted at acustomer group or a cost-led offer resultingin price leadership. Perhaps Normann andRamirez (1993) should have been more ex-pansive in their comments: many manage-ment academics and practitioners arewedded to the concepts of the eighties(despite practising the developments of thenineties) and tend to view conceptual devel-opments against this background.Three developments that have had a majorimpact are:1 information management;2 the focus on core activities and products;3 the importance of relationships in mar-keting.Information management has been consid-ered already and the virtual value chain is anapplication. Gilbert and Strebel (1977) sug-gest information can be a major facilitator innew product development and customersatisfaction but they add a proviso:Information systems are necessary, but theycannot be expected to do what they were notdesigned for. Because they focus on specia-lised tasks, they cannot help multidisciplin-ary teams share the same information, torecognise an opportunity and respond rapidlyand coherently. Competitive informationsystems...focus on the information needed tobuild and sustain a competitive advantage...-Competitive information systems link severaloperating systems and ``polarise them to-ward competitive advantage. Operating in-formation systems help an organisationalunit do its job right. Competitive informationsystems help several units do the right jobimplementing a competitive formula.Figure 8The IKEA value creation system[ 651 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • Their contribution is helpful in the context oforganising to deliver value. Competitiveinformation systems start from the formulawhich itself depends upon effective relation-ships existing between several functions,each of which is a key success factor of theformula. They also use IKEA as an example,which, it will be recalled, organises a valuedelivery system through ``co-productivity. Itrepresents an ideal example of a competitiveinformation system in which many differentoperating systems (i.e. design manufactur-ing, delivery, inventory and retailing) arebrought together to focus on a ``fast response/low inventory formula:Each key success factor is supported by an``information cluster, that retrieves andprocesses the information on which a keysuccess factor depends.This does, of course, consist of databases andapplications.Strategic and operationaleffectivenessIn a world of constant change it should comeas no surprise that other established con-cepts are increasingly questioned. Porter(1996) suggests that for many companiestechnological developments can create pro-blems:...the quest for productivity, quality and speedhas spawned a remarkable number of man-agement tools and techniques and bit by bit,almost imperceptibly (these) managementtools have taken the place of strategy. Asmanagers push to improve on all fronts, theymove farther away from viable competitivepositions.He develops an argument between strategyand operational effectiveness:A company can outperform rivals only if itcan establish a difference that it can preserve.It must deliver greater value to customers orcreate comparable value at lower cost or doboth. The arithmetic of superior profitabilitythen follows: delivering greater value allows acompany to charge higher average unitprices; greater efficiency results in loweraverage unit costs.Operational effectiveness is insufficient forlong-term competitive success:(competitive strategy)...is about being differ-ent...the essence of strategy is in the activities± choosing to perform activities differently orto perform different activities to rivals.In essence Porter (1996) is suggesting thatstrategic effectiveness is doing the rightthings and operational effectiveness is doingthe right things right. His model of aproductivity frontier does not address theentire problem. The productivity frontier(Figure 9) rather than being:the sum of all practices at any given timethemaximum value that a company delivering aparticular good or service can create at agiven cost...may best be viewed as a coordinated valuecreating process in which delivered customervalue is optimised within a set of constraintsimposed by the necessity to deliver long-termstakeholder value (i.e. profitability, produc-tivity and economic cash flow for the valuecreating system or configuration). Opera-tional effectiveness is achieved by extendingvalue creation into the implementation of thecustomer value delivery, either by copro-duction processes within customer or, possi-bly, supplier organisations.A solution offered is for the firm (and itspartners in the virtual corporation context)to identify a value strategy. We can nowmodify the earlier definition of value:Value is determined by the utility combina-tion of price and non-price benefits offered. Itis a relative measure i.e. it is determined bycomparison with similar market offerings toa target customer group.Value and competitive advantage are com-patible concepts. A value-based competitiveadvantage can be established by identifyingthose benefits, or attributes, which offervendors an opportunity to increase theattractiveness of their market offer to theirtarget customers. Within the context of ourearlier definition of a value driver, thebenefits or attributes (expected or perceived)are the value drivers that are important tothe target purchaser.Porters (1996) productivity frontier may beused to identify alternative value proposi-tions (defined earlier) ± see Figure 10. Twovalue offers are possible, the decision be-tween them is clearly influenced by a numberof factors. The first consideration is marketpotential and the probability of achievingFigure 9Porters productivity frontier[ 652 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • stakeholder objectives. The second concernsthe ability of the organisation to deliver thevalue package expectations: this will beinfluenced in turn by the extent to which theorganisation either has the required level ofcompetence(s) and whether shortfalls areavailable by entering partnership relation-ships to provide the service activities re-quired. This does of course also assumemutual acceptance of role, tasks and rewardsby the partner organisation(s). Thus, itfollows that the virtual corporation conceptpermits an organisation to pursue a range ofstrategies. It would no longer be constrainedby its range of competencies; rather it mayidentify market opportunities that were be-yond existing capabilities, such as logisticsservices.Cronshaw et al. (1994) argued that anumber of companies can, and do, earn aboveindustry ROI by pursuing a strategy thatresults in being stuck in the middle. Theyoffer examples of organisations whose custo-mer bases have broad, but manageable,segmentation criteria to which selective, butexpanded offers, can be successfully made.Porters view that being ``stuck in the mid-dle results in two feasible strategies isshown as Figure 11.Figure 11 shows that optional ROI perfor-mance is obtained by either a differentiationor cost-leadership strategy: being stuck in themiddle results in low performance.Porters (1996) productivity frontier offersa useful model for revisiting differentiationand considering a more valid and attractiveapproach of value-based segmentation. Fig-ure 10 identifies two possible value offers. Wesuggest this can be developed. Figure 12identifies a range of options. The componentsof value will differ as the options move fromultra-high service/no price-led value,through to an outright price offer with noservice support.Mathur and Kenyon (1998) offer an inter-esting view when they note the generalevidence of past over-diversification, and thecase for suspecting a deep-seated humantendency towards it. Its psychological ele-ments are likely to be conferred by power,and a sense of living in a jungle in whichmanagement teams must either kill or bekilled. They go on to state that these tend toblind managers to:. the need to add value in the sense ofbeating the cost of capital;. the risks of a proposal, especially thefuture competitive pressures on a newoffering like countermoves by competitors,and changes in consumer preferences;. the costs of implementing the project;. the skills, efforts and expendituresneeded, and the difficulties of motivatingor even retaining key staff in the acquiredbusiness;. the costs of restructuring, or harmonisinginformation systems and the like.Figure 12 suggests three generic strategies.Cronshaw et al. (1994) furnish poignantevidence that by providing a limited variety,an offer can prove to be profitable. Wesuggest that provided substantial marketshare is available, selective exclusivity valuestrategies can be profitable. Their evidence,based upon the UK retailer Sainsbury, sup-ports this view.Mention has already been made of theextent to which organisations are prepared toinvest time and money into the effort tocapture and hold customers. We have alsoestablished that scale economies are rapidlydeclining as a significant competitive factor.Variety is no longer expensive andFigure 11Optional ROI performanceFigure 10Using the productivity frontier to identify twovalue offer/strategy options[ 653 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • profitability is moving towards customisedproducts that have been tailored to theexpectations of their respective segments. Ascustomisation ceases to be distinctive andbecomes cosmetic we can see the attractive-ness of selective exclusivity or value-basedstrategies. Increasingly, we see the terms co-production and co-destiny as being ap-proaches in which risk, costs and increasedprofitability are shared by suppliers, manu-facturers, distributors and end-user custo-mers. The IKEA example quoted by Normannand Ramirez (1993) is an example of both co-production and codestiny: end-user custo-mers willingly involve themselves in thecoproduction activities and suppliers workwith IKEA towards a long-term relationshipfor mutual success.Figure 13 suggests a selective approach. Itis proposing that given an identified range ofmarket segment options a firm will respondby investing in ``technology relevant to itscore capabilities and activities and whichwill address the needs of a selected segment.The ``virtual value chain approach will befor groups of companies with complementarycore capabilities to develop a range ofactivities that together will enable them toposition themselves to gain competitive ad-vantage with the selected segment.The organisational implications of alter-native value strategies are shown in Figure14. Both marketing and operations differ-ences are addressed. Whilst this is a basicview of the differences that exist, it stillserves to illustrate the problems confrontingorganisations attempting to be `all things toall customers. The virtual value chainFigure 12A focussed approach to the productivity frontier: value-based strategiesFigure 13Matching the productivity frontier with market opportunities[ 654 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • approach is for complementary companies tomatch core competencies into an integratedoffer that responds to a selected targetmarket. Competitive advantage is jointlycreated and owned.ConclusionThis paper has introduced the notion of valuein terms of its various interpretations, andmore specifically our concern has been withits association in connection with the co-ordination of customer satisfaction. In thenew millennium, views of value and satis-faction are now seen to be merging and wesee terms like coproduction entering themarketing vocabulary.The notion of the traditional value chainbegins with the companys core competen-cies, whereas contemporary evidence sug-gests that the modern value chain reversesthis approach and uses customers as itsstarting point. It is additionally suggestedthat value appears in constellations ratherthan sequentially.Many organisations are now prepared toinvest heavily to retain loyal customers andit is even suggested that being ``stuck in themiddle might be a more profitable andstable course in the long run.This is the first paper from the authors thataddresses the issue of the delivery of value bycompanies. The next paper concerns theissue of value-based marketing to customers.ReferencesAnterasian, C. and Phillips, L. (1988),Discontinuities, Value Delivery, and the Share-Returns Association: A Re-examination of the``Share-Causes-Profits Controversy, Researchprogram monograph, Report No. 88-109, TheMarketing Science Institute, Cambridge, MA,October, p. 8.Brown, L. (1997), Competitive Marketing Strategy,Nelson, Melbourne.Carroll, J., Lurie, A.D., Van der Heijden, H. andZeithaml, A. (1993), in ``Comments on `Fromvalue chain to value constellation: designingintegrative strategy, Harvard BusinessReview, July/August.Cronshaw, M., Davis, E. and Kay, J. (1994), ``Onbeing stuck in the middle or good food costsless at Sainsburys, British Journal ofManagement, Vol. 5, pp. 19-32.Dietrich, M. (1994), Transaction Cost Economicsand Beyond, Routledge, London.Gilbert, X. and Strebel, P. (1977), ``Developingcompetitive advantage, in Quinn, J.B.,Mintzberg, H. and James, R.M. (Eds), TheStrategy Process, Prentice-Hall, EnglewoodCliffs, NJ.Kotler, P. (1994), Marketing Management:Analysis, Planning, Implementation andControl, 6th ed., Prentice-Hall, EnglewoodCliffs, NJ.Mathur, S.S. and Kenyon, A. (1998), CreatingValue: Shaping Tomorrows Business,Butterworth-Heinemann, Oxford.Murray, J.A. and ODriscoll, A. (1996), Strategyand Process in Marketing, Prentice-Hall,Europe, Hemel Hempstead.Figure 14Organisation implications[ 655 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656
  • Normann, R. and Ramirez, R. (1993), ``From valuechain to value constellation: designinginteractive strategy, Harvard BusinessReview, July/August.OSullivan, L. and Geringer, J.M. (1993), ``Har-nessing the power of your value chain, LongRange Planning, Vol. 26 No. 2, April.Porter, M.E. (1980), Competitive Advantage, TheFree Press, New York, NY.Porter, M.E. (1985), Competitive Advantage, TheFree Press, New York, NY.Porter, M.E. (1996), ``What is strategy?, HarvardBusiness Review, November/December.Scott, M. (1998), Value Drivers, Wiley, Chichester.Shank, J.K. and Govindarajan, V. (1988), ``Trans-action-based costing for the complex productline: a field study, Journal of CostManagement, Vol. 2 No. 2, Summer.Slywotzky, A.J. and Morrison, D.J. (1997), TheProfit Zone, Wiley, New York, NY.Smith, A. (1937) in Carman, E. (Ed.), An Inquiryinto the Nature and Causes of the Wealth ofNations, Modem Library, New York, NY.Van der Heijden, H. (1997), Scenarios: The Art ofStrategic Conversation, Wiley, New York,NY.Vollman, T. and Cordon, C. (1999), ``Building asmarter demand chain, in ``Mastering Infor-mation Management Part 4, Financial Times,22 February.Webster, F.E. (1994), Market Driven Management,Wiley, New York, NY.Williamson, O. (1985), The Economic Institutionsof Capitalism, The Free Press, New York, NY.Zeithaml, V.A., Berry, L.L. and Parasuraman, A.(1993), ``The nature and determinants ofcustomer expectations of service, Journal ofthe Academy of Marketing Science, Vol. 21.Application questions1 How do you add value for customers? 2 What are the three most important thingsthat you do to ensure that you retaincustomers?[ 656 ]David Walters andGeoff LancasterValue and information ±concepts and issues formanagementManagement Decision37/8 [1999] 643±656