34 rue de Bassano 75008 Paris Tel: +33 (0)1 53 23 83 10 – Fax: +33 (0)1 47 20 05 30 – www.eirma.asso.fr EIRMA/01.172 July 2001 EIRMA ROUND TABLE MEETING VALUE CHAIN MANAGEMENT 21/22 June 2001 IBM Europe, Rüschlikon, near Zürich Chairman Matthias KAISERSWERTH Director, IBM Research Division IBM EuropeCopies of individual presentations given at this Round Table are available via the members’corner of the EIRMA web site, www.eirma.asso.fr/members. A user name and password arerequired to access this area : members - innovate.
Procedural Summary Round Table "Value Chain Management"As manufacturing moves to low wage countries, competitiveness of companies in Europe isoften maintained through the massive introduction of robotics, through moving up the valuechain or through taking on additional bits of the value chain, hitherto either not recognised ornot considered to be the domain of the company. On occasion, entirely new elements can beadded to the value chain, such as specific services hitherto not available. The Round Tablewas to look at the role of R&D in the management of the value chain.e-Business and Managing the Value ChainThe Chairman, Dr Matthias Kaiserswerth, looked at the value chain from the point of viewof what IT, the inter-/intra-net, and e-business can contribute to it. He gave an overview ofthe systems such as Material Requirements Planning (MRP), and Manufacturing ResourcePlanning (MRP II), and Enterprise Resource Planning (ERP) for managing the internal valuechain chain. From the customers viewpoint, the value chain is a supply chain, defined as aseries of value adding activities. Similarly, from the suppliers viewpoint it is a demand chain.Sitting somewhere in the middle, it can be one or the other. The total value chain appearswhen looking at it from the outside. Both ends have their integrated information systems(SCM = Supply Chain Management and CRM = Customer Relations Management).The value chain is supported by IT layers and by logistics and physical layers, starting withthe raw inputs, and ending at the customer. Within this value chain, there can be severalintermediate value chains representing successive supplier-customer relations. In many casesthe one way relationship Marketing - Purchasing will by now be replaced by inter-relationships between the various functions of the two companies involved, impacting onmany business processes such as Strategic Planning and Design, Business Planning, QA andTQM, Accounting and Billing, MRP, ERP, Knowledge Management (KM), ElectronicCommerce, etc.For example e-business, which today supports many value chains or at least part of them, cantake place between different businesses (B2B), between Government and customers (G2C),between different consumers (C2C), and between businesses and consumers (B2C), and all ofthis can happen within the same value chain. The B2B component is expected to increaseexponentially and could be worth up to $ 7 trillion by the year 2004. e-Business leveragestechnology to redefine the business. It maximises efficiency across the organisation andsupports business model changes. e-Business sophistication has gone through the stages ofsimply publishing products and services through transactions, integration, value networks, tothe digital economy, which is where the economy is ultimately heading. The large firms startthe trends and the medium and smaller firms follow. New players and some traditional onesmay wish to be part of value networks, i.e. go for inter-enterprise integration, rather than firstgoing through the process of full internal integration of digital processes and thus perhapsadopting systems that are not optimised for inter-enterprise integration.Current trends have led to the creation of e-markets, within which the inter-company supplychains can be managed flexibly, integrating the horizontal supplier-customer relationships.This is expected to drive down search and transaction costs and to lead to perfect competition.These e-markets have shot up like mushrooms, but the economic slowdown has led to aconsolidation from 1500 last year to less than 350 today. The fundamental problem was thatthe business model was wrong: perfect competition is not sustainable. With perfect
information, prices are driven down to the lowest possible level and beyond almost instantlyand therefore suppliers are not motivated. However, 2nd generation e-markets, such asCovisint, E2Open, and Transora have emerged, the rationale not necessarily being to squeezeprices, but rather to get quality for money. In order to be successful, collaboration across thevalue chain and extended services must be re-enforced, and win-win situations must besought. From the point of view of infrastructure, there will be great demand for integrationmiddleware, translation hubs, and industry specific document type definitions.As e-Business is becoming part of the value chain, there will be more emphasis on servicesthan on goods, and these will have to be increasingly dynamic and complex, as shown in theCross Flow Scenario (see web Annex 1).Dr Kaiserswerth surmises that in the future competition will shift from businesses to valuechains. You will be better off at the intersection of several value chains than in the middle ofa single and very long value chain, which can make you vulnerable to fluctuations of theoverall value chain.Method for Value Chain AnalysisHindrik Öunpuu looked at the components of the value chain and compared the concept of achain with that of a network or web. Each value chain has its proper environment, it will bedifferent for different product categories, distribution channels, and trading partners andalliances. Whilst the Chairman surmised that in future not businesses, but value chains willcompete, the speaker saw not products but business models compete in the future. Businessmodels are influenced by the business environment, such as regulation taxes, user interfaces,supply interfaces, economics, market trends and technology roadmaps. Whilst the old worldwas confined to its four walls, held up positional power, was vertically integrated,predictability was important and companies were centralised, the new world is distributed,responsive and flexible, deregulated, enterprises are extended; focus is on core competencesand the customer, and on partnership between management and employees.Driving forces in Ericssons business are: bandwidth (from 1.2 terabits/second in 1996 to 99.8terabits in 2001), transistors per microprocessor (from 0.03 million in 1980 on the 8086microprocessor to 9.5 million in 2000 on the Pentium III), and the cost per megabyte ofDRAM memory, which is going down dramatically (from ~$ 7 in 1990 to an estimated $ 0.05in 2005). Other examples are transaction costs, which have decreased substantially whendone over the Internet. The "old" computer industry, which provided mainly hardware,increased revenue tenfold (from $ 80 billion to $ 800 billion) in the space of 18 years byincluding software, solutions, and networks. It is expected that the web will enable the "new"computer industry to again increase revenue tenfold by 2012. The customer expects and willget more customisation. The value chain will become a value network or value web.Nevertheless, analysing the value chain remains important. For example the internal valuechain can be down from the company level to the level of core competences, core processes,core sub-processes, and finally skills and activities.Globalisation, new business channels, mergers and acquisitions, developments in differenttime zones require configuration management, which is about managing the evolution ofsoftware and hardware development and maintenance practices and their components as theychange aver time.
In addition to the internal value chain, there is the external value chain, comprisingmanufacturers, business partners, suppliers, distributors, retailers, resellers, etc. Moving fromthe value chain to value networks implies supplier collaborations in product development,exploring new channels, managing changing supplier relationships, and trading nets.Companies are teaming up to pool their expertise, enter new markets, share financial risks,and accelerate time-to-market. However, it is important to choose the right partner. Newmarket channels provide for round the clock and global access, personalised services and real-time transactions. They are for communities of interest.Before giving business examples (see web Annex 2), Hendrik Öunpuu concluded that youmust have a clear understanding of your value chain. New business models will compete innew market channels. New product introduction will be faster and mostly on-line. You willfind new partners on your way up the value chain. The supplier base will decrease but newdistribution channels and customers will emerge and suppliers will increasingly act globally.There will be more risk and benefit sharing with alliance partners.The business examples included Cisco, which had successfully moved up in the value chainby leaving a large part of the manufacturing to contractors and concentrating on coreprocesses such as product design and innovation. Sun Microsystems simplified sales throughthe net, which drove down cycle times and drove up sales productivity to twice the previouslevel. Dell gained substantial income (almost $ 1 billion) from build-to order manufacturing,and Hewlett Packard attained cost savings of $ 0.6 billion through "Supply ChainGovernance".IBM contributionSimon Field of IBM demonstrated an IBM pilot portal for car insurances. It can be used byinsurance companies that can introduce their own specifications, and by customers forinsurance shopping. Thereafter the participants were shown some of the latest technologicalinnovations at the IBM show room.Integration and role of R&D in Value Chain ManagementNicola Redi looked at the innovation process, starting with inputs such as customer needs andwants, product opportunities, know-how leverage, and company technology and skills, endingwith the output "customer value". The various well-known phases in-between (see webAnnex 3) are supported by management processes. The classical key success factor was: "theonly sustainable source of competitive advantage is a superior process for innovation" thatusually starts out with competitive intelligence and the intellectual resources of the companywhich then combine into knowledge and creativity, leading into the innovation process andfrom there on to the development and industrialisation process to commercialisation.However, the competitive scenario is evolving: globalisation and mass customisation requirefast decision-making and thus availability of KL to decision makers when it is needed.Virtual teams and the Internet are the new essentials.e-Business can add value to the value chain by reducing transaction costs and by totallyintegrating the supply chain from the idea generation to the final customer. E-Architecture ismore than the integration of internal systems, it enables interaction with potential users,customers, partners, suppliers - anywhere and with any system.
Value chain management starts with business objectives and processes and is about sharingand integrating information along the value chain. It requires analysis and redesign ofworkflow, definition of workflow content, and identification of the best mix of IT tools.The new key success factors in the innovation process are: speed of the innovation transfer,Time –to-Product, Time-to-Market, adaptability and flexibility of processes & organisations,integration of Core Competencies and Knowledge on one hand and Innovation and coststrategies on the other. As a result, changing market requirements and evolving technologiescan be incorporated fast into the design until the last possible moment before a product isintroduced into the market. The new product development process "e-volves" from here withfast and flexible R&D processes, efficient integration of all resources, and development ofcentrally co-ordinated information platforms. Company value is generated throughknowledge and information. All company processes involved in the innovation developmentare no longer sequential or parallel, but interfacing.Data and information for all segments of the value chain will be accessible through integratedportals at the desktop, providing a single interface which links the user to the relevant data.At Pirelli, the project management process, which is fully integrated with other processes suchas idea screening, knowledge management, and the portfolio management process, isavailable on the portal. Related tools accessible from the portal are "planning","deliverables", and "follow-up". The portals integrate the knowledge at different value chainintersections. The integration of the portals integrates the value generation throughout thewhole value chain.The speaker illustrated how R&D integrates into the supply chain, showing how businessstrategy, competitive scenarios, Competitive Intelligence, Technology Watch, Benchmarking,Knowledge Management, operational units, the customer, etc. relate to R&D. The next giantstep is the digitalisation of the processes so as to obtain e-R&D, Technology e-Monitoring,and Process e-Integration. "To get a better flow of information and develop the rightprocesses and strategies, companies need a digital nervous system that will help them tobetter understand their business and act more effectively on that understanding." (Bill Gates)Participants wanted to know who funds the e-effort. It is a corporate initiative and thereforeinitially funded by corporate R&D. When it works and is accepted by the BUs, they fund itthemselves. Furthermore, it was interesting to know whether there could be a generic modelfor value chain management as has been established for project management (EIRMAWG53). It was felt that value chain management was too much dependent on the industrysector and probably even the company.Sharking Innovation: Towards New Value ChainsDr Math Kohnen looked at the value chain from a rather different perspective (see webAnnex 4). He said that the value chain is often visualised as a linear and sequential process -a mental straight jacket. Finding new bits of the value chain requires unorthodox lateral out-of-the-box thinking. Shell has introduced a Stage-Gate like process for selecting unusualideas that can lead to incubation and from there to ventures and finally New Business. Thefront end is occupied by the "Game Changer". In the middle, BUs, the Venture Unit,EXCOM, and R&D are involved. The seven steps involved to get an idea though to a viablebusiness proposal are: 1) thousands of idea submissions at any time, 2) first tollgate with peerrevision, 3) test and mature, 4) expert review, 5) second tollgate with value proposition, 6)technical feasibility, 7) a viable business proposal passes the third tollgate.
Essential attributes of the "Game Changer" (the intrapreneur who takes on a promising idea)are: Peer reviews, resources, a rolling budget, intrapreneurship, speed, experiments, agrassroots driven process, and nurturing the process. The process is driven by the bottom andsponsored at the top. Entrepreneurship is sometimes more important than new ideas – so givethe entrepreneurs a fair stake. The enabling infrastructure is crucial and paying your newideas should not entail cutting resources elsewhere.With this brief introduction to the innovative incubator system at Shell, Math Kohnendescribed three projects: energy from geothermal, water from oil deposits, from washingpowder to washing service. Whilst the geothermal project was rather more technical, thewater from oil production was a real out of the box idea: in oil production, water is a realproblem. In most cases an oil well produces more water than oil, and the water must beseparated anyway! So, why not use the water in arid regions for water supply to localpopulations. The third idea was one where the value chain was followed up beyond what theindustrial customer was doing with the washing powder, which is essentially branding andperhaps blending with other ingredients. The final customer is the often-working married orsingle woman, or the working married or single man, who does not relish starting washingwhen coming home from work. So why not set up a big washing centre for these people andoffer them a washing service. The first of these centres have been set up in the USA and thefirst encouraging results are coming in.This presentation triggered a lively discussion: • These very interesting projects distract from the core business. How do you deal with this issue? – You need top management support! Top management understands that in a mature business such as the oil business, if you want to have more than 10% growth, you must be innovative. • How do you convince your people that your disruptive technology will give you an adequate return? – The Game Changer pushes the idea down and that is accepted. • Why not leave the money returned from those ventures that made it to the venture fund so they can fund new projects. – This is not necessary since the Game Changer gets continuous funding. Important is that the intrapreneur is behind the idea and then he gets all the trust and support he needs. The game Changer must be the example entrepreneur. He has the task of getting people released for his project. The tools are only there as a support.General Discussion • We lack a generally accepted definition of the Value Chain. Has it to do with market analysis? Is it external or internal? Is the supply chain? – The Chairman surmised that it is probably a bit of all of this. However, scientists may not be overenthusiastic when looking at the market or Marketing for that matter. • It is also a question of internal or external technology. • It is extremely interesting to look into the question of how to create new value chains. • Another important question is where you earn your money in the value chain. Is it with the end-product or elsewhere?
• We should look at R&Ds role (together with Marketing) in the management of the value chain. Looking into the supply chain for creative value chain management may not be appropriate. • There should be quite a bit published on the subject. However, there should be scope to look into the white areas of the subject. When the new activity is non-core, do we have to adapt our core competences to the new activity? Probably yes, or else outsource the competence. • An interesting approach would be to collaborate in parts of your value chain with someone else and learn from him. You could then create a new service or product out of this learning. • On the other hand, you could see yourself as a true innovator and/or system integrator. You could your self create new value, not take it away from others.The general consensus was that EIRMA should set up a Study Group to explore this subjectfurther. For a number of people it was still fairly new and little experience was available!The Study Group should have a go at clearly defining the term "value chain" and explorewhere R&D in this value chain can add more value either by moving up the chain and takebusiness away from others, or by moving laterally (out-of-the-box thinking) and add trulynew value, or by integrating the value chain so that the whole becomes more than the sum ofits parts.
EIRMA ROUND TABLE MEETING VALUE CHAIN MANAGEMENTF. Bourgoin France Télécom R&DResponsable du Plan StratégiqueProf. J. De Stigter SwisscomManager Security & Service ManagementDr. W. Gehrisch EIRMADeputy Secretary GeneralDr. L. Haspeslagh Atofina ResearchGlobal Analyst, Petrochemicals R&D&TH. Kaikkonen Fortum GroupVice President, Strategic R&DDr M. Kaiserswerth IBM EuropeDirectorDr. M. Kohnen ArtesianM. Köpperschmidt Deutsche Telekom AGGroup Innovation Management & MonitoringG. Landén Volvo TechnologicalDevelopmentBusiness Development & AnalysisO. Lanz ABB Corporate ResearchDeputy DirectorH. Öunpuu Ericsson TelefonaktiebolagetSenior business analystJ. Pettersson Ericsson TelefonaktiebolagetBusiness research and analystDr. F. Prechtl BASF AktiengesellschaftR&D Planning & ControlllingN. Redi Pirelli SpAProject Planning ManagerDr. W. Rutsch Ciba Specialty ChemicalsHead of Corporate Technology OfficeJ. Scoyer Union MinièreInnovation ManagerDr. K. Stansfield TRW AutomotiveBusiness Development ManagerDr.ir. W. Van Vooren Bekaert S.A.R&D Technology Manager