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Value Chain Design: How To Design The Value Chain You Need

Updated:2017-12-29 15:52:06    Source:www.tannet-group.comViews:101

A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business models, or in other ways create improvements in its value system.

A value chain approach could also offer a meaningful alternative to evaluate private or public companies when there is a lack of publicly known data from direct competition, where the subject company is compared with, for example, a known downstream industry to have a good feel of its value by building useful correlations with its downstream companies.

Differences between supply chain and value chain
Supply chain has historically addressed issues of logistics and the flow of materials, flow of information, flow of money.

Value chain focuses on who gets the value in the chain, who creates value, who captures value, where is the value created, and how do you think about that in a coherent manner.   Thinking about the value chain is more about asking how we can change the competitive landscape, and change our competitive advantage, through the design of our entire end-to-end value chain.

How do company leaders need to think about value chain design?
Obviously it's more complicated than this, but two of the main models to think about are called integral value chain architecture and modular value chain architecture.

Those models confront companies with one of the biggest questions: Do we work with the players in our value chain in a collaborative fashion with long-term objectives that are somewhat common, or are each of us out for ourselves in the short run? Is it win-win or zero-sum? If a company working with a supplier says, "If I can force a price cut down your throat, I gain, you lose," it's zero-sum. If a company is saying to its laborers, "I can force a wage cut on you, or I can outsource overseas to find lower wage rates," it's also zero-sum. Zero-sum is modular architecture.

Win-win is integral architecture. Among other things, companies that build integral value chains are incentivizing their suppliers to share innovation, because the attitude of the players is, we're all in this together and we benefit collectively from innovation, and there's a long-term trust-based relationship such that I know if I give you an innovation, we'll share the wealth.

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