Value Creation Process
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Report.doc
The value creation as a process.ppt
Value Creation as a process using the example of the automobile industry
Introduction
This report is discussing Porter’s value chain model and how it changed throughout the time. It is also questioning how the value chain is connected with the creation of clusters and the necessity of configuration and coordination.
To support the used theory and to compare different approaches of the value chain we analysed the automobile industry of various countries.
Definition of the value chain
Porter‘s value chain framework is providing a tool for categorizing and displaying specific activities by cutting a company into individual values creation activities. Every activity can thus be screened on their current and their potential contribution to the competitiveness. Originally Porter‘s value chain was used to optimize the processes in one single company. But nowadays through the globalization this model should go beyond this approach by taking into consideration suppliers as well as the end consumers. Another consequence out of the globalization is a high cost pressure as well as a more sophisticated customer demand and thus an increasing competition between cooperating networks, so called clusters. The model of “companies against companies” becomes less important.
Practical example: The Automobile Industry
Nowadays it is difficult for a company to specialize in all of the nine activities according to the value chain mentioned by Porter. That’s why the companies are trying to specialize on some activities more than on others by using clusters. Clusters are an array of linked industries and other entities which are important to competition which leads to a higher concentration on core competences.
Germany for example is getting their automobile parts from everywhere around the world. They are putting more effort in the technology and design development. However this configuration needs a high demand of coordination. By deciding where and how to perform the company’s activities a creation of a competitive advantage is possible. This is why configuration and coordination are the two main pillars of the creation of a value chain.
Although the technology development in South Korea is comparable with the western technology they are more focusing on marketing and sales. This is due to the fact that there is a lack in brand reputation. By using marketing strategies they are trying to gain more market shares.
Due to their low labor costs western automobile companies were manufacturing components in these low income countries. These circumstances turned especially China but also Pakistan in manufacturing specialist. However these countries are now on their way to explore their knowledge, particularly in the technology development by using joint ventures. In addition these emerging markets are the future of the western automobile industry because of the increasing demand for cars.
In recent years many foreign companies (such as Ford, Volkswagen, Renault, Hyundai, etc) have placed their production lines in Russia. The reasons for this are not just high import taxes for cars but also low labor costs and a great demand for cars.
Conclusion
A critical success factor for the future of the automobile industry is to concentrate more on customers’ needs.
On the other side there is a trend to assign suppliers with products who are not directly connected to the brand. This means that the production doesn’t just take place in one region but worldwide. These cross-companies networks place a great demand on cooperation and coordination. What counts is not only the optimal performance of a partner but the entire network. Only a global perspective on the whole network makes it possible to offer international competitive services and prices. Another critical aspect is confidence. Working together means also to trust each other and to transfer responsibility.
In the near future, emerging markets will be more than just cheap production sites. These countries need to become an integral part of the value chain, since it can lead to greater competitive advantages for a company in its international business.
Bibliography
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Dresen, F. (2009). Whitepaper: Vernetzte Wertschöpfung in der Automobilbranche. www.automotiveit.eu
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Kamm, M. (2002). Die betriebliche Wertschöpfungskette als Objekt organisatorischer Gestaltung. www.economics.phil.uni-erlangen.de
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Kim, Y. (2005). The secret of Legend, Seoul, MA: Korea Cinetel
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Porter, M. (1986). Changing Patterns of International Competition, California Management Review, pp. 9 - 37
Porter, M. (1998). Clusters and the new Economics of Competition, Harvard Business Review, pp. 77 - 90
Roth, S. (2005). Informatisierung in der Automobilindustrie. www.informatisierung-der-arbeit.de
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Article 1: Strategic Outsourcing (by Quinn, J., Hilmer F.G.)
Q1: How can a company create pre-eminence and why is it so important?
Every company with state-of-the-art technology, products or services has to face the challenge and risk to attract competitors and imitations. The right outsourcing strategy can be a key for creating pre-eminence and thus to build barriers against competitors.
Taking into consideration all the benefits created through the right outsourcing strategy there still remain some risks like for example loss of critical skills and control over supplier. With the aim to avoid or minimize these risks, some companies are trying to control at least some parts of their producing system instead of outsourcing the whole process. This can insure them to keep the total knowledge of the most strategic and important processes. In some cases, companies need to control and to be good in some domains they used to be not very good. This strategy is used to keep competitors away from their market and their product.
In general a company should outsource only non competencies, which are not essential for the companies pre-eminence. The core competencies however need to be under the control of the company.
By being always preeminent in its domain, the company will ensure his competitive advantage.
Article 2: Defining and measuring relocation and outsourcing of production
(by Mattila, L. and Strandell A.C.)
Q2: What is the difference between outsourcing and offshoring?
Outsourcing appears when a company delivers some of their activities, which were performed earlier within the company, to a third party regardless of the location (e.g. in the home country or abroad). The reason for this is the company’s desire to concentrate on their core competencies in order to gain benefits attributable to such specialization. Nevertheless the company still has a necessity in these less significant activities and can not refuse them completely. However, after transferring some activities to other organizations, the company might lose control over these outsourced activities.
The term offshoring is linked with the allocation of some of the company’s activities abroad. There are two ways of offshoring. The first one is the relocation of some activities abroad without engaging other parties and thus without losing control over their performance (“offshore in-house sourcing”. Within the second strategy a company can totally deliver an activity to a third party which located overseas (“offshoring outsourcing”). One of the main motives for the first strategy is a cost reduction while the motive for the second tactic is the same as for the case of outsourcing mentioned above.
Article 3: Deconstructing clusters: chaotic concept or policy panacea?
(by Martin R, Sunley P.)
Q3: What makes the concept of clusters developed by Michael Porter chaotic according to Ron Martin and Peter Sunley?
According to Martin and Sunley, the weakest point of Porter’s concept is the absence of a clear and univocal definition of clusters. The main features of clusters according to Porter’s notion are close geographical location of companies operating within the cluster and the existence of interlinks between them. Nevertheless, Porter neither defines clear geographical and industrial boundaries of the cluster nor characterizes the type and strength of the linkages between organizations operating within it. Another shortcoming of Porter’s theory is the absence of well-analyzed and argued classification of clusters. All these factors lead to incomprehension of the essence of clusters and possibility to treat the concept differently in order to achieve personal goals of the analysts.
Article 4: Changing Patterns of International Competition
(by Porter M.)
Q4: What is the value chain?
Porter‘s value chain framework is providing a tool for categorizing and displaying specific activities by cutting a company into individual values creation activities. Every activity can thus be screened on their current and their potential contribution to the competitiveness. Originally Porter‘s value chain was used to optimize the processes in one single company. But nowadays through the globalization the value chain should go beyond this approach by taking into consideration also suppliers as well as the end consumers. Another consequence out of the globalization is a high cost pressure as well as a more sophisticated customer demand. To meet these requirements companies intensify collaboration with other companies, so called clusters. The model of “companies against companies” becomes less important.
The value chain consists of nine categories. The first five are so called primary activities which involve physical activities. They are describing the whole production process of a company and thus include inbound logistics, operation, outbound logistics, marketing and sales and finally services.
The second part of the value chains is formed by the supporting activities which can be seen as the infrastructure of a company and thus includes procurement, the technology department, HRM as well as the firm infrastructure.
Article 5: An inquiry into the nature and causes of the wealth of nations
(by Smith A.)
Q5: How can divisions of labour improve a company’s profitability? What is the relation between division of labour and extant of market?
Division of labour means a distinction of the work between labours or workers for example one employee is specialized in performing one task in the production process instead of manufacturing the whole product. This strategy can improve the dexterity due to the increase of specialization and standardization. In addition time waste can be avoided.
Moreover this strategy encourages a company’s machine investments so that specific tasks can be performed. In addition the division of labour needs the extent of the markets. This means that they will create an access to the big markets and thus a good demand. Because of that many companies around the world are located near to the sea port to have an access to the other markets.
Article 6: Clusters and the new economics of competition
( by Michael E. Porter )
Q6 : What are the competitive advantages of clusters?
Firstly, clusters offer a preferable approach to obtain employees and suppliers. Clusters have a pool of talented employees which can save research cost and low uncertain risks for the member of clusters, and clusters can easily attract talents from other regions, meanwhile a great deal of specialized suppliers are gathered that makes manufacturers have a sharply decrease on trade budget.
Secondly, clusters provide an efficient way to access professional information. It accumulates massive information concern about market, technology and competition; members of clusters have priority to obtain the information.
Thirdly, there is complementarity exists among the members in clusters. Each single member of clusters can not be successful without support from relevant organizations, the members are interdependent, high quality service from certain member can promote other member’s success, for example in tourism industry, local hotels, restaurants, shops, and traffic facilities must have enough capability to support each other, otherwise it can not satisfy the tourists with incomplete tourism service system. Achieving improvement for each single member of cluster requires relevant members to be improved simultaneously, therefore development of clusters always accompanying with common progress among the members.
Fourthly, it activates the members to improve continuously and measure achievement easily. Increasing pressure encourages the members to keep on improving for surviving or beating other competitors in a cluster. As they all in the same environment, so it is more convenient to compare each other.
Article 7: Sweden in the New economic geography of Europe conclusions and summary
( by Pontus Braunerhjelm, Richard Friberg, Victor Norman, Orjan Solvell )
Q 7: How Sweden can stand out of competition within new economic geography?
Traditional Swedish enterprises had achieved success in international market especially in the area of IT industry. As economy transformation, the advantage of Swedish economy is gradually declining due to the reason of U-turn of economic policy, deficiencies of implementation, digital revolution and new economy pattern of EU.
The raising element in the new economic geography is considered as mobility of production factors. It calls for clusters which based on highly specialized skills within closely related enterprises; therefore Sweden has to struggling to establish clusters first, it needs to establish highly standard education and research system and completed local infrastructure as supportive facilities. Moreover, a reconstructive economic policy is needed for Swedish companies; the policy must be concentrating on both international specialization and attractive local environment establishment.
A few indispensable conditions have to be fulfilled in the process of economy transformation for Sweden; the most crucial condition is to create a stable macroeconomic environment which includes remaining independent of party politics by a central bank and instituting rigorous fiscal discipline for public spending and profit oriented budget.
Additionally, tax cuts is another important issue should be treated carefully, Swedish government should cut taxation for the growth of new businesses and small business which contributed a lot to domestic employment. The taxation level has to be harmonized with the international level to keep entrepreneurs and skilled employees.
Interlink Question 1:
What is the interplay between division of labour and industry clusters?
According to Smith, division of labour is a suggestion to increase the efficiency of the production lines within companies. Each worker will be assigned a limited amount of work/task with the aim to get them professional and thus used to their tasks/jobs. Generally speaking they need to co-operate and not to accomplish one product completely alone.
Michael Porter insisted that corporate efforts on value promotes high technology and clusters. Due to this companies remove less significant corporate activities by transferring them to other companies (e.g. suppliers) to decrease not just production costs but also R&D costs. Hence, specialized workers are gathering together around one major company. In general clusters are a phenomenon in which subcontractors settle close to each other to simplify communication and to reduce delivery cost.
Interlink Question 2:
How does Porter’s value chain create clusters?
Nowadays it is difficult for a company to specialize in all of the nine activities according to the value chain mentioned by Porter. That is why the companies are trying to specialize on some activities more than on others by using clusters. This means that companies are seeking for cooperation with other companies to optimize their processes. Clusters are “an array of linked industries and other entities which are important to competition”. This strategy is leading to a higher concentration on core competences.
These cross-companies networks place a great demand on cooperation and coordination. What counts is not only the optimal performance of a partner but the entire network. Only a global perspective on the whole network makes it possible to offer international competitive services and prices.
Interlink Question 3:
What are the determinant factors for choosing the location of clusters? Based on analysis of Sweden
In the “clusters and the new economics of competition”, it says through development of globalization, more and more companies transfer their business to regions where consist low wage, low tax rate, and low cost-effectiveness, and it generates low cost clusters, but normally the regions are always lack of efficient infrastructure, and these disadvantages may counteract the effects of clusters’ advantages, therefore the low relevant cost is no longer the key issue for choosing the location of clusters but instead of infrastructure.
The key factor will influence the development of enterprises is productivity, and the productivity of each enterprise is mainly depends on strategy development, core products, research development and service, each of these respects can not be improved without completed infrastructure, therefore the infrastructure factor has to be taken account of as well as cost, not only depends on cost.
In Sweden, clusters have largely been concentrated in few major cities, such as Stockholm which has been regard as one of the competitive region for IT industry in the past few years. As research, the major cities of Sweden are the only parts experienced population growth that enable to generate cluster which focusing on knowledge-intensive industries, and the major cities are associated with substantial welfare gains which are prepared for people who move in. The cities are developing corresponding with mature housing markets, high wages and other necessary ingredients.
Speaking briefly, cost is vital to choose location for clusters, but infrastructure ingredients are more important than cost for the location choosing.