Tools and techniques - The value chain

Benefits management is the subject of a whole chapter in the IMBOK book. But the story of benefits management begins with the Value Chain, originally developed and promoted by Professor Michael Porter. It is a deceptively simple model that separates out the activities within an organisation that deliver value to customers, and the necessary parallel activities that keep the organisation together:

The internal value chain shows how the various activities and functions in a business unit contribute to the customer's requirements, and how costs are incurred in so doing. Understanding what is done, how it is done and how business activities are related leads to a better understanding of information and systems needs and opportunities. The value chain helps to get beyond the detail of current arrangements in order to see the bigger picture in relation to the whole business and the way that customers see it. The original value chain model was based primarily on manufacturing business, but its structure can be applied to most other types of business. The model identifies two different types of business activity - primary and support - and provides a framework for organizing the detail within them.

Primary activities (in the lower part of the figure) fulfil the value adding role of a business.

These primary activities must each be optimised individually and the whole linked together if the best overall business performance is to be achieved. They occur in five groups, generally considered in a sequence from the supply side (at the left) to the customer side (at the right):
  • Inbound logistics: obtaining, receiving, storing and provisioning key inputs and resources required by the central operations of the business. This can include recruiting staff, buying materials and services, and dealing with subcontractors.

  • Operations: transforming inputs of all types into the products or services to meet customer requirements. This involves bringing together the requisite materials, resources and assets to produce the right quantity and quality of products or services - for instance in a university, delivering the courses in the prospectus and examining the students.

  • Outbound logistics: distributing the products or services to the place of sale, or to customers directly, using channels of distribution by which the customer can obtain the product or service and pay for it.

  • Sales and marketing: making customers and consumers aware of the product or service and how they can obtain it; promoting the products in a way that persuades the customer that it satisfies a need at an appropriate price.

  • Services: adding additional value for the customer at the time of sale or afterwards, for example by means of financial services, user training and warranty claims processing.

Support activities (in the upper part of the figure) are those required to control and facilitate the working of the primary activities.

In the simple case a business does not always have much choice over what its actual primary activities are, since they are heavily influenced by the nature of the products, customers and suppliers in its industry. What is critical is how well it carries out each activity and how it links the activities together, so as to maximise the margin between value-added and costs incurred. Information intensive activities such as forecasting, capacity planning, scheduling, pricing and costing must be linked throughout the chain if each stage in the internal value is to make the best contribution to the overall result, and must be served by effective information systems.

On the other hand, a business does have control over how it carries out its support activities. They can be shared centralised services used by all business units or delegated activities within each of the units. It is a matter of choice, bearing in mind the need for managerial consistency across the units, and the particular business situation and unique aspects of each unit. Either way, the support activities have two main contributions to make:
  • To enable the primary activities to be carried out at optimum performance levels, for example by providing required services or by the development of new products, technologies or resources to meet current and future business needs.

  • To enable the business to be controlled and developed successfully over time, principally through support for the management and through improved methods of planning and control.
Support activities that are not well managed themselves can actually disrupt the smooth running of the business by spreading their tentacles of control throughout the primary activities - marketing people have been heard referring to the 'sales prevention system', no doubt in other business areas similar remarks might be heard. Good information systems to serve the value-adding and supporting activities of a business is what this is all about - not localised systems that serve the needs of a single department or division. The value chain helps us to see the big picture.

As noted above, Porter conceived the value chain in the context of manufacturing industry. It is surprising that the literature tends to ignore its adaptation and application to other industries. In the service industries the key value adding operations may be less obvious but it is therefore even more important to reveal them. In a home loans operation, for instance, customer savings and mortgage lending can be seen as different businesses that relate to each other only through the use of available funds. On the other hand, savings can be seen as inbound logistics (getting the money in) and mortgages as outbound (putting the money to work) while funds management constitutes the central core activity. In a more modern, progressive financial services operation where the service is total asset management, the inbound logistic becomes something else altogether: information about the client and the profile of investment needs that the client desires; the outbound logistic is a personalised portfolio of investments that will deliver the right balance of income and capital growth, and the right balance between risk and return. We will return to some of these ideas when we discuss business strategy.

There is an extended discussion about the value chain in the book, starting on page 210. The discussion gives examples, and shows how the idea of value can be used to develop a systems model of a complete industry value chain, in this case one that manufactures, distributes and sells floor cleaner:

This example has been simplified, and all of the details have been removed, but it was interesting that this study showed that for every single movement of goods, there are at least 11 movements of information. Is that what we would expect? For such a simple thing as a floor cleaner?

There is a discussion about extending the value chain to the industry level on page 215, and the discussion goes on to show how potential benefits can be positioned using the value chain.