Management Decision

Implementing value strategy through the value chain

David Walters Geoff Lancaster
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David Walters Geoff Lancaster, (2000),"Implementing value strategy through the value chain", Management Decision, Vol.
38 Iss 3 pp. 160 - 178
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 Implementing value strategy through the value chain

David Walters
Head of Department of Business, Macquarie University, Sydney, Australia
Geoff Lancaster
Chairman of Durham Associates Group Limited, Castle Eden, Co. Durham UK and
Lincoln School of Management and Macquarie University, Sydney, Australia

Keywords
Value chain, Model, Background Introduction
Supply chain management
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In our earlier articles in this journal (Walters Three important perspectives emerge. First
Abstract and Lancaster, 1999a, 1999b) we offered basic is the emphasis on relationship management
This article is a corollary to three definitions for three aspects of value. In between activities (possibly organisations) in
articles published earlier in
summary these were: the value chain. The second concerns the
Management Decision. More
precise definitions of a modern 1 Value is determined by the utility need for the first to result in competitive
value chain are proposed, in terms combination of benefits delivered to the advantage. The third identifies the role of
of it being a business system that customer less the total costs of acquiring information to evaluate the nature of
creates end-user satisfaction and the delivered benefits. Value is then opportunities offered, to identify optional
realises the objectives of other
member stakeholders. Compari-
a preferred combination of benefits methods for competing and to coordinate the
sons are drawn with the current (value criteria) compared with acquisition value chain's activities towards successful
notion of supply chain manage- costs. implementation of the value strategy.
ment and an explanation is given 2 Relative value is the perceived satisfaction Brown's (1997) industry perspective of the
as to how the supply chain fits into
the wider perspective put forward
obtained (or assumed to be available) from value chain raises other issues. These
in this paper. Ideas are advanced alternative value offers. concern the context of supply chain and
in relation to value chain 3 A value proposition is a statement of logistics management within the value chain.
relationships and options. Models how value is to be delivered to We offer the following propositions:
are then suggested relating to a
customers. It is important both Supply chain management is the
number of well-known
international companies, where internally and externally. Internally, it management of the interface relationships
the authors have researched, at identifies the value drivers it is among key stakeholders and enterprise
primary or secondary level. attempting to offer a target customer functions that occur in the maximisation of
group and the activities involved in value creation which is driven by customer
producing the value, together with the cost needs satisfaction and facilitated by efficient
drivers involved in the value-producing logistics management. Logistics management
activities. Externally it is the means by is the management of activities and costs that
which the firm positions itself in the occur within the supply chain.
minds of customers. Webster (1994) Slywotzky and Morrison (1997) used a
suggests: ``The value proposition should ``customer-centric'' approach to propose a
be the firm's single most important modern value chain in which the customer is
organising principle''. the first link to all that follows. The task of
management is to identify:
Brown (1997) has offered a succinct definition . Customer needs and priorities.
of the value chain: . The channels that can satisfy those needs
The value chain is a tool to disaggregate a
business into strategically relevant activities. and priorities.
This enables identification of the source of
. The services and products best suited to
competitive advantage by performing these flow through those channels
activities more cheaply or better than its . The inputs and raw materials required to
competitors. Its value chain is part of a larger create the products and services.
stream of activities carried out by other . The assets and core competencies
members of the channel-suppliers, essential to the inputs and raw materials.
distributors and customers.
They conclude:
The value of any product or service is the
Management Decision result of its ability to meet a customer's
38/3 [2000] 160±178
The current issue and full text archive of this journal is available at priorities. Customer priorities are simply the
# MCB University Press things that are so important to customers that
[ISSN 0025-1747] http://www.emerald-library.com
they will pay a premium for them or, when

[ 160 ]
 David Walters and they can't get them, they will switch knowledge and learning, together with
Geoff Lancaster suppliers. organisational structures that facilitate
Implementing value strategy response and delivery. Essentially this
through the value chain It follows that value opportunities are
requires management of information and
Management Decision distinguished by understanding customers'
38/3 [2000] 160±178 relationships. An important influence is the
priorities and producing, communicating
impact of the value and cost drivers, which in
and delivering the identified value. A value
turn are the important strategic and
perspective of strategy follows:
Strategy is the art of creating value . . . the operational relationship criteria influencing
way the company defines its business and value delivery and cost structures.
links together with the only two resources Figure 2 offers a detailed view of the model.
that really matter in today's economy ``Corporate value'' is a value chain
knowledge and relationships on an perspective of profitability, productivity and
organisation's competencies and customers cash flow objectives. ``Knowledge'' refers to
(Normann and Ramirez, 1993). market-based intelligence developed for
This suggests the value chain as both an strategic and operational use within the
analytical and a facilitating concept in which value chain. ``Information management''
value strategy is: components include; market identification,
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. . . primarily the art of positioning a company time, accuracy, relevance and control
in the right place on the value chain ± the aspects. ``Relationship management''
right business, the right products and market comprises the obvious coordination activity
segments, the right value-adding activities together with coproduction (upstream and
(Normann and Ramirez, 1993). downstream within the value chain),
They see strategy as the value-creating codestiny (the promotion of
system itself in which members work interdependence), cost management (to
together to create value. A key strategic task achieve optimal value chain costs for the
is the reconfiguration of value chain roles value added throughout) and cost
and relationships in order to ``mobilise the transparency (the notion that effective
creation of value in new forms and by new cooperation and coordination are only
players''. The underlying goal is to ``create an achievable if visibility exists).
ever improving fit between competencies and Organisational structure management is
customers''. concerned with ensuring maximum use is
made of knowledge generated in the value
chain and partnerships which lead to
effective learning. These activities and topics
A value chain model influence the production and coordination of
To understand how this may be achieved, value delivery through the impact of the
requires two models. The first is a model of value/cost drivers. For example ``time to
the value chain itself and the second is one market'' is suggested as a value/cost driver.
describing value chain structures and Rapid response/delivery may well be critical
processes. to the customer and as such minimum
Figure 1 is a composition of topics and sub- delivery times at low/optimal cost may best
components described in our earlier articles. be achieved by partnership arrangements
Thus the notion of customer value with specialist logistics services operators.
comprising customer value criteria, less Similarly, after-sales service may be more
their acquisition costs, is familiar; so, too, effectively delivered by centralised
will be key success factors and the value specialists (e.g. consumer durables in the
proposition. UK). Finally, reputation (such as that offered
``Corporate value'' introduces the notion by branding) may be more effectively
that if the value chain is to be successful it is managed by a strong marketing company
essential that the individual objectives of all coordinating its product design through
stakeholders are met (or optimised after manufacturing and distribution
negotiation) as well as those of the customer. intermediaries.
As the model suggests, ``corporate value'' is Not surprisingly, the value/cost drivers
an integral part of the value strategy and influence organisational and operations
positioning process (another concept defined structure and their management. As Figure 2
earlier). infers, both production and logistics are
Value production and coordination is important components of the operations
based on the argument Walters and structure which is the other input into value
Lancaster, 1999a, 1999b) in which we production and coordination. For example,
suggested that value is created by identifying quality may also be important and as such
and understanding customer benefits and both the production and logistics activities
costs and the combinations of organisational have significant inputs into quality products
[ 161 ]
 David Walters and and quality service. They are as their label the management of activities and costs that
Geoff Lancaster implies, the drivers of the value chain. We occur within the supply chain.
Implementing value strategy shall offer examples of successful value
through the value chain Here we can begin to distinguish between
chains following a review of value chain
Management Decision mission (and business scope) strategy and
38/3 [2000] 160±178 processes.
operations. In our definition, the value chain
identifies the mission or purpose of the
organisation (and any partners it becomes
Value chain processes involved with). The supply chain is strategic
Sutton (1998) reminds us that Porter (1985) in that it manages the relationships between
referred `` . . . to the totality surrounding one stakeholders and enterprise functions/
firm as the `value chain'''. To emphasise that activities (which are of necessity long term)
each step can only be justified if it creates and logistics management is the operational
more in value to the end user than it management of the ``stocks and flows'' within
consumes as cost and partly to emphasise the supply chain.
that an individual firm's competitive Hence the value chain becomes a design for
position depends on the effectiveness of the the business mission, the supply chain offers
the strategic direction and organisational
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chain as an entity, not just its own position as

a link in the value chain. Porter's value chain vehicle and the operational/ implementation
concept was used as a model for supply chain role is assumed by logistics management.
studies. The impact of globalisation (for Abell (1980) offered a useful model to explore
procurement and marketing purposes) has these relationships (and their
made the value chain a more useful approach interrelationships). His three-dimensional/
to identifying and evaluating business vector approach to identifying the scope of
opportunities. This was inferred in the business is illustrated in Figure 3. Abell's
Management Decision (Walters and argument is that the three vectors prescribe
Lancaster, 1999b, Figure 8). We offer the the market available either currently or
following composite definition: potentially to an organisation. The current
A value chain is a business system which activity is in customer group 1, using
creates end-user satisfaction (i.e. value) and technology identified as manufacturing and
realises the objectives of other member logistics 1, meeting customer applications 1.
stakeholders. Supply chain management is
The overall ``cube'' represents the potential
the management of the interface
mission or value chain available. Should the
relationships among key stakeholders and
enterprise functions that occur in the organisation wish to pursue expansion the
maximisation of value creation. This is structure of the value chain may need to
driven by customer needs satisfaction and change. At the firm's current position it may
facilitated by efficient logistics management; meet the KSFs necessary for successful

Figure 1
A value chain model

[ 162 ]
 David Walters and competition in the value chain, owning all of characteristics necessary for strategic
Geoff Lancaster the assets required and having the necessary success.
Implementing value strategy This issue is addressed in Figure 5. Here
through the value chain core competence(ies).
Expansion in any context may require the the overall relationships within the value
Management Decision
38/3 [2000] 160±178 value chain to be restructured if the chain are identified. For both current and
customer expectations at application 2 are to future perspectives precise details
be met successfully. At this juncture the concerning customer expectations of the
involvement of specialists may be necessary value created and costs to be added are
if the ``maximisation of value creation'' is to required. Clearly, current customer
be achieved and the stakeholders' objectives satisfaction expectations may change and
realised. Clearly the same decisions may be require an ongoing review of value creation
required concerning shifts in customer and cost additions. Thus current and future
groups and ``delivery technology''. Just how output of the value chain may require the
these may be achieved within the value chain addition of activities only available outwith
structure depends on an understanding of the the value chain. In Figure 5 a notional
processes within the value chain. ``specialist activities'' suggests a generic
A typical view of value chain structure and range of contributions that may be required
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process is illustrated by Figure 4, the as the value chain customer base (market
external influences have been omitted to opportunity response) expands. It is not
simplify the diagram. Figure 4 expands on surprising that value characteristics (e.g.
the role within the value chain and expands form, time, location and ownership) do
the topics identified in the model described change among an existing customer base or
by Figures 1 and 2. It is intuitively obvious, within adjacent segments. Indeed, adjacent
simply by observation, that expansion is segments may only become attractive (and
unlikely to occur without expansion of assets attainable) with the addition of external (at
and core competencies. Consequently, this is that point in time) specialist activities.
a means by which the relationship and Again, the primary mechanisms of
information management activities may relationship and information management
become more effective by identifying value are necessary.
chain constraints and the activities needed For effective value chain reconfiguration
(typically by first review key success factors) some structure is required. Sutton (1998)
to ensure competitive advantage proposes the market mechanism as a means

Figure 2
Value chain components

[ 163 ]
 David Walters and to coordinate activities. He suggests the term coordination of individually-owned
Geoff Lancaster ``market coordination'' for the situation in activities. In Figure 6, vertical coordination
Implementing value strategy which specialism is separate and the value comprises individual organisations, having
through the value chain
chain comprises a series of sequential specific objectives but shared purpose
Management Decision
38/3 [2000] 160±178 individual activities under individual (customer satisfaction) within the value
ownership. An alternative model is one in chain. Examples of vertical coordination are
which one or more firms `` . . . seek to combine found in fast-moving consumer goods
two or more stages under single control, and retailing. The relationships established by
rely upon internal management to ensure Marks & Spencer are among the oldest and
coordination''. He uses the conventional term most successful. Marks & Spencer ``own'' the
``vertical integration'' for this structure. brand; specify the customer response; use
There are hybrid structures. A firm may act individually-owned manufacturers and
as a contractor to coordinate the other links logistics companies to provide
in the value chain but relies on external ``manufacturing and distribution'' into
agreements rather than internal Marks & Spencer owned retail outlets. Recent
management. IKEA and Benetton are problems within Marks & Spencer may be
examples of this structure. Possibly Nike is examined within the context of the value
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the extreme example of what may be chain. Reports of uncompetitively high

described as a virtual company. Nike prices may be owing to a need for a review of
controls (and owns) the key core asset ± the product quality and specification, together
brand and coordinates manufacturing and with cost structures. The criticism of style
marketing logistics together with some and design may require the company to
retailing outlets. We suggest the use of the review its role in this activity and consider
term ``vertical coordination'' to describe the the addition of an external specialist activity

Figure 3
Using Abell's customer application/customer segment/technology model to explore value chain opportunities and structures

[ 164 ]
 David Walters and as occurs in automotive design. In other method for deciding on structure is required.
Geoff Lancaster words, the company no longer has the A number of influences exist. The
Implementing value strategy
through the value chain expertise (core competence) necessary to availability of economies of scale and of
address the key success factor of ``an scope are important. Within the context of
Management Decision
38/3 [2000] 160±178 awareness of style/design awareness''. our discussion these relate to the ability to
Vertical integration has alternative specialise and gain cost advantages and/or to
structural options. Sutton (1998) suggests offer a limited range of specialist products
two: breadth and depth. Breadth occurs in and/or services, that have significant impact
companies who rely on coordination of some on customer costs and for which much of the
activities while assuming ownership of fixed costs are shared.
others. Ownership may occur for a number of Hence the ability to avoid fixed-cost
reasons. Margins may appear attractive. commitment, or to transfer fixed costs to
Typically, the reason is based on control of variable costs, and at the same time, receive
resources or aspects of customer service or participate in either product/service
during the delivery process. He explains the differentiation and cost efficiencies has
nature of these relationships and implies that major attraction. Here the existence of
hybrid structures usually emerge as the most transactions costs are both important and
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common arrangements. He illustrates this significant. These include searching

using the oil industry as an example, (customer and supplier identification);
suggesting also that brewing has similar negotiation (trading and its associated
hybrid structures. In Figure 6, vertical activities) and implementation (the
integration follows Sutton's suggested successful delivery of customer value, e.g. the
differentiation: breadth is the extent of ability to meet rigorous delivery schedules
coordination with vertical integration and and product availability requirements) on an
depth the activities that are combined into agreed, contractual basis. More complex
one activity. examples. Readers are directed towards
Given that the value chain is concerned Coase (1937), Williamson (1975, 1985) and
with value maximisation and cost North (1990) for a rigorous review of the
optimisation (cost minimisation not usually subject. Clearly, the identification of
being a feasible option) some mechanism or suppliers, the precise nature of the product/

Figure 4
The value chain process

[ 165 ]
 David Walters and service offer and the transaction costs are Sutton (1998) suggests limitations of
Geoff Lancaster resolved by the effective use of both outsourcing. The first is that based on the
Implementing value strategy principle of comparative advantage any core
through the value chain information and relationship management.
Increasingly, coordination is replacing competency should be retained and
Management Decision
38/3 [2000] 160±178 integration. A number of reasons have strengthened. An evaluation of competencies
created this situation: and their impact on competitive advantage
. The impact of new technology in should be regularly conducted. This ensures
operations management, e.g. flexible the effective (strategic) allocation of
manufacturing systems, just-in-time, lean resources for future development as well as
manufacturing numerical control, etc., the efficient (operational) allocation of
have facilitated the offer of differentiation resources for improvement of profitability,
at acceptable cost levels. productivity and cash flow together with
. Markets have passed through ``knowledge''. A second issue concerns the
segmentation into fragmentation. development of future competencies,
. Vertical integration requires capital necessary for future competitive advantage:
investment/equity involvement in extensive outsourcing (recruiting specialist
processes within and outwith the firm, activities into the value chain) may inhibit
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thereby raising risk. the growth of competitive advantage for the

. Increasingly, organisations prefer to focus next generation.
on core competencies and to outsource The strategic implications for supply chain
those activities that may be performed management are not difficult to project.
more cost-effectively (or cost-efficiently) Typically, procurement managers are
elsewhere. This focusses management required to negotiate low prices with
capacities and capabilities on the core suppliers. Their success in doing so is the
business activity of the business. major criterion of performance. The value
chain approach requires a view to be taken of
These trends have resulted in situations both costs and value. Often negotiations
whereby strong brands now outsource the directed towards enhanced quality (at no cost
majority of the ``production and logistics'' increases) will add to end-user value
process and focus on developing the brand satisfaction. Another view would be to
and products/services which relate to consider joint efforts (and possibly
the brand and which may be produced investment) to reduce the costs of transaction
through contract manufacturing facilities. and negotiation processes. The adoption of

Figure 5
value chain relationships

[ 166 ]
 David Walters and EDI (electronic data interchange) and ECR manufacturers offer: ``leading-edge processes
Geoff Lancaster (efficient consumer response) are examples and equipment, lower costs, faster time to
Implementing value strategy of how costs may be reduced, accuracy
through the value chain market and improved return on assets''.
improved and customer end-use satisfaction Zuber identified: ``A combination of the
Management Decision
38/3 [2000] 160±178 be increased by cooperation within the technical expertise, innovation, cost
supply chain. These examples illustrate not competitiveness, responsiveness and flexible
simply the need for effective (and efficient) delivery . . . as: . . . key to the success of
relationship management but perhaps an contract manufacturers''. And: ``You need to
integrated approach to relationship and be fast and flexible, but scale is also
information management. important . . . To be competitive in global
contract manufacturing, a company must
respond quickly to its customers' continually
Active value chains changing demands''. Here we have identified
the elements of customer value and these are
In order to establish the efficacy of the value
included in Figure 7. The comments also
chain model, a number of company/industry
situations have been examined, using prescribe the key success factors.
From the customer value and key success
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interviews and published materials. The

examples that follow vary in complexity. factor statements we can conclude the value
They vary in size of enterprise, the proposition statement. Clearly, consistent
complexity of the value chain and the nature costs and quality are vitally important. This
of product-markets examined. is confirmed by a comment by Zuber: ``As
The first company examined was the much as 90 per cent of the cost of electronics
Bluegum Group, a contract manufacturer of products is parts. Hence, since contract
electronic components. Bluegum is manufacturers buy on global contracts that
Australia's largest contract electronics provide the same delivered component cost to
component manufacturer. Bluegum is any destination, 90 per cent of a particular
expanding its business in this product- product cost will be the same anywhere in
market as the electronic manufacturers the world''.
increasingly turns to contract manufacturers The structure of both information and
owing to decreasing product life-cycles in relationship management have an important
products such as personal computers. Our part to play. Information management should
review of Bluegum was based on published be structured to ensure rapid time response,
material (an article by Banaghan, 1999) and it should be accurate and have world-wide
using comments derived from interviews application. Bluegum recently undertook an
within Bluegum. Content was then used to extensive upgrade to the company's plants
construct a value chain specification. In this and this included implementation of i2's
example the value chain is simple: dealing Rhythm decision-support software. This is
with Bluegum and its customers. expected to increase response to customer
Bluegum's CEO, Paul Zuber, identified the order enquiries: ``Before i2, it would take
primary benefits of their offer. Contract Bluegum days to inform a customer when its

Figure 6
Value chain options

[ 167 ]
 David Walters and order could be fulfilled. Now it takes inventory trade-off between responsiveness
Geoff Lancaster minutes''. The decision-support software is and level of inventory. We will be able to
Implementing value strategy
through the value chain part of a new breed of supply-chain achieve reduced inventory throughout
automation tools that use electronic (authors' italics) our whole pipeline and,
Management Decision
38/3 [2000] 160±178 commerce on both an intranet and extranet most importantly, for our customer, also
basis. Zuber comments: ``If you don't have on- improve our responsiveness''.
line capabilities across a broad spectrum of The content of the interviews leads to an
what you do, you're just not going to be interpretation of the Bluegum value chain
competitive''. On-line configuration software (illustrated in Figure 7). The company's
allows customers to place an order that is reference to techniques, processes and
automatically sent to Bluegum's factory procedures identifies the components and
floor. And: ``They can then follow its progress activities in place and which ensure smooth
because we make our supply chain visible to operation of the value chain process
our customers and supplier through supported by supply chain and logistics
intranets''. management activities.
Zuber suggests that while cost savings are An industry perspective is provided by
important, time savings can be even more Figure 8, which constructs a value chain
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important: ``It does save you money, but more specification for the automotive industry.
importantly, it frees up your time to really Information for the analysis came from a
focus a lot more on your customers''. This number of sources, principally a feature in
extends to the role of supply chain and the International Herald Tribune (1998).
logistics management. A rapid response to The feature identified four competitive
customers requires: `` . . . a very strong supply challenges confronting the automotive
chain and logistics capability''. And: `` . . . you industry: competition, complexity,
can't do it without suppliers. If they don't customisation and capacity in excess of
know what's coming down the pipeline they global demand. It was suggested that to be
can't react quickly enough''. competitive: ``They need to be in every niche
A manufacturing perspective was given by of the market to maximise cost efficiencies,
Paul Weiss, the manufacturing director: ``By and they must be lean, agile and cost
reducing our decision-making time from conscious''. Complexity is due in part to
days to minutes, it somewhat lessens the globalisation of the industry, this has

Figure 7
The Bluegum Group value chain specification

[ 168 ]
 David Walters and Figure 8
Geoff Lancaster An automotive industry value chain model
Implementing value strategy
through the value chain
Management Decision
38/3 [2000] 160±178
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[ 169 ]
 David Walters and resulted in a requirement to cope with: `` . . . a recent years. Car designers now use 3-D
Geoff Lancaster variety of locations, government regulations digital design, having forsaken physical
Implementing value strategy and incentives, distribution patterns and prototypes. This permits shorter production
through the value chain
consumer buying habits . . . Buyers are cycles, with lower costs and quicker ``time-to-
Management Decision
38/3 [2000] 160±178 demanding more and more customisation in market''. CATIA (computer-aided
their cars, especially at the luxury end . . . tridimensional interactive application) offers
Very flexible production is needed to handle the ability to introduce changes relatively
this''. It is estimated that there is a 20 percent late in the product development cycle, as well
excess capacity in the industry and, as features that bring the final customer
furthermore, there is a cyclical nature to closer to the company. CATIA permits
demand. ``virtual reality'' test drives or specification
We could add ``concentration'' to this list. It configuration in a distributor showroom.
is estimated that there will be ten major CATWeb combines the efficiency of digital
manufacturers in the not too distant future; prototyping with the collaborative power of
the recent Ford/Volvo and Renault/Nissan the Internet. An Italian vehicle design
combinations add currency to this view. The company is testing CATWeb to distribute
view of a former industry executive is that design information throughout the company
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the manufacturers should: `` . . . provide (an intranet application). The experiment

solutions, not build cars''. suggests considerable time and integration of
Solutions or perhaps ``facilitating engineering and development benefits.
influencers'' have been provided by the Chrysler are reported as having made use of
information industry. Computer-aided CATIA to identify ``part interferences'' prior
design (CAD) shortens development time, to production of a physical prototype. The
and sophisticated links among designers, number of physical prototypes was reduced
suppliers and manufacturers lower costs and from 50 to 27. Data management systems
contribute to competitiveness. Information become essential: effective data management
technology (IT) can resolve some complexity enables the tracking of input and updates of
issues. IBM offer ``global embedded and all design, engineering and component
production solutions'' (GEP). IBM identifies a supply decisions. Two benefits cited are the
need for GEPs on the premise: increase in design productivity and
``manufacturing processes are now so profitability: `` . . . product life-cycles are
complex that nothing else can handle them''. shorter than ever. Instead of developing three
What is obvious is that IT has become cars in ten years, today's engineers may
essential if activities such as design and produce ten vehicles in two years''.
manufacturing processes are to be used to Mercedes and IBM created a fully-integrated,
facilitate mass-customisation (selective enterprise-wide IT system to support the
exclusively) thereby: ``tailoring mass- Mercedes US plant's business processes.
produced goods to individuals''. An There are no warehouses and no inventory.
interesting claim made by IBM is: ``All our Sequenced production techniques permit
technology has an end-user focus because the customer ordering for specific motor cars. In
customer is determinant . . . the business principle, the system has operated for some
drives the technology and not the other way time, but not without initial problems. In the
around''. new system, a combination of lean
The extent of industry integration has production, sequenced production and
resulted in a major role of IT management, AutoView (automated line control)
which has significant implications for customisation becomes a reality. AutoView
relationship marketing: ``The integration of has quality checks built in, plus easy-to-
suppliers, designers, manufacturers, dealers change features enabling a manufacturer to
and customers calls for information individualise production based upon
networks operating on a real-time basis''. customer requirements. A link is planned
Audi have introduced a customer with Java which will facilitate
specification facility. A number of Internetworking for JIT with suppliers.
dealerships, plus five airports, are to be On-line sales applications are expanding
equipped with kiosks that enable customers for both new and used vehicles. Networks are
to ``build'' a vehicle to their own being established by manufacturers,
specification. The system uses a standard distributors and the media. Relationship
``hypertext'' markup language (HTML) so management becomes essential as
information entered at a kiosk can be used on distributors' concern over direct sales by
the Audi Web site. manufacturers is seen as a major threat. An
Design developments have been built independent view suggests Internet
around a number of IT applications. CAD customers to differ from ``average'' customers
packages have made strident advances in as they (the customers) are well into the
[ 170 ]
 David Walters and ``sales cycle''. Reports of media success in the define a ``value-adding partnership'' as ``a set
Geoff Lancaster used car market suggest the Internet to be of individual companies that work closely
Implementing value strategy significant in reducing purchasers ``search'' together to manage the flow of goods and
through the value chain
costs. services along the entire value-added chain''.
Management Decision
38/3 [2000] 160±178 After-sales service also has intranet This perspective makes it ideal for research
applications. One, IRIS (intranet retail into value chain structures. Having
information system) currently being established this, it should be made clear that
installed by Saab, aims at increasing after Johnston and Lawrence shared the view
sales support to both distributors and (current at that time, 1988) that the value-
customers. IRIS offers a data management added chain was a micro-economics concept.
system detailing vehicle servicing records as They defined it as `` . . . the various steps a
well as vehicle sales and parts availability. good or service goes through from raw
Saab plan to expand IRIS to include links to material to consumption. Economics has
financial institutions, carriers (vehicle traditionally conceived of transactions
transporters) (to notify customers of the between steps in the chain as being arm's
arrival of a new vehicle) used car length relationships or hierarchies of
information, calendars for on-line scheduling common ownership''. Our perspective is the
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of service appointments and on-line vehicle reverse of this, as the earlier definition
purchasing. suggests, it is concerned with meeting
Returning to the value chain perspective customer expectations which are identified
provided by Figure 8, we can identify many of first and then configuring the value chain to
the value chain components raised above. meet these and, at the same time, optimise
Customer value issues clearly drive the the return to all members of the value chain.
industry and there are equally obvious Returning to McKesson. The McKesson
indications of the important key success Corporation is a distributor of drugs,
factors. The value proposition is a customer- health-care products and other consumer
led, IT-based response with an increasing use goods. In 1988 its revenues were US$6.67
of interactive and on-line information. A billion and it was considered successful. It
number of important issues arise. First is the was known for its application of IT to
increasing integration of information improve customer service and cut order-entry
management with relationship management costs. McKesson's activities were initiated as
aspects. For example, the interaction a response to vertically-integrated chain
between designers and engineers within stores. McKesson's future was inextricably
organisations and component suppliers tied into that of its independent customers. It
requires new levels of trust and confidence as introduced a customer-based ordering
competitive advantage features become the system that reduced order processing costs
result of joint R&D programmes. Equally, in by expediting the steps of inventory
times of permanent excess capacity, checking, calling in an order, manually
relationships with distributors become recording the order and eventually packing
important, if sales volumes are to be and delivering it. Management soon extended
maintained. Many of these issues are this ``system'' to specify order packs so they
identified as value/cost drivers, influencing coincided with the merchandise profiles of
both information and relationship their customers' shelf plans. This increased
management. Furthermore, many of the the efficiency of shelf merchandising. Other
value/cost driver characteristics have ``innovations'' followed. McKesson managers
implications for both distributors and realised they could use the data generated to
customers and these in turn may require help customers set prices and design store
joint manufacturer/distributor initiatives. layouts to maximise the profits of each
Relationship management has taken an particular store. Two other important
additional feature with the announcement by applications followed. The data were used to
Ford that it intends to vertically integrate produce accounting statements for customers
downstream by purchasing equity holding in and it was discovered that the system could
a number of its largest distributors. This may be used to warn consumers of potentially
be an initiative to reduce risk, make a greater harmful drug combinations by tracking
impact with reputation and enhance the prescription histories.
value delivered in service aspects. Upstream McKesson's customers, the independent
activities by Ford included (reported) drugstores, received a number of value
brokering mergers among its suppliers. This benefits. They were able to access benefits of
was discussed by Sutton (1998). computerised systems and data management
The McKesson corporation was cited by which reduced their costs as well as
Johnston and Lawrence (1988) as an example increased their efficiency and thus became
of a ``value-adding partnership''. The authors more price competitive, important in their
[ 171 ]
 David Walters and competitive situation. This, together with Japanese competition between 1982 and 1992.
Geoff Lancaster merchandise management and enhanced Fites (1996) describes Caterpillar's response
Implementing value strategy customer service, gave ``real'' aspects of to the Japanese challenge; his description
through the value chain
competitive advantage when compared with maps the Caterpillar value chain. While the
Management Decision
38/3 [2000] 160±178 the chains. And, at the same time, they thrust of Fites' article is aimed at the role
retained their independence and autonomy played by distributors in the industry, there
which permitted local responses to local is sufficient material to be able to construct a
demands. McKesson also benefited. Sales value chain.
increased dramatically, the warehouse Fites identifies the KSF requirements of a
system was reduced from 130 to 54 and major industry participant in his description
eliminated 500 clerical jobs. Most significant of the factors which were used defensively.
was the strengthening of the customer base; They are: a strong brand; responsiveness to
from 20,000 customers averaging $4,000 per customers; efficient, flexible operations;
month to 15,000 customers averaging $12,000 strong distributors who are loyal and
to $15,000 per month. Shipments were also responsive to the company's leadership and a
reduced from an average of two per day to product that is innovative, of high quality
two per week, while lowering its own and and well supported in the field. Fites
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customers' inventory costs. identifies the role of distributors as conduits

The company also recognised the value of for information to the end user, often acting
its data to its suppliers. The result was as ``consultants''. This adds another KSF:
improved logistics management with investment, in product development and in
computer-to-computer ordering that resulted the distribution network.
in a reduction of buying staff. McKesson also There are numerous examples of how
used the computer system to help process Caterpillar uses information management
health insurance claims and for prescription and relationship management to construct an
reimbursement. This move strengthened the effective value chain through the dealer
ties among insurance companies, consumers network. Given the commitment to the
and drugstores by accelerating payments and distributor organisation, many decisions are
smoothing administrative problems. simplified. For example, product design
The McKesson value chain is illustrated in includes: ``A critical design criterion for our
Figure 9. The addition of a distributor level machines is that they can be repaired
adds few complications. The amount of detail economically and conveniently, and our
is increased, but this adds to richness of the highly-integrated manufacturing and
information available for planning and distribution systems are designed so that we
control purposes. can replace a part in any machine anywhere
The consumer value characteristics have in the world within 48 hours''.
been assumed by inference. Clearly, the Fites argues that Caterpillar competitors'
model would be more robust if these were the customers typically wait four or five days for
result of specific research. These in turn lead a part, suggesting: ``One possible reason for
to key success factors and a value proposition the disparity is that few companies have
for distributors. Notable here is the need for integrated their dealers into their business
product relevance and availability, cost systems to the degree we have''. Here is an
competitiveness and service/advice. example of making supply chain and logistics
McKesson is an example of the use of management an important component of
information management to develop strong relationships management.
advantage and reinforced with relationship The role of information to create market
management. A clear identification of how knowledge comes from the learning aspects
its information systems were able to improve of the manufacturer/distributor partnership
the independent retailers' performance gave relationships. Another aspect of information
McKesson indicators on how to use the management concerns the productivity of
information to strengthen its own Caterpillar and distributor inventories and
performance. The cost efficiencies reinforced customer equipment. The remoteness of
by detailed and accurate merchandise many applications implies serious problems
planning increased still further the when parts of equipment begin to
competitive position of the company with the deteriorate. Caterpillar have begun to resolve
retailers. The inclusion of other stakeholder such problems by installing sensors on each
interests (McKesson suppliers, insurance machine that automatically spots a problem
companies) increased the overall which may occur and sends an electronic
effectiveness of the value chain. alert to the local dealer's field technician
Caterpillar is a well-known international through his portable computer. The
brand. While generally assumed to be symptoms and diagnosis are validated by a
successful, it admits to feeling the impact of technician who determines the necessary
[ 172 ]
 David Walters and Figure 9
Geoff Lancaster The McKesson Corporation value chain
Implementing value strategy
through the value chain
Management Decision
38/3 [2000] 160±178
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[ 173 ]
 David Walters and actions. The computer program identifies examples, the role of information and
Geoff Lancaster exactly the parts and tools required to effect relationship management can be seen as
Implementing value strategy repair. This done, the technician can then
through the value chain influencing the structure and operation of
use another feature of the program to the value chain. The role of integrated supply
Management Decision
38/3 [2000] 160±178 identify sources of parts, availability and a chain and logistics management has been
delivery date. Beyond this, an integrated expressed both explicitly and implicitly.
replenishment program retrieves parts from Finally, we review Freedom Furniture.
storage and issues replenishment orders as The data used for this analysis is based on
and when required. The computer program interviews with Freedom Furniture and from
contains best-practice repair procedures and, materials raised from in-house documents.
on completion of the repair, will update the Freedom Furniture is based in Sydney and
equipment's service record and issue an opened its first store in 1981. It now has 42
invoice. It can also handle electronic retail stores, 22 are company owned and 20
payments. are franchised stores in Australia and New
The supply chain and logistics Zealand. Freedom was floated on the
management implications are major: Australian Stock Exchange in 1996, and since
Caterpillar, in 1996, investing in the then has exceeded its prospectus forecast and
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expansion of the remote monitoring system continues to increase sales, market share and
and the worldwide sharing of inventories by profit. Currently, sales are in excess of A$250
the company, suppliers and distributors. million and market share approximately
Already the company maintains 22 parts 7 percent.
facilities around the world, within excess of The company's target market is mainly
10 million square feet of storage. Caterpillar women with a ``taste and attitude for stylish
services 480,000SKUs, of which 320,000 are and value-oriented furniture and home
stocked. Caterpillar dealers stock between wares, aged 27 to 46-years-old with annual
40,000 and 50,000 items. The remote sensing household income in excess of A$30,000. In
facility permits the company to deliver a part terms of demographics, this represents
before a customer realises the need for it. young singles, couples, families and young
Linkages with both customers and single parent households. During a recent
distributors are maintained in order to review of strategy the company's core
monitor product performance and, competencies were viewed as:
subsequently, product development. Both . Idea generation/commercialisation of
dealers and customers are involved in trends and styles, and new product
programmes on product quality, cost
development.
reduction and other manufacturing issues. . Strong management with positive attitudes.
Measures of the strength of relationships . Well-proven sourcing ability of domestic
between Caterpillar and its distributors are
and international products.
the actions taken to ensure the longevity of . Effective information systems.
the partnerships during periods of . Effective visual merchandising.
difficulties. During recessions and foreign . Established franchising; strong
exchange fluctuations, the company
relationship management.
undertakes whatever financial actions are
necessary to insulate the dealers from Those requiring strengthening:
financial difficulties. Dealer support, such as . Store/location development.
financial assistance for customers' purchases . ``Time-to-market'' for new products.
is shared by the company and it supports the . Marketing activities; brand
dealers with inventory management and strengthening, communications,
control, logistics, equipment management catalogue development.
and maintenance programs. Many of these . Value delivery; ``delivered in full and on
aspects are reinforced by Caterpillar-designed time'' (DIFOT).
software programs. Dealer staff are trained . Retail operations and training.
in technical and managerial techniques and
Freedom Furniture's strategic alternatives
technical literature is constantly updated.
appeared to be:
Business management programmes to . Category dominance.
improve profitability, productivity and cash . A ``new'' superior customer proposition,
flow ensure dealership performances.
such as assured seven-day delivery.
The structure of the Caterpillar value . Brand expansion and/or acquisition(s).
chain is shown in Figure 10. It includes both . International expansion.
customer and dealer perspectives. Each of . Expanding manufacturing.
the attributes has been derived from the
material provided by Fites (Chairman and While strategy and structure development is
CEO of Caterpillar, 1996). As with previous not a specific topic of this article, there are
[ 174 ]
 David Walters and Figure 10
Geoff Lancaster The Caterpillar value chain
Implementing value strategy
through the value chain
Management Decision
38/3 [2000] 160±178
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[ 175 ]
 David Walters and some issues which clearly influence the amounts of management capacity in detailed
Geoff Lancaster value chain in its mission to maximise activities) and has commensurate risk.
Implementing value strategy
through the value chain customer value and to optimise stakeholder Franchising has enabled the company to
returns. What emerges are some issues for expand its volume towards a critical mass
Management Decision
38/3 [2000] 160±178 key success factors. These include: supply volume and to increase brand awareness,
chain management (manufacturing, often in areas/locations that are not
inventory management and ``quick response'' necessarily high on Freedom's store rollout
(DIFOT) to direct customers and program.
franchisees); a strong, identifiable brand; The value proposition (product-service
category dominance in selected product attributes) is dominated by product and
ranges with strong supporting presence in advice. Product design and choice is very
other ranges; critical mass from which to important as is its rapid delivery once a
influence market developments and value purchase decision has been made. The
chain delivery options (e.g. franchising). process of decision making does require
The Freedom Furniture value chain is support. As well as catalogues, which initiate
shown in Figure 11. Customer satisfaction/ interest, ``ideas'' are essential and product
value criteria were derived from research coordination and advice at the point of sale
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that the company had undertaken and which are essential features of the value
the company was addressing with both proposition.
strategic and operational decisions. Key Freedom's information system extends
success factors were comprehensive but throughout the value chain. The company
there was an indication of the role of manufactures much of its range and sources
specialists and support activities within the on an international basis. It follows that
value chain. A strong, identifiable brand and accurate and timely information is
critical mass volume was enhanced by necessary. Relationships extend upstream
franchise operations. Expansion is capital and downstream and form an important
intensive (as well as consuming large feature of the Freedom Furniture operation.

Figure 11
The Freedom Furniture value chain

[ 176 ]
 David Walters and With much of its requirements manufactured (not in terms of volume) are franchise
Geoff Lancaster in-house, there are internal linkages to be operations, imposes additional pressures on
Implementing value strategy
through the value chain managed and overseas sourcing requires organisational and operations structures.
detailed management of reliability of The conclusion is that the value/cost
Management Decision
38/3 [2000] 160±178 suppliers if customer delivery promises are drivers for the Freedom value chain relate to
to be maintained. Potentially more difficult clear aspects of customer relationships
are relationships with franchisees. The (innovative products, advice and delivery
franchisees are autonomous in that they may promises that are maintained); volume
differ with opinions on range plans and expansion (through new product categories,
stocking and use local knowledge to develop a market expansion of own and franchised
detailed understanding of local market outlets, and possibly acquisitions); effective
requirements. But they are also part of the and efficient supply chain and logistics
Freedom brand and as such are expected to management, and; brand development.
give visual support to its development and to
match this with service, the qualitative
aspects of a brand. Conclusion
Organisational structure management
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reflects the extent of the supply chain. This article has added to our previous three
Control of relationships within the company and it has explored the concepts of value and
and with suppliers are influenced by a need information in a contemporary context. It
for innovative product development and has also broken new ground by suggesting
commercialisation, its sourcing (from own that supply chain and logistics management
manufacturing and/or external sources) the are functions that are supporting activities in
logistics of product stocks and flows and cost the overall value chain. A comprehensive
management. This has resulted in the need definition of value chain management
for an operations structure that can respond concludes this series.
in many directions, volumes and time spans. Value chain management is a coordinating
The fact that almost half of Freedom's outlets management process in which all of the

Figure 12
Value chain/supply chain/logistics management

[ 177 ]
 David Walters and activities (and their suppliers) involved in Banagahan, M. (1990), ``Speed and flexibility are
Geoff Lancaster delivering customer value satisfaction are winners for contract manufacturers'',
Implementing value strategy integrated such that customer satisfaction is Business Review Weekly, 1 March
through the value chain
maximised and the objectives of the (Australia).
Management Decision
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activities, processes, facilitating services, Nelson, Melbourne.
etc.) are optimised such that no preferable Coase, R.H. (1937), ``The nature of the firm'',
solution may be found. Supply chain Economica, Vol. 4, pp. 386-405.
management is the management of the Fites, D.V. (1996), ``Make your dealers your
interface relationships among key partners'', Harvard Business Review, March/
stakeholders and enterprise functions that April.
occur in the maximisation of value creation. International Herald (1998), ``Business to e-business:
This is driven by customer needs satisfaction automotive'', IBM sponsored page,
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becomes the means by which the customer Change and Economic Performance,
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Application questions
1 What are the key success factors in your 2 What implications do the authors'
organizations? findings have for your organization?

[ 178 ]
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