The value creation as a process

Table of Contents The Value Chain Clusters Configuration & Coordination Practical example: The Automobile Industry Conclusion

The Value Chain Porter‘s value chain is providing a tool for categorizing and displaying activities. These activities can be formed in nine categories as you can see here. The first five are so called primary activities which involve physical activities. But there are also the supporting activities which can be seen as the infrastructure of a company. For example, the HRM is needed throughout the whole company. Or the technology department is creating the innovations with are the basis for every product.

The Value Chain All activities in order of operational implementation Analysis of competitive advantages = screening on current and potential competitiveness Includes suppliers and end customer Increasing cooperating networks = clusters But what is so special about Porter‘s value chain? Why is it so important? The value chain as mentioned before is including all value-added activities in order of their operational implementation. By cutting a company into individual values creation activities every activity can 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 there value chain should go beyond this approach by taking into consideration also suppliers as well as the end consumers. A consequence out of this is an increasing competition between cooperating networks, so called clusters. The model of “companies against companies” becomes less important. Suppliers Customer Company End consumer Value Chain

Clusters „…array of linked industries and other entities important to competition.“ (Porter:78) The economy growth rate is mainly depending on the development degree of clusters nowadays Division of professional works Concentration on core competences According to Porter clusters are an array of linked industries and other entities important to competition. Nowadays, the economy growth rate is mainly depending on the development degree of clusters. Even though they are exchanging information and working together more closely there is still remaining a competition within the clusters. This competition is encouraging innovations. Another advantage is that each cluster has a pool of talented employees and relevant technology. Through the globalization the competition is becoming tougher and tougher which leads to a need of professionalism. Companies are aware about the fact that it is nearly impossible to be perfect in each single activity. As a solution the companies are seeking for other companies to optimize their processes. Another important factor is the enormous cost pressure. This is also one reason why so many companies spread out their jobs into many countries according to different advantages and situations. Companies are concentrating more on there core competences. For example, in the automobile industry, German companies are in charge of car design but the shift part of their manufacturing processes (e.g. parts) to China due to the fact that China has a big manufacture cluster which can fulfill all customers’ needs.

Configuration & Coordination Two main pillars for the creation of the value chain Configuration: Distribution of value-added activities (Where?) Downstream Value Activities Upstream Value Activities Coordination: Performing of value-added activities (How?) Configuration & Coordination are the two main pillars for the creation of the value chain. By using the right configuration strategy e.g. offshoring decentralization, mixed or centralization activities and by the right use of coordination a company can create a competitive advantage. The geographic distribution of value-added activities is called configuration. It is characterizing the degree of geographic dispersion (decentralization) and the geographical concentration of the value-added activities. In other words it is characterizing where in the world the activities are performed. In general downstream activities e.g. marketing and services with a certain proximity to the customers assume a tendency to perform locally while upstream value activities don’t have to take place near to the buyer’s location. The second dimension is coordination which is dealing with the question of “how” the company’s activities are performed. It allows the sharing of know-how among dispersed activities.

Practical Example: The Automobile Industry Germany: Technology and Design Development South Korea: Marketing & Sales China: Operations & Inbound Logistics Pakistan: Operations Russia: Operations We have tried to analyze the automobile industry in Germany, China, South Korea, Russia and Pakistan and we noticed some differences as well as similarities. What did we find out? Well, 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. Germany for example is getting their automobile parts from everywhere around the world which again points out the importance of clusters. They are putting more effort in the technology and Design Development. Anyway there is still a high demand of coordination. 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. In other words, they are to unknown. By using marketing strategies they are trying to gain more market shares. Analyzing China and Pakistan we found out that they are focused on operations and the manufacturing industry. Why is that? 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. We think that especially the increasing demand for cars is the main raison why foreign companies are investing in Russia. They want to gain as much market share as possible.

Conclusion Concentration on customers’ needs Great demand on cooperation and coordination Not just optimal performance but the entire networks counts Trust & Responsibility Higher integration of emerging countries 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. Confidence is also another critical aspect. 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. Sites in the emerging economies are assuming responsibility for increasingly high-level value activities, for example in technological development. These countries need to become an integral part of the value chain, since they can lead to greater competitive advantages for a company in its international business. China and India will emerge as major players in the industry because the are one of the biggest source of new customers.

Questions How can we assure high quality of parts while using offshoring and outsourcing? Offshoring and outsourcing are often connected with redundancy. How can we still integrate the blue-collar workers?