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Coming to Grips with the Value Chain of Philippine Inc.

May 5, 2010

What exactly is it that we Filipinos do, as a society that we come up with dismal results. This is a question that has bugged us, keeps bugging us, and will keep on bugging us until we get our sh*t together.

Will this election really improve the collective results generated by Da Pinoy? Maybe? Maybe not? Depends on the outcome? One way of untangling this seeming Gordian knot called the Philippines is to look at the value chain because elections is but one link in a chain of activities that have one end-result  – poverty or prosperity.

The Value Chain

One way of understanding the activities through which a firm develops a competitive advantage and generates shareholder value, is to segment the business system into a series of value-producing activities known as the value chain.

In his 1985 book Competitive Advantage, Michael Porter presented a generic value chain model that makes up the sequence of activities found to be prevalent in a very wide range of firms. Porter pointed out primary and support activities as shown in the following diagram:

A very good introduction to the concept of value chain can be found by clicking here.

The website Value Based Management has a concise explanation as well

Inbound Logistics

Includes receiving, storing, inventory control, transportation scheduling.

Operations

Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.

Outbound Logistics

The activities required to get the finished product to the customers: warehousing, order fulfillment, transportation, distribution management.

Marketing and Sales

The activities associated with getting buyers to purchase the product including channel selection, advertising, promotion, selling, pricing, retail management, etc.

Service

The activities that maintain and enhance the product’s value, including customer support, repair services, installation, training, spare parts management, upgrading, etc.

Procurement

Procurement of raw materials, servicing, spare parts, buildings, machines, etc.

Technology Development

Includes technology development to support the value chain activities, such as Research and Development, Process automation, design, redesign.

Human Resource Management

The activities associated with recruiting, development (education), retention and compensation of employees and managers.

Firm Infrastructure

Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

From a Value Based Management point of view, the Value Chain Framework helps to build a relative competitive advantage, together with Porter’s Competitive Advantage thinking. The Value Chain Framework can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is the Market/Industry Attractiveness for which another model from Porter is often used: the Competitive Forces model.

It was also observed that linkages exist not only in a firm’s value chain, but also with other value chains.

…  > Supplier Value Chain > Firm Value Chain > Channel Value Chain > Buyer Value Chain

Although a company with a high degree of vertical integration is poised to better coordinate upstream and downstream activities, a company with a reduced degree of vertical integration can still go into agreements with suppliers and channel partners to achieve tighter synchronization.

For example, a fish cannery may have its suppliers set up facilities in close proximity in order to minimize transport costs and reduce fish inventories.  Thus, a firm’s ability to develop and sustain a competitive advantage will depend not only on its own value chain, but on its ability to work with the the value system to which it belongs.

This very same business concept can be “ported” or transferred into the public sector arena.

In fact, the Dutch have undertaken a study which precisely uses Value Chain modeling and applies it to E-Governance. Astudy by Arjen Wassenaar, Associate Professor, University of Twente, Enschede, The Netherlands, Faculty Technology and Management, Department Business Information Systems:

“aims to support practitioners for better understanding and realisation of joint organisational and information system innovations in the public sector.

It consists of a legislative, administrative and juridical function embracing three fields of legislative governance, administrative(resource) management and governmental service delivety management. Each field is structured after a strategic constitutional, tactical-intermediation and operationalretail level. This model is an effort to transfer business concepts to Electronic Government in the public sector.

Basically, governmental activities will be considered as a value chain linking the “trading ” partners like citizens, administrative agencies and constitutional institutions.”

You can read the study here:

[gview file=”https://sanamagan.files.wordpress.com/2010/12/the-government-value-chain-model-00875041.pdf”%5D

The approach can be used and applied to the Philippines as well.

If the Philippines were a company

The Philippines is like a company that has been under receivership, bankruptcy, Chapter 11, and what have you – for the longest time.

It got to where it is today because of the manner in which it conducts its affairs. A strategic view is utterly lacking. And, tactics are totally incongruent to the strategy, if ever there was a strategy.

Each of the links that make up the Philippine, Inc’s value chain is awash in itself – so much that Philippine Inc’s output is pure kulelat.

  • Clamp down on inbound logistics (protectionism);
  • Retain antiquated production methods (corrupt pa rin)
  • No change in outbound logistics orientation (Export people instead of commodities or services).
  • Lackluster Marketing and Sales (Sick Man of Asia, Asia’s Laggard)
  • Service is next to non-existent (Swerte mo na lang at pinansin kita)

Once you put all these links together, guess what you come up with.  If you think elections will solve the issue, think again. We still have a long way to go.

(To be continued)

The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.

Inbound Logistics

Includes receiving, storing, inventory control, transportation scheduling.
Operations

Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.

Outbound Logistics

The activities required to get the finished product to the customers: warehousing, order fulfillment, transportation, distribution management.

Value Chain model of Michael Porter: Marketing and Sales

The activities associated with getting buyers to purchase the product including channel selection, advertising, promotion, selling, pricing, retail management, etc.
Service

The activities that maintain and enhance the product’s value, including customer support, repair services, installation, training, spare parts management, upgrading, etc.
Procurement

Procurement of raw materials, servicing, spare parts, buildings, machines, etc.
Technology Development

Includes technology development to support the value chain activities, such as Research and Development, Process automation, design, redesign.

Value Chain model of Michael Porter: Human Resource Management

The activities associated with recruiting, development (education), retention and compensation of employees and managers.

Firm Infrastructure

Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

From a Value Based Management point of view, the Value Chain Framework helps to build a relative competitive advantage, together with Porter’s Competitive Advantage thinking. The Value Chain Framework can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is the Market/Industry Attractiveness for which another model from Porter is often used: the Competitive Forces model.

From → Economy, Government

7 Comments
  1. Enlightening…

    will be looking out for the next installment

  2. Extending business modeling to government is a challenge even for people who are accustomed to applying it to business. It’s a concept that, while eminently useful, is completely alien to the leadership class of this country.

  3. Pinay Goddess permalink

    During FVR’s administration, there were attempts to “reengineer” the government. The advocacy was a mindshift to an entrepreneurial type of governance. It was a good attempt ‘coz some progressive thinking local leaders adopted the entrepreneurial spirit and spurred development of their localities. I guess more leaders opted to stick to the old, transactional way of running the government. That’s why we still perform poorly, way below globally acceptable standards.

  4. Hi Fauxx,

    Working on it – it’s a daunting and interesting assignment, but will keep going. thanks for the encouragement.

  5. Hi BenK,

    My interest in the model was stimulated while sitting in a continuing ed session.

    Porter’s value chain is relevant now as it was then. But more so now in a global world where the competition between companies is actually a competition between supply chains. Wal-mart is a master of its supply chain and has leveraged the total landed cost concept to establish cost and service leadership.

    Porting the value chain approach into the public sector can generate a boon because it will break down the silo mentality – (where each gov’t agency is a mini-kingdom) – and harmonize each agency’s goals and functions to meet one end-result – the desired future state as validated by macro KPIs and a balanced scorecard.

  6. I think things are changing so rapidly now that some of the older methods are struggling to keep up and sometimes it better to just redo an entire method or come up with a new one.

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