Chain Analysis: Literature Review and Application on Ikea

I, the undersigned, declare that this report is entirely my own written work, except where otherwise accredited, and that it has not been submitted for a degree or other award to any other university or institution. Introduction Since the 1980’s academics have been pointing to a firm’s own activity pool for analysis, as a way of determining competitive advantage. It was in 1985 that the term “Value Chain” was coined by Michael Porter (Porter 1998) and all its subsidiary headings. I will look at some of the literature surrounding the Value Chain concept to see how it has evolved and changed since its beginning two decades ago.

Using this literature I will see what recommendations are cited to carry this concept into the future with an ever more globalized market. Finally an application of this literature will be carried out on Ikea: a global company that has changed with market trends when necessary to stay a top player in its industry. Origination Kippenberger identifies in his research, how the idea of analyzing internal activities as a source of competitive advantage began in the early 1980’s with McKinsey’s Business Systems Concept (Kippenberger 1991).

Through this concept, firms could look at their own activity pool and performances and compare these to that done of their competitor. This comparison would then act as a source of competitive advantage. Michael Porter took influence from this research and began to fine tune it even further. His creation of the Value Chain concept in 1985 (Porter 1998) has been the topic of detailed research by academics in diverse fields: strategic management (Johnson et al. 2005), marketing (Webster 1988), and customer loyalty (Parasuraman 2000) to name a few.

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The concept was an aid to identify sources of competitive advantage by providing a basis of differentiation (Porter 1998). According to Porters earlier research, differentiation could be created by using one of both of the following strategies: lower relative cost, or some form of differentiation offering (Porter 1998). Porter’s Value Chain Concept The original concept started with a tool called the Value Chain which when implemented correctly helped to break down all activities that a business took part in, in order to identify and understand the sources of competitive advantage (Porter 1998).

Johnson et al. (2005) states that the value chain can be used to understand how a company creates or loses value in its activities. This needs to be identified if the company achieves competitive advantage by providing value to their customers. By stripping systems back to ‘strategically relevant activities’ (Porter 1998), cost savers and creators can be identified as well as the activities that house sources of differentiation. If these are carried out more efficiently, better or cheaper than competitors, then competitive advantage is created (Parasuraman 2000).

Kippenberger reminds us that in the original concept all of a firm’s activities can be broken down into two categories (Kippenberger 1991): primary and support. Primary activities are concerned with the physical creation and delivering of the product (Johnson et al. 2005); whilst support are the activities that supply primary ones with purchased inputs, human resources and technology. It also supplies the entire chain with firm infrastructure (Kippenberger 1991). All activities are embedded into a ‘stream of activities’ called the value system (Porter 1998).

These ‘generic description of activities’ should be mapped out in an activity system (Johnson et al. 2005). This disaggregation of discrete activities can isolate the value creating areas from the lacking (Porter 1998). In this way not so important areas can be combined or ‘clustered’ (Johnson et al. 2005). Thus the firm can now see which areas of activities they should be concentrating their resources on; and which they should de-emphasis or outsource (Johnson et al. 2005). Often the categorization of activities relies on judgment (Kippenberger 1991).

Linking of the Value Chain This system of mapping out and categorizing activities helps the firm to link its competencies to competitive advantage (Normann 1993). Relating your core competencies back to your resources is a successful way to gain competitive advantage (Lusch 2011); and participation of this is key to good strategy in a business (Normann 1993). Optimizing co-ordination between some activities may take place, as well as trade-offs between activities in order to achieve an overall more successful value result (Porter 1998).

Once activities have been clustered or isolated depending on their ‘higher order strategic themes’ (Porter 1998), the links between the different activities need to identified and analyzed in order to spot any potential competitive advantage sources that lie here (Kippenberger 1991). And so to, the notion of relationship and information management in the value chain arises in the different literature. Emphasis needs to be placed on the relationships between all activities within the firm and with external organizations (Walters 2000).

Information plays a significant role in good relations as it helps to co-ordinate all activities in the value chain, and implement any sources of competitive advantage found. Walter and Lancaster (2000) relate back to Browns 1997 industry perspective of value whereby concerns raised in the value chain are to do with supply chain management and logistics involvement. In the upper part of the supply chain, inputs are created or provided by suppliers; the company then adds value to these inputs before handing the product or service downstream, finally reaching the end consumer (Porter 1998).

Although most of the literature see’s the participation of the supply chain and logistic elements as a necessary involvement in the value chain in order to gain competitive advantage; these essentials play different roles in different literatures. Supply chain management has also been seen as the management of the differing relations along the value chain that take place to maximize value creation (Walters 2000). Every value creating activity is facilitated by logistics such as the management of costs that occur within the supply chain. Focus on External Sources

So far, the value chain and its successful application has revolved around the industrial view. However to modernize the value chain from its 1980’s foundations a focus on maximizing value starting from external sources has come to play. Instead of looking at one’s own activities within a business and its supply chain and logistical partners to spot sources of competitive advantage, businesses may start value chain analysis by looking at their target customer (Webster 1988),. Taking a customer-centric approach to the value chain means that when analyzing activities one is looking to see if it maximizes value for the customer.

Value opportunities are now distinguished by their ability to satisfy customer’s needs (Walters 2000). High perceived value is a determinant of customer loyalty (Parasuraman 2000). Research has shown that customer loyalty and retention is more profitable than gaining of a new customer pool. Thus it is in a business’s best interest to optimize value creation in the minds of their customer. Value should not be solely focused on product quality, as service quality has been found to be a driver of value perception (Parasuraman 2000). This is especially the case where the product offering and service quality overlap hotel stay. The idea of customers’ needs and value perceptions being paramount to the company needs to stem from every aspect and level within that company. There needs to be an organizational believe in order to create a customer orientated firm (Webster 1988). This should start at top management and the CEO and then instilled into every aspect of the company. Thus the idea of an information flow and relationship management comes to the forefront again. Value creation is aided by a good fit between relationships and knowledge within a value chain (Normann 1993).

This also contributes to good strategy within an organization where by all equally informed members working pro-actively together helps to create value in whatever activity they may be partaking in (Normann 1993). The value proposition (the value the customer understands is being offered to them [Walters 2000]) should be communicated to all stakeholders also (Lusch 2011). It needs to have an appeal to the stakeholders so that they can see the potential value for themselves in putting customer needs first (Lusch 2011). Through this aim, the idea of ‘corporate value’ is introduced (Walters 2000).

Corporate Value is the notion that if a value chain is to be successful it is crucial that the objectives of all stakeholders as well as customers are to be met. Managing the relationships between all relevant parties through the provision of information is pertinent again. This management is facilitated by the supply chain and logistical functions (as discussed earlier) within the value chain. The Future - Conclusion A number of themes keep re-emerging from the literature; all of which are noted to be prominent drivers of a successful value chain, thus being a source of competitive advantage.

Corporate value and the value chain should become a guide for a company’s mission statement. Supply Chain functions facilitate the strategic direction of fulfilling this mission statement. Logistics helps to implement this whole chain by managing operations (Walters 2000). To succeed in value chain management a number of factors need to be considered. Firstly customer value criteria needs to be identified. In this way a company can ensure that when carrying out Value Chain management they co-ordinate all activities and their suppliers so that customer satisfaction and the attempt to meet stakeholders objectives is maximized.

This should be carried out continuously so that at no time should there be a more preferable option to ensure value satisfaction (Walters 2000), (Parasuraman 2000). Successful implementation of supply chain management and logistical functions to aid favorable results in the value chain, can only be done so by the management of relationships and information (Normann 1993). Many relationships take place within the value chain such as relations between employers and employees, the firm with its customers and stakeholders, and the business with its partners in the supply chain (Kippenberger 1991).

Relevant information must be passed to each and every individual within the value chain (Walters 2000). Through good relations, companies can spot value creators and sources of differentiation within the vale chain (Porter 1998). Thus successful companies will learn how to re-invent value rather than just create it (Normann 1993). This will provide competitive advantage in today’s globalized market where competition is immensely high. The value chain can now also be used as a tool for evaluating new business opportunities (Walters 2000).

Globalization has also caused a change in customers’ needs and value criteria with the onset of increasing competitor choice in most industries. Thus tapping into customer’s wants and needs must be done on a continuing basis (Parasuraman 2000). This market intelligence needs to be communicated to everyone in the value chain in order that the chain be reconfigured to ensure maximum customer satisfaction and value at all times (Webster 1988). Value propositions should be looked at again. This is the way in which a customer understands the value offered to them (Walters 2000).

Firms need to mobilize their customer base so that they can create their own value from the company’s product offering (Normann 1993). They can use their value proposition as a tool for doing so. IKEA Example Six decades ago Ikea founder Ingvor Kampvad began a Swedish mail order operation selling furniture (Ikea 2012). Today, it is the global leader in home furnishing expanding into new geographic and product markets each year (Ikea 2012). By November 2011 the company had 332 stores in 38 countries worldwide (Collins 2011); 2010 saw them with an increase of 7. 7% in sales growth from the previous year ($23. Billion) (Collins 2011). But how does their use of the value chain attribute to this success? Ikea’s business model is simple: the selling of high quality, Scandinavian designed, flat pack furniture. New product lines have been added to their product offering such as the introduction of soft furnishing items e. g. rugs, paintings etc. Profit making amenities are also located within all their stores such as coffee shops and restaurants. What Ikea saves on efficient warehousing (Ikea Distribution 2011) and low cost components, they pass onto their customers in the form of lower prices.

Apart from this low cost strategy the company are able to maximize their organizational practices within the value chain in order to provide greater value to their customers in comparison to fellow competitors. By re-inventing their value proposition they have mobilized customers to take their own value from their offering. Customers are doing the jobs that furniture providers once did such as assembling of the product. Ikea aims to ensure that this is as seamless a process as possible for the customer by providing good quality, easy to fit components along with safety warnings and instructions.

If we go along Porters definition of value (Porter 1998) -value is what consumers are willing to pay for what a firm provides- then we can see from the Ikea example that consumers perceive the ease of assembly and instructions provided as high value for the low cost that they pay. Similarly when entering the store, customers are provided with measuring tapes, pens and paper etc. This allows the consumer to take over the role of the salesperson partially. This is aided by the amount of information provided about each product through their catalogue (also available upon store entry) and on product displays.

Again, these additions communicate extra value gained in the consumer’s mind by shopping at Ikea versus a competitor. Ikea have reinvented the idea of value for their customers. They do not position themselves as a supplier offering finished goods to an end-consumer. Instead they act as a mediator between two sets of producers (Ikea 2012), whereby the end consumer is also a producer as it is he who finalizes and assembles the offering. Suppliers are located in 50 countries around the world (Ikea 2012). They are selectively hosen to provide low cost, good quality wood that also complies with Ikea’s ‘Iway’ programme, whereby all wood must be obtained in a sustainable and traceable manner (Ikea 2012). By managing good relations with their suppliers in the value chain, good quality, low-priced raw materials can be guaranteed, and constantly meet the Ikea standards. Ikea also heightens the value created by their suppliers through their ‘Ikea Engineering’ programme (Ikea 2012). Technicians are provided for suppliers to aid in technical assistance.

Between their online and in store till sales, ordering and payment of goods is done electronically (Ikea 2012). This passing of information between activities makes it easier for their warehouses to analyze shipping patterns and sales globally (Ikea 2012). Stock quantities and deliveries can also be amended with ease. The communicating of information and managing of relations between all retail and supplier units worldwide means that standards are kept the same and are controlled no matter which Ikea location a customer may be in.

This means that no matter where the customer enters an Ikea outlet, that the value provided remains constant and high. Thus providing Ikea with the loyalty that earns them their competitive edge in this growing industry.

References

1. Collins, L. (2011, October). How Ikea transformed home furnshings: The New Yorker. Retrieved from The New Yorker: http://www. newyorker. com/reporting/2011/10/03/111003fa_fact_collins
2. Grewal, D. P. (2000). The Impact of Technology on the Quality-Value-Loyalty Chain: A Research Agenda. Journal of the Academy of Marketing Science. , 28(1), 168-174.
3. Ikea. (2011).Ikea Distribution. Retrieved from Ikea: http://www. ikea. com/ms/en_US/jobs/business_types/distribution_logistics/index. html
4. Ikea. (2012). Ikea-History. Retrieved from Ikea: http://www. ikea. com/ms/en_IE/about_ikea/the_ikea_way/history/index. html
5. Johnson, G. S. (2005). Exploring Corporate Strategy. Essex: Pearson Education Limited.
6. Kippenberger, T. (1991). The value chain: the original breakthrough. The Antidote, 2(5), 7-10.
7. Lancaster, G. W. (2000). Implementing value strategy through the value chain. Management Decision, 38(3), 160-178. 8. Lusch, R. W. (2011). A Stakeholder-Unifying,

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