walters, d. lancaster, g. 1999

Value and information ± concepts and issues formanagement

David WaltersHead of Department of Business, Macquarie University, Sydney, AustraliaGeoff LancasterChairman, Durham Associates Group Limited, Castle Eden, Co Durham andProfessor of Marketing, Macquarie University, Sydney, Australia

Introduction

Value is a term used frequently and for which

numerous interpretations exist. Our interest

is in its use within the context of all activities

designed for and coordinating customer sa-

tisfaction. Customers purchase products and

services for a range of uses and for a range of

reasons: hence value has numerous inter-

pretations.

Value delivery comprises all those activ-

ities involved in delivering the product-

service attributes that are considered to be

necessary to create customer satisfaction and

to maintain an ongoing, long-term relation-

ship with customers and in so doing build

competitive advantage. Our focus is on the

value chain rather than on the notion of

value added. Value-added analysis is mis-

leading. In a traditional accounting context

value added is defined as selling price less

cost of raw materials and production activ-

ities. In a colloquial context it is used to

imply benefits (or attributes) perceived by

customers; these may be tangible or intangi-

ble and are, by definition, often difficult or

impossible to cost. Shank and Govindaragan

(1988) suggest:the value chain ± not value added ± is the

more meaningful way to explore competitive

advantage.

They suggest value added is misleading for

three reasons. First is that it arbitrarily

distinguishes between raw materials and

other purchased inputs such as maintenance

or consulting services which receive differ-

ent accounting treatment, but which are

significant inputs. Second, value added does

not point out the potential to use the linkages

between an organisation and its suppliers, or

perhaps between it and its customers with a

view to reducing costs or enhancing differ-

entiation. Third, competitive advantage

cannot be explored without considering the

interaction between purchased raw materials

and other cost elements that may result in

cost trade-offs.

By contrast value chain analysis is exter-

nal to the firm and sees each organisation as

a component in an overall chain of value-

creating activities of which the organisation

is but one element. Shank and Govindarajan

(1988) focus on the strategic cost management

issues. Our interest is broader. Clearly cost

management is an important component but

just as important is the management of a

value delivery system that achieves customer

satisfaction objectives.

It is here where we see an extension of the

supply chain context to be applicable. The

supply chain comprises the management of

physical product flows, information flows

and the management of inter- and intra-

organisational relationships. We suggest a

view of the value chain to incorporate these

activities but plan to meet both end-use

(customer) expectations and the expectations

of stakeholders in the value chain process.

This article reviews the concept of value

and contributions to developing a concept of

value creation systems ± the value chain. A

number of approaches are considered rele-

vant to the development of a value chain

concept (which is market and customer

based) and are discussed in this context.

Value: a perspective

As 2000 approaches views concerning value

and customer satisfaction begin to converge.

We offer three basic definitions:

1 Value is determined by the utility combi-

nation of benefits delivered to the custo-

mer less the total costs of acquiring the

delivered benefits. Value then is a pre-

ferred combination of benefits (value

drivers) compared with acquisition costs.

2 Relative value is the perceived satisfaction

obtained (or assumed available) from

alternative value offers.

The current issue and full text archive of this journal is available at

http://www.emerald-library.com

[ 643 ]

Management Decision37/8 [1999] 643±656

# MCB University Press[ISSN 0025-1747]

KeywordsValue chain, Value analysis,

Management

AbstractThe notion of what is meant by

`̀ value'' is explored and sum-

marised in terms of its involve-

ment in delivering the product/

service attributes, considered

necessary to create customer

satisfaction. Investigates the

business system in relation to the

value chain, as well as citing the

conflicting views of a number of

authors upon this topic. A specific

company is used as a template to

bring out many of the notions that

have been put forward. Concludes

with the fact that the traditional

value chain begins with the com-

pany's core competences,

whereas evidence suggests that

modern value chain analysis re-

verses this approach and uses

customers as its starting point.

3 A value proposition is a statement of how

value is to be delivered to customers. It is

important both internally and externally.

Internally it identifies the value drivers it

is attempting to offer a target customer

group and the activities involved in pro-

ducing the value together with the cost

drivers involved in the value producing

activities. Externally it is the means by

which the firm positions itself in the

minds of customers. Webster (1994) sug-

gests: `̀ The value proposition should be

the firm's single most important organis-

ing principle''.

Value positioning has implications for mar-

keting strategy; it requires some fundamen-

tal decisions on segmentation, target

customer profiles and the identification of

target competitors. However, our interest is

in exploring the value concept, and how it is

being interpreted by businesses. Of particu-

lar interest is how value can be used to create

competitive advantage. Webster (1994) states:The conclusion that market share causedprofitability (has) proved to be simplistic ±strategy must be based on analysis of thecompany, the competition, and the customer,identifying those opportunities for the firm todeliver superior value to customers based onits distinctive competencies. The firm's valueproposition becomes the primary organisingforce for the busines.

It will be recalled that Adam Smith (1776 and

reported in 1937) was concerned with the

notion of `̀ value in use''. He argued two

aspects of value. He was of a view that value

was determined by labour costs (subse-

quently, modified to production costs). Smith

also argued that value in use from the user

point of view is important; it is only when

used that the full costs and benefits of a

product-service may be identified. A number

of companies use the `̀ value in use'' concept

to arrive at pricing decisions. The notion that

an end-user should consider all aspects of a

product-service purchase, not simply the

price to be paid, enables both vendors and

purchasers to identify all of the elements of

the procurement-installation-operation-

maintenance and replacement continuum.

The process encourages both parties to look

for trade-off situations like high acquisition

costs, with low operating and maintenance

costs, together with vendor services.

Value delivery: process and systemsThe value chain needs no introduction. It is

an ideal vehicle particularly when it is used

to identify an organisation's strengths and

weaknesses and to compare these with the

opportunities and threats posed by its ex-

ternal environment (i.e. competitors,

technology, social change, economic change,

political change and the legal environment).

The value chain may be used to evaluate

`̀ relative position'', identify an organisation's

distinctive competence(s) and directions for

developing competitive advantage.

Both Webster (1994) and Kotler (1994)

compare the traditional transaction process

with the increasingly favoured view of mar-

keting being based upon value creation and

delivery, and upon developing long-term

relationships with suppliers and customers.

Webster (1994) suggests:Our definition of marketing is built around

the concept of the value chain. Marketing is

the process of defining, developing and deli-

vering value.

A model created by Anterasian and Phillips

(1988) is highlighted. Webster refers to the

increasing importance of alliances and part-

nerships that are involved in the value

delivery process (ee Figure 1).

The business system and the valuechain

A number of authors have considered the

overall resource conversion process to be a

business system grant. Murray and

O'Driscoll (1996) suggest:A business system is the chain of value-

adding activities that is undertaken in order

to bring a product or service from raw

material to the provision of final customer

service and support.

A macro-business system encompasses whole

industries, while a micro-business system

maps the input-transformation-output pro-

cess at the business level. This is the firm's

value chain. Figures 2 and 3 are illustrations

of both macro- and micro-business systems.

The authors also suggest that the macro-

business system is a series of markets, the

product or service offering of each market

becoming an input for the next. Thus each

step becomes a technological or economic

transformation. Technological transforma-

tions involve manufacturing processes

whereby form utility or value is added to the

previous output. Economic transformations

are distribution activities in which time and

place utility or value added is contributed to

the earlier output activities, typically these

include location and product availability.

Figure 4 represents forms of market organi-

sation and has been modified to illustrate the

notion that value is a derived demand within

the context of the macro-business system. The

task of the macro-business system is to

identify end-user value expectations and to

coordinate the individual value contributions

[ 644 ]

David Walters andGeoff LancasterValue and information ±concepts and issues formanagement


from each firm to meet these competitively

and cost effectively (i.e. meet competitive

offers and meet the objectives of individual

firms in the macro-business system). The

activities include time and location utilities

(value) as well as form utility considerations

prescribed by product specification.

Murray and O'Driscoll (1996) introduce

vertical integration into their `̀ markets'' and

suggest this may occur if the firm's cost

structures are such that it can compete

successfully with external suppliers at each

market level. Whether or not this will occur

will depend largely upon an analysis of the

transactions costs involved. Williamson

(1985) and Dietrich (1994) made interesting

and useful contributions towards this issue.

These are considered later.

Porter's work on value chain analysis has

been the basis for a number of approaches to

analysing the activities of the firm. Porter's

approach is to consider the firm's activities

as comprising primary and support activ-

ities. The purpose is to:...disaggregate the firm into its strategically

relevant tasks and activities in order to

understand better their structure and inter-

relationships, the behaviour of costs, and

Figure 1The marketing value chain

Figure 2A macro business system

Figure 3A macro-business system for paper products

[ 645 ]



existing and potential sources of competitive

advantage (Murray and O'Driscoll 1996).

Porter's primary and secondary activities are

suggested to be physical and managerial

flows whereby physical flows are activities

involved in the physical creation of a product

or service.

O'Sullivan and Geringer (1993) remind us

of the purpose of value chain analysis. Given

that the organisation has limited access to

resources, value chain analysis has, as its

primary objective, the purpose of ensuring

that the resources of the enterprise work in a

coordinated way such that full advantage

may be taken of market-based opportunities.

It follows that the analysis should identify

the optimal configuration of both the macro-

and micro-business systems that will max-

imise value expectations. Thus the concep-

tual concerns of the supply chain and the

value chain begin to converge.

It follows that to take full advantage of the

current resources available, three activities

are involved. First the value expectations of

the end-user (customer) must be established,

then the resources and structures required

should be identified and finally the value

delivery systems required to deliver the

expected value be structured. This may

introduce alternative structures that include

inputs from other organisations within the

macro-business system.

Porter (1985) proposed the value chain as a

means by which business actions that trans-

form inputs could be identified (i.e. value

chain stages). Furthermore, he proposed that

stages in the value chain be explored for

interrelationships and common characteris-

tics. This could (he argued) lead to opportu-

nities for cost reduction and differentiation.

A more detailed view of the value chain and

its efficacy is that its purpose at either level

(macro- or micro-business systems) is to:

1 identify the business actions (stages)

which transform inputs;

2 identify relationships (commonalities and

interdependences) between stages for both

systems. Within the organisation the

micro-system is used to identify mean-

ingful differentiation characteristics

which are unique, or exclusive, to the

organisation;

3 identify costs and cost profiles within the

organisation together with cost advan-

tages that do or could exist;

4 choose its competitive positioning:. market segments. customer applications/end-uses. technologies

5 identify alternative value chain delivery

structures (ie. interrelationships intern-

ally and between business units within

the industry delivery structure ± the

macro-business system).

Both macro- and micro-business systems

should consider the value creation process.

More recently the interests of shareholders,

suppliers and employees (together with those

of the community) have been included in a

broader view of stakeholder interests and

value.

Brown (1997) pursues a conventional ap-

proach to the value chain but does add

emphasis to the need for an industry

perspective:The value chain is a tool to disaggregate a

business into strategically relevant activities.

This enables identification of the source of

competitive advantage by performing these

activities more cheaply or better than its

competitors. Its value chain is part of a larger

stream of strategic activities carried out by

other members of the channel-suppliers, dis-

tributors and customers.

He introduces two additional perspectives to

the value chain: the emphasis on links or

relationships between activities in the value

chain; and, the firm's competitive scope as a

source of competitive advantage. Links and

relationships between buyers, suppliers and

intermediaries can lower cost or enhance

differentiation. Competitive scope may con-

cern the range of products or customer types

(segment scope), the regional coverage (geo-

graphic scope), its integration (vertical

scope), or its activities across a range of

related industries (its industry scope).

The changes in, and convergence of, in-

formation and communications technologies

are identified as significant issues by Brown

Figure 4Hybrid forms of market organization

[ 646 ]



(1997). He illustrates changes in value chain

structures in newspaper production, video

entertainment and `̀ branchless'' banking:The emerging value chains in these examples

promise to restructure those industries and

redistribute value among different compo-

nents and players in the value chain.

The impacts of these changes will be very

significant, with irrevocable shifts in retail-

ing and distribution, the elimination of

intermediaries, shifts in market share and

moves towards mass customisation. Each of

these views of the value chain start with the

organisation and its industry onto which

customer interests are grafted. While they

now include the role of outsourcing to

achieve effective value delivery it could be

argued that the value chain concept would be

more effective if in fact it is created around

customer value expectations.

Scott (1998) takes a strategic management

view. He uses the value chain concept to

identify the tasks necessary to deliver a

product or service to the market. His ap-

proach is to combine segmentation and value

chain analysis and he suggests a number of

questions:. In which areas of the value chain does the

firm have to be outstanding to succeed in

each customer segment?. What skills or competencies are necessary

to deliver an outstanding result in those

areas of the value chain?. Are they the same for each segment or do

they differ radically?

Scott (1998) argues:All firms, whether industrial or services have

a value chain ... each part requires a strategy

to ensure that it drives value creation for thefirm overall. For a piece of the value chain to

have a strategy means that the individual

managing is clear about what capabilities the

firm requires to deliver effective marketimpact.

It follows that the firm may not have the

relevant competencies to match opportu-

nities. Two questions follow:

1 Is the structure of the organisation rele-

vant and are its managers competent?

2 Can the firm compete effectively by form-

ing a partnership/alliance with other

firm(s)?

The core elements of Scott's (1998) value

chain comprise seven areas:

1 operations strategy;

2 marketing, sales and service strategy;

3 innovation strategy;

4 financial strategy;

5 human resource strategy;

6 information technology strategy;

7 lobbying position with government.

Coordination across the value chain is

essential and Scott identifies the fact that

traditionally this did not occur. The rela-

tionship between a company's value chain

and its SBUs (strategic business units) is

discussed. He suggests that certain parts of

the value chain are likely to be common to all

its SBUs. These include human resources,

information technology and large parts of its

financial and selling functions. It could be

argued that the information requirements of

individual SBUs might differ and require

specific services. It could also be argued that

in a market/customer-focussed business (and

most make this claim) the core elements of

the business should be capable of developing

specific service inputs to ensure competitive

advantage.

Figure 5 illustrates Scott's view of the

value chain.

Slywotzky and Morrison (1997) discuss the

value chain in the context of `̀ customer-

centric'' thinking. They suggest the tradi-

tional value chain, which begins with the

company's core competencies and its assets

and then moves to other inputs and raw

materials, to a product offering, through

marketing channels and finally to the custo-

mer. In customer-centric thinking the mod-

ern value chain reverses the approach. The

customer becomes the first link and every-

thing else follows:...everything else is driven by the customer.

Managers should think of:(1) their customers' needs and priorities;(2) what channels can satisfy those needs and

priorities;(3) the service and products best suited to flow

through those channels;(4) the inputs and raw materials required to

create the products and services;(5) the assets and core competencies essential

to the inputs and raw materials.

and:The value of any product or service is the

result of its ability to meet a customer's

priorities. Customer priorities are simply the

things that are so important to customers that

they will pay a premium for them or, when

they can't get them, they will switch suppli-

ers.

Slywotzky and Morrison (1997) suggest that

value opportunities are distinguished by

understanding customers' priorities and

monitoring priorities for change. They give

examples: Nicolas Hayek (Swatch) under-

stood that a growing segment of consumers

would buy watches based upon taste, emotion

and fashion rather than on prestige. Jack

Welch (General Electric) identified custo-

mers who saw less value in the product and

more in services and financing.

[ 647 ]



This suggests a broad perspective of value,

well beyond direct benefits and one that

encompasses the nuances of basic criteria.

Basic value criteria are broad characteristics

like security, performance, aesthetics, con-

venience, economy and reliability. However,

at the next level these may be seen to be wide

ranging criteria.

The approach suggested by the authors

will change the traditional value chain such

that it takes on a customer-driven perspec-

tive. Slywotzky and Morrison (1997) go

further:In the old economic order, the focus was on

the immediate customer. Today, business no

longer has the luxury of thinking about just

the immediate customer. To find and keep

customers, our perspective has to be radically

expanded. In a value migration world, our

vision must include two, three, or even four

customers along the value chain. So, for

example, a component supplier must under-

stand the economic motivations of the manu-

facturer who buys the components, the

distributor who takes the manufacturer's

products to sell, and the end-use consumer.

The organisation's value chain becomes

merged with those of other value chain

members. Figure 6 takes an industry per-

spective of the value chain. An important

feature is the role of information manage-

ment that provides a coordinating activity.

Other authors have made contributions. Of

particular interest is that of Normann and

Ramirez (1993) who suggest:

Strategy is the art of creating value..the way a

company defines its business and links to-

gether with the only two resources that really

matter in today's economy: knowledge and

relationships on an organisation's competen-

cies and customers.

They see the value chain as an analytical tool

that facilitates strategy: ... strategy is pri-

marily the art of positioning a company in

the right place on the value chain ± the right

business, the right products and market

segments, the right value-adding activities.

They go on to add:Their focus of strategic analysis is not the

company or even the industry, but the value

creating system itself, within which different

economic actors ± suppliers, business part-

ners, allies, customers ± work together to co-

produce value. Their key strategic task is the

reconfiguration of roles and relationships

among this constellation of actors in order to

mobilise the creation of value in new forms

and by new players ... their underlying

strategic goal is to create an ever improving

fit between competencies and customers...

The value chain has an expanded role. It

becomes an integral component in the strat-

egy process: the evaluation of the company's

core competence and its fit in the overall

creation of value. The questions to be asked

are:. What is the combination of value drivers

required by the target customer group?. What are the implications for differentia-

tion decisions?. What are the implications for costs: do

economies of scale or scope exist?. Are there opportunities for trade-offs to

occur between the value creation system

partners?

An example of the application of fresh

thinking is produced by Normann and Ra-

mirez (1993). They use IKEA as an example of

a company that epitomises the new logic of

value:...any product or service is really the result of

a complicated set of activities: myriad eco-

nomic transactions and institutional ar-

rangements among suppliers and customers,

employees and managers, teams of technical

and organisational specialists ... what we

usually think of as prospects or services are

really frozen activities, concrete manifesta-

tions of the relationships among actors in a

value creating system.

The IKEA example is interesting because the

company has:systematically redefined the roles, relation-

ships and organisational practices in the

furniture business. The result is an inte-

grated business system that invents value by

matching the various capabilities of

Figure 5An alternative view of the value chain

[ 648 ]



participants more efficiently and effectively

than was ever the case in the past.

This approach has been extended into the

relationship between IKEA and its custo-

mers. Customer relationships are based upon

the customers' acceptance of a new view of

the division of labour in which the customers

`̀ agree'' to undertake key tasks traditionally

done by manufacturers and retailers ± the

assembly and delivery of products to custo-

mer homes. The value delivered to the

customer is a well designed, quality `̀ manu-

factured'' product priced anywhere from 25

percent to 50 percent below competitor offers.

Using the value creation system we can

identify IKEA's approach. The company has

both upstream and downstream links (Fig-

ures 7 and 8). Figure 8 identifies value

transfer items that are illustrated in Figure 7.

This notion is further developed by Voll-

man and Cordon (1999) who explain the

derivation of demand management in a

logistics context as:Essentially, a company has a `̀ pipeline'' of

capacity which is filled in the short-run with

customer orders, and in the long-run with

forecasts of demand. The point is that order

entry consumes the forecast, and demand

management explicitly integrates both of

these processes.

They suggest a more current view to be one

that includes a band of knowledge and

expands this argument to suggest that in a

manufacturing context `̀ knowledge'' is an

understanding of precise requirements. This

is, however, unrealistic for retailing and

there is a basis for developing an argument

concerning a retail demand-based value

chain. It is suggested that retail collaboration

occur when sales and cost data are exchanged

and such collaboration is usually retailer led,

based upon their determination to reduce

costs and focus more closely on their custo-

mers.

Normann and Ramirez (1993) suggest that

value occurs, not in sequential chains, but in

constellations; the role of business is to

involve customers in creating value, taking

advantage of the expertise, skills and knowl-

edge possessed by each member of the value

creation system. As value creating systems

become complex and varied so do the

component transaction relationships needed

to produce and deliver the value offer. A

company's principal task becomes the re-

configuration of its relationships and busi-

ness systems.

It follows that if the key to creating value is

to coproduce value offerings then the only

source of competitive advantage is the ability

to conceive the entire value creation system

and make it work by coordinating the

activities among actors so that actor and

activity are better matched. Hence, this new

logic of value depends upon a dialogue

between the organisation's competencies and

its customer base. More specifically, its

knowledge of its customers (effective com-

munication) results in a business system

(Murray and O'Driscoll, 1996) that is recon-

figured to maximise coproductivity, in which

an organisation's value offer is based upon

its primary assets (i.e. its knowledge base

(core competencies) and its customer base

(or, more specifically, its knowledge of its

customers).

There was considerable comment following

Normann and Ramirez's (1993) paper. Van

der Heijden (1993) comments that business/

customer interfaces are dynamic, with ac-

tivities being divided between suppliers and

customers. Thus, value creation may be seen

as an optimisation problem identifying what

each partner can do best (and most cost

effectively) in terms of constructing value.

This suggests the process of coproductivity is

not new, but is a process by which activities

can be (and possibly are) evaluated and

negotiated within the industry value chain.

Van der Heijden (1996) suggests that if the

value creation systems of each party are

stable and cost-effective, changes need not be

frequent. What is interesting is his comment

concerning new entrants who introduce new

methods (often made possible by new tech-

nology) and who make significant impact on

market volume. What he does not suggest is

that the new entrant initiates responses from

existing participants and consequently, re-

evaluation of relationships; these are:

`̀ ...shaped by revolutionary advances in in-

formation and communication technology''.

Figure 6A customer-centric value chain

[ 649 ]



Carroll et al. (1993) suggest that many value

creation systems are interpreted retrospec-

tively and that to do so prospectively pre-

sents a number of problems. These include

many role configuration options, the lack of

accessible systematic information about key

relationships, the inadequate distribution of

key strategic knowledge and information

throughout the organisation as well as the

emergent, and somewhat serendipitous

nature, of co-produced offerings. This sug-

gests that whilst the notion of strategic

alliances and partnerships is established,

there is not an established infrastructure

Figure 7The IKEA coordinated value creation system

[ 650 ]



with which to evaluate options and plan

implementation.

Zeithaml et al. (1993) suggest that the most

important point that Normann and Ramirez

raise is the need to break from the value-

chain orientation, in which a company

engages in a series of dyadic relationships

with individual customers and suppliers. In

contrast, the new kind of company integrates

the best of the value-creating competencies of

all the economic actors to yield a new

offering with new relationships among the

players. He identifies several issues: adding

value and reinventing value are not mutually

exclusive; continuous improvement, change,

flexibility and responsiveness are essential if

competitive advantage positions are to be

maintained. Reinventing value appears to be

easier to apply in flexible situations such as

distribution and service organisations; by

contrast heavy engineering, with large in-

vestment in fixed costs, faces greater chal-

lenges.

It has been suggested that many arguments

about creating value are only about customer

satisfaction and assume profit may be taken

for granted. However, companies need to

think about their comparative advantages in

the value chain even before they start think-

ing about how to reconfigure it for their

customers. If they do not, they are not

making strategy; they are simply engaging in

business process reengineering.

Some interesting issues have arisen. Nor-

mann and Ramirez (1993) responded by

commenting that the commentators are `̀ ...

yoked to the value chain''. They persist with

the view that value chains are no longer

basic building blocks and that `̀ needs'' are

less useful notions in a service economy than

value-creation processes and that product or

service offerings, more than companies,

compete for customers.

A number of topics now arise. The first

concerns the status of the value chain as an

analytical tool in developing competitive

strategy. Porter's (1980; 1985) arguments were

based upon three generic strategy options:

differentiation, cost leadership and focus.

Essentially there were two options ± a

differentiated product/service targeted at a

customer group or a cost-led offer resulting

in price leadership. Perhaps Normann and

Ramirez (1993) should have been more ex-

pansive in their comments: many manage-

ment academics and practitioners are

wedded to the concepts of the eighties

(despite practising the developments of the

nineties) and tend to view conceptual devel-

opments against this background.

Three developments that have had a major

impact are:

1 information management;

2 the focus on core activities and products;

3 the importance of relationships in mar-

keting.

Information management has been consid-

ered already and the virtual value chain is an

application. Gilbert and Strebel (1977) sug-

gest information can be a major facilitator in

new product development and customer

satisfaction but they add a proviso:Information systems are necessary, but they

cannot be expected to do what they were not

designed for. Because they focus on specia-

lised tasks, they cannot help multidisciplin-

ary teams share the same information, to

recognise an opportunity and respond rapidly

and coherently. Competitive information

systems...focus on the information needed to

build and sustain a competitive advantage...-

Competitive information systems link several

operating systems and `̀ polarise'' them to-

ward competitive advantage. Operating in-

formation systems help an organisational

unit do its job right. Competitive information

systems help several units do the right job

implementing a competitive formula.

Figure 8The IKEA value creation system

[ 651 ]



Their contribution is helpful in the context of

organising to deliver value. Competitive

information systems start from the formula

which itself depends upon effective relation-

ships existing between several functions,

each of which is a key success factor of the

formula. They also use IKEA as an example,

which, it will be recalled, organises a value

delivery system through `̀ co-productivity''. It

represents an ideal example of a competitive

information system in which many different

operating systems (i.e. design manufactur-

ing, delivery, inventory and retailing) are

brought together to focus on a `̀ fast response/

low inventory'' formula:Each key success factor is supported by an

`̀ information cluster'', that retrieves and

processes the information on which a key

success factor depends.

This does, of course, consist of databases and

applications.

Strategic and operationaleffectiveness

In a world of constant change it should come

as no surprise that other established con-

cepts are increasingly questioned. Porter

(1996) suggests that for many companies

technological developments can create pro-

blems:...the quest for productivity, quality and speed

has spawned a remarkable number of man-

agement tools and techniques and bit by bit,

almost imperceptibly (these) management

tools have taken the place of strategy. As

managers push to improve on all fronts, they

move farther away from viable competitive

positions.

He develops an argument between strategy

and operational effectiveness:A company can outperform rivals only if it

can establish a difference that it can preserve.

It must deliver greater value to customers or

create comparable value at lower cost or do

both. The arithmetic of superior profitability

then follows: delivering greater value allows a

company to charge higher average unit

prices; greater efficiency results in lower

average unit costs.

Operational effectiveness is insufficient for

long-term competitive success:(competitive strategy)...is about being differ-

ent...the essence of strategy is in the activities

± choosing to perform activities differently or

to perform different activities to rivals.

In essence Porter (1996) is suggesting that

strategic effectiveness is doing the right

things and operational effectiveness is doing

the right things right. His model of a

productivity frontier does not address the

entire problem. The productivity frontier

(Figure 9) rather than being:the sum of all practices at any given timethe

maximum value that a company delivering a

particular good or service can create at a

given cost...

may best be viewed as a coordinated value

creating process in which delivered customer

value is optimised within a set of constraints

imposed by the necessity to deliver long-term

stakeholder value (i.e. profitability, produc-

tivity and economic cash flow for the value

creating system or configuration). Opera-

tional effectiveness is achieved by extending

value creation into the implementation of the

customer value delivery, either by copro-

duction processes within customer or, possi-

bly, supplier organisations.

A solution offered is for the firm (and its

partners in the virtual corporation context)

to identify a value strategy. We can now

modify the earlier definition of value:Value is determined by the utility combina-

tion of price and non-price benefits offered. It

is a relative measure i.e. it is determined by

comparison with similar market offerings to

a target customer group.

Value and competitive advantage are com-

patible concepts. A value-based competitive

advantage can be established by identifying

those benefits, or attributes, which offer

vendors an opportunity to increase the

attractiveness of their market offer to their

target customers. Within the context of our

earlier definition of a value driver, the

benefits or attributes (expected or perceived)

are the value drivers that are important to

the target purchaser.

Porter's (1996) productivity frontier may be

used to identify alternative value proposi-

tions (defined earlier) ± see Figure 10. Two

value offers are possible, the decision be-

tween them is clearly influenced by a number

of factors. The first consideration is market

potential and the probability of achieving

Figure 9Porter's productivity frontier

[ 652 ]



stakeholder objectives. The second concerns

the ability of the organisation to deliver the

value package expectations: this will be

influenced in turn by the extent to which the

organisation either has the required level of

competence(s) and whether shortfalls are

available by entering partnership relation-

ships to provide the service activities re-

quired. This does of course also assume

mutual acceptance of role, tasks and rewards

by the partner organisation(s). Thus, it

follows that the virtual corporation concept

permits an organisation to pursue a range of

strategies. It would no longer be constrained

by its range of competencies; rather it may

identify market opportunities that were be-

yond existing capabilities, such as logistics

services.

Cronshaw et al. (1994) argued that a

number of companies can, and do, earn above

industry ROI by pursuing a strategy that

results in being stuck in the middle. They

offer examples of organisations whose custo-

mer bases have broad, but manageable,

segmentation criteria to which selective, but

expanded offers, can be successfully made.

Porter's view that being `̀ stuck in the mid-

dle'' results in two feasible strategies is

shown as Figure 11.

Figure 11 shows that optional ROI perfor-

mance is obtained by either a differentiation

or cost-leadership strategy: being stuck in the

middle results in low performance.

Porter's (1996) productivity frontier offers

a useful model for revisiting differentiation

and considering a more valid and attractive

approach of value-based segmentation. Fig-

ure 10 identifies two possible value offers. We

suggest this can be developed. Figure 12

identifies a range of options. The components

of value will differ as the options move from

ultra-high service/no price-led value,

through to an outright price offer with no

service support.

Mathur and Kenyon (1998) offer an inter-

esting view when they note the general

evidence of past over-diversification, and the

case for suspecting a deep-seated human

tendency towards it. Its psychological ele-

ments are likely to be conferred by power,

and a sense of living in a jungle in which

management teams must either kill or be

killed. They go on to state that these tend to

blind managers to:. the need to add value in the sense of

beating the cost of capital;. the risks of a proposal, especially the

future competitive pressures on a new

offering like countermoves by competitors,

and changes in consumer preferences;. the costs of implementing the project;. the skills, efforts and expenditures

needed, and the difficulties of motivating

or even retaining key staff in the acquired

business;. the costs of restructuring, or harmonising

information systems and the like.

Figure 12 suggests three generic strategies.

Cronshaw et al. (1994) furnish poignant

evidence that by providing a limited variety,

an offer can prove to be profitable. We

suggest that provided substantial market

share is available, selective exclusivity value

strategies can be profitable. Their evidence,

based upon the UK retailer Sainsbury, sup-

ports this view.

Mention has already been made of the

extent to which organisations are prepared to

invest time and money into the effort to

capture and hold customers. We have also

established that scale economies are rapidly

declining as a significant competitive factor.

Variety is no longer expensive and

Figure 11Optional ROI performance

Figure 10Using the productivity frontier to identify twovalue offer/strategy options

[ 653 ]



profitability is moving towards customised

products that have been tailored to the

expectations of their respective segments. As

customisation ceases to be distinctive and

becomes cosmetic we can see the attractive-

ness of selective exclusivity or value-based

strategies. Increasingly, we see the terms co-

production and co-destiny as being ap-

proaches in which risk, costs and increased

profitability are shared by suppliers, manu-

facturers, distributors and end-user custo-

mers. The IKEA example quoted by Normann

and Ramirez (1993) is an example of both co-

production and codestiny: end-user custo-

mers willingly involve themselves in the

coproduction activities and suppliers work

with IKEA towards a long-term relationship

for mutual success.

Figure 13 suggests a selective approach. It

is proposing that given an identified range of

market segment options a firm will respond

by investing in `̀ technology'' relevant to its

core capabilities and activities and which

will address the needs of a selected segment.

The `̀ virtual value chain'' approach will be

for groups of companies with complementary

core capabilities to develop a range of

activities that together will enable them to

position themselves to gain competitive ad-

vantage with the selected segment.

The organisational implications of alter-

native value strategies are shown in Figure

14. Both marketing and operations differ-

ences are addressed. Whilst this is a basic

view of the differences that exist, it still

serves to illustrate the problems confronting

organisations attempting to be `all things to

all customers'. The virtual value chain

Figure 12A focussed approach to the productivity frontier: value-based strategies

Figure 13Matching the productivity frontier with market opportunities

[ 654 ]



approach is for complementary companies to

match core competencies into an integrated

offer that responds to a selected target

market. Competitive advantage is jointly

created and owned.

Conclusion

This paper has introduced the notion of value

in terms of its various interpretations, and

more specifically our concern has been with

its association in connection with the co-

ordination of customer satisfaction. In the

new millennium, views of value and satis-

faction are now seen to be merging and we

see terms like coproduction entering the

marketing vocabulary.

The notion of the traditional value chain

begins with the company's core competen-

cies, whereas contemporary evidence sug-

gests that the modern value chain reverses

this approach and uses customers as its

starting point. It is additionally suggested

that value appears in constellations rather

than sequentially.

Many organisations are now prepared to

invest heavily to retain loyal customers and

it is even suggested that being `̀ stuck in the

middle'' might be a more profitable and

stable course in the long run.

This is the first paper from the authors that

addresses the issue of the delivery of value by

companies. The next paper concerns the

issue of value-based marketing to customers.

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Application questions

1 How do you add value for customers? 2 What are the three most important things

that you do to ensure that you retain

customers?

[ 656 ]

